The Status of the US Refining Industry: Is A Major Shakeout Imminent and Who is Vulnerable ? Peter Fasullo En*Vantage, Inc [email protected] Presented.

The Status of the US Refining Industry: The Status of the US Refining Industry:

Is A Major Shakeout Imminent and Who is VulnerableIs A Major Shakeout Imminent and Who is Vulnerable ? ?

Peter Fasullo

En*Vantage, Inc

[email protected]

Presented to the 16th Annual PFAA Conference

November 12, 2009

22

US operable refining capacity has US operable refining capacity has been increasing nearly 200 been increasing nearly 200 MBPD per year since ‘97 and is MBPD per year since ‘97 and is currently 17.7 MM BPD.currently 17.7 MM BPD.

Prior to ‘06, the industry spent a Prior to ‘06, the industry spent a greater proportion of its time greater proportion of its time operating above 90% utilization operating above 90% utilization rates. rates.

Since ‘06, the refining industry Since ‘06, the refining industry has spent considerable time has spent considerable time operating below 90% of its operating below 90% of its operable capacity. YTD 2009 operable capacity. YTD 2009 operating rate is 82%.operating rate is 82%.

Slowing product demand, the Slowing product demand, the recession, and growing supplies recession, and growing supplies of ethanol have taken a toll on of ethanol have taken a toll on the industry the past 2 years. the industry the past 2 years.

Current State of US Refining IndustryCurrent State of US Refining Industry

US Operable Refining Capacity vs Crude Runs(Thousand Barrels Per Day)

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

15,000

15,500

16,000

16,500

17,000

17,500

18,000

18,500

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

15,000

15,500

16,000

16,500

17,000

17,500

18,000

18,500Operable Refinery CapacityCrude Runs at 90% of CapacityActual Crude Oil Inputs or Runs

Source: EIA

2005 Hurricanes 2008 Hurricanes

Source: EIA and En*Vantage

33

Major Refined Product Demand is Declining in USMajor Refined Product Demand is Declining in US

US Demand for the Major Refined Products(1000 Barrels Per Day)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000Motor Gasoline Distillate Fuel Oils Kero Jet Fuels Residual Fuel Oils

Source: EIA and En*Vantage

44

Days of Supply of Major Refined Products areDays of Supply of Major Refined Products are Extremely High Extremely High

Source: EIA and En*Vantage

Days of Supply of Major Refined Products

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

36.0

38.0

40.0

55

Incremental Barrel Demanded by Emerging EconomiesIncremental Barrel Demanded by Emerging Economies

World Liquid Fuels Consumption Growth(Change from Previous Year)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

2008 2009 2010

Millionbarrelsper day

OECD* Non-OECD Asia FSU** and Eastern Europe Other

Short-Term Energy Outlook, October 2009

* Countries belonging to Organization for Economic Cooperation and Development** Former Soviet Union

Forecast

Represents major shift - US and other industrialized countries used to demand and set the price for the incremental product barrel.

Non-OECD Asia’s (China & India), Latin America’s and Middle East demand for the incremental product is pushing crude prices up.

Weak US product demand and higher crude prices is compressing US refinery margins.

66

US Regional Crack SpreadsUS Regional Crack Spreads

Distillate Crack Spread $/bblGasoline Crack Spread $/bblMonthly US Regional Gasoline Crack Spreads

($10)

($5)

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

($10)

$0

$10

$20

$30

$40

$50Gulf Coast Gasoline Crack

Mid-Continent Gasoline Crack

East Coast Gasoline Crack

West Coast Gasoline Crack

Monthly US Regional Distillates Crack Spreads

($5)

$0

$5

$10

$15

$20

$25

$30

$35

$40

($5)

$0

$5

$10

$15

$20

$25

$30

$35

$40Gulf Coast ULDS Crack SpreadMid-Continent ULDS Crack SpreadEast Coast Heating Oil Crack SpreadWest Coast ULDS Crack Spread

Source: En*Vantage and Platts

77

Light-Heavy and Sweet-Sour Light-Heavy and Sweet-Sour Differentials Under PressureDifferentials Under Pressure

Light-Sweet (WTI) Price Premium to Heavy-Sour and Medium-Sour Crudes

($8)

($6)

($4)

($2)

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

$22

$24

Price

Pre

miu

m $

/Bb

l

($8)

($6)

($4)

($2)

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

$22

$24WTI Price Premium to Maya WTI Price Premium to Dubai

WTI: 39° API; 0.4 wt% SulfurDubai: 32° API; 1.9 wt% SulfurMaya: 22° API; 3.4 wt% Sulfur

Source: EIA and En*Vantage

88

The US refining industry is currently constructing over 600 MBPD of high The US refining industry is currently constructing over 600 MBPD of high complexity refining capacity mainly on the Gulf Coast. complexity refining capacity mainly on the Gulf Coast.

Upgrading projects are also underway at several Midcontinent refineries Upgrading projects are also underway at several Midcontinent refineries to handle crudes derived from Canadian tar sands.to handle crudes derived from Canadian tar sands.

Export refineries have been constructed overseas and nearly 2 MM BPD Export refineries have been constructed overseas and nearly 2 MM BPD of refining capacity is under construction in the emerging economies. of refining capacity is under construction in the emerging economies.

Severe headwinds are coming in the form of CAFE standards, cap and Severe headwinds are coming in the form of CAFE standards, cap and trade, more sulfur specs on heating oil and bunker fuels, and the ramping trade, more sulfur specs on heating oil and bunker fuels, and the ramping up of the renewable fuels programs. up of the renewable fuels programs.

Even without these issues, the current economic slowdown has impacted Even without these issues, the current economic slowdown has impacted the US refining industry and capacity rationalization is starting. the US refining industry and capacity rationalization is starting.

To Make Matters WorseTo Make Matters Worse

99

Vehicle manufacturers will be required to achieve 35.5 mpg average Vehicle manufacturers will be required to achieve 35.5 mpg average across their fleets by 2016, 4 years ahead of the previous CAFE goals. across their fleets by 2016, 4 years ahead of the previous CAFE goals.

Initially, manufactures will shift production to smaller, more efficient Initially, manufactures will shift production to smaller, more efficient gasoline and diesel driven vehicles.gasoline and diesel driven vehicles.

Eventually, manufacturers will concentrate their efforts on hybrids, plug-in Eventually, manufacturers will concentrate their efforts on hybrids, plug-in hybrids and electric vehicles. hybrids and electric vehicles.

How fast the accelerated CAFE standards will impact gasoline demand How fast the accelerated CAFE standards will impact gasoline demand will depend on scrappage rates of existing vehicles and the auto industry’s will depend on scrappage rates of existing vehicles and the auto industry’s ability to effectively execute the CAFE standards. ability to effectively execute the CAFE standards.

Using existing auto fleet statistics, 2016 targets, a 5% scrappage rate, and Using existing auto fleet statistics, 2016 targets, a 5% scrappage rate, and a 12,000 vehicle miles per year capita national average - gasoline a 12,000 vehicle miles per year capita national average - gasoline demand could be reduced by 150 MBPD from current demand levels of 9 demand could be reduced by 150 MBPD from current demand levels of 9 MM BPD.MM BPD.

CAFE Standards

1010

If enacted, would require US refiners to purchase allowances for If enacted, would require US refiners to purchase allowances for emissions that come directly from their operations.emissions that come directly from their operations.

Greatly increases cost burden on US refineries.Greatly increases cost burden on US refineries.

Foreign refineries would not be subject to US cap and trade policies Foreign refineries would not be subject to US cap and trade policies putting the US refinery industry at a severe disadvantage.putting the US refinery industry at a severe disadvantage.

Overtime, this cost differential could shift investments in US refinery Overtime, this cost differential could shift investments in US refinery improvements to refineries located overseas.improvements to refineries located overseas.

As a result, the US dependence on crude oil imports could shift more to As a result, the US dependence on crude oil imports could shift more to refined product imports over the long-term.refined product imports over the long-term.

The cap and trade provision is also projected to result in fuel switching The cap and trade provision is also projected to result in fuel switching away from high carbon fuels (e.g., coal, petroleum products), towards away from high carbon fuels (e.g., coal, petroleum products), towards more lower carbon alternatives such as natural gas. more lower carbon alternatives such as natural gas.

Cap and Trade Policy

1111

Biofuels will continue to be a growing Biofuels will continue to be a growing component of the nation’s component of the nation’s transportation fuel mix.transportation fuel mix.

The Energy Independence & The Energy Independence & Security Act became law in Dec Security Act became law in Dec 2007 and increases the mandated 2007 and increases the mandated nationwide use of biofuels to 36 nationwide use of biofuels to 36 billion gallons (2.35 MM BPD) in billion gallons (2.35 MM BPD) in 2022, about 10% of all liquid fuels 2022, about 10% of all liquid fuels consumed in the US.consumed in the US.

Renewable Fuel Standards (RFS) and Biofuel Requirements

Total Renewable Fuel Requirements(thousand barrels per day)

0

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: EPA

The current biofuels mandate presents significant challenges -- reliance on The current biofuels mandate presents significant challenges -- reliance on unproven technologies, lack of distribution infrastructure, and concerns that the unproven technologies, lack of distribution infrastructure, and concerns that the nation’s vehicle fleet not equipped to use fuel with an ethanol content > 10%.nation’s vehicle fleet not equipped to use fuel with an ethanol content > 10%.

Regardless of the challenges, any addition of biofuels into the market place will Regardless of the challenges, any addition of biofuels into the market place will place additional competitive pressures on US refiners. place additional competitive pressures on US refiners.

1212

US Total Liquid Fuel Consumption(Million Barrels per Day)

0

5

10

15

20

25

Transportation Fuels

Forecast

Industrial Fuels

Biofuels

Electric Generation

Residential/Commercial

Source: EIA Annual Energy Outlook 2009

Flat US Liquid Fuel Consumption. Biofuels will accommodate any growth in consumption

1313

Let’s Do Some Simple MathLet’s Do Some Simple Math

MM BPDMM BPD Current US Operable Capacity……….…. 17.67Current US Operable Capacity……….…. 17.67 Specialty Refiners (Lubes & Asphalt)….. - Specialty Refiners (Lubes & Asphalt)….. - 0.470.47 US Conventional Refining Capacity…….. 17.20US Conventional Refining Capacity…….. 17.20 New Refining Capacity…………………… +New Refining Capacity…………………… +0.600.60 New Total………………………………….. 17.80New Total………………………………….. 17.80 Refinery Runs Needed to Meet Demand.. 15.00 (84% op rate)Refinery Runs Needed to Meet Demand.. 15.00 (84% op rate) Capacity Needed for Decent Returns….... Capacity Needed for Decent Returns….... 16.3016.30 (92% op rate) (92% op rate) Excess Capacity……………………………. 1.50Excess Capacity……………………………. 1.50

Since we made this projection 6 months ago, 270 MBPD of USrefining capacity has shutdown (3 complete refineries, 1 partial).

1414

Major Questions:

What type of refineries are vulnerable to shutting down and where?

What are the implications?

Challenge is to effectively screen US refineries to Challenge is to effectively screen US refineries to assess which types are most vulnerable to assess which types are most vulnerable to economic downturns, regulatory changes, and/or economic downturns, regulatory changes, and/or competitive forces.competitive forces.

1515

General Description of RefineriesGeneral Description of Refineries

1616

Role of a Refinery – Convert Crude to ProductsRole of a Refinery – Convert Crude to Products

Challenge for refiners is to process available crudes to produce products demanded by the market.

Source: Valero Energy , EIA an En*Vantage

1717

Simple Refinery – Hydroskimmer/Topping RefinerySimple Refinery – Hydroskimmer/Topping Refinery

Source: Valero Energy , EIA an En*Vantage

1818

Medium Conversion – Catalytic CrackingMedium Conversion – Catalytic Cracking

Source: Valero Energy , EIA an En*Vantage

1919

Highly Complex Refinery With Product HydrotreatingHighly Complex Refinery With Product Hydrotreating

Source: Valero Energy , EIA an En*Vantage

2020

Our ApproachOur Approach

Profiled each refinery by its Profiled each refinery by its distillation capacity and distillation capacity and downstream processing units.downstream processing units.

Calculated refinery complexity Calculated refinery complexity by using Nelson Complexity by using Nelson Complexity Index - a measure of the Index - a measure of the investment intensity of the investment intensity of the refinery’s downstream unit refinery’s downstream unit capacity compared to the capacity compared to the refinery’s distillation capacity. refinery’s distillation capacity. NCI is published by OGJ.NCI is published by OGJ.

Refining Process Complexity IndexCrude Distillation 1.00Vacuum Distillation 2.00Thermal Processes 2.75Delayed Coking 6.00Catalytic Cracking 6.00Catalytic Reforming 5.00Catalytic Hydrocracking 6.00Catalytic Hydrorefining 3.00Catalytic Hydrotreating 3.00Alkylation/Polymerization 10.00Aromatics/Isomerization 15.00Lubes 60.00Asphalt 1.50Hydrogen (Mcfd) 1.00Oxygenates 10.00

Refinery Complexity Indices

Processes highlighted in blue are top of the barrel processes.

Source: OGJ

2121

Sample Calculation of a Refinery’s Complexity FactorSample Calculation of a Refinery’s Complexity Factor

Refinery Units Capacity - BPCD

Capacity as a % of Crude Distillation

Process Unit Complexity

RatingNelson Complexity # of the Refinery

Crude Distillation 247,000 100.0% 1.0 1.00Vacuum Distillation 92,000 37.2% 2.0 0.74Coking 25,200 10.2% 6.0 0.61Visbreaking 0 0.0% 2.8 0.00Cat Cracking 104,000 42.1% 6.0 2.53Cat Reforming 42,000 17.0% 5.0 0.85Cat Hydrocracking 20,000 8.1% 6.0 0.49Cat Hydrofining 0 0.0% 3.0 0.00Cat Hydrotreating 197,400 79.9% 3.0 2.40Alkylation 38,000 15.4% 10.0 1.54BTX 31,800 12.9% 15.0 1.93Polymerization 0 0.0% 10.0 0.00Lubes 0 0.0% 10.0 0.00Hydrogen (MMcfd) 10 4.2% 1.0 0.04Oxygenates 0 0.0% 10.0 0.00Isomerization 0 0.0% 15.0 0.00Asphalt 0 0.0% 1.50 0.00

12.13

Sample Refinery

Source: En*Vantage and OGJ

2222

Our Approach (cont’d)Our Approach (cont’d)

Refinery’s complexity factor is only a directional indicator to a refinery’s Refinery’s complexity factor is only a directional indicator to a refinery’s ability to produce a high yield of premium products. ability to produce a high yield of premium products.

Also calculated each refinery’s “bottom of the barrel” BOB conversion Also calculated each refinery’s “bottom of the barrel” BOB conversion capacity (cat cracker + hydrocracker + coker) as % of its distillation capacity (cat cracker + hydrocracker + coker) as % of its distillation capacity. Refinery in the example has a BOB index of 52%.capacity. Refinery in the example has a BOB index of 52%.

This metric combined with a refinery’s NCI factor gives a better This metric combined with a refinery’s NCI factor gives a better indication of a refiner’s ability to process heavy crudes and produce indication of a refiner’s ability to process heavy crudes and produce premium refined products. premium refined products.

Also took into account a refiner’s hydrotreating capacity as a % of the Also took into account a refiner’s hydrotreating capacity as a % of the distillation capacity to provide a better measure of a a refiner’s ability to distillation capacity to provide a better measure of a a refiner’s ability to produce low sulfur refined products. produce low sulfur refined products.

Refinery location, size and ownership were also taken into Refinery location, size and ownership were also taken into consideration. consideration.

2323

Profiling US RefineriesProfiling US Refineries

Source: OGJ Surveys and En*Vantage

US Refineries - Complexity vs B.O.B Conversion

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Refinery Complexity Number

B.O

.B C

on

ve

rsio

n a

s %

of

Dis

till

ati

on

Ca

pa

cit

y .

US AVG Refinery: 144 MBPD; 120 Refineries

Refineries under 100 MBPD: 55 refineries; 2.92 MM BPD

Refineries from 100 to 200 MBPD: 32 refineries; 4.71 MM BPD

Refineries over 200 MBPD: 33 refineries; 9.60 MM BPD

Refineries in the high risk category.~5.1 MM BPD

Average US Refinery10.8 NCI, 56.5% B.O.B.

2424

Profiling US Refineries (cont’d)Profiling US Refineries (cont’d)

Source: OGJ Surveys and En*Vantage

US Refineries - Complexity vs Hydrotreating Capacity

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Refinery Complexity Number

Hy

dro

tre

ati

ng

Ca

pa

cit

y a

s %

of

Dis

till

ati

on

Ca

pa

cit

y .

US AVG Refinery: 144 MBPD; 120 Refineries

Refineries Under 100 MBPD: 55 refineries; 2.92 MM BPD

Refineries from 100 to 200 MBPD: 32 refineries; 4.71 MM BPD

Refineries over 200 MBPD: 33 refineries; 9.60 MM BPD

Refineries in the high risk category.~1.6 MM BPD Average US Refinery

10.8 NCI, 79.6% Hydrotreating

2525

Regional Breakdown of US RefineriesRegional Breakdown of US Refineries

WestCoast

Gulf Coast

Southwest and Rocky Mt Mid Continent Mid West and Mid South

EastCoast

1.23 MM BPD

3.10 MM BPD 1.30 MM BPD

7.79 MM BPD

2.50 MM BPD1.28 MM BPD

2626

US Refined Product FlowsUS Refined Product Flows

MBPDEast Coast to

Mid West 233

Gulf Coast to East Coast 2,839

Gulf Coast to Mid West 741

Gulf Coast to Rockies 27

Gulf Coast to West Coast 166Rockies to

West Coast 32

Net Regional Flows

Source: EIA an En*Vantage

2727

Regional AnalysisRegional Analysis

In total 14% of US conventional refining capacity is vulnerable to In total 14% of US conventional refining capacity is vulnerable to shutting down due to economic and regulatory pressures.shutting down due to economic and regulatory pressures.

Most vulnerable are low complexity refiners leveraged to light-sweet Most vulnerable are low complexity refiners leveraged to light-sweet crudes with very little feedstock and product flexibility. crudes with very little feedstock and product flexibility.

Expect the shakeout to be a 3 to 5 year process. Expect the shakeout to be a 3 to 5 year process.

Region# of

Refineries

Total Capacity MBPD

Average Size

MBPD NCI B.O.B %Hydotreating

%

# of Refineries Most

Vulnerable

Vulnerable Capacity MBPD

Gulf Coast 38 7,785 205 11.7 62.1% 88.0% 7 451

West Coast 26 3,098 119 11.2 64.2% 69.7% 7 488

Mid-Cont 12 1,283 107 10.4 46.7% 76.8% 5 299

Mid South/ Mid West 16 2,500 156 9.5 48.7% 79.1% 7 540

East Coast 7 1,303 186 9.1 46.5% 56.5% 2 208

SW and Rockies 21 1,230 59 9.3 38.8% 69.3% 7 374

Total 120 17,199 143 10.8 56.5% 79.6% 35 2,360

Regional Refinery Profile and Vulnerability Analysis

Source: EIA an En*Vantage

2828

Implications

In the short-term, a number of independent refiners may fail to meet covenants in their credit agreements.

Refinery valuations are plummeting for small, light – sweet crude refineries. Two facilities in Tulsa were recently sold for scrap value.

As the shakeout continues, US refined product flows are expected to shift. More imports into the East Coast. Product from new Gulf Coast expansions will initially move mainly

east and north. Eventually as new refinery upgrades occur in the Mid-Continent more

product will move west, putting more pressure on crack spreads in the Southwest and Rockies region.

2929

Implications (cont’d)

Propane and Refinery Grade Propylene production will be adversely impacted by as much as 50 to 70 MBPD.

Longer-term, refiners may try to revamp cat crackers to Longer-term, refiners may try to revamp cat crackers to produce more propylene and less gasoline.produce more propylene and less gasoline.

Butane and natural gasoline markets could be impacted as the industry realigns.