1. NPRA 2009 Annual Meeting Are Refinery Investments Responding to Market Changes? Joanne Shore John Hackworth U.S. Energy Information Administration March 2009 NPRA Annual Meeting

2. NPRA 2009 Annual Meeting Overview Long-Term Look at Market Drivers Impacting Investment Decisions Atlantic Basin Investments

3. NPRA 2009 Annual Meeting Long-Term Look at Market Drivers Impacting Investment Decisions Demand: Growth and Mix Shift Feedstocks: Incentives to use lower quality feedstocks (Light- heavy differentials) Margins

4. NPRA 2009 Annual Meeting Long-Term Demand Growth and Product Mix Shifts Growth: Mainly outside the Atlantic Basin Product Mix Shifts & Investment: –U.S. – Different future –Europe – Continued shift from gasoline to distillate –Asia – Less issue of shift than of growth

5. NPRA 2009 Annual Meeting World Petroleum Consumption Growing: Largest Growth Outside U.S. & Europe U.S. & EuropeRest of World Excl FSU Source: BP World Statistical Review of World Energy June 2008

6. NPRA 2009 Annual Meeting Europe Major Driver of World Consumption Mix Shift Towards Distillates Source: BP World Statistical Review of World Energy June 2008

7. NPRA 2009 Annual Meeting Atlantic Basin Price Incentives Shifting Toward Distillates Source: Bloomberg New York Harbor Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil and Premium Gasoline

8. NPRA 2009 Annual Meeting Feedstocks: Investing to Take Advantage of Widening Light-Heavy Differentials Light-heavy price difference – Incentive for investing in bottoms processing investments Drivers behind the widening price difference Future direction?

9. NPRA 2009 Annual Meeting Light-Heavy Product Price Difference Increases with Crude Oil Price Source: Bloomberg spot prices (LLS – Louisiana Light Sweet; GC – Gulf Coast)

10. NPRA 2009 Annual Meeting Light-Heavy Price Differentials Move Together Source: Bloomberg spot prices (LLS – Louisiana Light Sweet; GC – Gulf Coast)

11. NPRA 2009 Annual Meeting Higher Light-Heavy Price Differences Go with Higher Price Levels – But Much “Scatter” Source: Bloomberg spot prices 1/95-01/09

12. NPRA 2009 Annual Meeting Factors Impacting Light-Heavy Price Differentials Crude oil price level – EIA forecasts indicate increasing crude prices with economic recovery Available mix of light-heavy crude oil – Short- term variations, but mid-term mix not likely to change much Market for residual fuel products – Low sulfur bunker fuel uncertainties Changes in bottoms processing capacity – Not seeing planned increases having a large impact on differentials

13. NPRA 2009 Annual Meeting Margins – Short Golden Age for Capacity Expansion Incentives Margin Indicators U.S. vs. Europe

14. NPRA 2009 Annual Meeting Refining Output Variations Impact Profitability Source: Purvin & Gertz, GPMO Service

15. NPRA 2009 Annual Meeting U.S. Margin Indicator Usually Higher Due to No Residual Fuel and More Gasoline Source: Bloomberg monthly average spot prices New York Harbor and Northwest Europe gasoline, No. 2 heating oil, 3.5% fuel oil, LLS, Brent.

16. NPRA 2009 Annual Meeting Atlantic Basin Investments United States Europe

17. NPRA 2009 Annual Meeting U.S. Investment Environment Before 2008 –Forecasts called for increasing demand (gasoline and distillate) and need for capacity expansions –Slow shifts to distillate –Saw planned expansion with hydrocracking investments (Marathon Garyville, Motiva Port Arthur, Valero) 2008 –Surge in world distillate demand (mainly electricity needs) sent distillate prices up –U.S. refiners began shifting yields to distillate through operating changes alone –Recession reduced demand, some projects delayed –U.S. Energy Independence and Security Act (EISA) reduced long-term need for petroleum-based gasoline

18. NPRA 2009 Annual Meeting Long-Term U.S. Petroleum-Based* Gasoline and Distillate Fuel Needs Shift with EISA * Crude-Based excludes ethanol, biodiesel, and distillate from coal-to-liquids and biomass-to-liquids. Source: AEO 2009 Reference Case Million Bbls Per Day20082023Change Gasoline & E85 Demand 9.019.270.26 Ethanol0.601.570.97 Crude-Based Gasoline8.417.70-0.71 Total Distillate Demand3.944.750.81 Biomass, CTL, BTL0.050.430.38 Crude-Based Distillate3.894.320.43

19. NPRA 2009 Annual Meeting In 2008, U.S. Shifts from Net Importer to Net Exporter of Distillate – Short or Long Term? Source: EIA Petroleum Supply Monthly Data

20. NPRA 2009 Annual Meeting Distillate Yields Reflect Price Incentives Source: EIA Petroleum Supply Monthly Data

21. NPRA 2009 Annual Meeting Distillate Incentives Resulted in Unprecedented U.S. Operating Yield Shift Source: EIA Form 810

22. NPRA 2009 Annual Meeting Operating Changes and Next Step Investments Before Hydrocracking Cut-Point Shifts Distillation Efficiency Improvements Catalyst Changes Hydrotreating expansion

23. NPRA 2009 Annual Meeting U.S. Investment Uncertainties Short-term signals –How long will the economic slump keep demand down? –How long will strong short-term distillate pull from other countries continue – Europe in particular –Lower utilization vs. closures Long-term signals –Need for new capacity moved out in time. How far? –Still seeing need for shift to distillate from gasoline, but will U.S. (and world) policies further change level and mix of petroleum product needs? –Clear “wait-and-see” time

24. NPRA 2009 Annual Meeting European Investment Environment Forecasts continue to show increasing need for distillate and declining need for gasoline Margins under pressure in the short term. U.S. market for European gasoline exports coming under pressure Diesel import availability increasing

25. NPRA 2009 Annual Meeting OECD Europe: Imbalance Between Refining and Demand Met with Imports/Exports European Refinery YieldsEuropean Net Imports 19982008 Distil- late 44.4%49.3% Gaso- line 26.1%24.5% Source: IEA February 2009 Data Base

26. NPRA 2009 Annual Meeting Increasing European Distillate Production Refineries are already operating at maximum distillate potential (unlike the U.S.) Historical investments resulted in making more distillate by destroying residual fuel rather than reducing gasoline production Additional hydrocracking capacity is planned, but residual fuel destruction still a large factor

27. NPRA 2009 Annual Meeting European Capacity Plans (2008-2013) Capacity Changes KB/D Volume Changes KB/D AreaCrude Input Hydro- cracking (*) CokingDistillateResidual Fuel Southern Europe 211229115345-147 Eastern Europe 8818420217(**) Northwest Europe -3541021(**) Total264454135583 Source: Based on Company reports and presentation, construction capacity reports, and contractor press releases. Note: (*) Both hydrocracking and mild hydrocracking; (**) Insufficient information to make estimate.

28. NPRA 2009 Annual Meeting European Investment Uncertainties Short-term Signals –Economic slump impacts on capital expenditures: go, cancel, delay? –Need for and sources of distillate imports – short- or long-term changes? –U.S. gasoline market changes –Lower utilization vs. closures Long-term Signals –Product demand projections have decreased. Will that impact expansions? –Still seeing need for shift to distillate from gasoline, but the rate at which the distillate imbalance was increasing has diminished –So is there change in views of investment incentives?

29. NPRA 2009 Annual Meeting Summary Investment to produce more distillate –Distillate price premiums to gasoline becoming the norm –Distillate investments occurring in both U.S. and Europe Investment to upgrade bottoms –High light-heavy differentials inspired rash of upgrading, but differentials fell back with crude price. Differentials could well increase again with projected crude price increases. –Bottoms conversion investments occurring in U.S. to use Canadian tar sands and in Europe to produce more distillate Investment to expand production –Margin incentive is weak, and long-term refinery demand projections are flat or declining for U.S. and Europe – Apart from individual project economics that might show synergies with accompanying upgrade, hard to see need for more capacity

30. NPRA 2009 Annual Meeting www.eia.doe.gov joanne.shore@eia.doe.gov