U.S. Refining Capacity –

Past, Present and Future 

Outlook

OP

Sum

Malcolm M. Turner, Chairman

Turner, Mason & Company
TURNER, MA

Slide 2 CONSUL

U.S. Refineries – How Many?

● The number of operable U.S. refineries has declined f

in 1981 to 142 currently (see Slide 3).

● It is often stated that no refineries have been built in t

States since the Garyville, Louisiana refinery (now owMarathon) in 1976. That is not exactly true.

– Several “small refinery bias” refineries were built l

– Jack Stanley’s Good Hope refinery (now Valero’s S

Charles refinery) was substantially built during the 

● Will new refineries be built in the U.S.?

– Arizona Clean Fuels Yuma refinery– Old military bases– Louisiana and Maine development initiatives– California/Washington
TURNER, MA

Slide 3 CONSUL

0

50

100150200250300

1980 1990 2000 

Operable U.S. Refineries

1
TURNER, MA

Slide 4 CONSUL

How Much Do Refineries Cost

● It does not seem that long ago that $1,000 per barre

day of capacity was the “estimating figure”.

– Prior to 1970, that was a typical new constructio– When Clark (Premcor) bought the 170,000 BPD L

Ohio refinery from BP in 1998, the purchase pricabout $1,000 per barrel per day.

● The largest refiner in the U.S. with 2.3 million barrels 

day of capacity, Valero Energy, has its refining capabooked at about $5,400 per barrel per day. Former Chairman Bill Greehey frequently boasted of his abipurchase refineries at 15-20% of replacement cost.
TURNER, MA

Slide 5 CONSUL

How Much Do Refineries Cost

● Tesoro bought the California Bay Area Golden Eagle R

about 37% of replacement cost, or $5,500 per barrel pecapacity in 2002. What was thought to be an extremelprice proved to be almost a steal from Valero (sale reqthe FTC).

● On the other side, Valero bought Premcor and its four 

in 2005 at an estimated 75% of replacement costs, or $barrel per day of capacity. Again, many believed this texpensive, but it has not turned out that way. 

● Recently, Harvest Energy Trust agreed to purchase Vit

Come By Chance refinery for $1.5 billion, equivalent to 90% of replacement cost and about $13,000 per barrel capacity.
TURNER, MA

Slide 6 CONSUL

How Much Do Refineries Cost

● The reigning high price refining deal in U.S. history 

Lyondell purchase of CITGO’s minority interest in thMBPD Houston refinery. This transaction is reporteat an equivalent of $5.4 billion, or $19,000 per barrel of capacity and 135% of replacement cost.

● The most recent capital estimates announced by Ar

Clean Fuels Yuma equate to $18,000 per barrel per dcapacity.

● TM&C studies point to the cost of competitive grass 

refineries in the U.S. to be in the $15,000-20,000 per per day of capacity range. That, of course, reflects today’s replacement cost.
TURNER, MA

Slide 7 CONSUL

U.S. Refining Capacity – Past and P

● With sharply declining numbers of refineries in the 

the total capacity hit a bottom of 15.1 million barrelday (MMBPD) in 1993. Since then, steady growth hincreased U.S. refining capacity to a current level oMMBPD (see Slide 8).

● With the number of refineries in the U.S. reduced to 

the average refinery capacity today stands above 1BPD. This surprisingly high average figure reflects impact of 21 large U.S. refineries with capacities in excess of 250,000 BPD (see Slide 9).
TURNER, MA

Slide 8 CONSUL

12141618

1985 1987 1989 1991 1993 1995 1997 1999 2001 2

million barrels per day

U.S. Refining Capacity
TURNER, MA

Slide 9 CONSUL

U.S. Refining Capacity – Past and P

0369

121518

0 10 20 30 40 50 60 70 80 90 100 110 120 

Number of Refineries

million barrels per day
TURNER, MA

Slide 10 CONSUL

U.S. Refining Capacity – Past and P

● Ownership of U.S. refining capacity has changed 

dramatically over the last ten years. Currently, the tU.S. refiners are as follows:

Top 10 Refiners Capacity (MBPD)

Valero 2,257ConocoPhillips 2,178ExxonMobil 1,940BP 1,475Shell 1,143Marathon 935ChevronTexaco 909Sunoco 880PdVSA 828Flint Hills 746

Total 13,291
TURNER, MA

Slide 11 CONSUL

U.S. Refining Capacity – Past and P

● Concentration of U.S. refining capacity is also increas

number of refiners and refineries diminishes.

0

20406080

100

0 1 2 3 4 5 6 7 8 

Number of Refiners

percent of capacity Top 10 have >75%
TURNER, MA

Slide 12 CONSUL

U.S. Petroleum Products Supply/De

● In spite of forecasts and efforts by opponents of the p

industry and capitalism generally, the demand for petproducts continues to grow in the U.S. (see Slide 13).

● For the 15-year period 1990-2005, demand for motor g

in the U.S. increased over 26%. For this same period, for jet fuels grew over 37%, and for distillate fuels demmore than 36%.

● Most analysts and economists were shocked at the m

pact on demands of U.S. petroleum products resulting sharp price increases that developed during the last tU.S. consumers seem to have adjusted remarkably.

● With the falling prices observed during the past few m

certainly expect continued growth in U.S. demand for fuels products.
TURNER, MA

Slide 13 CONSUL

U.S. Petroleum Products Dema

(Actual)

0

2000400060008000

10000

2000 2001 2002 2003 2004 

thousands of barrels per day

Gasolines Distillate Fuels Jet Fuel/KerosenResidual Fuels Other(1)

(1) Includes LPGs, petrochemical feedstocks, lubricants/waxes, petroleum coke, asphalt, refinery g

miscellaneous products.

Source: TM&C “The Outlook”, mid-year 2006.
TURNER, MA

Slide 14 CONSUL

Supply/Demand (cont.)

● The outcry for production of fuels from non-crude oi

sources is broad but mostly noise. There is “Biodie“BioWillie” and even “Biobutanol”. Much effort is in to create fuels from anything other than petroleum sWill it amount to anything? 

● According to the National Biodiesel Board, there are 

plants in the U.S. producing biodiesel. Production in will amount to only about 16,000 BPD, a tiny fraction distillate demand. At least three-quarters of existing have capacity of less than 650 BPD. Over the next twyears, however, new facilities will be built to more thdouble U.S. production capacity.
TURNER, MA

Slide 15 CONSUL

Supply/Demand (cont.)

● On the demand side, there continues to be noise about 

consumption, especially for automobiles. There are maexpect large impacts from hybrid vehicles and even fueenergy sources. With no reasonable payouts for such por sensible economics in sight, I remain in the “skeptics 

● Growth in demands for petroleum products are very like

tinue, in the opinion of most analysts. TM&C recently fo(see Slide 16) the following annual growth rates for the 2010-2025: motor gasolines 1.2-1.3%; distillate fuels 1jet fuel 1.5%; and other products 0.4%.

● Other analysts and cautious petroleum executives expe

oline demand growth to dampen because of improved tnology and changing motorist/consumer purchasing pa(hybrids, crossovers, etc.). We have seen motor gasolinrates forecast at as low as 0.5-0.6% per year.
TURNER, MA

Slide 16 CONSUL

U.S. Petroleum Products Dema

(Forecast)

0

2000400060008000

1000012000

2010 2015 2020 

thousands of barrels per day

Gasolines Distillate Fuels Jet Fuel/KeroseResidual Fuels Other(1)

(1) Includes LPGs, petrochemical feedstocks, lubricants/waxes, petroleum coke, asphalt, refinery g

miscellaneous products.

Source: TM&C “The Outlook”, mid-year 2006.
TURNER, MA

Slide 17 CONSUL

Supply/Demand (cont.)

● To understand the substantial change in the financi

health of U.S. refiners and the increased value of refa closer look at the sources of supplies for U.S. petrproducts is helpful.

● For the many years that the U.S. was capable of sup

its own demands for petroleum products from domerefineries (including those nearby offshore facilities part of our traditional supply, such as Irving Oil and Canada and the Caribbean refiners), consumers enjthe competitive benefits of low incremental refining surplus capacity serving as a dominating force on psetting.
TURNER, MA

Slide 18 CONSUL

Supply/Demand (cont.)

● When U.S. refiners lost the ability to meet growing 

demands, they likewise lost the ability to be the incrmental source of supply and thus the dominant pricsetter.

● With subpar margins and unattractive profits, capita

investment was not available for refinery expansion projects or new refineries. John Auers, Vice PresidTM&C and key author of our firm’s August study “TOutlook”, was recently quoted: “The lack of significinvestment in grass roots refineries for over three dand sustained economic growth in recent years, espin Asia and North America, have combined to create worldwide shortage of refining capacity.”
TURNER, MA

Slide 19 CONSUL

Supply/Demand (cont.)

● Looking at U.S. gasoline demand and imports, we ma

the trends are dramatic. In 1985, imports were only 45which comprised 6.6% of total U.S. gasoline demand, of that was from long-haul sources. In 2006, about 1,2MBPD of U.S. gasoline demand was supplied by impoSlide 20), and most of it was long-haul.

● With distillate imports above 500 MBPD and almost 9% 

demand, we have come to depend more on sources wcompetition from other purchasers is stiffening (see S

● Most product imports come into PADD I, the U.S. East 

Here imports have risen to over 30% of demand. More tantly, this is the price setting area for most of the U.Sthe home of the NYMEX in New York City (see Slide 22
TURNER, MA

Slide 20 CONSUL

U.S. Gasoline Demand and Impo

(MBPD)

55006500750085009500

2000 2001 2002 2003 2004 2005 2006

YTD

Demand

Demand Imports

7.7 8.7

9.1 9.9 10.4 12.0 13.3

Imports as Percent of Demand
TURNER, MA

Slide 21 CONSUL

U.S. Distillate Demand and Impo

(MBPD)

40004500500055006000

2000 2001 2002 2003 2004 2005 200

YTD

Demand

Demand Imports

8.3 8.9 7.0 8.1

7.9

9.0 8.8

Imports as Percent of Demand
TURNER, MA

Slide 22 CONSUL

PADD I Gasoline Demand and Im

(MBPD)

1900240029003400

2000 2001 2002 2003 2004 2005 2006

YTD

Demand

Demand Imports

20.0 22.0

23.6 24.3 25.7 27.8 30.7

Imports as Percent of Demand
TURNER, MA

Slide 23 CONSUL

Supply/Demand (cont.)

● With the U.S. markets becoming more dependent ea

on long-haul imports, the costs are increasing relativand the price setting mechanism has proved to be escially beneficial for U.S. refiners. Long-haul imports risen from less than half in 2000 to about 71% of totaimports in 2006 (see Slide 25).

● For two growth scenarios, we have estimated the im

on long haul imports in 2015 (see Slide 26). Based oTM&C growth outlook for gasoline, long haul importincrease and the new Middle East refinery sources wcome into play. For the more pessimistic growth ouplentiful gasoline import sources should be available European refiners.
TURNER, MA

Slide 24 CONSUL

Supply/Demand (cont.)

● Long-haul imports are defined as production fro

refiners not located in Canada or the Caribbean. Major sources are European countries such as Netherlands, United Kingdom and France, and surprisingly Russia (see Slide 27). 

● Large refining projects announced in the Middle 

East, especially Saudi Arabia, indicate that these long-haul sources expect to become incrementasuppliers of imported products for the U.S. mark
TURNER, MA

Slide 25 CONSUL

0

400800

1200

2000 2001 2002 2003 2004 2005 

thousand barrels per day

Long-Haul Short-Haul

U.S. Gasoline Imports by Source Ca

47

53

57

56

60

64

Long-Haul Imports as Percent of Total
TURNER, MA

Slide 26 CONSUL

Projected U.S. Gasoline Imports 

Source Category (MBPD)

TM&C 

Est. Outlook 

2006 2015 

Total Demand 9,240 10,281 (1) Refining Production 7,761 8,500 (3) Less Exports (150) (150) MTBE 93 0 Ethanol 303 489 (4) Imports – Short Haul 364 364 (5) Imports – Long Haul 869 1,078 (6) (1) “The Outlook”, mid-year 2006.(2) Annual growth at 0.6%.(3) TM&C estimate.(4) 2012 federally mandated volume.(5) Assumed to be constant.(6) Calculated by difference.
TURNER, MA

Slide 27 CONSUL

U.S. Gasoline Imports by Country of 

June 2006

MBPD

Short HaulCanada 132U.S. Virgin Islands 125Venezuela 77Other Caribbean 23

Subtotal 357

Long Haul

Netherlands 179United Kingdom 170France 59Russia 55Spain 54Belgium 49Estonia 37

Long Haul (cont.)Italy Portugal Finland Sweden Germany Saudi Arabia Latvia Nigeria Norway Other Long Haul 

Subtotal 

Total Imports 
TURNER, MA

Slide 28 CONSUL

Worldwide Increases in Refining Ca

● In its study released in August, TM&C notes that “the ex

in worldwide refining capacity needed to sustain even meconomic growth is quite significant, and in our judgmeexceeds current engineering, procurement and construccapacity to effectively manage and complete major projetraditional time and cost parameters.”

● Significant new worldwide refining investment, currently 

mated to be as much as $300 billion or more during the nyears, will be required to meet growing product demand higher quality product specifications and to process heacrude oil slates.

● Worldwide expansion will have to be dramatic to meet de

By 2012 another 10.4 MMBPD of new capacity is expectecome on line, based on announced projects (see Slide 2total, the U.S. will add only net capacity of about 1.7 MM
TURNER, MA

Slide 29 CONSUL

Worldwide Refining Outlook

Capacity Expansions

U.S. 1.7Asia 4.0Latin America 1.2Mideast 2.4Others 1.1

Total by 2012 10.4

Product Supp

Increases

Gasoline Distillates Resid Others 

Total by 2012 

Source: TM&C “The Outlook”, mid-year 2006.

(MMBPD)
TURNER, MA

Slide 30 CONSUL

U.S. Refining Capacity – Future O

● TM&C expects most additional new capacity in t

U.S. to be concentrated on the Gulf Coast, althosome will be in the Midwest. Collectively, these regions may add an additional 1.5 MMBPD of cawith negligible additions in the East Coast and RMountain regions. West Coast additions will be nominal (see Slide 31).

● TM&C studies also forecast conversion capacity 

increases and octane unit capacity increases th2012 as shown in Slides 32 and 33.
TURNER, MA

Slide 31 CONSUL

U.S. Refining Capacity Increas

through 2012

Crude Capacity (MBPD)

Heavy/Sour Light/Sweet Tota

PADD I 30 (30) PADD II 675 (84) 59PADD III 1,060 (107) 95PADD IV 63 (35) 2PADD V 140 (31) 10

Total U.S. 1,968 (287) 1,68
TURNER, MA

Slide 32 CONSUL

U.S. Conversion Capacity Increa

through 2012

Coking FCCU Hydrocra

PADD I 14 20 0PADD II 184 52 174PADD III 270 50 228PADD IV 20 12 0PADD V 45 50 0

Total U.S. 533 184 402

(MMBPD)
TURNER, MA

Slide 33 CONSUL

U.S. Octane Unit Capacity Incre

through 2012

C5/C

Reforming Alkylation Isomeriz

PADD I 0 0 0PADD II 120 6 5PADD III 30 0 0PADD IV 0 3 0PADD V 0 17 0

Total U.S. 150 26 5

(MMBPD)
TURNER, MA

Slide 34 CONSUL

Capacity – Future Outlook (con

● TM&C notes that virtually every U.S. refiner has expan

projects under study for its currently owned plants, aare continuing to look at acquisitions. The high pricebuying refiners and building capacity, are significant rents. The extraordinary EPC circumstance worldwidundoubtedly caused many aspirants to cancel or scalplans.

● Earlier this month, Valero announced its plans to con

major expansion of its St. Charles refinery in Louisianboost to 380,000 BPD if implemented, Valero would be ing the pattern of its up-the-river neighbor Marathon aGaryville by adding crude, coking, hydrocracking and capacity. The result would be a very competitive Gulf refinery.
TURNER, MA

Slide 35 CONSUL

Capacity – Future Outlook (con

● Subsequent to completion of TM&C’s August report, 

Outlook”, Irving Oil announced its intention to considseriously the construction of a second refinery with a of 300,000 BPD. This facility could dramatically impaCoast markets where Irving already supplies more th100,000 BPD of reformulated gasoline meeting tough specifications. It also is capable of making ULSD and currently a formidable source of supply.

● Proposed expansions of the Come By Chance refiner

announced Newfoundland and Labrador Refining Co300,000 BPD new refinery are both competitors with tproject. Such additions to the East Coast supply souwould undoubtedly reduce dependence on long-haul petroleum products sources from Europe and the Mid
TURNER, MA

Slide 36 CONSUL

Capacity – Future Outlook (con

● It has been suggested that some skilled and well 

financed refiners might enjoy speculative announments concerning new capacity simply to deter thentry of newcomers and even fellow competitors. TM&C of course has no evidence of such activitiebut such ideas make for interesting conversation.

● On the bright side from the perspective of U.S. 

refiners, all of these new supplies will be relatively high cost. That is, they will require returns on capbased on new grass roots investments. These arclassic 100% of replacement cost facilities. 
TURNER, MA

Slide 37 CONSUL

Capacity – Future Outlook (con

● Existing U.S. refiners, with lower capital cost from cu

capacity or even newly built facilities, will enjoy compadvantages. This circumstance is one of TM&C’s pribases for a continued outlook for relatively prosperofinancial times for the U.S. refining industry.

● In the final analysis, TM&C believes that U.S. refiners 

not be able to “build” their way out of their new-founprosperity for perhaps a decade. On the other side osupply/demand equation, products demand outlooks indeed change dramatically during that time period.
TURNER, MA

Slide 38 CONSUL

Capacity – Future Outlook (con

● TM&C does believe that U.S. refiners will see consistent 

in feedstock supplies, with Canadian syncrude becominicant factor all the way into the Gulf Coast. We are activvolved in and well aware of several pipeline, refining and projects that will bring about shifts in crude oil suppliesWCS and similar grades will gain some markets from Veand perhaps Mexico. 

● An observation that we put forth is that while U.S. refine

heretofore been forced to make significant capital expenorder to avail themselves to optimum priced crude oil frowide sources, the Canadian syncrude alternative will brito that scenario. 

● We expect large upgrader projects to manufacture Cana

crudes that are tailor-made to fit U.S. refiners’ existing pconfigurations and allow them to avoid what otherwise mprohibitively expensive capital projects.