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Deal Flow Project Alignment

Deal Flow Project Alignment. January 14 1999. Change Management Inputs. ETCo Senior Leadership Team. Steering Committee. Resource Requirements. Our business purpose. Purpose. Envision Sessions. Cascading Implementation Workshops. Understanding Individual Value Added. Mission.

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Deal Flow Project Alignment

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  1. Deal Flow Project Alignment January 14 1999

  2. Change Management Inputs ETCo Senior Leadership Team Steering Committee Resource Requirements • Our business purpose Purpose Envision Sessions Cascading Implementation Workshops Understanding Individual Value Added Mission • Where we want to be in • 36 months? Performance Scorecards • Flawless execution in • 3-5 key areas Critical Success Factors New Behaviors Implications For Deal Flow • Setting the direction • for Deal Flow “to-be” Collaboration Across Boundaries Ongoing Leadership Initiatives • Process performance baseline • Benchmark data • Defining World Class Deal Flow Process Improvement Objectives 2

  3. ETCo’s Purpose Equiva Trading exists to use the gigantic deal flow to drive value into the assets of the business units and to use this leverage to create new market opportunities. 3

  4. Mission Key Questions: • Does Equiva Trading have a clear mission that is understood by all? • Where does ETCo want to be in 36 months? Outcome: • Clear direction for deal flow 4

  5. ETCo’s Mission Create world class trading organization - to successfully compete with the best in the industry at any point in time. 5

  6. Critical Success Factors Key Question: • On a going forward basis, what are the businesses’ 3-5 priority areas that the deal flow team must understand in order to achieve the mission? Outcome: • Focus for the deal flow team 6

  7. Critical Successful Factors • Marketplace - We have to create new market opportunities, and quickly analyze and execute against these opportunities • People - ETCo must attract, develop, and retain the best traders and support people in the business • Work Processes - We have to define our work processes to clearly understand what aspects of a deal add value and what aspects add cost • Risk - We have to manage and control exposure across the business units (Equilon, Motiva, Equiva) • Business Management Systems - We have to converge multiple systems into one flexible system to support our World Class mission 7

  8. Definitions • Base Supply Driven - primarily by asset requirements and little regard for margin optimization. • Internal Supply Optimization is driven by an equal focus on asset needs and margin optimization. • External Customer Driven is driven by the maximization of external customer market share and profit - unconstrained by the needs of the internal assets. • Niche Trading is driven purely by profitability, and executed to exploit inefficiencies where the organization has an information or asset advantage. • Pure TPT Trading is driven purely by profitability. These activities are executed in markets not as a function of an asset or information advantage, but rather on a level playing field (e.g. NYMEX, physical hubs). Market making. 8

  9. Business Implications 9

  10. Business Implications 10

  11. Examples of These Activities Base Supply Driven Physical Grade and Quality Trades Physical Time Trades Physical Location Trades Spot Exchanges Buy/Sells Run Month Crude Pricing Contractually (e.g. CIF, P+) Index Pricing for Refined Product Sales (Platts, Opis) Lease Program Yield Upgrades External Customer Driven Term Pricing Alternatives (e.g. Triggers, Fixed Priced, Floors, Caps, Collars) for: Lease/Crude Commercial Products/Sales Producer Financing Structured Financing Internal Supply Optimization Crude Supply and Hedging Alternatives: Fixed Price (FOB); run month pricing; lock in front/back spreads Inventory Management (Hedging) Forward Refinery Margin Hedging Substituting fixed price intermediates and blendstocks for crude runs Storage Plays Optimizing embedded options in contracts and assets Niche Trading Alkylate/Resid/MTBE/ VGO Trade for Profit Risk Book Market-Making for Profit Market-making, arbitrage or net position taking at hubs where have asset or information advantage Cash Month Crude Grade Trading (Basis Trading) Blending for TPT Storage Plays for TPT Trading embedded options in contracts and assets for Profit (e.g. flexibility according by pipeline interconnect) Pure TPT Trading Physical Trading in liquid hubs for Profit (Crude/Products) Exchange Trading in futures/options for Profit (NYMEX, IPE) Financial Trading in OTC instruments for Profit (swaps/options) 11

  12. Defining Risk and Risk-Adjusted Return • Price Risk is the risk of financial loss in earnings, cash flow, or fair values that arises due to uncertain future price levels or price differentials. • Credit Risk is the risk of financial loss in earnings, cash flow, or fair values that arises due to the chance of non-performance (either physical or financial) by a transaction counterparty. • Operational Risk is the risk of financial loss in earnings, cash flow, or fair values that arises due to imperfections in the scope, content, and/or execution of operating procedures within the organization. • Risk-Adjusted Return = ________________Return ____________ Market Risk, Credit Risk, Operational Risk 12

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