2. U.S. Petroleum Refining: Basics, Challenges, And The Case for a Supply- Oriented Energy Policy Charles T. Drevna National Petrochemical & Refiners Association IPAA Midyear Meeting June 16, 2005

4. Outline Refining Industry Basics Economics & Role Of Imports Challenges 2005 and Beyond National Energy Policy Conclusions

5. Refining Industry Basics 149 Operable Refineries Capacity: 16.8 MMBPD of Crude Oil Yields (approximate) –8.5 MMBPD Gasoline –4.0 MMBPD Diesel Fuels –1.5 MMBPD Jet Fuel Gasoline Imports – approximately 875 KBPD

6. Refining Industry Basics Infrastructure Each Refinery is Unique Crude Source Product Slate Conversion Capacity/Configuration

7. Refining Industry Basics Infrastructure Refinery Configuration Is Inflexible Changes in Crude Qualities Affect Refining Economics

8. Refining Industry Basics

9. Refining Industry Economics Crude Supply/Product Demand Crude Slate Changes Require Refinery Changes Product Demand Changes Require Refinery Changes Refiners Have Invested in Conversion Capacity –Hydrocrackers –Catalytic Crackers (FCCUs) –Cokers

10. Refining Industry Economics

11. Crude Supply Lower Cost Crudes Contain –More Heavy Material (BP>750°F) –More Sulfur –More Metals Conversion Capacity Enables Refiners to Purchase Cheaper Crudes –Ability to Upgrade Heavy Material –Ability to Reject Carbon

12. Refining Industry Economics

13. Crude Supply Additional Conversion Capacity Should Reduce Light/Heavy Differentials Cokers in Particular Have Been Built to Process Specific Crudes –Maya – Mexico –Oriente - Venezuela

14. Refining Industry Economics Crude Supply Synthetic Crudes Will Impact Refining Canadian Syncrudes from Tar Sands –Presently 900 KBPD –Expanding to 1800 KBPD by 2010 Syncrudes from Venezuela –Presently 250 KBPD –Expanding to 600 KBPD by end 2005

15. Gasoline Imports – An Essential Supply Source PADD 1 Sources of Supply Import Destinations 877 MB/D (2003) Source: EIA, Petroleum Supply Monthly

16. Changing U.S. Specifications May Change Import Sources Country20042005/20062010 U.S.12030 E.U.15050 (10)10 Brazil100040080 Argentina35050N/A South Korea13050N/A Source: Hart International Fuel Quality Center Gasoline Sulfur Specifications (ppm)

17. Some Historical Suppliers Cannot Produce Low Sulfur Gasoline Source: EIA, Form EIA-814

18. EU-15 Demand Mix May Imply Excess European Mogas Supply Source: History IEA; Forecast Purvin & Gertz

19. European New Vehicle Choices Show Why Diesel Fuel Growth May Continue Source: ACEA www.acea.bewww.acea.be

20. Imports – Less Competitive in the Short Term Short-term: –Fuel spec changes may be reducing number of potential import sources –Reduction in import sources may increase margins –But will that change over time? Long-term: –May still see higher product imports –Can capacity investment today compete tomorrow?

21. Refining Industry Challenges Industry Emphasis Is on Manufacturing Costs –Crude Selection/Optimization Is One Factor –Other Factors Are More Urgent Capital intensive operations Huge expenditures for regulatory compliance Rate of return on investment below average Refining Is Very Competitive

22. Refining Industry Challenges The refining industry is stressed. No new refineries built since 1976 Domestic capacity is flat Increasing demand well beyond domestic production capabilities –EIA Forecast: Petroleum demand to increase by 1.6% per year to 2025 - 65% of growth in imports will be refined products –Imports in 2003 - Crude Oil - 9.5 MMB/D - Petroleum Products - 2.3 MMB/D

23. Refinery Capacity MMB/D Refining Industry Challenges

24. Gross Inputs Operable Capacity EIA Refinery Utilization

25. Petroleum Industry Data 324149 Refining Industry Challenges

26. Regulatory Compliance In this decade: -Refiners face about $20 Billion in aggregate investment in this decade to comply with environmental requirements. -Does not include costs of facility security, maintenance, or capacity expansion.

27. Regulatory Compliance Investment Requirements of New Regulations: –Tier 2 Gasoline Sulfur - $ 8 billion –Highway and Off-Road Diesel Sulfur - $ 9 billion –MTBE Phasedown/Elimination - $ 2 billion –Ethanol Mandate Costs for these programs equal $19 billion Over $25 billion invested in the 1990’s (RFG and other requirements) Refining Industry Challenges

28. Cumulative Regulatory Impacts on Refineries, 2002 - 2010 20022003200420052006200720082010 Tier II Gasoline Sulfur 1 State RFG Waivers and MTBE Bans 4 Regional Haze 11 Off-Road Diesel Sulfur Phase II Gasoline Toxics Control 5 Urban Air Toxics (Area Sources) 12 PM 2.5 NAAQS 10 Residual Risk 13 KEY Actual time frame known or based on 36-48 month compliance schedule after final rule issued. Compliance Requirements unknown and time frame estimated. Prepared by the National Petrochemical & Refiners Association April 2004 8 Hour Ozone NAAQS 9 On-Road Diesel Sulfur 3 Renewable Fuels Mandate 2 Refinery MACT II 7 NO x SIP Calls/Section 126 8 New Source Review 6 Ext. Cumulative Regulatory Impacts on Refineries, 2002 - 2010 200220032004200520062007200820092010 Tier II Gasoline Sulfur 1 State RFG Waivers and MTBE Bans 4 Regional Haze 11 Off-Road Diesel Sulfur Phase II Gasoline Toxics Control 5 Urban Air Toxics (Area Sources) 12 PM 2.5 NAAQS 10 Residual Risk 13 KEY Actual time frame known or based on 36-48 month compliance schedule after final rule issued. Compliance Requirements unknown and time frame estimated. Prepared by the National Petrochemical & Refiners Association April 2004 8 Hour Ozone NAAQS 9 On-Road Diesel Sulfur 3 Renewable Fuels Mandate 2 Refinery MACT II 7 NO x SIP Calls/Section 126 8 New Source Review 6 Ext. Concurrently, 5-Year Review Underway Concurrently, 5-Year Review Underway

29. 2005 And Beyond Higher crude oil costs Continued rollout of Tier II gasoline sulfur reductions ULSD regulations for highway and non-road applications Full implementation of state MTBE bans Additional RFG areas 8- hour ozone non-attainment designations NSR reform gridlock because of federal stay “Boutique” Fuels Misperceptions Refining Industry Challenges

30. Tier II Gasoline Sulfur For refineries, gasoline sulfur phase-down requires: –Additional processing step(s) –Capital investment –Downgrade of some blendstocks Result: Upward pressure on manufacturing costs [Some gasoline importers sought a temporary compliance waiver. NPRA opposed the waiver.]

31. Refining Industry Challenges Highway & Non-Road Diesel For refineries, highway and non-road diesel sulfur reductions require: –Additional processing step(s) –Capital investment –Potential downgrade/contamination of product downstream of refinery Result: Upward pressure on manufacturing and distribution costs

32. Refining Industry Challenges Highway & Non-Road Diesel Additional factors impacting diesel fuel sulfur reductions: –Technology concerns (refinery & vehicle) –Disproportionate amount of capital needed –Mechanical reliability –Reprocessing/handling of difficult to process components –Complex and untested credit trading system

33. DIESEL FUEL TIMELINES 80% 15 PPM : 20% <500 PPM 6/1/20066/1/20086/1/2007 6/1/2010 6/1/2012 6/1/2009 100% 15 PPM Highway Rule 2-Step NRLM 2 Rule 15 PPMPART 89 <500 PPM 15 PPM OR Home Heating Oil HOME HEATING OIL >500 PPM 33 RAILROAD & MARINE <500 PPM

34. Refining Industry Challenges MTBE Bans For refineries, MTBE bans require: –Production of a new blendstock for blending with ethanol; –Lower vapor pressure; and –Additional segregation and transportation costs. Result: Upward pressure on manufacturing costs

35. EPA

36. Refining Industry Challenges Impact of 8-Hour Ozone Designations Approximately 120 new non-attainment areas –Each area will consider fuels controls –Areas have very little time to reach attainment (2007) –Benefits of clean fuels/vehicles programs will be of little help Approximately 40 non-attainment areas under both old and new NAAQS –Will be difficult for many of these to reach attainment –17 already use RFG –18 are in California & use CARB RFG

37. Boutique Fuels

38. Refining Industry Challenges Boutiques Fuel “Boutique” fuels are now the cause of all transportation fuels problems according to some politicians –“300 separate jurisdictions with their own rules” – Senator Kerry –“110-plus different fuel types” – Senator Bingaman –Must be bad if it needs a word from the French to describe it

39. Refining Industry Challenges Boutique Fuels: In reality: –Approximately sixteen distinct fuels –Each available in three grades –Many jurisdictions use the same fuel The number of fuels being produced in the US is more like 50.

40. Refining Industry Challenges Why “Boutique” Fuels? Local areas have different air quality needs. Local fuels result from both environmental and economic considerations Generally supported by all stakeholders Boutique fuels reduce or avoid inefficient investment costs for refiners Lowers overall costs to consumers

41. Boutique Fuels and Market Volatility Localized supply disruptions can result from: –Infrastructure; refinery or distribution –Weather conditions –International events These “upsets” may result in more volatile fuel costs in the affected area may if that area has a unique fuel formulation. –Marketplace usually corrects without need for government intervention Refining Industry Challenges

42. Boutique Fuels NPRA Perspective -Supply/demand balance is tight. -First, do no harm -Avoid unnecessary additional product changes Congress: -Repeal oxygen mandate for RFG -Reject MTBE ban and ethanol mandate All policymakers: - Factor supply when considering new fuel regulations Refining Industry Challenges

43. National Energy Policy NPRA urges Congress to reintroduce a supply ethic into our nation’s energy policy. Congress should avoid bans and mandates in its new energy policy.

44. NPRA Position on Energy Bill Supports elimination of the 2% by weight oxygen content requirement for RFG Opposes an ethanol mandate Opposes MTBE ban or phase out Supports MTBE liability protection National Energy Policy

45. Energy Policy & Public Opinion – Six Myths That Influence Public Policy Decisions: 1.Supply is always available at low prices 2.Environmental improvements are free 3.Alternate fuels are cheap and abundant, and unlike fossil fuels, require no environmental trade offs 4.Consumers are always willing to pay higher prices for better environmental performance 5.Little or no progress has been made in reducing air and water emissions and general improvements in the environment 6.Oil and petrochemical industries pay little attention to environmental, health and safety improvements These perceptions are wrong. But they often drive public policy.

46. Future Outlook & Conclusions Continued U.S. reliance on petroleum products through this decade and well into the next. Main Questions: Can industry and policymakers resolve the challenge of complying with more stringent environmental requirements while meeting increased demand for petroleum products? Will policymakers accept the fact that energy supply must increase to fuel continued U.S. economic growth? Conclusions