Refinery Investments and Future Market Incentives

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Refinery Investments and Future Market Incentives

• Joanne Shore
• John Hackworth
• U.S. Energy Information Administration
• September 29, 2008
• Platts 2nd Annual European Refining Markets
  Conference

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Overview Factors Affecting Investment Decisions

• Demand

• Demand Growth and Mix Shift
• Feedstocks Incentives to use lower quality
  feedstocks (Light-heavy differentials)
• Margins

• Feedstocks

• Margins

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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

• Demand

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World Consumption Growing Largest Growth Outside
U.S. Europe
U.S. Europe
Rest of World Excl FSU
Source BP World Statistical Review of World
Energy June 2008
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Europe Major Driver of World Consumption Mix
Shift Towards Distillates
Source BP World Statistical Review of World
Energy June 2008
6
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
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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)

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U.S. Distillate Focus This Summer Illustrated
Operating Yield Shift Potential
Source EIA Form 810
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U.S. Petroleum-Based Gasoline and Distillate
Fuel Needs Shift
Petroleum-Based excludes ethanol, biodiesel,
and distillate from coal-to-liquids and
biomass-to-liquids. Source AEO 2008 Reference
Case
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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

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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.

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OECD Europe Imbalance Between Refining and
Demand Met with Imports/Exports
European Refinery Yields
Net Import/Export Balance
Source IEA August 2008 Data Base
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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

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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

• Feedstocks

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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
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Light-Heavy Product Price Difference Increases
with Crude Oil Price
Source Bloomberg spot prices (LLS Louisiana
Light Sweet GC Gulf Coast)
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Light-Heavy Product Price Differential Crude
Oil Price Move Together
Source Bloomberg spot prices (LLS Louisiana
LIght Sweet GC Gulf Coast)
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Light-Heavy Price DifferentialsMove Together
Source Bloomberg spot prices (LLS Louisiana
Light Sweet GC Gulf Coast)
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Higher Light-Heavy Price Differences Go With
Higher Price Levels But Much Scatter
Source Bloomberg spot prices
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Refiners Continue to Process Crude without
Increasing Fuel Oil Yields
Source IEA August 2008 Data Base
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Future Coking Increases Will Expansions Affect
Light-Heavy Spread?
Source Purvin Gertz, GPMO Service
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Margins Short Golden Age

• Margin Indicators
• U.S. vs Europe
• Future Implications

• Margins

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Refining Output Variations Impact Profitability
Source Purvin Gertz, GPMO Service
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U.S. Margin Indicator Higher Due to No Residual
Fuel and More Gasoline
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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 1990s
• 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

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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

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• Questions?

www.eia.doe.gov joanne.shore_at_eia.doe.gov