Marc Seris, Senior Director
European Refining: Why Is It So Bad?
� European demand collapse
– Demand has fallen by over 1 mbd since 2006
� US WTI messup
– US production has been upheldby low crude pricing in MidWest
0
1
2
3
4
5
2006 2007 2008 2009 2010 2011
Net Cash Margin
$/bl
NWE Cracking Refinery
Margins have not
recovered
mbd
Downstream Eastern Med Challenges| © PFC Energy | Page 2
78%
80%
82%
84%
86%
88%
90%
0
5,000
10,000
15,000
20,000
2006 2007 2008 2009 2010 e2011
Ref Cap Thruput Utiliz
Europe is hardest hit No significant recovery yet in sight
� Russian export surge
– Russia has seen continued risein gasoil and HFO exports throughout the crisis
EU Utilizationmbd
10,000
15,000
20,000
European Demand Has Lost 1.2 mmb/d Since 2006
European Oil Product Consumptionmbd
16.4 mmbd 15.2
mmbd
Downstream Eastern Med Challenges| © PFC Energy | Page 3
0
5,000
10,000
2006 2007 2008 2009 2010 e2011
Light Middle Heavy
US Inland Light-Sweet Discounts Driving US Refining
� US inland crude logistics are bottlenecked…
� …leading to a dramatic surgein WTI discounts to Brent
� US light-sweet discount is keydriver behind US mid-
0
20
40
60
80
100
120
140
160
Jan
-20
06
Jul-
20
06
Jan
-20
07
Jul-
20
07
Jan
-20
08
Jul-
20
08
Jan
-20
09
Jul-
20
09
Jan
-20
10
Jul-
20
10
Jan
-20
11
Jul-
20
11
Jan
-20
12
WTI Brent
$/b Crude Oil Prices
Downstream Eastern Med Challenges| © PFC Energy | Page 4
Logistical Bottleneck Likely to Last WTI Discount Drives Crack Spreads
driver behind US mid-continental refining margins…
� …leading to substantialrefining earnings for US exposed IOCs
0
5
10
15
20
25
30
35
40
Jan
-20
06
Jul-
20
06
Jan
-20
07
Jul-
20
07
Jan
-20
08
Jul-
20
08
Jan
-20
09
Jul-
20
09
Jan
-20
10
Jul-
20
10
Jan
-20
11
Jul-
20
11
Jan
-20
12
NWE Crack Spread USGC Crack Spread
$/b Crack Spreads
To WTI
To Brent
16,000
18,000
20,000
US Flips from Importer to Exporter…
US Finished Product Production & Consumption
1.2 mmbd net
imports
1.3 mmbd net
exports
Downstream Eastern Med Challenges| © PFC Energy | Page 5
10,000
12,000
14,000
Production Consumption
mbd
US has turned into net exporter since 2009
10,000
12,000
14,000
16,000
18,000
20,000
1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
Operable Capacity Gross Input
…and US Utilization Partly Recovers
US Capacity & Refining Input
mbd
� US operable capacity has continued to increase
– In spite of shutdowns in wake of 2009 crisis
Downstream Eastern Med Challenges| © PFC Energy | Page 6
75%
80%
85%
90%
95%
1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
Utilization
Operable Capacity Gross Input
US Refining Utilization� Utilization rates have partly recovered
– Supported by MidWeststrong margins and refineryruns
2,000
2,500
3,000
Other
HFO
Gasoil
Russian Product Exports Growth Puts Pressure on Refiners
Russian Oil Product Exports Grow 600 mbdmbd
Downstream Eastern Med Challenges| © PFC Energy | Page 7
-
500
1,000
1,500
2006 2007 2008 2009 2010 e2011
Gasoil
Kerosene/jet
Gasoline
LPG
Source: Downstream Markets Service FSU
New Crude Outlets in Baltic and Far East Adds Export Options Outside of Black Sea-Med & Druzbha
40
60
80
100
120
140
160
Russian Crude Exports by Major Outlet Indexed from 2005
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
mb/d
Crude Pipeline Exports by Russia to Non-CIS Destinations
Downstream Eastern Med Challenges| © PFC Energy | Page 8
Trends and strategic priorities suggest Baltic and Far East gains will be off-set by declines in Druzhba and Black Sea exports
0
20
Total crude exports Druzhba
Baltic Black Sea
0
500
1,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1Q
12
2012F
2013F
Far East/China Black Sea Baltic Druzhba
Druzhba Refineries Under Pressure as Traditional Discount Evaporates; Secondary Supply to be Key
Exposed Refineries:•Leuna•Schwedt•Plock•Bratislava•Szhazhalombatta•Mozyr*
Potential Reversals / Bypasses:•Odessa-Brody•Gdansk-Plock•Rostock-Schwedt-Leuna•Schwechat-Bratislava
Downstream Eastern Med Challenges| © PFC Energy | Page 9
TAL supply zone
Adria supply zone
Significant Refinery Rationalization in the Atlantic Basin Expected
PADD 2 & Midwest.
Canada
PADD 1 & East.
Canada
40%
60%5%
95%
PADD 116%
PADD 23%
PADD 35%
Northwest Europe
47%
Med. Europe
16%
Caribbean13%
At Risk Capacity by Region*
Downstream Eastern Med Challenges| © PFC Energy | Page 10
Note: All numbers exclude refineries < 40 mb/d
� Roughly 2/3 of the at risk capacity is located in Europe
� This outlook is through 2016
PADD 3
Caribbean3%
97%48%
52%
Med. Europe
Northwest Europe
27%70%
3%
18%
80%
2%
How Much Relief Can We Expect For EuropeanRefining?
� European demand is expected to continue to decline
– 1% per year on average in benign scenario
– Euro break-up could be « nightmare » scenario
� US situation unlikely to normalize quickly
– Surge in shale oil will entrench US Light Sweet discounts
None
None
Downstream Eastern Med Challenges| © PFC Energy | Page 11
� Russian exports will eventually reverse (after 2015)
– Mooted change in 2015 to HFO export tax could lead to reduced capacity and throughputs…
– …but unlikely to affect distillate exports too much
– And Russian crude exports to Med likely to decline
Not before2015
In short to medium run, main relief willcome from refinery closures
Radical Change in European Refining Competitive Landscape Will Therefore Continue In The Medium Term
UK: Essaracquires Shell
Stanlow refinery
Germany: Kleschacquires Shell Heide
refinery
Netherlands: Lukoiltakes stake in
Vlissingen refinery from DOW
Assets for sale:• Czech Rep: Ceska Rafinerska (Shell, Eni
stakes)• France: Berre L’Etang (LyondellBasell)• UK: Humber (COP)• UK: Milford Haven (Murphy)• Petroplus: Cressier (Switzerland), Petit-
Couronne (France), Antwerp (Belgium)• UK: Lindsey (TOTAL) - cancelled
Confirmed permanent closures since 2009:• France: Dunkirk (Total)• France: Reichstett (Petroplus)• Germany: Wilhelmshaven (Hestya)• Italy: Cremona (Tamoil)• Romania: Arpechim (OMV Petrom)• UK: Teeside (Petroplus)
Non-confirmed permanent closures:• Petroplus: Cressier (Switzerland), Petit-
Recent M&A Activity
Germany: Hestyaacquires COP
Wilhemshaven refinery
Germany: Nynas acquires Shell Harburg refinery
Poland: Lotos Gdansk refinery privatization failed. May relaunch.
Downstream Eastern Med Challenges| © PFC Energy | Page 12
Sweden: Keele (St1) acquires Shell
refinery
Germany: Rosneftacquires stake in
Ruhr Oel
UK/France: PetroChina
acquires stakes in Ineos
refineries at Granemouthand Lavera
• Petroplus: Cressier (Switzerland), Petit-Couronne (France), Antwerp (Belgium)
• France: Berre L’Etang (LyondellBasell)
Italy: ERG sake to Lukoil
UK: Valero acquires Chevron Pembroke refinery
Italy: ERG Total JV at Pantano
Spain: IPIC acquires Total stake in Cepsa
Lithuania: PKN Orlenshelves sale of Orlen Lietuva
Bosnia: Zarubezhneftacquires Brod/Modrica
refineries
Albania: Taci Oil acquires ARMO refineries
Serbia: Gazprom Neftacquires 51% stake in NIS
Belgium: Vitol acquires Petroplus Antwerp
refinery
Source: Refining
Monitoring
Service
But Retail & Marketing Margins Hold Up in Europe
0.08
0.10
0.12
0.14
EU15 Gross Distribution Margins€ per liter
Source: Global
Retail Service
Downstream Eastern Med Challenges| © PFC Energy | Page 13
Lower Refining Runs Provide Support to EU Marketing Margins
0.00
0.02
0.04
0.06
0.08
2006 2007 2008 2009 2010 2011
For European Downstream, Refining Risks Will Remain, Value Likely to be in Fuels Marketing
� Negative drivers for European refining are likely to remain in place for upcoming years…
� …which will lead to continued closures across NWE and the Med
� Refinery closures will help to support distribution margins and provideadvantages to well integrated players
Downstream Eastern Med Challenges| © PFC Energy | Page 14
Refining Risks Remain Very High in Europe – Marketing to Provide Earnings
� For investors, need to be extremely selective in going after refineriesup for sale…
� …and need to privilege downstream integrated positions
Balkans Expected to Partly Buck Decline Trend of Europe
100
120
140
GDP - Balkans vs EuropeBase 100 in 2011
610,000
630,000
650,000
670,000
20,000
21,000
22,000
23,000
Product Demand - Balkans vs EuropekTons per year
Downstream Eastern Med Challenges| © PFC Energy | Page 16
European demand to decline Balkan demand expected to rise
60
80
2005 2007 2009 2011 2013 2015 2017
Balkans EU
Source: IMF, PFC Energy
570,000
590,000
610,000
18,000
19,000
20,000
2005 2007 2009 2011 2013 2015 2017
Balkans EU
Source: National Statistics, PFC Energy
Bulgaria: Mild Growth Expected in Medium Run
2,000
2,500
3,000
3,500
4,000
1,000 tonsDemand - Bulgaria
LPG & Gasoil to see main growth
Downstream Eastern Med Challenges| © PFC Energy | Page 17
0
500
1,000
1,500
2,000
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
LPG Naphtha Gasoline Jet/kero Gasoil HFO
Croatia: Demand Growth Expected Until Fuel Oil Phase Out
2,0002,5003,0003,5004,0004,500
1,000 tonsDemand - Croatia
Gas + SECA could
lead to dramatic
fall in HFO
Downstream Eastern Med Challenges| © PFC Energy | Page 18
0500
1,0001,5002,000
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
LPG Naphtha Gasoline Jet/kero Gasoil HFO
Serbia & Montenegro: Medium Term Growth Expected
2,000
2,500
3,000
3,500
4,000
1,000 tonsDemand - Serbia and Montenegro
Significantgrowth of Gasoil &
LPG
Downstream Eastern Med Challenges| © PFC Energy | Page 19
0
500
1,000
1,500
2,000
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
LPG Naphtha Gasoline Jet/kero Gasoil HFO
20,000
25,000
30,000
35,000
1,000 tonsDemand - Turkey
Turkey: Significant Growth Expected
Gasoil willcontinue to
drive demand
Downstream Eastern Med Challenges| © PFC Energy | Page 20
0
5,000
10,000
15,000
20,000
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
LPG Naphtha Gasoline Jet/kero Gasoil HFO
Refineries in East Med Are Poorly Equipped for Challenging Environment, Especially in Balkans
63%
69%
80%
81%
81%
Serbia
Bulgaria
Greece
Hungary
EU-27
Croatia
Greece
Bulgaria
Romania
Hungary
Bosnia & Herz.
Turkey
6
8
10
12
Co
mp
lex
ity
Balkan and Black Sea Refining
Area refiners are dealing with their own set of troubles…
Downstream Eastern Med Challenges| © PFC Energy | Page 21
25%
34%
39%
44%
52%
53%
54%
57%
0% 50% 100%
Ukraine
Albania
Bosnia & Herz.
FYRO Macedonia
Croatia
B&BS Average
Romania
Turkey Albania
Serbia
Ukraine
AverageFYRO
Macedonia
0
2
4
0 50 100 150 200
Co
mp
lex
ity
Average refinery size (mb/d)
• Inoperable capacity (particularly in Ukraine and the Balkans) skews utilization figures significantly below global averages
• Smaller average size limits benefits of scale and increases exposure for shutdown
HFO Substitution Major Challenge Going Forward
3,000
4,000
5,000
6,000
7,000
8,000
9,000
East MED & Black Sea
HFO Supply/Demand Balance Forecast1,000 tons
20%
22%
23%
29%
38%
44%
Ukraine
Albania
Bulgaria
Greece
FYRO Macedonia
Bosnia & Herz.
HFO Yield
NB: Ex. Russia
Downstream Eastern Med Challenges| © PFC Energy | Page 22
� As local demand falls and major conversion investments are delayed, HFO overhang will continue to grow– Tightening fuel standards (bunkering, electricity generation)
limit local demand markets
� Does not take into account Russian HFO exports flowing through Black Sea, which are ~15 mmt/y– Cannot compete with Russian refining system
-
1,000
2,000
3,000
2%
6%
8%
10%
17%
17%
20%
0% 20% 40% 60%
Hungary
Romania
Turkey
EU-27
B&BS Average
Croatia
Serbia
Assumes no closures of Balkan refineries
Balkans / East Med Considering Large Number of Refining Investments
� Romania
– Recent stream of HCK at Petromidia
– Thermal cracked & asphalt unit due in 2013 at Petrobrazi
� Bulgaria
– Resid HCK planned for 2015 at Bourgas
� Croatia
– Hydrotreating to meet Euro V almostcompleted at Rijeka
� Greece
– Elefsina refinery has seen major upgrade
• New CDU, flexicoker and hydrogen plant
– Thessaloniki also completed significantupgrade
• Boosts middle distillate yield
� Turkey
– Residuum upgrade project at Izmit,
Downstream Eastern Med Challenges| © PFC Energy | Page 23
Numerous mooted Balkan projects SEast Med also actively investing
completed at Rijeka
– Coker under consideration
� Serbia
– Resid upgrading under consideration
� Albania
– Considering upgrade to run more domestic crude
– Residuum upgrade project at Izmit, planned for 2014 streaming
• Will boost production of middle distillates
– STAR greefield refinery planned for 2014 startup
• Located near Izmir
• Socar and Turcas behind project
• Will provide feedstocks to nearby Petkimpetrochemical plant
• Will add 6 mmtons of Euro V diesel
Criteria For Profitable Refining?
� Investors are finding times challenging for downstream investments
1 ScaleRefineries above 200 mb/d usually enjoy unit costadvantages versus smaller sites
2 ComplexityComplex refineries generally produce more high valueproducts and have more flexibility
Criteria for Success in Refining
Downstream Eastern Med Challenges| © PFC Energy | Page 24
products and have more flexibility
3Alignment with market
Refinery production should be well aligned with demandin target markets to prevent selling at a loss
4 SupplyUpstream integration with crude can give a supply costadvantage.
5DownstreamIntegration
Downstream integration, for example withpetrochemicals and lubricants, can add value
6 LocationLogistical advantages (crude supply, product offtake,access to market) are all important
East Med Refining Projects Unlikely to All Go Ahead
� European refining environment will remain highly challenging in the next few years
� Balkan refineries lack complexity and scale and produce too muchfuel oil…
� …in a market that will see less and less fuel oil demand
Downstream Eastern Med Challenges| © PFC Energy | Page 25
Need to be very selective in choosing upgrade projects
� …in a market that will see less and less fuel oil demand
� Investing to upgrade all East Med refineries is not realistic…
� …only a few projects will be economically viable
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Downstream Eastern Med Challenges| © PFC Energy | Page 26
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