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Enron Asia Pacific / Africa / China August 17, 2000

Confidential. EnronOnline Korean Opportunities. For Discussion Purpose Only. Enron Asia Pacific / Africa / China August 17, 2000. Table of Contents. 1. Overview. EnronOnline Korea - Overview. Rationale Introduces Enron as the most innovative company in Korea

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Enron Asia Pacific / Africa / China August 17, 2000

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  1. Confidential EnronOnline Korean Opportunities For Discussion Purpose Only Enron Asia Pacific / Africa / China August 17, 2000

  2. Table of Contents

  3. 1. Overview

  4. EnronOnline Korea - Overview • Rationale • Introduces Enron as the most innovative company in Korea • First to introduce weather derivatives (if launched this year) • The leader in real time B2B exchange • Positions Enron as an innovative trader in Korea while minimizing cultural differences and language barriers • Capitalizes on the flourishing Korean market with limited online competition • Korean companies are receptive to new technologies and new methods of conducting business • There is an expressed willingness to trade on-line with the right price • Potential customers have responded positively to responses to EOL oil paper products • Many off-line companies have announced B2B plans, but a few are currently operational • Requires limited incremental cost to launchEOL in Korea • Legal due diligence report already prepared by local legal counsel • Preparation of some translated marketing materials and limited public relations effort

  5. EnronOnline Korea - Overview (Cont’d) • Initial products to be launched • Short-term focus on financial (paper) products due to logistical constraints • Crude oil, other oil products and weather derivatives to be launched initially • Considering EnronOnline availability and the level of interest of Korean potential customers • Metals to be launched as soon as the integration of MG is completed • Nonferrous metal is the biggest futures item in Korea • As of YE1999, the total futures traded amount to US$30bn (75% of total overseas futures trading in terms of number of contracts) • Action Steps • Finalize legal due diligence (follow-up questions for local legal counsel) • Determine initial items to be launched (whether or not to include weather derivatives) • Arrange presentation meetings with Bank of Korea (BOK)/ Ministry of Finance & Economy (MOFE) for classification of weather derivatives as commodity derivatives • Prepare marketing materials • Arrange for limited press release • Contact potential customers

  6. 2. Market Potential

  7. Market Potential • Korea is a big market for trading activities • Limited natural resources • As of YE 1999, over US$260 bn of import and export activities • Many of EnronOnline traded commodities are traded offline by Korean companies • Items include mineral fuels, plastics, chemicals, nonferrous metals, pulp and paper • Due to the delay in the power and gas industry de-regulation process, EOL’s biggest items (power and gas) will not be traded immediately • Korean companies are becoming more sophisticated in their trading strategies • Growth in the futures and derivatives trading in domestic market through Korea Futures Exchange (KOFEX) as well as in the overseas commodities market • With growing needs for spot trading in many different oil products over the past few years, more demands for financial instruments (forwards and swaps) of oil products anticipated • Nonferrous metals is the biggest futures item in terms of trading volume in Korea • MG Korea has the major position in Korean metals market • EnronOnline can benefit the most from the metals products in Korea in the short run • Korean companies are becoming aware of weather related products for hedging their revenue fluctuations • Introduction of weather insurance products in early 1999

  8. As of year-end 1999 (in US$ bn) Trading Activities by Korean Companies • As of year-end 1999, there have been considerable trading activities, amounting to more than US$260 bn • Steady growth with a 5 year CAGR of 6% • Electrical equipment/ appliances/ parts are the biggest trading items for Korean companies • Many EnronOnline traded products are traded off-line by Korean companies • Items include crude oil, refined oil, LPG, plastics, chemicals, nonferrous metals, pulp and paper • Online market potential for these items in the future

  9. Potential for EnronOnline Products in Korean Market 1Korea National Oil Corporation

  10. Potential for EnronOnline Products in Korean Market (Cont’d)

  11. Potential for EnronOnline Products in Korean Market (Cont’d)

  12. Commodity Futures Transactions by Korean Companies 1,000 1,800 • Steady growth in commodity futures trading by Korean companies over the years • Of the total overseas commodity futures traded: • Nonferrous metals take up approximately 75% in terms of total number of contracts - EOL recently introduced Aluminum and Copper products in the U.S. • Grains and other agricultural products (sugar, cotton, beans coffee & cocoa) take up 12% • Precious metals take up 11% • Energy products take up the remaining 2% - Active EOL items in Asia • Of the energy products, crude oil and refined oil products take up 99% (crude 49% and refined 50%) 800 Agricultural Products 600 No. of contracts (in ‘000s) Precious Metals Nonferrous Metals* Energy 400 200 - 90 91 92 93 94 95 96 97 98 99 * Korean metal futures market was dominated by LG Metals since 1997 (making up almost 50% of the trading) due to LG Metals’ increase in focus on metal futures market, separate from the global metal market condition. However, in 1999, due to LG Group’s restructuring plan, LG Metals was sold to a foreign company (became “LG-Nikko Copper Inc.”) and the new company decreased the volume of futures trading significantly.

  13. Energy (Oil) Products Trading in Korea Energy (Oil) Products • Actively traded items on EnronOnline in the U.S. and Europe • Relatively smaller size of transactions (financial products) in Korea due to limited spot trading of physical products - many companies have long-term contracts for import and export of oil/refined products • More frequent trading of diversified refined oil products starting in year 1999 • Growth potential upon sophistication of companies’ hedging strategies with derivatives products Note: Kerosene(lamp oil) and bunker-C were not listed on the exchange prior to 1999; In 1999, gas futures trading was done mostly for speculation by companies or individuals; no gas futures trading was done prior to 1999

  14. Metals Trading in Korea Metals Products • Currently the biggest futures commodity item in Korea • EnronOnline recently introduced aluminum and copper products in the U.S. • MG Korea has the major position in the Korean metals trading market • Major metals and trading companies have long-term relationships with MG Korea • Upon integration of MG, Enron will be a major metals player in Korea with offline expertise and a large customer base for the online launch • Metal would be the biggest trading item on EnronOnline Korea rather than other energy products in the short-run * Refer to page 12 for more info on the increase of metals trading in ‘97 and ‘98

  15. Weather Derivatives Trading in Korea • Currently no weather derivatives trading in Korea • No specified restrictions against trading weather derivatives except for Foreign Exchange Transaction Regulations (FETR) in case of foreign currency trades • Classification of weather derivatives as commodity or financial derivatives under FETR needs to be resolved • Financial Supervisory Commission(FSC)’s judgement call for further review and approval procedure on the product • K-weather, in alliance with Tong Yang Fire & Marine and Samsung Fire & Marine Insurance companies, and Hyundai Marine & Fire Insurance are offering weather insurance products • K-weather is working toward developing weather derivatives to be traded in conjunction with a Korean futures company - potentialcompetitor • Potential buyers of the weather derivative products are: • Electricity, oil and gas companies (depending on the de-regulation process) • Manufacturing companies (beverage, air-conditioner, & refrigerator) • Weather insurance companies • Theme parks / amusement parks • Construction and Shipping companies

  16. Other Potential Product Opportunities • Second biggest futures commodity item in Korea • Not introduced on EnronOnline yet • Off-line players: Kolon, LG Int’l, Daewoo Corp, Doosan, Cheil Jedang, NACF, etc. • Grains • Bandwidth • Current EnronOnline Product in the U.S. • Korea is quite advanced in its fiber optic cable network and internet technologies • Concept of bandwidth trading needs be educated in Korea • Potential Players: Korea Telecom, PowerComm, G&G Networks, Thrunet, Hanaro Telecom, Dacom, etc.

  17. 3. Regulatory / Legal Environment

  18. Kim & Chang, a Korean legal counsel, conducted due diligence on the possibility of EnronOnline in Korea with various trading items including oil products, metals, and weather derivatives Regulatory / Legal Environment Issues & Results Next Steps • Classification of weather derivatives as commodity derivatives or financial derivatives • Commodity derivatives are referred to the derivatives whose underlying assets are not financial products such as stocks, interest rates, and foreign currencies • Commodity derivatives require a prior reporting to the Bank of Korea for each trade • An ex post facto report is accepted if filed as soon as possible after trades - may take 1 to 5 days • For financial derivatives, prior approval is required before a trade is done and may take 3 to 5 days • These reporting and approval requirements apply only to onshore Korean entities - offshore Korean entities (foreign branch offices) need not file such reports or obtain approvals • All other EnronOnline products with the exception of bandwidth and emission allowances are classified as commodity derivatives in Korea • Legal due diligence memo to be completed by Kim & Chang • Incorporating Enron’s follow-up questions and comments • Make an internal decision on the launch of weather derivatives in Korea • Prepare for the presentation to the Bank of Korea and MOFE (Ministry of Finance and Economy) for the classification of weather derivatives • Clarify the BOK reporting procedure for commodity derivatives for other EnronOnline items • Reporting entity • Validity of ex post facto reporting

  19. 4. Competitors

  20. Competitors • Globally, there are many B2B online trading sites with different product offerings, but not covering all the products offered on EnronOnline • Many companies forming a B2B exchange for oil and chemical products • CheMatch.com and ChemConnect.com have already launched • In Korea, many B2B e-commerce companies involving online trading are being established • Many announced but not actively trading yet - still in the early stage • Offline companies with expertise lead the B2B e-commerce businesses • Large trading companies such as Samsung, Hyundai, LG, SK and Ssangyong have already started their own or joint B2B e-commerce sites • Samsung, with 8 other foreign companies, have agreed to launch on-line naphtha trading exchange, www.e-OSN.com • Online chemical exchanges, ChemCross.com and ChemRound.com, formed jointly with Korean and foreign offline chemical/petrochemical companies are in the merger talks - potential to be the largest chemical online B2B exchange in Asia • For crude and refined oil products, a few online trading sites have launched, but not active due to lack of participation from oil refineries in Korea • Most of the online companies focus on the physical product trading and not consider financial product (swaps and forwards) trading yet for the near-term

  21. Potential On-line Competitors - Chemical Products ChemCross.com • Supported and funded by 47 (25 Korean and 22 foreign) chemicals, oil, petrochemicals and general trading companies • Plans to leverage the off-line trading relationship and the established market presence of its founding chemical companies • To be launched in September 2000 ChemRound.com • Supported and funded by 21 (19 Korean and 2 foreign) chemicals, oil, petrochemicals and general trading companies • Major service offerings include online trading of chemicals products, transaction risk management services, trading infrastructure services and supply chain management • Launched in August 2000 ChemRound and ChemCross are in negotiation for the possible merger - the biggest B2B chemical exchange in Korea and Asia with major Korean conglomerates and trading companies together if the merger takes place

  22. Potential On-line Competitors - Oil Products Petromarket.co.kr • Privately owned online auction site for refined oil products in Korea launched in May 2000 • An exchange where buyers and sellers of refined oil products (gasoline, heating oil, kerosene, Bunker-C oil), promoting transparency of refined oil product pricing in Korea • Intermediary between oil refiners/ refined oil importers and buyers (small & medium sized companies and gas stations) Net-Oil.com • Privately owned online auction site for all oil products launched in July 2000 • Proprietary automated two-way system for extracting optimal trading counterparties Cyberpetro.co.kr • Privately owned online auction site for oil products launched in July 2000 • Serving mainly gas stations and small and medium sized companies e-OSN.com • Online Naphtha trading exchange in Asia promoting transparency and liquidity of naphtha trading market • Samsung with 8 other foreign companies representing the East Asian naphtha trading market have agreed to launch the site, www.e-OSN.com in September 2000 • Provides information exchange, auction facilities, bid & offer matching on real-time basis

  23. 5. Enron Strategy & Initial Market Response

  24. Short-Term EnronOnline Product Focus Petrochemicals Plastics Pulp & Paper Power Plastics Coal Emission Allowance LPG Weather Bandwidth • Due to the need for logistical arrangement incurred with physical delivery of the commodities, financial products rather than physical products can be considered for the short-term focus • No online competition in trading financial products • When the capability of physical delivery arrangements becomes available in the Asian region, physical commodity trading can be considered • Enron can take advantage of the availability of crude and refined oil financial products immediately • Enron can also explore introducing nonferrous metals, which are currently most actively traded by Korean companies, upon integration of MG Korea • With regulatory/ legal issues resolved, weather derivatives can be introduced Crude OilRefined OilGas (Natural) AluminumCopper(physical products) No Yes EnronOnline Availability GrainsCottonSugarNonferrous metalsPrecious metalsFinancial futures * Coffee & CocoaRubberMeat None Low High Overseas Futures Trading Activity in Korea EnronOnline products in bold letters* Include interest rate, FX, stock index and commodity index futures

  25. Potential Customer Contacts - Oil Financial Products • With currently available EnronOnline Singapore crude and refined oil financial products (swaps and forwards), Enron Korea has contacted several potential customers with the list of products for their interests • Most of the oil financial products offered by EOL are traded by the Korean companies we have contacted; they would be interested in trading these items with EOL if the prices are favorable • Actual transaction volume of the financial oil products is quite limited due to the limited physical trading of oil products • More than half the companies contacted trade their oil products through their Singapore (off-shore) branches • Seoul HQ’s get daily reports from the branches and make final trading decisions - some Singapore branch acts only as an execution office • Singapore is the information center for oil product trading and networking hub for connection with traders and brokers • Off-shore Korean entities don’t have the BOK report filing requirement • Many companies are interested in seeing EnronOnline’s pricing information for comparison purpose and for future trading needs

  26. 6. Next Steps

  27. Timetable for Launch of EnronOnline Korea Completion of legal due diligence Finalization of legal due diligence Decision on initial items for launch Meetings with BOK/ MOFE on weather derivatives classification Preparation of marketing materials Training for marketing PR efforts Launch of EnronOnline Korea Weather data system integration Credit check ofpotential customers One-on-one meetings with potential customers Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7

  28. Action Plan for Launch of EnronOnline Korea * In cooperation with the Korea Office** Tier 1, 2, and 3 customers listed in the Appendix

  29. Appendix

  30. Domestic & Overseas Futures Transactions by Korean CompaniesOverseas Futures Transactions -1999 KOFEX Futures Transactions - Apr. 1999 to Jun. 2000 During1999, the total overseas futures traded by Korean companies amount to US$84 billion

  31. Potential Customers for Oil Products There are five oil companies with refineries in Korea, namely SK Corp., LG-Caltex Oil Corp., Ssangyong Oil Refining Co., Hyundai Oil, and Inchon Oil Refinery LG-Caltex Oil Corp • Korea’s first private oil refining company, the second largest oil refiner, after SK Corp • Daily refining capacity of 650,000 barrels of crude oil (located in Yocheon) • Affiliate of LG-Caltex Gas, who is a major supplier (39% of domestic market) of LPG in Korea • Businesses include oil refining, lubricants, petrochemicals and other related products and services • Crude oil imports - 50% through long-term contracts and 50% through spot market • Major shareholders: LG & Caltex • No futures or financial swaps trading SK Corp • Korea’s largest oil refiner with a 33.8% share of domestic market; NCC and general chemicals company • Daily refining capacity of 810,000 barrels of crude oil (located in Ulsan) • Businesses include petroleum refining and marketing, oil exploration & production, gas, coal mining, lubricants, and chemicals (manufacturing of petrochemicals) • Crude oil imports - 70% through long-term contracts (1 year) and 30% through spot market (counterparts are major oil companies such as BP Amoco, ExxonMobil, TotalFina Elf, and Royal Dutch/Shell) • Major shareholders: SK Global 12.7% andDaehan Investment Trust 5.6% • Engaged in oil futures and swap trading

  32. Potential Customers for Oil Products (Cont’d) Hyundai Oil • Soon to be Korea’s third largest oil refiner upon completion of merger with Inchon Oil Refinery • Daily refining capacity of 310,000 barrels of crude oil (located in Daesan) • Businesses include oil refining, BTX projects, international oil explorations, gas businesses, and clean energy projects • Crude oil imports - 70% through long-term contracts and 30% through spot market • Major shareholders: Honocal Holdings (Hyundai controlled company) 50% and Hyundai Heavy Industries 27.6% • Engaged in oil futures trading SsangYong Oil Refining Co. • Korea’s third largest oil refiner, supplying refined oil, lubricants and petrochemicals for various industries • Daily refining capacity of 525,000 barrels of crude oil (located in Onsan) • Owns one of the largest bunker-C cracking center in the world • Businesses include oil refining, manufacturing of refined oil products, lube products, and petrochemicals • Crude oil imports - mostly through long-term contracts with companies in Saudi Arabia • Major shareholder: Saudi Aramco 35% • No futures or financial swaps trading

  33. Potential Customers for Oil Products (Cont’d) Korea National Oil Corporation • Government organization for oil-related businesses • Businesses include domestic and overseas oil exploration and development, export, import, stockpiling, transportation, construction, management, operation and lease of oil stockpiling facilities, construction of storage bases, sales of crude oil and its products and provision of oil related information through petronet.org(petrochemical information portal site) Inchon Oil Refinery • Former Hanwha Oil Refinery, acquired by Hyundai and changed its name to InchonOil Refinery • Daily refining capacity of 275,000 barrels of crude oil (located in Inchon) • Businesses include oil refining, resource exploration and petrochemicals • Crude oil imports - 70% through long-term contracts and 30% through spot market • Major shareholder: Hyundai Oil 38.9% • Engaged in oil futures trading • Most of the trading activities are done in sync with Hyundai Oil -soon to be one company

  34. Preliminary Customer List - Crude / Refined Oil Products * Companies are categorized into three tiers upon their size and the level of possibility of trading on EnronOnline

  35. Preliminary Customer List - Crude / Refined Oil Products (Cont’d) * Companies are categorized into three tiers upon their size and the level of possibility of trading on EnronOnline

  36. Responses to EOL Oil Financial Products

  37. Responses to EOL Oil Financial Products (Cont’d)

  38. Weather Information Sources • Korea Meteorological Administration (KMA), a government organization, collects and distributes weather data for public and private uses • KMA has the authority to approve the operations of private weather forecasting companies in Korea • KMA sells raw data only to the private forecasting companies; KMA does not serve other non weather forecasting companies • There are seven private weather forecasting companies in Korea • These companies will then serve the rest of the corporate community with the need for weather monitoring or weather forecasting at cost • Chumsungdae Co. • Jinyang Weather One Co., Ltd. • Korea Weather Forecast Co. • Kweather Ltd. • New Sky Weather Information • Tiros Weather Service Co. • Weathernews Inc.

  39. Weather Information Sources (Cont’d) 1 Updated every minute; includes temperature (high/low), rainfall, wind speed, wind direction 2 Updated every hour; actual meteorological personnel on watch; includes temperature, humidity, rainfall, snowfall, wind, amount of sunshine

  40. Potential Customers for Weather Derivatives

  41. Potential Customers for Weather Derivatives (Cont’d)

  42. Potential Customers for Weather Derivatives (Cont’d)

  43. Preliminary Customer List - Weather Products * Companies are categorized into three tiers upon their size and the level of possibility of trading on EnronOnline

  44. Preliminary Customer List - Nonferrous Metal Products Note: Upon integration of MG Korea, a more comprehensive list of customers to be available for metal trading on EnronOnline* Companies are categorized into three tiers upon their size and the level of possibility of trading on EnronOnline

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