U.S. Petroleum Refining: Basics, Challenges, And The Case for a Supply-Oriented Energy Policy

2. U.S. Petroleum Refining: Basics, Challenges, And The Case for a Supply-Oriented Energy Policy Charles T. Drevna National Petrochemical & Refiners Association IPAA Midyear Meeting June 16, 2005

4. Refining Industry Basics Economics & Role Of Imports Challenges 2005 and Beyond National Energy Policy Conclusions Outline

5. 149 Operable Refineries Capacity: 16.8 MMBPD of Crude Oil Yields (approximate) 8.5 MMBPD Gasoline 4.0 MMBPD Diesel Fuels 1.5 MMBPD Jet Fuel Gasoline Imports – approximately 875 KBPD Refining IndustryBasics

6. Infrastructure Each Refinery is Unique Crude Source Product Slate Conversion Capacity/Configuration Refining IndustryBasics

7. Infrastructure Refinery Configuration Is Inflexible Changes in Crude Qualities Affect Refining Economics Refining IndustryBasics

8. Refining IndustryBasics

9. Crude Supply/Product Demand Crude Slate Changes Require Refinery Changes Product Demand Changes Require Refinery Changes Refiners Have Invested in Conversion Capacity Hydrocrackers Catalytic Crackers (FCCUs) Cokers Refining Industry Economics

10. Refining Industry Economics

11. Crude Supply • Lower Cost Crudes Contain More Heavy Material (BP>750°F) More Sulfur More Metals Conversion Capacity Enables Refiners to Purchase Cheaper Crudes Ability to Upgrade Heavy Material Ability to Reject Carbon Refining Industry Economics

12. Refining Industry Economics

13. Crude Supply Additional Conversion Capacity Should Reduce Light/Heavy Differentials Cokers in Particular Have Been Built to Process Specific Crudes Maya – Mexico Oriente - Venezuela Refining Industry Economics

14. Crude Supply Synthetic Crudes Will Impact Refining Canadian Syncrudes from Tar Sands Presently 900 KBPD Expanding to 1800 KBPD by 2010 Syncrudes from Venezuela Presently 250 KBPD Expanding to 600 KBPD by end 2005 Refining Industry Economics

15. Gasoline Imports – An Essential Supply Source PADD 1 Sources of Supply Import Destinations 877 MB/D (2003) Source: EIA, Petroleum Supply Monthly

16. Changing U.S. Specifications May Change Import Sources Gasoline Sulfur Specifications (ppm) Source: Hart International Fuel Quality Center

17. Some Historical Suppliers Cannot Produce Low Sulfur Gasoline Source: EIA, Form EIA-814

18. EU-15 Demand Mix May Imply Excess European Mogas Supply Source: History IEA; Forecast Purvin & Gertz

19. European New Vehicle Choices Show Why Diesel Fuel Growth May Continue Source: ACEA www.acea.be

20. Short-term: Fuel spec changes may be reducing number of potential import sources Reduction in import sources may increase margins But will that change over time? Long-term: May still see higher product imports Can capacity investment today compete tomorrow? Imports – Less Competitive in the Short Term

21. Industry Emphasis Is on Manufacturing Costs Crude Selection/Optimization Is One Factor Other Factors Are More Urgent Capital intensive operations Huge expenditures for regulatory compliance Rate of return on investment below average Refining Is Very Competitive Refining Industry Challenges

22. The refining industry is stressed. No new refineries built since 1976 Domestic capacity is flat Increasing demand well beyond domestic production capabilities EIA Forecast: Petroleum demand to increase by 1.6% per year to 2025 - 65% of growth in imports will be refined products Imports in 2003 - Crude Oil - 9.5 MMB/D - Petroleum Products - 2.3 MMB/D Refining Industry Challenges

23. Refining Industry Challenges Refinery Capacity MMB/D

24. Refinery Utilization Operable Capacity Gross Inputs EIA

25. Refining Industry Challenges PetroleumIndustry Data 324 149

26. Regulatory Compliance • In this decade: -Refiners face about $20 Billion in aggregate investment in this decade to comply with environmental requirements. -Does not include costs of facility security, maintenance, or capacity expansion. Refining Industry Challenges

27. Refining Industry Challenges Regulatory Compliance • Investment Requirements of New Regulations: • Tier 2 Gasoline Sulfur - $ 8 billion • Highway and Off-Road Diesel Sulfur - $ 9 billion • MTBE Phasedown/Elimination - $ 2 billion • Ethanol Mandate • Costs for these programs equal $19 billion • Over $25 billion invested in the 1990’s(RFG and other requirements)

28. Cumulative Regulatory Impacts on Refineries, 2002 - 2010 Cumulative Regulatory Impacts on Refineries, 2002 - 2010 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2010 2010 Tier II Gasoline Sulfur 1 Tier II Gasoline Sulfur 1 Renewable Fuels Mandate 2 Renewable Fuels Mandate 2 On-Road Diesel Sulfur 3 On-Road Diesel Sulfur 3 Off-Road Diesel Sulfur Off-Road Diesel Sulfur State RFG Waivers and MTBE Bans4 State RFG Waivers and MTBE Bans4 Phase II Gasoline Toxics Control 5 Phase II Gasoline Toxics Control 5 New Source Review 6 New Source Review 6 Concurrently, 5-Year Review Underway Ext. Ext. Refinery MACT II 7 Refinery MACT II 7 NOx SIP Calls/Section 126 8 NOx SIP Calls/Section 126 8 8 Hour Ozone NAAQS 9 8 Hour Ozone NAAQS 9 KEY KEY PM 2.5 NAAQS 10 PM 2.5 NAAQS 10 Actual time frame known or based on 36-48 month compliance schedule after final rule issued. Actual time frame known or based on 36-48 month compliance schedule after final rule issued. Regional Haze 11 Regional Haze 11 Concurrently, 5-Year Review Underway Compliance Requirements unknown and time frame estimated. Compliance Requirements unknown and time frame estimated. Urban Air Toxics (Area Sources) 12 Urban Air Toxics (Area Sources) 12 Prepared by the National Petrochemical & Refiners Association April 2004 Prepared by the National Petrochemical & Refiners Association April 2004 Residual Risk 13 Residual Risk 13

29. Refining Industry Challenges 2005 And Beyond • Higher crude oil costs • Continued rollout of Tier II gasoline sulfur reductions • ULSD regulations for highway and non-road applications • Full implementation of state MTBE bans • Additional RFG areas • 8- hour ozone non-attainment designations • NSR reform gridlock because of federal stay • “Boutique” Fuels Misperceptions

30. Tier II Gasoline Sulfur For refineries, gasoline sulfur phase-down requires: Additional processing step(s) Capital investment Downgrade of some blendstocks Result: Upward pressure on manufacturing costs [Some gasoline importers sought a temporary compliance waiver. NPRA opposed the waiver.] Refining Industry Challenges

31. Highway & Non-Road Diesel For refineries, highway and non-road diesel sulfur reductions require: Additional processing step(s) Capital investment Potential downgrade/contamination of product downstream of refinery Result: Upward pressure on manufacturing and distribution costs Refining Industry Challenges

32. Highway & Non-Road Diesel • Additional factors impacting diesel fuel sulfur reductions: Technology concerns (refinery & vehicle) Disproportionate amount of capital needed Mechanical reliability Reprocessing/handling of difficult to process components Complex and untested credit trading system Refining Industry Challenges

33. DIESEL FUEL TIMELINES 6/1/2006 6/1/2007 6/1/2008 6/1/2009 6/1/2010 6/1/2012 Highway Rule 80% 15 PPM : 20% <500 PPM 100% 15 PPM 2-Step NRLM 2 Rule PART 89 <500 PPM 15 PPM RAILROAD & MARINE <500 PPM 15 PPM OR Home Heating Oil HOME HEATING OIL >500 PPM 33

34. MTBE Bans For refineries, MTBE bans require: Production of a new blendstock for blending with ethanol; Lower vapor pressure; and Additional segregation and transportation costs. Result: Upward pressure on manufacturing costs Refining Industry Challenges

35. EPA

36. Impact of 8-Hour Ozone Designations Approximately 120 new non-attainment areas Each area will consider fuels controls Areas have very little time to reach attainment (2007) Benefits of clean fuels/vehicles programs will be of little help Approximately 40 non-attainment areas under both old and new NAAQS Will be difficult for many of these to reach attainment 17 already use RFG 18 are in California & use CARB RFG Refining Industry Challenges

37. Boutique Fuels

38. Boutiques Fuel “Boutique” fuels are now the cause of all transportation fuels problems according to some politicians “300 separate jurisdictions with their own rules” – Senator Kerry “110-plus different fuel types” – Senator Bingaman Must be bad if it needs a word from the French to describe it Refining Industry Challenges

39. Boutique Fuels: In reality: Approximately sixteen distinct fuels Each available in three grades Many jurisdictions use the same fuel The number of fuels being produced in the US is more like 50. Refining Industry Challenges

40. Why “Boutique” Fuels? Local areas have different air quality needs. Local fuels result from both environmental and economic considerations Generally supported by all stakeholders Boutique fuels reduce or avoid inefficient investment costs for refiners Lowers overall costs to consumers Refining Industry Challenges

41. Refining Industry Challenges Boutique Fuels and Market Volatility • Localized supply disruptions can result from: • Infrastructure; refinery or distribution • Weather conditions • International events • These “upsets” may result in more volatile fuel costs in the affected area may if that area has a unique fuel formulation. • Marketplace usually corrects without need for government intervention

42. Refining Industry Challenges Boutique Fuels • NPRA Perspective -Supply/demand balance is tight. -First, do no harm -Avoid unnecessary additional product changes • Congress: -Repeal oxygen mandate for RFG -Reject MTBE ban and ethanol mandate • All policymakers: -Factor supply when considering new fuel regulations

43. NPRA urges Congress to reintroduce a supply ethic into our nation’s energy policy. Congress should avoid bans and mandates in its new energy policy. National Energy Policy

44. National Energy Policy NPRA Position on Energy Bill • Supports elimination of the 2% by weight oxygen content requirement for RFG • Opposes an ethanol mandate • Opposes MTBE ban or phase out • Supports MTBE liability protection

45. Energy Policy & Public Opinion – Six Myths That Influence Public Policy Decisions: Supply is always available at low prices Environmental improvements are free Alternate fuels are cheap and abundant, and unlike fossil fuels, require no environmental trade offs Consumers are always willing to pay higher prices for better environmental performance Little or no progress has been made in reducing air and water emissions and general improvements in the environment Oil and petrochemical industries pay little attention to environmental, health and safety improvements These perceptions are wrong. But they often drive public policy. National Energy Policy

46. Conclusions Future Outlook & Conclusions • Continued U.S. reliance on petroleum products through this decade and well into the next. • Main Questions: Can industry and policymakers resolve the challenge of complying with more stringent environmental requirements while meeting increased demand for petroleum products? • Will policymakers accept the fact that energy supply must increase to fuel continued U.S. economic growth?