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Petroleum Academy

Petroleum Academy. Supply & Distribution DS03 – S and D V1. Objectives. In this section, participants will:. Examine crude oil & refined products distribution systems Discuss marine, pipeline and overland movements Examine transportation modes and costs

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Petroleum Academy

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  1. Petroleum Academy Supply & Distribution DS03 – S and D V1

  2. Objectives In this section, participants will: • Examine crude oil & refined products distribution systems • Discuss marine, pipeline and overland movements • Examine transportation modes and costs • Learn the importance of measurement and inventory • Examine physical trading philosophy and types • Get introduced to hedging and SPOT markets • Identify key sources of key industry information

  3. Elements of the Downstream Oil Industry Our focus in this section is the distribution portion of downstream... Supply & Bulk Distribution Crude Acquisition and Transportation Refining MARKETING Final Distribution Retailing Terminals & Wholesalers RISK MANAGEMENT

  4. II Supply S & D Section Outline This section presents distribution modes and concepts... • Refinery Supply - Market Demand • Transportation Modes • Marine • Pipelines • Truck I Distribution • Inventory & Terminal Operations • Physical Trade Types • Location • Quality • Time • Hedging Introduction

  5. Crude & petroleum products are moved by: • Marine • International • Inland or Coastal • Pipelines • Overland by Rail Cars & Tank Trucks Distribution Modes for Petroleum In the most markets... Distribution is accomplished by a variety of land and marine modes including pipelines, rail tank cars, tank trucks, barges, and oceangoing tankers. On a volume basis, pipelines and marine carriers are predominant, but trucks and rail tank cars have essential functions.

  6. ALAS. MONT. N.D. WASH. MINN. IDA. WIS. S.D. WYO. ORE. MICH. IOWA NEB. UTAH OHIO IND. ILL. COLO. NEV. KAN. MO. KY. TENN. CALIF. OKLA. ARIZ. ARK. N.M. ALA. MISS. TEX. LA. Refining & Market Centers Drive Supply Reviewing USA refinery centers and the crude supply… 3.5 Million BCD 42% foreign via P/L: Canada, Venezuela, Mexico, Nigeria, Saudi Arabia VT. ME. IV N.H. MASS. II N.Y. R.I. V CONN. PENN. N.J. DEL. MD. W. VA. I VIR. N.C. S.C. 1.6 Million BCD 96% foreign via ship: Nigeria, Venezuela, Angola, Saudi Arabia, Kuwait GA. III FLA. The USA Gulf Coast (PADD III) is the world’s largest refining center. Crude imported through LOOP… La. Offshore Port 7.7 Million BCD Texas & Louisiana plus 67% foreign via ship: Saudi Arabia, Venezuela, Mexico, Kuwait, Nigeria

  7. Persian Gulf World's Largest Crude Center PADD III World's Largest Refinery Center Crude Transportation - International Marine Crude/products marine movements are largest portion of international freight tonnage... Movements of crude by water

  8. More sophisticated ship types work at this end of the market. Most products tankers can switch between clean and dirty products when the tanks are carefully cleaned. Gas oil is a good cleanup cargo when switching from dirty to clean. Older products tankers gravitate to this end of the market. Oil-Products Tanker Market Product tanker rates vary by type: clean vs. dirty... Clean Products Chemicals MTBE* Naphthas Clean condensates Jet fuels Kerosine Gasolines Gas oils Diesels Cycle oils Fuel oils Vegetableoils Lube oils Crude oil Dirty Products *Methyl tertiary butyl ether. Source: The Clarkson Shipping Review & Outlook, London.

  9. N.H. VT. Maine N.Y. R.I. PA. Conn. N.J. W. VA. Del. VA. MD. N.C. I 8 S.C. Georgia Fla. 3 Pipelines: Example – Crude Movements USA crude oil pipelines, excluding gathering, are 108,000 miles... Canada 345 84 55 21 N. Dak. Minn. Montana 12 Wis. S. Dak. Wash. IV 2.5 Mich. Iowa Idaho Nebraska Oregon Ohio Wyoming Ind. II Ill.. 33 V Kansas Kentucky Missouri Utah Nevada Colorado Tennessee Oklahoma Calif. 654 12 Arizona Mexico 508 Ark. New Mex. III Ala. Miss. 2002 movements inmillions of barrels LA. Texas Data source: Energy Information Administration Petroleum Supply Annual 2002

  10. Pipelines: Product Movements Batching of different grades is done in all producer pipelines... A pipeline company takes care of many shippers and their various products, so batching is a very important aspect of products pipelining. One company, for instance, handles as many as thirty different grades of products. PRODUCT FLOW UNLEADED REGULAR GASOLINE SUPER GASOLINE MID-GRADE GASOLINE UNLEADED REGULAR GASOLINE KEROSENE JET FUEL DIESEL FUEL HEATING OIL COMPATIBLE INTERFACES TRANSMIX (interface material which must be reprocessed)

  11. I. Trucks • Most expensive means of transportation per mile. • 43% of total product moved in 1990 was by truck. • But it only equaled to 6% of the total bbl-miles transported. • Mostly used to transport refined products from terminals to end users. Also used to transport crude from fields to central storing facilities. • Safety risk. • NAFTA • II. Rail Cars • 3% of total product moved from terminals Petroleum Product Overland Movements Overland movements are the most expensive product moves...

  12. 5 D 4 C 3 B TRANSPORTATION COST (CENTS PER GALLON) 2 1 A 0 500 1000 1500 1800 2000 DISTANCE MOVED (MILES) PIPELINE A GULF COAST B NEW YORK HARBOR C BOSTON HARBOR D GAS STATION BARGE TRUCK Petroleum Product Transportation Costs Cost/mile increases as size and distance of shipment decreases... Transport Cost Cents per Gallon Cents per Mile-Gallon No. of Miles Transport Segment A-B Pipeline to N.Y. Harbor 1,500 2.3 0.0015 B-C Barge to Boston 250 1.2 0.0048 C-D Truck to Service Station 40 1.5 0.0375 TOTAL 1,790 5.0 0.0028 NOTE: Barge 3 times Pipeline Cost for 250 Miles Truck 25 times Pipeline Cost for 40 Miles Illustrative cost to transport gasoline from US Gulf Coast to a Boston service station Source: NPC

  13. 1) Test quality and measure individual shipments 2) Record in terminal ops. system 1) Settle product in tank 2) Test product quality for entire tank 3) Release tanks 4) Tank valuation FIFO/LIFO 1) Measure individual shipments 2) Record in system Custody Transfer Points Metering and measurement drive accounting accuracy.. Product Outflows (Liftings) Product Inflows (Receipts) Pipelines Pipelines Marine Marine Tank Car Tank Car Storage Tanks Storage Tanks Truck Truck Source: PwC Internal Document

  14. I Distributin II Supply Section Outline This section presents supply and physical trading concepts... • Refinery Supply/Market Demand • Transportation Modes • Marine • Pipelines • Truck • Terminal Operations • Inventory Terms & Concepts • Physical Trade Types • Location • Quality • Time • Hedging Introduction

  15. Inventory Importance Accurate inventory is key to supply – transportation function... Supply Processes Trading & Contracts Oil Movements Invoicing Inventory Management Position Management Pricing

  16. Inventory Reconciliation Reconciliation – always a reality ... Physical Book May 11th May 11th Beginning Physical 1,000 Thruput for Others (300) Total Inflows 500 Inflows In Transit 200 Total Outflow (600) Closing Book 800 (Actual Inventory Owned at Terminal) Beginning Physical Inventory 1,000 (Yesterday’s Ending Physical) Total Product Inflows (System) 500 Total Product Outflows (System) (600) Calculated Ending Inventory 900 (Perpetual) Actual Physical Inventory 875 (Operated at Terminal) Operational Gain/(Loss) (25) Loss Percentage of Thruput 25/600% *

  17. Reasons for Trading Physical trading done to reduce costs and improve margins... Type of Reduce Trade Cost Opportunity Location* Save pipeline or Improve margin transportation cost Quality Save refinery Improve margin blending costs Timing Save carrying costs Lock in differentials * Some location trades done to balance supply/demand.

  18. Location Trade—Exchanges Primary reason is to save transportation cost... Shell delivers to BP Baltimore Colonial Pipeline Pipeline Tariff 1.9 CPG U.S. Gulf Coast BP delivers to Shell

  19. Quality Trades Relative value is different because of refinery configuration... Hydroskimming Refinery High Conversion Refinery Low value 87 octane gasoline 1 CPG cost High value 92 octane gasoline Low value 87 octane gasoline 2 CPG cost High value 92 octane gasoline 87 Octane 1.5 CPG 92 Octane

  20. Time Trades Balancing inventory and meeting demand during turnaround... March April May June Chevron Texaco XXXX Production Schedule100 Turnaround 100 100 Shell Inventory Operating Level Chevron Repays Potential Shortage Projected Surplus April: Shell delivers—100,000 Bbls June: Chevron Texaco repays—100,000 Bbls

  21. Location Trades • Quality Trades • Time Trades • Spot Market • Price Characteristics & Information • Futures/Forwards • Swaps • Options • Hedging Concepts Hedging Introduction Physical and paper activity must be linked... Physical Markets Paper Markets

  22. SPOT Markets Characteristics Available SPOT market for crude and products is key to trading... • Large number of buyers and sellers • Transportation systems to accommodate deliveries • Typically in a large consumption and/or supply area • Free flow of price and availability information • Global access to crude and products Term Sales vs. Spot Sales

  23. Policy & Guidelines Essential Must manage risk across trading organization... • Create a ‘Risk Management Board’ • Create and approve risk management programs • Identify trading limits (Volumetric and $$$) • Implement infrastructure to track limits • Monitor and enforce limits

  24. To Dig Deeper Future references to assist with client engagements… Glossary of Terms is available in course materials Websites: Shipping – www.clarksons.co.uk Trading exchanges – www.nymex.com or www.ipe.uk.com National Petroleum Council – www.NPC.org References: Treat, John E., Energy Futures: Trading Opportunities for the 90’s, 1990, Pennwell Publishing, Tulsa OK. ISBN 0-87824-347-5/488 Pennwell Publishing, Tulsa OK. 74101, Numerous S&T books available

  25. Your Worlds Our People

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