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Pioneering Value Based Consulting
Energy – Oil & GasDownstream operations
Point of View
2Downstream operations© Sympliciti 2007
The objectives are to provide:
Basic overview Downstream operations and terminology
Discuss the key Downstream value drivers and challenges
OBJECTIVES
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AGENDA
The agenda consists of a walk-through of the major functional areas and business units within typical Downstream organizations:
CrudeMarketing
RefiningProduct
Supply &Logistics
Terminals &Transpor-
tationMarketing
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
4Downstream operations© Sympliciti 2007
CRUDE MARKETING
Central And South America
North America
Asia Pacific
Europe
Africa
Middle East
FSU
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
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CRUDE MARKETINGWhile crude tankers are used for waterborne transportation, a network of pipelines exist to provide land transportation to major inland refining centers
M E X I C O
C A N A D A
Atlantic
O c ean
P acific
O cean
Bakersfield
U N I T E D S T A T E S
Carbon Dioxide
(Chevron Pipe Line CompanyÕsinterest in each pipeline is 100%unless otherwise noted.)
Natural Gas Products (including LPG)Crude
Spokane
SaltLakeCity
SanFrancisco
Albuquerque
PascagoulaEl Paso
Los Angeles
Empire
DixiePipeline(20.64%)
MesquitePipeline
Raven RidgePipe Line(56.3%)
Salt LakeCrude System
Standard Pacific Gas Line (14.29%)
KLMRPipeline
Salt LakeProducts
System
West TexasGulf Pipeline
(28.28%)El Paso
ProductsPipeline
ChandeleurPipeline
MAGS
AmberjackPipeline(25%)
Cypress Pipeline Co. (50%)
Explorer Pipeline(16.69%)
Mid-ValleyPipeline
(9%)
West TexasLPG Pipeline
(40.8%)
Estero
Gulf CoastCrude Pipelines
(Various %)
NGL(Various %)
JuarezPipeline
Venice-FaustinaPipeline
Major oil & gas companies own crude tankers and pipelines to transport crude oil and other products
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REFINING
Crude oil mixture is separated into several fractions or “cuts” during initial distillation process
FRACTION USE
Butanes and other light ends
Gasoline & naphtha
Kerosene and mid-distillates
Gas oil
Residual
Fuel and feedstocks for other refinery processes
Motor fuel
Motor fuel, heating oil, jet fuel
Feed to other refinery processes
Bunker fuel, asphalt, lubricants
TYPICAL FRACTIONSBoiling 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
The quality of crude oil drives refinery yields. However, distillation only generates about 20% - 25% yield of motor gasoline by volume.
7Downstream operations© Sympliciti 2007
REFININGTo improve gasoline yields, additional processing units are utilized in modern refining
Complex Refinery
Gas Plant
Hydrotreating
Hydrotreating
Reformer
Gasoline
Spl
itte
r
Jet fuel
Distillate fuel
Residual fuel
Cru
de
Un
it (D
istil
ler)
Isomerization
Flasher
ThermalCracker
Residuals
Gas Oil
Butanes & Other Light Ends
AlkylationCat
Cracker
Gasoline& Naptha
Asphalt
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
Most refineries are “complex” and represent a significant multi-billion dollar investment for an oil & gas company
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REFINING
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
While flawless execution of operations is critical to success in refining, several other value drivers must be managed as well. These include:
Successful refiners manage key value drives along with day-to-day operations
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REFINING
Projections suggests that demand for refined product will outstrip refining capacity
Projected US Refining Capacity(Million Barrels per Day)
Projected US Refined Product Consumption(Million Barrels per Day)
1980 1990 2000 2010 20200
5
10
15
20
History Projections
History ProjectionsHigh GrowthReferenceLow Growth
1980 1990 2000 2010 202019700
5
10
15
20
25 Total
MotorGasoline
OtherDistillateJet FuelResidual
Source: Annual Energy Outlook 2000 – Energy Information Administration
However, unannounced refinery capacity expansions and/or increased conservation efforts will likely close the gap
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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 and Logistics is a critical interface between the Refining and Marketing businesses
In the US, ChevonTexaco must supply more than 17 states from its 7 refineries
Product Supply & Logisticsperforms 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
Source: U. S. – Lundberg Share of Market Report –Taxable Mogas Sales
M E X I C O
Pacific
Ocean
Atlantic
Ocean
OR19%
2
NV16%
3
ID19%
1
NM14%
1
TX10%
4
AZ13%
3
LA13%
3
MS12%
4
GA10%
3
FL9%6
HI27%
1
WA19%
2AK
13%3
KY12%
3
CA18%
2
AL12%
3
UT21%
1
Market Share 9% or Greater Rank
C A N A D A
BC23%
1
U N I T E D S T A T E S
Burnaby
Richmond
El Segundo
El Paso
Salt Lake
Pascagoula
Refineries
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TERMINALS & TRANSPORTATIONTerminals and Transportation provides storage of refined products and delivery services to customers
Refined products are sold through various channels. Margins increases as sales gets closer to the consumer level, but so do investments.
Gases
Gasoline
Distillate
Residual
Refinery Gate
Service Stations
Distribution Via Product Tankers or Pipelines
Wholesale Margin
Rack Margin
Branded or Unbranded
Dealer Buying Price Margin
Street Margin
Contract DealersLessee Dealers
Load RackTerminal
Retail Jobbers,Commercial
CompanyOperatedSites
Oil Companies
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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
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MARKETING
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
Below are the key characteristics of the major Marketing Business Units
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RETAIL MARKETING TRENDS
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
Over the past 5+ years, oil & gas companies have developed marketing programs to differentiate their offering
While fairly cooperative in other parts of Downstream, oil & gas companies are fiercely competitive at the Retail Marketing level
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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
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The number of hypermarkets with fueling stations continue to grow and take market share away from oil & gas companies and other fuel marketers
Approximately 1,226 Hypermarket Fuel Sites exist (out of a total potential population of 33,735) . . .
Forecasted Gasoline Volume(Billions of Gallons per Year)
20002005
Hypermarkets 4.4 22.8All Other 128.5
118.4Total 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
Hypermarkets are forecast to take market share from traditional players
RETAIL MARKETING TRENDS
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Oil & Gas companies are redefining convenience by expanding site offerings to address multiple customers segments
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.
IMPLICATIONS
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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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About Sympliciti, Inc.
Sympliciti, Inc., operates an international elite network of business and technology client service professionals. Their mission is founded on a passionate obsession in seeing their clients succeed.
Sympliciti is famous for solving the world’s most complex integration challenges at the world’s most successful company’s. Their toolkit includes expertise in feasibility/fit assessment studies, strategic and tactical planning, project management, business and systems re-engineering and M&A integration consulting.
Sympliciti is a pioneer in the arena of value based consulting and virtual teaming. Their aim is to provide world-class professional services by embracing state-of-the-art processes and technology to deliver off-site, solution-focused, expert-led point advisory services. Their objective is to bring together the best team, architect the best solution and demonstrate the best results while delivering unbeatable value.
www.sympliciti.com
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