Winning in Emerging Markets Petroleum Retailing

1. Winning in Emerging Markets Petroleum Retailing INDIA OIL & GAS RETAILING DISTRIBUTION January 28, 2005

2. MBO-ZZT274(WEMPR)-20031205-(SN)(df) WINNING IN EMERGING MARKETS PETROLEUM RETAILING • Set context for downstream opportunities in Emerging Markets • What makes Emerging Markets challenging • Potential winning retailing models

3. MBO-ZZT274(WEMPR)-20031205-(SN)(df) WINNING IN EMERGING MARKETS PETROLEUM RETAILING • Set context for downstream opportunities in Emerging Markets • What makes Emerging Markets challenging • Potential winning retailing models

4. 1 MBO-ZZT274(WEMPR)-20031205-(SN)(df) EMERGING MARKETS ACCOUNT FOR A SIGNIFICANT PROPORTION OF PETROLEUM SALES • Worldwide petroleum sales • CAGR • Key drivers leading to emerging markets grabbing higher share of petroleum sales • Per cent, million barrels per day Per cent • 100% = • 63 • 77 • Flattening demand for fuel in developing countries • Vehicle penetration has reached saturation levels (>1 in the USA) • Fuel efficient vehicles • Increasing demand for fuel in emerging market • Increasing vehicle ownership/penetration with rising disposable income • Rising industrial fuel demand North America 1 Western Europe 0 -3 Eastern Europe and former CIS 3 Emerging markets (Asia Pacific + Middle East + Africa +other America) 1980 2001 Source: DRI WEFA; interviews; team analysis

5. MBO-ZZT274(WEMPR)-20031205-(SN)(df) WINNING IN EMERGING MARKETS PETROLEUM RETAILING • Set context for downstream opportunities in Emerging Markets • What makes Emerging Markets challenging • Potential winning retailing models

6. MBO-ZZT274(WEMPR)-20031205-(SN)(df) FIVE THINGS THAT MAKE EMERGING MARKETS CHALLENGING • Wafer-thin margins even when compared to the developing world • Significant regulatory uncertainties • Fragmented channel structure • Local consumer characteristics • Nascent development of non-fuel retail in most markets vs. the developed world

7. Not yet reflecting market rentals MBO-ZZT274(WEMPR)-20031205-(SN)(df) WAFER-THIN MARGINS EVEN BY DEVELOPED MARKETS' STANDARD US cents per litre • Gross integrated margin for main grade gasoline – 2002 • Comparison of average site economics (integrated margins) • Developed market • Emerging market • Italy • Regular fuels margin • Spain • Premium fuels • Germany • Fuels gross margin • France • UK • RO serving costs* • US • Labor cost • India • Other site costs** • China • Site EBITDA*** • Thailand • Average throughput • KL/month 530 250 • Indonesia * RO servicing includes primary and secondary distribution, depot/terminals costs ** Includes land lease *** Does not include marketing and other corporate costs Source: Interviews with CST; various gas station owners; OPAL; various local sources

8. Taiwan • Philippines • China • South Korea • India • Russia • Malaysia • Thailand • Pakistan • Vietnam MBO-ZZT274(WEMPR)-20031205-(SN)(df) COMPETITIVE INTENSITY IN DIFFERENT EMERGING MARKETS IS SET TO INCREASE • Increase in competitive intensity expected • Size of market • Top 3 players • Consumption in ‘01 (MBPD) • 4,975 • Petrochina • Sinopec • BP • Yes • 2,595 • Gazprom • Lokoil • TNK-BP • ? • 2,140 • SK Corp • Hyundai Oil • LG-Caltex • No • 2,130 • IOCL • BPCL • HPCL • Yes • 988 • Chinese Petroleum Corp (CPC) • National Petroleum • Taisugar • ? • 785 • PTT • Shell • Esso • No • 472 • Shell • Petronas • Esso • No • 365 • Pakistan State Oil • Shell • Caktex • ? • 343 • Petron • Shell • Caltex • ? • 185 • ? • Petrovietnam Source: EIA; litsearches; PFC reports; websearches

9. MBO-ZZT274(WEMPR)-20031205-(SN)(df) MARGIN PRESSURE IS LIKELY TO CONTINUE GOING FORWARD • CONCEPTUAL • Site/volume at risk • India example • Metro sites: limited room to drop further • High acquisition and new investment/rental costs provide support for retail margin • Wholesale margin likely to be competed away to average costs • New players' unit cost, even with 50% higher average throughput, will be close to current margin 5.4 • Current margin • Cost/margin • US cents per litre • Existing sites • New sites 5.2-5.4 • Fuels volume • Deregulation: entry of new players (e.g., Reliance) • Highway sites: further margin decline possible • Existing sites • Existing highway sites likely to face increased margin pressure with new high volume – low cost entrants (land cost difference less extreme) • Assuming new players successfully double average throughput, up to 10% unit site cost advantage could be achieved • Current margin • Room for price war 5.2 • Fuels volume • New margin • Demand 43.6 BLPA • New high volume sites • Existing sites • Fuels volume • Demand Source: Team analysis

10. Pricing flexibility • Universal Service Obligations • Pipeline tariffs and access • Product specifications • Tariffs and taxes MBO-ZZT274(WEMPR)-20031205-(SN)(df) CRITICAL REGULATORY UNCERTAINTIES REMAIN: INDIA EXAMPLE • Coastal prices artificially regulated higher than inland • Price caps are imposed by government fiat • Gap between announced specifications and industry preparedness, e.g., petrol slated to move from 87 octane to 91 octane by 1 April 2005 in 11 cities, but refineries not fully ready • Changes in import tariffs will impact relative competitiveness of players without local product • Change from sales tax to VAT (or not) will alter supply chain economics • Stated 11% of sites in backward areas may be applied disproportionately to new entrants to level playing field • Replacement cost tariffs would increase entry barriers • Likely purview of proposed regulator on oil pipelines unclear

11. MBO-ZZT274(WEMPR)-20031205-(SN)(df) HIGH DEPENDENCE ON FRAGMENTED, FRANCHISEES Large part of the network controlled by fragmented dealers. . . . . . with low capability and commitment • Operating model in typical emerging markets • Quality of dealers • Per cent of total sites • Per cent of total dealers • Low capability, high commitment Others • Low capability, low commitment • High capability, high commitment CODO • High capability, low commitment COCO Source: Interview with CST; team analysis

12. MBO-ZZT274(WEMPR)-20031205-(SN)(df) LOCAL CONSUMER CHARACTERISTICS IN EMERGING MARKETS • Lay’s Corn • Corn products do not fit the palate of Indian consumers who prefer snacks of either besan or rice • Convenience stores • Over 60% of customers are walk-in customers vs. fuel customers • Chicken McGrill • To suit Indian tastes it has a tangy sauce and a “tandoori” flavour • Very high value for money focus • Different non-fuel buying behaviour • Shampoos • Dramatic increase in consumption when excise value reduced from 120% to 70% • Noodles • Three-fold increase in consumption when prices dropped from Rs.7 to 5 per 100 gm • Modified corn flakes to remain crisp for longer in hot-milk

13. MBO-ZZT274(WEMPR)-20031205-(SN)(df) NON-FUEL RETAIL RELATIVELY NASCENT • FOREIGN PLAYERS/JVS • Non-fuel retailing development • Modern trade penetration • Regulatory status • Major players • Retail sector open to JVs since 1992 • All FDI restrictions expected to be removed in 2007 • Wholesale sector to deregulate in 2007 • Hypermarkets (65% of modern format sales): Carrefour, Wal-Mart, local players (Tier 3 cities) • C-stores: Kedi, Lianhua, 7-eleven, Lawson China (major cities) • Unlimited entry to foreign retailers (100% foreign ownership allowed with some conditions) • Distribution channels deregulated • Hypermarkets: Carrefour, Makro, Indogrosir • Supers: Matahari, Ramayana, Tops, Hero (Dairy Farm) • C-stores/mini: Starmart, AM/PM, Circle K, Indomaret Indonesia • FDI restricted (only wholesale and retail franchising allowed) • Zoning laws restrict large formats • Food World • Subhiksha India USA= 85% Source: Euro monitor for China; AC Nielsen for Indonesia

14. MBO-ZZT274(WEMPR)-20031205-(SN)(df) WINNING IN EMERGING MARKETS PETROLEUM RETAILING • Set context for downstream opportunities in Emerging Markets • What makes Emerging Markets challenging • Potential winning retailing models

15. Class of market • 1 • Geographic focus • 2 • Pace of expansion • 3 • Core value proposition in fuel • 4 • Single vs. multiple site franchisees • 5 • Non-fuel proposition • 7 • No convenience store/non-fuel emphasis • Basic, scaled-down store • Full-blown c-store as per global model • Tailored non-fuel formats for local market • Product supply • 6 MBO-ZZT274(WEMPR)-20031205-(SN)(df) KEY STRATEGIC CHOICES FOR PLAYERS IN EMERGING MARKETS • Area • Strategic choices • Focus only on cities • Simultaneous entry into cities and highways • Create pockets of scale in few regions/states • All-India play (focused on top 20-25 cities and golden quadrilateral highways) • Builds scale in few cities/highway stretches and then roll-out to others • Simultaneously build scale across multiple strategic cities/highway stretches • Premium fuels, (e.g., V-Power & Puradiesel) with regular fuels • Customer Service • Price • Fuel purity • One site, one dealer • 10-12 sites per dealer • Large master franchisees (McDonalds, Yum Foods) • Long-term tie-up for regular and high-performance fuel • Tie up with NOCs through service-fee arrangement • Trading for regular fuels; tie-ups for high performance fuels • Creation of mother-depots and rely on coastal freight for primary transport • Active trading from domestic and international sources • Investments in standard depots and terminals in areas of operations

16. Business model 1 • Business model 2 • Business model 3 MBO-ZZT274(WEMPR)-20031205-(SN)(df) THESE CHOICES WILL DRIVE DIFFERENT BUSINESS MODELS • NOT EXHAUSTIVE • Description • Issues • Focus on small number of urban sites in one region for next 2-3 years • Focus on premium fuel offerings and improved customer service • CORO franchising model • Will this strategy make the operations in a country material and sustainable? • Continue to focus on high-throughput sites but raise aspiration to 500+ sites in 2-3 years (covering key highways and cities across India) • Explore master-franchising strategy to accelerate pace and to make strategy capital-light • Can we execute? • Will master-franchising work? • Aspire to build 1,000+ sites in next 3 years across highways and key cities • Invest $300-500 million to build network • CORO franchising model (as master-franchising route likely to be difficult if such high investment required in a 2-3 year time frame) • Is this risky? • Can we execute?

17. MBO-ZZT274(WEMPR)-20031205-(SN)(df) WINNING IN EMERGING MARKETS: SOME PRELIMINARY IDEAS • Focus on cherry-picking high through-put sites • Match ‘local’ cost structures, especially capex • No cookie-cutter approach – deploy formats ranging from ‘bells and whistles’ to ‘stripped down versions’ • Divest unprofitable sites • Water-thin margins • Regulatory uncertainties • Ensure adequate local talent and senior management attention on regulatory management • Fragmented channel structure • Introduce dealer management as a core function – develop integrated package of sticks and carrots • Explore master-franchising • Unique consumer characteristics • Tailor value proposition to local needs/tastes • Nascent non-fuel retail • Look at non-fuel not as an add-on but as a core part of the retail opportunity e.g., build destination proportions