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Global Energy Management InstituteThe 2006 Refining Conference
“The Future of the Gulf Coast Refining Industry”
November 3, 2003
Gene EdwardsValero Energy Corporation
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The refining industry faces numerous supply and demand uncertainties.
Critical Uncertainties
Crude Supply
• Iraq?
• Iran?
• Saudi Arabia, Kuwait, UAE?
• Nigeria?
• Russia?
• Kazakhstan and Azerbaijan?
• Mexico?
• Venezuela?
• Canada?
• Deepwater Gulf of Mexico?
Refined Products Supply
• Refinery capacity expansion?
• Capacity creep?
• Gasoline imports?
• Renewable Fuels Standard?
• Ethanol?
• Biodiesel?
• Gas-to-liquids and Coal-to-liquids?
Refined Products Demand
• High price effect on demand growth?
• Economic growth?
• China and India continue rapid growth?
• Hybrids?
• Dieselization?
• Other fuel efficient engine technologies?
• CAFE Standards?
3
• GDP growth of 4.2% and efficiency improvements of 1.6% per year
– Compares to a 35 year historical GDP growth of 3.7% and efficiency improvement of 1.7% per year
• World petroleum demand grows 1.6 to 1.8% per year
– Compares to historical oil demand growth of 1.7%
40
50
60
70
80
90
100
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
World Petroleum Demand
MMBPD
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
World Oil Consumption Efficiency (Demand / GDP)
BPD / Million $ of GDP
World demand expected to grow 1.4 to 1.6 MMBPD per year over the next 5 years but added efficiency gains due to higher prices could reduce that.
World Petroleum Demand Growth
Forecast Demand / Efficiency GainsHistory
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• Oil prices have risen strongly over the last few years due to the reduction of spare OPEC capacity and increasing geopolitical risks
• Increases in non-OPEC supplies through the end of the decade come at the same time OPEC countries are adding capacity that should ease prices
– There are risks that non-OPEC supplies will come on more slowly than expected
• After 2010, OPEC again will be heavily relied upon to meet growing demand, providing support to the crude market
26.4 30.8 31.6 34.7
40.442.7 46.6
47.8
0
10
20
30
40
50
60
70
80
90
2002 2005 2010 2015
World Oil SupplyCrude Oil Supply
Non-OPEC production growth through 2010 should help ease prices.
OPEC & Non-OPEC Supply
MMBPD
Non-OPECOPEC
5
• Middle East growth will be led by Saudi Arabia and Kuwait
– Iran and Iraq both have supply growth potential but geopolitical consequences limit growth
• FSU growth fairly evenly split between Russia, Kazakhstan, and Azerbaijan
• African growth distributed between Angola, Nigeria, Algeria and Libya
• North American growth dominated by Canada’s oil sands
Crude supply growth moving forward will be dominated by the Middle East, FSU, and Africa along with Canada.
FSUMiddle East Latin AmericaNorth AmericaAfrica Asia Europe
World Oil SupplyCrude Oil Supply
5.0 5.0
3.1
1.40.7
-0.2
-1.8-2
-1
0
1
2
3
4
5
6 MMBPD
2005-2020 Supply Growth By Region
6
World Oil SupplyGrowth by Quality
Light/Medium Sour
High TAN (Sweet)Heavy Sour
Sweet
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2000-2005 2005-2010 2010-2015 2015-2020
MMBPD
Growth in Crude Oil Supply by Quality• Growth in sweet crude, but high demand from Far East refiners
• Growth in High TAN grades in the short term
• Heavy is growing less quickly than historically
Majority of growth is in medium sour crude oil.
7
• Lacking logistics to bring crude to USGC market (two proposed pipeline projects exist)
• High cost of developing fields
• Threat of Canadian upgrader projects
• Threat of increased capacity from Mid-Continent refinery upgrades
World Oil SupplyCanada
MMBPD
Canadian Hvy. Sour Crude Supply
Canada is expected to provide nearly all of the net heavy crude supply growth for the world.
Crude Production Year on Year Growth
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2005 2010 2015 2020
Types of Canadian Oil Sand API Sulfur Bitumen 8 4.5%
Synthetic-Bitumen 20-22 2.7%
Diluent-Bitumen 20-22 3.0%
Synthetic Crude Oil 32-35 0.2%
8
• Emerging economies lead world growth
– Asia alone accounts for nearly 53% with China about half of that
• U.S. demand grows 1.1% annually (240 MBPD) as the economy grows at its 3.1% per year long-term average
2007-2011 Petroleum Demand Growth
Total Growth* = 7.5 MMBPD (1.7%/Year)
World Petroleum Demand GrowthRegional & Product Breakdowns
Regional Growth (MBPD)
1,200
500
800
500
3,900
400
U.S.
ME / Africa
Asia
LatinAmerica
FSU
EuropeCanada - 200
* Includes demand growth supplied by NGLs, Condensates, and Other Liquids (e.g., Biofuels, Gas-to-Liquids)
9
World Gasoline & Diesel Demand
2006-2011 World Gasoline Demand
MMBPD
0
5
10
15
20
25
30
2006
2007
2008
2009
2010
2011
MMBPD
2006-2011 World Diesel Demand
0
5
10
15
20
25
30
2006
2007
2008
2009
2010
2011
U.S. Asia Europe ME/Africa Latin America FSU Canada
• World gasoline consumption grows about 1.1 - 1.3 MMBPD – Asia makes up 62% of global growth while European demand continues to decline
• World diesel demand grows about 2.5 – 2.7 MMBPD– Asia makes up 47% of this growth
• The U.S. makes up 37% of expected gasoline growth but only 11% of diesel growth
World diesel growth is expected to more than double gasoline growth over the next five years.
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U.S. gasoline demand is expected to continue growing, although at a slowing pace as a result of new engine technologies and changing consumer preferences.• U.S. gasoline demand to grow at 1.0 to 1.3% per year (450 to 600 MBPD) over the next five years
• Supply Demand balance remains relatively tight over the next few years
• Longer-term, the supply-demand balance loosens due to numerous factors increasing supply:
– Increased ethanol production
– Increased production from U.S. refinery expansions
– Increasing imports from Europe and new foreign refineries
5,000
6,000
7,000
8,000
9,000
10,000
11,000
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
U.S. Gasoline DemandMBPD
U.S. Gasoline Demand
11
• On-road consumption will continue to be based on heavy-duty diesel trucking and not by dieselization of the light-duty vehicle fleet as has been the case in Europe
• HSD to become a product for home heating use only
• Jet demand should grow at 1.0 – 1.5% through 2011 amidst continued growth in domestic travel and very strong growth in international passenger travel and cargo shipments
U.S. Distillate Demand
Diesel demand to grow 1.4 – 1.7% per year (300 to 350 MBPD) over the next five years driven by growth in on-road consumption as a result of economic growth.
U.S. Distillate Demand OutlookMMBPD
3,000
4,000
5,000
6,000
7,000
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
12
• The bulk of U.S. diesel demand is in the on-highway sector which began a shift from 500 ppm LSD to 15 ppm ULSD earlier this year
• A significant portion of the existing off-road HSD market moves to LSD specifications in June 2007
• The LSD market then disappears by the middle of 2012
• Transitions put strain on supply and logistics, likely causing dislocations until markets adjust
U.S. Diesel Sulfur Specifications By Use
2006
15
3400
2000
3400
3400
3400
3400
3400
2007 – 2009
15
500
2000
500
500
500
3400
500
On-Road Diesel
Off-Road Diesel
Heating Oil*
Farm
Locomotive
Marine Diesel
Electric Power
Industrial
2010-2011
15
15
2000
15
500
500
3400
15
U.S. Distillate Demand
U.S. diesel markets will continue to be affected by product specification changes until nearly all uses are at ULSD quality in 2012.
2012
15
15
2000
15
15
15
3400
15
* Some states have discussed mandating lower Heating Oil sulfur limits
7%2%
4%
10%
29%
44%
4%
Total = 5.96 MMBPD
2007 U.S. Distillate Demand Profile
On-HighwayHeating Oil
Locomotive
MarineFarm
Electric Power & Other
Jet
13
Tightening Specifications Hinder Investment
Significant capital has been spent to meet tightening environmental standards, pulling capital away from refinery expansion projects
The American Petroleum Institute estimates U.S. downstream companies spent nearly $90 billion on environmental projects from 1995 through 2004 and have spend tens of billions more on ULSD compliance
Capital constraints likely to continue as environmental standards continue to tighten:
EPA 2006 tightening of particulate matter standards likely to impact industry
Continuing compliance with ULSD transition
2011 Implementation of Mobile Source Air Toxics Phase II standard
1989 1991 1993 1995 1997 1999 2001 2003 2005
1989:Summer Volatility Standards Begin
1995: Reformulated
Gasoline Begins
1992:OxyFuel
Program Begins
2004: Tier 2 Sulfur Specs Begin
– Gasoline Standards Tighten Through 2006
2002:Mobile Source
Air Toxics Program Begins
1998:RFG
Standards Tighten
2000: RFG Phase 2
1993:On-road
Diesel Sulfur Reduction
2006:Ultra-low Sulfur Diesel Program
Begins
14
Conversion capacity needed to capitalize on sour crude discounts Hydroskim - Breakeven or moderate margins; High resid yield
When margins are positive - increase crude runs When margins are negative - decrease crude runs
Cracking - Better margins; Lower resid yield Coking - Best margins; Lowest resid yield
Maximize heavy crudes
Conversion Economics
-10
-5
0
5
10
15
20
25
30
35
4020
00
2001
2002
2003
2004
2005
2006
LLS Hydroskimming
Arab Medium Hydroskimming
Arab Medium Cracking
Maya Coking
$/Bbl
15
U.S. Refining Outlook
• Light product demand continues to grow
– distillate balances tighter than gasoline
• Gasoline specifications and mix
– lower volatility
– lower benzene
– RBOB for ethanol blending
– Alkylate/ Iso-octane values remain strong
• Complex refineries have advantage
• Continued reliance on Product Imports
• Government regulations are biggest threat
– alternative energy (ethanol, biodiesel, GTL, H2, etc.)
– demand reduction
– CAFE standards
– incentives for hybrids and new technologies
– stay in business capital for environmental
– particulates standards
– tighter product specifications
– Windfall profits taxes
• New refinery capacity additions
– tremendous escalation in construction cost
• Competitive advantage for foreign refineries?
16
Refinery Strategies
• Compliance with environmental & safety standards
• Focus on higher efficiency
– energy reduction projects
– best practices in maintenance
– improved reliability
– multi-site synergies
– economies of scale
• Feedstock optimization
– flexibility
– lower cost/ higher margin
– secondary cost control (shipping/ demurrage/ terminalling)
– blending
– intermediates
• Product optimization
– conversion to light products
– flexibility - seasonal
– shift to middle distillates
– optimize gasoline blending
• Capitalize on niche products
– lubes
– petrochemicals
– asphalt- specialty grades
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