Feed for Thought

1. Feed for Thought George Gale Naphtha Information ServicesNovember, 2006 NIS

2. Naphtha won’t quit. Data source: NIS

3. Naphtha goes eight for twelve. Data source: NIS

4. Naphtha cracking requires imports. Data source: cracking imports, EIA and NIS

5. Condensate gives heavy feed inertia. Data source: cracking imports, EIA and NIS

6. USA needs full-sized feedstocks. • Under-sized feeds have their place. • Mideast ethane crackers will take all the ethylene derivatives business they want. • Propane will become desperate and end up cheap. • Embarrassed producers will want to upgrade it. • How much of it will the mature markets want, anyway? • Gulf coast crackers will thrive by making a broad range of olefins and aromatics efficiently. • Propylene, butadiene, and aromatics have no Mideast. • We’ve seen these co-products rein-in light feed cracking in 2006. • No one, anywhere, gets naphtha substantially cheaper than anyone else. • Gasoline should give pygas good seasonal support in USA.

7. US gasoline must become expensive. Data source: EIA

8. SUV’s don’t make much difference. • Four factors drive motor fuel demand: • Population • Mobility • Vehicle loading • Vehicle efficiency • The first two account for growth of US mogas sales • ’00–’04 Growth, %/yr Miles/person, +1.68 Vehicle miles, +1.88 Mogas sales, +1.79 • Vehicles, as used, actually became more efficient. Data source: Bureau of Transportation Statistics

9. Caught between what we want . . . • Let’s try to solve USA’s mogas problem. • Limitations: • Supply can only increase 1.3% per year. Today that means 120 kb/d per year including ethanol, 97 kb/d pure gasoline. By 2010, it means 147 kb/d with ethanol, 103 kb/d pure, assuming agribusiness reaches 7.5 B gallons/year ethanol by 2010. • Refinery expansion remains difficult in USA. • Oil companies hesitate to expand in a hostile environment. • Expansion of foreign refineries capable of making US-spec mogas comes slowly. • America’s population grows 1.0% per year. • Americans want to live in ways and places which require auto travel. • Americans resist ride-sharing, driving at fuel-efficient speeds, and other mature behavior. • Many Americans cannot afford new automobiles. Data source: EIA, Census Bureau, and NIS

10. . . . and what it costs. Data source: NIS

11. USA only has to give up everything. • “Mixture of evils” case • We compromise everything else so our population can keep growing almost as fast as our gasoline supply. • Barely feasible • 40.1 mpg autos replace ’05’s • Autos do 94.1% of EPA rating • A mix of EPA’s top four (all hybrids) would do it. • 20% Prius hybrid • 20% Civic hybrid • 20% Camry hybrid • 40% Escape fwd hybrid • That’ll work. Americans will like this plan. Data source: NIS

12. Price will restrict mogas sales. • USA’s mogas problem has no easy solutions. • Social and demographic forces push demand to the limit of supply. • Our politicians lack the will to implement solutions. • They couldn’t streamline refinery permitting this year. • They won’t pass unpopular measures which would limit demand. • They actually make the problem worse. • The brighter ones know we must have high prices. • They might impose a profits tax. • If the pump price restricts sales, gasoline becomes independent of crude oil and refining costs. • During the high season, when price must restrict consumption, cracker products like pygas and T/X mix will sell to refiners and blenders for very good money.

13. US naphtha imports increase. Data source: EIA and NIS

14. Gasoline gets the imports. Data source: EIA and NIS

15. Cracking naphtha doesn’t travel very far. Data source: EIA and NIS

16. USA gets local support. • Some Western Hemisphere countries continue to export naphtha. • USA has only one big rival for Americas paraffinic naphtha, Brazil. • Diluent for Canada tar sands crude has taken some cracker feed. But availability rises anyway. • Mogas blending faces sulfur, octane, and RVP restrictions. • Density effect keeps cracking from getting much N+A naphtha now. Data source: EIA and NIS

17. East leaves West. • The East (Asia, the Mideast, and PADD5 USA) sent surplus naphtha to the West, 2004 through 2006. • By 2H 2007, the flow will likely reverse. • New naphtha re-run projects, which split FRN to get reformer feedstock, add a new dimension to Asia’s paraffinic market. • This West-to-East arbitrage will last only briefly. But it will give USA a rival for some European excess supply while it does. Data source: NIS

18. Europe needs customers. • Europe (including its suburbs – north Africa, Near East, and European Russia) has naphtha to spare. • Surplus naphtha goes to Asia and South America as well as North America. • Discontinuation of ethylene projects assures a European surplus for years to come. • Europe’s exports stop drifting toward blending and reforming grades. • This drift helped the Mideast supply cracker feed to USA. Data source: NIS

19. Condensate has another good year in it. • Condensate comes from just a few sources. • Some seasonality crept into the program in 2006 as residual oil tanked. • But the lightest grades largely escape refinery competition. • Some opportunities, like Libya, haven’t done much. • A few new streams should arrive late in ’07. • A big one, Bejaia, got a reprieve from delay of the Skikda splitter. Data source: EIA and NIS