Trends, Cycles, and Kinks (Changing Trade

1
Trends, Cycles, and Kinks(Changing Trade
Investment Patterns)

• OPIS 11th Annual
• National Supply Summit
• October 19, 2009
• Joanne Shore
• John Hackworth
• Energy Information Administration

2
Overview

• Major market drivers affecting trade patterns and
  investments are changing
• Demand growth
• Product mix
• Crude price light-heavy price differences
• Profitability
• Review implications for investment trade
• Historical trends
• Recent cycle
• Kinks or shifts in trends

• Trends

• Cycles

• Kinks

3
Trends As Seen from 2007 Will They Resume?

• Trends

• Rising crude prices and wide light-heavy price
  differences encourage changing feedstocks
• Demand Growth and mix shift
• Increase in refining margins capital
  expenditure driver
• Policy shifts towards biofuels efficiencies

4
View from 2007 Climbing Crude Prices But Small
Demand Impact (Oil Sands Looking Good)
Cycle
Source EIA
5
Higher Light-Heavy Price Differences Go with
Higher Price Levels -- Encouraging Bottoms
Upgrading
Source Bloomberg monthly average spot prices
1/95-08/09
6
World Petroleum Consumption Growing Until
Recently Largest Growth Outside U.S. Europe
U.S. Europe
Rest of World Excl FSU
Cycle
Cycle
Note KB/D is thousand barrels per day. Source
BP World Statistical Review of World Energy, June
2009
7
Refinery Utilization Grew with Demand through
Late 1990s Capacity Expansion Kept Up After
Cycle
2008
Source BP World Statistical Review of World
Energy June 2009
8
Atlantic Basin Petroleum Consumption Growth
through 2007 Mainly in U.S.
Source BP World Statistical Review of World
Energy, June 2009
9
In Last Decade, Europe Major Driver of World
Product-Mix Shift Towards Distillates
Cycle
Source BP World Statistical Review of World
Energy, June 2009
10
Atlantic Basin Price Incentives Shifting Toward
Distillates
Source Bloomberg New York Harbor Conventional
Gasoline, No. 2 Heating Oil NW Europe 0.2
Heating Oil Cargo and Premium Gasoline
11
Refining and Marketing Net Margins Rose 2003-2007
Providing Investment Incentive
Source EIA Financial Reporting
12
Balancing Demand and Supply with Trade Flows An
Option to Investment

• Changing trade flows are an important means of
  balancing product supply with demand, and are
  weighed against investments to meet demand
• Historically, economics favored Europe sending
  excess gasoline to U.S. rather than investing to
  reduce gasoline production
• And U.S. suppliers used excess European supply
  rather than investing in more gasoline production
• But Europe has had to seek out other markets for
  its growing gasoline exports

13
OECD Europe Imbalance Between Refining and
Demand Met with Imports/Exports
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
14
Western Europes Gasoline Net Export Growth in
Mexico, Africa, Middle East
Source IEA September 2009 Data Base
15
Investment View in 2007 Can We Build Fast
Enough?

• UNITED STATES
• U.S. was planning expansions of about 1
  million-barrels-per-day from 2007-2011 (Down
  slightly from 2006 due to rising costs and
  biofuel growth)
• U.S. upgrading projects (coking units) also
  planned to make use of more Canadian crude
• Several U.S. refiners engaged in large
  hydrocracking expansions for more distillate

• EUROPE
• Europes plans focused on upgrading for product
  mix changes -- more residual fuel destruction and
  increased production of distillate.
• But increasing distillate imports still projected
• Gasoline production left unchanged

• REST OF WORLD
• Most of the worlds expansion plans were in high
  growth areas of Middle East and Asia.
• These areas also included upgrading projects to
  make more use of heavy crude oils

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Outlook from Early 2007 Perspective

• Crude price forecasts high
• Oil sands optimism
• Biofuel growth planned especially ethanol
• Petroleum demand growth continuing
• Tight distillate demand expected to stay tight
• Refining margins improved Golden Age
• Refinery capacity tight plans for expansion
  upgrading

Source Supply EIA, FACTS, company
presentations, Oil and Gas Journal, Hydrocarbon
Processing Boxscore. Demand EIA, BP World
Statistical World Review 2006, FACTS, IEA
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Cycles The Tide Turns, Clouding Trend Paths

• 2008 Distillate Anomaly
• Unusually tight distillate market
• Gives glimpse of future
• Recession hits
• Demand declines
• Utilization declines
• Price declines
• Stocks build
• Expansion plans delayed/cancelled

• Cycles

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Distillate Prices Soared in 2008 Relative to
Gasoline But Reverting in 2009
Source Bloomberg New York Harbor Conventional
Gasoline, No. 2 Heating Oil NW Europe 0.2
Heating Oil Cargo and Premium Gasoline
19
U.S. Distillate Yields Reflect Price Incentives
Strong Prices in 2008 Reversal in 2009
Source EIA Petroleum Supply Monthly Data
20
2008 Distillate Incentives Resulted in
Unprecedented U.S. Operating Yield Shifts
Source EIA Form 810
21
2009 Europe and U.S. Consumption Reflect Recession
United States Consumption (Million Barrels Per Day) United States Consumption (Million Barrels Per Day) United States Consumption (Million Barrels Per Day) United States Consumption (Million Barrels Per Day)
2008 Est. 2009 Growth
Gasoline 8.99 9.02 0.3
Middle Distil- lates 5.49 5.03 -8.4
OECD European Consumption (Million Barrels Per Day) OECD European Consumption (Million Barrels Per Day) OECD European Consumption (Million Barrels Per Day) OECD European Consumption (Million Barrels Per Day)
2008 Est. 2009 Growth
Gasoline 2.36 2.30 -2.5
Middle Distil- lates 7.67 7.47 -2.6
Source EIA Short Term Energy Outlook October 6,
2009 IEA Oil Market Report, September 10, 2009.
22
First Half 2009 Refinery Inputs Down in Europe
and U.S.
Cycle
Hurricane
Source IEA September 2009 Data Base EIA
23
U.S. Growth in Gasoline Imports (Coming Mainly
from Europe) Slowed with Recession
Cycle
24
Distillate Inventories Reflect Much More Supply
Than Demand
Distillate Inventories
Note Grey bands are 2004-2008 average /- 1
standard deviation Source IEA September 2009
Data Base EIA
25
Gasoline Supply and Demand in Closer Balance than
Distillate
Gasoline Inventories
Note Grey bands are 2004-2008 average /- 1
standard deviation Source IEA September 2009
Data Base EIA
26
2008-09 Crude Price Roller Coaster
Source EIA
27
High Light-Heavy Differentials Declined Sharply
as All Drivers Reversed
Cycle
Source Bloomberg spot prices (LLS Louisiana
Light Sweet GC Gulf Coast)
28
Refining Margin Golden Age to Dark Age?
Cycle
Note LLS Louisiana Light Sweet Source Purvin
Gerz margins produced for IEA, IEA Oil Market
Report.
29
Refining Capacity Plans Change Delay vs. Cancel

• Independent refiners see full impact of refining
  margins on bottom line
• The decision to delay or even cancel depends on
  how far along a project is
• The type of project also affects the delay/cancel
  decision
• Upgrading for more distillate, less gasoline may
  seem safer than capacity expansion
• Bottoms upgrading to use heavier crude oils
  becoming more refinery location dependent

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Kinks Changing Trends

• Demand growth prospects change sharply
• Crude-based distillate will grow more than
  gasoline
• Atlantic Basin gasoline surplus
• Oil sands GHG and light-heavy price
  uncertainties but US looking for heavy
• Margins Not likely to return to high levels in
  mid term

• Kinks

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Significant Shift in Trends from 2007 Outlook to
2009 Outlook

• In 2007,
• Rising prices projected to ease in the long term
  with new supply
• U.S. petroleum growth projected to continue need
  for more refining capacity
• But outlook from 2009 is dramatically different
• Future prices are about double those seen in 2007
• Demand flat
• Policy changes another important factor

32
Rising Crude Oil Prices and Policies Made
Biofuels More Attractive

• Higher prices improved biofuels economic
  attractiveness
• Ethanol replaced MTBE in the U.S. due to concerns
  over water contamination and liabilities
• Renewable fuel interest increased for national
  security and GHG control
• U.S. policy changes in 2005 and 2007 set and
  increased renewable fuel standard

Source EIA Monthly Energy Review
33
Long-Term U.S. Petroleum-Based Gasoline and
Middle Distillate Needs Shift with Policy
Million Bbls Per Day 2008 2023 Change
Gasoline E85 Demand 8.99 9.21 0.22
Ethanol 0.63 1.43 0.80
Crude-Based Gasoline 8.36 7.78 -0.58
Middle Distillate Demand (Jet Dist.) 5.48 6.43 0.95
Biomass, CTL, BTL 0.05 0.41 0.36
Crude-Based Distillate 5.43 6.02 0.59

• Crude-Based excludes ethanol, biodiesel, and
  distillate from coal-to-liquids and
  biomass-to-liquids.
• Source AEO 2009 Reference Case, April 2009

34
In 2008, U.S. Shifts from Net Importer to Net
Exporter of Distillate Short or Long Term?
Source EIA Petroleum Supply Monthly Data
35
U.S. Distillate Exports Still Strong in 2009
36
European Export Trend Continues in 2009 But For
How Long?
Source IEA Data Base
37
Future Atlantic Basin Balances Implied Trade

• Distillate Shortfall
• Europe needs more
• U.S. may help fill that need
• Eastern Europe, Middle East, and India will be
  important suppliers to Europe
• Gasoline Glut
• Europes surplus production expected to grow
• Europes exports will compete with
• India, Middle East to supply Asia and Africa
• U.S. Gulf Coast, Virgin Islands to supply Latin
  America
• U.S. Gulf Coast, Canada, Virgin Islands to supply
  U.S. East Coast
• But Europes best market may still be the U.S.
  implying strong competition in East Coast
  markets.

38
Atlantic Basin Capacity Expansion Not Needed Now

• Planned capacity expansions in Atlantic Basin
  exceed demand growth in medium term (to 2015)
• Again seeing closures (Eagle Point just the
  beginning?)
• Refinery asset value has dropped
• Heavy crude supply impacting U.S. projects
• PADD 2 upgrading projects more likely to move
  ahead than PADD 3 due to oil sands connections
• Europe needs more diesel production

39
U.S. Heavy Crude Oil and Oil Sands Import Sources
Expected to Shift
Source Purvin Gertz
40
U.S Refinery Investment Outlook Hit the Brakes,
Idle the Engine

• Profit picture alters refinery project plans
• Planned projects delayed or suspended in light of
  revised market outlook
• Impacts greater in PADD 3 than PADD 2
• Will margins and light-heavy price differences
  rebound?

41
European Refinery Investment Outlook Upgrading
But Competition Pressing

• Profit declines hurting cash for capital
  expenditures
• Outlook for distillate demand still increasing,
  but recession reprieve encourages delays
• Refinery projects are mostly in Southern Europe
• New capacity from India and Middle East is very
  competitive

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• Questions?

Joanne Shore joanne.shore_at_eia.doe.gov www.eia.doe.
gov