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COMPETITIVE OVERVIEW OF SELECTED U.S. MARKETING AND REFINING COMPANIES

COMPETITIVE OVERVIEW OF SELECTED U.S. MARKETING AND REFINING COMPANIES. CONFIDENTIAL. November, 1997. Discussion Document for IOL Personnel. TABLE OF CONTENTS. I. Tosco Strategic Summary Financial Overview Operations Overview Conclusions and Expectations II. Mobil Strategic Summary

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COMPETITIVE OVERVIEW OF SELECTED U.S. MARKETING AND REFINING COMPANIES

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  1. COMPETITIVE OVERVIEW OF SELECTED U.S. MARKETING AND REFINING COMPANIES CONFIDENTIAL November, 1997 Discussion Document for IOL Personnel

  2. TABLE OF CONTENTS • I. Tosco • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • II. Mobil • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • III. Shell • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • IV. Koch • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations

  3. TABLE OF CONTENTS • I. Tosco • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • II. Mobil • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • III. Shell • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • IV. Koch • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations

  4. TOSCO • Strategic Summary • Low cost asset base • Bayway cost $175 million • BP Ferndale/Trainer together cost $75Million • CEO Tom O’Malley is credited as “... a rare deal-maker in an industry more used to elderly engineers” • Operating efficiency and flexibility • Lower crude acquisition cost • Lower operating cost i.e. Bayway Refinery capacity increase of 55% • Lower inventories • Increased high value products yield • Focus • Flat organization (only 14 people in Head Office) • Seamless supply, trading, and operations structure • Micro-market focused • “Specialist” mentality • Independence • Tosco is not managed as a vertically integrated enterprise • Business unit decisions are made at the business unit level • Market liquidity for both supply and products has facilitated business unit independence • Culture • Opportunistic, trading mentality • Incentive programs throughout the organization • Primarily “Exxon” people in an entrepreneurial environment

  5. TOSCOFinancial Overview 1996 Year-End Financials Debt Ratio = 43.6 % Return On Equity = 13.7% Cash ($MM) = 94 Current Ratio = 1.01 Long Term Debt ($MM) = 827 Number of Shares (MM) = 138 Dividend Yield = 0.8% Dividend Payout = 18.3% Market Value ($MM) = 3,649

  6. TOSCOOperations Overview Tosco Areas Of Influence • West Coast Operations • Integrated West Coast supply operation • Total gasoline supply = 239 KBD • Branded retail demand = 165 KBD • Avon/Chevron Conventional and CARB II swap of 35 KBD (evergreen deal) • Net movements from Northern California refining center north and south • Spot availability in the Pacific Northwest and Northern California • Process ANS crude and SJV • East Coast Operations • Integrated East Coast supply operation • Total gasoline supply = 215 KBD • Branded retail demand = 124 KBD • Spot gasoline availability of 90 KBD • Foreign crude term contracts • Statoil, YPF • Petroecuador, Ecopetrol • Texaco Trading • U.K. subsidiary for foreign crude purchases • Nova Scotia crude terminal lease • 4 -100 DWT crude tanker charter • 153 terminals throughout the United States

  7. TOSCO • Conclusions and Expectations • Tosco’s recent acquisition of Circle K make it the leading operator of company-controlled convenience stores in the U.S. • Tosco’s retail outlets include stores operating under the following brand names; • Circle K (5,300 stores) • British Petroleum (500 stores in the Northeast as well as the Pacific Northwest and Northern California) • Unocal 76 (1,300 stores) • Exxon (Arizona retail) • Tosco is likely to go after a large Gulf Coast refiner due to: • Tosco has significant operations on the East and West Coasts • A Gulf Coast supply source would add flexibility to the current supply system • Much of the Circle K retail outlets are in the sunbelt • O’Malley may be able to find some “Cheap” refining assets on the Gulf Coast by way of the following: • JV with producer country with crude equity financing (PDVSA, PEMEX) • Alliance with producer in a crude/product swap arrangement (Not a netback deal like LCR) • Acquire additional retail assets in a refinery wrap-around deal • Some Gulf Coast refining/marketing assets which Tosco may find attractive would include: • Clark, Texas City • Exxon, Baytown (Exxon would want a long term supply agreement) • Coastal, Corpus Christi

  8. TABLE OF CONTENTS • I. Tosco • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • II. Mobil • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • III. Shell • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • IV. Koch • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations

  9. MOBIL • Strategic Summary • Vertical integration • Global oil and gas exploration and production • Global marketing and refining • Global distribution network • World-scale chemical business • Proprietary research & development organization • Business alliances • Upstream • Pan Energy gas marketing JV (North America) • California production (Shell/Cal Resources) JV • North Sea production sharing (Beryl, Scott, Britannia, Stratfjord, Oseberg, Aasgard, Njord, Lauwersoog East) • Arun condensate, Sumatra, Natuna, etc. • Hibernia, Newfoundland Trans-shipment, Terra Nova, Sable, Maritimes and Northeast Pipeline • Nigeria e.g. Usari, Oso • Equatorial Guinea • Qatar LNG e.g. Qatargas and Ras Laffan • Abu Dhabi • Lagoven i.e. Lake Maracaibo crude processing at Chalmette • Peru gas • Argentina - Aquarague and Chihuidos • Angola crude oil production • Russia - Kirin, Kazakstan, Azerbaijan, Turkmenistan

  10. MOBIL • Strategic Summary • Business alliances • Downstream • Altona, Australia refinery upgrade • Kawasaki, Japan RCC upgrade • Yanbu, Saudi Arabia LUBEREF expansion • Minority interest in the La Pampilla, Peru refinery • European strategic alliance with BP for fuels and lubricants in 43 countries • Mobil 30% fuels interest • Mobil 51% lubes interest • Tianjan, China lube blending plant • Chemicals • Mobil Yanbu petrochemical (50/50 JV) • Pequiven JV (50/50) olefins project

  11. MOBILFinancial Overview 1996 Year-End Financials Debt Ratio = 18.7 % Return On Equity = 15.9% Cash ($MM) = 808 Current Ratio = 0.85 Long Term Debt ($MM) = 4,450 Number of Shares (MM) = 788 Dividend Yield = 3.2% Dividend Payout = 53.4% Market Value ($MM) = 48,145

  12. Mobil Areas Of Influence MOBIL • Mobil Operations • Total gasoline supply = 458 KBD • Total gasoline retail demand = 488 KBD • Mobil has regionalized its business into the following U.S. geographic areas: • Mobil West (Torrance) • Mobil Midwest (Joliet) • Mobil South (Beaumont/Chalmette) • Mobil East (Paulsboro) • Each business area has a VP (office located at the refinery) with overall P/L responsibility for: • Refinery supply • Refinery operations • Clean product distribution • Retail marketing and operations • Mobil’s West Coast retail supply volumes are constrained by supply availability • Mobil is integrating its West Coast business with its Singapore operation (Seasonal optimization) • Mobil's Midwest business is balanced, with clean product movements from the Gulf • Could gain market share with an Amoco alliance • Mobil is short on the East Coast with the Paulsboro Refinery being optimized for lubes production

  13. MOBIL • Conclusions and Expectations • Mobil has significantly downsized over the last few years (See chart) • These large personnel reductions have resulted in appreciable short-term cost savings (Long term cost?) • Many people at Mobil were forced to take up to a three level demotion to maintain employment • Redesign of the organization with a regional focus (Business P/L) • Mobil has recently focused on increasing crude oil reserves to balance crude supply with demand • Mobil/Lagoven/Veba JV • Russian initiatives • Peru and Indonesia gas projects • Sable Island and Terra Nova • Equatorial Guinea • Closure of the Woerth and integration of the Coryton and Gravenchon refineries in Europe • Rationalization of the European lube blending system • Mobil has spun off non-core assets totaling $1.8 billion • Tucker Housewares • Mining and Minerals • Real Estate Holdings • Selected North American upstream assets

  14. MOBIL • Conclusions and Expectations • Mobil continues to invest in retail gasoline sales in the chase for market share • Mobil is short gasoline on the East Coast and this could potentially constrain market share gain initiatives • Mobil may look to an independent refinery for a long term gasoline supply contract to continue East Coast retail market share penetration • Mobil will not spend capital on another U.S. refinery as Mobil’s highest return investments are in international upstream oil & gas (similar to UNOCAL)

  15. TABLE OF CONTENTS • I. Tosco • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • II. Mobil • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • III. Shell • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • IV. Koch • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations

  16. SHELL • Strategic Summary • Ample crude oil supply • Shell Oil is long on crude and the Shell refining system enjoys flexibility in crude slate mix • Shell swaps indigenous crude production to minimize crude acquisition cost and maximize crude extraction value • Organization structure • In 1996 Shell Oil restructured its U.S. refineries as separate subsidiaries. • The following being separate companies with P&L responsibility: • Martinez • Wood River • Norco • Odessa • Anacortes • Each refinery is operated as a separate profit center with crude and clean product acquisition prices based on market price setting mechanisms • Retail Marketing • Scope economy • Shell has over 8,900 branded retail outlets in the U.S. • Shell markets petroleum products in 41 states Shell Oil Actual Retail Outlet Growth

  17. SHELLFinancial Overview: Shell Oil Is A Subsidiary of Royal Dutch/Shell Group 1996 Year-End Financials Debt Ratio = 5.2 % Return On Equity = 14.1% Cash ($MM) = 393 Current Ratio = 0.80 Long Term Debt ($MM) = 794

  18. Shell Areas Of Influence SHELL • Shell Operations • Total gasoline supply = 487 KBD • Total retail gasoline demand = 497 KBD • Overall Shell is balanced in the US. • Long in PNW • Short in the Northeast • Balanced in the Midwest • Shell has the opportunity to swap PNW • barrels for East Coast barrels • The merger with Texaco will balance • Shell on the East Coast but will give • excess capacity in PNW • The FTC will require Shell to spin off its Anacortes refinery to reduce its supply • concentration in PNW • Shell sold its 125 KBD refinery in Southern California in 1991 and invested the proceeds • in E&P activities in Syria and Yemen • Shell’s U.S. refineries are all integrated with chemicals operations to maximize value-added and minimize operating income volatility • Shell is long on crude oil in the U.S. and Gulf of Mexico production represents roughly 40% of Shell Oil’s domestic production • In 1994 Shell Oil formed a 50/50 joint venture with Pemex at the Deer Park Refining Complex • Shell operates the facility, and Pemex provides equity crude

  19. SHELL • Conclusions and Expectations • Technology • Strong emphasis on R&D • Shell has technical superiority in the following areas: • Product research • Fuel products • Chemicals • Process technology • Exploration • 3D seismic • Deep water drilling • Horizontal drilling • Production • Enhanced recovery techniques i.e. CO2 injection, etc. • Chemicals • Product research • Process technology • Retail marketing • Shell has a marketing presence throughout most of the U.S. contiguous states • Shell is a technological leader in retail assets • Shell Smart Pump • Shell Easy Pay • Multi-media kiosk system for tourists • Shell will continue to solidify brand image and will continue market share penetration in • Pacific Northwest • Gulf Coast

  20. SHELL • Conclusions and Expectations • Organizational Structure • Shell has restructured all refineries as wholly owned subsidiaries allowing for an alignment of accountability and controllability • Shell management has the autonomy to use in-house services or to outsource those services • Retail marketing is not a part of the refinery P/L • Shell is using market based pricing mechanisms for intra-company transfers e.g. crude oil acquisition and chemicals feedstock transfer price • Texaco/Star merger • The merger will allow Shell to increase market share in markets where it currently competes by: • Providing a fungible dedicated supply source in California and the East Coast • Lower clean products acquisition cost in target market areas • Rationalization of distribution and refining assets such as: • Shell Anacortes • Overhead support functions • The merger will reduce clean products acquisition cost, especially on the East Coast and allow Shell price flexibility in obtaining further market share

  21. TABLE OF CONTENTS • I. Tosco • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • II. Mobil • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • III. Shell • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations • IV. Koch • Strategic Summary • Financial Overview • Operations Overview • Conclusions and Expectations

  22. KOCH • Strategic Summary • Private enterprise • Long term focus • Business autonomy • Competitive information is not public • Culture • Entrepreneurial environment i.e. Koch Market-Based Management (MBMtm) • Young, aggressive, high energy workforce • Flat organization with authority delegation to the lowest levels • Business team mentality • Corporate loyalty doctrine • Efficiency • Low cost of clean products • Refinery scale economy • Concentrated regional market share • Well developed distribution infrastructure • Koch services • Supply and product trading • Infrastructure support • Cutting edge technology • Regional focus • Strong intra-regional integration of value-chain assets • Land locked retail marketing regions provide a geographic entry barrier • Very high localized market share increases retail margin

  23. KOCHFinancial Overview: Second Largest Privately Held U.S. Company Koch Financial Data • 90% of earnings reinvested in the corporation • 1997 revenues of approximately $30 Billion • Diversified earnings base • Natural gas and NGL transportation major net income contributor • Refining and chemicals primary revenue base

  24. KOCHOrganization Structure • Koch manages each business as a separate company • Koch concentrates core competencies in the service organizations i.e. • Crude Oil Services • Mineral Services • Chemical Technology • International Group • Capital Services Group • Operating affiliates are managed as separate businesses • Service functions use a charge-back mechanism and must compete at market rates for the specific services provided • International offices primarily provide a presence for the operating businesses • Primary R&D is in the areas of chemicals and materials • Personnel are moved freely between the service companies and the operating affiliates

  25. Koch Areas Of Influence KOCH • Koch Industries Operations • Total gasoline supply = 286 KBD • Total retail gasoline demand = 160 KBD • Koch does not deal in fungible clean products for branded retail • Koch delivers indigenous clean products to retail markets through its proprietary distribution system • The Corpus Christi refining complex is integrated with chemicals operations • Almost 40% of Koch’s gasoline production is available for third party market spot purchases • Refining and Marketing are managed as one business with one P/L • Koch states that it markets refined products to customers worldwide

  26. KOCH • Conclusions and Expectations • Koch is a diversified energy juggernaut involved in every aspect of the oil and gas business including: • Refining • St. Paul, Minnesota • Corpus Christi, Texas • Gas pipelines • Liquid pipeline network from Texas to Canada • Oil Trading • Chemical technology • Global distribution system comprised of: • Storage facilities • Terminals • Trucks • Barges • Ranches in: • Kansas • Montana • Texas • Minerals • Financial Services • Materials • Road • Construction

  27. KOCH • Conclusions and Expectations • Koch currently has a lot of cash available as a result of a very successful 1996 • Koch retail marketing is regionally focused in the Midwest and there is little room for branded retail volume growth in existing markets • Koch will maintain the status quo in existing markets • Koch has significantly expanded its gas marketing presence in Houston • Koch’s growth will be in gas marketing and related activities • Transportation • Distribution • Risk management • Koch will continue to exploit niche regional business activities in hydrocarbon and related businesses

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