# Presentation: 172622

## The U.S. Refining Industry:Developments and Outlook, 1998-2001Dr. Neal Davis, Energy Information Administration

- August 10, 2000

## EIA’s Financial Reporting System

**Proprietary company-level data on U.S. majors collected since 1977**
**Uniform reporting of line-of-business on company worldwide financial and operating details**
**Audited by independent CPAs; summary data consistent with company annual reports and SEC disclosures**

**Notes:**
The Financial Reporting System (FRS) is a unique data set.  It is superior to simply comparing company annual reports in that companies report in a format, that increases comparability.
Company-level data is confidential and not publicly reported.  Only aggregate data is reported.
Only publicly traded companies are included in the survey, ensuring that FRS data can be compared to public financial disclosures (e.g.,  Annual report and SEC Form 10-K).
Reporting companies benefit by seeing reports that allow them to compare their corporate results to the aggregate of the industry by line of business.
The reporting companies are commonly referred to as the “FRS companies.”

## U.S. Majors (FRS Companies), 1999

**Notes:**
Although the original members of the reporting group were almost without exception vertically-integrated oil companies, many changes have occurred in the past 20+ years
The members of the FRS include vertically-integrated oil and gas companies, oil and gas producers, refiner/marketers, refiner/wholesalers, energy companies, natural gas companies, and refining(/marketing) joint ventures.

## Shares of U.S. Energy Production and Refinery Capacity for the U.S. Majors, 1981-1998

- Source:  Financial Analysis Team, Office of Energy Markets and End Use, Energy Information Administration, Form EIA-28, “Financial Reporting System.”

**Refining capacity**

**Crude oil and NGL**

**Natural gas**

**Coal**

**Uranium oxide**

**Notes:**
Although many of the U.S. majors have become more specialized in their operations over the last several years, the operations of the U.S. majors as a group is still varied.
During 1998 the U.S. majors accounted for:
85 percent of U.S. crude distillation capacity (the increase from 60 percent in 1997 to 85 percent in 1998 was due to the addition of 11 companies, primarily to reverse the erosion of refining/marketing within the group of U.S. majors),
48 percent of crude oil and NGL production,
44 percent of natural gas production, and
7 percent of coal production (after reaching 30 percent in 1988).

## Returns on Investment in Refining/Marketing and Other Operations for U.S. Majors, 1990-1998

- Source:  Financial Analysis Team, Office of Energy Markets and End Use, Energy Information Administration, Form EIA-28, “Financial Reporting System.”

**Notes:**
Domestic refining/marketing is a key area for the FRS companies 
FRS domestic refining/marketing data have been of considerable use in EIA reports and to EIA customers
Return on investment is the net income contributed by the line of business divided by the asset base associated with the line of business (in this case net investment in place — net pp&e plus investments and advances to unconsolidated affiliates). 
Simply considering net income could be misleading without additionally considering the magnitude of the assets used to generate it.
The profitability of domestic refining/marketing has been historically low compared to other lines of business, including foreign refining/marketing.

##  Refining Margins and Production Costs of U.S. Majors, 1990-1998(1998 dollars per barrel)

- Source:  Costs, margins, and sales:  Financial Analysis Team, Office of Energy Markets and End Use, Energy Information Administration, Form EIA-28, "Financial Reporting System." GDP deflator: Department of Commerce, Bureau of Economic Analysis

**Notes:**
Note the last 3 columns of this table.  With the addition in 1998 of 11 new companies to the survey of U.S. majors, the downstream time series substantially changed.  In order to provide some insight into the changes that occurred between 1997 and 1998 for the U.S. majors, the 1998 data was split into two groups:  the data for the companies that were considered majors in both 1997 and 1998 and the data for the companies that were only present in 1998. 
Strongly linked to the profitability of domestic refining/marketing operations is the net refining margin.
The gross margin is the difference between the average price received for petroleum products less the acquisition costs of raw materials (chiefly crude oil) and purchased petroleum products.
The gross margin has fluctuated considerably during the 1990’s, reflecting the difference between product prices and input costs.
Marketing costs and energy costs also have varied during the decade of the 1990’s, but have been targeted for reduction (with some apparent success over the latter half of the decade).
The net margin is the gross margin less out-of-pocket operating costs.  The net margin, too, has varied considerably during the 1990’s, but has increased considerably over the last 3 years (1996-1998) as cost-cutting efforts have apparently been successful.

##  U.S. Refined Product Margins and Costs per Barrel of Petroleum Product Sold for U.S. Majors, 1990-1998

- Source:  Financial Analysis Team, Office of Energy Markets and End Use, Energy Information Administration, Form EIA-28, "Financial Reporting System."

**Gross refined product margin**

**Operating costs**

**Net refined product margin**

**Notes:**
An illustration of the recent trends in the gross margin, operating costs, and the net margin demonstrates that reductions in operating costs, not raw materials costs, have resulted in increased profitability (see the figure in this presentation entitled “Returns on Investment in Refining/Marketing and Other Operations for U.S. Majors, 1990-1998”).

## U.S. Refineries and Refining Capacities, 1990-2000

- n.a.:  information unavailable
- Sources:  1990-1993:  U.S. Department of Commerce, *1994 U.S. Industrial Outlook*, p.4-2
- 1994-1995:  Energy Information Administration (EIA), *Petroleum Supply Annual 1994*, Volume 1(DOE/EIA-0340(94)/1) (Washington, DC, May 1996), Table 36 (and previous issues).
- 1996:  EIA, Short-Term Integrated Forecasting System in support of the Short-Term Energy Outlook and Annual Energy Outlook 1999, Table 11.
- 1997:  EIA, *Petroleum Supply Annual 1996*, Volume 1 (DOE/EIA-0340(96)/1) (Washington, DC, June 1997), Table 36.
- 1998 and 1999:  Changes are inferred from the *Oil and Gas Journal* Refinery Report (December 21, 1997 and December 22, 1998, respectively) and applied to 1997 data.
- 2000:  EIA, *Petroleum Supply Annual 1999*, Volume 1 (DOE/EIA-0340(99)/1) (Washington, DC, June 2000), Table 36.

**Notes:**
One way in which the U.S. industry as a whole, and the U.S. majors in particular, have attempted to reduce their costs is by increasing downstream charge capacity through the addition of downstream processing units.
One of the outcomes of increased downstream charge capacity is that refinery crude distillation capacity has increased despite the closure of refineries.
Between 1990 and 2000 the number of refineries in the United States fell 23 percent, but crude distillation capacity increased 6 percent.  
Thus, the average crude distillation of a U.S. refinery increased from 76 thousand barrels per day to 105 thousand barrels per day — a 38-percent increase.

## U.S. Refinery Configurations of U.S. Majors, 1974-1999, Selected Years

-  n.a.:  Information not available.
- Source:  *Oil and Gas Journal*, "Worldwide Refinery Report," December 1974, 1981, 1997, and 1999.

**Notes:**
The sophistication of the refineries of the U.S. majors has increased significantly over the past several years (i.e., between 1974 and 1999), 
However, it has changed relatively little over the past few years (i.e., between 1997 and 1999).
At least some of the reason for the apparent halt to the expansion of downstream processing capacity is that refinery downstream expansion has increased refinery crude distillation (i.e., upstream) capacity.

## Real Price Difference Between Light Crude Oil and Heavy Crude Oil, 1978-1999

- Note:  Light crude oil is defined here as having an API gravity of 40.1 or greater and heavy crude oil is defined as having  an API gravity of 20 or less.
- Source:  Energy Information Administration, *Petroleum Marketing Monthly*, DOE/EIA-0380(00/02), Tables 27 and 28.

**Notes:**
The increased sophistication of U.S. refineries allows all refiners, and especially the U.S. majors who tend to have the most sophisticated refineries, to take advantage of increases in the differences between light and heavy crude oil.  
The more sophisticated the refinery, the more easily heavy crude oil can be processed into petroleum products.

## Real Price Difference Between Motor Gasoline and Residual Fuel Oil, 1978-1999

- Source:  Energy Information Administration, *Petroleum Marketing Monthly*, DOE/EIA-0380(00/02), Table 4.

**Notes:**
Similarly, sophisticated refineries allow all refiners, including the U.S. majors, to take advantage of price differences between light (e.g., motor gasoline) and heavy (e.g., residual fuel oil) products.  
Thus, the more sophisticated the refinery, the more easily the refiner can pay less for crude oil and receive more for the refined products.

## Net Income by Lines of Business and Petroleum Segments for Selected U.S. Majors (Million Dollars)

- Note:  Net income excludes unusual (i.e., non-recurring) items.  The number in parentheses is the number of companies reporting net income for the category.
- Source:  Company press releases for fourth quarter 1999.  Data is preliminary and not audited.

**Notes:**
Although the 1999 data that the U.S. majors report to EIA (i.e., the Financial Reporting System) is still being reviewed by independent auditors, the fourth-quarter 1999 earnings press releases of many of the U.S. majors indicate that 1999 was a good year for oil companies. 
Although petroleum operations in general benefited greatly from higher crude oil prices during 1999, domestic refining and marketing operations were less profitable during 1999 than during 1998.
The increase in petroleum product prices that occurred during 1999 was proportionally less than the increase in crude oil prices. 
The weighted-average wholesale price for petroleum products increased from $20.36/bbl in 1998 to $23.14/bbl in 1999, a 14-percent increase.
Meanwhile, the composite refiner acquisition crude oil price increased from $12.70/bbl in 1998 to $17.44/bbl in 1999, a 37-percent increase.
Thus, the gross refining margin fell from $7.66/bbl in 1998 to $5.70/bbl in 1999, a 26-percent reduction.
Although the U.S. majors attempted to reduce their refining/marketing operating costs during 1999, it is not yet known how successful they were nor is it yet known what happened to the net refining margin (which historically has been strongly correlated with profitability).

## Petroleum Products:  U.S. Refinery Output, Trade, and Supply, 1990-2001(millions of barrels per day)

- Source:  EIA, Short-Term Energy Outlook (STEO), August 2000 (August 8, 2000), Table A5 and Short-Term Integrated Forecasting System in support of STEO.

**Notes:**
As for the future of the industry, note that EIA does not forecast changes in refinery capacity (crude distillation or downstream processing units).
However, this table (and the next one) imply changes in refinery capacity over the next 18, or so months.
Refinery production is expected to increase while product imports are expected to remain fairly stable.

## Quantity of Petroleum Products Supplied by Type, 1990-2001 (Millions of Barrels per Day)

- Source:  EIA, *Short-Term Energy Outlook *, August 2000 (August 8, 2000).

**Notes:**
Essentially no change/increase in petroleum product consumption is expected to occur this year (i.e., 2000) relative to 1999, partially in reaction to the substantial increases in product prices — particularly fuel oil during the winter and motor gasoline this summer.
Consumption of petroleum products is expected to increase next year — so long as the shortages that occurred during the first half of this year don’t recur — by almost 3 percent.
So, the U.S. refining industry has undergone a large amount of change/restructuring during the past decade.  Although the profitability of the industry has been relatively low (at least for the U.S. majors and relative to their other petroleum operations), the future of the industry over the next several months appears stable, if not spectacular.

## EIA Internet Links

- EIA homepage (http://www.eia.doe.gov)
- Financial data (http://www.eia.doe.gov/emeu/finance/)
*Performance Profiles of Major Energy Producers* (Primary financial annual publication, http://www.eia.doe.gov/emeu/perfpro/)
- Quarterly energy financial news (http://www.eia.doe.gov/emeu/finance/results.html)
- Forecasts (http://www.eia.doe.gov/oiaf/forecasting.html)
*Annual Energy Outlook (*Long-term domestic forecast, http://www.eia.doe.gov/oiaf/aeo.html)
*Short-Term Energy Outlook* (http://www.eia.doe.gov/emeu/steo/pub/contents.html)