The Role of Foreign Supply in the U'S' Gasoline Market

1
The Role of Foreign Supply in the U.S. Gasoline
Market

• Aaron Brady
• Senior Analyst
• SAIS ESAI Seminar
• October 24, 2003

2
Critical Spec Changes

• Tier 2 low-sulfur gasoline rules (2004-2006 phase
  in)
• Ultra low sulfur diesel (2006-2008 phase in)
• MTBE Ban (California, Northeast, others?)

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2003 Nearly 1 Million b/d Gasoline Imports
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U.S. Increasingly Import Dependent
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The Role of Foreign Gasoline

• Most of the surge in imports has come from Canada
  and Europe
• Huge surplus of gasoline in Europe as demand
  there plummets
• Divergence in fuel quality European sulfur spec
  dropped to 150 ppm in 2000 (and 50 ppm in NW
  Europe), while average U.S. levels remained high
• Rising demand in the U.S. provides a convenient
  dumping ground for unwanted high sulfur
  gasoline

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Europes Gasoline Surplus
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Tier 2 Sulfur Road Block?

• The flood of European and other foreign gasoline
  streaming into U.S. markets is likely to face a
  roadblock over the next five years as the Tier 2
  gasoline sulfur rules are phased in.
• By next year, annual corporate averages will be
  more or less in line with the EUs 150 ppm limit
  by 2005, most of the U.S. will be in line with
  Northern European standards (50 ppm and below)

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Gasoline Import Sources
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Critical Spec Changes Who Will Supply?

• Canada, Hovensa (Virgin Islands) will invest to
  meet US standards (low sulfur, non-MTBE, etc)
  because US is a baseload market for them.
• Venezuela a major question mark seeming
  inability to produce even RFG since the nation
  wide strike and purge at PDVSA
• Europe moving to LS Gasoline by 2005 fewer clean
  streams available for export

10
Blending Component Imports Have Skyrocketed
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Most Blending Components Go Into NY Harbor for
RFG Blending
12
Disadvantaged Mediterranean Refiners High-Sulfur
Feedstock and Less Hydrotreating Capacity
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Desulfurization Capacity Where Is It?
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MTBE Ban Focus on Imports

• Real potential for a California-type boutique
  market in the Northeast
• The supply problems for NY and CT are perhaps
  more stark than that of California and the
  Chicago/Milwaukee cases.
• In CA and Midwest, almost all of the boutique
  gasoline is produced by refineries in-state, or
  nearby, with resulting very short supply chains.
  
• In the case of New York and Connecticut, foreign
  imports fill a much larger role!

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Non-MTBE Gasoline Creates Major Import Barrier

• Foreign refiners would have to invest in ability
  to manufacture super low RVP RBOB for ethanol
  blending
• Primarily a summertime gasoline issue
• U.S. price would have to rise much higher to
  motivate foreign refiners to make specialty
  gasoline

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California Gasoline Imports 2003 vs. 2002
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CARB Imports Fewer Sources

• Finished CARB Gasoline
• 2002 5 countries
• 2003 2 countries
• Conventional or Near-CARBOB gasoline imported
  into California
• 2002 14 countries
• 2003 3 countries

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Northeast MTBE Ban How Will Exporters Hedge?

• NYMEXs RFG unleaded futures contract will
  continue to be for finished gasoline, not RBOB
• How will foreign blending component suppliers
  lock in the delivered value of their product?
• Risk increases for these suppliers, who face
  prospect of a price collapse by time cargo
  arrives
• This risk paradoxically increases chance of
  prolonged price spikes

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Will the Northeast Become a California Style
Price Island?
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Changing Marginal Economics for East Coast
Gasoline Supplies Imports are Low Cost
Incremental Barrel
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Gulf Coast Market Share on East Coast Has Declined
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Gulf Coast Refiners Focus on Midwest...
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And the West Coast
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Boutique Gasoline Issues Not Limited to U.S.

• Australia 2004 Spec Gasoline
• 1 MTBE Limit, 20 Olefin Cap Limit
• Australian capacity closures increasing import
  requirements
• Net reduction in number of suppliers to Australia
• Eliminates almost all Chinese gasoline, which is
  mostly cat gasoline and therefore very high in
  olefins
• Importers worried high premiums will be necessary
  to motivate marginal suppliers

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European Product Specs

• Most of NW Europe at 50 ppm sulfur diesel and
  gasoline
• Germany is at 10 ppm
• Mediterranean Europe is lagging
• 350 ppm diesel, 150 ppm gasoline, some 50 ppm
  fuels
• Investment being made

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European Product Specs

• Over investment in Europe?
• Tax incentives help refinery economics
• Little premium in the market for ultra low sulfur
  fuels
• Massive amount of investment for clean fuels in
  Northwest Europe
• Germany leading
• Netherlands, Scandinavia, UK, Belgium

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Over Investment In Europe?
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Over Investment In Europe?