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Downstream Training

Downstream Training. Downstream Overview – Introduction MartyStetzer@aol.com. Historical Perspective: The Seven Sisters. “During research on Shell in the early 60’s, I came in contact with the Italian oilman, Enrico Mattei, who popularized the phrase – The Seven Sisters...”.

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Downstream Training

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  1. Downstream Training Downstream Overview – Introduction MartyStetzer@aol.com

  2. Historical Perspective: The Seven Sisters “During research on Shell in the early 60’s, I came in contact with the Italian oilman, Enrico Mattei, who popularized the phrase – The Seven Sisters...” • I try to tell, in political and human terms, one of the oddest stories in contemporary history: of how the world’s biggest and most critical industry came to be dominated by seven giant companies; how the western governments delegated much of their diplomatic functions to them; how their control of oil was gradually countered by the producing countries, until in October 1973 it appeared to be suddenly wrestled from them…” • Anthony Sampson, September 1975

  3. The New Leadership Super major’s diminishing control of oil… Source: Financial Times - FT.com

  4. Course Objectives In this course, participants will: • Concentrate on crude oil and refined fuel products • Discuss business drivers affecting economics • Recognize the importance of a global perspective • Understand substitute fuels & current events • Go into detail in each downstream segment • Crude Transportation • Refining • Product Distribution • Supply Trading and Risk Management • Marketing • Identify key sources of industry information

  5. The Definition For this course… • Downstream includes oil refineries, petrochemical plants, petroleum fuel products distributors, retail outlets and LPG, asphalt and lube oil manufacturing and distribution. • The downstream industry touches every state and city-- wherever consumers are located -- and provides thousands of products such as gasoline, diesel, jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilizers, antifreeze, pesticides, pharmaceuticals, natural gas and propane. • The network of service stations, dealers, and jobber-distributors is one of the biggest franchise systems in the country.

  6. Characteristics of the Downstream Some downstream business drivers are obvious, some are not... • The downstream is a margin business… in some ways, absolute crude price is irrelevant • Complex in manufacturing, chemistry, distribution & retailing • A global perspective important… It impacts supply and price • Fuel products are 65% of USA demand

  7. Which crude, yield, price, demand • Which products to produce? • What is impact of alternative fuels? Which Refinery Process? • Marine vs. pipeline vs. truck • Owned vs. exchange terminals • Scheduling and physical trading • Spot-term price strategies • Value of hedging What Supply - Distribution Options? What About Price/Risk? • Directly to end-users? • Through resellers & jobbers? • Which retail strategy? How to Market? Key Economic Decisions – Downstream Key economic decisions to be addressed in downstream...

  8. Role of Imports in US Product Supply By 2006, USA very dependent on foreign sources… MMBCD Avg. Imports as % of U.S. demand National Petroleum News: July, 2007

  9. WASH. MONT. N.D. VT. ME. ORE. MINN. IDA. N.H. WIS. MASS. S.D. WYO. N.Y. MICH. R.I. CONN. PENN. IOWA N.J. NEB. NEV. OHIO UTAH IND. DEL. ILL. COLO. MD. W. VA. KAN. VIR. CALIF. MO. KY. N.C. TENN. OKLA. ARIZ. S.C. GA. ARK. N.M. FLA. ALA. MISS. TEX. LA. Update Importance of Global Perspective In 2006, the PADD’s received numerous global crudes (top 5 shown)… 0.7 Million BCD 48% Canadian crudes balance local USA 1.6 Million BCD 71% foreign via P/L: Canada, Saudi Arabia, Nigeria, Algeria, Iraq ALAS. 2.6 Million BCD 55% Alaska, California. 45% foreign: Saudi Arabia, Ecuador, Iraq, Canada, Brazil IV II V I • In 2006, U.S. refineries got 2/3 of their crude supply from abroad: • 22% Middle East • 33% Mexico/Canada • 21% Africa • 11% Venezuela 1.6 Million BCD 99% foreign via ship: Nigeria, Canada, Saudi Arabia, Venezuela, Angola III The USA Gulf Coast (PADD III) is the world’s largest refining center 8.9 Million BCD Major JV’s: 67% foreign via ship: Mexico, Venezuela, Saudi Arabia, Nigeria, Iraq EIA – Petroleum Supply Annual Feb 2007

  10. Main Driver of Gasoline Price – July 2009 Crude cost is the most important factor in the price of a gallon of gas... Crude cost $63.81/bbl == Average gas cost $2.53 / gallon Refining 10% Crude Costs 60% Distribution & marketing 14% • Federal Tax: 18.4 CPG • State Taxes vary: • New York – 60.8 CPG • Alaska –26.4 CPG State Tax 8% Federal Tax 8% www.EiA.gov - Most current information

  11. ? Update Recent Crude Price How to plan a business with this volatility?…

  12. Crude Price – More Volatile How to plan a business with this volatility?…

  13. PEAK July 11, 2008- $145.66 Paradigm Shift ? 9/11/2009 $69.29 Update Volatile Crude Prices Changing Downstream Crude Oil Prices Since 1861 $US per barrel… BP Annual Survey 2009

  14. The New Downstream Era How will industry react? • Highest profitability in a generation • USA supply security uncertain • Can investments keep up with demand? • Balancing act with new environmental pressures • Substitution investments underway: • Ethanol • Biofuels • Gas-to-Liquids (GTL) • Coal-to-Liquids (CTL)

  15. Downstream Section Outline We will now address each of the major downstream sectors... Industry Challenge – New Downstream Dimensions Crude Transportation Product Distribution Marketing Supply Trading Refining

  16. To Dig Deeper References to assist in your future work... • Websites: • Oil & Gas Journal – www.ogjonline.com • American Petroleum Institute – www.API.gov • Energy Information Agency – www.eia.doe.gov • References: • NPC - National Petroleum Council, 1625 K Street, NW., Washington DC 20006, 202-393-6100. US Industry Special Studies done at request of Secretary of Energy. www.npc.org • Pennwell Publishing, POB 21288, Tulsa, OK. 74121 800/752-0764 or http// www.pennwell.com

  17. Smart Pigs?!? • A ‘pig’ is an in-line inspection device used to check the integrity of pipelines. • “A smart pig is an electronic sensing device, or combination of devices, that can detect cracks, dents, or corrosion as it runs through the inside of the pipe. They can detect internal and external defects, or anomalies, in a pipeline, as well as identify the exact locations of any damage. Once the pig run is complete, the data is analyzed and repairs are scheduled.” Quote from TransitTimes, First Quarter 2007

  18. USA Crude Logistics and Transit Times Sullom Voe Valdez 9 Days 4.5 Days Whiffenhead 2.9 Days Ferndale Pt. Tupper 5.5 Days 2 Days 6.5 Days 15.3 Days San Francisco Bayway LA LakeCharles 2 Days 5 Days Dos Bocas Maracaibo

  19. ConocoPhillips New Infrastructure Opportunities Keystone Pipeline Project Enabling Integrated Growth • Project being developed with TransCanada Pipeline • $2.1B project with 435 MBPD initial capacity • Project sponsor with right to purchase 50% interest in Keystone pipeline • 2009-2010 estimated completion Hardisty Cushing Wood River Proposed 1,840 mile pipeline Proposed Cushing extension

  20. ? 80% 1Q 2009 J. Carrig, COP, DJNews, 042309 U.S. Refinery Capacity Utilization 100 2006 Forecast (DOE) 95 92% needed to justify new investment 90 85 Percent Utilization 1 History 80 75 70 65 60 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: U.S. Department of Energy 1 Percent utilization defined as: Gross input to refineries / operable capacity

  21. 2005 Refining Trends – Still true U.S. Diesel Sulfur Specs • Little excess crude production capacity • Growth in heavy sour crude • Increasingly stringent global sulfur specs • Growing Atlantic basin trade • Global distillate demand growth outpacing gasoline • Significant Asia demand growth • More Middle East refining U.S. Gasoline Deficit vs. Europe Surplus* Diesel/Gasoil Sulfur % of Demand MBPD Gasoline Surplus in Europe U.S. Gasoline Deficit Middle East Refining Capacity** Global Distillate vs. Gasoline Demand * MMBPD % of Total Product Demand Distillate Gasoline * Source: P&G Summer 2005 ** Source: IEA World Energy Outlook 2005

  22. 3-2-1 Crack Spread A key indicator of refinery margin potential in a particular crude…. Positive Crack Spread Margin 1 barrels of distillate Size represents price 3 barrels of crude Size represents price 2 barrels of gasoline Size represents price

  23. _ + = 3 (MC) Market Crack Example: 3-2-1 3 (MC) = 2 (RUL) + 1 (HSD) – WTI Assumption: The purchase of 3 bbls of WTI will yield 2 bbls of Regular Unleaded Gasoline and 1 bbl of High Sulfur Diesel 3 bbls Benchmarch Crude (ex: WTI) 1 bbl Diesel 2 bbls Gasoline 130 cpg 140 cpg $50/bbl 3 ($6.00) = 2 (1.30x42) + 1 (1.40x42) – 3 ($50.00)

  24. Crude Margin • Crude margin or gross refiners margin is a more sophisticated measure since it takes into account crude types, specific refinery hardware and, in some cases operating costs. • Crude Margin or Gross Refiners Margin • = Total Product Value Delivered Crude Cost

  25. Challenging COP Business Environment • Access to reserves difficult • Intense competition • Less attractive terms • Higher geo-political risk • Continued cost escalation • Material cost • Availability and cost of labor • Historically high commodity prices through 2008, now volatile… • Public concern over energy costs, desire for alternatives

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