Energy – Oil & Gas

1. Energy – Oil & Gas Downstream operations Point of View

2. OBJECTIVES • The objectives are to provide: • Basic overview Downstream operations and terminology • Discuss the key Downstream value drivers and challenges

3. AGENDA The agenda consists of a walk-through of the major functional areas and business units within typical Downstream organizations: Crude Marketing Refining Product Supply & Logistics Terminals & Transpor-tation Marketing • 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

4. Europe FSU North America Middle East Africa Asia Pacific Central And South America CRUDE MARKETING 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

5. C A N A D A Spokane P acific Salt Lake O c ean Products System Raven Ridge Pipe Line (56.3%) S alt Sa n Lak e Salt Lake F r ancisc o Cit y Crude System U N I T E D S T A T E S Standard Pacific KLMR Gas Line (14.29%) Pipeline Explorer Pipeline Bak ersfield (16.69%) Estero Albuquerque Mid-V a lley Pipeline W e st T e xas L os A ngeles Dixie (9%) Gulf Pipeline El Paso Pipeline (28.28%) Products (20.64%) Pipeline Mesquite Pipeline P ascagoula El P aso Empir e MAGS Juarez Chandeleur Pipeline Atlantic W e st T e xas Pipeline LPG Pipeline Cypress Pipeline Co. (50%) NGL (40.8%) V enice-Faustina ( V arious %) Pipeline O c ean (Chevron Pipe Line Company Õ s Gulf Coast Amberjack interest in each pipeline is 100% M E X I C O Crude Pipelines Pipeline unless otherwise noted.) ( V arious %) (25%) C a rbon Dio x ide Crude Natural G a s P r oduc ts (including LPG) CRUDE MARKETING While crude tankers are used for waterborne transportation, a network of pipelines exist to provide land transportation to major inland refining centers Major oil & gas companies own crude tankers and pipelines to transport crude oil and other products

6. REFINING Crude oil mixture is separated into several fractions or “cuts” during initial distillation process FRACTION USE • TYPICAL FRACTIONS • Boiling 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 Fuel and feedstocks for other refinery processes Butanes and other light ends Gasoline & naphtha Motor fuel Kerosene and mid-distillates Motor fuel, heating oil, jet fuel Gas oil Feed to other refinery processes Residual Bunker fuel, asphalt, lubricants The quality of crude oil drives refinery yields. However, distillation only generates about 20% - 25% yield of motor gasoline by volume.

7. REFINING To improve gasoline yields, additional processing units are utilized in modern refining Complex Refinery 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 Butanes & Other Light Ends Gas Plant Gasoline & Naptha Isomerization Gasoline Splitter Reformer Crude Unit (Distiller) Jet fuel Hydrotreating Distillate fuel Hydrotreating Alkylation Gas Oil Cat Cracker Flasher Residuals ThermalCracker Residual fuel Asphalt Most refineries are “complex” and represent a significant multi-billion dollar investment for an oil & gas company

8. REFINING While flawless execution of operations is critical to success in refining, several other value drivers must be managed as well. These include: • 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 Successful refiners manage key value drives along with day-to-day operations

9. 1980 1990 2000 2010 2020 1970 1980 1990 2000 2010 2020 REFINING Projections suggests that demand for refined product will outstrip refining capacity Projected US Refined Product Consumption Projected US Refining Capacity (Million Barrels per Day) (Million Barrels per Day) 20 High Growth History Projections Total 25 Reference Low Growth 20 15 15 10 MotorGasoline 10 5 Other 5 Distillate Jet Fuel History Projections Residual 0 0 Source: Annual Energy Outlook 2000 – Energy Information Administration However, unannounced refinery capacity expansions and/or increased conservation efforts will likely close the gap

10. Burnaby 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 & Logistics • performs 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 In the US, ChevonTexaco must supply more than 17 states from its 7 refineries C A N A D A WA AK 19% 13% 2 3 OR 19% ID 2 19% 1 CA U N I T E D S T A T E S 18% NV BC 2 16% Salt Lake 23% 3 1 Richmond UT 21% KY 1 12% El Segundo 3 HI AZ 27% NM 13% 1 14% 3 1 AL GA MS 12% 10% 12% 3 Atlantic 3 LA 4 Pacific TX 13% 10% 3 El Paso 4 FL Pascagoula Ocean 9% 6 Ocean M E X I C O Market Share 9% or Greater Source: U. S. – Lundberg Share of Market Report –Taxable Mogas Sales Rank Refineries Product Supply and Logistics is a critical interface between the Refining and Marketing businesses

11. TERMINALS & TRANSPORTATION Terminals and Transportation provides storage of refined products and delivery services to customers Distribution Via Product Tankers or Pipelines Terminal Load Rack Gases Gasoline Distillate Residual Service Stations Wholesale Margin Oil Companies Refinery Gate Rack Margin Retail Jobbers,Commercial Branded or Unbranded Dealer Buying Price Margin Contract DealersLessee Dealers Street Margin CompanyOperatedSites Refined products are sold through various channels. Margins increases as sales gets closer to the consumer level, but so do investments.

12. 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

13. MARKETING Below are the key characteristics of the major Marketing Business Units • 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

14. RETAIL MARKETING TRENDS Over the past 5+ years, oil & gas companies have developed marketing programs to differentiate their offering • 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 While fairly cooperative in other parts of Downstream, oil & gas companies are fiercely competitive at the Retail Marketing level

15. RETAIL MARKETING TRENDS 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

16. The number of hypermarkets with fueling stations continue to grow and take market share away from oil & gas companies and other fuel marketers RETAIL MARKETING TRENDS Approximately 1,226 Hypermarket Fuel Sites exist (out of a total potential population of 33,735) . . . Hypermarkets are forecast to take market share from traditional players • Forecasted Gasoline Volume • (Billions of Gallons per Year) • 20002005 • Hypermarkets 4.4 22.8 • All Other 128.5118.4 • Total 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

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

18. 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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