The Status of the US Refining Industry: Is A Major Shakeout Imminent and Who is Vulnerable ?

1. The Status of the US Refining Industry: Is A Major Shakeout Imminent and Who is Vulnerable ? Presented to the 16th Annual PFAA Conference November 12, 2009 Peter Fasullo En*Vantage, Inc pfasullo@envantageinc.com

2. Current State of US Refining Industry • US operable refining capacity has been increasing nearly 200 MBPD per year since ‘97 and is currently 17.7 MM BPD. • Prior to ‘06, the industry spent a greater proportion of its time operating above 90% utilization rates. • Since ‘06, the refining industry has spent considerable time operating below 90% of its operable capacity. YTD 2009 operating rate is 82%. • Slowing product demand, the recession, and growing supplies of ethanol have taken a toll on the industry the past 2 years. Source: EIA and En*Vantage

3. Major Refined Product Demand is Declining in US Source: EIA and En*Vantage

4. Days of Supply of Major Refined Products are Extremely High Source: EIA and En*Vantage

5. Incremental Barrel Demanded by Emerging Economies Represents major shift - US and other industrialized countries used to demand and set the price for the incremental product barrel. Non-OECD Asia’s (China & India), Latin America’s and Middle East demand for the incremental product is pushing crude prices up. Weak US product demand and higher crude prices is compressing US refinery margins.

6. US Regional Crack Spreads Gasoline Crack Spread $/bbl Distillate Crack Spread $/bbl Source: En*Vantage and Platts

7. Light-Heavy and Sweet-Sour Differentials Under Pressure Source: EIA and En*Vantage

8. To Make Matters Worse • The US refining industry is currently constructing over 600 MBPD of high complexity refining capacity mainly on the Gulf Coast. • Upgrading projects are also underway at several Midcontinent refineries to handle crudes derived from Canadian tar sands. • Export refineries have been constructed overseas and nearly 2 MM BPD of refining capacity is under construction in the emerging economies. • Severe headwinds are coming in the form of CAFE standards, cap and trade, more sulfur specs on heating oil and bunker fuels, and the ramping up of the renewable fuels programs. • Even without these issues, the current economic slowdown has impacted the US refining industry and capacity rationalization is starting.

9. CAFE Standards • Vehicle manufacturers will be required to achieve 35.5 mpg average across their fleets by 2016, 4 years ahead of the previous CAFE goals. • Initially, manufactures will shift production to smaller, more efficient gasoline and diesel driven vehicles. • Eventually, manufacturers will concentrate their efforts on hybrids, plug-in hybrids and electric vehicles. • How fast the accelerated CAFE standards will impact gasoline demand will depend on scrappage rates of existing vehicles and the auto industry’s ability to effectively execute the CAFE standards. • Using existing auto fleet statistics, 2016 targets, a 5% scrappage rate, and a 12,000 vehicle miles per year capita national average - gasoline demand could be reduced by 150 MBPD from current demand levels of 9 MM BPD.

10. Cap and Trade Policy • If enacted, would require US refiners to purchase allowances for emissions that come directly from their operations. • Greatly increases cost burden on US refineries. • Foreign refineries would not be subject to US cap and trade policies putting the US refinery industry at a severe disadvantage. • Overtime, this cost differential could shift investments in US refinery improvements to refineries located overseas. • As a result, the US dependence on crude oil imports could shift more to refined product imports over the long-term. • The cap and trade provision is also projected to result in fuel switching away from high carbon fuels (e.g., coal, petroleum products), towards more lower carbon alternatives such as natural gas.

11. Renewable Fuel Standards (RFS) and Biofuel Requirements • Biofuels will continue to be a growing component of the nation’s transportation fuel mix. • The Energy Independence & Security Act became law in Dec 2007 and increases the mandated nationwide use of biofuels to 36 billion gallons (2.35 MM BPD) in 2022, about 10% of all liquid fuels consumed in the US. • The current biofuels mandate presents significant challenges -- reliance on unproven technologies, lack of distribution infrastructure, and concerns that the nation’s vehicle fleet not equipped to use fuel with an ethanol content > 10%. • Regardless of the challenges, any addition of biofuels into the market place will place additional competitive pressures on US refiners.

12. Flat US Liquid Fuel Consumption. Biofuels will accommodate any growth in consumption Source: EIA Annual Energy Outlook 2009

13. Let’s Do Some Simple Math MM BPD • Current US Operable Capacity……….…. 17.67 • Specialty Refiners (Lubes & Asphalt)….. - 0.47 • US Conventional Refining Capacity…….. 17.20 • New Refining Capacity…………………… +0.60 • New Total………………………………….. 17.80 • Refinery Runs Needed to Meet Demand.. 15.00 (84% op rate) • Capacity Needed for Decent Returns….... 16.30 (92% op rate) • Excess Capacity……………………………. 1.50 Since we made this projection 6 months ago, 270 MBPD of US refining capacity has shutdown (3 complete refineries, 1 partial).

14. Major Questions: • What type of refineries are vulnerable to shutting down and where? • What are the implications? Challenge is to effectively screen US refineries to assess which types are most vulnerable to economic downturns, regulatory changes, and/or competitive forces.

15. General Description of Refineries

16. Role of a Refinery – Convert Crude to Products Challenge for refiners is to process available crudes to produce products demanded by the market. Source: Valero Energy , EIA an En*Vantage

17. Simple Refinery – Hydroskimmer/Topping Refinery Source: Valero Energy , EIA an En*Vantage

18. Medium Conversion – Catalytic Cracking Source: Valero Energy , EIA an En*Vantage

19. Highly Complex Refinery With Product Hydrotreating Source: Valero Energy , EIA an En*Vantage

20. Our Approach • Profiled each refinery by its distillation capacity and downstream processing units. • Calculated refinery complexity by using Nelson Complexity Index - a measure of the investment intensity of the refinery’s downstream unit capacity compared to the refinery’s distillation capacity. NCI is published by OGJ. Source: OGJ

21. Sample Calculation of a Refinery’s Complexity Factor Source: En*Vantage and OGJ

22. Our Approach (cont’d) • Refinery’s complexity factor is only a directional indicator to a refinery’s ability to produce a high yield of premium products. • Also calculated each refinery’s “bottom of the barrel” BOB conversion capacity (cat cracker + hydrocracker + coker) as % of its distillation capacity. Refinery in the example has a BOB index of 52%. • This metric combined with a refinery’s NCI factor gives a better indication of a refiner’s ability to process heavy crudes and produce premium refined products. • Also took into account a refiner’s hydrotreating capacity as a % of the distillation capacity to provide a better measure of a a refiner’s ability to produce low sulfur refined products. • Refinery location, size and ownership were also taken into consideration.

23. Profiling US Refineries Source: OGJ Surveys and En*Vantage

24. Profiling US Refineries (cont’d) Source: OGJ Surveys and En*Vantage

25. Regional Breakdown of US Refineries Southwest and Rocky Mt Mid Continent Mid West and Mid South 1.23 MM BPD 1.28 MM BPD 2.50 MM BPD West Coast East Coast 3.10 MM BPD 1.30 MM BPD Gulf Coast 7.79 MM BPD

26. US Refined Product Flows Source: EIA an En*Vantage

27. Regional Analysis • In total 14% of US conventional refining capacity is vulnerable to shutting down due to economic and regulatory pressures. • Most vulnerable are low complexity refiners leveraged to light-sweet crudes with very little feedstock and product flexibility. • Expect the shakeout to be a 3 to 5 year process. Source: EIA an En*Vantage

28. Implications • In the short-term, a number of independent refiners may fail to meet covenants in their credit agreements. • Refinery valuations are plummeting for small, light – sweet crude refineries. Two facilities in Tulsa were recently sold for scrap value. • As the shakeout continues, US refined product flows are expected to shift. • More imports into the East Coast. • Product from new Gulf Coast expansions will initially move mainly east and north. • Eventually as new refinery upgrades occur in the Mid-Continent more product will move west, putting more pressure on crack spreads in the Southwest and Rockies region.

29. Implications (cont’d) • Propane and Refinery Grade Propylene production will be adversely impacted by as much as 50 to 70 MBPD. • Longer-term, refiners may try to revamp cat crackers to produce more propylene and less gasoline. • Butane and natural gasoline markets could be impacted as the industry realigns.