Light-Heavy Crude Oil Outlook: Implications for Coker Margins

Disclaimer Baker & O Brien conducted this analysis and prepared this presentation with reasonable care and skill, utilizing methods we believe to be consistent with normal industry practice. No other representations or warranties, expressed or implied, are made by Baker & O Brien. All results and observations are based on information available at the time of this presentation. To the extent that additional information becomes available or the factors upon which our analysis is based change, our opinions could be subsequently affected. 1 Argus U.S./Canada Asphalt 2009

Presentation Topics 1. LLS-Maya Benchmark: Overview 2. Delayed Coker Feedstock Supply Factors a) U.S. Crude Production b) Heavy Crude Regional Production c) Vacuum Resid Imports d) U.S. Refining Capacity Rationalization 3. Delayed Coker Feedstock Demand Factors a) New Delayed Coker Projects b) Fuel Oil Switching in Power Generation c) Asphalt Demand 4. Outlook and Sensitivities 2 Argus U.S./Canada Asphalt 2009

Overview LLS-Maya Overview Light Louisiana Sweet (LLS) and Maya represent opposite ends of crude oil quality spectrum. Each grade is a key pricing benchmark. Not without imperfections: LLS USGC (St. James delivery), declining volumes, increased importance due to WTI price breakdown, however, a hedging mechanism is not currently available. Maya declining volumes; price link to fuel oil can lead to short-term anomalies. LLS-Maya still useful indicator: relative crude pricing, coking margins. Crude Oil Gravity (degrees API) 45 40 35 30 25 20 15 10 5 Sweet Condensates Ultra-Light LLS Brent WTI Marlim Sour SOURCE: Baker & O Brien Analysis WTS Mars Maya WCS Ultra-Heavy Mexican and Brazilian Bitumen 3 Argus U.S./Canada Asphalt 2009

Overview Historical Context: Lower and Upper Boundaries Upper Limit Driven by coker additions over longer term Function of absolute oil price and new coker capital costs Lower Limit Refining indifference point between heavy sour and lighter grades Fuel price competition with natural gas Dollars Per Barrel 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 LLS-Maya Price Differential New coker requires LLS-Maya = $15-19/B* * For LLS of $60 to $120/B Coker economics of the past Approx floor = $4-6/B 91 93 95 97 99 01 03 05 06 07 08 Historical Data through 2008 SOURCE: Platts, Baker & O Brien Analysis 4 Argus U.S./Canada Asphalt 2009

Overview 25% Today s Coker Projects Require Higher LLS-Maya: Three USGC Projects Reviewed Comparison of Expansion Project Economics Project 1 Project IRR, % 20% 15% 10% Returns of 12%-21% at LLS-Maya = $15-$19 Project 2 5% Project 3 0% 0 5 10 15 20 25 30 Assumptions: LLS - Maya Differential, $/Bbl. LLS = $60/B SOURCE: Baker & O Brien Analysis USGC 321Crack Spread = $4.00/B 5 Argus U.S./Canada Asphalt 2009

Overview Supply-Demand Forces for Coker Feedstock U.S. Vacuum Residuum Balance (recent) Supply Demand 3,000 3,000 MB/D 2,500 2,000 1,500 1,000 500 0 850 1,050 870 250 U.S. Crude Production Heavy Crude Imports Other Crude Oil Imports Resid Imports MB/D 2,500 2,000 1,500 1,000 500 0 2,050 470 500 Vacuum Resid Upgraded at Refineries RFO and Bunker Fuel Asphalt SOURCE: EIA, Baker & O Brien Analysis 6 Argus U.S./Canada Asphalt 2009

Supply Factors U.S. Production Modest, Negative Impacts From U.S. Production Production declines of Heavy Crudes over past five years driven by California. Growth prospects of Light Crudes include Gulf of Mexico and Williston Basin/Bakken (U.S. Upper Midwest). Short-term Outlook: According to the EIA, domestic production is projected to increase approximately 400,000 Bbl./day in 2009 (first increase in U.S. production since 1991). Longer-term Outlook: By 2012, however, any gains of Vacuum Resid supply would be wiped out by expected production declines. 7 Argus U.S./Canada Asphalt 2009

Supply Factors Heavy Imports Brazil Outlook: Waiting for New Production Volume to Show on Market 4,000 Total Brazil Crude Oil Production, MB/D 3,500 3,000 2,500 2,000 1,500 1,000 500 Heavy Grades Light Grades Total IEA 2008 Total EIA 2009 AEO [Preliminary] Announced Projects - 2007 2008 2009 2010 2011 2012 2013 2014 2015 SOURCE: EIA, IEA, Petrobras, Baker & O Brien Analysis 8 Argus U.S./Canada Asphalt 2009

Supply Factors Heavy Imports Canadian Bitumen Production Growth Curve Likely to Shift Downward a Bit 5,000 4,500 4,000 Announced Projects Bitumen Production, MB/D 3,500 3,000 2,500 2,000 1,500 1,000 North Athabasca In Situ Athabasca Mining South Athabasca In Situ Peace River In Situ Cold Lake In Situ Actual + DEC 2008 CAPP Forecast 500-2007 2008 2009 2010 2011 2012 2013 2014 2015 SOURCE: CAPP, Baker & O Brien Analysis 9 Argus U.S./Canada Asphalt 2009

Supply Factors Heavy Imports Mexican Heavy Decline Tempered Over Short Term by KMZ Development 2,000 Total Mexico Heavy Crude Oil Production, MB/D 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - Note: Assumes 14% decline rate in Maya production 2007 2008 2009 2010 2011 2012 2013 2014 2015 SOURCE: PEMEX, Baker & O Brien Analysis Ayin-Alux Agua Fria (Chicontepec) Amatitlan (Chicontepec) Ku-Maloob-Zaap (KMZ) Maya + other hvy 10 Argus U.S./Canada Asphalt 2009

Supply Factors Heavy Imports Potential Regional Coker Feedstock From Major Imported Heavy Oil Sources Vacuum Resid Supply, MB/D 250 200 150 100 50 0 Volumes shown represent incremental volumes versus preceding year 2008 2009 2010 Key Assumptions: Maya decline at 14%/Yr. Brazil based on EIA AEO 2009 [Preliminary] Adjusted CAPP bitumen production Flat Venezuelan Growth 2011 2012 Brazil Canada-Bitumen Venezuela [EIA Long Term Outlook] Mexico Total -50 SOURCE: Company Reported Information, Baker & O Brien Analysis 11 Argus U.S./Canada Asphalt 2009

Supply Factors Vacuum Resid Imports Resid Imports Supply only a Small Share of Total Demand Importing Vacuum Resid: 250 MB/D 23% Other Angola 3% 55% Nigeria 5% Russia 5% UK 9% Libya SOURCE: EIA (2008) 12 Argus U.S./Canada Asphalt 2009

Demand Factors Coker Projects Announced Coker Projects Coker Capacity Additions, MB/D 600 500 400 300 200 100 - Over two-thirds of the announced cokers are integrated with a Canadian or Middle East crude supplier, suggesting less likelihood of being cancelled (although with a possibility of being delayed). 2008 2009 2010 2011 2012 SOURCE: Company Reported Information Alberta Suncor Millennium Shell Scotford Exp Opti-Nexen CNRL Horizon USA Total Port Arthur BP Whiting Sinclair Tulsa Marathon Detroit Motiva Port Arthur WRB Wood River Marathon Garyville WRB Borger Valero Norco 13 Argus U.S./Canada Asphalt 2009

Demand Factors Refining Capacity Potential U.S. Refinery Rationalization Would Affect Crude and Resid Balances 2007 Q4-2008Q3 Average Cash Margin ($/Bbl.) 25 20 15 10 5 Capacity Removed: Light Sweet Grades: Light Sour Grades: Vacuum Resid: Capacity Removed: Light Sweet Crude: Light Sour Crude: Vacuum Resid: 1,000 MB/D 880 MB/D 120 MB/D 80 MB/D 500 MB/D 470 MB/D 30 MB/D 40 MB/D 0 0 5 10 15 Cumulative barrels of clean product yield 1 (MMB/D) 1 Not included within the evaluation group were those specialty refineries primarily operating to produce petrochemicals, lubricants, or asphalt. SOURCE: PRISM TM PRISM is a trademark of Baker & O Brien, Inc. All rights reserved. 14 Argus U.S./Canada Asphalt 2009

Demand Factors Fuel Oil Conversion 400 350 Volumes of Residual Fuel Oil to Power Generation Can Swing 200 MB/D RFO to Power Gen RFO (3%S) Price Natural Gas Price 25 20 RFO to Power Gen, MB/D 300 250 200 150 Annual Avg. RFO volumes to power generation increases when price is favorable RFO volumes decrease when nat gas price is more favorable 15 10 Fuel Cost, $/MM Btu 100 5 50 - Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 - SOURCE: EIA, Baker & O Brien Analysis 15 Argus U.S./Canada Asphalt 2009

Demand Factors Asphalt U.S. Asphalt Demand U.S. Asphalt demand falls in a fairly narrow range (500-550 MB/D). Asphalt Demand Outlook: Demand is expected to increase in the future due to U.S. Government-financed economic stimulus projects. U.S. Asphalt Demand SOURCE:EIA MB/D 560 550 540 530 520 510 500 490 480 470 460 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 16 Argus U.S./Canada Asphalt 2009

Outlook and Sensitivities Summary Indicators expected to tighten coker feedstock balance, increase relative pricing for fuel oil & asphalt and degrade coker economics. Driver Regional Heavy Crude Supply U.S. Refinery Rationalization New Coker Projects Increased RFO to Power Plants Declining U.S. Crude Production Reduced Resid Imports Asphalt Stimulus Projects Impact on Coker Feedstock Availability Increased supply 3%-6% Reduced supply 2%-4% Increased demand 5%-10% Reduced supply 5-10% Reduced supply 1%-2% Reduced supply 2%-5% Increased demand 2%-4% Relative Asphalt Price 17 Argus U.S./Canada Asphalt 2009

Outlook and Sensitivities Summary Limited volumes of heavy crude oils, along with new cokers coming on-stream in 2011 and 2012 will likely erode coker margins and lead to relative price strengthening for asphalt and residual fuel oil. Case can be made for continued wide differentials and relatively depressed asphalt prices for the next two years. Production growth in Brazil and Canada are key factors to watch. After two years - when/if significant coker capacity comes on line key supply and demand factors suggest strengthening asphalt prices. Other wildcards also seem to favor higher asphalt prices: Global recession leading to curtailed production of less valuable, but more costly to produce heavy grades of crude oil. Integrated cokers will be run at full capacity to monetize heavy crude oils, regardless of low coker margins. Analysis is complex and dynamic. 18 Argus U.S./Canada Asphalt 2009

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