US Downstream Market Outlook

US Downstream Industry
Outlook and Opportunities
LSU Energy Summit 2004
October 21, 2004
Gil Nebeker
Purvin & Gertz, Inc.
International Energy Consultants

Agenda
• About Purvin & Gertz, Inc.
• Drivers of Downstream Profitability
• U.S. Downstream Market Outlook
• Downstream Opportunities
2

Purvin & Gertz - Background
• Founded in 1947 – in business for 57 years
• Independent firm owned by consultants
• Global presence with offices in:
Houston, Los Angeles, Calgary, London,
Singapore, Buenos Aires and Moscow
• Consulting staff of Chemical Engineers/MBAs
• Focus on technical/commercial issues
3

Industries Served
• Crude and Condensate - Supply & Pricing
• Petroleum Products - Refining & Marketing
• NGL - Processing & Marketing
• Natural Gas and LNG - Markets & Infrastructure
• Technology Development – GTL , Heavy Oil
Upgrading
4

Agenda
• About Purvin & Gertz, Inc.
• Drivers of Downstream Profitability
• U.S. Downstream Market Outlook
• Downstream Opportunities
5

Key drivers of downstream profitability . . .
PRODUCT
SUPPLY/DEMAND
LONG-TERM DRIVERS
‣ Demand Growth
‣ Refinery Capacity
Utilization
SHORT-TERM INDICATORS
‣ Product Inventories
‣ Market Price
Structure
LIGHT/HEAVY
DIFFERENTIAL
‣Crude Oil Market
Conditions
‣Conversion Capacity
Investment
‣Conversion Capacity
Utilization
6

Factors that determine refining margins
involve trends, cycles and random events . . .
TRENDS
CYCLES
RANDOM
EVENTS
‣ Product Quality
‣ Crude Oil Quality
‣ Trade Patterns
‣ Technology
‣ World Economic
growth
‣ Product demand
growth rates
‣ Major Capacity
Additions
‣ Weather
‣ Refinery Outages
‣ Supply Disruptions
‣ Political Events
7

Agenda
• About Purvin & Gertz, Inc.
• Drivers of Downstream Profitability
• U.S. Downstream Market Outlook
• Downstream Opportunities
8

Overall U.S. downstream returns have been
poor, but have improved in the late 1990s . . .
20
U.S. Refining & Marketing Return on Investment, Percent
15
10
Approximate Cost of Capital
Estimate
5
0
-5
1985 1990 1995 2000 2005
9
Source: U.S. Department of Energy Financial Reporting System Data

Short-term term outlook for refining profitability is
positive in all major regions . . .
• US: Tight capacity will keep markets
strong, particularly for high-conversion
refiners
• Europe: Strong US gasoline prices will
help maintain margins as European
gasoline demand shrinks
• Asia: Capacity overhang finally wearing
off, need for conversion capacity will grow
10

Is there enough
refinery capacity?
11

US refinery capacity utilization is high
18,000
17,500
17,000
Capacity Utilization %
100%
95%
Capacity K Barrels/CD
16,500
16,000
15,500
15,000
14,500
14,000
13,500
13,000
90%
85%
80%
75%
70%
1990
1995
2000
2005
2010
12

U.S. refinery capacity additions have slowed,
but response to tight capacity is expected . . .
800
600
400
Thousand Barrels per Day
Expansions
200
0
-200
-400
Closures
1991 1993 1995 1997 1999 2001 2003
13

Refinery capacity effectively full including
the impact of feedstocks in Europe . . .
25
20
15
10
Million Barrels per Day
1995 2003
93%
91%
92%
90%
88%
85%
5
0
U.S. Europe Asia
Note: European capacity utilization includes secondary feedstocks.
14

U.S. refinery capacity additions are lagging
runs, but further creep will meet the shortfall
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Million Barrels per Day
Capacity
Incremental Runs
Capacity Creep
1995-1999 1999-2003 2003-2007
15

U.S. gasoline imports are increasing, but
there may be a limit to future increases . . .
1.5
1.0
Million Barrels per Day
Other
CIS Region
Europe
Canada
Latin America
0.5
0.0
1990 1995 2000 2005 2010
16

Efficiency gains and alternative fuels will slow
U.S. gasoline growth later this decade . . .
12
11
Million Barrels per Day
1992-2003 Trend line
Forecast
10
9
8
7
1990 1995 2000 2005 2010 2015
17

US Gulf Coast refinery profitability should remain
strong as product markets remain tight . . .
12
10
8
6
4
2
0
-2
Forecast in 2004 Dollars per Barrel
Heavy Sour Coking
Light Sour Coking
Light Sour Cat Cracking
1985 1990 1995 2000 2005 2010
18

However profitability will likely remain below levels
necessary to support new grass roots capacity
12
10
Forecast in 2004 Dollars per Barrel
Grass Roots Investment Margin
Heavy Sour Coking Margin
8
6
4
2
0
1985 1990 1995 2000 2005 2010
19

Light/heavy differentials will provide incentive
for incremental conversion investments . . .
20
USGC Light Products minus Fuel Oil,
Constant 2004 Dollars per Barrel
15
10
5
0
1985 1990 1995 2000 2005 2010
20

Agenda
• About Purvin & Gertz, Inc.
• Drivers of Downstream Profitability
• U.S. Downstream Market Outlook
• Downstream Opportunities
21

New and different crude oils will create
investment opportunities for refiners . . .
2.0
Million Barrels per Day Increase, 2000 - 2010
1.5
1.0
0.5
0.0
Synthetic
Heavy
Crude
Condensate High TAN
22

Canadian production is growing due to
increases in bitumen and synthetic crude . . .
4
3
2
1
Million Barrels per Day
Bitumen
Synthetic
Pentanes
Plus
East Coast
Light Sweet
Light Sour
0
1985 1990 1995 2000 2005 2010
Heavy
23

Russian/Caspian crude exports increasing
dramatically and penetrating new markets ...
14
12
10
8
6
4
2
Million Barrels per Day
Production
Exports
Runs
0
1990 1995 2000
24

Successful downstream strategies will take
advantage of current market opportunities ...
• Favorable changes in crude oil supply patterns for
U.S. refiners
• Tight capacity creates potential to integrate crude
opportunities with capacity additions
• Product specification changes have forced
investment, but contributed to strong product prices
• Industry is entering an ‘Investment Phase’ providing
benefits to financially strong companies
25

Russian imports to the U.S. are increasing as
export supplies exceed European runs . . .
500
Thousand Barrels per Day
400
300
200
100
0
Jan
2002
Jul
Jan
2003
Jul
Jan
2004
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US Downstream Industry
Outlook and Opportunities
LSU Energy Summit 2004
October 21, 2004
Gil Nebeker
Purvin & Gertz, Inc.
International Energy Consultants

About this presentation
This analysis has been prepared for the sole benefit of NAPIA/PIRA. Neither the
analysis nor any part of the analysis shall be provided to third parties without the written
consent of Purvin & Gertz. Any third party in possession of the analysis may not rely
upon its conclusions without the written consent of Purvin & Gertz. Possession of the
analysis does not carry with it the right of publication.
Purvin & Gertz conducted this analysis utilizing reasonable care and skill in applying
methods of analysis consistent with normal industry practice. All l results are based on
information available at the time of review. Changes in factors upon which the review is
based could affect the results. Forecasts are inherently uncertain because of events or
combinations of events that cannot reasonably be foreseen including ing the actions of
government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY.
Some of the information on which this analysis is based has been provided by others.
Purvin & Gertz has utilized such information without verification n unless specifically
noted otherwise. Purvin & Gertz accepts no liability for errors or inaccuracies in
information provided by others.
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