Changing World Product Markets and Potential Refining Capacity Increases

1
Changing World Product Markets and Potential
Refining Capacity Increases

• NPRA Annual Meeting
• March 2006
• Joanne Shore
• John Hackworth
• Energy Information Administration

2
Changing World Product Markets and Potential
Refining Capacity Increases

• World Supply/Demand Cycles Shifts in Demand
• Historical Regional Demand Supply (Why capacity
  varies regionally)
• U.S., Europe, Asia
• Demand growth, product mix, trade
• Price Signals for Capacity Changes
• Capacity Change Outlook Who, What, Where
• Over- or Under-Capacity Potential

3
World Capacity Consumption Changes Result in
Utilization Increases
Notes World Excluding FSU Source BP World
Statistical Review 2005
4
World Distillates Growing More than Gasoline
Fuel Oil Declining
Notes World excluding FSU middle distillate is
jet, kerosene, diesel and heating oil (No. 2)
Source BP World Statistical Review 2005
5
Historical Regional Demand and Supply

• Overview of regional demand differences
• U.S and Europe Atlantic Basin partners
• Asia Pacific Mixture, with total driven by
  large emerging countries

Notes World Excluding FSU Source BP World
Statistical Review 2005
6
U.S., EU-25, and Asia-Pacific Regions Represent
76 World Petroleum Use
Note European Union-25 (EU-25) former European
Union-15 plus Estonia, Latvia, Lithuania, Czech
Republic, Slovakia, Hungary, Poland, Slovenia
(beginning in 1992/93), Cyprus, Malta Source BP
Statistical World Review 2005
7
Regional Consumption Growth Varied
Source BP World Statistical Review 2005
8
U.S. Light Product Demand

• Transportation main driver
• Not likely to see any major shift from gasoline
  to diesel in next 10 years
• Hybrids and diesel likely to increase in next
  decade, but little impact on demand during next
  decade
• Uncertain efficiency changes in all new vehicle
  sales, but slow impact regardless

9
Imports Supplied About Half Gasoline Demand
Growth in Recent Years
Low-Sulfur Years
Note Total gasoline is finished product plus
blending components. Source EIA, Form EIA-814
10
Europes Light Product Demand

• General policy to reduce energy use and CO2
  emissions
• Petroleum demand growth has been small (annual
  0.7 since 1995)
• Policies led to increased shift to diesel
  engines
• Diesel demand is increasing while gasoline demand
  is declining
• EU is major driver behind world shift to
  distillate versus gasoline

11
Europe Is Unique In Degree of Shift to Middle
Distillate
Source BP Statistical World Review 2005
12
E.U. Hydrocracking Growing, But Not as Fast as
Diesel Demand Shift
Note FCC - Fluid Catalytic Cracking Source
EIA, Oil and Gas Journal
13
Europes Growing Product Imbalance
Source IEA
14
Summary of European and U.S. Balances
United States
European Union 15
Source EIA, IEA
15
Asia-Pacific

• Growth resumed after financial collapse
• Much variation China India large growth
  drivers, OECD Asia small growth
• Product mix future?
• Non-highway use of petroleum in emerging Asian
  countries large
• Distillate use will continue to grow rapidly,
  but
• Light duty vehicle use will also grow, and
  Chinas light-duty fleet is gasoline

16
Asia-Pacifics Distillate-Gasoline Shares
Source BP Statistical World Review 2005
17
Price Signals for Capacity Change

• Margins and differentials drive refinery
  investment decisions not price
• Since the turn of the century, margins and
  differentials point to need for more investment
• But views of the future vary
• Interesting distillate price signal in 2005

Source Bloomberg spot prices
18
Light-Heavy Product Price Differential Crude
Oil Price Move Together
Source Bloomberg spot prices GC - Gulf Coast,
NWE-Northwest Europe ARA Barge, WTI West Texas
Intermediate Cushing
19
Light-Heavy Crude Price Differential Crude Oil
Price Move Together
Source Bloomberg spot price
20
Light-Heavy Price Differentials Move Together
Source Bloomberg spot price
21
Unusual Atlantic Basin 2005 Distillate Prices
Source Bloomberg Gulf Coast Conventional
Gasoline, No. 2 Heating Oil NW Europe 0.2
Heating Oil and Premium Gasoline
22
If WTI Drops from 60 to 40, Will Differential
Drop by 33 (15-10)?
23
If WTI Drops from 60 to 40, Margin Relationship
Less Certain
Note Three hurricane months excluded (Aug-Oct
2006) Source Bloomberg Gulf Coast
product spot prices and WTI Cushing.
24
Looking Ahead to Refinery Capacity Growth

• Where U.S., Europe, Asia, Middle East
• What type
• Who are the companies investing, and what is
  driving their decisions?

When one admits that nothing is certain one
must, I think, also admit that some things are
much more nearly certain than others. Bertrand
Russell, 1947
25
Current Regional Downstream Capacity Reflects
Different Needs
Note Asia-6 China, India, Indonesia, Japan,
Singapore, South Korea EU-6France, Germany
Italym, Netherlands, Spain, and U.K., Middle
East Bahrain, Kuwait, Saudi Arabia, and UAE.
Source Oil and Gas Journal
26
Regional Distillation Capacity Changes 2005-2010
Sources Oil and Gas Journal, FACTS, Company
Presentations
27
U.S. Capacity Changes 2005-2010 (KB/D)
Note ? denotes plans that mention a type of
unit, but no capacity volumes. CDU Crude
distillation unit FCC Fluid catalytic cracking
RCC Residual catalytic cracking HDC
Hydrocracking. Sources Oil Gas Journal,
company presentations, Industrial Information
Resources
28
Europes Capacity Changes 2005-2010 (KB/D)
Note ? denotes plans that mention a type of
unit, but no capacity volumes. CDU Crude
distillation unit VDU Vacuum distillation unit
FCC Fluid catalytic cracking RCC Residual
catalytic cracking HDC Hydrocracking.

Sources Oil and Gas
Journal, company presentations.
29
Asian Capacity Changes 2005-2010 (KB/D)
Note ? denotes plans that mention a type of
unit, but no capacity volumes. CDU Crude
distillation unit VDU Vacuum distillation unit
FCC Fluid catalytic cracking RCC Residual
catalytic cracking HDC Hydrocracking
Sources Oil and Gas Journal, FACTS,
industry media reports.
30
Middle East Capacity Changes 2005-2010 (KB/D)
Note ? denotes plans that mention a type of
unit, but no capacity volumes. CDU Crude
distillation unit VDU Vacuum distillation unit
FCC Fluid catalytic cracking RCC Residual
catalytic cracking HDC Hydrocracking
Sources Oil and Gas Journal, FACTS,
industry media reports.
31
Who Will Expand Outlooks/Plans Vary
Sources Trade press articles, company
presentations and press releases.
32
Over or Under Capacity Potential

• Putting demand and capacity together regionally
• Postulating potential for over- or under-capacity

Capacity
Gross Inputs
Source EIA
33
Capacity and Consumption Changes2005-2010
Sources Capacity see previous slides Demand
EIA, BP World Statistical World Review 2005,
FACTS, IEA
34
Potential for Over/Under Expansion?

• The potential for under-capacity is probably
  greatest in the next year or two, before all new
  expansion plans come online.
• If the world does not experience any major demand
  shocks, over-expansion potential is small.
• The most likely areas where overexpansion has and
  may again occur are Asia and the Middle East.

35
Product Market Price Outlook Summary

• Demand growth keeps capacity tight to 2010
• Light-heavy price differentials and higher
  margins will result in increased bottoms
  upgrading capacity
• Mixed views on margin outlook will prevent
  significant overbuilding with Middle East and
  Asia being most likely areas for overbuild
• Gasoline-diesel price differential will stay
  close and possibly invert more often as in 2005.

36
Summary of Capacity Outlook

• Capacity expansion announcements growing with
  continued price strength
• U.S. capacity could even keep up with demand
  growth
• Europes gasoline surplus will continue, but new
  hydrocracking capacity may slow growth in
  Europes diesel imports
• Middle East gearing up to meet growing Asian and
  European needs
• Asias growth driven largely by China and India
• Continue to watch distillate mix Particularly
  in Europe, our Atlantic Basin partner.