npra 2009 annual meeting are refinery investments responding to market changes? joanne shore john...
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NPRA 2009 Annual Meeting
Are Refinery Investments Are Refinery Investments Responding to Market Responding to Market
Changes?Changes?
Joanne Shore
John Hackworth
U.S. Energy Information Administration
March 2009 NPRA Annual Meeting
NPRA 2009 Annual Meeting
OverviewOverview
• Long-Term Look at Market Drivers Impacting Investment Decisions
• Atlantic Basin Investments
NPRA 2009 Annual Meeting
Long-Term Look at Market Drivers Long-Term Look at Market Drivers Impacting Investment DecisionsImpacting Investment Decisions
• Demand: Growth and Mix Shift
• Feedstocks: Incentives to use lower quality feedstocks (Light-heavy differentials)
• Margins
NPRA 2009 Annual Meeting
Long-Term Demand Growth and Long-Term Demand Growth and Product Mix ShiftsProduct Mix Shifts
• Growth: Mainly outside the Atlantic Basin
• Product Mix Shifts & Investment:– U.S. – Different future– Europe – Continued
shift from gasoline to distillate
– Asia – Less issue of shift than of growth
NPRA 2009 Annual Meeting
World Petroleum Consumption Growing: World Petroleum Consumption Growing: Largest Growth Outside U.S. & EuropeLargest Growth Outside U.S. & Europe
0
10000
20000
30000
40000
50000
1967
1975
1983
1991
1999
2007
Other
Fuel Oil
MiddleDistillates
Gasoline/Naphtha
KB/D
0
10000
20000
30000
40000
50000
19
67
19
75
19
83
19
91
19
99
20
07
KB/D
U.S. & Europe Rest of World Excl FSU
Source: BP World Statistical Review of World Energy June 2008
NPRA 2009 Annual Meeting
Europe Major Driver of World Consumption Europe Major Driver of World Consumption Mix Shift Towards DistillatesMix Shift Towards Distillates
0.0
0.5
1.0
1.5
2.0
2.5
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
EuropeAsia
Rest of World Excl FSU
United States
Ratio of Middle Distillates/Gasoline & Naphtha
Source: BP World Statistical Review of World Energy June 2008
NPRA 2009 Annual Meeting
Atlantic Basin Price Incentives Shifting Atlantic Basin Price Incentives Shifting Toward DistillatesToward Distillates
-50
-30
-10
10
30
50
70
90Ja
n-9
5
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Cen
ts P
er G
allo
n
Spot Heating Oil Price - Gasoline Price Differences
NY Harbor
Northwest Europe
Source: Bloomberg New York Harbor Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil and Premium Gasoline
NPRA 2009 Annual Meeting
Feedstocks: Investing to Take Advantage Feedstocks: Investing to Take Advantage of Widening Light-Heavy Differentialsof Widening Light-Heavy Differentials
• Light-heavy price difference – Incentive for investing in bottoms processing investments
• Drivers behind the widening price difference
• Future direction?
NPRA 2009 Annual Meeting
Light-Heavy Product Price Difference Light-Heavy Product Price Difference Increases with Crude Oil PriceIncreases with Crude Oil Price
$0$20$40$60$80
$100$120$140$160$180
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Pri
ce P
er B
arre
l
LLS Crude PriceGC No. 2GC 3% Resid
Crude Oil, Distillate, Residual Fuel Prices ($/Barrel)
Source: Bloomberg spot prices (LLS – Louisiana Light Sweet; GC – Gulf Coast)
NPRA 2009 Annual Meeting
Light-Heavy Price DifferentialsLight-Heavy Price DifferentialsMove TogetherMove Together
$0
$10
$20
$30
$40
$50
$60
$70
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Pro
du
ct P
rice
Dif
f
$0
$5
$10
$15
$20
$25
$30
$35
Cru
de
Pri
ce
Dif
f
GC No.2 - 3% Resid
LLS-Maya
Crude & Product Price Differentials($/Barrel)
Source: Bloomberg spot prices (LLS – Louisiana Light Sweet; GC – Gulf Coast)
NPRA 2009 Annual Meeting
Higher Light-Heavy Price Differences Go with Higher Light-Heavy Price Differences Go with Higher Price Levels – But Much “Scatter”Higher Price Levels – But Much “Scatter”
$0
$5
$10
$15
$20
$25
$30
$0 $50 $100 $150
LLS ($/Barrel)
LL
S -
May
a ($
/Bar
rel)
Crude Price vs. Light-Heavy Crude Price Difference
Source: Bloomberg spot prices 1/95-01/09
NPRA 2009 Annual Meeting
Factors Impacting Light-Heavy Price Factors Impacting Light-Heavy Price DifferentialsDifferentials
• Crude oil price level – EIA forecasts indicate increasing crude prices with economic recovery
• Available mix of light-heavy crude oil – Short-term variations, but mid-term mix not likely to change much
• Market for residual fuel products – Low sulfur bunker fuel uncertainties
• Changes in bottoms processing capacity – Not seeing planned increases having a large impact on differentials
NPRA 2009 Annual Meeting
Margins – Short Golden Age for Capacity Margins – Short Golden Age for Capacity Expansion IncentivesExpansion Incentives
• Margin Indicators
• U.S. vs. Europe
NPRA 2009 Annual Meeting
Refining Output Variations Impact Refining Output Variations Impact Profitability Profitability
49.029.9 31.7
33.7
43.5 43.2
3.814.1 12.3
0%
20%
40%
60%
80%
100%
U.S. Europe Asia
Other
ResidualFuel Oil
Distillates
Gasoline &Naphtha
2006 Refining Output Shares
Source: Purvin & Gertz, GPMO Service
NPRA 2009 Annual Meeting
U.S. Margin Indicator Usually Higher U.S. Margin Indicator Usually Higher Due to No Residual Fuel and More Due to No Residual Fuel and More
GasolineGasoline
-$5
$0
$5
$10
$15
$20
$25
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
NY 3-2-1 Crack
NWE 6-2-3-1 Crack
U.S. and European Margin Indicators 1/00-01/09
Source: Bloomberg monthly average spot prices New York Harbor and Northwest Europe gasoline, No. 2 heating oil, 3.5% fuel oil, LLS, Brent.
NPRA 2009 Annual Meeting
Atlantic Basin InvestmentsAtlantic Basin Investments
• United States
• Europe
NPRA 2009 Annual Meeting
U.S. Investment EnvironmentU.S. Investment Environment
• Before 2008– Forecasts called for increasing demand (gasoline and
distillate) and need for capacity expansions– Slow shifts to distillate– Saw planned expansion with hydrocracking investments
(Marathon Garyville, Motiva Port Arthur, Valero)
• 2008– Surge in world distillate demand (mainly electricity
needs) sent distillate prices up– U.S. refiners began shifting yields to distillate through
operating changes alone– Recession reduced demand, some projects delayed– U.S. Energy Independence and Security Act (EISA)
reduced long-term need for petroleum-based gasoline
NPRA 2009 Annual Meeting
Long-Term U.S. Petroleum-Based* Gasoline Long-Term U.S. Petroleum-Based* Gasoline and Distillate Fuel Needs Shift with EISAand Distillate Fuel Needs Shift with EISA
* Crude-Based excludes ethanol, biodiesel, and distillate from coal-to-liquids and biomass-to-liquids. Source: AEO 2009 Reference Case
Million Bbls Per Day 2008 2023 Change
Gasoline & E85 Demand
9.01 9.27 0.26
Ethanol 0.60 1.57 0.97
Crude-Based Gasoline 8.41 7.70 -0.71
Total Distillate Demand
3.94 4.75 0.81
Biomass, CTL, BTL 0.05 0.43 0.38
Crude-Based Distillate 3.89 4.32 0.43
NPRA 2009 Annual Meeting
In 2008, U.S. Shifts from Net Importer to Net In 2008, U.S. Shifts from Net Importer to Net Exporter of Distillate – Short or Long Term?Exporter of Distillate – Short or Long Term?
-400
-300
-200
-100
0
100
200
300
1978
1982
1986
1990
1994
1998
2002
2006
Th
ou
san
d B
arre
ls P
er D
ay
U.S. Distillate Net Imports
0
100
200
300
400
500
600
2004
2005
2006
2007
2008
Th
ou
san
d B
arre
ls P
er D
ay Other
WesternEuropeLatinAmerica
U.S. Distillate Exports
Source: EIA Petroleum Supply Monthly Data
NPRA 2009 Annual Meeting
Distillate Yields Reflect Price Distillate Yields Reflect Price IncentivesIncentives
22%
24%
26%
28%
30%
32%
Jan Mar May Jul Sep Nov
2008
2007
2006
Distillate Production/(Crude+Unfinished Oil Inputs)
Source: EIA Petroleum Supply Monthly Data
NPRA 2009 Annual Meeting
Operating Changes and Next Step Operating Changes and Next Step Investments Before HydrocrackingInvestments Before Hydrocracking
• Cut-Point Shifts
• Distillation Efficiency Improvements
• Catalyst Changes
• Hydrotreating expansion
NPRA 2009 Annual Meeting
U.S. Investment UncertaintiesU.S. Investment Uncertainties
• Short-term signals– How long will the economic slump keep demand down?– How long will strong short-term distillate pull from other
countries continue – Europe in particular– Lower utilization vs. closures
• Long-term signals– Need for new capacity moved out in time. How far?– Still seeing need for shift to distillate from gasoline, but
will U.S. (and world) policies further change level and mix of petroleum product needs?
– Clear “wait-and-see” time
NPRA 2009 Annual Meeting
European Investment EnvironmentEuropean Investment Environment
• Forecasts continue to show increasing need for distillate and declining need for gasoline
• Margins under pressure in the short term.
• U.S. market for European gasoline exports coming under pressure
• Diesel import availability increasing
NPRA 2009 Annual Meeting
OECD Europe: Imbalance Between Refining OECD Europe: Imbalance Between Refining and Demand Met with Imports/Exportsand Demand Met with Imports/Exports
-1,500
-1,000
-500
0
500
1,000
1,500
19
97
19
99
20
01
20
03
20
05
20
07
Thousand Bbls/Day
Middle Distillates
Gasoline
European Refinery Yields European Net Imports
1998 2008
Distil-late
44.4% 49.3%
Gaso-line
26.1% 24.5%
Source: IEA February 2009 Data Base
NPRA 2009 Annual Meeting
Increasing European Distillate Increasing European Distillate ProductionProduction
• Refineries are already operating at maximum distillate potential (unlike the U.S.)
• Historical investments resulted in making more distillate by destroying residual fuel rather than reducing gasoline production
• Additional hydrocracking capacity is planned, but residual fuel destruction still a large factor
NPRA 2009 Annual Meeting
European Capacity Plans (2008-2013)European Capacity Plans (2008-2013)Capacity Changes
KB/DVolume Changes
KB/D
Area Crude Input
Hydro-cracking (*)
Coking Distillate Residual Fuel
Southern Europe
211 229 115 345 -147
Eastern Europe
88 184 20 217 (**)
Northwest Europe
-35 41 0 21 (**)
Total 264 454 135 583
Source: Based on Company reports and presentation, construction capacity reports, and contractor press releases.
Note: (*) Both hydrocracking and mild hydrocracking; (**) Insufficient information to make estimate.
NPRA 2009 Annual Meeting
European Investment UncertaintiesEuropean Investment Uncertainties• Short-term Signals
– Economic slump impacts on capital expenditures: go, cancel, delay?
– Need for and sources of distillate imports – short- or long-term changes?
– U.S. gasoline market changes– Lower utilization vs. closures
• Long-term Signals– Product demand projections have decreased. Will that
impact expansions?– Still seeing need for shift to distillate from gasoline, but
the rate at which the distillate imbalance was increasing has diminished
– So is there change in views of investment incentives?
NPRA 2009 Annual Meeting
SummarySummary
• Investment to produce more distillate– Distillate price premiums to gasoline becoming the norm
– Distillate investments occurring in both U.S. and Europe
• Investment to upgrade bottoms– High light-heavy differentials inspired rash of upgrading, but
differentials fell back with crude price. Differentials could well increase again with projected crude price increases.
– Bottoms conversion investments occurring in U.S. to use Canadian tar sands and in Europe to produce more distillate
• Investment to expand production– Margin incentive is weak, and long-term refinery demand
projections are flat or declining for U.S. and Europe
– Apart from individual project economics that might show synergies with accompanying upgrade, hard to see need for more capacity
NPRA 2009 Annual Meeting
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