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Downstream Training

Downstream Training. Downstream Overview - Introduction. 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

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

  4. 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.

  5. Crude Acquisition and Transportation Refining Bulk Distribution MARKETING Retailing Final Distribution Terminals & Wholesalers RISK MANAGEMENT Elements of the Downstream Oil Industry Downstream materials focus on crude, products and key participants...

  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 on the environment? 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. Main Drivers of Product Price and Margin Crude cost is the most important factor in the price of a gallon of gas... FY2005 USA Cost Components of Gasoline – Average Cost $2.27 / gallon Refining 19% Crude Costs 53% Distribution & marketing 9% • Of the 18.4 cents per gallon federal tax on gasoline: • 9.5 cents Highway Trust Fund • 2.0 cents mass transit account • 6.8 cents deficit reduction • 0.1 cents Leaking Underground Storage Tank Trust Fund (LUST) State Tax 11% Federal Tax 7% www.EiA.gov Primer on gasoline prices

  9. Role of Imports in Domestic Product Supply USA more & more dependent on foreign sources… MBCD Avg. Imports as % of U.S. demand

  10. 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. Importance of Global Perspective In 2003, the USA received numerous global crudes for USA refineries… 0.5 Million b/cd 45% Canadian crudes balance local USA 3.2 Million b/cd 47% foreign via P/L: Canada, Saudi Arabia, Nigeria, UK, Columbia,Venezuela ALAS. 2.6 Million b/cd 37% Alaska, California. 33% foreign: Saudi Arabia, Ecuador, Iraq, Canada,Argentina, Mexico IV II V I • In 2003, U.S. refineries got over 60% of their crude supply from abroad: • 25% Middle East • 32% Mexico/Canada • 15% Africa • 12% Venezuela 1.6 Million b/cd 98% foreign via ship: Nigeria, Angola, Saudi Arabia, Canada, UK, Gabon III The USA Gulf Coast (PADD III) is the world’s largest refining center 7.3 Million b/cd Major JV’s: 72% foreign via ship: Mexico, Saudi Arabia, Venezuela, Nigeria, Iraq, UK Source: Energy Information Administration – Petroleum Supply Annual 2003 Oil & Gas Journal 01/05/05

  11. Paradigm Shift ? 1861-69 1870-79 1880-89 1890-99 1900-09 1910-19 1920-29 1930-39 1940-49 1950-59 1960-69 1970-79 1980-89 1990-99 2000-05 High Crude Prices Changing Downstream Crude Oil Prices Since 1861 - US dollars per barrel… Fears of shortage in USA Yom Kippur war World events Russian oil exports begin Post-war reconstruction Iranian revolution Growth of Venezuelan production Netback pricing introduced Sumatra production begins Loss of Iranian supplies Iraq invaded Kuwait Asian financial crisis Pennsylvanian oil boom Discovery of Spindletop, Texas East Texas field discovered Invasion of Iraq Suez crisis 110 100 1861-1944 US average. 1945-1983 Arabian Light posted at Ras Tanura 1984-2005 Brent dated. 90 80 70 60 50 40 30 20 10 0 $ money of the day $ 2005 Source: BP

  12. Refining Recovery Forecasted in 2002 USA & EU refining could turn profitable…. Source: Morgan Stanley, 12th December 2002

  13. 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 environmental pressures • Substitution investments underway: • Ethanol • Biodiesel • Gas-to-Liquids (GTL) • Coal-to-Liquids (CTL)

  14. Vulnerability in producing refined products Thanks to National Oceanic & Atmospheric Administration (NOAA)...

  15. Downstream Section Outline We will now address each of the major downstream sectors... Industry Overview – New Downstream Dimensions Refining Transportation & Distribution Supply, Trading & Risk Management Marketing

  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. • Pennwell Publishing, POB 21288, Tulsa, OK. 74121 800/752-0764 or http// www.pennwell.com/

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