NPRA 2007 Annual Meeting Trends and Transitions in the Diesel Market Joanne Shore John Hackworth NPRA Annual Meeting

NPRA 2007 Annual Meeting Diesel Trends Overview ULSD UpdateULSD Update What Lies Ahead for Distillate?What Lies Ahead for Distillate? –Historical Perspective –Future Directions in Atlantic Basin

NPRA 2007 Annual Meeting ULSD Update ProductionProduction ImportsImports Transition IssuesTransition Issues PricesPrices

NPRA 2007 Annual Meeting ULSD Production Ramped Up in May for June Start Date

NPRA 2007 Annual Meeting PADD Level Distillate Production (Aug - Oct 2006)

NPRA 2007 Annual Meeting Production Comparison to Expectations PADD Actual (Aug-Oct 2006) Expected <15 ppm ppm Total Sol- omon <15 EPA <15 ppm EPA ppm , ,5431,0361,

NPRA 2007 Annual Meeting PADD 3 ULSD Refinery Status ULSD Production Relative to Total Distillate No. Refin- eries Diesel Production Fall 2004 (MB/D) ULSD Production Fall 2006 (MB/D) Percent ULSD of Distillate Fall 2006 Percent >500 ppm of Dist. Fall 2006 All ULSD %0.3% >50% ULSD %11.8% Mainly 500 ppm Diesel %13.1% No ULSD, But ULSD Projects Pending %53.8% No Diesel 5700%96.4% Note: ULSD–ultra-low sulfur diesel; Fall period – August through October Source: Form EIA-810

NPRA 2007 Annual Meeting Diesel Imports Shift to ULSD Note: LSD – 500 ppm low sulfur diesel Source: Form EIA-814

NPRA 2007 Annual Meeting Transition Issues Production ramped up quicklyProduction ramped up quickly Distribution from refinery to terminals went wellDistribution from refinery to terminals went well –Now have limited number of terminals carrying low sulfur diesel –Terminals carrying only ULSD may be supplying more than highway demand Winter diesel (Ultra-Low-Sulfur Kerosene) issuesWinter diesel (Ultra-Low-Sulfur Kerosene) issues –Warm weather –“Winterized diesel” produced and more use of additives

NPRA 2007 Annual Meeting Diesel Prices Reflected ULSD Transition – But Note ’04 & ’05 Notes: LSD – Low sulfur diesel; HO – Heating Oil. Source: Bloomberg monthly average spot prices

NPRA 2007 Annual Meeting Spot Diesel Prices Outpaced Gasoline Source: Bloomberg Gulf Coast Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil and Premium Gasoline

NPRA 2007 Annual Meeting Most of the Action is At Wholesale Source: Bloomberg Gulf Coast Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil and Premium Gasoline

NPRA 2007 Annual Meeting Insight from Europe on Where Diesel Prices May Settle Down? Source: Bloomberg NW Europe 0.2% Heating Oil and 10 ppm Diesel

NPRA 2007 Annual Meeting Heating Oil Strengthening Since ‘05 Source: Bloomberg Gulf Coast Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil and Premium Gasoline

NPRA 2007 Annual Meeting What Lies Ahead for Distillate? First Look Behind: Historical PerspectiveFirst Look Behind: Historical Perspective –Product Growth –Europe –United States Future Directions in Atlantic BasinFuture Directions in Atlantic Basin Notes: World Excluding FSU, Gasoline includes aviation gasoline & light distillate feedstocks. Middle distillates include heating oil, diesel, jet, and kerosene. Source: BP World Statistical Review 2006

NPRA 2007 Annual Meeting Europe Is Major Driver of Recent Shift to Middle Distillate Source: BP Statistical World Review 2006

NPRA 2007 Annual Meeting Europe’s Transportation Demand General policy to reduce energy use and carbon dioxide (CO 2 ) emissions, but not meeting targetsGeneral policy to reduce energy use and carbon dioxide (CO 2 ) emissions, but not meeting targets Petroleum demand growth has been small (annual 0.7% since 1995)Petroleum demand growth has been small (annual 0.7% since 1995) Policies led to increased shift to diesel enginesPolicies led to increased shift to diesel engines Diesel demand is increasing while gasoline demand is decliningDiesel demand is increasing while gasoline demand is declining

NPRA 2007 Annual Meeting European Preference for Diesel Grew Quickly since Late 1990s Source: ACEA

NPRA 2007 Annual Meeting European Gasoline Falling While Distillate Demand Increases Note: 2006 is based on January-October data. Source: IEA

NPRA 2007 Annual Meeting OECD Europe’s Growth in Distillate Production Fallen Short of Demand Increase Change Distillate Demand (MB/D) 5,4676, Crude Input (MB/D) 13,44813, Gasoline Output (MB/D) 3,5473, Distillate Output (MB/D) 5,1525, KeroJet Output (MB/D) Gasoline Yield 26.4%25.8%-0.6% Distillate Yield 38.3%41.1%+2.8% Note: 2006 is based on January-October data. Source: IEA

NPRA 2007 Annual Meeting Europe’s Growing Product Imbalance Note: Middle distillates include jet and distillate; 2006 is January-October average. Source: IEA

NPRA 2007 Annual Meeting Symbiosis: Growth in Gasoline US Imports & OECD Europe Exports Note: U.S. imports includes blending components is based on January-October data. Source: IEA

NPRA 2007 Annual Meeting Europe & U.S Supply & Demand Mix Europe Refinery OutputU.S. Refinery Output European DemandU.S. Demand

NPRA 2007 Annual Meeting U.S. Demand and Supply Changes U.S. Gasoline and distillate demand relationship changing – but not as rapidly as in EuropeU.S. Gasoline and distillate demand relationship changing – but not as rapidly as in Europe Changing supply issues may be more important to U.S. refining than demand shiftsChanging supply issues may be more important to U.S. refining than demand shifts

NPRA 2007 Annual Meeting Historical U.S. Gasoline Demand Dominates, But Middle Distillate Growth Stronger Note: Middle distillates include kerosene, jet, and distillate fuel oil. Source: EIA Petroleum Supply Annual

NPRA 2007 Annual Meeting U.S. Shift to More Efficient Cars: Impact is Slow Hybrid Share of LDV New Sales 2006: 1.5% Est. 2007: 2.1% Source: JD Powers hybrid estimate, EPA Light-Duty Automotive Technology and Fuel Economy Trends:

NPRA 2007 Annual Meeting MPG: Growing LDV Truck Share of Sales Hindered Fleet Efficiency Source: EPA Light-Duty Automotive Technology and Fuel Economy Trends: % Light Trucks

NPRA 2007 Annual Meeting U.S. Middle Distillate Demand Changes Heavy duty vehicles drove historical distillate demandHeavy duty vehicles drove historical distillate demand Any signs of emerging growth in light duty diesel market?Any signs of emerging growth in light duty diesel market? Shifts in relative pricing of diesel versus gasolineShifts in relative pricing of diesel versus gasoline Note: Transportation includes on- and off-highway, rail road, farm use, marine. Source: EIA Fuel Oil and Kerosene Sales

NPRA 2007 Annual Meeting Supply: Refinery-Based Gasoline Grew At Slower Rate than Middle Distillates Refinery Outputs from Crude & Other Refinery Outputs from Crude Net Imports Oxygenates Note: Crude & Other includes refinery-produced oxygenates; Net Imports for gasoline includes blending component imports; Oxygenates excludes refinery produced oxygenates. Middle distillates are jet and distillate. Source: Forms EIA-810 and -819.

NPRA 2007 Annual Meeting Future U.S. Middle Distillate Demand Increase Greater than Gasoline Note: Middle distillate includes kerosene, jet and distillate. Source: 2007 AEO 1.1% Annual Growth % Annual Growth

NPRA 2007 Annual Meeting Increasing Biofuels Reduces Need for Future Refining Capacity Average Annual Increase AEO Combo Demand Oxy- genates Total Net Imports Refinery Output Gasoline Balance (MB/D) AEO 2007 Ethanol & MTBE in Gasoline (MB/D) Note: Oxygenates are volumes blended in the U.S; Net Imports includes blending components. Inventory change included in historical output. Source: History Petroleum Supply Annual, Forecast: AEO 2007; Combo is combination of forecast information from IEA, Deutsche Bank, Hart Energy.

NPRA 2007 Annual Meeting Future Directions for Atlantic Basin Diesel Demand through 2015 Demand Europe Diesel/gasoline demand ratio growsDiesel/gasoline demand ratio grows Greenhouse gas driverGreenhouse gas driver Efficiency increasesEfficiency increases More biofuelsMore biofuels Slowing diesel penetrationSlowing diesel penetration Switch from bunker fuel to distillateSwitch from bunker fuel to distillate Demand US Continued distillate growth higher than gasolineContinued distillate growth higher than gasoline Light duty diesel growth has small impact on demand growthLight duty diesel growth has small impact on demand growth Switch from bunker fuel to distillateSwitch from bunker fuel to distillate Nonroad ULSDNonroad ULSD HybridsHybrids

NPRA 2007 Annual Meeting Future Directions for Atlantic Basin Diesel Supply through 2015 Supply Europe Refinery diesel projects do not keep up with demandRefinery diesel projects do not keep up with demand Gasoline exports growGasoline exports grow Alternatives increase (biodiesel)Alternatives increase (biodiesel) Increased import capability from Middle East (incl GTL) & Asia after 2010Increased import capability from Middle East (incl GTL) & Asia after 2010 Supply U.S. Distillate yields continue to increaseDistillate yields continue to increase Ethanol in gasoline increasesEthanol in gasoline increases Diesel imports continue (Canada & Virgin Islands)Diesel imports continue (Canada & Virgin Islands) Gasoline import availability increasesGasoline import availability increases Feedstock quality impacts volume and quality of diesel productionFeedstock quality impacts volume and quality of diesel production

NPRA 2007 Annual Meeting Future Directions for Atlantic Basin Diesel Balance through 2015 Diesel supply/demand balance tighter than gasoline.Diesel supply/demand balance tighter than gasoline. –Supply growth from Middle East and Asia, but occurs late in time period –Net deficit may widen for a time Gasoline supply growth from European excess and ethanol growth dampen incentives to expand U.S. capacityGasoline supply growth from European excess and ethanol growth dampen incentives to expand U.S. capacity Margins: Continued strength in diesel relative to gasolineMargins: Continued strength in diesel relative to gasoline

NPRA 2007 Annual Meeting “If anything is certain, it is that change is certain. The world we are planning for today will not exist in this form tomorrow.” Philip Crosby