NPRA Annual Meeting 2006 Changing World Product Markets and Potential Refining Capacity Increases NPRA Annual Meeting March 2006 Joanne Shore John Hackworth Energy Information Administration

NPRA Annual Meeting 2006 Changing World Product Markets and Potential Refining Capacity Increases World Supply/Demand Cycles & Shifts in Demand Historical Regional Demand & Supply (Why capacity varies regionally) –U.S., Europe, Asia –Demand growth, product mix, trade Price Signals for Capacity Changes Capacity Change Outlook: Who, What, Where Over- or Under-Capacity Potential

NPRA Annual Meeting 2006 World Capacity & Consumption Changes Result in Utilization Increases Notes: World Excluding FSU Source: BP World Statistical Review 2005

NPRA Annual Meeting 2006 World Distillates Growing More than Gasoline & Fuel Oil Declining Notes: World excluding FSU; middle distillate is jet, kerosene, diesel and heating oil (No. 2) Source: BP World Statistical Review 2005

NPRA Annual Meeting 2006 Historical Regional Demand and Supply Overview of regional demand differences U.S and Europe – Atlantic Basin partners Asia Pacific – Mixture, with total driven by large emerging countries Notes: World Excluding FSU Source: BP World Statistical Review 2005

NPRA Annual Meeting 2006 U.S., EU-25, and Asia-Pacific Regions Represent 76% World Petroleum Use Note: European Union-25 (EU-25): former European Union-15 plus Estonia, Latvia, Lithuania, Czech Republic, Slovakia, Hungary, Poland, Slovenia (beginning in 1992/93), Cyprus, Malta Source: BP Statistical World Review 2005

NPRA Annual Meeting 2006 Regional Consumption Growth Varied Source: BP World Statistical Review 2005

NPRA Annual Meeting 2006 U.S. Light Product Demand Transportation main driver Not likely to see any major shift from gasoline to diesel in next 10 years Hybrids and diesel likely to increase in next decade, but little impact on demand during next decade Uncertain efficiency changes in all new vehicle sales, but slow impact regardless

NPRA Annual Meeting 2006 Imports Supplied About Half Gasoline Demand Growth in Recent Years Note: Total gasoline is finished product plus blending components. Source: EIA, Form EIA-814 Low-Sulfur Years

NPRA Annual Meeting 2006 Europes Light Product Demand General policy to reduce energy use and CO2 emissions; Petroleum demand growth has been small (annual 0.7% since 1995); Policies led to increased shift to diesel engines; Diesel demand is increasing while gasoline demand is declining; EU is major driver behind world shift to distillate versus gasoline

NPRA Annual Meeting 2006 Europe Is Unique In Degree of Shift to Middle Distillate Source: BP Statistical World Review 2005

NPRA Annual Meeting 2006 E.U. Hydrocracking Growing, But Not as Fast as Diesel Demand Shift Note: FCC - Fluid Catalytic Cracking Source: EIA, Oil and Gas Journal

NPRA Annual Meeting 2006 Europes Growing Product Imbalance Source: IEA

NPRA Annual Meeting 2006 Summary of European and U.S. Balances Source: EIA, IEA United StatesEuropean Union 15

NPRA Annual Meeting 2006 Asia-Pacific Growth resumed after financial collapse Much variation – China & India large growth drivers, OECD Asia small growth Product mix future? –Non-highway use of petroleum in emerging Asian countries large –Distillate use will continue to grow rapidly, but… –Light duty vehicle use will also grow, and Chinas light- duty fleet is gasoline

NPRA Annual Meeting 2006 Asia-Pacifics Distillate-Gasoline Shares Source: BP Statistical World Review 2005

NPRA Annual Meeting 2006 Price Signals for Capacity Change Margins and differentials drive refinery investment decisions – not price Since the turn of the century, margins and differentials point to need for more investment But views of the future vary Interesting distillate price signal in 2005 Source: Bloomberg spot prices

NPRA Annual Meeting 2006 Light-Heavy Product Price Differential & Crude Oil Price Move Together Source: Bloomberg spot prices – GC - Gulf Coast, NWE-Northwest Europe ARA Barge, WTI – West Texas Intermediate Cushing

NPRA Annual Meeting 2006 Light-Heavy Crude Price Differential & Crude Oil Price Move Together Source: Bloomberg spot price

NPRA Annual Meeting 2006 Light-Heavy Price Differentials Move Together Source: Bloomberg spot price

NPRA Annual Meeting 2006 Unusual Atlantic Basin 2005 Distillate Prices Source: Bloomberg Gulf Coast Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil and Premium Gasoline

NPRA Annual Meeting 2006 If WTI Drops from $60 to $40, Will Differential Drop by 33% ($15-$10)?

NPRA Annual Meeting 2006 If WTI Drops from $60 to $40, Margin Relationship Less Certain Note: Three hurricane months excluded (Aug-Oct 2006) Source Bloomberg Gulf Coast product spot prices and WTI Cushing.

NPRA Annual Meeting 2006 Looking Ahead to Refinery Capacity Growth Where: U.S., Europe, Asia, Middle East What type Who are the companies investing, and what is driving their decisions? When one admits that nothing is certain one must, I think, also admit that some things are much more nearly certain than others. Bertrand Russell, 1947

NPRA Annual Meeting 2006 Current Regional Downstream Capacity Reflects Different Needs Note: Asia-6: China, India, Indonesia, Japan, Singapore, South Korea; EU-6:France, Germany Italym, Netherlands, Spain, and U.K., Middle East: Bahrain, Kuwait, Saudi Arabia, and UAE. Source: Oil and Gas Journal

NPRA Annual Meeting 2006 Regional Distillation Capacity Changes Sources: Oil and Gas Journal, FACTS, Company Presentations

NPRA Annual Meeting 2006 U.S. Capacity Changes (KB/D) CDUCokingFCC/RCCHDC AZ Clean Fuels 150 ? ? - BP100 Coffeyville 15 ConocoPhillips Frontier Marathon Motiva Sunoco ? - Valero Others Creep-Closings TOTAL 1, Note: ? denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking. Sources: Oil & Gas Journal, company presentations, Industrial Information Resources

NPRA Annual Meeting 2006 Europes Capacity Changes (KB/D) CDUVDUCoking FCC/ RCC HDC Croatia Finland France Greece Italy Lithuania Romania Spain TOTAL Note: ? denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; VDU: Vacuum distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking. Sources: Oil and Gas Journal, company presentations.

NPRA Annual Meeting 2006 Asian Capacity Changes (KB/D) CDUVDUCoking FCC/ RCC HDC China 1, India 1, Indonesia Pakistan Other TOTAL 3,614 1, Note: ? denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; VDU: Vacuum distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking Sources: Oil and Gas Journal, FACTS, industry media reports.

NPRA Annual Meeting 2006 Middle East Capacity Changes (KB/D) CDUCoking FCC/ RCC HDC Bahrain Iran Iraq Kuwait410 ? ? ? Oman Qatar 145 ? ? ? Saudi Arabia UAE Yemen TOTAL 2, Note: ? denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; VDU: Vacuum distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking Sources: Oil and Gas Journal, FACTS, industry media reports.

NPRA Annual Meeting 2006 Who Will Expand: Outlooks/Plans Vary GroupRegions Future Market Expectations Refinery Investment Strategy Super MajorsAll Margins revert to historic Maintain top- quartile performance, little expansion need Majors with Large Downstream U.S. & Europe Improved margins with cycles Heavy crude projects & cautious expansion Independent Refiners U.S. "Golden Age of Refining" Expand distillation & conversion Export Refiners Middle East Tight capacity & high light-heavy Expand for export, add bottoms upgrading State & Private India & China High demand growth, better margins Rapid expansion existing & grassroots Sources: Trade press articles, company presentations and press releases.

NPRA Annual Meeting 2006 Over or Under Capacity Potential Putting demand and capacity together regionally Postulating potential for over- or under- capacity Gross Inputs Capacity Source: EIA

NPRA Annual Meeting 2006 Capacity and Consumption Changes Sources: Capacity see previous slides; Demand: EIA, BP World Statistical World Review 2005, FACTS, IEA

NPRA Annual Meeting 2006 Potential for Over/Under Expansion? The potential for under-capacity is probably greatest in the next year or two, before all new expansion plans come online. If the world does not experience any major demand shocks, over-expansion potential is small. The most likely areas where overexpansion has and may again occur are Asia and the Middle East.

NPRA Annual Meeting 2006 Product Market & Price Outlook Summary Demand growth keeps capacity tight to 2010; Light-heavy price differentials and higher margins will result in increased bottoms upgrading capacity; Mixed views on margin outlook will prevent significant overbuilding – with Middle East and Asia being most likely areas for overbuild; Gasoline-diesel price differential will stay close and possibly invert more often as in 2005.

NPRA Annual Meeting 2006 Summary of Capacity Outlook Capacity expansion announcements growing with continued price strength; U.S. capacity could even keep up with demand growth; Europes gasoline surplus will continue, but new hydrocracking capacity may slow growth in Europes diesel imports; Middle East gearing up to meet growing Asian and European needs; Asias growth driven largely by China and India; Continue to watch distillate mix – Particularly in Europe, our Atlantic Basin partner.