1. The Hydrocarbon Value Chain: Business Process and Performance James McCoy General Manager, Petroplus Marketing AG

2. The Hydrocarbon Value Chain The Markets The Assets Exploration & Production Logistics Refining Primary Distribution The Brand Secondary Distribution Stations and C-Stores Crude Markets FOB Crude Markets CIF Spot Products Bulk Products In Transit Bulk Products At Terminal Products Dealer Tank Wagon

3. A Pure Demand-Pull Value Chain End ConsumerDistributionManufacturingLogisticsSuppliers Sales? Trades? Buys? No Bulk Sales? Wholesalers? Retailers? No Volume Signal

4. The Hydrocarbon Value Chain Existence of markets allows for arbitration of the normal volume signal Exploration & Production Logistics Refining Primary Distribution The Brand Secondary Distribution Stations and C-Stores Supply Push Market Demand Pull

5. The Hydrocarbon Value Chain Exploration & Production Logistics Refining Primary Distribution The Brand Secondary Distribution Stations and C-Stores Supply Push Demand Pull Option to Sell Option to Buy Option to Ship, Process

6. A Generic Value Chain Planning Process Potential Variation in the System + - Final Outcome Forecast (Heads-up) n-3 Plan (Getting Prepared) n-2 Schedule (Executing) n-1 Measure and Control (Firefighting) n The “Event” Post-Audit (Learning) n+1

7. Observations !“Make what you sell, sell what you make” isn’t necessarily true !“Make,” “buy,” or “sell” decisions occur at each step in the value chain !Decisions are made for future events, so processes and tools must match Exploration & Production Logistics Refining Primary Distribution The Brand Secondary Distribution Stations and C-Stores

8. Financial Optimization of Assets The vertebrae of the value chain backbone Exploration & Production Crude Trans- portation Manu- facturing Primary Distribution Marketing Secondary Distribution Retail Marketing Reserves Ships, Pipelines Refineries Pipelines The Brand Truck Fleet Stations & C-Stores

9. Refinery Asset: Some Characteristics !Engineered facility with limited flexibility !Initial design optimized for particular crude and product slate !The Theory of Constraints Applies To Gross Margin !Typically represented by model due to complexity. Main elements: !Process Unit Sub-Models !Stream Routing !Product Specification Tables !Blending Equations !High Fixed Costs Approaching 70% of Total Cash Costs !Variable Costs Are Largely Energy !Very High Capital Employed !PPE will most likely be in billions of US Dollars !Working capital will most likely be 20-30 days

10. Low Margin, High Volume Global Business…

11. Yield On Crude Source: TOTAL Crude Oil Marketing C1-C4 Gas Light Naphtha Heavy Naphtha Kerosene Gasoil VGO Residue

12. Yield In Hydroskimming Refinery Source: TOTAL Crude Oil Marketing LPG Mogas+Naphtha Kerosene Gasoil Fuel Oil

13. Yield In Cracking Refinery Source: TOTAL Crude Oil Marketing LPG Mogas+Naphtha Kerosene Gasoil Fuel Oil

14. Refineries Operate Between Two Global Commodity Markets

15. Simple Refineries Have Consistently Low or Negative Margins

16. Asset Optimization: Typical Models !Crude Assay and Assay “cutter” !Provides “technical value” for the crude oil !Ignores constraints and synergies !Linear Programing Model !Considers constraints and synergies. !Attempts to saturate as many constraints to derive maximum value. !Incremental or marginal analysis; therefore only variable costs. !First Principles Model !Similar to Linear Programing Model !Almost never used for economic optimization !Other Models-Scheduling Tools !Makes translation from continuous to batch !Includes inventory effects, batch size, timing

17. Asset Optimization: Use Of Models !How do you demonstrate that: !The tool is pointing to the optimum? !The users understand why? Capability of the Tool Capability of the Computer

18. Observations: Right Organization, Priority, Tools, People !Clear division of labor between optimization and scheduling activities !The two efforts are linked, e.g. constraints, but must demand recognition that the optimizer drives the scheduler !Use right tool for the job !Typically Linear Program for optimization !Scheduling and inventory tools for translation to batch !Error control in sub-models and model structures !No a priori method to check model accuracy !Monthly KPIs, followed by well-defined corrective process !Management discipline, resources and focus to !Maintain KPIs !Maintain a team of expert users-because: Understanding the results is more important than the results themselves

19. Extracting Money from Markets The discs of the value chain backbone Exploration & Production Logistics Refining Primary Distribution The Brand Secondary Distribution Stations and C-Stores Crude Markets FOB Crude Markets CIF Spot Product Markets Bulk Products in Transit Bulk Products at Terminal Branded/ Unbranded in Truck

20. Market Approaches: Examples Asset Optimization Volume Signal Transfer Prices No Relationship To Market Market Prices-All Volumes Market Prices-Volume-Time Pure Speculation Market Prices-Volumes Market

21. Internal “Free” Market Market curve based on knowledge of markets Internal value curve based on knowledge of assets Value Creation=Run Volume Price Value Creation=Sell

22. Observations !The combination of market knowledge and assets can create greater value !Functional “silos” don’t really matter !Having a common language does matter !Economics with price-volume-time !An internal “free market” requires !Accountability !Transparency

23. Overall Value Chain: Petroplus Example Exploration & Production Logistics Refining Primary Distribution The Brand Secondary Distribution Stations and C-Stores Supply Push Demand Pull Market

24. Work Processes and Organization !Many companies including Petroplus have evolved to the role of “senior economic pilot” Senior PILOT Refinery PILOT Refinery Management Team “Traders” or Commodity Managers Markets

25. “Economic Pilot” Resposibilities !Setting and Re-setting the course that the operational departments follow to optimize overall profitability !Establish realistic but challenging goals by understanding compromise between external and internal factors !Maintain focus on meeting or beating the economic plan and understanding the alternatives.

26. “Trader” or Commodity Manager Decision Rights !Buy Smart !Sell Smart !Manage Risk !Determine Inventory (Working Capital) Required to Execute Plan !Create Knowledge !Determine Assets Required to Execute Strategy

27. “Trader” or Commodity Manager Capabilities !Market Analysis !Developing a Point-of-View (on the market) !Development and Ownership of a Strategy !Negotiation !Planning

28. Summary !Create value using a combination of market knowledge and assets !Understand your approach to the value chain; i.e., your business model !Define work processes first !They may be unique !Define the Organization and Decision Rights !Define the tools