The Altered Outlook of Jet Fuel Supply/Demand Situation in the East of Suez Market

1. The Altered Outlook of Jet Fuel Supply/Demand Situation in the East of Suez Market By Fereidun Fesharaki, President FACTS Inc., Hassaan Vahidy, Lead Analyst, FACTS Inc., Singapore Presented to Middle East Jet Fuels Conference Bahrain May 2004

2. Global Oil Demand and the Asia-Pacific Region • Oil product consumption in the Asia Pacific region has slowed down in the recent years; and even under an optimistic scenario growth rates of the past will not be achieved in years to come. • Currently China accounts for almost 70% of the growth in Asia, and some 25-30% of the global oil consumption growth. • Following poor performance in 2001 and 2002 the region posted a growth of 664 kb/d in 2003. This however does not mark a broad-base growth revival in the region.

7. Refining Capacity and Product Balances

11. The impact of these product balances is clearly visible on the region’s refining profitability…

13. … and more so in the case of Jet Fuel

14. Regional Refining Profitability and Jet Fuel Prices • The overall surplus of refined products in the Asia-Pacific market has resulted in a decline in the region’s refining profitability vis-à-vis other refining centers. • Although jet fuel prices seem to move in tandem with crude prices, however comparative analysis shows that jet prices as a ratio of crude prices have declined over the last 10 years. • This decline is most pronounced in case of the Asia-Pacific market; which is inline with a surplus of the fuel (I.e., net exports from Asia-Pacific countries).

20. 2003 2010

22. Concluding Remarks • The kerosene / jet fuel market has undergone a fundamental change in the East of Suez Market. The change is brought about both by supply side considerations as well as a demand side issue. • Supply side issues are dominated by the massive capacity additions in Asia, this coupled with and a relatively lower growth trajectory in terms of consumption, has resulted in an overall surplus of refined products in the region. • The impact is particularly pronounced in the case of kerosene and jet fuel: the change in net import requirements from approximately 250 kb/d in 1995 to a surplus of approximately 50 kb/d in 2003. • This has negative implications on the overall refining profitability and particularly the attractiveness to produce jet fuel.

23. Concluding Remarks (cont’d.) • Middle East refiners have traditionally relied on Asian markets. Though the developments in the Asian downstream market has created a sense of urgency to look for other markets. • On a relative basis, jet fuel is the only globalized product in the world oil market. Unlike gasoline and diesel, it can move across the boundaries as its specifications are less varied than other fuels. • As a base-case, we project Asian and Middle Eastern jet fuel consumption to grow in the range of 3-3.5% per year. However kerosene consumption in Middle East is projected to shrink and grow slightly in the Asian countries. • This growth outlook coupled with the projected increases in East of Suez refining capacity points to out a continued surplus of kerosene and jet fuel in the region. • Rising export availability from the Middle East region suggests that the refiners there will have to continue their efforts in finding markets in Africa, Europe, and beyond. ------------------------------------------