1	Are Refinery Investments Responding to Market Changes? Joanne Shore John Hackworth U.S. Energy Information Administration March 2009 NPRA Annual Meeting
2	Overview Long-Term Look at Market Drivers Impacting Investment Decisions Atlantic Basin Investments
3	Long-Term Look at Market Drivers Impacting Investment Decisions Demand: Growth and Mix Shift Feedstocks: Incentives to use lower quality feedstocks (Light-heavy differentials) Margins
4	Long-Term Demand Growth and Product Mix Shifts Growth: Mainly outside the Atlantic Basin Product Mix Shifts & Investment: U.S. – Different future Europe – Continued shift from gasoline to distillate Asia – Less issue of shift than of growth
5	World Petroleum Consumption Growing: Largest Growth Outside U.S. & Europe
6	Europe Major Driver of World Consumption Mix Shift Towards Distillates
7	Atlantic Basin Price Incentives Shifting Toward Distillates
8	Feedstocks: Investing to Take Advantage of Widening Light-Heavy Differentials Light-heavy price difference – Incentive for investing in bottoms processing investments Drivers behind the widening price difference Future direction?
9	Light-Heavy Product Price Difference Increases with Crude Oil Price
10	Light-Heavy Price Differentials Move Together
11	Higher Light-Heavy Price Differences Go with Higher Price Levels – But Much “Scatter”
12	Factors Impacting Light-Heavy Price Differentials Crude oil price level – EIA forecasts indicate increasing crude prices with economic recovery Available mix of light-heavy crude oil – Short-term variations, but mid-term mix not likely to change much Market for residual fuel products – Low sulfur bunker fuel uncertainties Changes in bottoms processing capacity – Not seeing planned increases having a large impact on differentials
13	Margins – Short Golden Age for Capacity Expansion Incentives Margin Indicators U.S. vs. Europe
14	Refining Output Variations Impact Profitability
15	U.S. Margin Indicator Usually Higher Due to No Residual Fuel and More Gasoline
16	Atlantic Basin Investments United States Europe
17	U.S. Investment Environment Before 2008 Forecasts called for increasing demand (gasoline and distillate) and need for capacity expansions Slow shifts to distillate Saw planned expansion with hydrocracking investments (Marathon Garyville, Motiva Port Arthur, Valero) 2008 Surge in world distillate demand (mainly electricity needs) sent distillate prices up U.S. refiners began shifting yields to distillate through operating changes alone Recession reduced demand, some projects delayed U.S. Energy Independence and Security Act (EISA) reduced long-term need for petroleum-based gasoline
18	Long-Term U.S. Petroleum-Based* Gasoline and Distillate Fuel Needs Shift with EISA
19	In 2008, U.S. Shifts from Net Importer to Net Exporter of Distillate – Short or Long Term?
20	Distillate Yields Reflect Price Incentives
21	Operating Changes and Next Step Investments Before Hydrocracking Cut-Point Shifts Distillation Efficiency Improvements Catalyst Changes Hydrotreating expansion
22	U.S. Investment Uncertainties Short-term signals How long will the economic slump keep demand down? How long will strong short-term distillate pull from other countries continue – Europe in particular Lower utilization vs. closures Long-term signals Need for new capacity moved out in time. How far? Still seeing need for shift to distillate from gasoline, but will U.S. (and world) policies further change level and mix of petroleum product needs? Clear “wait-and-see” time
23	European Investment Environment Forecasts continue to show increasing need for distillate and declining need for gasoline Margins under pressure in the short term. U.S. market for European gasoline exports coming under pressure Diesel import availability increasing
24	OECD Europe: Imbalance Between Refining and Demand Met with Imports/Exports
25	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 Additional hydrocracking capacity is planned, but residual fuel destruction still a large factor
26	European Capacity Plans (2008-2013)
27	European Investment Uncertainties Short-term Signals Economic slump impacts on capital expenditures: go, cancel, delay? Need for and sources of distillate imports – short- or long-term changes? U.S. gasoline market changes Lower utilization vs. closures Long-term Signals Product demand projections have decreased. Will that impact expansions? Still seeing need for shift to distillate from gasoline, but the rate at which the distillate imbalance was increasing has diminished So is there change in views of investment incentives?
28	Summary Investment to produce more distillate Distillate price premiums to gasoline becoming the norm Distillate investments occurring in both U.S. and Europe Investment to upgrade bottoms High light-heavy differentials inspired rash of upgrading, but differentials fell back with crude price. Differentials could well increase again with projected crude price increases. Bottoms conversion investments occurring in U.S. to use Canadian tar sands and in Europe to produce more distillate Investment to expand production Margin incentive is weak, and long-term refinery demand projections are flat or declining for U.S. and Europe Apart from individual project economics that might show synergies with accompanying upgrade, hard to see need for more capacity
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