1	Trends, Cycles, and Kinks (Changing Trade & Investment Patterns) OPIS 11^th Annual National Supply Summit October 19, 2009 Joanne Shore John Hackworth Energy Information Administration
2	Overview Major market drivers affecting trade patterns and investments are changing Demand growth Product mix Crude price & light-heavy price differences Profitability Review implications for investment & trade: Historical trends Recent cycle Kinks or shifts in trends
3	Trends As Seen from 2007: Will They Resume? Rising crude prices and wide light-heavy price differences encourage changing feedstocks Demand: Growth and mix shift Increase in refining margins – capital expenditure driver Policy shifts towards biofuels & efficiencies
4	View from 2007: Climbing Crude Prices But Small Demand Impact (Oil Sands Looking Good)
5	Higher Light-Heavy Price Differences Go with Higher Price Levels -- Encouraging Bottoms Upgrading
6	World Petroleum Consumption Growing Until Recently: Largest Growth Outside U.S. & Europe
7	Refinery Utilization Grew with Demand through Late 1990’s; Capacity Expansion Kept Up After
8	Atlantic Basin Petroleum Consumption Growth through 2007 Mainly in U.S.
9	In Last Decade, Europe Major Driver of World Product-Mix Shift Towards Distillates
10	Atlantic Basin Price Incentives Shifting Toward Distillates
11	Refining and Marketing Net Margins Rose 2003-2007 Providing Investment Incentive
12	Balancing Demand and Supply with Trade Flows – An Option to Investment Changing trade flows are an important means of balancing product supply with demand, and are weighed against investments to meet demand Historically, economics favored Europe sending excess gasoline to U.S. rather than investing to reduce gasoline production And U.S. suppliers used excess European supply rather than investing in more gasoline production But Europe has had to seek out other markets for its growing gasoline exports
13	OECD Europe: Imbalance Between Refining and Demand Met with Imports/Exports
14	Western Europe’s Gasoline Net Export Growth in Mexico, Africa, Middle East
15	Investment View in 2007 – Can We Build Fast Enough? UNITED STATES U.S. was planning expansions of about 1 million-barrels-per-day from 2007-2011 (Down slightly from 2006 due to rising costs and biofuel growth) U.S. upgrading projects (coking units) also planned to make use of more Canadian crude Several U.S. refiners engaged in large hydrocracking expansions for more distillate EUROPE Europe’s plans focused on upgrading for product mix changes -- more residual fuel destruction and increased production of distillate. But increasing distillate imports still projected Gasoline production left unchanged
16	Outlook from Early 2007 Perspective Crude price forecasts high Oil sands optimism Biofuel growth planned – especially ethanol Petroleum demand growth continuing Tight distillate demand expected to stay tight Refining margins improved – Golden Age Refinery capacity tight – plans for expansion & upgrading
17	Cycles: The Tide Turns, Clouding Trend Paths 2008 Distillate Anomaly Unusually tight distillate market Gives glimpse of future Recession hits Demand declines Utilization declines Price declines Stocks build Expansion plans delayed/cancelled
18	Distillate Prices Soared in 2008 Relative to Gasoline – But Reverting in 2009
19	U.S. Distillate Yields Reflect Price Incentives: Strong Prices in 2008 & Reversal in 2009
20	2008 Distillate Incentives Resulted in Unprecedented U.S. Operating Yield Shifts
21	2009 Europe and U.S. Consumption Reflect Recession
22	First Half 2009 Refinery Inputs Down in Europe and U.S.
23	U.S. Growth in Gasoline Imports (Coming Mainly from Europe) Slowed with Recession
24	Distillate Inventories Reflect Much More Supply Than Demand
25	Gasoline Supply and Demand in Closer Balance than Distillate
26	2008-09 Crude Price Roller Coaster
27	High Light-Heavy Differentials Declined Sharply as All Drivers Reversed
28	Refining Margin: Golden Age to Dark Age?
29	Refining Capacity Plans Change: Delay vs. Cancel Independent refiners see full impact of refining margins on bottom line The decision to delay or even cancel depends on how far along a project is The type of project also affects the delay/cancel decision Upgrading for more distillate, less gasoline may seem “safer” than capacity expansion Bottoms upgrading to use heavier crude oils becoming more refinery location dependent
30	Kinks: Changing Trends Demand growth prospects change sharply Crude-based distillate will grow more than gasoline Atlantic Basin gasoline surplus Oil sands – GHG and light-heavy price uncertainties; but US looking for heavy Margins – Not likely to return to high levels in mid term
31	Significant Shift in Trends from 2007 Outlook to 2009 Outlook In 2007, Rising prices projected to ease in the long term with new supply U.S. petroleum growth projected to continue; need for more refining capacity But outlook from 2009 is dramatically different; Future prices are about double those seen in 2007 Demand flat Policy changes another important factor
32	Rising Crude Oil Prices and Policies Made Biofuels More Attractive Higher prices improved biofuels’ economic attractiveness Ethanol replaced MTBE in the U.S. due to concerns over water contamination and liabilities Renewable fuel interest increased for national security and GHG control U.S. policy changes in 2005 and 2007 set and increased renewable fuel standard
33	Long-Term U.S. Petroleum-Based* Gasoline and Middle Distillate Needs Shift with Policy
34	In 2008, U.S. Shifts from Net Importer to Net Exporter of Distillate – Short or Long Term?
35	U.S. Distillate Exports Still Strong in 2009
36	European Export Trend Continues in 2009 – But For How Long?
37	Future Atlantic Basin Balances & Implied Trade Distillate Shortfall Europe needs more U.S. may help fill that need Eastern Europe, Middle East, and India will be important suppliers to Europe Gasoline Glut Europe’s surplus production expected to grow Europe’s exports will compete with India, Middle East to supply Asia and Africa U.S. Gulf Coast, Virgin Islands to supply Latin America U.S. Gulf Coast, Canada, Virgin Islands to supply U.S. East Coast But Europe’s best market may still be the U.S. – implying strong competition in East Coast markets.
38	Atlantic Basin Capacity Expansion Not Needed Now Planned capacity expansions in Atlantic Basin exceed demand growth in medium term (to 2015) Again seeing closures (Eagle Point – just the beginning?) Refinery asset value has dropped Heavy crude supply impacting U.S. projects PADD 2 upgrading projects more likely to move ahead than PADD 3 due to oil sands connections Europe needs more diesel production
39	U.S. Heavy Crude Oil and Oil Sands Import Sources Expected to Shift
40	U.S Refinery Investment Outlook – Hit the Brakes, Idle the Engine Profit picture alters refinery project plans Planned projects delayed or suspended in light of revised market outlook Impacts greater in PADD 3 than PADD 2 Will margins and light-heavy price differences rebound?
41	European Refinery Investment Outlook – Upgrading But Competition Pressing Profit declines hurting cash for capital expenditures Outlook for distillate demand still increasing, but recession reprieve encourages delays Refinery projects are mostly in Southern Europe New capacity from India and Middle East is very competitive
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