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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?

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• 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

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• 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

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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.

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• 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%

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• 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)

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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

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• 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

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• 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

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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

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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?

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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