Refinery Investments and Future Market Incentives

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Diagram: Factors Affecting Investment Decisions. Request: Growth and Mix Shift Feedstocks: Incentives to utilize lower quality feedstocks (Light-overwhelming differentials)Margins. Request. Feedstocks. Edges. Future Demand Growth and Product Mix Shifts. Development: Mainly outside the Atlantic BasinProduct Mix Shifts

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

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Overview: Factors Affecting Investment Decisions Demand: Growth and Mix Shift Feedstocks: Incentives to utilize bring down quality feedstocks (Light-overwhelming 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 move in from fuel to distillate Asia – Less issue of move than of development 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

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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. framework potential to move from gas to distillate Planned hydrocracking speculations (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 rejects ethanol, biodiesel, and distillate from coal-to-fluids and biomass-to-fluids. Source: AEO 2008 Reference Case

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Future U.S. Speculation to Produce More Distillate Equipment changes: Cut-point shifts Distillation proficiency Hydrotreating extension Catalyst changes – FCC impetuses to deliver all the more light cycle oil Planned hydrocracking ventures going ahead stream May not require more to fulfill U.S. request move and increment a few fares of distillate

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Increasing European Distillate Production Refineries are now working at greatest distillate potential (not at all like the U.S.) Historical ventures brought about making more distillate by crushing leftover fuel as opposed to decreasing gas generation.

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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 creation interest in Southern Europe. Hydrocracking developments 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 augmenting cost contrast Supply of light unrefined Product advertise impacts on the cost differentials Conversion limit impacts on differentials Feedstocks

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Supplies of Light Sweet Crude Increasing in Atlantic Basin Atlantic Basin Crude Production Projections Note: Most development on this graph is in territories with higher quality rough oils. Latin America incorporates Venezuela and Mexico with their overwhelming rough oils, however these territories is not anticipated to develop 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 costs (LLS – Louisiana Light Sweet; GC – Gulf Coast)

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

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

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Higher Light-Heavy Price Differences Go With Higher Price Levels – But Much "Scramble" Source: Bloomberg spot costs

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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. versus Europe Future Implications Margins

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

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

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Future Profitability Light-overwhelming value differentials May decay some with developing change limit and somewhat bring down unrefined petroleum costs But prone to remain moderately high Margins U.S. gas edges under weight from developing European fares, ethanol utilize, and enhanced vehicle efficiencies, yet U.S. refinery edges liable to stay higher than in the 1990's Atlantic Basin distillate edges prone to be higher than gas all the more frequently later on as territorial distillate lopsidedness proceeds with European edges floated by quality in distillate request, additionally rely on upon U.S. gas edges

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Summary Investment to deliver more distillate Future request shifts suggest alluring decision for a few refiners to build distillate yields Bottoms redesigning venture Light substantial differentials liable to remain lifted as unrefined value remains high Amount of overwhelming overhauling may not affect light-substantial value contrasts significantly as aggregate lingering generation not anticipated that would change much and as leftover fuel advertise request is influenced by natural concerns. Edges – Short brilliant age, yet at the same time superior to anything 1990s Margin levels affect a wide range of refining speculation, yet particularly development Little requirement for extension in Atlantic Basin – development could contrarily affect edge

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Questions? www.eia.doe.gov joanne.shore@eia.doe.gov

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