Presently
CSIS Oil Market Group April 15, 2004
Bob Slaughter, President Jeff Hazle, Technical Director National Petrochemical & Refiners Association
Outline • Refining Industry Basics • Economics • Staying in Business
Refining Industry Basics • 149 Operable Refineries • Capacity: 16.8 MMBPD of Crude Oil • Yields (approximate) – 8.5 MMBPD Gasoline – 4.0 MMBPD Diesel Fuels – 1.5 MMBPD Jet Fuel
• Gasoline Imports – approximately 800 KBPD
Refining Industry Basics • Each Refinery is Unique • Crude Source • Product Slate – ‘Lubes-only’ Refineries – Topping Refineries – Gasoline
• Conversion Capacity/Configuration
Refining Industry Basics • Refinery Configuration Is Inflexible • Changes in Crude Qualities Affect Refining Economics
API Gravity Sulfur, wt% 20
20
20
20
19
19
19
19
19
19
19
19
19
19
19
19
19
19
03
02
01
00
99
98
97
96
95
94
93
92
91
90
89
88
87
86
A P I G ra v ity 35.00 1.50
34.00 1.30
33.00 1.10
32.00 0.90
31.00 0.70
30.00 0.50
W t. P c t. S u lfu r
US Crude Oil Trend
1.60 1.40 1.20 1.00 148% 0.80 0.60 0.40 0.20 126% 0.00
35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
Catalytic Cracking
Hydrocracking
Coking
Sulfur, wt%
W t. P c t. S u lfu r
105%
19 86 19 8 19 7 8 19 8 89 19 90 19 91 19 9 19 2 93 19 94 19 95 19 96 19 9 19 7 98 19 99 20 00 20 0 20 1 02 20 03
C o n ve r s io n C a p ac ity
US Refining Capability
Refining Industry Economics • Crude Slate Changes Beget Refinery Changes • Product Demand Changes Beget Refinery Changes • Refiners Have Invested in Conversion Capacity – Hydrocrackers – Catalytic Crackers (FCCUs) – Cokers
1.5 1.0 0.5 0.0
Catalytic Cracking Hydrocracking
Coking
Sulfur, wt%
Wt. Pct. Sulfur
155% 145% 135% 125% 115% 105% 95% 19 86 19 8 19 7 88 19 8 19 9 9 19 0 91 19 9 19 2 93 19 9 19 4 95 19 96 19 9 19 7 98 19 9 20 9 00 20 0 20 1 02 20 03
Conversion Capacity
US Refining Conversion Capacity v. Base Year 1988
Refining Industry Economics • Lower Cost Crudes Contain – More Heavy Material (BP>750°F) – More Sulfur – More Metals
• Conversion Capacity Enables Refiners to Purchase Cheaper Crudes – Ability to Upgrade Heavy Material – Ability to Reject Carbon
19 8 19 6 8 19 7 88 19 89 19 90 19 91 19 92 19 93 19 94 19 9 19 5 9 19 6 97 19 9 19 8 99 20 00 20 01 20 02 20 03
L ig h t-H e a v y D iffe re n tia l, $ /B B L $8.00 $6.00 $4.00 $2.00 $0.00 1.50
1.00
0.50
0.00
WTI-WTS WTI-Maya Sulfur, wt%
W t. P c t. S u lfu r
Light/Heavy Differentials, $/BBL WTI-Maya Differential
WTI-WTS Differential
Refining Industry Economics • Additional Conversion Capacity Should Reduce Light/Heavy Differentials • Cokers in Particular Have Been Built to Process Specific Crudes – Maya – Mexico – Oriente - Venezuela
Sulfur v. API Gravity 6.00
5.00
4.00
3.00
2.00
1.00
0.00
5
10
15
20
25 AP I Gra v i t y
30
35
40
45
Canadian Crudes US Annual Averages Hamaca Zuata Sweet Zuata Medium Petrozuata Light Petrozuata Heavy Maya Canadian Syncrude Canadian Bitumen
Refining Industry Economics • Synthetic Crudes Will Impact Refining • Canadian Syncrudes from Tar Sands – Presently 900 KBPD – Expanding to 1800 KBPD by 2010
• Syncrudes from Venezuela – Presently 250 KBPD – Expanding to 600 KBPD by end 2005
Refining Industry Staying in Business • Refining Is Very Competitive • Industry Emphasis Is on Manufacturing Costs – Crude Selection/Optimization Is One Factor – Other Factors Are More Urgent
Refining Industry Staying in Business • Manufacturing Cost Factors – Price of Crude Oil – Gasoline Sulfur Phase-down – MTBE Bans – Additional RFG Volume
Refining Industry Staying in Business • Phase-in of new federal standards began on January 1, 2004 • Most refineries and importers will comply by 2006 • Rocky Mountain-area refineries will comply by 2007 • Small refineries will comply in 2008
Refining Industry Staying in Business • For refineries, gasoline sulfur phase-down means: – Additional processing step(s) – Capital investment – Downgrade of some blendstocks
• Result: Upward pressure on manufacturing costs
Refining Industry Staying in Business • For refineries, MTBE ban means: – Production of a new blendstock for blending with ethanol; – Lower vapor pressure; and – Additional segregation and transportation costs.
• Result: Upward pressure on manufacturing costs
Refining Industry Staying in Business • The following areas will require federal RFG: – Baton Rouge: June 23, 2004 – Atlanta: January 1, 2005
• Summer 2004: Atlanta (45 counties) gasoline will have a 95 ppm sulfur cap at retail
Refining Industry Staying in Business • For Refineries, additional RFG volume means: – More stringent fuel properties; – Lower vapor pressure; and – Additional segregation and transportation costs.
• Result: Upward pressure on manufacturing cost
Refining Industry Staying in Business • Summary of Manufacturing Cost Factors: – Gasoline sulfur phase-down is gradual and is just starting in 2004 – MTBE bans have limited geographical implementation – New RFG/low-sulfur areas have limited geographical implementation – Crude oil price changes predominate
Refining Industry Staying in Business • Price Volatility – Results from Temporary Supply/Demand Imbalances Due to: - Weather - Refinery production disruptions - Distribution system disruptions - International events
Refining Industry Staying in Business • Prices can be more volatile if an affected area has a unique fuel formulation. • This is commonly referred to as a ‘boutique fuel’. – Limited geographical area – Not interchangeable with other fuels
Refining Industry Staying in Business • Boutique fuels are now the root of all evil – “300 separate jurisdictions with their own rules” – Senator Kerry – “110-plus different fuel types” – Senator Bingaman – Must be bad if it needs a word from the French to describe it
Refining Industry Staying in Business • Actually… • ‘Boutique’ fuels – Approximately sixteen distinct fuels – Each available in three grades – Many jurisdictions use the same fuel
• The number of fuels being produced in the US is more like 50.
Refining Industry Staying in Business Why Do We Have Boutique Fuels? • Local areas have different air quality needs. • A local fuel is a compromise between environmental and economic considerations. • Often supported by refiners and other stakeholders – Lowers or avoids investment costs for refiners – Lower consumer costs overall
Refining Industry Staying in Business • Refinery Capacity Utilization – Refining Industry Operates at High Utilization – There Is No Spare Capacity During ‘Gasoline Season’ – Spare Capacity Would Dampen Price Volatility
REFINERY UTILIZATION (%) 100 95 90 85 80 75 70 1
7
13
2000
19
25
2001
WEEK
31
2002
37
43
2003
49
Refining Industry Conclusions • The refining industry is operating at maximum capacity. • Transportation fuel prices will track crude oil costs. • Except for ‘memorable’ unpredictable events.
Refining Industry Conclusions • Boutique fuels are not today’s problem, i.e. not the cause of price increases. • They do add complexity to the refining and distribution system. • They may contribute to the effects of unpredictable events.
Refining Industry Conclusions • Future years - The refining industry will continue to cope with significant capital investment requirements to stay in business.
Bob Slaughter, President Jeff Hazle, Technical Director National Petrochemical & Refiners Association
Outline • Refining Industry Basics • Economics • Staying in Business
Refining Industry Basics • 149 Operable Refineries • Capacity: 16.8 MMBPD of Crude Oil • Yields (approximate) – 8.5 MMBPD Gasoline – 4.0 MMBPD Diesel Fuels – 1.5 MMBPD Jet Fuel
• Gasoline Imports – approximately 800 KBPD
Refining Industry Basics • Each Refinery is Unique • Crude Source • Product Slate – ‘Lubes-only’ Refineries – Topping Refineries – Gasoline
• Conversion Capacity/Configuration
Refining Industry Basics • Refinery Configuration Is Inflexible • Changes in Crude Qualities Affect Refining Economics
API Gravity Sulfur, wt% 20
20
20
20
19
19
19
19
19
19
19
19
19
19
19
19
19
19
03
02
01
00
99
98
97
96
95
94
93
92
91
90
89
88
87
86
A P I G ra v ity 35.00 1.50
34.00 1.30
33.00 1.10
32.00 0.90
31.00 0.70
30.00 0.50
W t. P c t. S u lfu r
US Crude Oil Trend
1.60 1.40 1.20 1.00 148% 0.80 0.60 0.40 0.20 126% 0.00
35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
Catalytic Cracking
Hydrocracking
Coking
Sulfur, wt%
W t. P c t. S u lfu r
105%
19 86 19 8 19 7 8 19 8 89 19 90 19 91 19 9 19 2 93 19 94 19 95 19 96 19 9 19 7 98 19 99 20 00 20 0 20 1 02 20 03
C o n ve r s io n C a p ac ity
US Refining Capability
Refining Industry Economics • Crude Slate Changes Beget Refinery Changes • Product Demand Changes Beget Refinery Changes • Refiners Have Invested in Conversion Capacity – Hydrocrackers – Catalytic Crackers (FCCUs) – Cokers
1.5 1.0 0.5 0.0
Catalytic Cracking Hydrocracking
Coking
Sulfur, wt%
Wt. Pct. Sulfur
155% 145% 135% 125% 115% 105% 95% 19 86 19 8 19 7 88 19 8 19 9 9 19 0 91 19 9 19 2 93 19 9 19 4 95 19 96 19 9 19 7 98 19 9 20 9 00 20 0 20 1 02 20 03
Conversion Capacity
US Refining Conversion Capacity v. Base Year 1988
Refining Industry Economics • Lower Cost Crudes Contain – More Heavy Material (BP>750°F) – More Sulfur – More Metals
• Conversion Capacity Enables Refiners to Purchase Cheaper Crudes – Ability to Upgrade Heavy Material – Ability to Reject Carbon
19 8 19 6 8 19 7 88 19 89 19 90 19 91 19 92 19 93 19 94 19 9 19 5 9 19 6 97 19 9 19 8 99 20 00 20 01 20 02 20 03
L ig h t-H e a v y D iffe re n tia l, $ /B B L $8.00 $6.00 $4.00 $2.00 $0.00 1.50
1.00
0.50
0.00
WTI-WTS WTI-Maya Sulfur, wt%
W t. P c t. S u lfu r
Light/Heavy Differentials, $/BBL WTI-Maya Differential
WTI-WTS Differential
Refining Industry Economics • Additional Conversion Capacity Should Reduce Light/Heavy Differentials • Cokers in Particular Have Been Built to Process Specific Crudes – Maya – Mexico – Oriente - Venezuela
Sulfur v. API Gravity 6.00
5.00
4.00
3.00
2.00
1.00
0.00
5
10
15
20
25 AP I Gra v i t y
30
35
40
45
Canadian Crudes US Annual Averages Hamaca Zuata Sweet Zuata Medium Petrozuata Light Petrozuata Heavy Maya Canadian Syncrude Canadian Bitumen
Refining Industry Economics • Synthetic Crudes Will Impact Refining • Canadian Syncrudes from Tar Sands – Presently 900 KBPD – Expanding to 1800 KBPD by 2010
• Syncrudes from Venezuela – Presently 250 KBPD – Expanding to 600 KBPD by end 2005
Refining Industry Staying in Business • Refining Is Very Competitive • Industry Emphasis Is on Manufacturing Costs – Crude Selection/Optimization Is One Factor – Other Factors Are More Urgent
Refining Industry Staying in Business • Manufacturing Cost Factors – Price of Crude Oil – Gasoline Sulfur Phase-down – MTBE Bans – Additional RFG Volume
Refining Industry Staying in Business • Phase-in of new federal standards began on January 1, 2004 • Most refineries and importers will comply by 2006 • Rocky Mountain-area refineries will comply by 2007 • Small refineries will comply in 2008
Refining Industry Staying in Business • For refineries, gasoline sulfur phase-down means: – Additional processing step(s) – Capital investment – Downgrade of some blendstocks
• Result: Upward pressure on manufacturing costs
Refining Industry Staying in Business • For refineries, MTBE ban means: – Production of a new blendstock for blending with ethanol; – Lower vapor pressure; and – Additional segregation and transportation costs.
• Result: Upward pressure on manufacturing costs
Refining Industry Staying in Business • The following areas will require federal RFG: – Baton Rouge: June 23, 2004 – Atlanta: January 1, 2005
• Summer 2004: Atlanta (45 counties) gasoline will have a 95 ppm sulfur cap at retail
Refining Industry Staying in Business • For Refineries, additional RFG volume means: – More stringent fuel properties; – Lower vapor pressure; and – Additional segregation and transportation costs.
• Result: Upward pressure on manufacturing cost
Refining Industry Staying in Business • Summary of Manufacturing Cost Factors: – Gasoline sulfur phase-down is gradual and is just starting in 2004 – MTBE bans have limited geographical implementation – New RFG/low-sulfur areas have limited geographical implementation – Crude oil price changes predominate
Refining Industry Staying in Business • Price Volatility – Results from Temporary Supply/Demand Imbalances Due to: - Weather - Refinery production disruptions - Distribution system disruptions - International events
Refining Industry Staying in Business • Prices can be more volatile if an affected area has a unique fuel formulation. • This is commonly referred to as a ‘boutique fuel’. – Limited geographical area – Not interchangeable with other fuels
Refining Industry Staying in Business • Boutique fuels are now the root of all evil – “300 separate jurisdictions with their own rules” – Senator Kerry – “110-plus different fuel types” – Senator Bingaman – Must be bad if it needs a word from the French to describe it
Refining Industry Staying in Business • Actually… • ‘Boutique’ fuels – Approximately sixteen distinct fuels – Each available in three grades – Many jurisdictions use the same fuel
• The number of fuels being produced in the US is more like 50.
Refining Industry Staying in Business Why Do We Have Boutique Fuels? • Local areas have different air quality needs. • A local fuel is a compromise between environmental and economic considerations. • Often supported by refiners and other stakeholders – Lowers or avoids investment costs for refiners – Lower consumer costs overall
Refining Industry Staying in Business • Refinery Capacity Utilization – Refining Industry Operates at High Utilization – There Is No Spare Capacity During ‘Gasoline Season’ – Spare Capacity Would Dampen Price Volatility
REFINERY UTILIZATION (%) 100 95 90 85 80 75 70 1
7
13
2000
19
25
2001
WEEK
31
2002
37
43
2003
49
Refining Industry Conclusions • The refining industry is operating at maximum capacity. • Transportation fuel prices will track crude oil costs. • Except for ‘memorable’ unpredictable events.
Refining Industry Conclusions • Boutique fuels are not today’s problem, i.e. not the cause of price increases. • They do add complexity to the refining and distribution system. • They may contribute to the effects of unpredictable events.
Refining Industry Conclusions • Future years - The refining industry will continue to cope with significant capital investment requirements to stay in business.
