1	Refinery Investments and Future Market Incentives Joanne Shore John Hackworth U.S. Energy Information Administration September 29, 2008 Platts 2^nd Annual European Refining Markets Conference
2	Overview: Factors Affecting Investment Decisions Demand: Growth and Mix Shift Feedstocks: Incentives to use lower quality feedstocks (Light-heavy differentials) Margins
3	Future Demand Growth and Product Mix Shifts Growth: Mainly outside the Atlantic Basin Product Mix Shifts & Investment: U.S. – Different future Europe – Continued shift in from gasoline to distillate Asia – Less issue of shift than of growth
4	World Consumption Growing: Largest Growth Outside U.S. & Europe
5	Europe Major Driver of World Consumption Mix Shift Towards Distillates
6	Atlantic Basin Price Incentives Shifting Toward Distillates
7	U.S. – Steps to Increased Distillate Operating changes – Beginning to see U.S. system potential to shift from gasoline to distillate Planned hydrocracking investments (Marathon Garyville, Motiva Port Arthur, Valero)
8	U.S.: Distillate Focus This Summer Illustrated Operating Yield Shift Potential
9	U.S. Petroleum-Based* Gasoline and Distillate Fuel Needs Shift
10	Future U.S. Investment to Produce More Distillate Equipment changes: Cut-point shifts Distillation efficiency Hydrotreating expansion Catalyst changes – FCC catalysts to produce more light cycle oil Planned hydrocracking investments coming on stream May not need more to satisfy U.S. demand shift and increase some exports of distillate
11	Increasing European Distillate Production Refineries are already operating at maximum distillate potential (unlike the U.S.) Historical investments resulted in making more distillate by destroying residual fuel rather than reducing gasoline production.
12	OECD Europe: Imbalance Between Refining and Demand Met with Imports/Exports
13	Europe: What Next for Product Mix Investment? Seeing more distillate production investment in Southern Europe. Hydrocracking expansions include: Portugal 50 KB/D Spain 180 KB/D Italy 70 KB/D Greece 30 KB/D Total 330 KB/D Biodiesel
14	Feedstocks: Investing to Take Advantage of Widening Light-Heavy Differentials Drivers behind the widening price difference Supply of light crude Product market influences on the price differentials Conversion capacity impacts on differentials
15	Supplies of Light Sweet Crude Increasing in Atlantic Basin
16	Light-Heavy Product Price Difference Increases with Crude Oil Price
17	Light-Heavy Product Price Differential & Crude Oil Price Move Together
18	Light-Heavy Price Differentials Move Together
19	Higher Light-Heavy Price Differences Go With Higher Price Levels – But Much “Scatter”
20	Refiners Continue to Process Crude without Increasing Fuel Oil Yields
21	Future Coking Increases: Will Expansions Affect Light-Heavy Spread?
22	Margins – Short Golden Age Margin Indicators U.S. vs Europe Future Implications
23	Refining Output Variations Impact Profitability
24	U.S. Margin Indicator Higher Due to No Residual Fuel and More Gasoline
25	Future Profitability Light-heavy price differentials May decline some with growing conversion capacity and slightly lower crude oil prices But likely to remain relatively high Margins U.S. gasoline margins under pressure from growing European exports, ethanol use, and improved vehicle efficiencies, but U.S. refinery margins likely to remain higher than in the 1990’s Atlantic Basin distillate margins likely to be higher than gasoline more often in the future as regional distillate imbalance continues European margins buoyed by strength in distillate demand, but also depend on U.S. gasoline margins
26	Summary Investment to produce more distillate Future demand shifts imply attractive choice for some refiners to increase distillate yields Bottoms upgrading investment Light heavy differentials likely to stay elevated as crude price stays high Amount of heavy upgrading may not impact light-heavy price differences greatly as total residual production not expected to change much and as residual fuel market demand is affected by environmental concerns. Margins – Short golden age, but still better than 1990s Margin levels impact all types of refining investment, but especially expansion Little need for expansion in Atlantic Basin – expansion could negatively impact margin
27