STATUS OF THE U.S. REFINING INDUSTRY

STATUS OF THE U.S. REFINING INDUSTRY October 2005 BAKER & O BRIEN Incorporated, All Rights Reserved

REFINING VITAL LINK IN THE OIL SUPPLY CHAIN Crude Oil Supply & Logistics Products Distribution & Marketing Pipelines The Petroleum Refinery Pipelines Storage Railcars Commercial Customers Tankers Vessels Service Stations 1

U.S. REFINING INFRASTRUCTURE 2

GEORGIA MAJOR CRUDE OIL PIPELINES ALBERTA Kitimat Fort McMurray BRITISH COLUMBIA SASKATCHEWAN MANITOBA ONTARIO Vancouver Edmonton Lloydminster Hardisty Regina Anacortes Cutbank WASHINGTON OREGON IDAHO MONTANA NORTH DAKOTA SOUTH DAKOTA Billings Clearbook Superior MINNESOTA WISCONSIN St. Paul MICHIGAN Casper Chicago IOWA WYOMING NEVADA NEBRASKA ILLINOIS OHIO INDIANA Wood River Denver Patoka UTAH COLORADO CALIFORNIA KANSAS OKLAHOMA ARIZONA KENTUCKY MISSOURI TENNESSEE ARKANSAS Cushing NEW MEXICO MISSISSIPPI ALABAMA TEXAS LOUISIANA Houston Port Arthur 3 Sarnia

MAJOR PRODUCT PIPELINES 4

WHY WE NEED COMPLEX REFINERIES West Texas Intermediate Maya U.S. Demand Gasoline Mid Distillates (Jet / Diesel) Heavy Fuel Oils 5

THE SHORTFALL IN U.S. REFINING CAPACITY Percent Utilization 100% 90% 80% 70% 60% 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 24.0 20.5 17.0 13.5 10.0 Product Demand and Refining Capacity (Millions of Barrels Per Day) Historical Data thru YTD 2005 Projected SOURCE: Energy Information Administration. Utilization Product Demand Refining Capacity 6

SLOW GROWTH AND LARGER REFINERIES Millions of Barrels Per Calendar Day 18.00 17.75 17.50 17.25 17.00 16.75 16.50 16.25 16.00 15.75 15.50 15.25 15.00 135.0 122.5 110.0 97.5 85.0 72.5 60.0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Thousands of Barrels Per Calendar Day 2002 2003 2004 2005 Total Refining Capacity Average Refinery Capacity SOURCES: Oil & Gas Journal and 7

FEWER BUT MORE COMPLEX REFINERIES 200 190 10.2 9.6 180 170 160 150 140 130 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Operating Refineries 9.0 8.4 7.8 7.2 Complexity Index 6.6 6.0 Operating Refineries Complexity Index SOURCES: Oil & Gas Journal and 8

PRODUCT IMPORTS WILL CONTINUE TO RISE 5.0 4.5 Millions of Barrels Per Day 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 Historical Data thru YTD 2005 Projected SOURCES: Energy Information Administration and 9

ACCELERATED INCREASE IN GASOLINE IMPORTS 2.5 Millions of Barrels Per Day 2.0 1.5 1.0 0.5 Blending Components Finished Gasoline 0.0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Historical Data thru YTD 2005 Projected SOURCE: Energy Information Administration and Baker & O Brien Estimates. 10

MORE GASOLINE IMPORTS FROM LONG HAUL SUPPLIERS 2.5 Millions of Barrels Per Day 2.0 1.5 1.0 0.5 Western Hemisphere Suppliers "Long Haul " Suppliers 0.0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Historical Data thru YTD 2005 Projected SOURCE: Energy Information Administration and Baker & O Brien Estimates. 11

MORE LIMITED LONG HAUL DIESEL SUPPLIERS 1.0 Millions of Barrels Per Day 0.9 0.8 Western Hemisphere 0.7 0.6 "Long Haul " Suppliers 0.5 0.4 0.3 0.2 0.1 0.0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Historical Data thru YTD 2005 Projected SOURCE: Energy Information Administration and Baker & O Brien Estimates. 12

IMPACT OF PRODUCT IMPORTS ON PRICES Gasoline product imports will increasingly come from across the Atlantic (and eventually Asia & Middle East) instead of from Western Hemisphere sources Distillate imports will need to come increasingly from Western Hemisphere sources Long-haul imports are becoming base requirements to satisfy growing demand Previously a seasonal occurrence--now year round Higher transportation costs for Long Haul marginal gasoline imports will continue to be reflected in higher U.S. product prices Increased Western Hemisphere diesel supplies may be limited 13

THE GROSS REFINING MARGIN (GRM) The revenues of refined products over some period, less the costs of all feedstocks over the same period, divided by the number of barrels of crude oil (or feedstock) processed. GRM = Revenues minus Feed Costs Crude Processed 14

NOT ALL REFINERIES ARE CREATED EQUAL Simple - Topping or Hydroskimming Have the lowest margins; close to breakeven Often small, niche players Must accept what is naturally in the crude oil Cracking Some ability to convert heavy fuels to lighter oils Supply the marginal barrel and live off base margins Coking Can convert virtually all the barrel to light oils Enjoy the highest upgrading margins; highly flexible 15

TYPES OF REFINERIES AND THE GRM Number Average Historical Typical Typical Net % of U.S. of Size Range for GRM Cash Costs Refining Margin Type Capacity Refineries (B/D) ($/Barrel) ($/Barrel) ($/Barrel) Simple 5.6 27 35,233 0.50 to 1.50 0.50 to 1.00 (0.50) to 1.00 Cracking 28.7 53 92,552 3.00 to 4.50 2.00 to 3.00 0.00 to 2.50 Coking 65.7 57 196,939 5.00 to 7.00+ 3.00 to 4.50 0.50 to 4.00+ NOTE: $1.00 per barrel equals approximately $35 million per year for a typical 100,000 barrels per day refinery. GRM and costs are for U.S. Gulf Coast refineries. SOURCES: Oil and Gas Journal and 16

HISTORICAL GRM FOR GULF COAST REFINING TYPES 20.00 18.00 16.00 Dollars Per Barrel 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 81 83 85 87 89 91 93 95 97 99 01 03 05 YTD Simple Cracking Coking SOURCE: 17

ANALYSIS OF GROSS REFINING MARGINS Base Refining Margins The U.S. Gulf Coast The Marginal Barrel Cracking Refineries Upgrading Margins Base Margins Plus Heavy Sour Crudes Coking Refineries 18

ISSUES AFFECTING BASE REFINING MARGINS Total Product Demand and Growth Refinery Capacity Utilization Product Imports / Availability Product Quality Changes Crude Oil Quality and Availability 19

ISSUES AFFECTING UPGRADING REFINING MARGINS Product Demand Mix Residual Fuel Oil Supply / Demand Refinery Upgrading Additions Environmental Regulations / Gasoline and ULSD Crude Oil Quality and Availability The Light / Heavy Spread 20

TODAY S CRUDE OIL TRENDS World Supply / Demand is Tight. Bulk of Reserves are Heavy. Incremental Demand Met by Increasing Proportion of Heavy Crude, which Many Refineries have Difficulty Processing in Large Volumes. Major Sources: Middle East, Venezuela, Mexico, Canada New Light Crude Discoveries (e.g., West Africa) Can Postpone these Developments, but Not Reverse them. New Heavy Crude Production Puts Pressure on Heavy Crude Price. 21

REFINING CAPACITY / UPGRADING Latest of New Coking Capacity Additions are Complete. Light / Heavy Crude Differentials are Superlative. Coking Capacity is Fully Utilized. Continued Pressure on Heavy Crude Oil Price and Upward Pressure on Light Crude Price (China, et. al.). Capital Spending being Directed to Fuel Quality Improvements, Not Refinery Capacity Expansion. 22

LIGHT / HEAVY CRUDE PRICE DIFFERENTIALS Historical Cyclicality Based on Imbalances in Resid Conversion and Crude Supply / Demand. Cycles Can be Irregular and Timing Difficult to Predict. Fundamentals Indicate Future Differentials Should be Higher--and Remain Higher--than Historical Averages. Light / Heavy Product Differentials Follow Similar Trends. 23

WTI / MAYA DIFFERENTIAL Dollars Per Barrel 16.00 15.00 Projected 14.00 13.00 12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 Actual 5 Year Average 2000 to 2005 YTD $9.15 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 Historical Data thru YTD 2005 Projected NOTE: Maya formula: f.o.b. Mexico; WTI spot: Cushing. SOURCES: Platt s Oilgram and 24

ENVIRONMENTAL ISSUES / SULFUR REGULATIONS More Stringent Sulfur Specifications Increase Relative Cost of Refining Heavy Sour Crudes. These Costs Need to be Recovered. Penetration of Unleaded Gasoline and ULSD in Developing Countries Increases Relative Demand for Light Crudes. Accelerated Use of Cleaner Fuels Such as Natural Gas; Reduced Demand for Residual Fuel Oil. Result: Pressure on Heavy Crude Prices. 25

OUTLOOK FOR BASE REFINING MARGINS Impact on Base Margins Trends Positive Neutral Negative Factors Product Demand Growth Capacity Utilization Product Imports / Availability Product Quality Changes Crude Oil Availability Moderate to Strong High and Stable Rising / Potentially Limited More Stringent Tight 26

OUTLOOK FOR UPGRADING REFINING MARGINS Impact on Upgrading Margins Trends Positive Neutral Negative Factors Product Demand Mix Residual Fuel Oil Supply / Demand Refining Upgrading Additions Environmental Regulations Crude Oil Quality Available Light / Heavy Spread More Light Products Resid Demand Declining Limited More Stringent More Heavy Strong 27

BARRIERS TO NEW DOMESTIC REFINERIES Environmental Concerns NIMBY Time and Cost Will it get approved? Long Lead Time 5 Years Minimum Economies of Scale Must be Big (>100 MBD) Capital Intensity - $12-15K / BD Can I get a long term crude oil supply? Competition from lower-cost foreign refiners I ve seen the movie already -- it ends badly 28