Energy Outlook and Binder Supply Challenges

Energy Outlook and Binder Supply Challenges Bill Kirk Virginia Asphalt Association Annual Meeting The Greenbrier Hotel April 13, 2012

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Crude Oil Outlook

Crude Oil Outlook

Short-Term (2012)

Slowing rate of economic and oil demand growth

Slower non-OPEC production growth

Surplus but shrinking OPEC production capacity

Domestic crude oil supply increasing some

Long-Term (2013+)

Tighter oil balance

• Strong oil demand growth in developing countries

• Constrained resource access slowing investment in new supplies

• Rising reserve replacement costs

2

Global Economic Recovery

-1

0

1

2

3

4

5

6

1980 1985 1990 1995 2000 2005 2010 2015

3

Real GDP Growth (%)*

Recovery continuing but downside risks remain

Avg.

Typical

Forecast (2011-2015)

Source: I.H.S. Global Insight, January 14, 2010

* Purchasing power parity basis

• Two speed recovery with Global recovery continuing

Two-speed recovery led by developing nations

• Developing now surpass advanced nations in share of global economy

• Energy demand growth will follow this shift

Downside risks remain

• Government debt crises • Protectionism • Inflation in developing countries • Premature fiscal or monetary tightening in OECD nations

World Energy Demand By Fuel

0

50

100

150

200

250

300

350

1980 1990 2008 2015 2020 2030

Renewables

Nuclear

Coal

Natural Gas

Oil

4 Source: International Energy Agency, 2010 World Energy Outlook

New Policies Scenario

MM

BB

OE

D

Fossil fuels projected to be three-quarters of energy demand in 2030

Forecast

OPEC* Surplus Production Capacity

0

2

4

6

8

10

12

1970 1975 1980 1985 1990 1995 2000 2005 2010E 2015F

5

Source: PIRA for history, COP forecast * Excludes Angola, Gabon, Ecuador and Indonesia in all years

Million Barrels per Day

17% of demand $22.20/bbl (10$)

6% of demand

8% of demand

1. 5% of demand

$19.60/bbl (10$)

Greater surplus than in mid-2000s but shrinking

Long-Term World Oil Demand Outlook IEA Benchmark “New Policies” Scenario

0

20

40

60

80

100

120

1980 2000 2009 2015 2020 2030

Biofuels

Other*

Other Asia

China

OECD

6

Million Barrels per Day

Source: International Energy Agency, “2010 World Energy Outlook” *Other includes other developing countries and international marine bunker fuel

0.6% per year growth

OECD demand has peaked but significant growth is projected in developing countries

Limited Access to World Oil and Gas Reserves

7

7%5%

74%

56%

18%19%

7%

NOC reserves (equity access)

Full IOC access

Reserves held by Russian companies

NOC reserves (no equity access)

Natural Gas (6,621 TCF)

Full IOC access

Oil (1.3 Trillion Barrels)

NOC reserves (no equity access)

IOC = International oil company NOC = National oil company

Source: PFC Energy, Oil & Gas Journal, BP Statistical Review 2010 Note: Excludes unconventional crude oil and bitumen reserves; proved reserves

Access more limited for oil than natural gas

Reserves held by Russian companies

NOC reserves (equity access)

14%

The Future Oil Supply Challenge

8

Million Barrels Per Day

Source: Based on IEA World Energy Outlook 2010 Assumes 4.6% decline (3.5% between 2009 and 2020 and 5.5% between 2020 and 2035)

0

20

40

60

80

100

120

2009 2014 2019 2024 2029 2034

Existing Production (including NGL and unconventional)

10 MMBPD Capacity Additions Needed

to Meet Demand Growth

Projected global oil demand

24

Significant capacity additions required

Capacity Additions Needed to Maintain Production 28 MMBPD

58

U.S. Natural Gas

9

NATURAL GAS

FRACKING

Some experts are saying that the U.S. supply glut of natural gas could exhaust our current storage capacity.

The broader issue of Fracking.

U.S. Pipelines

10

As an example of what the pipeline developers contend with, consider the following, excerpted from an application submitted to the North Dakota Public Service Commission for this project, dated February 2012:

Cease construction and contact US Fish and Wildlife Service if a whooping crane (specifically of the Aransas Wood Buffalo Population) is sighted within 1 mile of a pipeline or associated facilities

Construction in areas within ¼ mile of a sharp-tailed grouse must not occur between March 1 to May 15 of any year or within 2 hours of sunrise on any given day*

*Taken from Eye on the Market, JP Morgan, 3/22/12

•

U.S. 2020 Crude Supply

0

5

10

15

20

With Oil

Sands

Without Oil

Sands

Million Barrels

per Day

Unsourced

Middle East

Canada

Latin America

Africa

Other

Domestic

11 Source: Purvin & Gertz 2010 GPMO and COOSMO

Mexico Venezuela

Mexico

Venezuela

Oil Sands ~20%

Additional Middle East?

~40%

~20%

Canadian oil sands are an important source of supply

for the U.S.

12

Refining Outlook

Refined Products Outlook

Short-Term (2012)

Improved global oil demand growth

Some capacity rationalization & deferred additions

Speed of recovery hampered by refining capacity additions in Asia

Long-Term (2013+)

Cyclical recovery but long-term challenges

• Insufficient capacity rationalization in the Atlantic Basin

• Subsidized refining capacity additions in Asia

• Declining OECD gasoline demand driven by government policy

– Surplus gasoline production capacity

13

14

-2

-1

0

1

2

3

4

Atlantic Basin

29.2 to 28.1 mmb/d

09 vs 20

Utilization

78% / 80%*

0

2

4

6

8

10

Rest of World

43 to 53 mb/d

09 vs 20

Utilization

82% / 86%*

To address declining hydrocarbon gasoline demand in the U.S. and Europe, crude runs will decline by over 1 MMBD

Crude Runs Change 2009YE to 2020

Crude runs includes crude and condensates. Gross inputs are not shown. Sources: COP Analysis Global Crude Study 2010. * COP premises 3 mmb/d of capacity will shutdown in US/EU and 800 mbd will shutdown in Japan.

Utilization 2009 / 2020* Rate shown is in MMBD

What’s This Mean To The Asphalt Market?

Factors Affecting Asphalt Supply/Pricing

Absolute price of WTI crude.

Currency exchange rate.

Light / Heavy crude differential.

Refining margins (crack spreads).

Refining utilization.

Alternate value of asphalt to #6 oil.

Alternate value of asphalt to coker feed.

16

Supply Factors (Examples)

Increased Supply

>Strong light product demand

> Profitable refining margins

> High refinery utilization

> Wide light/heavy crude differential

Decreased Supply

> Absence of any of the above

> Strong coking margins (return on investment)

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18

Price Factors (Examples)

Increased price structure

> High WTI price

> Narrow light/heavy crude differential

> Poor refining margins – low utilization

> Strong #6 oil market (follows crude)

> Higher coking margins

> Some combination of the above

19

Price Factors (Examples)

Reduced price structure

> Low WTI price

> Wide light/heavy crude differential

> Good refining margins – high utilization

> Weak #6 oil market

> Any combination of the above

20

Supply Outlook

2010 second strongest year for oil growth in 30 years even with global recession – China and developing countries.

Increase in heavy crude production.

Large coking projects completed in 2012-2013.

Asphalt value will have to compete based on hydrocarbon value of alternative uses.

Supply will be available if economics are favorable.

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