LEAP POINT OF VIEW: MASTER AGREEMENT MANAGEMENT AND NEGOTIATION BEST PRACTICES, LESSONS LEARNED, AND CHALLENGES IN NEGOTIATING AND MANAGING MASTER AGREEMENTS LEAP GENERAL MEETING – HOUSTON, TEXAS SEPTEMBER, 2012

WHAT WE HOPE TO COVER TODAY “WHAT’S OUR ANGLE?” - BACKGROUND AND PURPOSE PANEL INTRODUCTION MARKET OVERVIEW: MASTER AGREEMENT ADMINISTRATION PRACTICES BEST PRACTICES AS SEEN FROM THE “OUTSIDE” OF SUCCESSFUL COMPANIES WHAT MORE CAN LEAP DO? 2

PANEL INTRODUCTION Panel Facilitator: Kevin Jandora, LEAP project manager, former head of Global Physical Oil Operations for Morgan Stanley Richard England – Contracts Team Lead, for Shell (STUSCO Products) Karen Mikkelborg – Senior North American Contract Negotiator and Special Projects for Nexen Vivian Ramos – Team Lead, Crude Contracts and Master Agreements for Chevron Marianne Ryan – Master Agreement Specialist for BP 3

WHAT’S OUR ANGLE? LEAP has supported the use of electronic confirmation by creating standardized documents… …but we often collectively and individually have faced barriers to increased adoption of these documents for our markets 4

WHAT’S OUR ANGLE? (continued) Previous LEAP meetings and advocacy efforts have focused on the benefits of e-confirmation and the use of bilaterally agreed master terms based on industry-accepted templates. –Simplify or eliminate individual transaction confirmations, allowing staff to focus on disputes and mismatches of commercial terms (as well as negotiate new agreements). –Reduce or eliminate legal basis risk among transactions. –May allow for netting of default risk across transactions. –In some cases, allow for future changes to be agreed by bilaterally-signed protocol letters 5

OK…SO WHAT’S OUR ANGLE? Barriers to adoption of industry-standard master agreements and GTCs for the US physical oil market are related to its “maturity” –Oil trading matured earlier in the US/Europe, and historically “Sellers’ terms govern”, with few reasons for Sellers to deviate from that practice –Companies have largely “figured this out” for derivatives, natural gas & power trading as the documentation “grew up” along with the market; Commonplace for parties in those markets to refuse to trade without a master –Some say “It’s always been done that way for oil…” Bilateral masters are relatively “new” for physical oil but best practices have evolved; LEAP members are willing to share those emerging practices 6

MARKET OVERVIEW: MASTER AGREEMENT ADMIN PRACTICES VARY BY MARKET SEGMENT 7

ELECTRONIC MATCHING OF PHYSICAL OIL TRADES IS HAPPENING TODAY 2009: ICE’s eConfirm and LEAP members worked to create initial service to support Colonial pipeline : eConfirm scope expanded with LEAP members’ help to include NGLs, crude, and certain “date-based” pipelines –Effort has included non-LEAP members from Exxon, Marathon, ConocoPhillips, and Valero, among others –Current scope includes Colonial, Plantation, Explorer, TEPPCO, Magellan, KinderMorgan, West Shore, Wolverine –A subset of this group is committed to working together to define requirements for matching of RINs trades As of September, 2012: –13 Counterparties using eConfirm for NGLs (6 Live, 7 Click & Confirm “C&C”) –16 Counterparties using eConfirm for Refined Products (8 Live, 8 C&C) –21 Counterparts using eConfirm for Crude Oil (11 Live, 10 C&C) 8

OBERVATION FROM THE ‘OUTSIDE’: BEST PRACTICES HAVE EMERGED Companies who achieve scale with bilateral master agreements and leveraging electronic confirmation standards in the US Oil Market largely share some practices in: –Business Process –Organizational Setup –Technology 9

POSSIBLE APPROACH TO MASTER AGREEMENT MANAGEMENT FOR OIL TRADING Review Standard Templates Cross Functional Discussions Develop Cover Sheets Select Elections Establish Priorities Deal Frequency / Risk Negotiate Send / Exchange Cover Sheets Change Master Agreement Position Change Master Agreement Priorities

POSSIBLE APPROACH TO MASTER AGREEMENT MANAGEMENT FOR OIL TRADING 11 Gather industry templates in the form of counterparty GTCs, templates from industry groups like LEAP; If possible participate in their formation via industry Committees Form ‘virtual’ team made up of: –Contract Admin –Trading –Legal –Tax –Operations/Scheduling –Credit –Settlements Discuss 1-2 templates for each market as a basis Review Standard Templates Cross Functional Discussions

POSSIBLE APPROACH TO MASTER AGREEMENT MANAGEMENT FOR OIL TRADING 12 Flag internal points for preferred cover sheet elections and amendments, where necessary Segment discussions between negotiable and “deal-killer” items, depending on counterparty type and other risk factors Create policies that “flag” individual master agreements when negotiators exceed agreed certain rules/boundaries Develop Cover Sheets Select Elections

POSSIBLE APPROACH TO MASTER AGREEMENT MANAGEMENT FOR OIL TRADING 13 Establish a permanent negotiating team, whether it is “virtual” or actual. (See organizational considerations below). Establish goals and implement a transparent method to track and report progress to goals for “Top Priority Counterparties” lists. Segment market focus by business volume and “pain points” (related to product, region, delivery mode, customer type, etc). Develop “Top Priority Counterparties” list on each market with input related to credit concerns, operational challenges, trade volumes, market focus, etc. Establish Priorities Deal Frequency / Risk

POSSIBLE APPROACH TO MASTER AGREEMENT MANAGEMENT FOR OIL TRADING 14 Establish a permanent negotiating team, whether it is “virtual” or actual. (See organizational considerations below). Reach out to Top Priority Counterparties, keeping in mind that negotiations will likely have a “hurry up and wait” element. Report potential “flagged” exceptions to policy on a real-time basis. Open parallel negotiations with as many counterparts as possible given team size; Team should utilize previously established amendments and negotiating guidelines. Execute a final review of ‘blacklined’ changes prior to execution, and then ensure confirmation practices are changed, including “turning on” eConfirm. Negotiate Send / Exchange Cover Sheets

POSSIBLE APPROACH TO MASTER AGREEMENT MANAGEMENT FOR OIL TRADING 15 Establish an ongoing dialogue with the original cross-functional team via bi- monthly, monthly, or quarterly meetings and transparent status reporting. Ensure that any trends in negotiating points, and lessons learned from Operational or marketplace events are fed back for discussion. Where necessary, as market practice and regulatory or statutory changes occur, update templates accordingly and consider renegotiating existing masters. Reprioritize Master Agreement target list as the business focus and market changes Change Master Agreement Position Change Master Agreement Priorities

ORGANIZATIONAL BEST PRACTICES Separate but closely-collaborative “Negotiation Team” and “Transactional Confirmation Team” Negotiation Team: –Lends itself to regional, not global expertise –Mix of junior operations skills and senior legal and paralegal oversight –Both a feeder from and to other departments like Scheduling, Legal, Settlements, Projects, etc –Lends itself to part-time and contractor resources, with emerging trend of law firms providing secondment service How often are these resources “shared” across derivative and physical functions? Across product groups like Power, Natural Gas, Coal? 16

TECHNOLOGY BEST PRACTICES Systems for storing executed masters along with certain key terms for quick reference and reporting. –Consider scenarios where documents would need to be pulled at short notice (e.g. Credit Crisis in 2008, credit downgrade of your own company, Hurricane FM Terms). Systems for tracking the “lifecycle” of negotiations from initial contact to executed agreement. This could be the same system for storing executed master agreements and their terms. Tie-in references of signed master agreements with trading and confirmations systems. 17

WHAT CAN LEAP DO OTHER THAN CREATING/MAINTAINING STANDARDS? Has performed a “Rolodex” function for parties interested in contacting LEAP and non-LEAP members for years Has performed an advocacy and education function through industry functions such as the LEAP GMM, Marcus Evans conferences and ISDA conferences. Stayed in touch with other industry organizations (e.g. ISDA, NAESB, Energy Institute) on their docs. Has reached out to technology vendors to educate on the latest available services in the market. Has assisted with requirements gathering related to expansion of existing confirmation services. 18