Refining OutlookWhat Happened?What Will?Presenter: John Auers, P.E., Sr. Vice PresidentCo-Authors: Bob Funk & Charles Miller, P.E.Turner, Mason & Company•International engineering consulting practice since1971.•Downstream focus.•Publish semi-annual Outlook to internationalsubscribers.–Petroleum supply/demand–Survey of refinery projects–Detailed price forecast (crude/products)Presentation Outline•What Happened – Historical Perspective.–1970’s through 2007–2008•Current Situation.•What Will Happen – TM&C Outlook.–Petroleum product demand–Crude oil price–Refinery construction activity–Alternative fuels–SummaryREFINING OUTLOOKA recent history with focus on the U.S.What Happened?What Happened: 1970s•Three decades of lowbut stable oil pricesended.•Geopolitics drove twooil price spikes.REFINING OUTLOOKWhat Happened: 1970s•Massive upstreamand downstreaminvestment.•Demand peaked in1978 and droppedprecipitously as pricesspiked in 1979.What Happened: 1980s•High oil prices led toworldwide economicslowdown•Oversupply & USdecontrol caused oilprice collapse in the mid80’s, with some recoverytowards end of thedecade.What Happened: 1980s•Transportation fuelsdemand growthresumed.•Residual fuel demandcontinued to decline.•U.S. demand stayedbelow 1978 peak.What Happened: 1980s•Less complexdownstream facilitiesrationalized.•However, refiningcapacity continued toexceed need.What Happened: 1990s•Control erainvestments providedadequate oil supplythrough the ‘90s.•By the early 1990’sworld oil demandgrowth picked up,particularly in Asia.What Happened: 1990s•After the trough from the 1stGulf War, US gasoline anddistillate demand finallysurpassed 1978 levels(gasoline in 1993 and distillatein 1997).What Happened: 1990s•Prelude to the “GoldenAge of Refining.”–High U.S. refineryutilization rates.–U.S. refining capacityincreased during last half ofthe decade.–Imports became animportant and growingsupply source.What Happened: 1990s•Although U.S. refiningcapacity was short,worldwide capacityremained long,holding the “GoldenAge” at bay.What Happened: Early 2000s•Asia crisis of 1998-99•U.S. recession from9/11 terrorist attack•Then, oil demandrecovered and crudeoil prices improvedWhat Happened: Early 2000s•The Golden Age ofRefining had begun!–Temporarily blunted byeconomic slump post9/11.What Happened: 2004•Largely unanticipated, 2004 was pivotal.•World oil demand jumped 2.9 million B/D,an increase of 3.7%.•China & the US were the principal drivers.–Demand in China grew by almost 1.0 MMBPD(17%).–US demand grew by 0.7 MMBPD (3.5%).What Happened: 2004 - 2007•World oil demand grew1.4 %/year.•Prices moved on anupward trajectory.•Crude oil supplytightness exacerbatedby natural andgeopolitical events.What Happened: 2004-2007•U.S. demand grew atrecord rates witheconomic expansion.•U.S. refining capacitylimited by hurricanesand maintenanceissues.•Worldwide capacityshort: Refining’sGolden Age.What Happened: 2004 - 2007•Worldwide capexplans expanded,including substantialrefinery capacityadditions.What Happened: 2007 - 2008•Factors, other than supply/demand fundamentals beganto affect oil prices–Dollar decline vs. other currencies–Geopolitical tensions in key producing countries (Venezuela,Nigeria, Iraq).–Speculation of world oil production peak & decline•Considerable outside money moved into oil futures–Hedges against the falling dollar–Bets on future supply shortages–Flight from securitiesWhat Happened: 2008•Long developing subprime credit problembecame a crisis in the US in Sept. ’08.•Impact spread rapidly worldwide.•Banking Crisis; some failed, others weresupported by national governments.•Short term credit vanished & markets reactednegativelyWhat Happened: 2008•WTI spiked to $147 inJuly.•OECD demand fellsharply with record highprices.•In mid-July, the marketran out of steam andstarted to decline –rapidly.•WTI < $ 50 by Dec.Current SituationREFINING OUTLOOKWhat Happening?Current Economic Situation•Experiencing worldwide businessrecession, possibly the deepest indecades.•Significant government intrusion offinancial institutions likely, unknown impacton longer term capital markets.Current Oil Market OutlookDemand•Developed nations –reduced demand.•Developing nations –reduced growth rate.•Mandated increased biofuels penetration in U.S.•Bio-fuels penetrationrelaxed in E.U.Supply•OPEC production quotasreduced.•High-cost production notexpanded.•Reduced capex in 2009 –projects delayed orcancelled.TM&C Long Term OutlookREFINING OUTLOOKWhat Will Happen?Key Questions•Demand drop–How much–How long–Effect on product mix (gasoline vs. distillate)–Demand recovery growth rate•Impact on production and refining projects•Industry consolidation?•Impact of alternate fuel development•Impact of carbon emission regulations•Prices & MarginsEconomic and Demand Assumptions•Worldwide GDP–Close to zero growth in 2009–Growth back to 4 %/year after 2 to 3 years•World Oil Demand–Flat in 2008 & 2009–Growth returning to 1.5 %/year as worldeconomy recoversCrude Oil Outlook•World crude sparecapacity increases to 3 -5 million B/D over thenext two years (from 2 in2008).•Gap tightens again asdemand growth resumes.•Oil prices volatile, butstay in the $40-80 perbarrel range through2010 and resume upwardtrajectory.John to provide data020406080100120140

$ per barrelWest Texas Intermediate Price(Cushing)OutlookActualProduct Supply/Demand Outlook•Most major refinery projects for 2012-2015 completiondelayed or cancelled.–India/China market the exception•New refinery projects needed to meet demand after2015.•US gasoline demand–Recovery to 2007 level by 2014–Growth at less than 0.5% thereafter•Distillates–Major worldwide demand driver over the long term–Continued better margins than gasoline, but lower than recentlevelsMajor Refinery ProjectsRefineryDateCrudeMBPDGas/DslMBPDReliance,Jamnagar, India2009580180/230Marathon,Garyville, LA201018080/75Motiva,Port Arthur, TX2010325115/125•Refining capacityexceeds demand nearterm, squeezing refiningmargins.Major Projects Nearing CompletionRefining Capacity Expansion –Short TermRefineryCrudeMBPDGas/DslMBPDUnited States683316/283Asia/Pacific1,839569/721Rest of World-Total World9893,511409/4461294/1450•Capacity additionsinclude many smallerprojects throughout theworld–New refineries in Asia,the Middle East, andother developing areas.–Expansions of existingplants in OECD countriesOther Projects Nearing Completion2009/2010Delayed Projects – North AmericaRefineryDateCrudeMBPDGas/DslMBPDBig West, Bakersfield2009011/6Valero, Port Arthur201175All Hvy25/20Marathon, Detroit20111580 Hvy5/5Valero, Quebec2012040 Hvy0/5ConocoPhillips,Ferndale2012555 Hvy2/2•Most projectdefermentsannounced inNorth Americainvolveconversion toheavy crude anddo not have majorproduct supplyimpacts,Delayed Projects - MideastRefineryDateCrudeMBPDGas/DslMBPDKuwait Petroleum,Al-Zour2012615120/240Qatar Petroleum,Messaieed201225080/75Aramco/Total, Jubail2012400145/165Aramco, Ras Tanura201240085/140Aramco/ConocoPhillips,Yanbu2013400150/155Abu Dhabi Refining,Fujairah2012300100/125Abu Dhabi Refining,Ruwais2013400160/130•Delays of projectsworldwide,combined withresumed demandgrowth, causesupply tightening& better marginsby 2013.TM&C Refining Margin Outlook($/B)ActualForecast2008200920102013WTI (Cushing)99.56 52.00 62.50 77.00USGC Reg. Gas Crack 5.45 2.45 4.00 8.00USGC No. 2 Oil Crack 18.77 7.80 8.15 9.75USGC ULSD Crack 23.08 10.25 11.40 14.50Alternative Fuels•Legislated biofueltargets shownshould be delayedby 3-5 years.–Due to lower pricesand demand.–Important supplysource but stillfraction of total poolRegionTarget DatePenetrationU.S.20222.3 MMBPDEU-25202010% biofuelChina202010% ethanolJapan2011860 BPDvoluntaryIndia201720% biofuelBrazilNow201023% ethanol5% biodieselCanada201020125% in Gaso2% in DistLegislated Biofuel TargetsMajor MarketsCarbon Limits•Regulation of CO2emissions proceedsmore slowly thanpreviously expecteddue to slowerworldwide economicgrowth.Climate Effort Could Be Stalledby Credit Crisis CostsCosts of Curbing Global-WarmingEmissions Are a Tough Sell in U.S.,Europe Amid Economic Disruptionand Financial UncertaintyWall Street JournalOctober 16, 20082008 vs. early 1980’s•Similarities–Substantial crude price increase leading to demanddestruction and ultimate collapse in absolute crude price–Government proposals to mandate lower consumption andalternative fuels•Differences–Demand destruction less permanent than in earlier period–Energy less significant part of overall economy/decreaseddemand response to prices–Refining capacity significantly tighter in 2008Refining Capacity Remains Tight on aHistorical BasisRefinery Rationalization – U.S.•Tight margins and tight credit over the next year or two willchallenge the economic viability of some refineries•Slowdowns will be more prevalent in the U.S. than shutdowns•At-risk plants include:–Small plants with limited heavy/sour crude capability–Plants with financially weak owners–Facilities unable to meet regulatory requirements economically–Facilities who are located in markets threatened by onerousregulatory regimesWhat to Remember•Crude prices will stay “depressed” for the next year or two,before recovering, although not to the levels seen in 2008.•Surplus refining capacity worldwide through 2012 will limitimprovements in margins in the short term, but margins willincrease as the supply demand balance tightens post-2012.•Economic issues will slow penetration of alternate fuels.•Long term margins will be better than those seen in the 1980’sand 90’s but below “Golden Age” levels of 2005 to 2007.Q&A•Questions?Thank YouJohn R. Auers, P.E.Senior Vice President214-754-0898jauers@turnermason.com