Pioneering Value Based Consulting Energy – Oil & Gas Downstream operations Point of View.

Pioneering Value Based Consulting

Energy – Oil & GasDownstream operations

Point of View

2Downstream operations© Sympliciti 2007

The objectives are to provide:

Basic overview Downstream operations and terminology

Discuss the key Downstream value drivers and challenges

OBJECTIVES


AGENDA

The agenda consists of a walk-through of the major functional areas and business units within typical Downstream organizations:

CrudeMarketing

RefiningProduct

Supply &Logistics

Terminals &Transpor-

tationMarketing

Key Business Unit:• Retail Marketing• Commercial Fuels• Aviation• Asphalt• Lubricants

Although often referred to as “Refining & Marketing,” Downstream really consists of a number functions and businesses


CRUDE MARKETING

Central And South America

North America

Asia Pacific

Europe

Africa

Middle East

FSU

Crude Marketing links Upstream (Exploration & Production) with Downstream

Crude Oil Marketing is involved in the buying, selling and transportation of crude oil to refineries where it is converted to a usable product


CRUDE MARKETINGWhile crude tankers are used for waterborne transportation, a network of pipelines exist to provide land transportation to major inland refining centers

M E X I C O

C A N A D A

Atlantic

O c ean

P acific

O cean

Bakersfield

U N I T E D S T A T E S

Carbon Dioxide

(Chevron Pipe Line CompanyÕsinterest in each pipeline is 100%unless otherwise noted.)

Natural Gas Products (including LPG)Crude

Spokane

SaltLakeCity

SanFrancisco

Albuquerque

PascagoulaEl Paso

Los Angeles

Empire

DixiePipeline(20.64%)

MesquitePipeline

Raven RidgePipe Line(56.3%)

Salt LakeCrude System

Standard Pacific Gas Line (14.29%)

KLMRPipeline

Salt LakeProducts

System

West TexasGulf Pipeline

(28.28%)El Paso

ProductsPipeline

ChandeleurPipeline

MAGS

AmberjackPipeline(25%)

Cypress Pipeline Co. (50%)

Explorer Pipeline(16.69%)

Mid-ValleyPipeline

(9%)

West TexasLPG Pipeline

(40.8%)

Estero

Gulf CoastCrude Pipelines

(Various %)

NGL(Various %)

JuarezPipeline

Venice-FaustinaPipeline

Major oil & gas companies own crude tankers and pipelines to transport crude oil and other products


REFINING

Crude oil mixture is separated into several fractions or “cuts” during initial distillation process

FRACTION USE

Butanes and other light ends

Gasoline & naphtha

Kerosene and mid-distillates

Gas oil

Residual

Fuel and feedstocks for other refinery processes

Motor fuel

Motor fuel, heating oil, jet fuel

Feed to other refinery processes

Bunker fuel, asphalt, lubricants

TYPICAL FRACTIONSBoiling Temperature Range• < 90° F

• 90°-220° F• 220°-315° F• 315°-450° F• 450°-800° F• > 800° F

• Butanes & other gases

• Gasoline• Naphtha• Kerosene• Gas oil• Residual

The quality of crude oil drives refinery yields. However, distillation only generates about 20% - 25% yield of motor gasoline by volume.


REFININGTo improve gasoline yields, additional processing units are utilized in modern refining

Complex Refinery

Gas Plant

Hydrotreating

Hydrotreating

Reformer

Gasoline

Spl

itte

r

Jet fuel

Distillate fuel

Residual fuel

Cru

de

Un

it (D

istil

ler)

Isomerization

Flasher

ThermalCracker

Residuals

Gas Oil

Butanes & Other Light Ends

AlkylationCat

Cracker

Gasoline& Naptha

Asphalt

Processing Unit Description

Crude unit

Gas plant

Isomerization

Hydrotreater

Reformer

Cracker (cat cracker, thermal cracker, hydro-cracker)

Alkylation plant (Alky plant)

Distills crude into its naturally occurring fractions

Use pressure and cooling to separate gases (butane, propane, ethane, methane)

Molecule re-arranging to increase octane levels

Removes sulfur & other impurities from heavy gas oils

Transforms naptha into high octane blending components

“Cracks” heavier products into lighter products

Converts cat cracked gases to high octane blend stocks

Most refineries are “complex” and represent a significant multi-billion dollar investment for an oil & gas company


REFINING

Crude Flexibility – ability to acquire advantageous types of crude oils and/or effectively refine alternative types of crude oils

Production Scheduling – determine optimal product slate to produce – based on crude type, product market values and the refinery configuration. LP models are typically utilized for this task.

Product Specifications – adherence to stricter environmental requirements and “boutique” product specifications across the US

Maintenance Management – management and execution of refinery “turnarounds” and deployment of preventative and predictive maintenance practices to increase return on assets

Capital Budgeting – sound decision making in regards to major refinery expansions and de-bottlenecking projects

While flawless execution of operations is critical to success in refining, several other value drivers must be managed as well. These include:

Successful refiners manage key value drives along with day-to-day operations


REFINING

Projections suggests that demand for refined product will outstrip refining capacity

Projected US Refining Capacity(Million Barrels per Day)

Projected US Refined Product Consumption(Million Barrels per Day)

1980 1990 2000 2010 20200

5

10

15

20

History Projections

History ProjectionsHigh GrowthReferenceLow Growth

1980 1990 2000 2010 202019700

5

10

15

20

25 Total

MotorGasoline

OtherDistillateJet FuelResidual

Source: Annual Energy Outlook 2000 – Energy Information Administration

However, unannounced refinery capacity expansions and/or increased conservation efforts will likely close the gap


PRODUCT SUPPLY & LOGISTICS

Product Supply & Logistics plays a critical “flywheel” role in balancing refinery production with marketing demand while minimizing cost and risk

Product Supply and Logistics is a critical interface between the Refining and Marketing businesses

In the US, ChevonTexaco must supply more than 17 states from its 7 refineries

Product Supply & Logisticsperforms several key activities: Trading:

- Spot market buys/sells- Term agreements- Forward purchases

Supply Arrangements- Crude processing agreements- Exchanges

Risk Management: - Futures- Options of futures- Other derivatives

Transportation Scheduling:- Pipeline- Barges- Tankers

Source: U. S. – Lundberg Share of Market Report –Taxable Mogas Sales

M E X I C O

Pacific

Ocean

Atlantic

Ocean

OR19%

2

NV16%

3

ID19%

1

NM14%

1

TX10%

4

AZ13%

3

LA13%

3

MS12%

4

GA10%

3

FL9%6

HI27%

1

WA19%

2AK

13%3

KY12%

3

CA18%

2

AL12%

3

UT21%

1

Market Share 9% or Greater Rank

C A N A D A

BC23%

1

U N I T E D S T A T E S

Burnaby

Richmond

El Segundo

El Paso

Salt Lake

Pascagoula

Refineries


TERMINALS & TRANSPORTATIONTerminals and Transportation provides storage of refined products and delivery services to customers

Refined products are sold through various channels. Margins increases as sales gets closer to the consumer level, but so do investments.

Gases

Gasoline

Distillate

Residual

Refinery Gate

Service Stations

Distribution Via Product Tankers or Pipelines

Wholesale Margin

Rack Margin

Branded or Unbranded

Dealer Buying Price Margin

Street Margin

Contract DealersLessee Dealers

Load RackTerminal

Retail Jobbers,Commercial

CompanyOperatedSites

Oil Companies


TERMINALS AND TRANSPORTATON

The key challenges faced by the terminals and transportation function includes:

Cost Reduction – continue to find ways to reduce costs including the following

Common Carrier or Proprietary – balance the use of proprietary truck fleet versus common carriers for fuel deliveries to reduce costs

Delivery Scheduling – achieve operational effectiveness through optimized routing, shift from day to night deliveries, etc.

Minimize Error Rates – avoid delivery errors such as runouts, retains and diversions, particularly with the use of Auto-Replenishment

Fleet Maintenance – standardization of fleet equipment and deployment of maintenance programs to increase asset utilization

Cost reductions is a focus of the Terminals and Transportation function


MARKETING

Retail Marketing– 4 retail channels – Company Operated, Contract Dealers, Lessee Dealers and Retail Jobbers– Includes convenience stores and other formats (i.e. QSR, Car Washes, Auto Repair, other)– Commercial customers

Lubricants– Production consists of blending of Base Oils and Additives– Offered in bulk and packages (barrels, cases, gallons, quarts, tubes, etc.)– Warehouses exist to stock goods– Highly brand driven; higher margin, lower volume relative to fuels– Sold directly to end user customers and to marketers

Aviation– Commercial and General Aviation sectors– Sell to dealers, to airport or directly to the airline– Razor thin margins, high volumes

Asphalt– For road construction– Sells to contractors

Retail Marketing is the largest volume and profit contributor in Downstream

Below are the key characteristics of the major Marketing Business Units


RETAIL MARKETING TRENDS

Brand – promote the brand, focusing largely on product quality

Segmentation – majors tend to target consumer who value convenience, and are willing to pay more for higher perceived quality

Fuel Strategy – promote premium octane gasoline, where margins are larger

Increase Revenues per Site – build c-store and other ancillary offering to supplement gasoline sales and profits

Convenience Technologies – pay at the pump, cash acceptors, Speedpass

Over the past 5+ years, oil & gas companies have developed marketing programs to differentiate their offering

While fairly cooperative in other parts of Downstream, oil & gas companies are fiercely competitive at the Retail Marketing level



Several forces are driving change in the Retail Marketing sector

Market Forces• New competition from

Hypermarkets with fuel

• Shifting consumer preferences

• Increased competition from independents

• Emergence of electric vehicles and fuel cells

Examples• Costco, Wal-Mart, Safeway, Kroger,

Albertson etc. have added fuel stations to stores

• Partnerships with oil & gas companies (e.g. Murphy Oil & Wal-Mart)

• 3 most important factors driving consumers’ gasoline purchases:*- Convenient location: 72%- Low prices: 72%- High quality: 30%

• Roll-out of “Spirit” brand for small independents by PMAA in Feb 2002, with signage, credit card processing and fuel (optional)

• Hybrid gas and electric vehicles gaining acceptance

Implications• Severe pricing and market

share pressure

• Erosion of brand loyalty and gasoline quality as a purchase driver

• Increased pricing pressure and need to differentiate

• Future consideration; no immediate action required

* NACS 2005 Future Study


The number of hypermarkets with fueling stations continue to grow and take market share away from oil & gas companies and other fuel marketers

Approximately 1,226 Hypermarket Fuel Sites exist (out of a total potential population of 33,735) . . .

Forecasted Gasoline Volume(Billions of Gallons per Year)

20002005

Hypermarkets 4.4 22.8All Other 128.5

118.4Total Market 132.8

141.2

Hypermarket Share 3% 16%

Source: NACS

• In the Houston market, hypermarkets have gained 11.3% market share from the majors, while only accounting for 3.2% of locations

• Average rack-to-retail spreads are about 4.3 cents for hypermarkets compared to 12-13 cents for average majors

Source: OPIS

Hypermarkets are forecast to take market share from traditional players



Oil & Gas companies are redefining convenience by expanding site offerings to address multiple customers segments

Traditional Customer Profile:• Young male, smokes, low

income

Traditional Offerings:• Convenience technologies

- CRINDs- Cash acceptors

• C-stores• Car Wash• QSR

Multiple Customer Segments:• Workers• Mothers• Teens• Retirees• Students

Additional Offerings:• Business services• Internet access• Groceries• Meals (various types)• Pharmacy, Photo• More convenience technologies• Others

Oil & Gas companies are striving to be better retailers, and are pursuing improved loyalty programs, merchandising capabilities, etc.

IMPLICATIONS


SUMMARY

The Oil & Gas Industry includes key elements of several sophisticated modern industries

1. It is a retail industry - Retail level programs are finally differentiating the commodity

2. It is a real estate industry - oil & gas companies routinely buy/sell service stations properties

3. It is a financial industry - Financial derivatives are creating new risk management opportunities

4. It is a transportation industry - Pipelines, barges, rail, tankers, trucks are all used to move raw materials & products

5. It is a manufacturing industry - Large refineries are multi-billion dollar conversion plants


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Pioneering Value Based Consulting Energy – Oil & Gas Downstream operations Point of View.

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