Trends, Cycles, and Trends, Cycles, and KinksKinks

(Changing Trade & (Changing Trade & Investment Patterns)Investment Patterns)

OPIS 11th Annual

National Supply Summit

October 19, 2009

Joanne Shore

John Hackworth

Energy Information Administration

OverviewOverview

• 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 As Seen from 2007:Trends As Seen from 2007: Will They Resume? Will They Resume?

• 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

View from 2007: Climbing Crude Prices But Small View from 2007: Climbing Crude Prices But Small Demand Impact (Oil Sands Looking Good)Demand Impact (Oil Sands Looking Good)

$0

$20

$40

$60

$80

$100

$120

Jan-8

5

Jan-8

7

Jan-8

9

Jan-9

1

Jan-9

3

Jan-9

5

Jan-9

7

Jan-9

9

Jan-0

1

Jan-0

3

Jan-0

5

Jan-0

7

Jan-0

9

U.S. Average Imported Crude Oil Price (1/85-8/09)

Nominal

Adjusted for Inflation (Sept 2009 $)

Dollar

s P

er B

arre

l

Source: EIA

Cycle

Higher Light-Heavy Price Differences Go with Higher Higher Light-Heavy Price Differences Go with Higher Price Levels -- Encouraging Bottoms UpgradingPrice Levels -- Encouraging Bottoms Upgrading

$0

$5

$10

$15

$20

$25

$30

$0 $50 $100 $150

LLS ($/Barrel)

Crude Price vs. Light-Heavy Crude Price Difference

LLS

-May

a ($

/Bar

rel)

Source: Bloomberg monthly average spot prices 1/95-08/09

World Petroleum Consumption Growing Until World Petroleum Consumption Growing Until Recently: Largest Growth Outside U.S. & EuropeRecently: Largest Growth Outside U.S. & Europe

0

10000

20000

30000

40000

50000

1985

1990

1995

2000

2005

Other

Fuel Oil

MiddleDistillates

Gasoline/Naphtha

KB/D

0

10000

20000

30000

40000

50000

1985

1990

1995

2000

2005

KB/D

U.S. & Europe Rest of World Excl FSU

Note: KB/D is thousand barrels per day.

Source: BP World Statistical Review of World Energy, June 2009

Cycle Cycle

Refinery Utilization Grew with Demand through Refinery Utilization Grew with Demand through Late 1990’s; Capacity Expansion Kept Up AfterLate 1990’s; Capacity Expansion Kept Up After

50%55%60%65%70%75%80%85%90%95%

100%

1985 1990 1995 2000 2005

Europe

US

Atlantic Basin Refinery Utilization 1985-2008(Throughputs/Distillation Capacity)

Source: BP World Statistical Review of World Energy June 2009

Cycle

2008

Atlantic Basin Petroleum Consumption Growth Atlantic Basin Petroleum Consumption Growth through 2007 Mainly in U.S.through 2007 Mainly in U.S.

0

5,000

10,000

15,000

20,000

25,000

US 1987

US 2007

Europe1987

Europe2007

Others

Fuel oil

Middle Distillates

Gasoline &Naphtha

Petroleum Consumption (Thousand Barrels Per Day)

Source: BP World Statistical Review of World Energy, June 2009

In Last Decade, Europe Major Driver of In Last Decade, Europe Major Driver of World Product-Mix Shift Towards DistillatesWorld Product-Mix Shift Towards Distillates

0.0

0.5

1.0

1.5

2.0

2.5

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

EuropeAsia

Rest of World Excl FSU

United States

Ratio of Middle Distillates/Gasoline & Naphtha

Source: BP World Statistical Review of World Energy, June 2009

Cycle

Atlantic Basin Price Incentives Shifting Atlantic Basin Price Incentives Shifting Toward DistillatesToward Distillates

-90

-70

-50

-30

-10

10

30

50

70

90Ja

n-9

8

Jan-9

9

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Spot Gasoline Price - Heating Oil Price Differences

NY Harbor

Northwest Europe

Cen

ts P

er G

allo

n

Source: Bloomberg New York Harbor Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil Cargo and Premium Gasoline

Refining and Marketing Net Margins Rose Refining and Marketing Net Margins Rose 2003-2007 Providing Investment Incentive2003-2007 Providing Investment Incentive

$0

$2

$4

$6

$8

$10

$12

$14

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

U.S. Refined Product Margins & Costs for FRS Companies

$/B

arre

l P

rod

uct

So

ld

Gross Margin

Operating Costs

Net Margin

Source: EIA Financial Reporting

Balancing Demand and Supply with Trade Balancing Demand and Supply with Trade Flows – An Option to InvestmentFlows – 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

OECD Europe: Imbalance Between Refining and OECD Europe: Imbalance Between Refining and Demand Met with Imports/ExportsDemand Met with Imports/Exports

-1,500

-1,000

-500

0

500

1,000

1,500

1998

2000

2002

2004

2006

2008

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

Western Europe’s Gasoline Net Export Western Europe’s Gasoline Net Export Growth in Mexico, Africa, Middle EastGrowth in Mexico, Africa, Middle East

0

200

400

600

800

1000

1200

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Asia/Pac

Middle East

Africa

South America

Mexico

Canada

United States

Western Europe's Gasoline Net Exports(Thousand Barrels Per Day)

Source: IEA September 2009 Data Base

Investment View in 2007 – Can We Build Investment View in 2007 – Can We Build Fast Enough?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

• Europe’s 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 world’s 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

Outlook from Early 2007 PerspectiveOutlook 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

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

U.S. Europe MiddleEast

AsiaPacific

Distillation Capacity

Demand

Thousand B

arr

els

Per D

ay

From Early 2007: Expected Changes in Capacity and Demand 2007-2011

Source: Supply: EIA, FACTS, company presentations, Oil and Gas Journal, Hydrocarbon Processing Boxscore.; Demand: EIA, BP World Statistical World Review 2006, FACTS, IEA

Cycles: The Tide Turns, Clouding Trend Cycles: The Tide Turns, Clouding Trend PathsPaths

• 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

Distillate Prices Soared in 2008 Relative to Distillate Prices Soared in 2008 Relative to Gasoline – But Reverting in 2009Gasoline – But Reverting in 2009

-90

-70

-50

-30

-10

10

30

50

70

90Ja

n-9

8

Jan-9

9

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Spot Gasoline Price - Heating Oil Price Differences

NY Harbor

Northwest Europe

Cen

ts P

er G

allo

n

Source: Bloomberg New York Harbor Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil Cargo and Premium Gasoline

U.S. Distillate Yields Reflect Price Incentives: U.S. Distillate Yields Reflect Price Incentives: Strong Prices in 2008 & Reversal in 2009Strong Prices in 2008 & Reversal in 2009

22%

24%

26%

28%

30%

32%

Jan Mar May Jul Sep Nov

2008

2007

2006

Distillate Production/(Crude+Unfinished Oil Inputs)

2009

Source: EIA Petroleum Supply Monthly Data

2008 Distillate Incentives Resulted in Unprecedented 2008 Distillate Incentives Resulted in Unprecedented U.S. Operating Yield ShiftsU.S. Operating Yield Shifts

-4-202468

101214

-14 -12 -10 -8 -6 -4 -2 0 2 4

Gasoline Yield Change (Percentage Points)

FCC Only

FCC + Coker

FCC +Hydrocracker

FCC +Hydrocracker +Coker

Refinery Yield Shifts May-Aug 2007 to May-Aug 2008

Dis

tillat

e Y

ield

Chan

ge

(P

erce

nta

ge

Poin

ts)

Source: EIA Form 810

2009 Europe and U.S. Consumption Reflect 2009 Europe and U.S. Consumption Reflect RecessionRecession

United States Consumption (Million Barrels Per Day)

2008Est. 2009

Growth

Gasoline 8.99 9.02 0.3%

Middle Distil-

lates5.49 5.03 -8.4%

OECD European Consumption

(Million Barrels Per Day)

2008Est. 2009

Growth

Gasoline 2.36 2.30 -2.5%

Middle Distil-

lates7.67 7.47 -2.6%

Source: EIA Short Term Energy Outlook October 6, 2009; IEA Oil Market Report, September 10, 2009.

First Half 2009 Refinery Inputs Down in First Half 2009 Refinery Inputs Down in Europe and U.S.Europe and U.S.

70%

80%

90%

100%Ja

n-0

3

Jul-03

Jan-0

4

Jul-04

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Refining Utilization (Crude Inputs/Capacity)

U.S.

OECD Europe

Hurricane

Cycle

Source: IEA September 2009 Data Base & EIA

U.S. Growth in Gasoline Imports (Coming U.S. Growth in Gasoline Imports (Coming Mainly from Europe) Slowed with RecessionMainly from Europe) Slowed with Recession

0

200

400

600

800

1000

1200

1400

1998 2000 2002 2004 2006 2008

Th

ou

san

d B

arre

ls P

er D

ay Rest of WorldEastern EuropeWestern EuropeVirgin IslandsCanadaLatin America

U.S. Total Gasoline Imports January through June

Cycle

Distillate Inventories Reflect Much More Supply Distillate Inventories Reflect Much More Supply Than Demand Than Demand

United States(Thousand Barrels)

80,000

90,000

100,000110,000

120,000

130,000

140,000150,000

160,000

170,000

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

OECD Europe (Thousand Barrels)

160,000

180,000

200,000

220,000

240,000

260,000

280,000

300,000

320,000

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Distillate Inventories

Note: Grey bands are 2004-2008 average +/- 1 standard deviation Source: IEA September 2009 Data Base & EIA

Gasoline Supply and Demand in Closer Gasoline Supply and Demand in Closer Balance than DistillateBalance than Distillate

OECD Europe (Thousand Barrels)

70,000

80,000

90,000

100,000

110,000

120,000

130,000

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

United States(Thousand Barrels)

160,000

170,000

180,000

190,000

200,000

210,000

220,000

230,000

240,000

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Gasoline Inventories

Note: Grey bands are 2004-2008 average +/- 1 standard deviation Source: IEA September 2009 Data Base & EIA

2008-09 Crude Price Roller Coaster2008-09 Crude Price Roller Coaster

$0

$20

$40

$60

$80

$100

$120

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

U.S. Average Imported Crude Oil Price

Nominal

Adjusted for Inflation

Do

llar

s P

er B

arre

l

Source: EIA

High Light-Heavy Differentials Declined High Light-Heavy Differentials Declined Sharply as All Drivers ReversedSharply as All Drivers Reversed

$0

$10

$20

$30

$40

$50

$60

$70

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

$0

$5

$10

$15

$20

$25

$30

$35GC No.2 - 3% Resid

LLS-Maya

Crude & Product Price Differentials($/Barrel)

Cru

de

Pri

ce D

iffe

ren

ce

Pro

du

ct

Pri

ce D

iffe

ren

ce

Source: Bloomberg spot prices (LLS – Louisiana Light Sweet; GC – Gulf Coast)

Cycle

Refining Margin: Golden Age to Dark Age? Refining Margin: Golden Age to Dark Age?

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$30

$35

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Gulf Coast Margin Indicators $/Barrel (1/03-08/09)

Maya Coking

LLS Cracking

Note: LLS – Louisiana Light Sweet

Source: Purvin & Gerz margins produced for IEA, IEA Oil Market Report.

Cycle

Refining Capacity Plans Change: Delay vs. Refining Capacity Plans Change: Delay vs. CancelCancel

• 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

Kinks: Changing TrendsKinks: 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

Significant Shift in Trends from 2007 Significant Shift in Trends from 2007 Outlook to 2009 OutlookOutlook to 2009 Outlook

15

17

19

21

23

25

27

2004

2007

2010

2013

2016

2019

2022

U.S. Liquid Fuels Consumption(Million Barrels Per Day)

2007 Outlook

2009 Outlook

4 Million Barrels

• 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

Rising Crude Oil Prices and Policies Made Rising Crude Oil Prices and Policies Made Biofuels More Attractive 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

0

100

200

300

400

500

600

700

1987 1992 1997 2002 2007

U.S. Ethanol Consumption 1987-2008(Thousand Barrels Per Day)

Source: EIA Monthly Energy Review

Long-Term U.S. Petroleum-Based* Gasoline and Long-Term U.S. Petroleum-Based* Gasoline and Middle Distillate Needs Shift with PolicyMiddle Distillate Needs Shift with Policy

•Crude-Based excludes ethanol, biodiesel, and distillate from coal-to-liquids and biomass-to-liquids.

•Source: AEO 2009 Reference Case, April 2009

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

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

U.S. Distillate Net Imports

Thousa

nd B

arre

ls P

er D

ay

0

100

200

300

400

500

600

2004

2005

2006

2007

2008

Other

WesternEuropeLatinAmerica

U.S. Distillate Exports

Thousa

nd B

arre

ls P

er D

ay

Source: EIA Petroleum Supply Monthly Data

U.S. Distillate Exports Still Strong in 2009U.S. Distillate Exports Still Strong in 2009

0

100

200

300

400

500

600

700

800

900

Jan-06 Jan-07 Jan-08 Jan-09

Other

Canada

WesternEurope

LatinAmercia

Thousa

nd B

arre

ls P

er D

ay

Monthly U.S. Distillate Exports Jan 2006-Aug 2009

European Export Trend Continues in 2009 – European Export Trend Continues in 2009 – But For How Long?But For How Long?

0

100

200

300

400

500

600

700

800

900

1000

2005 2006 2007 2008 2009

Middle East

Africa

Mexico

U.S.

Major European Gasoline Export Destinations January - April (Thousand Barrels/Day)

Source: IEA Data Base

Future Atlantic Basin Balances & Implied Future Atlantic Basin Balances & Implied Trade 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– Europe’s surplus production expected to grow– Europe’s 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 Europe’s best market may still be the U.S. –

implying strong competition in East Coast markets.

Atlantic Basin Capacity Expansion Not Atlantic Basin Capacity Expansion Not Needed NowNeeded 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

U.S. Heavy Crude Oil and Oil Sands Import U.S. Heavy Crude Oil and Oil Sands Import Sources Expected to ShiftSources Expected to Shift

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1990 1995 2000 2005 2010 2015

Latin America

Middle East

Canada

Thousa

nd B

arre

ls P

er D

ay

Major Sources of Heavy Crude Imports to U.S.

Source: Purvin & Gertz

U.S Refinery Investment Outlook – Hit the U.S Refinery Investment Outlook – Hit the Brakes, Idle the EngineBrakes, 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?

European Refinery Investment Outlook – European Refinery Investment Outlook – Upgrading But Competition PressingUpgrading 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

Joanne Shore

joanne.shore@eia.doe.gov

www.eia.doe.gov