Major Drivers of Competitive Advantage and Business Success

1. Major Drivers ofCompetitive Advantage andBusiness Success Khalid Buainain Vice President for Refining Distinguished guests, ladies and gentlemen, good morning, let me begin today by thanking the conference organizers for their kind invitation, and for providing me with an opportunity to share some thoughts on the future of the global refining industry , the dynamics which are shaping it, and what I believe will be the key drivers for business success in that changing environment. I�d like to start my discussion with a look at the industry most reviewed chart . CLICKDistinguished guests, ladies and gentlemen, good morning, let me begin today by thanking the conference organizers for their kind invitation, and for providing me with an opportunity to share some thoughts on the future of the global refining industry , the dynamics which are shaping it, and what I believe will be the key drivers for business success in that changing environment. I�d like to start my discussion with a look at the industry most reviewed chart . CLICK

2. This graph shows the change in global refining distillation capacity and product demand or �refinery runs�.  A combination of strong demand and limited capacity additions resulted in narrowing the gap between the two;� and improving the refinery utilization rates represented here by the yellow line. Due to high demand growth experienced in the past four years, the global refinery utilization rates increased to 86% which on world scale is considered to be tight capacity, as some regions of the world have unutilized capacities such as Russia, Africa and China. CLICK This graph shows the change in global refining distillation capacity and product demand or �refinery runs�. A combination of strong demand and limited capacity additions resulted in narrowing the gap between the two;� and improving the refinery utilization rates represented here by the yellow line. Due to high demand growth experienced in the past four years, the global refinery utilization rates increased to 86% which on world scale is considered to be tight capacity, as some regions of the world have unutilized capacities such as Russia, Africa and China. CLICK

3. Refinery Investments the industry is responding to this increased demand and improved margins by expanding global refining capacity, through both grassroots facilities and expansions of existing refineries. However, if we are to make smart investment decisions, and ensure the system�s ability to meet demand while maintaining acceptable levels of profitability, we have to go beyond these top-line numbers, and look at some of the more complex factors shaping the future of the refining industry. First of all � we have to remember that future supply-demand scenarios are more important for investment planning than current profitability is. From planning to commissioning, it may take up to five years to bring a new refinery on-stream, aside from the operating lifetime of the plant, during which returns must be generated. Broadly speaking �.. I think most forecasts for the future , fall into one of 3 main scenarios. CLICKthe industry is responding to this increased demand and improved margins by expanding global refining capacity, through both grassroots facilities and expansions of existing refineries. However, if we are to make smart investment decisions, and ensure the system�s ability to meet demand while maintaining acceptable levels of profitability, we have to go beyond these top-line numbers, and look at some of the more complex factors shaping the future of the refining industry. First of all � we have to remember that future supply-demand scenarios are more important for investment planning than current profitability is. From planning to commissioning, it may take up to five years to bring a new refinery on-stream, aside from the operating lifetime of the plant, during which returns must be generated. Broadly speaking �.. I think most forecasts for the future , fall into one of 3 main scenarios. CLICK

4. Scenario One The first viewpoint holds that while margins may vary year-to-year, in general they will track downwards and return to historically low levels. This group believes that the industry has been blinded to the lessons of the past by today�s high margins, and that over-investment now will lead to over-capacity in the years to come. In particular, these forecasters think that leveraging operating flexibility in existing refineries; capacity creep, including investments in conversion capacity; grassroots investments; new technologies; and trade flows that close localized supply-demand gaps will all serve to push margins lower. The risk is the potential overinvestment would not only hurt the economics of the new investments but also effect the profitability of the entire industry , Including the vast existing base of refining assets . CLICK The first viewpoint holds that while margins may vary year-to-year, in general they will track downwards and return to historically low levels. This group believes that the industry has been blinded to the lessons of the past by today�s high margins, and that over-investment now will lead to over-capacity in the years to come. In particular, these forecasters think that leveraging operating flexibility in existing refineries; capacity creep, including investments in conversion capacity; grassroots investments; new technologies; and trade flows that close localized supply-demand gaps will all serve to push margins lower. The risk is the potential overinvestment would not only hurt the economics of the new investments but also effect the profitability of the entire industry , Including the vast existing base of refining assets . CLICK

5. Scenario Two The opposite point of view argues that sustained healthy product demand will offset those factors; that investors have learned their lesson and will remain prudent; and thus that recurrent over-capacity is a thing of the past. Again, margins may fluctuate year-to-year , but this group believes that in general they will remain healthy. In other words , the refining business has undergone a fundamental shift . CLICKThe opposite point of view argues that sustained healthy product demand will offset those factors; that investors have learned their lesson and will remain prudent; and thus that recurrent over-capacity is a thing of the past. Again, margins may fluctuate year-to-year , but this group believes that in general they will remain healthy. In other words , the refining business has undergone a fundamental shift . CLICK

6. Scenario Three The third scenario represents a special case, in which consuming countries with high projected demand growth will invest aggressively now in new capacity. The assumption is that once this new capacity comes on-stream, these refineries will export their surplus products for some period of time, then gradually divert those products to their domestic market as large anticipated demand begins to materialize. The overall impact on product margins under this scenario could vary widely over time, depending on the scale, configuration and geographic location of such new capacity. CLICKThe third scenario represents a special case, in which consuming countries with high projected demand growth will invest aggressively now in new capacity. The assumption is that once this new capacity comes on-stream, these refineries will export their surplus products for some period of time, then gradually divert those products to their domestic market as large anticipated demand begins to materialize. The overall impact on product margins under this scenario could vary widely over time, depending on the scale, configuration and geographic location of such new capacity. CLICK

7. In order to monitor the global refining capacities, we have developed a data base that records all the distillation capacity additions being announced globally. Our sources include consultancy firms, financial institutes, media group and our contact in the industry. According to our database, roughly 30.7 MMBD of new refining distillation capacity has been announced to come on-stream during the period from 2006 to 2015. CLICK We have recorded a total of 250 projects which includes 72 new grass-root refineries and 178 capacity expansion projects. CLICK From the graph it is clear that the majority of new capacities will come on line after 2008. CLICK Geographically, about 42% (13 MMBD) of the upcoming capacity is planned in Asia-Pacific, mainly in China and India. The Middle-East is also planning major refinery projects with around 20% (6.2 MMBD) of the upcoming capacity. CLICK�.Those two regions will account for about 62% of the new capacity announcements. Past experience with refining capacity additions indicate that not all the capacities that are announced will be actually built. Indeed, the majority of these projects have very slim chance of actually being implemented. CLICK In order to monitor the global refining capacities, we have developed a data base that records all the distillation capacity additions being announced globally. Our sources include consultancy firms, financial institutes, media group and our contact in the industry. According to our database, roughly 30.7 MMBD of new refining distillation capacity has been announced to come on-stream during the period from 2006 to 2015. CLICK We have recorded a total of 250 projects which includes 72 new grass-root refineries and 178 capacity expansion projects. CLICK From the graph it is clear that the majority of new capacities will come on line after 2008. CLICK Geographically, about 42% (13 MMBD) of the upcoming capacity is planned in Asia-Pacific, mainly in China and India. The Middle-East is also planning major refinery projects with around 20% (6.2 MMBD) of the upcoming capacity. CLICK�.Those two regions will account for about 62% of the new capacity announcements. Past experience with refining capacity additions indicate that not all the capacities that are announced will be actually built. Indeed, the majority of these projects have very slim chance of actually being implemented. CLICK

8. Firm Projects Already under construction Financially strong Strong JV partner with established marketing experience Has location advantage Located in high demand region Well positioned to supply high demand region Well supported by the government To have a better understanding of the global refining developments, we focused on investments that have a higher chance of being completed. Investments under this category, labeled as �firm�, meet one or more of the these criteria CLICK To have a better understanding of the global refining developments, we focused on investments that have a higher chance of being completed. Investments under this category, labeled as �firm�, meet one or more of the these criteria CLICK

9. Based on the mentioned criteria, only one third of the total announced capacity or 10.9 MMBD of firm new capacity is anticipated during the period of 2006 to 2015. Just over half of this firm capacity will come from Asia-Pacific, mainly China and India, with about 5.7 MMBD. The Middle-East will contribute roughly 2.5 MMBD. Our two new JVs are included in this category. On the time scale, projects are well distributed over the next five years with the exception of 2009 when the 600 MBD Reliance refinery is planned to come on line. Note that the majority of the Asian-Pacific projects (Pink bar) are planned to start up before 2010 whereas, projects in the ME (Blue bar) increase progressively until they peak by 2011. On the accumulative basis, all of these plan are anticipated to come on line by 2011. Decision on the announced projects beyond 2011 will be impacted by the performance of the industry in the coming few years. CLICK Based on the mentioned criteria, only one third of the total announced capacity or 10.9 MMBD of firm new capacity is anticipated during the period of 2006 to 2015. Just over half of this firm capacity will come from Asia-Pacific, mainly China and India, with about 5.7 MMBD. The Middle-East will contribute roughly 2.5 MMBD. Our two new JVs are included in this category. On the time scale, projects are well distributed over the next five years with the exception of 2009 when the 600 MBD Reliance refinery is planned to come on line. Note that the majority of the Asian-Pacific projects (Pink bar) are planned to start up before 2010 whereas, projects in the ME (Blue bar) increase progressively until they peak by 2011. On the accumulative basis, all of these plan are anticipated to come on line by 2011. Decision on the announced projects beyond 2011 will be impacted by the performance of the industry in the coming few years. CLICK

10. Critical Success Factors Access to ample, reliable supplies of crude oil Flexibility in product marketing Ability to use low-cost feedstocks, like heavy  crudes Economies of scale Efficient energy management Petrochemical Integration Looking ahead, then, what makes for smart refining investments ? , and what dynamics need to be considered before building additional refining capacity? ? Let us first tackle the issue of crude supply. CLICK Investors must be certain that ample, reliable long-term supplies of crude oil will be available for their refineries. Currently, most refining capacity is located in consuming areas, and especially in mature, industrialized economies . In the future, though, many major crude oil producers are planning significant investments in domestic refining capacities, and expect to export not only crude but also refined products. Combine that with a tight crude oil supply-demand outlook, and it would appear that , export-oriented refineries located in producing nations, close to their crude supplies, will have a competitive advantage over merchant refineries chasing barrels in the spot market. CLICK Of course, these refineries also have the advantage of sending different product streams to different markets to realize the greatest returns, while also having the flexibility to capitalize on seasonal demand trends in various parts of the world. Looking ahead, then, what makes for smart refining investments ? , and what dynamics need to be considered before building additional refining capacity? ? Let us first tackle the issue of crude supply. CLICK Investors must be certain that ample, reliable long-term supplies of crude oil will be available for their refineries. Currently, most refining capacity is located in consuming areas, and especially in mature, industrialized economies . In the future, though, many major crude oil producers are planning significant investments in domestic refining capacities, and expect to export not only crude but also refined products. Combine that with a tight crude oil supply-demand outlook, and it would appear that , export-oriented refineries located in producing nations, close to their crude supplies, will have a competitive advantage over merchant refineries chasing barrels in the spot market. CLICK Of course, these refineries also have the advantage of sending different product streams to different markets to realize the greatest returns, while also having the flexibility to capitalize on seasonal demand trends in various parts of the world.

11. Critical Success Factors Access to ample, reliable supplies of crude oil Flexibility in product marketing Ability to use low-cost feedstocks, like heavy  crudes Economies of scale Efficient energy management Petrochemical Integration Given its proximity to both the industrialized economies of Europe and the fast-growing markets of the Asia-Pacific region, as well as the extensive petroleum infrastructure and supply networks already in place, the Middle East in particular offers extraordinary opportunities in this area. CLICK Regardless of their location, refineries with the ability to utilize low-cost feedstock such as heavy crude could come out ahead despite their need for higher initial capital investment.. Therefore, optimum facility design and a strategic approach to refinery configuration will be other major factors in determining refining investments. CLICK Coupled with the question of configuration . . . . is the issue of �economies of scale �. Players who build world-scale refineries will have a distinct advantage over their competitors who are building smaller units. CLICK And since energy accounts for approximately half of the cash operating costs of a refinery, investors with a competitive advantage in energy�and who have the ability to use and manage it efficiently�will be even further ahead of the game . CLICK Integration of petrochemicals with refineries is yet another strategy for success that smart investors should consider, given their positive impact on profitability. Advantages of such integration include sharing common infrastructure such as utilities; more efficient management of joint energy costs; and spreading the expenses of support and administrative activities. CLICKGiven its proximity to both the industrialized economies of Europe and the fast-growing markets of the Asia-Pacific region, as well as the extensive petroleum infrastructure and supply networks already in place, the Middle East in particular offers extraordinary opportunities in this area. CLICK Regardless of their location, refineries with the ability to utilize low-cost feedstock such as heavy crude could come out ahead despite their need for higher initial capital investment.. Therefore, optimum facility design and a strategic approach to refinery configuration will be other major factors in determining refining investments. CLICK Coupled with the question of configuration . . . . is the issue of �economies of scale �. Players who build world-scale refineries will have a distinct advantage over their competitors who are building smaller units. CLICK And since energy accounts for approximately half of the cash operating costs of a refinery, investors with a competitive advantage in energy�and who have the ability to use and manage it efficiently�will be even further ahead of the game . CLICK Integration of petrochemicals with refineries is yet another strategy for success that smart investors should consider, given their positive impact on profitability. Advantages of such integration include sharing common infrastructure such as utilities; more efficient management of joint energy costs; and spreading the expenses of support and administrative activities. CLICK

12. Conclusion Refining is an indispensable link in the petroleum  value chain Investors must go beyond the basics to  understand keys to long-term profitability Prudent investments, the nature of new refineries,  and the capabilities of individual investors will all  be critical factors In conclusion , ladies and gentlemen , we all know that refining can be a tough business to be in,� but that it represents an indispensable link in the petroleum value chain, and is vital to our companies� continued ability to meet the growing demands of an energy-hungry world. Therefore, if investors are going to prosper, I believe they have to go beyond the basics, and undertake a careful assessment of the long-term prospects of the refining sector, in order to understand the mix of complex forces which affect it. The future profitability of the refining sector as a whole , prudent investments in distillation and conversion capacities, the geographic locations and business models of grassroots refineries, and the individual strengths of investors coupled with their ability to execute their strategies and projects will all be critical success factors in this complex but exciting business environment. CLICKIn conclusion , ladies and gentlemen , we all know that refining can be a tough business to be in,� but that it represents an indispensable link in the petroleum value chain, and is vital to our companies� continued ability to meet the growing demands of an energy-hungry world. Therefore, if investors are going to prosper, I believe they have to go beyond the basics, and undertake a careful assessment of the long-term prospects of the refining sector, in order to understand the mix of complex forces which affect it. The future profitability of the refining sector as a whole , prudent investments in distillation and conversion capacities, the geographic locations and business models of grassroots refineries, and the individual strengths of investors coupled with their ability to execute their strategies and projects will all be critical success factors in this complex but exciting business environment. CLICK

13. Major Drivers ofCompetitive Advantage andBusiness Success Khalid Buainain Vice President for Refining