Studium Conferences Biofuels Logistic Challenges and Solutions Jerry Morehart Commercial Development Manager Supply, Distribution and Planning February 18, 2008
This presentation contains forward-looking statements concerning expansion plans for ethanol. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied from such information. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Marathon Oil Corporation has included in its Annual Report on Form 10-K for the year ended December 31, 2006, and in subsequent Forms 10-Q and 8-K, cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forwardlooking statements. 1
Marathon Oil Corporation Upstream In business since 1887 Market cap approx. $35-40 billion Fourth largest U.S. based integrated oil company Downstream Integrated Gas Fifth largest U.S. refiner 2 Oil Sands Mining
Marathon s Downstream Business Model Fifth largest U.S. refiner, largest in Midwest Largest pipeline carrier in volumes delivered of crude oil plus product Third largest terminal system among R&M companies Largest private inland liquid barge fleet Fourth largest company-operated operated C-store network, largest in Midwest 50% equity in nation s largest travel center system Leverages entire value chain 3
Marathon s RM&T Operations Refineries Terminals Utilized Pipelines Utilized Coastal Water Terminal Inland Water Terminal 4
Ethanol Plants, Corn Regions & MRO Operations Operational Capacity = 8.1 bgy Under Construction Capacity = 4.8 bgy Refineries Terminals Corn Harvested Area Source: Industry Sources and Company Information 5
Marathon Ethanol History Marathon has more than 15 years of experience blending ethanol Gasoline sales through our company owned and operated retail outlets allowed Marathon to Build an ethanol-blending infrastructure Generate return on ethanol related invested capital Refineries supply terminals with low-octane octane gasoline at a reduced cost to blend with high-octane ethanol An ethanol blend was used by Marathon to comply with reformulated gasoline (RFG) requirements All MRO RFG has been ethanol blended since late 2002 6
Marathon s Current Biofuels Initiatives Currently blending over 720 Million Gals/Yr of Ethanol as E- 10. Began blending in TN and SC in 2007, anticipate adding blending in GA, NC and FL in 2008 E-85 sales were suspended at retail while UL issue with dispensers was being resolved. Problems with current ASTM spec for E-85, RVP minimums impede blending with commercial gasoline Blending B2 in Minnesota and offering biodiesel blends at Louisville, KY; Robinson, Champaign, Chicago IL. Predominantly B-11 in IL, B-2 or B-5 in KY. Equity owner in 2 ethanol plants having 220 MMGY of annual production capacity 7
Energy Independence and Security Act of 2007 Greatly expanded volume requirements for renewables were established Substantial demand growth is needed in 2008 to meet mandates (about 2.4 BGY minimum after adjustment for potential RIN carryover from 2007), but higher demand growth is required to avoid shut-in capacity Production capacity of ethanol and biodiesel will exceed new mandated near term requirements RIN carryover rules mitigate impact of 9 MMGY target in 2008 Logistics will be challenged to meet mandated growth, and even more challenged to avoid shut in capacity 8
PADD II Limited Ability to Absorb Ethanol Expansion Now Billion Gals/Yr Gasoline Ethanol Total 38 3.00 Minnesota 2.6 0.26 RFG 5.5 0.55 Discretionary Conventional Blending 29.9 2.19 Total potential of PADD II to absorb ethanol at E-10 Limited to.80 bgy to reach saturation 100% E-10 Billion Gals/Yr Gasoline Ethanol Total 38 3.8 Minnesota 2.6 0.26 RFG 5.5 0.55 Discretionary Conventional Blending 29.9 2.99 Production Capacity Expected to Grow by 3.5 BGY in 2008 9 Source: EIA, Marathon Markets must expand beyond PADD II
Impediments to Biofuels Expansion into New Markets Regulatory Issues State Motor Fuels Specs, ethanol s compatibility with fungible gasoline Physical Issues Ethanol s affinity for water Ethanol s corrosivity Biodiesel s cold flow properties Lack of logistical assets to support rapid growth Rail hubs/ terminal tankage/ terminal blending all need to be developed in new markets Biofuels transportation costs are high Distributed production results in need for high cost rail and truck vs barge and pipeline High growth rate also creates short term transportation inefficiencies Commercial Issues Value driver needed, either free market incentives, or mandates 10
Ethanol Expansion Commercial Drivers Wave of incremental production hitting market first four months of 2008, more to follow Expansion must come in discretionary markets where new blenders need incentive to shift Expanded RFS will drive substantial demand growth, but primary driver will remain economic incentives to blend vs mandated obligations. Oversupplied market will allocate disproportionate share of total value chain to demand creators 11
Ethanol Expansion Commercial Drivers Is total value chain adequate to pay incentives needed for all players in the value chain that create demand? Blend value in gasoline vs Production cost Key commodity prices determining value chain: Gasoline price (blend value) Corn, natural gas price (production cost) If value chain is not adequate to stimulate growth at least to mandated volumes, obligated parties (refiners/importers) will have to supplement economic incentives Retailer (Station operator) key value chain participant in allocation of total margin available 12
Market Structure Presents Hurdle to Ethanol Major-Company Owned, 9% Hypermarketer, 2% Major Jobber, 57% Independent, 32% Sites by Type 13 Source: EIA, Annual Reports, NPN
Supply Challenge Summary PADD II discretionary demand can only absorb a part of the projected incremental production E-85 can clear substantial volumes, but Requires 25% retail discount and 35% or more ethanol price discount, and Greater availability of FFVs and dispensers, and ASTM spec changes on minimum RVP To clear production E-12, E-15, or E-20 not currently legal options New discretionary blending at E-10 level is needed outside of PADD II Incentives to rack customers required to stimulate expansion 14
Distribution Patterns- Ethanol vs Gasoline Gasoline Ethanol 15 Ethanol Pipelines Not likely to be able to use existing pipelines Pipelines for ethanol more commercially challenged than technically challenged 110 MMGY ethanol plant is only 7.2 MBPD, small pipeline is 50 MBPD, large pipeline does 200-300 MBPD
Logistical Impediments Transportation Pipelines Commercially challenged Most distribution terminals can not receive by rail Distribution terminals that have rail or water access will be logical sources for ethanol distribution, is there enough capacity? Most new expansion volume is outside economic trucking distance from production plants Even with substantial economic incentives, it will take time to add logistical infrastructure Inefficient, immature expansion market will provide opportunities for first movers with efficient logistics Likely long term solution? Rail with unit trains to key hubs More terminals with rail receiving capability Marine tankage in Florida for ethanol Niche pipelines a possibility in out years as mandated volumes increase Terminal Blending and Storage Many light product terminals still lack ethanol storage and blending capability Product quality initiatives at many companies prohibit splash blending Delays in getting equipment delivered and installed due to global demand for construction materials Project budget/permitting/ engineering and design time cycles. Typically 18 to 24 months for large companies 16
Destination Plants vs Origin Plants Destination plants need substantial offsets to overcome high cost of railed in corn. 56# Bushel of corn becomes roughly 1/3 ethanol, 1/3 CO2, and 1/3 DDG. Destination plant needs offsets to pay for 1/3 corn weight that becomes CO2. Hopper cars are cheaper than tankers, but Further integration with cattle operations usually required to cut drying cost of DDG, etc. There are cases where sufficient offsets can be found, but transportation issues play an even bigger role in destination plants Destination Plants could be better than an origin plant in an overbuilt area 17
Biodiesel Blending Challenges New RFS mandates several times the level of 2007 US biodiesel blending by 2009. Blending capacity and distribution logistics are big concern Plenty of production capacity, if feedstocks are available Soybean Oil prices have surged and soybean is competing with corn and wheat for acreage Most distribution terminals, do not have rail, even fewer have heated offloading Heated storage and in line blending needed to address the cold flow properties of biodiesel Long lead times and high costs for installations Multiple installations vs. central blending at refineries is inefficient Refinery based renewable diesel is a good alternative to terminal investments, avoids the quality issues, and distribution issues, but longer design/budget cycle than terminals 18
The Dilemma of Motor Fuels Regulations RVP, T50 and Tv/l State regulations accommodate ethanol blending State regulations allow ethanol blending with caveats State regulations impede ethanol blending 19 Some regulations will stymie ethanol penetration
Marathon s Goals Increase ethanol and biodiesel blended product offerings wherever it adds value to its petroleum based product business Make investments enabling E-10 blends at all our terminals, and biodiesel blending at select terminals Partner with suppliers and end users to expand blending into new markets Increase focus on biofuel logistics and supply chain reliability Seek equity in ethanol plants that provide adequate returns and transportation efficiencies 20
Ethanol Equity with The Andersons Strategic rationale: Reliability of supply into our marketing area Recognition that in the EE-10 environment, unavailability of 1 gallon of ethanol prevents the sale of 9 gallons of hydrocarbons Portfolio approach equity, longlong-term offoff-take agreements, shortshort-term purchases Vertical Integration of Ethanol Value Chain Clymers, IN 110 mmgy Greenville, OH 110 mmgy 21
E10 Infrastructure Investment January 1, 2008 E10 Ethanol Infrastructure Program June 1, 2008 E10 Ethanol Infrastructure Program Terminals Greenville Ethanol Plant Entering the Southeast 80% Capability @ ~ 1.0 billion GPY 22 100% Capability @ 1.2 billion GPY