Refinery Update John C. Felmy Chief Economist American Petroleum Institute Felmyj@api.org www.api.org October 2006 1
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Diesel, gasoline & crude oil prices $3.87 $3.22 10/16/2006 Diesel (EIA) $2.50 Retail Gasoline (EIA) $2.23 Crude Oil (NYMEX) $1.43 $2.58 $1.93 $1.29 $0.64 $0.00 Oct01 Oct02 Oct03 Oct04 Oct05 Oct06 price per gallon 3
EIA Crude Oil Price Forecast (Base Case and 95% Confidence Interval) October 2006 4
EIA Natural Gas Price Forecast (Base Case and 95% Confidence Interval) October 2006 5
EIA Price Forecast October 2006 Year Percent Change 2004 2005 2006 2007 0405 0506 0607 WTI Crude a ($/barrel) 41.44 56.49 66.86 65.92 36.3 18.3 1.4 Gasoline b ($/gal) 1.85 2.27 2.58 2.51 22.7 13.6 2.4 Diesel c ($/gal) 1.81 2.41 2.73 2.66 33.0 13.2 2.4 Heating Oil d ($/gal) 1.54 2.04 2.34 2.33 32.5 14.6 0.3 Natural Gas d ($/mcf) 10.75 12.81 13.43 12.83 19.2 4.9 4.5 a West Texas Intermediate. b Average regular pump price. c Onhighway retail. d Residential average. 6
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Heating Bills 20062007 EIA October 2006 1,600 1,400 1,200 1,522 1,265 Heating Oil Propane 1,000 800 902 839 826 All Fuels Electricity Natural Gas 600 400 200 0 0001 0102 0203 0304 0405 0506 0607 8
Apparent 321 Spread Apparent 321 Spread NYMEX 0.9000 0.8000 0.7000 0.6000 0.5000 0.4000 0.3000 0.2000 0.1000 0.0000 9 Cents per gallon 4/6/2001 7/6/2001 10/6/2001 1/6/2002 4/6/2002 7/6/2002 10/6/2002 1/6/2003 4/6/2003 7/6/2003 10/6/2003 1/6/2004 4/6/2004 7/6/2004 10/6/2004 1/6/2005 4/6/2005 7/6/2005 10/6/2005 1/6/2006 4/6/2006 7/6/2006 10/6/2006
Refiner Profit Rate Crack 321 Refiner Profit Rate 0.400 0.350 0.300 0.250 0.200 0.150 0.100 0.050 0.000 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1.0 Q206 10 Q405 Q106 Q305 Q102 Q202 Q302 Q402 Q103 Q203 Q303 Q403 Q104 Q204 Q304 Q404 Q105 Q205 Cents per gallon Cents per dollar CR321 Refiner Profit Rate
Refiner/Marketer Profits EIA Refiner/Marketer Net Income 14,000 12,000 10,000 8,000 Million $ 6,000 4,000 2,000 0 Q101 Q201 Q301 Q401 Q102 Q202 Q302 Q402 Q103 Q203 Q303 Q403 Q104 Q204 Q304 Q404 Q105 Q205 Q305 Q405 Q106 Q206 2,000 11
Fuels Timeline (Since 1990) 1991 Phase II Low volatility gasoline 1992 Winter Oxygenated gasoline 1993 Low Sulfur Diesel 1993 CARB Diesel 1995 RFG Phase I 1995 CARB 2 2000 RFG Phase II 2004 CARB 3 2004 06 Low sulfur gasoline 2006 RFS 2006 Removal of RFG Oxygenate Mandate 2006 Ultra Low Sulfur Diesel OnRoad 12
2006: The Year of the Fuel Spec EIA Full Tier 2 lowsulfur gasoline requirements Major turnarounds due to hurricane delays and fuel changes Elimination of oxygenate requirement and MTBE bans Renewable Fuels Standard Northern, Southern region equalization of RFG VOC standards Ultra lowsulfur diesel 13
Highway and Nonroad Diesel Timelines 2006 2007 2008 2009 2010 2011 2012 2013 2014 Highway 15 ppm (80%)* 15 ppm (100%) Part 89 Nonroad Diesel (NR) (Farm/Construction) 500 ppm 15 ppm Locomotive and Marine (L&M) 500 ppm 15 ppm With Credits NR (not in NE or AK) Small Refiner Nonroad Diesel (not in NE; with approval in AK) Transmix/InUse NR (not in NE or AK) Transmix/Inuse L&M (not in NE or AK) 5000 ppm 5000 ppm 5000 ppm 5000 ppm 500 ppm 500 ppm 500 ppm 500 ppm 15 ppm 15 ppm 15 ppm * 2006: Refinery June 1; Terminal September 1; Retail October 15 14
Oil & Natural Gas New Investments and Net Income 120 100 New Investments Net Income 80 (billions $) 60 40 20 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Ernst & Young 15
Refining Capacity Overview US demand growth has increased significantly in recent years US refining capacity continues to expand Expansions can help meet demand more quickly & costeffectively than building a new refinery 10 years for new; 3 years for expansion ~$17K per daily barrel for new; ~$912K for expansion Refineries operate in a global market; the market place is efficient and provides best means of supply/demand balance Refineries expand and upgrade units while spending billions to meet clean fuels and environmental regulations For domestic expansion: Improve permitting process Provide regulatory certainty Ensure reasonableness in regulations 16
Refining Capacity: Global Market Industry operates in global market There is spare global refining capacity Gaps filled by imports since WWII Most US product imports from Canada, Europe & Virgin Islands Response of global market to hurricanes shows that markets work As global economies expand, there will be increased competition for imports 17
Number of refineries declines but capacity expands barrels per day 250 200 150 100 50 0 Number of refineries Refining capacity 1985 1988 1991 1994 1999 2002 2005 17,500,000 17,000,000 16,500,000 16,000,000 15,500,000 15,000,000 14,500,000 14,000,000 13,500,000 13,000,000 12,500,000 18
Producing more gasoline with fewer refineries Billions gallons 250 Gasoline production 140 200 120 150 100 Number of refineries 100 80 50 1985 1988 1991 1994 1999 2002 2005 60 Source: EIA 19
Refining Capacity: Expansions Equivalent of 12 new 200,000 BD refineries built last decade Expansions can help meet demand more quickly & costeffectively than building new Refineries expand and upgrade units, while: spending billions to meet clean fuels and environmental regulations $47.5 billion from 19952004 (largely due to sulfur reduction in gasoline & diesel) Future plans Based on publicly available data, nearly 1.3 million barrels/day of additional refinery capacity projects are either planned or under strong consideration for the years 20062011 Such expansions will boost domestic refining capacity to over 18.5 million barrels per day near the alltime high for U.S. operable refinery capacity 20
Considerations for Building New Refineries Federal, State and local permit process Crude supply and product pipeline access Electrical, water, natural gas, etc. access Community acceptance Cost ~ $2.5 to $3 billion for 150,000 B/D Average rate of return ~ 6.2% (19942003) Will not help meet demand in near term (3 to 10 years) Policies are needed to create a climate conducive to investments to expand domestic refining capacity: Improve permit process Complete NSR reforms Align Ozone NAAQS deadlines 21
World Capacity & Consumption Changes Result in Utilization Increases 5,000 100% Thousand Barrels Per Day 4,000 3,000 2,000 1,000 0 1,000 2,000 3,000 4,000 5,000 Capacity Consumption Utilization 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Utilization Notes: World Excluding FSU Source: BP World Statistical Review 2005 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 22
World Distillates Growing More than Gasoline & Fuel Oil Declining Thousand Barrels Per Day 12,000 10,000 8,000 6,000 4,000 2,000 0 2,000 Cumulative Consumption Changes 19852004 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Middle Distillate Gasoline Residual Fuel Oil Notes: World excluding FSU; middle distillate is jet, kerosene, diesel and heating oil (No. 2) Source: BP World Statistical Review 2005 23
Imports Supplied About Half Gasoline Demand Growth in Recent Years Thousand Barrels Per Day 1200 1000 800 600 400 200 U.S. Total Gasoline Imports LowSulfur Years 0 1993 1995 1997 1999 2001 2003 2005 Other Other Latin America Brazil E Europe Venezuela W Europe Virgin Islands Canada Note: Total gasoline is finished product plus blending components. Source: EIA, Form EIA814 24
E.U. Hydrocracking Growing, But Not as Fast as Diesel Demand Shift Percent of Distillation Capacity 18 16 14 12 10 8 6 4 2 0 EU11 Capacity As Percent of Distillation FCC (Mainly Gasoline) Hydrocracking (More Distillate) 1990 1992 1994 1996 1998 2000 2002 2004 Note: FCC Fluid Catalytic Cracking Source: EIA, Oil and Gas Journal 25
Europe s Growing Product Imbalance Thousand Barrels Per Day Source: IEA 800 600 400 200 0 200 400 600 800 1000 EU15 Product Net Imports Middle Distillate Net Imports Gasoline Net Exports 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 26
Summary of European and U.S. Balances Thousand Barrels Per Day 1500 1000 500 0 500 1000 How Added Demand Was Met: 19952004 United States European Union 15 U.S. Gasoline U.S. Dist + K/J EU15 Gasoline EU15 Dist + K/J Net Imports Change Yield Change Throughput Change Source: EIA, IEA 27
LightHeavy Crude Price Differential & Crude Oil Price Move Together $20 $16 $12 $8 $4 $0 $70 $56 $42 $28 $14 $0 28 Jan95 Jan96 Jan97 Jan98 Jan99 Jan00 Jan01 Jan02 Jan03 Jan04 Jan05 Jan06 LightHeavy Differential Crude Price Crude Price & Price Differential ($/Barrel) WTIMaya WTI Crude Price Source: Bloomberg spot price
LightHeavy Price Differentials Move Together $54 $48 $42 $36 $30 $24 $18 $12 $6 $0 Crude and Product Price Differentials $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 Jan95 Jan96 Jan97 Jan98 Jan99 Jan00 Jan01 Jan02 Jan03 Jan04 Jan05 Jan06 Product Price Differential Crude Price Differential WTI Maya GC No. 2 3% Resid Source: Bloomberg spot price 29
Current Regional Downstream Capacity Reflects Different Needs 80% 70% 60% 50% 40% 30% 20% 10% 0% 2004 Downstream Capacity Percent of Distillation US EU6 Asia6 Middle East Coking FCC Hydrocracking Hydrotreating Note: Asia6: China, India, Indonesia, Japan, Singapore, South Korea; EU6:France, Germany Italym, Netherlands, Spain, and U.K., Middle East: Bahrain, Kuwait, Saudi Arabia, and UAE. Source: Oil and Gas Journal 30
Regional Distillation Capacity Changes 20052010 EIA Thousand Barrels Per Day 4000 3500 3000 2500 2000 1500 1000 500 0 U.S. Europe Middle East Asia Pacific Sources: Oil and Gas Journal, FACTS, Company Presentations 31
U.S. Capacity Changes 20052010 (KB/D) EIA CDU Coking FCC/RCC HDC AZ Clean Fuels 150?? BP 100 Coffeyville 15 ConocoPhillips 230 105 Frontier 10 Marathon 193 70 40 60 Motiva 325 90 60 Sunoco 100? Valero 406 30 19 107 Others 70 152 31 85 CreepClosings 250 TOTAL 1,749 557 90 312 Note:? denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking. Sources: Oil & Gas Journal, company presentations, Industrial Information Resources 32
Europe s Capacity Changes 20052010 (KB/D) EIA CDU VDU Coking FCC/ RCC HDC Croatia 42 Finland 47 France 2 48 Greece 50 37 Italy 25 Lithuania Romania 25 Spain 30 20 50 TOTAL 30 70 2 274 Note:? denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; VDU: Vacuum distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking. Sources: Oil and Gas Journal, company presentations. 33
Asian Capacity Changes 20052010 (KB/D) EIA CDU VDU Coking FCC/ RCC HDC China 1,966 680 135 142 242 India 1,015 275 50 198 228 Indonesia 250 Pakistan 150 60 50 Other 233 33 184 40 TOTAL 3,614 1,015 218 524 560 Note:? denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; VDU: Vacuum distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking Sources: Oil and Gas Journal, FACTS, industry media reports. 34
Middle East Capacity Changes 20052010 (KB/D)EIA CDU Coking FCC/ RCC HDC Bahrain 60 Iran 896 171 2 Iraq 370 90 35 Kuwait 410??? Oman 131 75 Qatar 145??? Saudi Arabia 400 80 100 200 UAE Yemen 185 20 TOTAL 2,537 Note:? denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; VDU: Vacuum distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking Sources: Oil and Gas Journal, FACTS, industry media reports. 35
Who Will Expand: Outlooks/Plans Vary EIA Group Regions Future Market Expectations Refinery Investment Strategy Super Majors All Margins revert to historic Maintain topquartile performance, little expansion need Majors with Large Downstream U.S. & Europe Improved margins with cycles Heavy crude projects & cautious expansion Independent Refiners U.S. "Golden Age of Refining" Expand distillation & conversion Export Refiners Middle East Tight capacity & high lightheavy Expand for export, add bottoms upgrading State & Private India & China High demand growth, better margins Rapid expansion existing & grassroots Sources: Trade press articles, company presentations and press releases. 36
Capacity and Consumption Changes 20052010 EIA Thousand Barrels Per Day 4000 3500 3000 2500 2000 1500 1000 500 0 Distillation Capacity Demand U.S. Europe Middle East Asia Pacific Sources: Capacity see previous slides; Demand: EIA, BP World Statistical World Review 2005, FACTS, IEA 37
National Weather Service Temperature October December 38
National Weather Service Precipitation October December 39
National Weather Service Temperature January March 40
National Weather Service Precipitation January March 41
Old Farmers Almanac 42
Wooly Bears 2005 43
What can government do? Rely on market forces to allocate products Do not impose new taxes that: Will reduce investment in expanded oil and natural gas production and refining expansion Will ultimately harm consumers and shareholders Reduce barriers to supply Open onshore areas to responsible energy development and reduce permitting delays Lift constraints on key offshore areas with highresource potential Expand access to world natural gas supplies (LNG) Increase refiners flexibility to facilitate expansion Provide timely response to waiver requests in emergencies Streamline existing permit processes to expedite capacity expansions Clarify environmental requirements to streamline operations 44