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Preparing for Global Change in the Petroleum Supply Chain

Preparing for Global Change in the Petroleum Supply Chain. University of Nevada/COPPEAD Petroleum Executive Logistics Course. Houston, Texas. June 13, 2007. Presented by: Paul Weissgarber Vice President. Agenda. About A.T. Kearney

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Preparing for Global Change in the Petroleum Supply Chain

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  1. Preparing for Global Change in the Petroleum Supply Chain University of Nevada/COPPEAD Petroleum Executive Logistics Course Houston, Texas June 13, 2007 Presented by: Paul WeissgarberVice President

  2. Agenda • About A.T. Kearney • Basics and fundamentals — Petroleum supply chains are complex and global • A look to the future • Keys to value

  3. About A.T. Kearney

  4. A.T. Kearney is one of the world’s leading management consulting firms IndustryPractices Aerospace and Defence Communications and High Technology Consumer Goods and Retail Pharmaceutical and Healthcare Transportation and Utilities Energy Financial Institutions Automotive Strategy and Organization • Operations • Supply Chain • Next Generation Manufacturing • Operating Asset Effectiveness ServicePractices Technology Solutions Our global service and industry practices enable tailored solutions to specific issues

  5. We use deep energy expertise to accelerate and expand results for our clients

  6. Basics and fundamentals — Petroleum supply chains are complex and global

  7. Reserves — Much of the traditional oil reserve base is located in the Middle East Oil (1) Gas Note: (1) Canadian Association of Petroleum Producers (CAPP) reports 4.3 billion barrels; considering Alberta Oil Sands(174.5 Bn Barrels in 2004) total reserves amount to178.8 billion barrels Source: EIA (Energy Information Administration), CAPP

  8. Crude Oil Production in 2005(1) Americas Argentina4% Others7% Brazil8% US33% Canada15% Mexico18% Venezuela15% Oil Supply — The global crude oil production totals to US$ 1.61 trillion Middle East US$ 1.61 trillion Iraq7% Kuwait11% Africa UnitedArabianEmirates11% SaudiArabia44% Middle East Others11% Iran16% Asia Pacific Europe & Eurasia Kazakhstan8% Others11% Europe & Eurasia UnitedKingdom10% RussianFederation 54% Americas Norway17% Note: (1) Based on production volume times Brent spot crude oil price 2005 (US$54.52/bbl). Source: BP Statistical Review of World Energy 2006; Platts.

  9. Crude Oil Production BreakdownTotal = US$1610 billion Oil Supply — Saudi Arabia, Russian Federation and USA dominate crude oil production Key Producing Countries (1)(US$ Billion) 80% of Global Market Middle East Asia Pacific Americas Africa Europe 50% of Global Market Iraq Iran SaudiArabia USA UnitedArabianEmirates India Qatar Libya Egypt Brazil China Oman Mexico Kuwait Nigeria Algeria United Kingdom Angola Canada Norway RussianFederation Malaysia Argentina Venezuela Indonesia Kazakhstan Note: (1) Covering 90% of entire oil production in 2006 Source: BP Statistical Review of World Energy 2006; A.T. Kearney analysis

  10. Crude Oil Production in 2005(1) Oil Demand — The global crude oil consumption totals to US$ 1.64 trillion Americas Asia Pacific US$ 1.64 trillion Brazil6% Indonesia5% Thailand 4% Mexico7% SouthKorea10% Africa Canada7% Middle East China29% India10% Others10% US70% Asia Pacific Japan22% Other20% Europe & Eurasia UnitedKingdom9% Europe & Eurasia Italy9% France10% Others46% Americas Germany13% RussianFederation 13% Note: (1) Based on production volume times Brent spot crude oil price 2005 (US$54.52/bbl). Source: BP Statistical Review of World Energy 2006; A.T. Kearney analysis

  11. Crude Oil ConsumptionTotal = US$1,640 billion Oil Demand — The USA, China, Japan are the three dominant petroleum consumers Key Consuming Countries(1)(US$ Billion) 80% of Global Market Middle East Asia Pacific Americas Africa Europe 50% of Global Market Turkey Iran USA Italy India Brazil Spain Egypt China Japan France UnitedKingdom Mexico Raiwan Canada Thailand Germany Australia Indonesia RussianFederation Singapore Belgium &Luxembourg Netherlands South Korea Saudi Arabia Note: (1) Covering 82% of Entire Oil Production in 2006 Source: BP Statistical Review of World Energy 2006; A.T. Kearney analysis

  12. Oil Balance — Demand and supply are spatially separate resulting in long supply chain product flows Regional Crude Oil Production and Consumption(Million Barrels per Day) Production Consumption 82 81 79 81 80 77 25 25 20 23 20 20 18 17 17 5 5 5 22 24 24 8 8 8 29 30 30 20 21 21 8 9 10 3 3 3 Source: BP Statistical Review of World Energy 2006

  13. When considering the distances and variations at each step, the oil supply chain complexity is staggering Crude Sources InboundTransport Refining & Conversion Product Mix OutboundTransport Bulk Distr.Terminals Markets /Retail Outlets • Africa • Bonny • Forcados… • Asia • Alif • Belida • Hydra … • Australia • Cossack • Gippsland • Kutubu... • Latin America • Leona • Isthmus • Medanito… • Middle East • Saudi • Iranian • Iraqi… • North America • Alaska North Slope • West Texas Inter. • Hibernia… • North Sea • Brent Blend • Danish North Sea • Liverpool Bay… • … • LPG • Butane • Premium Gasoline • Mid Grade Gasoline • Regular Gasoline • Military Jet Fuel • Commercial Jet Fuel • Heater Oil • Low sulfur diesel • High sulfur diesel • Aromatics and other Chemical Feedstocks • Asphalt • Coke • Sulfur • Others Asia Refinery U.S. Refinery C Asia Refinery U.S. Refinery Europe Refinery U.S. Refinery C Retail Outlets Asia Refinery U.S. Refinery • Ship • Pipeline • Barge • Rail • Truck Asia Refinery Market Centers C • Pipeline • Barge • Rail • Truck U.S. Refinery Asia Refinery U.S. Refinery Europe Refinery U.S. Refinery Africa Refinery Europe Refinery • Industrial Users • Petrochemical • Construction • Electricity • Others Asia Refinery Asia Refinery Asia Refinery Asia Refinery

  14. Natural Gas Production in 2005 Gas Supply — The Natural gas production totals to 2.76 trillion cubic meters Europe & Eurasia Americas 2.76 Trillion Cubic Meters Trinidad & Tobago 3% Others16% Others 6% Africa Mexico 5% Uzbekistan 5% Middle East Argentina 5% RussianFederation 57% US 59% Netherlands 6% Asia Pacific Norway 8% Canada 21% United Kingdom 8% Americas Asia Pacific Indonesia 21% Others 30% Europe & Eurasia India 8% Malaysia 17% Australia 10% China 14% Source: BP Statistical Review of World Energy 2006

  15. Natural Gas Production BreakdownTotal = $2760 Billion Cubic Meters Gas Supply — Russian Federation and USA are the dominant natural gas producers Key Producing Countries(1)(Billions of Cubic Meters) 80% of Global Market Middle East Asia Pacific Americas Africa Europe 50% of Global Market Iran UnitedArabianEmirates USA India Qatar China Egypt Algeria Mexico United Kingdom Trinidad& Tobago Canada Norway RussianFederation Pakistan Malaysia Australia Argentina Indonesia Venezuela Uzbekistan Kazakhstan Netherlands Saudi Arabia Turkmenistan Note: (1) Covering 90% of global natural gas production in 2006 Source: BP Statistical Review of World Energy 2006; A.T. Kearney analysis

  16. Natural Gas Consumption in 2005 Gas Demand — The global Natural Gas demand totals 2.75 trillion cubic meters Europe & Eurasia Americas 2.75 Trillion Cubic Meters Venezuela3% Brazil2% Others4% Argentina5% Africa Middle East Mexico6% Others34% RussianFederation 36% Asia Pacific Canada10% US70% Ukraine 7% United Kingdom 8% Americas Italy 7% Germany 8% Asia Pacific Japan20% Others 41% China11% Europe & Eurasia Indonesia 10% Malaysia 9% India 9% Source: BP Statistical Review of World Energy 2006

  17. Natural Gas Consumption BreakdownTotal = $2,750 Billion Cubic Meters Gas Demand — Russian Federation and USA are the dominant natural gas consumers Key Consuming Countries(1)(Billions of Cubic Meters) 80% of Global Market Middle East Asia Pacific Americas Africa Europe 50% of Global Market Iran Italy SaudiArabia UnitedArabianEmirates USA India Brazil Spain Egypt China Japan France Turkey Algeria Mexico United Kingdom Canada Belarus Ukraine RussianFederation Thailand Pakistan Malaysia Romania Australia Germany Indonesia Argentina Venezuela Belgium &Luxembourg Uzbekistan Kazakhstan South Korea Netherlands Note: (1) Covering 90% of global natural gas consumption in 2006 Source: BP Statistical Review of World Energy 2006; A.T. Kearney analysis

  18. Gas Balance — Most of the regions keep production and consumption balanced Regional Natural Gas Production and Consumption(Billion cubic meters) Production Consumption 2750 2695 2602 1071 1101 1122 2763 2703 1061 2533 1024 1056 260 280 293 226 242 251 407 354 379 360 313 333 886 904 899 886 890 886 140 144 163 65 69 71 Source: BP Statistical Review of World Energy 2006

  19. 88.4 43.6 64.9 17.8 11.55 8.35 21.3 6.75 3.05 104.2 9.49 10.1 19.0 8.31 5.8 2.62 25.23 2.8 1.84 3.85 5.93 17.65 6.36 10.1 4.05 4.56 7.51 12.4 8.9 5.8 4.95 8.35 4.83 11.81 19.0 8.6 13.1 6.5 Gas However, demand unbalances inside and outside each region are satisfied through pipelines and LNG Major Trade MovementsTrade Flows Worldwide (Billion Cubic Meters) USA Canada Mexico S. & Cent. America Europe & Eurasia Middle East Africa Asia Pacific Natural gas LNG 71% of out of region movements are LNG trade movements Out ofRegion5% LNG26% Natural Gas74% Same Region95% Note: (1) LNG=Liquified Natural Gas Source: BP Statistical Review of World Energy 2006

  20. US supply chain infrastructure is one of the most complex systems in the world Source: Energy Information Administration/Association of Oil Pipelines/BP Statistical Review 2003/Opis/Department of Transportation/A.T. Kearney Analysis

  21. Petroleum enters and leaves the US supply chain at many locations US Petroleum Oil Flow — Supply Chain Energy Balance — 2005(Million Barrels per Day) Source: Energy Information Administration

  22. US petroleum imports have increased dramatically and are projected to continue United States Petroleum Supply, Consumption, and Imports, 1970-2025(Million Barrels Per Day) 30 History Projections 25 20 68% Consumption Net imports 15 56% 10 Domestic supply 5 0 1970 1980 1990 2000 2010 2025 Source: Energy Information Administration

  23. US imports from most nations continues to grow, with major share gains from the Persian Gulf and Canada US Crude Oil Import Sources Source: Energy Information Administration; A.T. Kearney analysis

  24. In 1997 the average capacity of the top 50 refining & marketing companies in the US was 303,000 BPD 1997 US Refining Capacity in kBPD Refining Capacity — kBPD Top 50 R&M CompaniesAverage Capacity = 303 kBPD Source: Energy Information Agency

  25. Consolidation of majors and growth of independents resulted in structural change 2004 US Refining Capacity in kBPD Top 50 Average Refining Capacity (kBPD) Max Capacity has doubled since 1997 Top 50 R&M CompaniesAverage Capacity = 335 kBPD Refining Capacity — kBPD Source: Energy Information Agency: January 1, 2005

  26. Capacity grew in spite of substantial refinery closures US Refinery Count and Capacity Trends(1985 – 2006) Source: Energy Information Administration

  27. Refining economics are driven by supply options and the ability to “upgrade” declining quality crude US Refining Crude Input Quality Trends Source: Energy Information Administration

  28. Supply chain remains a substantial portion of the downstream sector controllable costs Cost Contribution to US Retail Gasoline Prices — 2006 Supply ChainControllable Costs Note: (1) US average price as of May 29, 2006 Source: Energy Information Administration/Department of Energy/A.T. Kearney Analysis

  29. A Look to the Future

  30. The Global Business Policy Council (GBPC) was formed over a decade ago with the objective of providing early warning against accelerating shifts in economics, politics, technology, demographics, and culture that are poised to shape and shake the global business environment Membership in the GBPC is limited to a select group of corporate leaders (~50) and their companies joined by a small group of world-renowned policy makers, scholars, and other thought leaders and their companies. Each year, these members have three opportunities to gather for two-to-three days of intense discussion and reflection on the forces shaping a volatile and continually changing global business environment The Council produces a series of intellectual capital products that provide a broad range of insights on important global trends The Global Business Policy Council provides deep insight into future trends Why is this so important?

  31. 2005 2003 Emerging Risks Increase of 4 – 11% since 2003 Traditional risks are giving way to a number of emerging risks to which companies are exposed Most Critical Risks to Firm Operations (2005)(% of Total Respondents) Traditional Risks Decrease of 6 – 24% Since 2003 Source: A.T. Kearney Global Business Policy Council, 2006.

  32. Large firms often attribute earnings under-performance to unexpected external events External Events Reported in 2003 Annual Reports of the Fortune 100 43% of Fortune 100 companies blamed unexpected external events for failure to meet earnings expectations 43% Blame External Events Note: (1) Percentages do not add up due to multiple events reported by some companies Sources: A.T. Kearney Global Business Policy Council analysis of companies annual reports

  33. Over time, the impact of risks on large corporations is clear Change in the Fortune 500 A Third Gone(1) Almost 50% of Original 500 Gone 60% of Original 500 Gone Note: (1) Bought out or no longer in business Sources: INSEAD; A.T. Kearney analysis

  34. To better understand risks, A.T. Kearney focuses on the forces reshaping the world

  35. The implications for oil and gas supply chains are immense Demographics • Fundamental shift in customer demand and labor supply Globalization New Consumers • Increasing segmentation • Shift of location of demand Technology & Innovation • Major growth outside US • New competitors • Continuous opportunities/threats from new products, processes, technologies • Sourcing • Labor Conditions • Environment • Privacy Natural Resources & Environment Regulation & Activism Wildcards • Potential supply disruptions

  36. Increased Demand — Worldwide Revival of Economy • Developed Nations • Expansion of Older Population • Environmental and Social Responsibility Preferences • Emerging Nations • Access and Economic Development • Technology Growth Demographics Economic performance and customer preferences drive global demand for petroleum GDP Top 30 Countries Further influenced by political unrest in certain regions (e.g. Middle East) Source: Global Insight, A.T. Kearney analysis

  37. Unprecedented Demand Shifting — Fundamental Relocation of Industries Demographics Industries, including petrochemicals, are rebalancing to meet demographic and preference shifts Exports of Finished Goods NAFTA China Future Exports of Petrochemicals After China, India is likely to be the next area for major growth Source: Global Insight, A.T. Kearney analysis

  38. Canada Japan UK Ireland U.S. Russia Scandinavia China Benelux EasternEurope Germany France South Korea Spain Turkey Mexico Turkey Italy Italy Iran Iran Austria Switzerland Central America Portugal Taiwan Venezuela Columbia Israel Peru Hong Kong Greece Brazil Ecuador Philippines North Africa Thailand Chile Australia India Argentina South Africa Singapore New Zealand Indonesia Middle Income Upper Middle Upper Income Scale: 10 million consumers Globalization / New Consumers By 2020, middle income spending will shift to emerging markets — how will you seize the market opportunity? Total middle income consumers = 2.3 billion(31% world population) Source: World Bank, EIU, U.S. Census Bureau, A.T. Kearney analysis

  39. Northern Gateway Sibirien-Japanisches Meer Clair Oil Westsibirien-Westchina Ostsee-Pipeline Russia Kola Sibirien-Nordostchina Ventspils Novo- sibirsk Irkutsk Krasnojarsk Tengiz Ulan- Ude Daqing Novorossisk Samsun Ürünqi Beijing Nachodka Baku Samsun-Ceyhan Ceyhan China Siberia-Beijing Baku-Ceyhan Chad Caspic Pipeline Chad-Cameroon Globalization / New Consumers New pipelines and terminals are securing supply flexibility and connecting resources with customers Oil & Gas Pipeline Projects Realistic Projects Postponed Projects Oil Fields 2004 finalized Existing Pipelines Source: DekaBank

  40. About 60% of produced oil is traded, and roughly 2/3 of the world’s oil trade moves by tanker (EIA, 2005) Demand for tankers is likely to grow faster than oil production, given the dramatic oil demand growth in the Far East and the increases in existing crude oil production areas around the world Mediterranean and West African crude oil moving to the Far East has absorbed significant amounts of available double-hull tonnage in the market Competition from other shipping sectors to compete for berth space at shipyards driving up vessel prices ($130 million) The current orderbook is over 1,000 vessels and represents between 30-40% of each of the current sectors with orders already starting to be placed for 2011 delivery Strength in the dry hull market among others has led to a surge in bulk carrier orders, effectively reducing the tanker building capacity worldwide Globalization / New Consumers The shift in oil demand balance may cause capacity constraints in the mid- and long-term Oil Demand and Tanker Capacity Million Barrels per Day Vessel DemandCAGR >4% Oil ProductionCAGR ~2% In the near term, global oil tanker capacity will not be the limiting factor for accessing customers — but the picture is changing Source: Deutsche Bank analyst reports; IEA; BP Statistical Report 2006; A.T. Kearney analysis

  41. Natural Resources & Environment Economic growth, shifting economic power coupled with current supply constraints have doubled crude prices Oil & Gas Supply Constraints and Development of WTI Price (in US$ per barrel) Increased demand from non-OECD countries; unexpectedly large demand growth from China $50 Midpoint? OPEC slows production $30 Midpoint $20 Midpoint Asian financial crisis slowed demand just as Iraq entered the market Historically OPEC adjusts production to maintain prices Will pricing retreat? ― In the near term substitutes will attract investment and displace traditional energy and petroleum sources NOC = National Oil Company; NA = North America; WTI = West Texas Intermediate Source: Energy Information Administration; A.T. Kearney research

  42. Natural Resources & Environment The significant increase in prices of crude and refined products places additional pressure on the supply chain Source: Energy Information Administration

  43. Natural Resources & Environment For example, increased dependence on foreign oil in the US is causing ports to adjust their terminals Case Study: The Port of Long Beach • Between 2000 and 2020, San Pedro Bay liquid bulk cargo movements are forecast to slightly decline, with most of the change from refined petroleum products • However, as dependence on foreign crude oil increases, additional deep-water berths will be necessary to accommodate increased traffic of larger vessels • “Near-term development” project for Long Beach is to construct a new deep-water liquid bulk terminal on the pier to service the forecasted increase of larger vessels US Crude Oil Forecasted Net Imports Expanding existing ports is constrained by scarce waterfront property, costly projects, and environmental and regulatory barriers – how does this affect your supply chain? Source: Poten & Partners, “Trade and Traffic”; Port of Long Beach Master Plan 2020; A.T. Kearney analysis

  44. Natural Resources & Environment 30% 37% 33% BP Different objectives by the various types of industry players place further demands on the logistics infrastructure North America Participation Mode by Key U.S. Player(Basis: Refining market share from Crude refining capacities) 47% 26% 39% 100% 6% 20% 50% 34% 48% 74% 61% 60% 53% 50% 33% Valero ExxonMobil ConocoPhillips Pemex Shell Chevron Marathon Vertically Integrated Downstream Oil Upstream Refiner Merchant Refiner How do potential participation mode shifts affect your area? How will you deal with such shifts ? Source: Oil & Gas Journal, A.T. Kearney (May 2006)

  45. Natural Resources & Environment A deficit in refining capacity will continue to inject risk to the supply chain Refining Capacity vs. Demand in Different Scenarios • In 2005 refining capacity was above 90% utilization • Refining capacity planned expansions are likely to cover only the most conservative IEA oil consumption scenario through 2008 • Shortfalls in refining capacity will not only add urgency to the use of new technologies, but also will likely cause even larger downstream price increases Refining Capacity Deficit Refining Capacity Surplus Demand Scenarios Historical Demand Source: BP Statistical Review, 2004; IEA, Energy to 2050, 2003; A.T. Kearney Analysis

  46. Natural Resources & Environment Several regions will potentially face refined oil supply deficits over the next 5 years… Expected Refined Oil Product Deficit Regions in 2010(Figures in mtpa1) Shift in location of demand North America Western Europe Total Atlantic Basin Indus-trialized Asia China Rest of Asia Total Pacific Basin Total Atlantic Basin Pacific Basin Key Drivers • Strong demand growth for middle and light distillates • Strict fuel norms leading to closure of marginal units • Few investments in new capacity • Robust demand growth driven by overall economic growth in the region • Growth in Chinese consumption driven by transportation and petrochemicals sector • Closure of uneconomical & marginal units Note: (1) mtpa=Million Metric Tons per annum; 1 mtpa = 0.02 mbd Source: EIA Outlook, Analyst Reports, A.T.Kearney analysis

  47. Natural Resources & Environment Projected global refined oil product capacities will be potentially unable to address these deficits Expected Demand Supply Scenario – 2010 (Figures in mtpa) Pacific Basin (Unmet Demand) Atlantic Basin (Unmet Demand) East Europe West Europe S. Korea 175 North America China -65 -94 15 Middle-east -207 -62 IndustrializedAsia -50 Africa 90 Latin America 20 -67 33 Rest of Asia -15 Likely flows based on historical trends Supply deficit Supply surplus Assumptions: Based on historical flows, it is assumed that 75% of Middle East production will be available for Asia Pacific, Eastern Europe, Latin America & Africa; surplus is assumed to serve North America and Europe demand Source: EIA Outlook; Analyst Reports; A.T.Kearney analysis

  48. Technology & Innovation In response, the industry will look to conventional resources such as LNG to offset the deficit 2004 Natural Gas Proven Reserves(Trillion cubic meters) Usable reserves are only 20% of the proven reserves Source: BP Statistical review of world energy 2005; Brian A. Toal, Gas to Liquids, July 2002

  49. Technology & Innovation 88.4 43.6 64.9 17.8 11.55 8.35 21.3 6.75 3.05 104.2 9.49 10.1 19.0 8.31 5.8 2.62 25.23 2.8 1.84 3.85 5.93 17.65 6.36 10.1 4.05 4.56 7.51 12.4 8.9 5.8 4.95 8.35 4.83 11.81 19.0 8.6 13.1 6.5 Natural gas LNG In fact, LNG is already playing an increasingly important role in the international gas trade … Natural Gas and LNG Trade Flows Worldwide 2005 (bcm) LNG Volume & Development (bcm) Europe North America Asia Note: bcm = Billion Cubic Meters Source: BP Statistical Review 2006; IEA, World Energy Outlook 2004

  50. Technology & Innovation Norway Russia 4.0 0.0 9.8 Middle East North America 85.8 0.0 1.1 1.1 25.2 North Africa 37.3 55.9 30.1 48.3 20.4 Asia Oceania Latin America 9.0 West Africa 6.0 6.0 14.8 9.6 Australia … which will likely result in excess liquefication capacities as significant additions are planned Liquefication Capacities Worldwide (2005 vs. 2010) Mt/a in 2005 Mt/a in 2010 Note: 1 Mt = 2.47 Million Cubic Meters of LNG Source: von Hirschhausen, EPRG Seminar 2005

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