Slide 9 of 25

Notes:

• In the early to mid 1980’s, Atlantic Basin refiners rapidly expanded their conversion capacity as a consequence of the belief that world crude production would get heavier, and residual fuel oil demand would decline.

• What actually happened was:
  • Crude supplies did not get heavier
  • And the additional conversion capacity actually helped to reduce the light-heavy crude differential.

• Since the late 1980’s, conversion capacity additions have slowed. European and U.S. refiners have increased coking capacity, which is part of the “thermal capacity” shown in the figure. These additions occurred when light crude oil supply was increasing. This seemingly uneconomic capital expansion makes sense when we note that much of the coking capacity expansion was associated with refiners connected with producing countries that have heavy crude oil to sell.
  • In the U.S., these producing countries wanted to assure that they would have a market for their heavy crudes. These heavy crudes also have a high sulfur content, and without conversion capacity to upgrade the bottoms, high sulfur residual fuel would be produced. But the U.S. has very little market for high sulfur residual fuel.