U.S. Petroleum Refining: Basics, Challenges, And The Case for a Supply- Oriented Energy Policy Charles T. Drevna National Petrochemical & Refiners Association.

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

Outline

• Refining Industry Basics

• Economics & Role Of Imports

• Challenges 2005 and Beyond

• National Energy Policy

• Conclusions

Refining IndustryBasics

• 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


Infrastructure

• Each Refinery is Unique

• Crude Source

• Product Slate

• Conversion Capacity/Configuration


Infrastructure

• Refinery Configuration Is Inflexible

• Changes in Crude Qualities Affect Refining Economics


US Crude Oil Trend

30.00

31.00

32.00

33.00

34.00

35.00

API G

ravit

y

0.50

0.70

0.90

1.10

1.30

1.50

Wt. P

ct. S

ulfu

r

API Gravity Sulfur, wt%

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


US Refining Capability

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%

Conv

ersi

on C

apac

ity

0.000.200.400.600.801.001.201.401.60

Wt.

Pct.

Sulfu

r

Catalytic Cracking Hydrocracking Coking Sulfur, wt%

105%

148%

126%


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


Light/Heavy Differentials, $/BBL

$0.00$2.00$4.00$6.00$8.00

Light

-Hea

vy

Diffe

rent

ial, $

/BBL

0.00

0.50

1.00

1.50

Wt. P

ct. S

ulfur

WTI-WTS WTI-Maya Sulfur, wt%


Crude Supply

• Additional Conversion Capacity Should Reduce Light/Heavy Differentials

• Cokers in Particular Have Been Built to Process Specific Crudes– Maya – Mexico– Oriente - Venezuela


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

Gasoline Imports – An Essential Supply Source

Local Production

Net Imports

Other DomesticProduction

Imports to Other Regions

PADD 1 Share

PADD 1 Sources of SupplyImport Destinations

877 MB/D (2003)

Source: EIA, Petroleum Supply Monthly

Changing U.S. Specifications May Change Import Sources

Country 2004 2005/2006 2010

U.S. 120 30 30

E.U. 150 50 (10) 10

Brazil 1000 400 80

Argentina 350 50 N/A

South Korea 130 50 N/A

Source: Hart International Fuel Quality Center

Gasoline Sulfur Specifications (ppm)

Some Historical Suppliers Cannot Produce Low Sulfur Gasoline

0100200300400500600700800900

100019

90

1992

1994

1996

1998

2000

2002

Th

ou

san

d B

arre

ls P

er D

ay Other

Other Latin America

E Europe

Venezuela

W Europe

Virgin Islands

Canada

U.S. Total Gasoline Imports

Source: EIA, Form EIA-814

EU-15 Demand Mix May Imply Excess European Mogas Supply

0

50

100

150

200

1990

1995

2000

2005

2010

2015

Mil

lio

n T

on

nes

/Yea

r

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Mo

gas

/Die

sel

Rat

io

Gasoline Diesel Ratio Gasoline/Diesel

Source: History IEA; Forecast Purvin & Gertz

European New Vehicle Choices Show Why Diesel Fuel Growth May Continue

40.3

0

10

20

30

40

50

Per

cen

t o

f N

ew

Reg

istr

atio

ns

1990 1992 1994 1996 1998 2000 2002

W. Europe Diesel-Fueled Vehicle Share of New Passenger Car Registrations

Source: ACEA www.acea.be

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?

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


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

14.00

14.50

15.00

15.50

16.00

16.50

17.00

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Refinery Capacity

MM

B/D


02468

101214161820

MM

B/D

ay

U.S. Refining Capacity & Inputs

Gross Inputs

Operable Capacity

EIA

Refinery Utilization

Number ofRefineries in 1981

Number ofRefineries in 2003

Petroleum Industry Data

324 149



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.

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

Cumulative Regulatory Impacts on Refineries, 2002 - 2010

2002 2003 2004 2005 2006 2007

2008 2010

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

NOx SIP Calls/Section 126 8

New Source Review 6

Ext.

Cumulative Regulatory Impacts on Refineries, 2002 - 2010

2002 2003 2004 2005 2006 2007

2008 2009 2010

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

NOx SIP Calls/Section 126 8

New Source Review 6

Ext.

Concurrently, 5-Year Review Underway

Concurrently, 5-Year Review Underway

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



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.]


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


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

DIESEL FUEL TIMELINES

80% 15 PPM : 20% <500 PPM

6/1/2006 6/1/20086/1/2007 6/1/2010 6/1/2012

6/1/2009

100% 15 PPMHighway Rule

2-Step NRLM 2 Rule

15 PPMPART 89 <500 PPM

15 PPMOR

HomeHeating

OilHOME HEATING OIL >500 PPM

33

RAILROAD & MARINE <500 PPM


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

EPA


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

Boutique Fuels


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


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.


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

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


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


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.

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



Energy Policy & Public Opinion –

Six Myths That Influence Public Policy Decisions:

1. Supply is always available at low prices2. Environmental improvements are free3. Alternate fuels are cheap and abundant, and unlike fossil fuels, require no

environmental trade offs4. Consumers are always willing to pay higher prices for better environmental

performance5. Little or no progress has been made in reducing air and water emissions and

general improvements in the environment6. Oil and petrochemical industries pay little attention to environmental, health and

safety improvements

These perceptions are wrong. But they often drive public policy.

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

U.S. Petroleum Refining: Basics, Challenges, And The Case for a Supply- Oriented Energy Policy Charles T. Drevna National Petrochemical & Refiners Association.

Documents

refining economics slide

kbpd slide

mmbd slide

competitive slide

carbon slide

petroleum refining

petroleum supply monthly

average refining