VALUE & MARKETABILITY OF HEAVY OILS

DEVEX 2006 THE PRODUCTION & DEVELOPMENT CONFERENCE & EXHIBITION MAY 17-18, 2006
Colin Birch Senior Principal

Agenda Heavy crude market fundamentals Recent price history Economic benefits of refining/upgrading

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Heavy crude market fundamentals Heavy products (heavy fuel oil, bitumen etc) represent less than 20% of world demand World petroleum demand growth is almost entirely for light products
Gasoline, jet fuel, diesel growing Heavy fuel oil close to flat and declining in some regions

Most crudes naturally contain more heavy fuel oil than the market requires

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Heavier crudes naturally contain too much heavy fuel oil

370C+ residue
370C- products

w t% Yield

100 90 80 70 60 50 40 30 20 10 0 Brent Urals Maya Souedie N.Sea Hvy

Even a light crude like Brent contains too much heavy fuel oil for world demand Heavier crudes contain much more residue and so need more upgrading/conversion
HFO DEMAND

API 38
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22

23

15
4

Heavy fuel oil yield depends on crude oil quality and refinery configuration
Lt Sweet

Lt Sour

Heavy

80 70 60 50 40 30 20 10 0

Refinery HFO yield, %

Coking

Cracking

Hydroskimming

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Capital cost of refining increases as complexity increases

INDICATIVE RELATIVE CAPITAL COST
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 LSW Hydroskimming LSR Cracking Heavy Coking

Complexity of refineries has generally increased incrementally as HFO demand requirements have fallen Economy of scale decreases capital cost per barrel up to a certain level

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Residue conversion capacity is usually added incrementally

FUEL GAS

GAS PLANT

LPG

REFORMER DISTILLATION
Hydrogen

GASOLINES LOW SULFUR MIDDLE DISTILLATES

CRUDE

HYDROTREATER

CRACKING UNIT VACUUM DISTILLATION

VACUUM RESIDUE

COKING UNIT
7

COKE

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Prices for all crude oils have risen strongly in the last few years
CRUDE OIL PRICES
Brent $/barrel 60 50 40 30 20 10 0 1995 2000 2005 Maya Souedie

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.. but price differentials have widened

Shortage of crude oil supply has resulted in increased crude oil production from OPEC Marginal barrels from OPEC (and non-OPEC) tend to be heavier Refining industry cannot adjust to heavier crude slate in the short term
Excess HFO Wide light/heavy spreads

PRICE DIFFERENTIALS VERSUS BRENT

Maya
Souedie

0.0 1995 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 -14.0 -16.0 2000 2005

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Investment in heavy oil refining can help recover some of the differential
PRICE DIFFERENTIALS VERSUS BRENT
4.0 2.0 0.0 1995 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 -14.0 -16.0

Maya differential + coking margin

2000 2005

Potential gain from coking margin

Maya differential to Brent

Most of the light/heavy differential can be recovered through refining investments Several heavy crude producers have invested in downstream capacity to place their crude However, this doesnt take account of refining capital costs

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The financial returns on conversion investments have improved as light/heavy spreads have widened
CAPITAL RECOVERY FACTORS ON CONVERSION INVESTMENTS
Cracking vs. Hyskim

Coking vs. Cracking

Brent - Maya

70 60 50 40 30 20 10 0

ICRF%

$/barrel

16 14 12 10 8 6 4 2 0

As light/heavy spreads widen the profitability of converting HFO components to light products increases The incentive to process heavier crudes also increase for refineries with zero or very low fuel oil yields

1995

2000

2005

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N.Sea heavy crude (15 API) values would have followed similar trends
PRICE DIFFERENTIALS VERSUS BRENT
N.Sea Heavy
1%S Fuel Oil

0.0 2000 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 -14.0 -16.0 -18.0 2005

N.Sea heavy oils are generally low sulfur which gives some additional value versus crudes like Maya N.Sea heavy oils can be acidic however which is a disadvantage and can push the value down Low sulfur fuel oil price may set a floor for N.Sea heavies
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About this presentation ....

This report has been prepared for the sole benefit of the attendees of The Production & Development Conference & Exhibition 2006. Neither the presentation nor any part of the analysis shall be provided to third parties without the written consent of Purvin & Gertz. Any third party in possession of the presentation may not rely upon its conclusions without the written consent of Purvin & Gertz. Possession of the analysis does not carry with it the right of publication. Purvin & Gertz prepared this analysis utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY. Some of the information on which this presentation is based has been provided by others. Purvin & Gertz has utilized such information without verification unless specifically noted otherwise. Purvin & Gertz accepts no liability for errors or inaccuracies in information provided by others.

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VALUE & MARKETABILITY OF HEAVY OILS

DEVEX 2006 MAY 17-18, 2006

Colin Birch Senior Principal E-mail : chbirch@purvingertz.com www.purvingertz.com Stratton House 1, Stratton St. London W1J 8LA Tel: +44 207 499 0115 Fax: +44 207 499 1985