Refinery Investments and Future Market Incentives Joanne Shore John Hackworth U.S. Energy Information Administration September 29, 2008 Platts 2 nd Annual European Refining Markets Conference

Overview: Factors Affecting Investment Decisions Demand: Growth and Mix Shift Feedstocks: Incentives to use lower quality feedstocks (Light- heavy differentials) Margins

Future Demand Growth and Product Mix Shifts Growth: Mainly outside the Atlantic Basin Product Mix Shifts & Investment: –U.S. – Different future –Europe – Continued shift in from gasoline to distillate –Asia – Less issue of shift than of growth

World Consumption Growing: Largest Growth Outside U.S. & Europe U.S. & EuropeRest of World Excl FSU Source: BP World Statistical Review of World Energy June 2008

Europe Major Driver of World Consumption Mix Shift Towards Distillates Source: BP World Statistical Review of World Energy June 2008

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

U.S. – Steps to Increased Distillate Operating changes – Beginning to see U.S. system potential to shift from gasoline to distillate Planned hydrocracking investments (Marathon Garyville, Motiva Port Arthur, Valero)

U.S.: Distillate Focus This Summer Illustrated Operating Yield Shift Potential Source: EIA Form 810

U.S. Petroleum-Based* Gasoline and Distillate Fuel Needs Shift Million Barrels Per Day Growth to 2022 Petroleum Gasoline Petroleum Distillate * Petroleum-Based excludes ethanol, biodiesel, and distillate from coal-to-liquids and biomass-to-liquids. Source: AEO 2008 Reference Case

Future U.S. Investment to Produce More Distillate Equipment changes: –Cut-point shifts –Distillation efficiency –Hydrotreating expansion Catalyst changes – FCC catalysts to produce more light cycle oil Planned hydrocracking investments coming on stream May not need more to satisfy U.S. demand shift and increase some exports of distillate

Increasing European Distillate Production Refineries are already operating at maximum distillate potential (unlike the U.S.) Historical investments resulted in making more distillate by destroying residual fuel rather than reducing gasoline production.

OECD Europe: Imbalance Between Refining and Demand Met with Imports/Exports European Refinery YieldsNet Import/Export Balance Distil- late 44.8%48.0% Gaso- line 26.6%25.7% Source: IEA August 2008 Data Base

Europe: What Next for Product Mix Investment? Seeing more distillate production investment in Southern Europe. Hydrocracking expansions include: –Portugal 50 KB/D –Spain 180 KB/D –Italy 70 KB/D –Greece 30 KB/D –Total 330 KB/D Biodiesel

Feedstocks: Investing to Take Advantage of Widening Light-Heavy Differentials Drivers behind the widening price difference –Supply of light crude –Product market influences on the price differentials Conversion capacity impacts on differentials

Supplies of Light Sweet Crude Increasing in Atlantic Basin Atlantic Basin Crude Production Projections Note: Most growth on this chart is in areas with higher quality crude oils. Latin America includes Venezuela and Mexico with their heavy crude oils, but these areas is not projected to grow much Source: EIA International Energy Outlook 2008, Wood Mackenzie Presentation NPRA Annual Conference 2007

Light-Heavy Product Price Difference Increases with Crude Oil Price Source: Bloomberg spot prices (LLS – Louisiana Light Sweet; GC – Gulf Coast)

Light-Heavy Product Price Differential & Crude Oil Price Move Together Source: Bloomberg spot prices (LLS – Louisiana LIght Sweet; GC – Gulf Coast)

Light-Heavy Price Differentials Move Together Source: Bloomberg spot prices (LLS – Louisiana Light Sweet; GC – Gulf Coast)

Higher Light-Heavy Price Differences Go With Higher Price Levels – But Much “Scatter” Source: Bloomberg spot prices

Refiners Continue to Process Crude without Increasing Fuel Oil Yields Source: IEA August 2008 Data Base

Future Coking Increases: Will Expansions Affect Light-Heavy Spread? Distilla- tion Capacity Coking Capacity Coking Percent Distillation Distilla- tion Capacity Coking Capacity Coking Percent Distillation U.S.17,8132, %18,8633, % Europe17, %17, % Asia26,5121,2594.7%29,7041,7816.0% Rest of World 29,5791,1083.7%31,9381,5845.0% Total91,1165,2985.8%98,0337,0117.2% Source: Purvin & Gertz, GPMO Service

Margins – Short Golden Age Margin Indicators U.S. vs Europe Future Implications

Refining Output Variations Impact Profitability Source: Purvin & Gertz, GPMO Service

U.S. Margin Indicator Higher Due to No Residual Fuel and More Gasoline

Future Profitability Light-heavy price differentials –May decline some with growing conversion capacity and slightly lower crude oil prices –But likely to remain relatively high Margins –U.S. gasoline margins under pressure from growing European exports, ethanol use, and improved vehicle efficiencies, but U.S. refinery margins likely to remain higher than in the 1990’s –Atlantic Basin distillate margins likely to be higher than gasoline more often in the future as regional distillate imbalance continues –European margins buoyed by strength in distillate demand, but also depend on U.S. gasoline margins

Summary Investment to produce more distillate –Future demand shifts imply attractive choice for some refiners to increase distillate yields Bottoms upgrading investment –Light heavy differentials likely to stay elevated as crude price stays high –Amount of heavy upgrading may not impact light-heavy price differences greatly as total residual production not expected to change much and as residual fuel market demand is affected by environmental concerns. Margins – Short golden age, but still better than 1990s –Margin levels impact all types of refining investment, but especially expansion –Little need for expansion in Atlantic Basin – expansion could negatively impact margin