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Crude Supply Workshop

Crude Supply Workshop. December 18-19, 2001. Contents. Preliminary Workshop Agenda 3 Proposed Analysis Framework 4 CITGO “As Is” Processes 7 Timeline 19 Dataflow 20 Summary of CITGO Issues & Potential Solutions 21 PwC Experiences 25 Crude Selection 26 Crude Supply 38

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Crude Supply Workshop

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  1. Crude Supply Workshop December 18-19, 2001

  2. Contents • Preliminary Workshop Agenda 3 • Proposed Analysis Framework 4 • CITGO “As Is” • Processes 7 • Timeline 19 • Dataflow 20 • Summary of CITGO Issues & Potential Solutions 21 • PwC Experiences 25 • Crude Selection 26 • Crude Supply 38 • Marine/Chartering 45 • Implementation Planning 54

  3. Preliminary (Proposed) Agenda • Tuesday Dec 18 • AM • Introductions & Workshop Objectives • Overview of CITGO physical assets, constraints, etc. (e.g. physical limits, PDVSA commitments, % spot) • Review PwC-proposed analysis framework/templates • Review CITGO “As Is” Processes (capture issues/problems/questions) • PM • Continue As-Is review (capture issues/problems/questions) • Organize and priortize issues • Drinks/Dinner? • Wednesday Dec 19 • AM • Brainstorm and develop “future state” improvements • Prioritize and define discrete improvement initiatives • PM • Develop preliminary business case and charter for each initiative

  4. Suggested Analysis Framework • A dual approach – process-analysis and functional problem-solving – is recommended 1. Quantify reason for improvement Process or functional gap? Process restructuring path Functional problem solving path Process Analysis Root-Cause Analysis 5. Analyze causes; group into projects 6. Quantify benefits; define improvements 7. Select best solution; relate to processes 2. “As-is” analysis: process and value 3. Set vision and new paradigms 4. Generate ideas & opportunities “Process” Demurrage “Structural” 8. Redesign new processes 9. Develop implementation change plan Capture benefits; verify results Build new processes Ongoing

  5. PwC’s Petroleum Process Taxonomy – 1/2 SupplyMarket,& Transport Market & Distribute Wholesale Products Operating Processes Refine & Process Feedstocks Sell Retail Products Forecast Supply / Demand Admin. Contracts Make & Document Deal Control Plant Units Admin. Contracts Forecast Market Demand In 1998, PwC developed a common business language, based on the Michael Porter value chain concept. A petroleum-specific operating process taxonomy was developed to facilitate diagnosis of existing processes and development of improved operating practices. We suggest using the taxonomy as a cross-check for inter-relationships, completeness of analysis, etc.. Manage Inventory Make Feed-stock Selection Manage Inventory Manage Product & Merch. Inventory Arrange Exchanges Arrange Ex-changes Arrange Transport & Actualize Move-ments Manage Risk / Exposure Manage & Optimize Process Ops Arrange Transport & Actualize Move-ments Manage Risk / Exposure Process Sales Transac-tions Forecast Supply / Demand Process Orders Manage Plant Inventory Process Orders Promote & Advertise Products Make & Docu-ment Deal Set & Maintain Price Receive & Load Feed-stocks & Products Set & Maintain Price Set & Maintain Price Processes relevant to CITGO’s crude supply initiative

  6. PwC’s Petroleum Process Taxonomy – 2/2 SupplyMarket,& Transport Market & Distribute Wholesale Products Refine & Process Feedstocks Sell Retail Products Support Processes Report Operational Information Perform Business Improvement Manage Environmental Concerns Manage External Relationships Manage Corporate Services/Facilities Manage Financials Manage Human Resources Manage Legal Services Perform Planning/Management Perform Procurement/Materials Management Develop & Maintain Systems/Technology

  7. CITGO Documented “As-Is” Process Blocks 1. Manage Inventory 5. Purchase crudes - marine 10. Schedule marine crudes 9. Nominate Venz crudes & purchase 2. Arrange long-term Marine 11. Dock scheduling & monitoring 7. Purchase crudes - domestic 8. Schedule pipelines - domestic 3. Prepare crude assays • Notes: • Several issues (lack of clarity) around PDVSA nomination process • Inconsistent treatment of crude delivery scheduling by refineries (CC and LC) • SAP transaction “friction” in several areas • Many key documents are independent spreadsheets – no centralized data repository 6. Crude Selection Optimization 4. Develop price / volume forecast On the following pages, a common template is used for each “process block”. The information (partial) was extracted from CITGO’s “brown-paper” process document.

  8. 1. Manage Inventory Process Customer/Output Supplier/Input Issues/Problems • How do we know our inventory today? • How do we know our inventory X days out? • How do we manage our inventory? Open Questions Future State

  9. 2. Arrange Long-term Marine Process Customer/Output Supplier/Input • Plan rough requirements for vessels (3 months +) • Require a COA for these vessels • Contracts of affreightment (COA) • Term charters Issues/Problems Open Questions Future State

  10. 3. Prepare Crude Assays Process Customer/Output Supplier/Input • Sample and test crude deliveries • Acquire test results from crude analysis • Check reasonableness of data • Update crude assay and contact refinery if needed • Crude Assays (50 crudes) Issues/Problems • Not enough time to maintain; requires 1 FTE Open Questions Future State

  11. 4. Develop Price/Volume Forecast Process Customer/Output Supplier/Input • PDVSA • Receive price/avails from PDVSA • Verify consistency of PDVSA prices/volumes • Develop final consensus on price/volume forecast • Forecast non-PDVSA crude prices diffs • Audit forecast performance • Crude.xls • Crude_PDV-xls Issues/Problems • PDVSA price forecast often late/last minute Open Questions Future State

  12. 5. Purchase Crudes – Marine/Cargo Process Customer/Output Supplier/Input • Previous month’s plan, modified based on operations (unit down, TA) • Crude buy/sell sheet for marine cargoes Issues/Problems Open Questions Note: Purpose not clear Future State

  13. 6. Crude Selection Optimization Process Customer/Output Supplier/Input • Acquire product price/vol info (tiered pricing; logistical constraints • Acquire TA schedules from refineries • Run LPs for each refinery (max profitability) • Optimize PDV and CITGO plan • Crude plan spreadsheet (Lake Charles and Corpus Christi) • PDV nomination word doc (for legal, CSA, FSA, accounting) Issues/Problems • Some people may use the PDV nom. doc in operations • Crude plan spreadsheet requires a lot of time to input/update Open Questions • Why are there so many iterations? • Who uses PDV nomination doc? Why? Future State

  14. 7. Purchase Crudes – Domestic Process Customer/Output Supplier/Input • Accounting of previous month’s deliveries (“Exchange Report”) not in SAP) • Evergreen (yearly) contracts • Confirm volumes of domestic crude w/ Supplier • Tracking and adjusting evergreen contracts (short/long position) • Enter evergreen contracts into SAP • Balance domestic trade locations • Purchase domestic crudes • Enter into SAP “dealsheet” for domestic • Ring trades on ______ for WTI • Domestic crude deal sheet • Domestic purchases spreadsheet Issues/Problems • Exchange report not captured in SAP • Evergreen contract info must be updated w/ new PO# monthly for SAP Open Questions Future State

  15. 8. Schedule Pipelines – Domestic Process Customer/Output Supplier/Input • Nominate pipeline shipments of crude • Confirm nominations to get a schedule • Determine need for storing crude at Equilon P/L or Sour Lake • Nominate dates and volumes into SAP • Enter trade barrels (before month is over) into SAP • Pipeline nominations (10 spreadsheets) Issues/Problems • Entering trade bbls into SAP very cumbersome • Accounting for month N….. • Don’t know how much crude is delivered until end of month N Open Questions Future State

  16. 9. Nominate Venezuelan Crudes and Purchase Process Customer/Output Supplier/Input • Reserve load windows • Check crude quality, volumes, timing, compatibility • Schedule crudes in time windows • Calculate crude arrival dates • Check logistical (dock) constraints • Purchase crudes • “Early” PDV nominations (load dates) (word doc) • “Final” PDV nominations (load dates) (word doc) • Confirmation nomination • Deal sheet for spot cargoes • Spreadsheet for scorecard tracking and risk Issues/Problems • Nominated windows are not confirmed and subject to change • PDV changes time windows w/o considering customers • Marine limit of 15 cargoes per month • Changes in the plan occur often • Crude type change and movement of windows cause marine scheduling difficulties Open Questions • Why are there two nominations to PDV? • Why are there two nominations from PDV? • How difficult is it to change a crude nomination in SAP? • What are the costs from changing load windows? • How do we consider demurrage at this stage? Future State

  17. 10. Schedule Marine Crudes Process Customer/Output Supplier/Input • abc • Input crude delivery schedule into SAP • Inform Risk Management • Confirm crude plan to refineries • Nominate/Notification to suppliers and inspection companies • Acquire a vessel for each delivery • Issue vessel orders • Track/facilitate vessel movement • Monitor crude inspection reports for quality concerns • Make changes to doc schedule for weather/other delays • SAP voyage file • Schedule log • Notification to suppliers/inspection companies • Spreadsheet or TBN report in SAP • SAP marine schedule log • P.O. for ship in SAP (incl. scanned broker conf.) • Load inspection for quality • _________ document Issues/Problems • Lake Charles doesn’t allow direct input into spreadsheet • Spreadsheets are primary source; SAP isn’t kept up Open Questions • How difficult is it to change a crude schedule in SAP? • Can SAP create the crude schedule from deal sheets or vice versa? • Why isn’t SAP scheduling used? Future State

  18. 11. Dock Scheduling and Monitoring Process Customer/Output Supplier/Input • Inventory projection report (daily) • Dock notification spreadsheets (daily) • Optimize dock utilization and demurrage (comparative economic analysis) • Acquire dock info from products and feedstocks • Develop detailed dock schedule(s) (iteratively) • Update dock schedule(s) for changes • Update dock schedule and log actual dock activity • “Tulsa” dock schedules (CC, LC) • “Judy” Schedule – LC dock schedule (<48 hr focus) • Detailed dock log Issues/Problems • Lake Charles isn’t concerned as much about 5+ days out • LC doesn’t use Tulsa dock schedules • Redoing work from one dock tool to the next • Electronic log sheet is available, but not being used yet Open Questions • How do we minimize demurrage (scheduling)? • How do we minimize demurrage (execution)? Future State

  19. Crude Supply Timeline (incomplete) Domestic Ring trades-Cushing Confirm volume of domestic crude Nominate P/L shipments Purchase domestic crudes – P/L Purchase domestic crudes – barge N - 3 N - 2 N - 1 N 1 5 10 15 20 25 30 1 5 10 15 20 25 30 1 5 10 15 20 25 30 1 5 10 15 20 25 30 Cargo Purchase Marine Crudes Purchase marine crude (LC only)? Early PDV nomination Final PDV nomination Confirm nomination of PDV crudes Planning Develop price/volume forecast Optimize dock utilization & demurrage Develop detailed dock schedule Update dock schedule and log actuals Plan long-term freight (COA) Optimize PDV & CITGO plan Finalize Crude.xls & Crude_PDV.xls Final consensus price/volume forecast Plan Updates

  20. MS Excel? MS Excel? MS Excel? MS Excel MS Excel MS Excel MS Excel MS Excel MS Excel MS Excel MS Excel MS Excel MS Excel MS Excel MS Excel Hard Copy MS Word? MS Word MS Word MS Word MS Word Fax SAP IS Oil SAP IS Oil MS Word or fax Crude Supply Data Flow (incomplete) Planning/Forecasting Dom. Crude Vols/Loc/Price Dom. Crude Deal Sheet Crude Selection LP Crude Assays Domestic Purchases MS Excel or Access AT PIMS Crude Plan Domestic “Exchange Report” PIMS PAssMan? Price/Vol Forecast Pipeline Nominations (x10) • Evergreen Contracts • SAP “Deal Sheet” • Nomination Dates/Vols • Trading bbls • Crude.xls • Crude_PDV.xls • RefPrice.xls • RefPrice_PDV.xls Domestic Purchasing Other crude price diffs Inventory Mgmt / Dock Scheduling Crude Del. Sched. - CC Inventory Projection Report Tulsa Dock Schedule(s) PDV Nomination (from PDV) Crude Buy/Sell Sheet - Marine • Deal sheet for spot cargoes • Voyage file • Crude delivery schedule • TBN report or spreadsheet • Marine schedule log • Ship P.O.s TBN spreadsheet Dock Notification Spreadsheet LC (Judy) Dock Schedule Early PDV Nomination Marine Purchasing Scorecard Tracking & Risk Load Inspection Quality _____ doc Final PDV Nomination Confirmed Nom. Dock Log

  21. Summary of CITGO Issues and Potential Solutions • CITGO Issues • Demurrage Management • Demurrage minimization at scheduling • Demurrage minimization at execution • Decision Support • Availability of alternative economic analysis at each management step • Inventory management during the whole timeline • Data Management • Inventory tracking during the whole timeline • Easy input, changing, communicating, and reporting of all data • Elimination of isolated spreadsheet data • Easy interfacing with SAP • Solution Implications (preliminary) • Collaborative dock scheduling tool, integrated with refinery scheduling tool • Automated dock log / feedback loop • Consistency of practices between LC and CC • Increased visibility of latest plan • Adapted decision support tools, including refinery scheduling • Expanded view of crude value vs. delivery timing • Centralized data model/platform • Increased automation of workflow/messaging • New/extended SAP interfaces

  22. Demurrage Management • Analysis of root causes is necessary to determine focus of effort. Reducing controllable demurrage will likely require a dock scheduling application to facilitate making the right choices. Total Demurrage, $ X MM/yr X% y% Controllable Non-controllable • Weather • etc X% y% Process Structure • Storage Volume • Berth/jetty capacity • etc • Nomination process/dates • Vessel ETA visibility • Real-time Inventory position availability • Equipment malfunction • etc • Dock Scheduling Tool Options • Adapt proven tool outside petroleum (e.g. CarrierPoint software) • Adapt related refinery scheduling tool (e.g. Dock Sched module for Aspen Tech Orion Tool • Adapt other industry-specific tool (e.g. PortMaster application from JIT Shiping and Triple Point • Custom development • Dock Simulation • Conduct rigorous simulation to determine “natural” demurrage exposure, based on terminal and jetty constraints • Evaluate CapEx vs. demurrage savings • Industry expert with tool available

  23. Decision Support • A framework must be developed that identifies the true decision-point “degrees of freedom” over the 60-90 cycle process (crude selection to cargo discharge). As the process enters the true scheduling phase, care must be taken not to sub-optimize small periods of time; the overall optimization “window” must be considered. • It is essential to close feedback loops from operations (e.g. dock log, refinery operations log) so that the degree of plan/schedule feasibility is improved. In our experience this is best done electronically, providing operations with an easy and rapid feedback mechanism. • A platform (e.g. company intranet) is necessary, such that the latest version of all key planning documents can be viewed, downloaded, etc. with ease. Clear delineation of the roles responsible for each key planning output document is critical. • It is important to transition to a time-specific refining value for each crude grade, such that delays or advances in the delivery schedule can be analyzed for margin costs as well as out-of-pocket demurrage. • Automation of workflow (e.g. automatic document transmittal and messaging) can greatly facilitate this process

  24. Data Management • Must consider existing plans/directions for SAP IS Oil and other modules. Are we talking about interfaces only are adoption/modification of other modules? • CITGO will have to decide on data management philosophy: • Continued use of spreadsheets in more controlled fashion, with some workflow automation and automated import/export OR • Development of data platform/repository to maintain one storage source for each data element • Discuss main issues with inventory tracking. Very likely that inventory data updated daily. Is access a problem? Does SAP handle?

  25. PwC Experiences (Case Studies) Crude Selection Crude Supply Marine

  26. Case Study 1Improving the Crude Selection Process

  27. Increasing Crude Synergy Realization • This section presents a more robust crude evaluation and selection framework with the following objectives: • Make better crude selection decisions during the planning cycle, realizing how relative crude refining values change with changes to key input variables • Provide a framework for determining the cost to the refinery stemming from changes in the crude delivery schedule • The new process has two key principles: • Institutionalize the process for developing likely sensitivities that impact crude value • Provide rigorous output data for crude refinery BEV and margin that equip the trader with more tools to understand crude value drivers Planned Crude Value = ? Planning Premises Scheduling & Logistics Events Realized Crude Value

  28. Crude Valuation Methods – Hierarchy of Accuracy • Various methods are used to value the time-specific value of a crude grade. There is a trade-off between robustness of analysis and the time required to perform the evaluation. Assay/Spreadsheet-Derived Crude Values Assay yields valued at associated netback prices - no correction for cut qualities LP - Derived Crude Values Assay yields and cut qualities. Yields valued at associated netback prices, - quality penalty or premium (estimate) applied to key quality difference for each cut. LP run with 100% of evaluation crude vs. 100% of Brent for a given price structure and process unit constraint environment. Shorter Decision Times Increasing Robustness/Confidence Level Assay yields and cut qualities. Yields calculated at associated netback prices, - quality penalty or premium (derived from LP run of most likely crude slate environment) applied to key quality difference for each cut. LP shadow prices for each crude, given a converged basecase run with most likely crude slate environment, price structure, and process unit constraint environment. Assay yields and cut qualities. Yields calculated at associated netback prices, - quality penalty or premium (derived from LP run of most likely crude slate) applied to key quality difference for each cut. Historical analysis, forward schedule, and probability analysis used to “tune” the quality difference value components LP run with 100% of evaluation crude vs. 100% of Brent for a given price structure and process unit constraint environment. Model allowed to buy or sell products/intermediates to enable production of saleable refined products. Many companies end up with less-than-robust solutions due to time constraints and the inability to properly focus the area of analysis. Or, they have prolonged decision cycles that result in missed opportunities. LP run with cargo-equivalent volume of evaluation crude in lieu of Brent for a given crude slate environment, price structure, and process unit constraint environment

  29. The Crude Slate Processing Environment Strongly Dictates Crude Refinery BEV Crude breakeven values (BEVs) are heavily dependent upon processing environment. However, quality of spot crude slate is largely unknown 60 days in advance. The inter-dependency of crude refining value must be communicated to the crude supply trader. Crude, M BPD Light Sour Light Sour Light Sour Light Sweet Light Sweet Light Sweet Spot Heavy Sweet Scheduled To be purchased Heavy Sour Heavy Sour Heavy Sour Heavy Sour Pipeline Sweet, 10 M BPD Base Load Cargo Light Sour, 20 M BPD Cargo Heavy Sour, 35 M BPD 0 30 60 90 days

  30. Conventional Crude Selection Results in “Point Values” - 1/2 Improved Understanding of Crude Refining Value -0.20 -0.40 -0.60 -0.80 Conventional View of Crude Refining Value Value vs. Dtd Brent, $/B Grade A - 0.30 Grade B - 0.60 …. … Grade Z - 1.65 Value vs. Dtd Brent, $/B -0.30 Grade A -0.60 Grade B Processing Environment and Assumptions In this example, “Grade A” has a higher refining value, by $0.30/B, than “Grade B”. Assuming the grades are priced the same on a delivered basis, Grade A will easily “win out” in the selection process. However, Grade A has some “unique” qualities that require certain other crudes and/or feedstocks to be processed concurrently in order to realize full value synergy. The value of “Grade A” falls off sharply if it is processed outside of a relatively narrow operating range. Grade B, on the other hand, has a more stable value curve and does not lose significant value when the actual operating environment deviates from planned. Using probability analysis, some refiners might value Grade A higher than Grade B, while other refiners would place a lower value on Grade A. The key is to provide a robust analysis framework that reflects the probability that the crude value planned-for will be realized.

  31. Conventional Crude Selection Results in “Point Values” - 2/2 • For example, consider Nigerian Forcados that is cetane deficient, with the straight-run diesel cetane being below the specification for transportation diesel. If Forcados is valued against a crude slate that has excess cetane-barrels, the cetane quality penalty for Forcados will be effectively zero, and the crude may show a high relative value (and margin) vs. other similar grades. However, if purchased, the actual delivery time of the Forcados cargo is key to ensure that the cetane deficiency is effectively handled through crude blending. Similarly, the delivery times of the other cetane-rich grades are also very important. Using this simple example, one can see that the value of Forcados may represent a bell-shaped curve, with the shape heavily dependent on the crude qualities. Relative Refining Value, $/B Forcados Ship Arrival Time Early Late Other Grades Delivery Time Early Late Heating Oil Demand Low High Forcados Composite Value Curve Processing Environment and Assumptions

  32. A New Way of Viewing the Crude Value Hierarchy • The concept on the previous pages can be extended to various other parameters, resulting in an n-dimensional “surface” that reflects the ranges of possible crude oil values. • Therefore, planners and traders need to begin thinking of crude value as a multi-dimensional surface, subject to certain constraints and assumptions. BaseCase (“Plan”) 1.00 0.75 0.50 Crude “A” Crude “B” 0.25 0 Parameter 4 Parameter 1 -0.25 -0.50 -0.75 Relative Crude Margin “Surface” vis-à-vis Sensitivities Crude “A” and Crude “B” vs. Brent Parameter 2 Parameter 3

  33. Understanding Crude Margin Sensitivity is Important • The Key Question is: How does the relative margin of the crude change with: • Changes in product price structure (price spreads)? • Changes in product demand volumes (domestic/export)? • Changes in unit capacities and/or constraints? • Changes in crude slate environment? • Changes in crude freight rates? • Changes in crude price differentials? • Contaminant levels (not modeled)? • Variability of Crude Quality? • So, if we could only run a sufficient number of cases, or make enough simplifying assumptions WITHOUT losing accuracy, we could facilitate a much better understanding of the factors that drive relative crude refining value.

  34. Structuring the Senstivity Types • The primary classes of independent variables can be structured into “Sensitivity Types”, with corresponding requirements for analysis: • Sensitivity Type Analysis Tool Required (Ideal) • Product price LP preferred, spreadsheet may be suitable for small changes • Product demand LP • Unit constraints LP • Crude slate LP • Crude freight Spreadsheet - direct relationship to margin • Crude Price Spreadsheet - direct relationship to margin • No Sensitivity Required - Analysis Built into Basecase • Non-modeled variables (e.g. contaminants) - use fixed spreadsheet penalties/limits, considering a forward view of the schedule, and qualitative assessment as needed. • Crude quality variability - differences in crude quality variability should be reflected in the margin differences for the Basecase using fixed penalties where appropriate and qualitative assessments.

  35. Institutionalizing the “Sensitivity Selection Process” • A process must be established for each business unit, and for the downstream system as a whole, to define key sensitivities to be studied for each planning cycle, whether it is for crude selection or monthly program development. • Basically, sensitivities are selected for analysis depending on current market and operating conditions, initially perhaps limited to one sensitivity per “Sensitivity Class”. The planning group would facilitate the definition of each sensitivity, depending upon the Sensitivity Class. The table below indicates the primary responsibilities for developing each type of sensitivity: Responsibility for Sensitivity Development (Planning Group responsible for facilitating development) Sensitivity TypePrimarySecondary • 1. Product price Product Supply/trading Planning • 2. Product demand Product Supply/trading Refinery Scheduling • 3. Unit constraints Refinery Operations/Scheduling Planning • 4. Crude slate Crude Traders Refinery Scheduling • 5. Crude freight Crude Logistics Planning • 6. Crude Price Crude Traders Planning Sensitivity Development Process (in context of Planning Premise Development) Collect input and future “views” Develop Basecase Premises Facilitate Sensitivity Case Development Define Sensitivity Cases Perform crude evaluation and Operating Targets Planning Group Refinery Scheduling Provide Input to Basecase Development Review Basecase Premises Recommend Sensitivity(ies) Refinery Operations Crude Logistics Product/Crude Traders

  36. Analyzing and Selecting the Sensitivities • For each type of sensitivity, several types of analyses can be used to properly define the “right” case to run. Shown below is a sampling of suggested methods for making the sensitivity selection process more than just a “gut feel” or intuition. • Example Methods for Sensitivity Development • Sensitivity TypePrimary ResponsibilityMethods 1. Product price Product Supply/trading - Historical analysis of key price spreads - seasonal averages, std deviations - Price spread analysis during certain different price structures - e.g. high crack spreads vs. low crack spreads - Market fundamentals - Company and outside consultant views 2. Product demand Product Supply/trading - Historical analysis of Planned vs. Actual domestic supply volumes - Regional supply/demand fundamentals; Competitive refinery analysis 3. Unit constraints Refinery Ops/Scheduling - Historical analysis of unit run lengths and equipment failure history - Preventative maintenance projections; turnaround project updates - Unit operating weaknesses; Process engineers’ assessment of utilities and other support units 4. Crude slate Crude Traders/Scheduling - Forecast for scheduled crude deliveries and crude runs - Fundamentals vis-à-vis global crude quality supply/demand balances 5. Crude freight Crude Logistics - Historical worldscale (WS) analysis; WS forecasts by brokers - Supply/demand fundamentals 6. Crude Price Crude Traders - Historical analysis of seasonal quality spreads - Supply/demand fundamentals - Outside consultant projections

  37. Viewing the Results Relative Crude Margin “Surface” vis-à-vis Sensitivities Crude “A” and Crude “B” vs. Brent BaseCase ILLUSTRATIVE Relative refining margins are shown for two crudes, Crude “A” and Crude “B” vs. Brent for the Basecase and 4 Sensitivity cases 1.00 0.75 0.50 Crude “A” Crude “B” 0.25 0 Sensitivity Type 4 Crude Slate Shift - Increased sour slate Sensitivity Type 1 Widening jet to naphtha price spread -0.25 -0.50 In only one case, Sensitivity 4, is the economic incentive for Crude “B” greater than that for Crude “A”. Unless Senstivity 4 is more highly probable - relative to the other cases - Crude “A” can be purchased with a significantly higher degree of confidence. -0.75 Probabilities can be established to gauge the “likelihood of occurrence” for each sensitivity, allowing a weighted-average refining value to be calculated. Sensitivity Type 2 Reduced domestic supply of low-cetane heating oil Sensitivity Type 3 Reduced reformer charge because of possible maintenance

  38. Case Study 2Improving the Crude Supply Process

  39. Crude Supply – Level 1 Process To define the scope of the crude project and develop a basis for more in depth mapping, a high level process map was constructed. The map below shows the high level (level one) processes that occur during crude planning and acquisition. 2.0 Refinery Premises 1.0 4.0 Acquisition Business Development Develop Systems/Model a 3.0 5.0 Market Premises Optimal LP Solution Decision Support Process 6.0 Refinery Scheduling & Op’s Guidance Planned Performance Crude Nominations & Delivery Windows 8.0 7.0 Crude & Term Feedstock Acquisition Continuous Improvement Actual Performance

  40. Crude Supply – Detailed Process Analysis – 1/3 Once the major crude processes were clearly distinguished in the level one map, sub-processes (below and on the following page) were defined and then mapped in detail. 1.0 Acquisition Business Development 2.0 Refinery Premises 3.0 Market Premises Level 1 2.1 Develop Unit Premises 2.1.1 Define Time Horizon 2.1.2 Map Scheduled Downtime 2.1.3 Map Unit Capacities 2.1.4 Data Updates for Current Perf. 2.2 Develop Input Premises 2.2.1 Identify Incompatible Crudes 2.2.2 Define Crude Pool Limitations 2.2.3 Def. F/stock Logistic Constraints 2.3 Develop Product Premises 2.3.1 Identify Marketing Rqmts 2.3.2 Evaluate Outside Supply vs. Sub- Optimal Refinery Ops. 2.3.3 Fix Min. and Max. Production 2.3.4 Map Seasonal Specification 2.4 Develop Inventory Premises 2.4.1 Identify Exceptional Inv. Levels 2.4.2 Def. Intermediates Inv. Rqmts 2.4.3 Def. Crude & F/stock Inv. Rqmt 2.5 Assay Updates 2.5.1 Update Assay Library 2.5.2 Process Data for Cutting Scheme 2.5.3 Import into LP Model 1.1 Develop & Maintain Databases 1.1.1 Market Price Database 1.1.2 CEP Database 1.1.3 Generate Historical Trends 1.1.4 Eval. Known Future Developments 1.2 Develop & Maintain Bus. Potential 1.2.1 Evaluate Supply Constraints 1.2.2 Evaluate Supply Objectives 1.2.3 Develop supply Options 1.2.4 Acquire More Data 1.3 CEP Analysis 1.3.1 Eval. Competitiveness of Basis 1.3.2 Basket Mix Analysis 1.3.3 Basket Marker Crude Analysis 1.4 Determine Options/Contract 1.4.1 Verify Feasibility 1.4.2 Verify Econ’cs/Vol. Relationships 1.4.3 Negotiate Terms & Conditions 3.1 Crude Pricing Gathering & Analysis 3.1.1 Mkt Intelligence Analysis 3.1.2 Evaluate Market Crude Pricing 3.1.3 Estim. Monthly Marker Prices 3.2 Product Pricing Gathering, Analysis 3.2.1 Market Intell.Analysis 3.2.2 Determine Crack Spreads & Margins 3.2.3 Update Graphs 3.2.4 Finalize Spreads 3.3 Product, F/S & Arab CEP Pricing 3.3.1 Develop USEC, USGC Product & Arab Crude Prices 3.3.2 Market Intel Analysis 3.3.3 Review F/S, LPG, Chem Price Hist 3.3.4 Forecast F/S, LPG, Chem Prices 3.3.5 Compile Final Product, F/S & Arab CEP Pricing 3.4 Non-CEP Crude Pricing 3.4.1 Develop Market Crude-Based Prices 3.4.2 Develop Formula Crude Prices 3.4.3 Estimate Transportation Costs 3.4.4 Estimate Lightering, Demurrage, Fees 3.4.5 Develop Refinery Delivered Prices 3.5 Non-Arab Crude CEP Pricing 3.5.1 Determine CEP Yields 3.5.2 Develop CEP Prices

  41. Crude Supply – Detailed Process Analysis – 2/3 6.0 Refinery Scheduling & Op’s Guidance 5.0 Decision Support Process 8.0 Crude & Term Feedstock Acquisition 4.0 Develop System/Model 6.1 Develop Crude Run & Lay Down Schedule 6.1.1 Update Firm Nomination Laydowns 6.1.2 Set Crude Pool Runs to Optimal 6.1.3 Lay in Cargoes Managing Pool & Tot. Inv. 6.1.4 Develop Notice of Refining Schedule 6.2 Develop F/stock Schedules 6.2.1 Define Optimal F/stock Requirements 6.2.2 Update Schedule for Firm Purchases/Draws 6.2.3 Define Target Delivery Windows for Additional Purchases 6.3 Develop Operating Guidelines 6.3.1 Define Optimal Stream Dispositions 6.3.2 Define Planned Inventory Movements 6.3.3 Define Target Cut Points & Severities 6.3.4 Define Low Level Ops Strategies 6.4 Develop Production Schedule 6.4.1 Det Finished Product Open Inv by Grade 6.4.2 Map Out major Products Planned Production 6.4.3 Map Out Planned Lift Schedule 6.4.4 Coordinate with S&D 6.5 Monitor & Update 6.5.1 Monitor for Deviation from Plan 6.5.2 Rerun LP 6.5.3 Update Relevant Schedules & Financials 6.5.4 Feedback Current Performance vs. Plan 4.1 Obtain Required Data 4.1.1 Complete Process Test Run 4.1.2 Ensure Data Quality 4.1.3 Tune Simulation 4.1.4 Develop Partial Derivatives 4.2 Develop LP Code 4.2.1 Map Data to LP Representation 4.2.2 Develop Ancillary Structure 4.2.3 Develop Unit Interaction 4.3 Validate 4.3.1 Verify Representation vs. Actual 4.3.2 Verify Code Functionality 5.1 Establish Base Case Model 5.1.1 Define Time Staging 5.1.2 Fix Firm Nominations 5.1.3 Fix Term Crudes 5.1.4 Optimize Arabian Grades 5.1.5 Fine-Tune Operating Rep. 5.2 Develop Non-Term Opportunities 5.2.1 Identify Non-Term Opportunities 5.2.2 Verify Rel. Pricing & Availability 5.2.3 Case Study Cargo Economics 5.2.4 Fix Volumes & Optimize Arabian Grades 5.3 Develop Non-Crude Case Studies 5.3.1 Define Scenarios for Analysis 5.3.2 Execute Subject Cases 5.3.3 Summarize and Present Results 5.3.4 Finalize View 8.1 Term Feedstock Acquisition Process 8.1.1 Identify Sellers 8.1.2 Evaluate Risk 8.1.3 Coordinate w/ Refinery 8.1.4 Negotiate Terms & Conditions 8.2 CEP Crude Acquisition Process 8.2.1 Review & Compile 8.2.2 Make Adjustments 8.2.3 Submit Nomination to Suppliers 8.3 Existing Term Crude Acq Process 8.3.1 Renegotiate 8.3.2 Submit Nomination to Supplier 8.4 Spot Crude Acquisition Process 8.4.1 Identify Sellers 8.4.2 Evaluate Risk 8.4.3 Coordinate w/ Refinery 8.4.4 Negotiate Terms & Conditions 7.0 Continuous Improvement 7.1 Reconcile Actual & Planned Ops. Perf. 7.1.1 Extract Key Operating Results 7.1.2 Summarize Actual vs. Planned 7.1.3 Summarize Actual vs. Tac Plan 7.2 Reconcile Actual & Planned Fin. Perf. 7.2.1 Identify Price Based Deviation 7.2.2 Identify Operating Based Deviation 7.2.3 Reconcile Current vs. Prior Mo. Actual 7.2.4 Reconcile Current vs. Tactical Plan 7.3 Backcast Non-Arab vs. Arab Alternative 7.3.1 Determine Equiv Arab Replacement 7.3.2 Run LP w/ Non-Arab & Arab Replcmt 7.3.3 Calculate Non-Arab Equivalent

  42. Level 1 Processes Crude Selection Cycle Market Premise Development Modeling and Assays Risk Management Acquisition Business Development Crude Capability Constraints CSF 1. Timely accurate and comprehensive market information and premises. 2. Accurate decision support systems. 3. Ability to proactively identify and act on opportunities for improved profitability. 4. Deliver crude consistent with refinery requirements. 5. Manage risk effectively Critical Success Factors Mapped to Processes Critical Success Factors (CSF’s) are the few things that must be done correctly for maximum process efficiency. The team found five CSF’s that apply across the crude processes. X X X X X X X X X X X X X X X Evaluation of Processes

  43. Recommended Projects A review of processes, issues and CSF’s was combined with envisioning ideas to generate six project categories representing twelve initiatives. Benefit Crude Constraint Removal Acquisition Business Development High • Identified Projects • Crude Selection Cycle • Market Premises • Modeling/Assay • Risk Management • Acquisition Business Development • Crude Constraint Removal Market Premises Modeling/Assay Crude Selection Cycle Medium Risk Mgmt Low Low Medium High Implementation (Time/Cost/Complexity) Overview

  44. Project Benefits The six projects will potentially contribute annual benefits of over $40 MM. This figure excludes the $50 MM/yr potential identified for eliminating physical constraints to crude selection at an undefined cost. Crude Supply Projects Year 1 Costs & Potential Benefits • Crude Selection Cycle • $9.0 MM/yr potential • $0.04 MM one-time cost • Market Premises • $15.1 MM/yr potential • $0.05 MM/yr cost • Modeling/Assay • $6.8 MM/yr potential • $0.42 MM/yr cost • Risk Management • $1.9 MM/yr potential • $0.1 MM/yr cost • Acquisition Business Development • $6.0 MM potential • $0.1-0.2 MM/yr cost • Crude Constraint Removal • $1.2 - $50 MM potential • $0 + (undefined capital cost) Crude Selection Cycle Market Premises Model / Assay Risk Mgmt Acquisition Business Development Crude Constraints 16 14 12 10 8 $ MM/yr 6 4 2 0 -2 Potential Benefit Implementation Cost Overview

  45. Case Study 3Improving the Marine Scheduling Process

  46. Trades and Exchanges Supply & Demand Bal. Marine Trans. Needed? Determine Mode of Transportation Other Transportation Methods no yes 1.0 Determine Movement Specifications Refiner Provides Equip.? no: 65% yes: 35% 2.0 Designate Equipment 3.0 Fix and Nominate Movements 4.0 Monitor and Update 5.0 Delivery Activity 6.0 Contract Closure Financial Recording Marine Activities – Level 1 Process To define the scope of the marine project and develop a basis for more in depth mapping a high level process map was constructed. The map below shows the high level processes that occur for each marine movement.

  47. Marine Activities – Detailed Process Mapping – 1/2 Once the major marine processes were clearly distinguished in the level one map, sub-processes (below and on the following page) were defined and then mapped in detail. In terms of activities, process 2.0, Designate Equipment, is most cumbersome. 1.0 Determine Movement Specifications 3.0 Fix and Nominate Movements 2.0 Designate Equipment Level 1 2.1 Determine Equipment and Specs. 2.1.1 Determine Grade/Vol/Timing 2.1.2 Analyze Reqt’s vs. Port Info. 2.2 Develop Service Agreement 2.2.1 Dev. Charter Terms/Conditns 2.2.2 Dev. Service Agreement 2.2.3 Draft Package and Send 2.2.4 Evaluate Response 2.2.5 Prep Final Doc for Approval 2.2.6 Sign Off by Legal & BU 2.2.7 Sign Off by Affiliate 2.2.8 Sign Off by 2nd Affiliate 2.2.9 Prepare for Mgmt. Committee 2.2.10 Mgmt. Committee Approval 2.3 Evaluate & Develop COA’s 2.3.1 Outline Movement 2.3.2 List Possible Carriers 2.3.3 Develop Proposed COA 2.3.4 Finalize COA, Send Bid Pkge. 2.3.5 Evaluate Bid Offers 2.3.6 Select Carrier 2.3.7 Negotiations w/ Carrier 2.3.8 Carrier Approved 2.4 Develop Master Agreement 2.4.1 Develop Movement Outline 2.4.2 Develop Proposed Master 2.4.3 Final Master Prepared 2.4.4 Master Agreement Signed 2.4.5 Continued Negotiations 2.5 Designate Equipment 2.5.1 Discuss Mvmt w/ Carrier 2.5.2 Review Quotes and Avail. 2.5.3 Review COA Equipment 1.1 Gather Information 1.1.1 Review Contract 1.1.2 Contact Trader 1.1.3 Contact Refinery 1.1.4 Contact Credit Dept. 1.1.5 Review Port Conditions 1.1.6 Call Marine Dept. 1.1.7 Review Port Book 1.1.8 Call Ports or Trader 1.2 Exchange Info. w/ Partner 1.2.1 Exchange Info w/ Customer 1.2.2 Rev. Window; Make Changes 3.1 Agree on Equipment and Inspector 3.1.1 Discuss Move w/ Customer 3.2 Fix Equipment and Nominate 3.2.1 Secure Equipment 3.2.2 Documentation of Moves

  48. Marine Activities – Detailed Process Mapping – 2/2 6.0 Contract Closure 4.0 Monitor and Update 5.0 Delivery Activity Level 1 6.1 Compile Documentation 6.1.1 Obtain Documentation 6.1.2 Evaluate Documentation for Completeness 6.2 Analysis of Reports & Financials 6.2.1 Analyze Financials 6.2.2 Resolve Disputes 6.2.3 Approval of Invoice 6.3 Payments, Collections, Reports 6.3.1 Issue Invoices 6.3.2 Resolve Disagreements 6.3.3 Extract Data for Reports 6.3.4 Update Database(s) 6.3.5 Follow-up until Payment 6.3.6 Prepare Reports and Responses 4.1 Assess Changes and Resolve Issues 4.1.1 Received Changes & Updates 4.1.2 Define Problem 4.1.3 Determine Alternatives 4.1.4 Request Changes - Other Party 4.1.5 Request Change - Carrier 4.1.6 Document Agreed Changes 4.1.7 Refinery Ops. Adjustments 4.1.8 Provide Notifications/Updates 4.2 Obtain Lightering Equipment 4.2.1 72 hr. Notice from Agent 4.2.2 Conf. Tankage & Dock Timing 4.2.3 Initial Request from Maritrans 4.2.4 Resolve Issues 5.1 Terminal Activity Planning 5.1.1 Issue Pumping Orders 5.1.2 Establish ETA 5.1.3 Call and Monitor Inspectors 5.2 Pre-Custody Activity 5.2.1 Sample Lines & Tanks 5.2.2 Quality Testing 5.2.3 Reblend or Doctor 5.2.4 Line Press Procedures 5.2.5 Automatic Sampler Procedures 5.2.6 Custody Opening Gauges 5.3 Loading & Unloading 5.3.1 Unloading Procedures 5.3.2 Loading Procedures 5.3.3 Release Vessel

  49. Level 1 Processes 1.0 Determine Movement Specifications 2.0 Designate Equipment 3.0 Fix Equipment 4.0 Monitor and Update 5.0 Delivery Activities 6.0 Financial Closure CSF 1. Need training, expertise and time for analysis and execution of movements. X X 2. Need accountability for control of marine activities including allocation of time/activities to develop human assets. X X X 3. Product and equipment must be available when needed. X 4. Q&Q must be accurate and reliable. X X 5. Need optimal performance of facilities and equipment to maximize refining and marketing capabilities. X 6. Minimize cost, expense, risk and loss associated with crude and product marine movements. X X X 7. Need accurate and timely supply/demand balance information. X X X Marine Critical Success Factors Mapped to Processes Critical Success Factors (CSF’s) are the few things that must be done correctly for maximum process efficiency. The team found seven CSF’s that apply across the marine activity processes. The table below shows that processes 2,3 and 6 are most important to efficiency of marine operations. Evaluation of Processes

  50. Marine Issues Concentrated in “Designate Equipment” and “Financial Closure” Based on the process analyses (CSF’s, value ratios, hand-offs, cycle time and FTE’s), it was determined that the Designate Equipment (#2) and Financial Closure (#6) processes deserve the most attention. Summary of Issues and Observations Impact of Issues • Personnel do not have time to make complete analysis of marine movements. • Dual responsibilities between marine and other functions take attention away from marine activities. • Incomplete information with which to make decisions on movements. Also unable to make full post- evaluation of marine movements. • No central, accessible data on marine movements to facilitate communication. • Dockmen do not have vessel windows available on weekends. • Traders may not have appropriate information to make decisions. • Dockmen do not always know all pertinent information about scheduled vessels. • Unnecessary handling of paperwork and invoices. • Personnel intensive system to pay invoices and pursue claims. • Difficult to collect data for claims administration. • No “full voyage review of movements to identify and correct mistakes. • Higher freight rates. • Inefficient vessel selection. • Increased demurrage costs • Dockmen are unable to prioritize weekend deliveries. • Missed trading opportunities. • Unnecessary work to approve small amounts that are rarely incorrect. • Excess hand-offs • Too many FTE’s Opportunities and Issues

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