1. Ethanol, Gasoline, and ULSD Supply Issues in 2006 State Heating Oil and Propane Conference August 2006 John Hackworth Joanne Shore Energy Information Administration

2. 2 Overview MTBE to Ethanol Shift –Challenges –Progress to date Gasoline Supply Issues –Refinery limitations –MTBE to ethanol issues –Import changes ULSD Supply –Implementation so far –Areas to watch

3. 3 MTBE Elimination: Northeast & Texas Region served mainly by pipeline

4. 4 Eliminating MTBE and Replacing with Ethanol MTBE mainly used in RFG (11.4% volume per gallon) Both MTBE and ethanol have good octane and are clean Issue is ethanol relative to MTBE. Ethanol has: –Higher blending RVP (VOCs problem) –Higher toxics (MSAT issue) –Higher affinity for water, which means shipping separately from petroleum and blending at terminals

5. 5 VOCs: Summer Gasoline Capability Loss When Switching from MTBE to Ethanol RFG Outside of CA – net 5-6% loss –Lose 11% MTBE –Gain 10% ethanol –Lose 5% light ends to compensate for ethanol’s increased RVP CARB RFG – net 10% loss –Lose 11% MTBE –Gain 6% ethanol –Lose 5% light ends to compensate for ethanol’s increase RVP May also need small additional volume to compensate for lower energy of ethanol vs. MTBE Longer term, refiners will make changes to compensate

6. 6 MTBE Bans Increased Ethanol Use CA, NY/CT

7. 7 Use of Ethanol-Blended Gasoline Increased in May as Industry Eliminated MTBE

8. 8 RFG Gasoline in 2006 MTBE being eliminated and replaced with ethanol About 130 KB/D of additional ethanol needed to replace MTBE Added ethanol not all available from domestic production –Move ethanol from E10 sold in conventional gasoline markets and use in RFG –More ethanol imports? –May reduce RFG ethanol blend from 10% to 5.7% for a time Ethanol distribution & terminal preparation challenges Shift in RBOB supply to East Coast (Less East Coast production, more from Gulf Coast and imports) RFG v. conventional gasoline differentials could be high – possible price surges

9. 9 “Room” for 400 KB/D of Ethanol BALANCEKB/D 2005 Ethanol Use263 Extra Demand in 2006 (East Coast, Texas)130 Potential Ethanol Demand~400 Ethanol Production & Imports March 2006332 Balance? “Discretionary Shift”, production, or imports ~60

10. 10 Ethanol Production Increasing

11. 11 Historical Ethanol Imports

12. 12 Ethanol Generally Follows Gasoline Source: Bloomberg

13. 13 Gasoline Supply Issues Lower utilization and higher imports Focus on East Coast markets –Transition to ethanol –Imports (sources and volumes to meet demand) Regional prices and implications

14. 14 Utilization Patterns Reflect Maintenance & Hurricanes Typical Range is 10-year average 1995-2004 +/- 2 standard deviations

15. 15 Total Gasoline Imports Year-to-Date Jan-May Note: Total gasoline is finished product plus blending components. Source: EIA, Form EIA-814

16. 16 Europe’s Diesel Use Exceeds Gasoline, & Gasoline Demand is Falling

17. 17 Europe’s Excess Gasoline Supply Is Growing

18. 18 Europe’s Domestic Light Product Supply Imbalance Grown Strongly since 1998

19. 19 U.S. Imports Growing and Blending Component Share Increasing

20. 20 Largest Gasoline Suppliers to U.S. (Thousand Barrels Per Day) 2004 Jan-May 2005 Jan-May 2006 Jan-May Canada 170180160 Netherlands 7293146 U.K. 10798116 Virgin Islands 11610195 Venezuela 447677

21. 21 U.S. Is Becoming More Important Destination for UK and Netherlands UK and Netherlands Gasoline Production & Exports (Thousand Barrels Per Day) Gasoline Production Net Exports to OECD Europe Net Exports to U.S. Netherlands 199534411920 20053302287 UK 19956318144 20055244107

22. 22 New York’s Recent Prolonged Discount to Gulf Coast Prices

23. 23 RBOB Showing Extra Strength in 2006

24. 24 Ultra-Low Sulfur Diesel (ULSD) Few basics Production so far Things to watch Info website: www.clean-diesel.org

25. 25 Clean Fuel Quality Requirements & Supply Gasoline –Low sulfur requirements –MTBE elimination –Import impacts Ultra-Low Sulfur Diesel (ULSD) –ULSD requirements (trending to all USLD) –ULSD implementation –Implications for other distillate fuels

26. 26 ULSD Phase In Summary Fuel200620072008200920102011201220132014 Highway 80% 15 ppm & 20% 500 ppm 15 ppm Non-Road 500 ppm 15 ppm LM 500 ppm 15 ppm NRLM w/ Credits HS 500 ppm 15 ppm Notes: LM – Locomotive and Marine; ppm – parts per million Source: EPA Presentation ULSD Workshop Nov 2004

27. 27 As ULSD Requirements Grow, Non-ULSD Pool Shrinks & Production Issues Grow Source: EIA estimates derived from EPA planned capacity survey, EPA Regulatory Impact Analysis, EIA Sector Demand, EIA AEO 2006 distillate projections.

28. 28 ULSD Production Is Progressing Rapidly

29. 29 Diesel Production June 2005 vs Last Week June 2006

30. 30 Number of Refineries Producing Diesel By Sulfur Level EPA Precompliance Report (2005) 6/30/2006 Reported Comments PADD 3 100% 15 ppm299 Mix 15 & 5003127 are Hi ULSD 100% 500 ppm813 PADD 2 100% 15 ppm177 Mix 15 & 5003104 are Hi ULSD 100% 500 ppm46 Note: EPA data include all refineries. The EIA 6/30 reported data are from the weekly sample, which does not cover all refineries.

31. 31 ULSD Summary Refinery production began in June. Refiners should average 80% for June through December. Issues to watch –Distribution and contamination – next presentation –Kerosene/jet and winter diesel blending –Import availability –State interest in limiting heating oil sulfur content

32. 32 Wrap Up: Year of Record Fuel Prices Record crude oil prices High refinery limitations – hurricane and maintenance Two difficult fuel specification changes – MTBE to ethanol and ULSD