1. Refining Challenges: Changing Crude Oil Quality & Product Specifications Joanne Shore Energy Information Administration World Fuels Conference Washington, DC September 2002 www.eia.doe.gov

2. Introduction Where We Are Today –Refinery Input Quality Changes –Refinery Capacity Changes Where Are We Going –Product Specification Changes –Crude Oil Imports How Might We Get There

3. Crude Imports Grew as Production Declined Source: EIA

4. Heavier Crude Oils Accounted for Import Growth Source: EIA

5. U.S. Refinery Input Quality Source: EIA

6. Rapid Growth in Bottoms Processing for Heavy Sour Crude Oils Source: EIA – Capacity as of January Each Year

7. Where Are We Going? Product Quality Requirements Increase –Goals: Lower Sulfur (30 ppm gasoline and 15 ppm diesel) and possible trend toward lower aromatics –Oxygenate requirements? –MSAT, DI Crude Oil Import Outlook

8. Gulf of Mexico Abates Domestic Production Decline, But Imports Still Increase Source: EIA - AEO 2002 Outlook

9. Light Sweet Crude Availability Grows Source: EIA

10. How Might We Get There? Explore: Crude Input Changes Processing Changes

11. Crude Oil Choices Heavy, High Sulfur Crude Availability increasing in the longer term Heavy crude oil producing country connections More coking (but high sulfur coke markets?) More gasification down the road? More aromatics Light, Sweet Crude Oils Near term availability “Reasonable” historical price difference (but future?) Reduces size of processing investments for new product specs Provides higher light product yields

12. Crude Oil Price Differentials: No Sign of Major Shifts Yet Source: S&P’s DRI/Platts

13. Factors Influencing Light-Heavy Crude Oil Price Differences Historical Differentials Light crude oil fluctuations –Major influence on differential’s short-term ups & downs Heavy crude movements –Less movement than light –Balance between refiners ability to handle larger bottoms content and –Production of heavy oil –Seen bottoms capacity increase rapidly Future Differential Movement Heavy price support: Bottoms processing likely to grow –Gasification in longer term Light price depression: Increasing production of light crude (Atlantic Basin) Differentials not likely to increase significantly in next 5-10 years

14. Product Spec Changes Mean More Complex Refineries More and deeper sulfur removal and more aromatics separation or saturation Less (no?) MTBE –More ethanol –More alkylate & clean quality gasoline components More hydrogen production and consumption More hydrocracking More rigid product blend patterns

15. Results of Greater Complexity and Tighter Product Specs Increased likelihood of outages –Single unit outage has greater impact on product production –Decrease in maximum achievable utilization Diminished yields of prime fuels per barrel of crude oil Greater “stay-in-business” investment hurdle for smaller refiners

16. Recent Margin Swings Indicative of Future? Source: S&P’s DRI/Platts

17. Closing Thoughts Challenging Choices for Refiners –Type of crude oils –Bottoms processing choices –Stay-in-business requirements Crystal Ball Reading –Differentials not likely to widen significantly –Bottoms processing will continue – possibly reduced rate –Complexity will increase Uncertainty in Future Refinery Margins – Ups & Downs, But Positive Average Growth?