Lehman Brothers

Analyst Teach-In
February 17, 2005
Refining Fundamentals &
Impact of Changing Fuel Specifications
1

Lehman Brothers Disclaimer Statement

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 to
sell or as a solicitation of an offer to buy any product to which this
information relates.

Safe Harbor Statement

Statements contained in this presentation that state
the Companys or managements expectations or predictions
of the future are forward-looking statements intended to be
covered by the safe harbor provisions of the Securities Act of
1933 and the Securities Exchange Act of 1934. It is important
to note that the Companys actual results could differ
materially from those projected in such forward-looking
statements. Factors that could affect those results include
those mentioned in the documents that the Company has filed
with the Securities and Exchange Commission.

Rich Marcogliese
Senior Vice President,
Refining Operations

Crude Oil Characteristics

Crude density is commonly measured by API gravity
z

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)

z

Less than 0.7% sulfur content = sweet

Greater than 0.7% sulfur content = sour

High sulfur crudes require additional processing to meet regulatory

specs

Acid content measured by Total Acid Number (TAN)

z

Acidic crudes highly corrosive to refinery equipment

High acid crudes are those with TAN > 0.7

5

Crude Oil Basics

Crude Quality by Types

Estimated Quality of Reserves (2005)

SOUR

3.5
Maya
3

Arab Heavy

High Acid
(Sweet)
2%

SULFUR CONTENT

Arab Medium
2.5
Mars

Venezuela Medium

2010

Iran Heavy

Heavy
Sour
16%

Arab Light

1.5
2000

Iran Light
Urals

1990

SWEET

Dubai

Alaska North Slope

(ANS)

1980

0.5

Brent
Cabinda

0
20

25

HEAVY

30

35

Light/Medium
Sour
63%

WTI
Tapis

Bonny Light

API GRAVITY

Source: Simmons & Co.

Sweet
19%

40

45

50

LIGHT
Source: Oil & Gas Journal, Company Information

Majority of global reserves are light/medium sour

Most quoted benchmark prices are light sweet crudes
z WTI (West Texas Intermediate), Western Hemisphere
z Brent (North Sea Crude), Europe
Global crude supply is becoming heavier and more sour
6

Basic Refining Concepts

Crude Types

Characteristics
34+ API Gravity

Yields
3%

Sweet Crude

< 0.7 % Sulfur

30%

(i.e. WTI, Brent)

35% Demand

34%

Most Expensive
24 - 34 API Gravity

Medium Sour Crude

> 0.7 % Sulfur

(i.e. Mars, Arab Light,

Arab Medium)

50% Demand
Less Expensive
< 24 API Gravity

Heavy Sour Crude

> 0.7 % Sulfur

(i.e. Maya)

15% Demand
Least Expensive

2004 U.S. Refinery

Production
8%
8%

Propane/
Propane/
Butane
Butane

49%

Gasoline
RFG
Conventional
CARB
Premium

33%

3%
21%
26%

50%

32%

Distillate
Jet Fuel
Diesel
Heating Oil

1%
14%
22%

11% Heavy
Fuel Oil

& Other

63%

Source: EIA Refiner Production

Refineries upgrade crude oil to higher value products

Basic Refining Concepts

<90 Degrees

Crude
Crude
Oil
Oil

Butane &
Lighter

Refinery Fuel
Gas Processing

Straight Run
Gasoline

Further Processed to Gasoline

220-315 Degrees

Naphtha

Further Processed to Gasoline

Heavy naphtha for jet fuel

315-450 Degrees

Kerosene

Further Processed to Jet Fuel,

Diesel and Fuel Oils

450-650 Degrees

Light Gas Oil

Further Processed to Gasoline,

Diesel and Fuel Oil

650-800 Degrees

Heavy Gas Oil

Further Processed to Gasoline,

Diesel and Fuel Oil

800+ Degrees

Residual Fuel
Oil/Asphalt

Further Processed to Gasoline,

Diesel, Fuel Oil & Lube Stocks

Distillation 90-220 Degrees

Tower
(Crude
Unit)

Furnace

Vacuum
Unit

Hydroskimming Refineries Distillation Process

Light
Sweet
Crude

Distillation Tower

Crude
Unit

Propane/Butane

Low Octane Gasoline

Reformer

High Octane Gasoline

30%

Hydrogen

Kerosene/Jet Fuel

Distillate
Desulfurizer

Kerosene/Jet Fuel

34%

Diesel/Heating Oil

Diesel/Heating Oil

Vacuum
Unit

4%

Propane/
Butane
Gasoline
RFG
Conventional
CARB
Premium
Distillate
Jet Fuel
Diesel
Heating Oil

Gas Oil
Heavy Fuel Oil

32%

Heavy
Fuel Oil
& Other

100% Total Yield

Simple low upgrading capability refineries tend to run sweet crude

Medium Conversion Refineries - Catalytic Cracking

Crude
Unit

Propane/Butane

Reformer

Distillation Tower

Low Octane Gasoline

Light
Sour
Crude

8%

High Octane Gasoline

45%

Hydrogen

Kerosene/Jet Fuel

Distillate
Desulfurizer

Diesel/Heating Oil

Kerosene/Jet Fuel

27%

Diesel/Heating Oil

Propane/
Butane
Gasoline
RFG
Conventional
CARB
Premium
Distillate
Jet Fuel
Diesel
Heating Oil

Light Cycle Oil

(LCO)

Vacuum
Unit

Gas Oil

Fluid Catalytic
Cracker (FCC)

Alkylation
Unit

Alkylate

FCC Gasoline

24%
Heavy Fuel Oil

Heavy
Fuel Oil
& Other

104% Total Yield

Moderate upgrading capability refineries tend to run more sour crudes
while achieving increased higher value product yields and volume gain. 10

High Conversion Refineries Coking/Resid Destruction

Crude
Unit

Hydrogen Plant

Gas

Medium/
Heavy
Sour
Crude

Distillation Tower

Propane/Butane

Reformer

Low Octane Gasoline

Propane/
Butane

58%

Gasoline
RFG
Conventional
CARB
Premium

Hydrogen

Kerosene

Distillate
Desulfurizer

Kerosene/Jet Fuel

28%

Distillate
Jet Fuel
Diesel
Heating Oil

15%

Heavy
Fuel Oil
& Other

Diesel/Heating Oil

Diesel

Light Gas Oil

Hydrocracker
LCO

Vacuum
Unit

High Octane Gasoline

7%

Medium Gas Oil

Fluid Catalytic
Cracker (FCC)

Heavy Fuel Oil

Delayed
Coker

Hydrocrackate Gasoline

Alkylation
Unit

Alky Gasoline

FCC Gasoline

Coke

108% Total Yield

Complex refineries can run heavier and more sour crudes while
11
achieving the highest light product yields and volume gain.

Conversion Economics
$/BBL
13.0

USGC Medium Sour Crude Refining Margins

11.0
9.0
7.0
5.0
3.0
1.0
-1.0
-3.0
Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Conversion capacity needed to capitalize on sour crude discounts

z Hydroskim - Breakeven or moderate margins; High resid yield

z
z

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

12

Comparison of Sour Conversion Capacity

Conversion Capacity1

MBPD

1,600

Cat Cracking
Hydrocracking
Coking

1,400
1,200
1,000
800
600
400
200
0

XOM

VLO

Note: VLO includes Aruba and Quebec

Source: Oil & Gas Journal, Company Websites

COP

RDS

BP

CVX

PCO

MRO

SUN

TSO

1: Conversion Capacity = Sum of Coking, Hydrocracking and Cat Cracking Capacity

Valero is an industry leader in upgrading capacity

Valeros 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
13

Regulatory Changes Impacting Supply

Maximum Gasoline
Sulfur Content (PPM)

Maximum Diesel
Sulfur Content (PPM)

300
500 500

500

350

150

350

150

120
90
30

03 04 05 06

U.S.

30

Beyond

50

50
10

03 04 05 06

Beyond

Europe

15

03 04 05 06

U.S.

15

Beyond

50

50

10

03 04 05 06

Beyond

Europe

Major changes in sulfur specs

z

2005 in Europe and 2006 in U.S.

Capital diverted to regulatory compliance rather than capacity

increases
U.S. Refining Industry expected to invest around $20 billion
for Tier II

14

Desulfurization Basics

Goal

Removal sulfur from light products (gasoline or diesel) to meet air quality
requirements for clean burning fuels

Process
Desulfurization Unit

High Sulfur
Light Products
(HC-S)

H2

HC-S

HC-S

H2

HC-S

HC

H2

Elemental
Sulfur
Sulfur Plant

Catalyst
HC-S

HC-S
H2

HC-S

Desulfurized Light Products

H2S

S
S

Agricultural
Pharmaceutical

Hydrogen Unit
H2
H2

H2 H2
H2

H2

15

Gasoline Desulfurization
Hydrogen Plant

Crude
Unit

Sour
Crude

Distillation Tower

Propane/Butane

Reformer

Low Octane Gasoline

Kerosene

Distillate
Desulfurizer

High Octane Gasoline

Kerosene/Jet Fuel

Significant capital
investment
Lower FCC
gasoline octane
(yield loss)
Other Options

Diesel

Diesel/Heating Oil

Light Gas Oil

Hydrocracker

LCO
Vacuum
Unit

Medium Gas Oil

Heavy Fuel Oil

Fluid
Catalytic
Cracker
(FCC)
Delayed
Coker

Hydrocrackate Gasoline
Alky
Unit

Desulfurize FCC
feed
Shift FCC
gasoline into
distillate

Alkylate Gasoline

FCC
Gasoline
Desulfurizer

FCC Gasoline

Coke

Install
InstallNew
New
FCC
FCC
Gasoline
Gasoline
Desulfurizer
Desulfurizer
16

Diesel Desulfurization
Hydrogen Plant

Crude
Unit

Sour
Crude

Distillation Tower

Propane/Butane

Low Octane Gasoline

Kerosene

Diesel

Light Gas Oil

Kerosene
Desulfurizer

Medium Gas Oil

Heavy Fuel Oil

High Octane Gasoline

Kerosene/Jet Fuel

Modified or New
Diesel Desulfurizer

Fluid
Catalytic
Cracker
(FCC)
Delayed
Coker

Diesel/Heating Oil

Hydrocracker

LCO
Vacuum
Unit

Reformer

Significant capital
investment
Significant project
management time
and focus
Diesel yield loss

Hydrocrackate Gasoline
Alky
Unit

Alkylate Gasoline

FCC
Gasoline
Desulfurizer

FCC Gasoline

Coke

Install
InstallNew
New
Diesel
Diesel
Desulfurizer
Desulfurizer
oror
Modify
ModifyExisting
Existing
Desulfurizer
Desulfurizer
17

Summary
Industry Environment

Increasing global demand for clean products

Regulatory changes limiting supply
z
z

Reduced yields
Capital spending focused on upgrading existing products versus
capacity increase

Increasing availability of lower quality crudes

Refiners Challenges

Process lowest cost crudes into highest value products

Ensure compliance with changing regulatory requirements
Improve efficiency to offset rising per barrel operating costs
18

Appendix

19

Major Refining Processes

Category
Topping
(Separation of Crude)

Definition
Separating crude oil into
difference hydrocarbon groups.
The most common means is
through distillation.

Process
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 the
desalted 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.

20

Major Refining Processes

Category
Thermal and
Catalytic Cracking

Definition
Cracking or breaking down
large, heavy hydrocarbon
molecules into smaller
hydrocarbon molecules thru
application of heat or thru the
use of catalysts.

Process
Coking 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 and
surrounding 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 to
proceed at lower temperatures than in catalytic
cracking, although pressures are much higher.
21

Major Refining Processes

Category
Combination/
Rearrangement of
Hydrocarbons

Definition
Linking two or more
hydrocarbon molecules together
to form a large molecule (e.g.
converting gases to liquids).

Process
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 selfignition.
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.
22

Major Refining Processes

Category
Treating

Definition

Process

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 and
diolefins to parafins, which reduces gum formation
in fuels. Hydroprocessing also cracks heavier
products to lighter, more saleable products.

23