Remarks for Alejandro Granado

CITGO Petroleum Corporation Chairman, President and CEO Alejandro Granado presented this speech titled “New Era in Refining” at the Global Refining Strategies Summit on Sept. 10-11 in the Woodlands, Texas.

I am honored to participate in this year’s Global Refining Strategies summit.

Allow me to begin by listing the topics that I will be discussing today:

I will start by introducing CITGO Petroleum Corporation and our parent company, Petroleos de Venezuela (PDVSA,) to illustrate our strong position to meet today’s energy needs.

I will move on to discuss the global landscape of the refining industry, addressing such issues as refinery utilization, investment and the availability of crude oil reserves.

I will then focus on the Western Hemisphere and the challenges and opportunities facing the refining industry in this part of the world.

Then I will concentrate on the heavy crude oil reserves in Venezuela’s Orinoco Oil Belt and the potential of this region that can redraw the world’s energy map.

To conclude, I will discuss how CITGO fits in PDVSA’s strategy to develop the Orinoco Oil Belt reserves and meet the world’s ever expanding energy needs.

Petroleos de Venezuela today is a vertically-integrated, global company which sits on a base of over 300 billion barrels of conventional and Orinoco heavy crude oil reserves.

Through ships and pipelines, those reserves are connected to the downstream portion of the system here in the United States, where CITGO plays a key role.

CITGO’s refineries, terminals and marketing network of more than 8,200 service stations enable the products from Venezuelan reserves to reach the final U.S. consumer.

Now, when we take a look at the global landscape for refining, one key fact jumps out: after allowing for maintenance requirements, the existing refining capacity has reached it's effective limit, be it in Europe, Asia or the United States, and we have been in this situation since the mid- 1980s.

So, why is refining capacity so tight?

Well, in the United States, during the last 20 years our industry has spent a cumulative amount of capital - above the amount required for maintenance - equivalent to the cost of 60 percent of existing capacity.

But – all this investment has provided for an increase of only 11 percent in actual additional U.S. refining capacity. Where has all this money gone? Well, as you may have guessed, the biggest chunk has gone into meeting regulatory requirements.

Not surprisingly, then, since our demand for refined products has grown by a third over this period, the gap between U.S. refining capacity and product needs – which first appeared in 1986 - has grown ever since, resulting in an increasing dependence on imported products.

Recent forecasts show that the need for additional refinery capacity is not limited to the U.S. This graph shows that the need for additional capacity over the next ten years exceeds planned expansions in every region of the world.

As you might expect, the corresponding gaps between additional demand and planned expansions are the largest in Asia, the Middle East and the United States.

As shown here, U.S. refining margins already reflect the need for additional capacity. And, as we have shown, with a growing gap between the demand for additional products and planned expansions worldwide, we expect refinery margins will continue at high levels for some time.

Back to the U.S. Let's talk about what kind of capacity we need here.

This slide shows the availability of heavy crude oil reserves in the Western Hemisphere, in the form of heavy crude oil from the Orinoco Oil Belt and the Canadian Tar Sands.

It shows that, during the next five years, we are going to have an additional two million barrels per day of heavy crude production coming from these areas! That's a lot of new heavy crude production coming into the market and investments in the type of refining capacity required to process these crudes should be well rewarded.

Now, let me give you a little more detail about our production in the Orinoco.

This map shows the Orinoco Oil Belt area, which is gigantic. It covers 21,351 square miles, which is roughly the size of the state of West Virginia.

Today, only 0.3 percent of these vast reserves, or four billion barrels, have been developed. Another 2.9 percent, 39 billion barrels, are part of current proven reserves.

And an additional 17 percent, 236 billion barrels, is in the process of being quantified.

Finally, 79 percent or 1,081 billion barrels remain as estimated reserves.

All of this adds to a total of 1,360 billion barrels of estimated reserves in the Orinoco Oil Belt.

The Orinoco Oil Belt extra-heavy crude oil reserves are found in shallow deposits, with typical depths of 1,000-3,500 feet.

API gravity ranges from 8-15.

These crudes are also known for their high metal and sulfur content, with an average sulfur weight of 3-4 percent.

Here you can see the current certification timeline, leading to 236 billion barrels by the end of 2008.

This project is being carried out by RyderScott, a Houston-based company.

RyderScott is managing 150 engineers from 12 different countries, a group that has become known within PDVSA as our Tower of Babel.

And finally, as you can see, our Orinoco crude does FLOW!

This graph shows the countries holding the top 10 positions in terms of crude oil reserves worldwide.

When we add the Orinoco Oil Belt reserves currently being certified, Venezuela shifts to the number one position with reserves larger than those of Saudi Arabia.

And this would be at a 20 percent recovery factor.

The yellow portion of the bar shows a jump in Venezuelan reserves that would occur with a 60 percent recovery factor, achievable with new technologies on the horizon.

So, as we have discussed, both Canada and Venezuela have a lot of new production coming on- line in the next five years. These tables compare published information on the production costs for Canadian Tar Sands and Orinoco Oil Belt reserves. As you can see, upgraded crude from the Orinoco has a huge cost advantage.

Given this cost advantage, investors have a lot of flexibility in terms of choosing where to put their money.

One alternative is to invest in a crude upgrading refinery near the field to upgrade the crude to 16- 22 degrees API, and then invest in a heavy crude joint venture refinery near the consuming market.

Another option is to invest in a crude upgrading refinery near the field and convert the crude to 26-plus degrees API, which would allow then the use of existing refining capacity near the consuming market.

I'd like to emphasize, at this point, that either option employs existing, conventional technologies. Moreover, we do have a rather large "pilot plant" in operation at our Jose upgrading complex, currently running 600,000 BPD.

This graph breaks down the upgrading cost for Orinoco Oil Belt crude oil to achieve different API gravities. Depending on the level of upfront investment, production can be tailored to customer needs using conventional technologies.

You might note that the total production cost of a light upgraded crude from the Orinoco is not much different from that for many conventional fields of similar gravity. So, if we were to classify crude reserves by production costs, should we classify the reserves in the Orinoco as heavy crude or as light?

CITGO has been and continues to be a vital part of PDVSA's integrated strategy. PDVSA has the largest reserves of low cost, heavy crude in the world. And, CITGO processes the heaviest, lowest cost crudes of any refiner in the United States. The combination provides a secure source of finished products to the U.S. market.

In 2005, CITGO completed a 100,000-barrels-per-day expansion at its Lake Charles refinery – the largest refinery expansion in recent years.

CITGO continues to study additional expansions.

Crude oil transportation times to the U.S. market by tanker range from 15-45 days from most parts of the world.

17 When Energy is Needed... Crude Transportation Time: 6 days

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South America

Venezuela is right next door!

However, it only takes six days for a tanker to depart from Venezuela and arrive somewhere on the U.S. Gulf Coast.

Thank you very much.

End

CITGO, based in Houston, is a refiner, transporter and marketer of transportation fuels, lubricants, petrochemicals, refined waxes, asphalt and other industrial products. The company is owned by PDV America, Inc., an indirect wholly owned subsidiary of Petróleos de Venezuela, S.A., the national oil company of the Bolivarian Republic of Venezuela.