US coker outlook: Issues for new capacity Stephen Burns Houston Bureau Chief Argus Media

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Coke production: Unique features? Coke production is not driven by coke demand Supply reflects refinery utilization and investment strategies

US gasoline challenges Demand to keep growing Infrastructural capacity constraints Tightening specifications to limit imports

No new refineries World-scale refinery of 200,000 b/d would cost $2 billion? New Source Review battle in courts creates uncertainty NIMBY syndrome turning into BANANA Never any good news about refinery emissions High US retail gasoline prices do not hurt consumers enough

“Golden Age” for refining? Refining margins hit record high Sour crude discounts enhance margins at complex refineries Q2 profits to eclipse all of 2003? Sentiment hangover after 20 years of low returns High utilization = deferred maintenance = coke supply risk?

Sour crude discount favors complex refineries I

Coker growth path Gulf Coast coker capacity from 800,000 b/d in 1998 to 2.1 million b/d now Mexico, Venezuela encouraged projects to secure market share for heavy crudes Around 2mn b/d of Pemex/PdV crude to US Gulf Coast Advances in coker technology improve economics

Significant recent US additions ChevronTexaco, Pascagoula: extra 800,000 t/yr from 2003 Valero, Texas City: New 45,000 b/d coker in $337 million upgrade, started up October Extra 1.08 million t/yr; could reach 1.20 million t/yr? Valero, St. Charles: Expanded coker by 15,000 b/d, Q ConocoPhillips, Wood River: extra 300,000 t/yr from April Citgo plans for Corpus Christi?

Factors against new coker investment Cokers are expensive propositions - $400mn for 50,000 b/d? Economies of scale favor cokers in larger refineries – most of the obvious candidates already have them Mexico crude production reaching a plateau Venezuela struggling to achieve political stability Massive drain of investment funds for Tier II spending

Refiners bearing the burden Tier II spending will cost refining industry $20bn Re-orientation of industry following mergers Majors were more likely to plan for long-term Independents don’t have as much financial clout Oil price assumptions have not yet moved up much

Factors in favor of coker investment Increased OPEC production to keep sour discounts wide? Will international refiners make the investment needed to meet tighter US standards? Venezuela potential as gasoline supplier unfulfilled? “Secular upcycle” underway for refiners? Potential for Canada’s oil sands to head south?

Summary New coker investment is slowing as opportunities filled Capacity creep reaching limits, new units needed. US gasoline demand growth plus tighter specifications will underpin margins, but sentiment lagging Remaining Tier II costs will sap available funds If not now, maybe later?