The Petrochemical Feedstock Association of the Americas

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The Petrochemical Feedstock Association of the
Americas The Outlook for the U.S. Refining
IndustryNovember 9, 2006

• Gene Edwards
• Valero Energy Corporation

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Critical Uncertainties
The refining industry faces numerous supply and
demand uncertainties.
Crude Supply
Refined Products Supply
Refined Products Demand

• Iraq?
• Iran?
• Saudi Arabia, Kuwait, UAE?
• Nigeria?
• Russia?
• Kazakhstan and Azerbaijan?
• Mexico?
• Venezuela?
• Canada?
• Deepwater Gulf of Mexico?

• Refinery capacity expansion?
• Capacity creep?
• Gasoline imports?
• Renewable Fuels Standard?
• Ethanol?
• Biodiesel?
• Gas-to-liquids and Coal-to-liquids?

• High price effect on demand growth?
• Economic growth?
• China and India continue rapid growth?
• Hybrids?
• Dieselization?
• Other fuel efficient engine technologies?
• CAFE Standards?

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World demand expected to grow 1.4 to 1.6 MMBPD
per year over the next 5 years but added
efficiency gains due to higher prices could
reduce that.
World Petroleum Demand Growth

• GDP growth of 4.2 and efficiency improvements of
  1.6 per year
• Compares to a 35 year historical GDP growth of
  3.7 and efficiency improvement of 1.7 per year
• World petroleum demand grows 1.6 to 1.8 per year
• Compares to historical oil demand growth of 1.7

World Petroleum Demand
World Oil Consumption Efficiency (Demand / GDP)
MMBPD
BPD / Million of GDP
Source Valero Estimates
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Non-OPEC production growth through 2010 should
help ease prices.
World Oil SupplyCrude Oil Supply

• Oil prices have risen strongly over the last few
  years due to the reduction of spare OPEC capacity
  and increasing geopolitical risks
• Increases in non-OPEC supplies through the end of
  the decade come at the same time OPEC countries
  are adding capacity that should ease prices
• There are risks that non-OPEC supplies will come
  on more slowly than expected
• After 2010, OPEC again will be heavily relied
  upon to meet growing demand, providing support to
  the crude market

OPEC Non-OPEC Supply
MMBPD
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Crude supply growth moving forward will be
dominated by the Middle East, FSU, and Africa
along with Canada.
World Oil SupplyCrude Oil Supply

• Middle East growth will be led by Saudi Arabia
  and Kuwait
• Iran and Iraq both have supply growth potential
  but geopolitical consequences limit growth
• FSU growth fairly evenly split between Russia,
  Kazakhstan, and Azerbaijan
• African growth distributed between Angola,
  Nigeria, Algeria and Libya
• North American growth dominated by Canadas oil
  sands

2005-2020 Supply Growth By Region
MMBPD
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Majority of growth is in medium sour crude oil.
World Oil SupplyGrowth by Quality
Growth in Crude Oil Supply by Quality

• Growth in sweet crude, but high demand from Far
  East refiners
• Growth in High TAN grades in the short term
• Heavy is growing less quickly than historically

MMBPD
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World Oil SupplyCanada
Canada is expected to provide nearly all of the
net heavy crude supply growth for the world.
Canadian Hvy. Sour Crude Supply

• Lacking logistics to bring crude to USGC market
  (two proposed pipeline projects exist)
• High cost of developing fields
• Threat of Canadian upgrader projects
• Threat of increased capacity from Mid-Continent
  refinery upgrades

MMBPD
Types of Canadian Oil Sand API Sulfur
Bitumen 8 4.5
Synthetic-Bitumen 20-22 2.7
Diluent-Bitumen 20-22 3.0
Synthetic Crude Oil 32-35 0.2
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World Petroleum Demand GrowthRegional Product
Breakdowns

• Emerging economies lead world growth
• Asia alone accounts for nearly 53 with China
  about half of that
• U.S. demand grows 1.1 annually (240 MBPD) as the
  economy grows at its 3.1 per year long-term
  average

2007-2011 Petroleum Demand Growth Total Growth
7.5 MMBPD (1.7/Year)
Canada - 200
Regional Growth (MBPD)
Europe
FSU
U.S.
Latin America
ME / Africa
Asia
Includes demand growth supplied by NGLs,
Condensates, and Other Liquids (e.g., Biofuels,
Gas-to-Liquids)
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World Gasoline Diesel Demand
World diesel growth is expected to more than
double gasoline growth over the next five years.

• World gasoline consumption grows about 1.1 - 1.3
  MMBPD
• Asia makes up 62 of global growth while European
  demand continues to decline
• World diesel demand grows about 2.5 2.7 MMBPD
• Asia makes up 47 of this growth
• The U.S. makes up 37 of expected gasoline growth
  but only 11 of diesel growth

2006-2011 World Gasoline Demand
2006-2011 World Diesel Demand
MMBPD
MMBPD
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U.S. gasoline demand is expected to continue
growing, although at a slowing pace as a result
of new engine technologies and changing consumer
preferences.
U.S. Gasoline Demand

• U.S. gasoline demand to grow at 1.0 to 1.3 per
  year (450 to 600 MBPD) over the next five years
• Supply Demand balance remains relatively tight
  over the next few years
• Longer-term, the supply-demand balance loosens
  due to numerous factors increasing supply
• Increased ethanol production
• Increased production from U.S. refinery
  expansions
• Increasing imports from Europe and new foreign
  refineries

U.S. Gasoline Demand
MBPD
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Diesel demand to grow 1.4 1.7 per year (300
to 350 MBPD) over the next five years driven by
growth in on-road consumption as a result of
economic growth.
U.S. Distillate Demand

• On-road consumption will continue to be based on
  heavy-duty diesel trucking and not by
  dieselization of the light-duty vehicle fleet as
  has been the case in Europe
• HSD to become a product for home heating use only
• Jet demand should grow at 1.0 1.5 through 2011
  amidst continued growth in domestic travel and
  very strong growth in international passenger
  travel and cargo shipments

U.S. Distillate Demand Outlook
MMBPD
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U.S. diesel markets will continue to be affected
by product specification changes until nearly all
uses are at ULSD quality in 2012.
U.S. Distillate Demand

• The bulk of U.S. diesel demand is in the
  on-highway sector which began a shift from 500
  ppm LSD to 15 ppm ULSD earlier this year
• A significant portion of the existing off-road
  HSD market moves to LSD specifications in June
  2007
• The LSD market then disappears by the middle of
  2012
• Transitions put strain on supply and logistics,
  likely causing dislocations until markets adjust

U.S. Diesel Sulfur Specifications By Use
2007 U.S. Distillate Demand Profile
Total 5.96 MMBPD
Electric Power Other
Marine
Farm
Locomotive
Heating Oil
On-Highway
Jet
Some states have discussed mandating lower
Heating Oil sulfur limits
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Tightening Specifications Hinder Investment

• Significant capital has been spent to meet
  tightening environmental standards, pulling
  capital away from refinery expansion projects
• The American Petroleum Institute estimates U.S.
  downstream companies spent nearly 90 billion on
  environmental projects from 1995 through 2004 and
  have spend tens of billions more on ULSD
  compliance
• Capital constraints likely to continue as
  environmental standards continue to tighten
• EPA 2006 tightening of particulate matter
  standards likely to impact industry
• Continuing compliance with ULSD transition
• 2011 Implementation of Mobile Source Air Toxics
  Phase II standard

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Conversion Economics
/Bbl

• Conversion capacity needed to capitalize on sour
  crude discounts
• Hydroskim - Breakeven or moderate margins High
  resid yield
• When margins are positive - increase crude runs
• When margins are negative - decrease crude runs
• Cracking - Better margins Lower resid yield
• Coking - Best margins Lowest resid yield
• Maximize heavy crudes

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U.S. Refining Outlook

• Light product demand continues to grow
• distillate balances tighter than gasoline
• Gasoline specifications and mix
• lower volatility
• lower benzene
• RBOB for ethanol blending
• Complex refineries have advantage
• Continued reliance on Product Imports
• Government regulations are biggest threat
• alternative energy (ethanol, biodiesel, GTL, H2,
  etc.)
• demand reduction
• CAFE standards
• incentives for hybrids and new technologies
• stay in business capital for environmental
• particulates standards
• tighter product specifications
• Windfall profits taxes
• New refinery capacity additions
• tremendous escalation in construction cost

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Refinery Strategies

• Compliance with environmental safety standards
• Focus on higher efficiency
• energy reduction projects
• best practices in maintenance
• improved reliability
• multi-site synergies
• economies of scale
• Feedstock optimization
• flexibility
• lower cost/ higher margin
• secondary cost control (shipping/ demurrage/
  terminalling)
• blending
• intermediates
• Product optimization
• conversion to light products
• flexibility - seasonal
• shift to middle distillates
• optimize gasoline blending
• Capitalize on niche products

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Impacts on Petrochemical Industry

• Continued increase in ethanol blending
• more RBOB production
• octane added to pool
• displace more C4s C5s
• raffinate needed
• heavy naphtha favored over natural gasoline
• Benzene reduced to 0.6 vol by 2001
• fractionation
• extraction
• saturation
• Blendstock values could shift
• low sulfur is a must
• premium for right boiling range
• reduced requirement for octane
• Alkylate/ ISO-octane are ideal
• Toluene/ Xylene have pluses and minuses
• high value to solve volatility/ distillation
  issues
• detrimental for NOx and toxics
• octane is less important except for premium
  gasoline