Number of U.S. Refineries and Capacity

The Future of the U.S. Refining Industry Why Climate Legislation is (more) Bad News for the

Refining Sector

Presentation by

Lucian PugliaresiEnergy Policy Research Foundation, Inc.

Washington, DC

before New York Energy Forum

New York CityFebruary 22, 2010

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org

Number of U.S. Refineries and Capacity

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

0

50

100

150

200

250

300

350

Capacity Refineries

mbd

Refi

nerie

s

Source: EIA data

Total Gasoline Imports Share of Finished Motor Gasoline Product Supplied

Source: EIA data, EPRINC calculations

19911991

19921992

19931994

19941995

19951996

19971997

19981998

19991999

20002001

20012002

20022003

20042004

20052005

20062006

20072008

20082009

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

% o

f mar

kets

hare

US Refinery Capacity Utilization1985-2009

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 200913500

14000

14500

15000

15500

16000

16500

17000

17500

18000

60

65

70

75

80

85

90

95

100

U.S. Percent Utilization of Refinery Operable CapacityU. S. Operable Crude Oil Distillation Capacity (Thousand Barrels per Day)

mbd

% U

tiliz

ation

Source: EIA data, EPRINC Calculations

Compliance Costs: US Refining Industry

2012 2015 2020 2025 20300

10

20

30

40

50

60

70

80

Cost of Allowances to Cover Product CombustionCost of Allowances to Cover Stationary Source EmissionsTotal Cost of Allowances, Stationary Source and Product Combustion – net of 2 % allocation

billi

on $

ann

ually

Red area above yellow line represents

“free” allowances allocated to refiners

Effective Cost of Production: US Product Slate

Source: EPRINC Calculations from OGJ and proprietary refinery data sets of complexity, product slate valuations, and location. Product slate standardized to common EPRINC product/cost value index.


U.S. Refiners' Future Cost of Production(2015 - 2030)

7

0

5

10

15

20

25

Blend Wall CostsStationary Emissions Costs @ $15/ton - 80% Pass-ThroughStationary Emissions Costs @ $15/ton - 90% Pass-ThroughSection 199 CostsProduct Combustion Costs @ $15/tonEffective Production Cost

$ pe

r bar

rel

5 mbd 10 mbd 15 mbd

Source: EPRINC report: The American Clean Energy and Security Act:An EPRINC Assessment of Capacity and Employment Losses in the Domestic Refining Industry.

Stationary Emission Costs and Potential Capacity Losses2015-2030


Product Combustion Pass-Through Costs and Potential Capacity Losses - 2015-2030


Emission Allowances for Refiners Under W-M (Millions of Metric Tons of CO2 per Annum)


Year Total CO2 Emissions Permitted for US Economy

U.S. Refiners’ Emissions (Stationary Source)

U.S. Refiners’ Emissions (Product Combustion)

Refiners’ Total Emission Compliance Obligation

Emission Allowances Provided at No Cost

Net Emission Allowance Purchase Requirement

2015 5,003 256 2,029 2,285 100 2,185

2020 5,056 250 1,980 2,230 101 2,129

2025 4,294 248 1,964 2,212 86 2,126

2030 3,533 249 1,973 2,222 0 2,222

Annual Compliance Cost for U.S. Refiners Under W-M (U.S. dollars in billions, carbon prices derived from EPA estimates)


Year Cost of Allowances to Cover Stationary Source Emissions

Cost of Allowances to Cover Product Combustion

Value of Allowances Allocated under W-M to U.S. Refiners

Total Cost of Allowances, Stationary Source and Product Combustion – net of 2 % allocation

2005 ---------- ---------- ---------- ----------

2015 $3.3---$4.4 $26.4---$34.5 $1.30---$1.70 $28.4---$37.1

2020 $4.3---$5.5 $33.7---$43.5 $1.72---$2.22 $36.2---$46.8

2025 $5.4---$7.0 $42.6---$55.2 $1.86---$2.41 $46.1---$59.7

2030 $6.9---$8.9 $54.6---$70.7 $0 $61.5---$79.6

EPA and EIA Allowance Price Forecasts

Source: EPA and EIA Forecasts

20152016

20172018

20192020

20212022

20232024

20252026

20272028

20292030

0

20

40

60

80

100

120

140

160

180

200

EIA No Int'l Offsets, Lim-ited Alternatives

EIA Basic

EPA - Core IGEM

EPA - Core ADAGE

$/to

n CO

2

U.S. Distillate Net Imports

Source: EIA Data

19701971

19721973

19741975

19761977

19781979

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

-1000

-800

-600

-400

-200

0

200

400

600

800

1000

thou

sand

bar

rels

per

day

Projected Worldwide Refining Capacity Additions

Source: IEA Forcasts, EPRINC Calculations

2009 2010 2011 2012 2013 20140

1

2

3

4

5

6

7

8

9

10

With Saudi ProjectsIEA Forecast - Non-OECDIEA Forecast - OECD

mb/

d of

cru

de d

istil

latio

n ca

paci

ty

Some Planned Refining Capacity Additions by Locations

Source: EPRINC Calculations

Planned Completion Date

Net Addition to Capacity (thousand b/d)

India - Jamnagar Export Refinery 2009 580

China 2014 5,600*

Saudi Arabia - Ras Tanura 2012 400

Saudi Arabia - Jubail 2013 400

Saudi Arabia - Yanbu Export Refinery 2014 400

Abu Dhabi - Ruwais 2014 400

Total: 7,780

Refined Product Gross Margins

Source: EIA Data, EPRINC Calculations

1997 1998-50

-40

-30

-20

-10

0

10

20

30

40

50

Composite Margin Gasoline Margin Kerosene MarginDistillate Margin Residual Fuel Margin

$ pe

r ba

rrel

Stationary Emissions not Covered by Free Allowances

Source: EIA Data, EPRINC Calculations

20142015

20162017

20182019

20202021

20222023

20242025

20262027

20282029

0

50

100

150

200

250

300

Refiner's Share of Free Al-lowances, 2%Total U.S. Refiner Stationary Emissions (2002)

mill

ion

met

ric

tons

per

yea

r of a

llow

ance

s

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org 18

EISA ’07 Renewable Fuels Standard

Source: DOE, EIA Data and June 2009 STEO. Blend wall assumes projected 2009 gasoline consumption found in the June 2009 EIA STEO.

20062007

20082009

20102011

20122013

20142015

20162017

20182019

20202021

20220

5

10

15

20

25

30

35

40

45

50

Biomass based DieselAny AdvancedCellulosic AdvancedCorn Ethanol / OtherEPACT 0510% Ethanol Penetration (The Blend Wall)

Billi

on G

allo

ns

Retail Fuel Prices

19Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org

4/1/0

0

11/1/0

0

6/1/0

1

1/1/0

2

8/1/0

2

3/1/0

3

10/1/0

3

5/1/0

4

12/1/0

4

7/1/0

5

2/1/0

6

9/1/0

6

4/1/0

7

11/1/0

7

6/1/0

8

1/1/0

9$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

E85 BTU Adjusted*GasolineDiesel*

*Price is per gallon of gasoline equivalent (BTU basis), according to DOE conversion standards: 1 Gallon of Gasoline = 1.333 gallons of E85 and 0.904 gallons of diesel. Source: DOE Data

Energy Subsidies Not Related to Electricity Production


Category Fuel Consumption (Quadrillion BTU)

FY 2007 Subsidy and Support (million 2007 dollars)

Subsidy (dollars per Million BTU)

Coal 1.93 78 0.04Refined Coal 0.16 214 1.35Natural Gas and Petroleum Liquids 55.78 1921 0.03Ethanol/Biofuels 0.57 3249 5.72Geothermal 0.04 1 0.02Solar 0.07 360 2.82Other Renewables 2.5 184 0.14Hydrogen * 230 NMTotal Fuel Specific 60.95 6237 0.1Total Non-Fuel Specific NM 3597 NMTotal End-Use and Non-Electricity NM 9834 NMSource: EIA Data

Ethanol Subsidies


Total 2008 Ethanol Subsidies: $9.15 billion

Total Subsidy Per Gallon of Ethanol: $1.08

TotalSubsidy Per Gallon of Gasoline Displaced, BTU Equivilent $1.63

(Total does not include cost of fuel, only the fuel subsidy), * = EPRINC Estimate, not all subsidies are listed

Source: http://www.globalsubsidies.org/files/assets/Brochure_-_US_Update.pdf , EPRINC calculated Blender's Credit

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org 22Source: EIA Data, DOE Data, EPRINC Calculations

FFVs and E85 Usage

2003 2004 2005 2006 20070

1

2

3

4

5

6

7

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

Light Duty E85 FFV's In Use% of FFV's Actually Op-erating on E85

Mill

ion

Vehi

cles

The Blend Wall in a low RBOB World

23

1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 13.000

0.5

1

1.5

2

2.5

RBOB (NYMEX Futures: March Delivery) Ethanol's Value Relative to Gasoline Ethanol (CBOT Futures: March Delivery)Corn Feedstock - $ per gallon of Ethanol All In-Cost of Ethanol Production

% of Gasoline Pool

$/ga

llon

Falling values for ethanol will be mirrored by rising values for RINs

After serving its role as an oxy-genate, ethanol must compete directly with gasoline

Estimated all-in cost for ethanol: corn + operating costs + capital costs

Ethanol loses significant value as it moves into E85

Price difference between ethanol and RBOB

Blender's Credit: $0.45/gallon


EIA AEO 2010 Biofuels Projection

• “Biofuels grow, but fall short of the 36 billion gallon RFS target in 2022, exceed it in 2035.”

• Richard Newell, EIA, at SAIS, December, 2009


Cost and Effectiveness of Cash for Guzzlers Program

Baseline=18 mpg, 12,000 VMT

Voucher Value

Program Cost for One Million Vehicles

Gallons Saved Per Vehicle, Annually

Total Fuel Savings for One Million Vehicles Over Eight Years, Gallons

Cost Per Gallon Saved Over Eight Years

Fleet Fuel Consumption Reduction Compared to 2008 Rate

New Car, +4 MPG $3,500 $3,500,000,000

121.2 969,600,000 $3.61 0.0882%

New Car, +10 MPG $4,500 $4,500,000,000

238.1 1,904,800,000 $2.36 0.1733%

New Light Truck/SUV, +2 MPG

$3,500 $3,500,000,000

66.7 533,600,000 $6.56 0.0485%

New Light Truck/SUV, +5 MPG

$4,500 $4,500,000,000

144.9 1,159,200,000 $3.88 0.1054%

Sources: EIA Data, EPA Data, EPRINC Calculations


The RFS Already Maximizes U.S. Low-GHG Biofuel Use Through 2025

0

10

20

30

40

2010 2015 2020 2025 2030 2010 2015 2020 2025 2030

EIA AEO 2008 WBS Reference Case

Bill

ion

Ga

llon

s E

tha

no

l E

qu

iva

len

t

.

RFS gap

Biodiesel

Sugar

F-T Cellulosic

B-C Cellulosic

Biodiesel

B-C Cellulosic

F-T Cellulosic

Grain

imports

U.S.

• The 2008 AEO & a 2008 DOE Policy Analysis Office study project that RFS2 cellulosic biofuel waivers will be required through 2030 (AEO) or 2025 (Policy Analysis Office). Since then, the recession has further delayed investment.


Source: EIA Forecasts

EIA W-M Base Case Petroleum Demand

20062008

20102012

20142016

20182020

20222024

20262028

20300

2

4

6

8

10

12

14

16

18

20

BiodieselEthanolTotal Crude and Refined Petroleum Product Supply*

mb/

d

28


Product Prices and Share


Dec/05

Mar/0

6

Jun/06

Sep/0

6

Dec/06

Mar/0

7

Jun/07

Sep/0

7

Dec/07

Mar/0

8

Jun/08

Sep/0

8

Dec/08

Mar/0

90

50

100

150

200

250

300

350

400

0

1

2

3

4

5

6

7

8

CBOT Ethanol FuturesNYMEX RBOB FuturesEthanol Production's Share of Finished Motor Gasoline Supplied (%)

cent

s pe

r ga

llon

%

Source: EIA Data, CME Group, EPRINC Calculations. All prices are for front month futures contracts. Prices are not BTU adjusted.

Lifecycle GHG Emissions


Source: EPA, http://www.epa.gov/OMS/renewablefuels/420f09024.htm



A Selection of Ethanol Subsidies


2008 Ethanol Subsidies $ MillionMarket Price Support on Domestic Production 2,240Market Price Support on Exports 30Volumetric Excise Tax Credit (Blender's Credit)* 4,335Reductions in State Motor Fuels Tax 440Federal Small Producer Tax Credit 170Excess of Acclerrated Over Cost Depreciation 680Federal Grants, Demonstration Projects, R&D 350Access to Tax-Exempt Solid Waste Bonds 110Deferral of gain on sale of farm refineries to coops 20Crop Support to Corn 730Crop Support to Sorghum 20Credits for Clean Fuel Refueling Infrastructure 20

Ethanol Subsidies


Total 2008 Ethanol Subsidies: $9.15 billion

Total Subsidy Per Gallon of Ethanol: $1.08

TotalSubsidy Per Gallon of Gasoline Displaced, BTU Equivilent $1.63

(Total does not include cost of fuel, only the fuel subsidy), * = EPRINC Estimate, not all subsidies are listed

Source: http://www.globalsubsidies.org/files/assets/Brochure_-_US_Update.pdf , EPRINC calculated Blender's Credit

GHG Well to Wheels – CA ULSD


Product Transport<0.5%

Crude Refining12%

Tank to Wheel 79%

Crude Production7%

Crude Transport1%

Source: Detailed California-Modified GREET Pathway for Ultra Low Sulfur Diesel (ULSD) from Average Crude Refined in California, CARB, Feb 28 2009

Upstream GHG Emissions by Feedstock


Source: “An Evaluation of the Extraction, Transport and Refining of Imported Crude Oils and the Impact on Life Cycle Greenhouse Gas Emissions”, DOE/NETL-2009/1362, March 27, 2009

How the LCFS is Met in 2030


Cellulosic ethanol

54%

Sugar ethanol4% Corn Ethanol

3%

BTL23%

Biodiesel1%

PHEV electricity1%

Reductions from refining and up-

stream15%

Approx. 275 million

tonnes of CO2

equivalent credits are required by

2030.

Alberta Oil Sands – With and Without LCFS


Source: “An Evaluation of the Extraction, Transport and Refining of Imported Crude Oils and the Impact on Life Cycle Greenhouse Gas Emissions”, DOE/NETL-2009/1362, March 27, 2009

Reference case 2025 LCFS case 2025

3.4 mbpd 1.2 mbpd

0.6 mbpd 0.7 mbpd

2.0 mbpd

39


Impact of U.S. LCFS on CO2 Emissions

Note: US LCFS limits leads to significant reductions in emissions attributed to the LCFS, but these reductions are largely offset by increased emissions in the rest of the world: Canadian oil sands go elsewhere & most increased biofuel use is at the expense of biofuel use elsewhere.

Source: US DOE, Unofficial estimates of LCFS, private communication.

The Endangerment Finding

Greenhouse Gas Emission Regulation Under the Clean Air Act

December 2009


Pathways for Control of GHGs• Clean Air Act (CAA) – emission limitations on stationary

and mobile sources, including fuels• Endangered Species Act (ESA) – emission sources could

be subject to consultation requirements and “takings” claims for effects on specie habitat

• Clean Water Act (CWA) – limits could be placed on GHG emissions to address ocean acidification and water temperature changes

• National Environment Policy Act (NEPA) – could require the analysis of climate change in environmental assessments and impact statements Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org

What are Prospects for Legislative Preemption?

• None of the legislative proposals before Congress call for full preemption of CAA stationary and mobile source requirements

HR 2454 preempts some stationarysources requirements but not fuels S. 1733 is similar to HR 2454 but has 25k source

threshold for PSD and Title V• None of the legislative proposals preempt CWA and

ESA requirements or tort. Only limited State preemption

• Worse outcome is legislation and regulation ̶ 60 votes for full preemption may be difficult


Preliminary Conclusions• Multiple Regulatory Pathways under which Petroleum

facilities could be regulated.• Clean Air Act (CAA) – not well suited to regulating GHGs • Pathways are linked; regulation under one CAA

provision can and will trigger regulation under others.• Litigation, including citizen suits, will increase

dramatically but unlikely to stay rules.• Managing the regulation of GHGs likely to be a key

objective for industry.


Petroleum Emission Sources


FlaresFCCFluid cokingCat reformingOn-site sulfur recovery unitsCoke calciningAsphalt blowingDelayed cokingProcess ventsUncontrolled blow-downEquipment leaksStorage tanks Crude oil, intermediate or product loading operations

Topping Plants (Alaska)Sulfur Plants Chemical Plants (partial equity and Bayway Polypropylene) Specialty Chemicals (Flow Improver Manufacturing) Lubricants Manufacturing CoGens Calciners Sulfuric Acid Plants Pipeline Terminals and Bulk Stations Marine Loading facilities Natural Gas Processing Plants

Fractionators Midstream Compressor Stations LNG Facilities Upstream-Production Facilities Development Drilling and Workover Rigs East Vacuum Liquid Recover and CO2 Injection Plant Coal Gasification Offshore platforms

Final Endangerment Finding: Second Order Effects are Numerous

• Two major findings: Current and projected atmospheric concentrations of 6

GHGs endanger public health and welfare; Combined emissions of 4 of the 6 pollutants emitted from

motor vehicles contribute to atmospheric concentrations and threat.

• Final Endangerment Finding will likely compel regulation under several other provisions of CAA that rely on similar endangerment test


Stationary and Mobile Controls Will Be Triggered Early Next Year

• March 2010 – Final Endangerment Finding – will allow EPA to finalize its GHGs motor

vehicle rule Final Motor Vehicle Rule – will make CO2 and other GHGs a “regulated

pollutant” under the CAA.• Even though EPA will regulate cars, EPA states that the motor vehicle

rule will immediately trigger (without further rulemaking) stationary source requirements: Operating Title V permit requirements

• for plants or buildings having potential to emit > threshold limit

Plant modification pre-construction permit requirements and best available controls (“PSD/BACT”)

• For existing plants with emissions ≥ threshold limits that make modifications that increase GHG emissions


What Would National GHG NAAQSLook Like*

• National Ambient Air Quality Standard (NAAQS) ̶ endangerment test similar to§202 finding.

• Expect litigation ̶ CBD petition to set 350 ppm GHG NAAQS.• Similar to ozone and PM2.5 – standard could force all areas of country

to be considered in attainment or non-attainment.• Given tough statutory consequences for non-attainment – LAER,

offsets for all emission increases and 10-year attainment deadline – EPA likely to place all areas into attainment.

EPA could then require states to develop maintenance strategies – reductions to assure concentrations are not exceeded.

Challenge of attaining concentration levels that will be driven by international emissions.

*If not preempted by legislation

Political Factors Affecting Regulatory Outcomes


New Administration Eager to right perceived wrongs Moving at breakneck speed to issue new rules Some recognition that speed is necessary to prevent unraveling

if one-term Presidency Top-down management style – career staff frustrated Few moderating influences inside the Administration

One year from now things could change -- Mid-term election coupled with lackluster economic growth

and job creation could slow EPA regulatory march Significant regulatory activity on non-GHGs could overwhelm

States and sources Top-down management strategy could yield to more staff

reality checks and greater interagency push back

Documents

Number of U.S. Refineries and Capacity