Harry Kwon(권희열) SK Energy Co. Ltd.

Harry Kwon(권희열) SK Energy Co. Ltd.
Lubricants Symposium, Danyang 24th~25th September, 2009 Trends & Changes in the Group III Base Oil market Thank you for the introduction, Mr. Chairman I am Jay Kim, senior manager in SK Energy It is a great honor to be here and have the opportunity to address such a distinguished audience. I want believe all of the audience in this hall came to see my presentation, not for cocktail party after my presentation. Today, we’re going to look at the trends and changes in the Group III base oils market I am not a technician and I would like to clarify that the ideas and expectations shown in this presentation are from the base oil marketer’s point of view. And the lubricants described in this presentation are automotive engine oils in most cases. O.K. Let’s get started Harry Kwon(권희열) SK Energy Co. Ltd.

Presentation Overview
SK Energy introduction Group III base oil characteristics Let me give an overview of today’s topic First, I’ll give you an brief introduction of SK GROUP and SK Energy Second, I would like to explain the features of GROUP 3 B/O AND give an example with YUBASE, SK BRANDNAME. The third, I will show what is the current market forces and demand drivers for use of high quality base oil by explaining new specification, GF-5 and give an example of engine oil sales in North America Market , which will have an direct impact from GF-5 The fourth, I would like to review the past & current forecast of Group 3 supply & demand The Fifth, I will introduce our new product, YUBASE plus produced in Indonesia I will speak for 35 minutes I will much appreciate it if you could hold your question until the end of my presentation. Please, ask them when we reach Q&A session. Let’s move to the main topic. Group III base oil supply / demand forecast Market Forces and Demand Drivers for Group III Base Oil Summary

SK Group One of the largest enterprises in Korea
“Most preferred company to work for” in Korea Energy & Chemicals 51% Telecomm- unications 30% Trading & Services 19% SK Group 50 75 Revenue (US B$) ‘03 ‘04 ‘05 ‘06 25 56 61 71 86 SK Group is one of the three largest business groups in Korea. It’s also known as the most preferred employer in the country! SK Group’s core businesses are energy and chemicals at 51 percent of revenue, IT and telecommunications at 19 percent, and logistics and service account for 30 percent of revenues. . ‘07

SK Energy Founded in 1962 as Korea’s first oil refiner
Continues to be the nation’s leading player Third-largest refining capacity in Asia-Pacific region Refining & Marketing Upstream Petrochemicals CDU: 1,115,000 B/D RFCC: 117,000 B/D H/C: ,000 B/D Lubricant: 4,000 B/D Base Oil: 28,000 B/D SK Energy’s refining capacity is around 1.1 million B/D, which is the 3rd largest refining capacity in the Asia-Pacific region And SK Energy was Korea’s first oil refinery, founded in 1962 and continue to a national leading player in the Envery Sector SK Energy’s core business is composed of refining and marketing, oil development, petrochemicals, lubricants and the Base Oil business Reserves: Mil. Bbl Production: ,000 B/D Ethylene: ,000 Ton/Yr Propylene: 840,000 Ton/Yr BTX: 2,607,000 Ton/Yr 4

SK Energy Two production facilities, Ulsan and Incheon
Operates in more than 20 Countries Domestic Global Employees: 5,661 Gas Stations: 4,519 Storage Terminals: 11 Ulsan Incheon Daejeon Seoul (HQ) London Moscow Almaty Kuwait Singapore Guangdong Shanghai Beijing Tokyo Houston New Jersey Branch Subsidiary Dubai Exploration LNG Business Let’s take a look at our current presences on the map As you can see on this map, SK is a very active global player in more than 20 countries. Our main production facility is in Ulsan/Incheon, Korea

According to the BOD resolution on 16th July, Lubricants business of
Spin-off Structure According to the BOD resolution on 16th July, Lubricants business of SK Energy split off to a new company “SK Lubricants (tentative name)” Spin-off (‘ ) As-Is 100% subsidiary SK Energy SK Energy SK Lubricants Refining Chemical E&P Lubricants Refining Chemical E&P 윤활유 Lubricants business exist as one of SK Energy’s biz units SK Energy unships Lubricants Biz in a form of physical division. Newly established company “SK Lubricants” will be launched (100% SK Energy owned subsidiary)

Background SK Energy plans to enhance value of the company through separation of competitive individual business units such as lubricants biz. Corporate Governance BOD Focused Management ‘09 『Best corporate governance』, 『Best audit system』 Increasing Competitiveness of each business Biz structure improvement through spin-off - Active response to environment changes - Acquire appropriate management system for the individual business - Responsible management through performance separation - Create value as a lubricants specialized company Create Corporate Value Business Structure Developing Growth Options Enhance flexibility of biz. structure Financial Structure Maintaining Credit Rating Secure liquidity and maintain proper investment level

Base Oil Classification
API Base Oil Classification API Category Viscosity Index (VI) Saturates (%) Sulfur (%) Group I 80-120 < 90 and/or ＞0.03 Group II ≥ 90 and ≤ 0.03 Group III 120 + As shown in this table, In 1995, API updated its base oil classifications by adding Group IV and V There is a interesting point to take a look at. Even though there is no definition in the chart that we’re looking at, some base oil suppliers also use their own terms such as Group II+ and Group III+. The ICIS USA report list them as well, Group II+ since 2004, and Group III+ since 2008 GRP II+ GRP III+ Group IV PAO Group V All others

Properties of Group III Base Oils
4 cSt Grades Item ASTM Method HC Residue HC Residue (High Waxy) Slack Wax (1) GTL (2) 100°C, cSt D 445 4.2 4.15 3.9~4.1 3.8~4.2 Viscosity Index(VI) D 2270 122 134 136 135 NOACK Volatility, wt% D 5800 15.2 13.0 <14.8 12.0 Pour Point, °C D 92 -15 -18 <-18 <-30 CCS cP D 5293 1590 1130 <1000 This table illustrates the properties of Group III base oils. Depending on feed sources such as fuel hydrocracker residue and high waxy residue, the oil will take on different kinds of properties, and in particular, the viscosity index(VI) and cold temperature property will vary a lot , depending on its feed sources Source: (1) ExxonMobil website, (2) The 3rd Fuel & Lube Asian Pacific Conference

YUBASE Physical Properties
Physical properties, YUBASE slate YUBASE 4 YUBASE YUBASE 6 YUBASE6+ cSt 19.5 18.4 36.9 35.4 cSt 4.22 4.20 6.48 6.65 Viscosity Index 124 134 130 146 Pour Point, ℃ -15 -18 -12 cP - 2920 2420 cP 1590 1190 5200 4160 Noack (A), wt% 15.2 13.5 7.5 4.1 This is a good example that illustrates the characteristics of commercial Group III base oil properties. All of these products belong to the YUBASE brand from SK Energy. With Fuel Hydrocracker residue as a feed source, YU-4 and YU-6 displays good properties, such as viscosity index and cold temperature properties. YU-4 Viscosity index is 124 and YU-6 viscosity index is 130 In case of YU-4+ and YU-6+, With its high waxy feed source, YU-4+ has higher VI compared with YUBASE 4 134 compared to 124 of YU-4, Accordingly CCS viscosity is better than YUBASE 4 and 6 and Noack volatility as well You can see that the properties of Group 3 base oil depend on the feed sources significantly

Group III Production Capacity
Most Group III supplier production is located in Asia It is interesting that, including SK, around 60% of Group III base oil is produced in the Asia-Pacific region. We know that more production is coming online in the near future However, the largest portion will still be located in the Asia Pacific region 60% (3 largest suppliers) Source: 2008 Lubes ’N’ Greases

Group III Production Capacity
How is the capacity of Group III base oil growing and evolving?

Base Stock Availability Interdependence
Increasing quality requirements Demand shifts to Groups II, III Diminishing production of Group I Increasing production of Group III stocks As I mentioned earlier, in the market, there is an increasing quality requirement for lighter viscosity grades such as 0W20 and 5W20 This means that demand will shift to Group II & III rapidly, diminishing the demand for Group I. Consequently, the production of Group I will continue to decrease as demand keeps declining. And also, given the announced production capacity increases, there will be an ample supply of Group III base oil As you can see on the pie chart, in 2013, Group III capacity will be more double. Source: Lubes N Grease 2008 Announced upcoming capacities.

SK Base Oil Production Plan
2014 +10 KBD 5th 2012 +10 KBD 4th +4.5 KBD 1~3rd 2011 1995 2001 2004 2006 2008 1st 2nd 3rd Production Capacity : 48 KBD (by 2014) Production Capacity : 23.5K BD (by 2008) Now, I am pleased to address our future plan for SK base oil production. As the world largest Group III base oil manufacturer, SK has a good reputation for globally accessible supply chain, premium quality, and various applicable formulations. To keep up with the current market movement to high quality base oils, we are developing new plans for additional new capacities and revamping existing plants. Until 2011, SK will revamp our current capacity about 4,500 b/d And, in the end of 2012 and 2014, additional new plants will be released with its capacity, 10,000 b/d, respectively Then, our total production capacity will reach 48,000 b/d by 2014. World largest Group III base oil manufacturer Hydro-cracked / CDW / All hydro processing route Total Group III production capacity is 1.1 million MT/Y Additional new plants will be available in 2012 & 2014 with revamping of current plant(#1~3 plant) -16-

Group III Supply/Demand Forecast
A : Technical Demand A for Group III (16% annual increase) A [BPD] B B : Technical Demand B for Group III (21% annual increase) C C : Technical(B) + Commercial Demand for Group III 125,000 2014 GTL SK O Global Supply 2013 SK GTL O 100,000 Supply by SK energy GTL The next chart illustrates the forecast for Group III supply/demand. In 2008, there was a capacity increase by new plants, from SK, Petronas and GS caltex. As you may know, from the end of 2007 to the end of 2008, we experienced a shortage of Group III base oils before bringing online 2 new plants (SK and Petronas). But after the global recession, demand decreased sharply and we have now an oversupply situation. Due to the global recession, we expect base oil demand dropped more than 30% in 2009 compared to 2008. However in the end of 2010, we expect that base oil demand will be getting improved with the current upward market situation. And the supply and demand is expected to be balanced well. In 2011 to 2014, based on the announced plans, there will be an ample supply of Group III base oils But in 2011, before new plants, there will be a shortage again. Let’s look at the forecast of technical demand, A. With GF-5, there will be a sharp increase of Group III base oils, about 16% annually. In the technical demand B, SK is forecasting the maximum 21% annual increase. (1) Between A and B, there will be several factors to determine the trend. - As I mentioned earlier, the extent to how fast to move toward 0W-20 and 5W-20 with new specification, GF-5 and Euro 5 The impact of emerging market, mainly China and India. 3rd one will be supply availability of Group I plant depending on its economics Let me explain more detail in next slides for these. Depending on the base oil availability, commercial demand will be effected significantly. However, if GTL project is delayed in 1 or 2 years, then in 2010 to 2012, we can face the insufficient base oil supply again, similar with that of 2007 to 2008. (2) * O : Other Suppliers GTL 75,000 New Plants SK & Pertamina PETRONAS/GS O O SK SK SK 50,000 Commerical Demand 2008 2009 2010 Technical Demand 25,000 2003 2007 2011 2012

Main Issues to be concerned for the future
Invisible releasing timing of announced new plants - GTL, New Group III plants....(?) When 0W-20/5W-20 will become the main-grade in the After-Market (Service Fill)? after GF-5 ? - Movement toward top tier product As I mentioned at the previous slide, there are lots of variables to determine the trend A , B, and C First one is the invisible releasing timing of the announced new plants. As you know, many projects had been already cancelled and delayed. And Due to the high project costs and volatile economics, Even the projects still alive have the high possibility to be cancelled or delayed This will impact the balance of supply and demand in global base oil. The second thing is when 0W-20/5W-20 will become the main grade in the Service Fill market. As I mentioned before, OEMs are already changing their main grade as 5W-20 & 0W-20 grades. Considering that the vehicles with new specifications, like GF-5 and Euro 5, will be found on the road in 2012 to 2013, we expect 5W-20 and 0W-20 to be the main grades in the after market after 2013. And also, Lube Manufacturers will move to top tier product for better profitability and their product differentiation (1) The 3rd thing is the economics of Group I plants. I already mentioned about this in previous slide. And the last one is the emerging new markets, China and India. Currently in China and India, there is not much demand for Group III base oil However, Once they start to use Group III base Oil, its impact will be incredible in 2013~2014 (2) The economics of Group I plants Emerging new markets

Market Forces Driving the Use of High Quality Base Oils
Legislation Emissions Fuel Economy Environmentally Friendly Consumers Extended Oil Drain Intervals Fuel Economy Maintenance In this slide, I would like to explain the five main drivers influencing lubricant requirements. First, we have legislation that pushes car makers to implement solutions to achieve better emissions and improved fuel economy. Second. We have consumers. Consumers need the extended oil drain intervals for reduced maintenance and better fuel economy Third, we have OEMs requirements. Car makers call on lubricant manufacturers to improve their lubricants to keep engines durable and clean even at the highest operating temperatures. Fourth, we must consider lube manufacturers. Lube manufacturers want to differentiate their products by improving quality and competitive cost control. Furthermore, the synthetic claim appeals to the consumer and his cost is advantageous to the producer. The last one is the global economy We have interrelated and important critical factors to impact this industry Economic growth, Volatile Crude price, Future fuel demand and Vehicle changes All these five factors impacts this industry Global Economy Economic Growth Crude Pricing Fuel Demand Vehicle Changes Engine Durability/ Cleanliness Higher Operation Temperatures New Specifications OEMs Formulation Product Differentiation Cost Lubricant Manufacturers

OEMs Continue Shift From 10W-30
Toyota* 2AZ-FE engine: Camry, Solara, Highlander & RAV4 Genuine Oil grade since 2006 1.5 L, 3.5 L Ford Cars and Trucks Main grade Honda 2.0 L Nissan 2.5 L, 3.5 L Hyundai 2.0 L, 2.4 L, 3.3 L BMW 3.0 L Chevrolet Cars and Trucks 2.2 L, 3.9 L, 4.3 L, 4.8 L GM 2.4 L, 3.8 L, 5.3 L Please, take a look at the next table. It illustrates the main grades of OEM from Car Makers As you can see in this chart, currently OEMs continue their shift from 10W-30 to 5W and 0W. Toyota, Ford, Honda and Hyundai moved their main grade to 5W-20. These shifts directly impact Base oil quality requirements * Source:Toyota TSB EG018-06

Higher Fuel Efficiency
Grade Shift in US Sales Top Selling Grades ‘06 MM gals % Change ‘06 vs ‘05 Gasoline 5W-20 65.3 +22 % 5W-30 231.1 +6 % 10W-30 235.0 -14 % 10W-40 58.3 -13 % 20W-50 22.5 Diesel 5W-40 1.9 10.5 +12 % 15W-40 299.7 0.7 % % Change ‘07 vs ‘06 +11 % + 5 % -13 % -14 % -19 % +34 % -24 % -0.2 % Higher Fuel Efficiency This table illustrates the grade shift in US sales. As you can see in this table, There is significant movement toward 5W20/30 for Gasoline and 5W40/10W-30 for Diesel to achieve higher fuel efficiency Source: NPRA Sales Report

US Gasoline Engine Oil Sales
Source: NPRA US Sales Reports +11 % Million Gallons -16 % Now, let’s take a look at other graph that shows a shift from Heavy to Light viscosity multigrade oils As you can see, while 10W-30 is declining, 5W & 0W grade keep increasing rapidly +20 %

Demand Drives the Use of High Quality Base Oils
5W-20 0W-20 Mono Grade 20W-XX Better Fuel Economy Durability 15W-XX Better FUEL ECONOMY Consumers in the finished lubricants are also pushing lubricant manufacturers to comply with their requirements, like better fuel economy and durability. 5W-20 and 0W-20 will meet this requirements and also bring the attention of lubricant manufacturers to the selection of proper base oils and development of formulation and technology 10W-XX Base Oil/ Formulation Technology 5W-XX 0W-XX

The changes of standard from GF-4 to GF-5
Please look closely at this chart about the changes from GF-4 to GF-5(’10. October) This chart gives the meaningful information for future base oil demand. As you can see, there is the big change on the fuel economy as well as the emission control. We believe this enhanced specification will impact significantly on the future base oil demand. Source: Lubrizol,[

ILSAC GF-5 API will announce the new GF-5 specification by the end of 2009, at the earliest; car manufacturers have to use GF-5 for year 2011 vehicle models. Higher fuel economy expectations will increase demand for low viscosity SAE grades: 0W-20, 5W-20. Sequence VID (6D) will be the method used to test for fuel economy Currently developed by a consortium of OEMs, marketers and additive companies. ILSAC GF-5 proposes higher fuel economy specifications than GF-4 limits. The new Sequence VID still to be benchmarked against the existing Sequence VIB test. VID test isn’t ready so comparisons between VIB and VID limits are premature. Let me explain about the ILSAC GF-5 briefly. API will announce the new GF-5 specification by the end of 2009 and car manufacturers should use GF-5 for their 2011 Vehicle Model. And the enhanced fuel economy specification will increase the demand for low viscosity grades, such as 0W-20 and 5W-20. From this, we can imagine that there will be a fundamental change of Group III base oil demand, around 2011, with GF-5 The new fuel economy test will be the sequence VID(6D) and we can learn more detail by the end of this year.

America’s Outlook for 2010 to 2015
Gasoline Engine Oil - Expect growth of SAE 0W-20 grade for Gasoline Engine Well accepted that SAE 0W-20 will increase fuel economy Honda and Toyota already announced SAE 0W-20 requirements for current (since 2006) and future engines Let’s take a look at the North America Market for 2010 to 2015 In case of Gasoline Engine Oil, 0W-20 will increase fuel eonomy through improved viscometrics And Honda and Toyota already announced their plan to move to 0W-20 for their current and future engines, Therefore, we can easily expect the growth of 0W-20 grade gradually. In case of Light Duty Diesel Engine Oil, Fuel economy will be also the main issue OEM will want to steer away from 15W-40 to gain fuel economy To maximize fuel economy, if 0W-30 and 0W-40 is not their main grade, 5W-30 and 5W-40 will have the high potential for OEM’s main grade Light Duty Diesel Engine Oil OEMs will want to steer away from SAE 15W-40 oils to gain fuel economy Look for SAE 5W-30 and 5W-40 grades, if not 0W and 0W-40, to maximize fuel economy

 Group III demand increases with increased fuel economy demands -
Key Market Trends – Fuel Economy  Group III demand increases with increased fuel economy demands - 2011MY CAFE(Corporate Average Fuel Economy) standard may be 27.3mpg, ~8% above current, and 35mpg by 2020 GF-5 will cause 0W-20 and 0W-30 oils to become mainstream OEMs recommend lower viscosity grades for CAFE and fuel economy marketing Let me summarize the fuel economy impact as a key market trend. For 2011 Model Year, Corporate Average Fuel Economy standard may be 27.3mpg, ~8% increase above current level, and for 2020, this will reach 35mpg With this movement, GF-5 will cause 0W-20 and 0W-30 oils to become mainstream Consequently OEMs recommend lower viscosity grades for CAFE and fuel economy marketing. Below chart is showing how OEM’s main grade is evolving. Because 0W grade will require mostly Group III base oil, Once 0W- grade gets on the right track as a main grade, then the Group III demand will increase significantly 10W-xx 15W-xx 20W-xx Monogrades 5W-30 Select models : Toyota, Honda, Nissan, GM, BMW, others 5W-20 Ford main grade Honda main grade Toyota Genuine Oil Hyundai select models 0W-xx Toyota, select models 100% Group III Group III < 10%

Fuel economy What do these market shifts mean for the Group III Marketers and the Group III base oil markets? With this trend, we can think about this question. What do these market shifts mean for the Gruop 3 Marketers And The Group 3 base oil Markets?

Higher VI Group III base stocks enable product differentiation
Summary Market forces continue to increase the demand for Group III base stocks SAE 5W-20 and 0W-20 grades will grow and increase demand for Group III base stocks Global Group III new supply from 2011 to 2014 may experience a surplus, depending on announced project schedules Finally, we come to the end of my talk. I would like to summarize my main point Higher VI Group III base stocks enable product differentiation

Harry Kwon(권희열) SK Energy Co. Ltd.

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