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Lehman BrothersLehman Brothers
Analyst TeachAnalyst Teach--InInFebruary 17, 2005February 17, 2005
Refining Fundamentals &
Impact of Changing Fuel Specifications
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This presentation is not the property of Lehman Brothers. It is being
reproduced and distributed by Lehman Brothers as a convenience to
you. The information contained within has been obtained from
various sources; we do not represent that this information (including,but not limited to, prices, quotes and statistics) is complete or
accurate and it should not be relied upon as such. All information is
subject to change without notice. This document is provided for
information purposes only and should not be regarded as an offer tosell or as a solicitation of an offer to buy any product to which this
information relates.
Lehman Brothers Disclaimer StatementLehman Brothers Disclaimer Statement
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Statements contained in this presentation that state
the Company’s or management’s expectations or predictions
of the future are forward-looking statements intended to be
covered by the safe harbor provisions of the Securities Act of1933 and the Securities Exchange Act of 1934. It is important
to note that the Company’s actual results could differ
materially from those projected in such forward-looking
statements. Factors that could affect those results includethose mentioned in the documents that the Company has filed
with the Securities and Exchange Commission.
Safe Harbor StatementSafe Harbor Statement
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Rich Marcogliese
Senior Vice President,Refining Operations
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Crude Oil CharacteristicsCrude Oil Characteristics
Crude density is commonly measured by API gravity API gravity provides a relative measure of crude oil density …
the higher the API number, the lighter the crude
Classified as light, medium, or heavy
Light crudes are easier to process
Heavy crudes are more difficult to process
Sulfur content measures if a crude is sweet (low sulfur) or
sour (high sulfur) Less than 0.7% sulfur content = sweet
Greater than 0.7% sulfur content = sour
High sulfur crudes require additional processing to meet regulatoryspecs
Acid content measured by Total Acid Number (TAN)
Acidic crudes highly corrosive to refinery equipment
High acid crudes are those with TAN > 0.7
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Crude Oil BasicsCrude Oil Basics
Estimated Quality of Reserves (2005)
16%
2% 19%
63%
High Acid
(Sweet)
Source: Oil & Gas Journal, Company Information
Light/Medium
Sour
Heavy
Sour
Sweet
Bonny Light
1980
Brent
Mars
Maya
Arab Medium
Arab Heavy
Cabinda
Urals
Iran Heavy
Iran Light
Dubai
TapisWTI
Alaska North Slope
(ANS)
1990
2000
2010Arab Light
Venezuela Medium
0
0.5
1
1.5
2
2.5
3
3.5
20 25 30 35 40 45 50
S W E E T
S U L F U R C O N T E N T
S O U R
HEAVY API GRAVITY LIGHT
Crude Quality by Types
Source: Simmons & Co.
Majority of global reserves are light/medium sour
Most quoted benchmark prices are light sweet crudes WTI (West Texas Intermediate), Western Hemisphere
Brent (North Sea Crude), Europe Global crude supply is becoming heavier and more sour
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50%
26%
21%
3%
63%
22%
14%
1%
33%
34%
30%
3%34+ API Gravity
< 0.7 % Sulfur
35% DemandMost Expensive
24 - 34 API Gravity
> 0.7 % Sulfur
50% Demand
Less Expensive
< 24 API Gravity
> 0.7 % Sulfur
15% Demand
Least Expensive
Refineries upgrade crude oil to higher value products
2004 U.S. Refinery
Production
8%
Propane/Butane
49%
Gasoline
RFG
Conventional
CARB
Premium
32% Distillate
Jet Fuel
Diesel
Heating Oil
HeavyFuel Oil& Other
11%
Source: EIA Refiner Production
Basic Refining ConceptsBasic Refining Concepts
Propane/
Butane8%
Sweet Crude
(i.e. WTI, Brent)
Medium Sour Crude(i.e. Mars, Arab Light,
Arab Medium)
Heavy Sour Crude(i.e. Maya)
Crude Types Characteristics Yields
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Crude
Oil
Crude
Oil
Basic Refining ConceptsBasic Refining Concepts
Distillation
Tower
(Crude
Unit)
Butane &Lighter
Refinery FuelGas Processing
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Light
Sweet
Crude
100% Total Yield
HeavyFuel Oil& Other
30%
Gasoline
RFG
Conventional
CARB
Premium
HydroskimmingHydroskimming RefineriesRefineries – – Distillation ProcessDistillation Process
Simple low upgrading capability refineries tend to run sweet crude
Propane/
Butane
Hydrogen
CrudeUnit
Vacuum
Unit
Reformer Low Octane Gasoline
Propane/Butane
High Octane Gasoline
Heavy Fuel Oil
Kerosene/Jet Fuel
Diesel/Heating Oil
Distillate
Desulfurizer
Diesel/Heating Oil
Kerosene/Jet Fuel
Gas Oil
4%
32%
34% Distillate
Jet Fuel
Diesel
Heating Oil
D i s t i l l a t i o n T o w e r
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Hydrogen
Light Cycle Oil
(LCO)
Crude
Unit
VacuumUnit
Reformer
Alkylation
Unit
Low Octane Gasoline
Propane/Butane
Hi h Octane Gasoline
Heavy Fuel Oil
FCC Gasoline
Kerosene/Jet Fuel
Alkylate
Diesel/Heating Oil
Distillate
Desulfurizer
Diesel/Heating Oil
Kerosene/Jet Fuel
Gas Oil
Fluid Catalytic
Cracker (FCC)
Light
Sour
Crude
104% Total Yield
HeavyFuel Oil& Other
24%
45%
Gasoline
RFG
Conventional
CARB
Premium
Medium Conversion RefineriesMedium Conversion Refineries -- Catalytic CrackingCatalytic Cracking
Moderate upgrading capability refineries tend to run more sour crudes
while achieving increased higher value product yields and volume gain.
D
i s t i l l a t i o n T o w
e r
Propane/Butane8%
27% Distillate
Jet Fuel
Diesel
Heating Oil
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Hydrogen
LCO
Reformer
Medium Gas Oil
Propane/Butane
Hi h Octane Gasoline
Heav Fuel Oil
FCC Gasoline
Kerosene
lky Gasoline
Hydrogen Plant
Hydrocrackate Gasoline
Coke
Gas
Light Gas Oil
Diesel
Kerosene/Jet Fuel
Diesel/Heating Oil
Low Octane Gasoline
Delayed
Coker
Fluid Catalytic
Cracker (FCC)
Alkylation
Unit
Hydrocracker
Distillate
Desulfurizer
Crude
Unit
Vacuum
Unit
Medium/Heavy
Sour
Crude
Complex refineries can run heavier and more sour crudes whileachieving the highest light product yields and volume gain.
58%
Gasoline
RFG
Conventional
CARB
Premium
108% Total Yield
28% Distillate
Jet Fuel
Diesel
Heating Oil
HeavyFuel Oil& Other
15%
D i s t i l l a t i o n T
o w e r
High Conversion RefineriesHigh Conversion Refineries – – Coking/Resid DestructionCoking/Resid Destruction
Propane/
Butane7%
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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 EconomicsConversion Economics
USGC Medium Sour Crude Refining Margins13.0
11.0
9.0
7.0
5.0
3.0
1.0
-1.0
-3.0
$/BBL
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05
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Valero is an industry leader in upgrading capacity Valero’s upgrading capacity provides superior operational flexibility
Significant capital investment and long lead time required to add
conversion capacity No significant growth in conversion capacity expected until at least
’07 to ’09 time period
Note: VLO includes Aruba and QuebecSource: Oil & Gas Journal, Company Websites
Conversion Capacity1
1: Conversion Capacity = Sum of Coking, Hydrocracking and Cat Cracking Capacity
Cat Cracking
Hydrocracking
Coking
0
200
400
600
800
1,000
1,200
1,400
1,600
XOM VLO COP RDS BP CVX PCO MRO SUN TSO
MBPD
Comparison of Sour Conversion CapacityComparison of Sour Conversion Capacity
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Regulatory Changes Impacting SupplyRegulatory Changes Impacting Supply
Major changes in sulfur specs
2005 in Europe and 2006 in U.S.2005 in Europe and 2006 in U.S.
Capital diverted to regulatory compliance rather than capacityincreases
U.S. Refining Industry expected to invest around $20 billionfor Tier II
150
300
150
120
50
90
5030
1030
’03 ’04 ’05 ’06 Beyond
U.S.
500
350
500 500
350
5015
5015 10
’03 ’04 ’05 ’06 Beyond
Europe
’03 ’04 ’05 ’06 Beyond
U.S.
’03 ’04 ’05 ’06 Beyond
Europe
Maximum Gasoline
Sulfur Content (PPM)
Maximum Diesel
Sulfur Content (PPM)
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Desulfurization BasicsDesulfurization Basics
Goal Removal sulfur from light products (gasoline or diesel) to meetRemoval sulfur from light products (gasoline or diesel) to meet air qualityair quality
requirements for clean burning fuelsrequirements for clean burning fuels
Process
High Sulfur
Light Products(HC-S)
Desulfurization Unit
Sulfur Plant• Agricultural
• Pharmaceutical
Desulfurized Light Products
Elemental
Sulfur
HC-S
HC-SS
HC-S
S
S
Catalyst
HC-SS
HC-S
S
HC
H2S S
HC-S
H 2
Hydrogen Unit
H2
H2
H2
H2
H2H2
H2
H2H2
H2
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LCO
Reformer
Medium Gas Oil
Pro ane/Butane
Hi h Octane Gasoline
Heav Fuel Oil
FCC Gasoline
Kerosene
lkylate Gasoline
Hydrogen Plant
Hydrocrackate Gasoline
Coke
Li ht Gas Oil
Diesel
Kerosene/Jet Fuel
Diesel/Heatin Oil
Low Octane Gasoline
Delayed
Coker
Fluid
Catalytic
Cracker
(FCC)
Alky
Unit
Hydrocracker
Distillate
Desulfurizer
Crude
Unit
Vacuum
UnitFCC
Gasoline
Desulfurizer
Sour
Crude
Install New
FCC
Gasoline
Desulfurizer
Install New
FCC
Gasoline
Desulfurizer
Significant capitalinvestment
Lower FCCgasoline octane
(yield loss)
Other Options
Desulfurize FCCDesulfurize FCC
feedfeed
Shift FCCShift FCCgasoline intogasoline into
distillatedistillate
Gasoline DesulfurizationGasoline Desulfurization
D i s t i l l a t i o n T o w e r
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LCO
Reformer
Medium Gas Oil
Pro ane/Butane
Hi h Octane Gasoline
Heav Fuel Oil
FCC Gasoline
Kerosene
lkylate Gasoline
Hydrogen Plant
Hydrocrackate Gasoline
Coke
Li ht Gas Oil
Diesel
Kerosene/Jet Fuel
Diesel/Heatin Oil
Low Octane Gasoline
Delayed
Coker
Fluid
Catalytic
Cracker
(FCC)
Alky
Unit
Hydrocracker
Modified or New
Diesel Desulfurizer
Kerosene
Desulfurizer
Crude
Unit
Vacuum
Unit FCC
Gasoline
Desulfurizer
Sour
Crude
Install New
Diesel
Desulfurizer
or
Modify Existing
Desulfurizer
Install New
DieselDesulfurizer
or
Modify Existing
Desulfurizer
Significant capitalinvestment
Significant projectmanagement timeand focus
Diesel yield loss
Diesel DesulfurizationDiesel Desulfurization
D i s t i l l a t i o n T
o w e r
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Industry Environment Increasing global demand for clean products
Regulatory changes limiting supply
Reduced yields
Capital spending focused on upgrading existing products versus
capacity increase
Increasing availability of lower quality crudes
Refiner’s Challenges
Process lowest cost crudes into highest value products
Ensure compliance with changing regulatory requirements
Improve efficiency to offset rising per barrel operating costs
SummarySummary
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Appendix
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Major Refining ProcessesMajor Refining Processes
Category Definition ProcessTopping
(Separation of Crude)Separating crude oil into
difference hydrocarbon groups.
The most common means is
through distillation.
Desalting – Prior to distillation, crude oil is often
desalted to remove corrosive salts as well as metals
and other suspended solids.
Atmospheric Distillation – Used to separate thedesalted crude into specific hydrocarbon groups
(straight run gasoline, naphtha, light gas oil, etc.) or
fractions.
Vacuum Distillation – Heavy crude residue
(“bottoms”) from the atmospheric column is further
separated using a lower-pressure distillation
process. Means to lower the boiling points of the
fractions and permit separation at lower
temperatures, without decomposition and excessive
coke formation.
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Major Refining ProcessesMajor Refining Processes
Category Definition ProcessCoking – Thermal non-catalytic cracking process
that converts low value oils to higher value gasoline,
gas oils and marketable coke. Residual fuel oil from
vacuum distillation column is typical feedstock.
Visbreaking – Thermal non-catalytic process used
to convert large hydrocarbon molecules in heavy
feedstocks to lighter products such as fuel gas,
gasoline, naphtha and gas oil. Produces sufficient
middle distillates to reduce the viscosity of the heavy
feed.
Catalytic Cracking – A central process in refining
where heavy gas oil range feeds are subjected to
heat in the presence of catalyst and large molecules
crack into smaller molecules in the gasoline andsurrounding ranges.
Catalytic Hydrocracking – Like cracking, used to
produce blending stocks for gasoline and other fuels
from heavy feedstocks. Introduction of hydrogen in
addition to a catalyst allows the cracking reaction toproceed at lower temperatures than in catalytic
cracking, although pressures are much higher.
Thermal and
Catalytic Cracking
“Cracking” or breaking down
large, heavy hydrocarbon
molecules into smaller
hydrocarbon molecules thru
application of heat or thru theuse of catalysts.
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Major Refining ProcessesMajor Refining Processes
Category Definition ProcessCombination/
Rearrangement of
Hydrocarbons
Linking two or more
hydrocarbon molecules together
to form a large molecule (e.g.
converting gases to liquids).
Alkylation – Important process to upgrade light
olefins to high-value gasoline components. Used to
combine small molecules into large molecules to
produce a higher octane product for blending with
gasoline.
Catalytic Reforming – The process where naphthas
are changed chemically to increase their octane
numbers. Octane numbers are measures of whether
a gasoline will knock in an engine. The higher the
octane number, the more resistance to pre or self-
ignition.
Polymerization – Process that combines smaller
molecules to produce high octane blending stock.
Isomerization – Process used to produce compounds
with high octane for blending into the gasoline pool.
Also used to produce isobutene, an important
feedstock for alkylation.
Ethers Manufacture – Alcohols and ethers (MTBE)are added to gasoline to increase octane levels and
reduce generation of carbon monoxide.
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Major Refining ProcessesMajor Refining Processes
Category Definition ProcessTreating Processing of petroleum
products to remove some of the
sulfur, nitrogen, heavy metals
and other impurities
Catalytic Hydrotreating, Hydroprocessing,
sweeting/sulfur removal – Used to remove
impurities (e.g. sulfur, nitrogen, oxygen and halides)
from petroleum fractions. Hydrotreating further
“upgrades” heavy feeds by converting olefins anddiolefins to parafins, which reduces gum formation
in fuels. Hydroprocessing also cracks heavier
products to lighter, more saleable products.
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