Trends, Cycles, and Kinks (Changing Trade & Investment Patterns) OPIS 11 th Annual National Supply Summit October 19, 2009 Joanne Shore John Hackworth Energy Information Administration

Overview Major market drivers affecting trade patterns and investments are changing –Demand growth –Product mix –Crude price & light- heavy price differences –Profitability Review implications for investment & trade: –Historical trends –Recent cycle –Kinks or shifts in trends

Trends As Seen from 2007: Will They Resume? Rising crude prices and wide light-heavy price differences encourage changing feedstocks Demand: Growth and mix shift Increase in refining margins – capital expenditure driver Policy shifts towards biofuels & efficiencies

View from 2007: Climbing Crude Prices But Small Demand Impact (Oil Sands Looking Good) Source: EIA Cycle

Higher Light-Heavy Price Differences Go with Higher Price Levels -- Encouraging Bottoms Upgrading Source: Bloomberg monthly average spot prices 1/95-08/09

World Petroleum Consumption Growing Until Recently: Largest Growth Outside U.S. & Europe U.S. & EuropeRest of World Excl FSU Note: KB/D is thousand barrels per day. Source: BP World Statistical Review of World Energy, June 2009 Cycle

Refinery Utilization Grew with Demand through Late 1990’s; Capacity Expansion Kept Up After Source: BP World Statistical Review of World Energy June 2009 Cycle 2008

Atlantic Basin Petroleum Consumption Growth through 2007 Mainly in U.S. Source: BP World Statistical Review of World Energy, June 2009

In Last Decade, Europe Major Driver of World Product-Mix Shift Towards Distillates Source: BP World Statistical Review of World Energy, June 2009 Cycle

Atlantic Basin Price Incentives Shifting Toward Distillates Source: Bloomberg New York Harbor Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil Cargo and Premium Gasoline

Refining and Marketing Net Margins Rose Providing Investment Incentive Source: EIA Financial Reporting

Balancing Demand and Supply with Trade Flows – An Option to Investment Changing trade flows are an important means of balancing product supply with demand, and are weighed against investments to meet demand Historically, economics favored Europe sending excess gasoline to U.S. rather than investing to reduce gasoline production And U.S. suppliers used excess European supply rather than investing in more gasoline production But Europe has had to seek out other markets for its growing gasoline exports

OECD Europe: Imbalance Between Refining and Demand Met with Imports/Exports European Refinery YieldsEuropean Net Imports Distil- late 44.4%49.3% Gaso- line 26.1%24.5% Source: IEA February 2009 Data Base

Western Europe’s Gasoline Net Export Growth in Mexico, Africa, Middle East Source: IEA September 2009 Data Base

Investment View in 2007 – Can We Build Fast Enough? UNITED STATES U.S. was planning expansions of about 1 million-barrels-per-day from (Down slightly from 2006 due to rising costs and biofuel growth) U.S. upgrading projects (coking units) also planned to make use of more Canadian crude Several U.S. refiners engaged in large hydrocracking expansions for more distillate EUROPE Europe’s plans focused on upgrading for product mix changes -- more residual fuel destruction and increased production of distillate. But increasing distillate imports still projected Gasoline production left unchanged REST OF WORLD Most of the world’s expansion plans were in high growth areas of Middle East and Asia. These areas also included upgrading projects to make more use of heavy crude oils

Outlook from Early 2007 Perspective Crude price forecasts high Oil sands optimism Biofuel growth planned – especially ethanol Petroleum demand growth continuing Tight distillate demand expected to stay tight Refining margins improved – Golden Age Refinery capacity tight – plans for expansion & upgrading Source: Supply: EIA, FACTS, company presentations, Oil and Gas Journal, Hydrocarbon Processing Boxscore.; Demand: EIA, BP World Statistical World Review 2006, FACTS, IEA

Cycles: The Tide Turns, Clouding Trend Paths 2008 Distillate Anomaly –Unusually tight distillate market –Gives glimpse of future Recession hits –Demand declines –Utilization declines –Price declines –Stocks build –Expansion plans delayed/cancelled

Distillate Prices Soared in 2008 Relative to Gasoline – But Reverting in 2009 Source: Bloomberg New York Harbor Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil Cargo and Premium Gasoline

U.S. Distillate Yields Reflect Price Incentives: Strong Prices in 2008 & Reversal in 2009 Source: EIA Petroleum Supply Monthly Data

2008 Distillate Incentives Resulted in Unprecedented U.S. Operating Yield Shifts Source: EIA Form 810

2009 Europe and U.S. Consumption Reflect Recession United States Consumption (Million Barrels Per Day) 2008 Est Growth Gasoline % Middle Distil- lates % OECD European Consumption (Million Barrels Per Day) 2008 Est Growth Gasoline % Middle Distil- lates % Source: EIA Short Term Energy Outlook October 6, 2009; IEA Oil Market Report, September 10, 2009.

First Half 2009 Refinery Inputs Down in Europe and U.S. Hurricane Cycle Source: IEA September 2009 Data Base & EIA

U.S. Growth in Gasoline Imports (Coming Mainly from Europe) Slowed with Recession Cycle

Distillate Inventories Reflect Much More Supply Than Demand Distillate Inventories Note: Grey bands are average +/- 1 standard deviation Source: IEA September 2009 Data Base & EIA

Gasoline Supply and Demand in Closer Balance than Distillate Gasoline Inventories Note: Grey bands are average +/- 1 standard deviation Source: IEA September 2009 Data Base & EIA

Crude Price Roller Coaster Source: EIA

High Light-Heavy Differentials Declined Sharply as All Drivers Reversed Source: Bloomberg spot prices (LLS – Louisiana Light Sweet; GC – Gulf Coast) Cycle

Refining Margin: Golden Age to Dark Age? Note: LLS – Louisiana Light Sweet Source: Purvin & Gerz margins produced for IEA, IEA Oil Market Report. Cycle

Refining Capacity Plans Change: Delay vs. Cancel Independent refiners see full impact of refining margins on bottom line The decision to delay or even cancel depends on how far along a project is The type of project also affects the delay/cancel decision –Upgrading for more distillate, less gasoline may seem “safer” than capacity expansion –Bottoms upgrading to use heavier crude oils becoming more refinery location dependent

Kinks: Changing Trends Demand growth prospects change sharply Crude-based distillate will grow more than gasoline Atlantic Basin gasoline surplus Oil sands – GHG and light- heavy price uncertainties; but US looking for heavy Margins – Not likely to return to high levels in mid term

Significant Shift in Trends from 2007 Outlook to 2009 Outlook In 2007, –Rising prices projected to ease in the long term with new supply –U.S. petroleum growth projected to continue; need for more refining capacity But outlook from 2009 is dramatically different; –Future prices are about double those seen in 2007 –Demand flat Policy changes another important factor

Rising Crude Oil Prices and Policies Made Biofuels More Attractive Higher prices improved biofuels’ economic attractiveness Ethanol replaced MTBE in the U.S. due to concerns over water contamination and liabilities Renewable fuel interest increased for national security and GHG control U.S. policy changes in 2005 and 2007 set and increased renewable fuel standard Source: EIA Monthly Energy Review

Long-Term U.S. Petroleum-Based* Gasoline and Middle Distillate Needs Shift with Policy Crude-Based excludes ethanol, biodiesel, and distillate from coal-to- liquids and biomass-to-liquids. Source: AEO 2009 Reference Case, April 2009 Million Bbls Per Day Change Gasoline & E85 Demand Ethanol Crude-Based Gasoline Middle Distillate Demand (Jet + Dist.) Biomass, CTL, BTL Crude-Based Distillate

In 2008, U.S. Shifts from Net Importer to Net Exporter of Distillate – Short or Long Term? Source: EIA Petroleum Supply Monthly Data

U.S. Distillate Exports Still Strong in 2009

European Export Trend Continues in 2009 – But For How Long? Source: IEA Data Base

Future Atlantic Basin Balances & Implied Trade Distillate Shortfall –Europe needs more –U.S. may help fill that need –Eastern Europe, Middle East, and India will be important suppliers to Europe Gasoline Glut –Europe’s surplus production expected to grow –Europe’s exports will compete with ›India, Middle East to supply Asia and Africa ›U.S. Gulf Coast, Virgin Islands to supply Latin America ›U.S. Gulf Coast, Canada, Virgin Islands to supply U.S. East Coast –But Europe’s best market may still be the U.S. – implying strong competition in East Coast markets.

Atlantic Basin Capacity Expansion Not Needed Now Planned capacity expansions in Atlantic Basin exceed demand growth in medium term (to 2015) Again seeing closures (Eagle Point – just the beginning?) Refinery asset value has dropped Heavy crude supply impacting U.S. projects PADD 2 upgrading projects more likely to move ahead than PADD 3 due to oil sands connections Europe needs more diesel production

U.S. Heavy Crude Oil and Oil Sands Import Sources Expected to Shift Source: Purvin & Gertz

U.S Refinery Investment Outlook – Hit the Brakes, Idle the Engine Profit picture alters refinery project plans Planned projects delayed or suspended in light of revised market outlook Impacts greater in PADD 3 than PADD 2 Will margins and light-heavy price differences rebound?

European Refinery Investment Outlook – Upgrading But Competition Pressing Profit declines hurting cash for capital expenditures Outlook for distillate demand still increasing, but recession reprieve encourages delays Refinery projects are mostly in Southern Europe New capacity from India and Middle East is very competitive

Joanne Shore