Global Energy Management InstituteThe 2006 Refining Conference“The Future of the Gulf Coast Refining Industry”November 3, 2003: Global Energy Management Institute The 2006 Refining Conference “The Future of the Gulf Coast Refining Industry” November 3, 2003 Gene Edwards Valero Energy Corporation


Critical Uncertainties: The refining industry faces numerous supply and demand uncertainties. Critical Uncertainties Crude Supply Iraq? Iran? Saudi Arabia, Kuwait, UAE? Nigeria? Russia? Kazakhstan and Azerbaijan? Mexico? Venezuela? Canada? Deepwater Gulf of Mexico? Refined Products Supply Refinery capacity expansion? Capacity creep? Gasoline imports? Renewable Fuels Standard? Ethanol? Biodiesel? Gas-to-liquids and Coal-to-liquids? Refined Products Demand High price effect on demand growth? Economic growth? China and India continue rapid growth? Hybrids? Dieselization? Other fuel efficient engine technologies? CAFE Standards?


World demand expected to grow 1.4 to 1.6 MMBPD per year over the next 5 years but added efficiency gains due to higher prices could reduce that.: GDP growth of 4.2% and efficiency improvements of 1.6% per year Compares to a 35 year historical GDP growth of 3.7% and efficiency improvement of 1.7% per year World petroleum demand grows 1.6 to 1.8% per year Compares to historical oil demand growth of 1.7% World Petroleum Demand MMBPD World Oil Consumption Efficiency (Demand / GDP) BPD / Million $ of GDP World demand expected to grow 1.4 to 1.6 MMBPD per year over the next 5 years but added efficiency gains due to higher prices could reduce that. World Petroleum Demand Growth


Non-OPEC production growth through 2010 should help ease prices.: Oil prices have risen strongly over the last few years due to the reduction of spare OPEC capacity and increasing geopolitical risks Increases in non-OPEC supplies through the end of the decade come at the same time OPEC countries are adding capacity that should ease prices There are risks that non-OPEC supplies will come on more slowly than expected After 2010, OPEC again will be heavily relied upon to meet growing demand, providing support to the crude market World Oil Supply Crude Oil Supply Non-OPEC production growth through 2010 should help ease prices. OPEC & Non-OPEC Supply MMBPD


Crude supply growth moving forward will be dominated by the Middle East, FSU, and Africa along with Canada.: Middle East growth will be led by Saudi Arabia and Kuwait Iran and Iraq both have supply growth potential but geopolitical consequences limit growth FSU growth fairly evenly split between Russia, Kazakhstan, and Azerbaijan African growth distributed between Angola, Nigeria, Algeria and Libya North American growth dominated by Canada’s oil sands Crude supply growth moving forward will be dominated by the Middle East, FSU, and Africa along with Canada. World Oil Supply Crude Oil Supply MMBPD 2005-2020 Supply Growth By Region


Majority of growth is in medium sour crude oil.: World Oil Supply Growth by Quality MMBPD Growth in Crude Oil Supply by Quality Growth in sweet crude, but high demand from Far East refiners Growth in High TAN grades in the short term Heavy is growing less quickly than historically Majority of growth is in medium sour crude oil.


Slide7: Lacking logistics to bring crude to USGC market (two proposed pipeline projects exist) High cost of developing fields Threat of Canadian upgrader projects Threat of increased capacity from Mid-Continent refinery upgrades World Oil Supply Canada MMBPD Canadian Hvy. Sour Crude Supply Canada is expected to provide nearly all of the net heavy crude supply growth for the world.


Slide8: Emerging economies lead world growth Asia alone accounts for nearly 53% with China about half of that U.S. demand grows 1.1% annually (240 MBPD) as the economy grows at its 3.1% per year long-term average 2007-2011 Petroleum Demand Growth Total Growth* = 7.5 MMBPD (1.7%/Year) World Petroleum Demand Growth Regional & Product Breakdowns Regional Growth (MBPD) U.S. ME / Africa Asia Latin America FSU Europe Canada - 200 * Includes demand growth supplied by NGLs, Condensates, and Other Liquids (e.g., Biofuels, Gas-to-Liquids)


Slide9: World Gasoline & Diesel Demand 2006-2011 World Gasoline Demand MMBPD MMBPD 2006-2011 World Diesel Demand World gasoline consumption grows about 1.1 - 1.3 MMBPD Asia makes up 62% of global growth while European demand continues to decline World diesel demand grows about 2.5 – 2.7 MMBPD Asia makes up 47% of this growth The U.S. makes up 37% of expected gasoline growth but only 11% of diesel growth World diesel growth is expected to more than double gasoline growth over the next five years.


U.S. gasoline demand is expected to continue growing, although at a slowing pace as a result of new engine technologies and changing consumer preferences.: U.S. gasoline demand is expected to continue growing, although at a slowing pace as a result of new engine technologies and changing consumer preferences. U.S. gasoline demand to grow at 1.0 to 1.3% per year (450 to 600 MBPD) over the next five years Supply Demand balance remains relatively tight over the next few years Longer-term, the supply-demand balance loosens due to numerous factors increasing supply: Increased ethanol production Increased production from U.S. refinery expansions Increasing imports from Europe and new foreign refineries U.S. Gasoline Demand MBPD U.S. Gasoline Demand


Diesel demand to grow 1.4 – 1.7% per year (300 to 350 MBPD) over the next five years driven by growth in on-road consumption as a result of economic growth.: On-road consumption will continue to be based on heavy-duty diesel trucking and not by dieselization of the light-duty vehicle fleet as has been the case in Europe HSD to become a product for home heating use only Jet demand should grow at 1.0 – 1.5% through 2011 amidst continued growth in domestic travel and very strong growth in international passenger travel and cargo shipments U.S. Distillate Demand Diesel demand to grow 1.4 – 1.7% per year (300 to 350 MBPD) over the next five years driven by growth in on-road consumption as a result of economic growth. U.S. Distillate Demand Outlook MMBPD


U.S. diesel markets will continue to be affected by product specification changes until nearly all uses are at ULSD quality in 2012.: The bulk of U.S. diesel demand is in the on-highway sector which began a shift from 500 ppm LSD to 15 ppm ULSD earlier this year A significant portion of the existing off-road HSD market moves to LSD specifications in June 2007 The LSD market then disappears by the middle of 2012 Transitions put strain on supply and logistics, likely causing dislocations until markets adjust U.S. Diesel Sulfur Specifications By Use U.S. Distillate Demand U.S. diesel markets will continue to be affected by product specification changes until nearly all uses are at ULSD quality in 2012. * Some states have discussed mandating lower Heating Oil sulfur limits Total = 5.96 MMBPD 2007 U.S. Distillate Demand Profile On-Highway Heating Oil Locomotive Marine Farm Electric Power & Other Jet


Slide13: Tightening Specifications Hinder Investment Significant capital has been spent to meet tightening environmental standards, pulling capital away from refinery expansion projects The American Petroleum Institute estimates U.S. downstream companies spent nearly $90 billion on environmental projects from 1995 through 2004 and have spend tens of billions more on ULSD compliance Capital constraints likely to continue as environmental standards continue to tighten: EPA 2006 tightening of particulate matter standards likely to impact industry Continuing compliance with ULSD transition 2011 Implementation of Mobile Source Air Toxics Phase II standard


Slide14: Conversion capacity needed to capitalize on sour crude discounts Hydroskim - Breakeven or moderate margins; High resid yield When margins are positive - increase crude runs When margins are negative - decrease crude runs Cracking - Better margins; Lower resid yield Coking - Best margins; Lowest resid yield Maximize heavy crudes Conversion Economics $/Bbl


Slide15: U.S. Refining Outlook Light product demand continues to grow distillate balances tighter than gasoline Gasoline specifications and mix lower volatility lower benzene RBOB for ethanol blending Alkylate/ Iso-octane values remain strong Complex refineries have advantage Continued reliance on Product Imports Government regulations are biggest threat alternative energy (ethanol, biodiesel, GTL, H2, etc.) demand reduction CAFE standards incentives for hybrids and new technologies stay in business capital for environmental particulates standards tighter product specifications Windfall profits taxes New refinery capacity additions tremendous escalation in construction cost Competitive advantage for foreign refineries?


Slide16: Refinery Strategies Compliance with environmental & safety standards Focus on higher efficiency energy reduction projects best practices in maintenance improved reliability multi-site synergies economies of scale Feedstock optimization flexibility lower cost/ higher margin secondary cost control (shipping/ demurrage/ terminalling) blending intermediates Product optimization conversion to light products flexibility - seasonal shift to middle distillates optimize gasoline blending Capitalize on niche products lubes petrochemicals asphalt- specialty grades