CMI 9th Annual Meeting: US Refining Outlook & Climate Policy Implications

Jim Keating – BP America, R&LTFebruary 9th, 2010

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US Refining Outlook & Climate Policy Implications

• Refining sector market outlook in the US

• Refining sector as “Energy Intensive Trade Exposed” in the Waxman-Markey bill

• Implications of Clean Air Act regulation of GHGs (i.e. PSD permitting requirements)

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Much of recent refining margin improvement attributable to unusual events. Global competition and supply length in OECD expected to move margins back toward late-1990s. Historically refining in a highly capital intensive low return business (ca. 6% ROI)

Source: USGC Platts

US Refining Margins

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US Net Imports vs. Refinery Utilization

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North American refinery shutdowns Jan 09 – Jan 10Total capacity mothballed/closed ~800 kbd

ArubaMothballed Jul 09230 kbd

Delaware CityClosed Nov09210kbd

Corpus ChristiCoker shut20 kbd

BakersfieldMothballed Jan 09

70 kbd

BloomfieldClosed Nov09

17kbd

Eagle PointMothballed Oct 09150kbd

Montreal EastClosure announced Jan 10130kbd

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-630

-400

470

-270232

890

400

Net GlobalBalance:

U.S. short 900 kbd of gasoline, balanced distillates

Europe short 1MM bpd

distillates, long 1 MMbpd gasoline

Majority of estimated Russian

length not produced

Source: Average of various consultants

Regional Gasoline and Distillate S&D Balance 2007 (k bbl / day)

7

630

-870

310

-470 600

750

Net GlobalBalance:

2680

890

540

350

CAFE and RFS flip U.S. S&D from short

to long gasoline

… leaving Europe gasoline

length with no home

Massive over building in

Middle East and Asia

Growing economies but little investment in

refining supply

Source: Average of various consultants

Regional Gasoline and Distillate S&D Balance 2020 (k bbl / day)

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Refining & Trade ExposureAn Increased Allowance Allocation is Needed

• The US Refining Sector competes internationally

− 16% of the 7.1 billion barrels of oil products consumption in the US (2008) were imported

• The Waxman-Markey bill 2.25% allowance allocation to the Refining Sector covers only ~30% of the direct operational GHG emissions

• Additional costs associated with allowance purchase will:

− Will not apply to foreign refiner operational emissions

− Increase competitive pressures, reduce US refining production, and increase imports

− Reduce US energy security and employment

• Solution:

− Increase the allocation to Refining via an increase of the 2.25% allocation and/or via designation as an Energy Intensive Trade Exposed (EITE) sector (consistent with Refining treatment in Australia and EU ETS)

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Clean Air Act (CAA) Regulation of GHG

• Endangerment Finding (Dec 2009)

− Affirmative finding that vehicle GHGs “cause & contribute” to “endangerment” of human health and welfare

− EPA must regulate Vehicle GHG emissions

• Proposed Sec 202 Vehicle Rule (expected final Mar 2010)

− Sets new CAFÉ standard at 35 mpg by 2016

− Sets new vehicle GHG std at 250 g CO2e/mi

• GHGs defined as a “Regulated Air Pollutant” under the CAA

• Instantaneous trigger other CAA programs to address GHG emissions

− Prevention of Significant Deterioration (PSD) pre-construction permitting

− PSD threshold is 100/250 tons

− Case-by-case control technology evaluation

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Implications of PSD Permit Regulation of GHG

• Immediate Applicability to new or modified sources

• Lack of Regulatory Clarity for Planning

− GHG permitting program requirements yet to be developed by EPA

− EPA attempts to tailor PSD program for GHGs will meet legal challenges

• Permitting Complexity

− States may not be clear on authority and requirements (i.e. changes to state law)

− State agency overload as new sources are brought in to permitting programs

• Project Delays

− Agency permitting delays due to lack of resources, guidance, and experience

− Litigation and challenges to any permit issued

• Increased Costs

− New control requirements; potential process redesign for new projects, off-sets

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EPA Should Defer PSD Permitting of GHGs

EPA deferral of PSD permit regulation of GHG will:

• Avoid the detrimental impacts to the economy and counteract the goals to simulate the economy

• Allow Congress and the Administration time to craft an appropriate market-based legislative approach

• Allow EPA time to craft a path forward for the GHG Vehicle Rule without trigger CAA stationary controls

• Allow EPA time to craft a more appropriate program under the CAA that will complement eventual market-based systems (i.e. performance standards)

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Questions?