Refining Industry Outlook Ron Chittim Refining Issues Manager American Petroleum Institute Crude Oil Quality Group Houston September 27, 2001
Topics Overview of API & Major Activities Refining Industry Background Petroleum Product Demand Refinery Capacity Expansion Constraints Current and Future Refinery Construction Activity
Overview of API & Major Activities API is a national trade association with over 400 members Primary focus is advocacy for industry segments Support services to support advocacy efforts Strong self-supporting programs to support industry API locations and staffing
Refining Industry Background Industry has changed Mergers and Acquisitions Growth of independents Size Matters
Capacity and Number of U. S. Refineries 20 Refinery capacity is up 8.2% (1990-2000) or 0.8% per year 400 Operating Capacity, MMBD 15 10 5 350 300 250 200 150 100 Number of Operating Refineries 50 0 0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 9
Capacity and Number of U. S. Refineries (continued) 20 Refinery capacity is up 8.2% (1990-2000) or 0.8% per year 400 Operating Capacity, MMBD 15 10 5 350 300 250 200 150 100 Number of Operating Refineries 50 0 0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 9
Capacity and Number of U. S. Refineries (continued) 20 Refinery capacity is up 8.2% (1990-2000) or 0.8% per year 400 Operating Capacity, MMBD 15 10 5 350 300 250 200 150 100 Number of Operating Refineries 50 0 0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 9
U. S. Petroleum Product Demand and Light Product Net Imports 20 MMBD 15 10 5 Product Demand Net Imports Domestic deliveries up by 16% over the 1990-2000 period or 1.5% per year 0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
U. S. Petroleum Product Demand and Light Product Net Imports 20 MMBD 15 10 5 Product Demand Net Imports Domestic deliveries up by 16% over the 1990-2000 period or 1.5% per year 0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Refinery Balances U.S. Petroleum Demand, Refinery Capacity and Utilization Rate 22.0 100.0% Demand and Capacity: Million barrels per day 21.0 20.0 19.0 18.0 17.0 16.0 15.0 Peak utilization rate Annual utilization rate Demand Refinery capacity 95.0% 90.0% 85.0% 80.0% 75.0% 70.0% 65.0% 60.0% 55.0% Utilization rates 14.0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 50.0%
1999 Excess Refinery Capacity 20 18 16 14 Unused Capacity 12 10 8 Gross Input to Distillation Units 6 4 2 0 Capacity Gross Input 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997
Refinery Capacity Expansion Constraints Permitting and Regulatory Uncertainty Outdated Depreciation Treatment of Refineries Near Term Requirements for Large Environmental Investments
Permitting and Regulatory Uncertainty Permits required to construct new equipment or modify existing equipment Complex and time consuming process involving federal, state and local authorities Due to changing interpretations and guidance, great deal of regulatory uncertainty related to scope, timing, requirements and interpretations
Outdated Depreciation Treatment of Refineries Most manufacturing assets subject to 5 to 7- year depreciation Refineries still subject to 10-year depreciation schedule Result is longer recovery period and less incentive to invest in new projects
Number of Refineries Decreasing Environmental Requirements Increasing 200 150 195 140 190 130 185 number of refineries 180 175 170 165 160 Operating Refineries Number of Requirements 120 110 100 90 number of requirements 155 80 150 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 70
Regulatory Avalanche
Number of Refineries Decreasing -- Environmental Expenditures Increasing 200 7.0 195 190 185 6.0 5.0 number of refineries 180 175 170 4.0 3.0 billions of dollars 165 160 155 Operating Refineries Environmental Expenditures 2.0 1.0 150 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 0.0
Inverse Relationship: Environmental Expenditures and Rate of Return on Refinery Investment Sources: Performance Profiles of MEP and EIA/DOE 7 16 6 Environmental Expenditures 14 billions of dollars 5 4 3 2 Rate of Return on Investment 12 10 8 6 4 2 rate-of-return (percent) 1 0 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998-2
Near Term Requirements for Large Environmental Investments Reducing sulfur content in gasoline to 30 ppm $8 billion Reducing sulfur content in on-highway diesel fuel to 15 ppm $8 billion Eliminating MTBE from gasoline $1.8 to $10 billion
Current and Future Refinery Construction Activity Large investments required at essentially all domestic refineries to produce cleaner fuels EIA Petroleum Product Supply Forecast between now and 2020 predicts 25% increase in demand Oil and Gas Journal Worldwide Construction Update 37 projects reported
Current and Future Refinery Construction Activity Large investments required at essentially all domestic refineries to produce cleaner fuels EIA Petroleum Product Supply Forecast between now and 2020 predicts 25% increase in demand Oil and Gas Journal Worldwide Construction Update 37 projects reported
Conclusions Industry significantly challenged to meet demand given substantial fuel specification changes and other regulatory initiatives Refiners will continue to provide products to meet consumer demand Construction needed to produce cleaner fuels and expand capacity Available investment capital impacted by environmental expenditures and low rates of return