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

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Presentation on theme: "Confidential Page 1 Enron Asia Pacific / Africa / China August 17, 2000 EnronOnline Korean Opportunities Confidential For Discussion Purpose Only."— Presentation transcript:

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

2 Confidential Page 2 Table of Contents

3 Confidential Page 3 1. Overview

4 Confidential Page 4 EnronOnline Korea - Overview qRationale âIntroduces 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 âCapitalizes 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 âRequires limited incremental cost to launch EOL in Korea  Legal due diligence report already prepared by local legal counsel  Preparation of some translated marketing materials and limited public relations effort

5 Confidential Page 5 EnronOnline Korea - Overview (Cont’d) qInitial products to be launched âShort-term focus on financial (paper) products due to logistical constraints âCrude oil, other oil products and weather derivatives to be launched initially  Considering EnronOnline availability and the level of interest of Korean potential customers âMetals 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) qAction Steps âFinalize legal due diligence (follow-up questions for local legal counsel) âDetermine initial items to be launched (whether or not to include weather derivatives) âArrange presentation meetings with Bank of Korea (BOK)/ Ministry of Finance & Economy (MOFE) for classification of weather derivatives as commodity derivatives âPrepare marketing materials âArrange for limited press release âContact potential customers

6 Confidential Page 6 2. Market Potential

7 Confidential Page 7 Market Potential qKorea is a big market for trading activities âLimited natural resources âAs of YE 1999, over US$260 bn of import and export activities qMany of EnronOnline traded commodities are traded offline by Korean companies âItems include mineral fuels, plastics, chemicals, nonferrous metals, pulp and paper âDue to the delay in the power and gas industry de-regulation process, EOL’s biggest items (power and gas) will not be traded immediately qKorean companies are becoming more sophisticated in their trading strategies âGrowth in the futures and derivatives trading in domestic market through Korea Futures Exchange (KOFEX) as well as in the overseas commodities market qWith 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 qNonferrous metals is the biggest futures item in terms of trading volume in Korea âMG Korea has the major position in Korean metals market âEnronOnline can benefit the most from the metals products in Korea in the short run qKorean companies are becoming aware of weather related products for hedging their revenue fluctuations âIntroduction of weather insurance products in early 1999

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

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

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

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

12 Confidential Page 12 - 200 400 600 800 1,000 90919293949596979899 Agricultural Products Precious Metals Nonferrous Metals* Energy Commodity Futures Transactions by Korean Companies * 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. 1,800 No. of contracts (in ‘000s) qSteady growth in commodity futures trading by Korean companies over the years qOf the total overseas commodity futures traded: âNonferrous metals take up approximately 75% in terms of total number of contracts - EOL recently introduced Aluminum and Copper products in the U.S. âGrains and other agricultural products (sugar, cotton, beans coffee & cocoa) take up 12% âPrecious metals take up 11% âEnergy products take up the remaining 2% - Active EOL items in Asia qOf the energy products, crude oil and refined oil products take up 99% (crude 49% and refined 50%)

13 Confidential Page 13 Energy (Oil) Products Trading in Korea Energy (Oil) Products qActively traded items on EnronOnline in the U.S. and Europe qRelatively 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 qMore frequent trading of diversified refined oil products starting in year 1999 qGrowth 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 Confidential Page 14 Metals Trading in Korea Metals Products qCurrently the biggest futures commodity item in Korea qEnronOnline recently introduced aluminum and copper products in the U.S. qMG Korea has the major position in the Korean metals trading market âMajor metals and trading companies have long-term relationships with MG Korea âUpon integration of MG, Enron will be a major metals player in Korea with offline expertise and a large customer base for the online launch qMetal 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 Confidential Page 15 Weather Derivatives Trading in Korea qCurrently no weather derivatives trading in Korea qNo specified restrictions against trading weather derivatives except for Foreign Exchange Transaction Regulations (FETR) in case of foreign currency trades âClassification of weather derivatives as commodity or financial derivatives under FETR needs to be resolved âFinancial Supervisory Commission(FSC)’s judgement call for further review and approval procedure on the product qK-weather, in alliance with Tong Yang Fire & Marine and Samsung Fire & Marine Insurance companies, and Hyundai Marine & Fire Insurance are offering weather insurance products âK-weather is working toward developing weather derivatives to be traded in conjunction with a Korean futures company - potential competitor qPotential buyers of the weather derivative products are: âElectricity, oil and gas companies (depending on the de-regulation process) âManufacturing companies (beverage, air-conditioner, & refrigerator) âWeather insurance companies âTheme parks / amusement parks âConstruction and Shipping companies

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

17 Confidential Page 17 3. Regulatory / Legal Environment

18 Confidential Page 18 Regulatory / Legal Environment Issues & Results qClassification of weather derivatives as commodity derivatives or financial derivatives âCommodity derivatives are referred to the derivatives whose underlying assets are not financial products such as stocks, interest rates, and foreign currencies qCommodity derivatives require a prior reporting to the Bank of Korea for each trade âAn ex post facto report is accepted if filed as soon as possible after trades - may take 1 to 5 days qFor financial derivatives, prior approval is required before a trade is done and may take 3 to 5 days qThese reporting and approval requirements apply only to onshore Korean entities - offshore Korean entities (foreign branch offices) need not file such reports or obtain approvals qAll other EnronOnline products with the exception of bandwidth and emission allowances are classified as commodity derivatives in Korea Next Steps qLegal due diligence memo to be completed by Kim & Chang âIncorporating Enron’s follow-up questions and comments qMake an internal decision on the launch of weather derivatives in Korea âPrepare for the presentation to the Bank of Korea and MOFE (Ministry of Finance and Economy) for the classification of weather derivatives qClarify the BOK reporting procedure for commodity derivatives for other EnronOnline items âReporting entity âValidity of ex post facto reporting 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

19 Confidential Page 19 4. Competitors

20 Confidential Page 20 Competitors qGlobally, there are many B2B online trading sites with different product offerings, but not covering all the products offered on EnronOnline âMany companies forming a B2B exchange for oil and chemical products âCheMatch.com and ChemConnect.com have already launched qIn Korea, many B2B e-commerce companies involving online trading are being established âMany announced but not actively trading yet - still in the early stage qOffline companies with expertise lead the B2B e-commerce businesses âLarge trading companies such as Samsung, Hyundai, LG, SK and Ssangyong have already started their own or joint B2B e-commerce sites âSamsung, with 8 other foreign companies, have agreed to launch on-line naphtha trading exchange, www.e-OSN.com qOnline 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 qFor 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 qMost 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 Confidential Page 21 Potential On-line Competitors - Chemical Products ChemCross.com qSupported and funded by 47 (25 Korean and 22 foreign) chemicals, oil, petrochemicals and general trading companies qPlans to leverage the off-line trading relationship and the established market presence of its founding chemical companies qTo be launched in September 2000 ChemRound.com qSupported and funded by 21 (19 Korean and 2 foreign) chemicals, oil, petrochemicals and general trading companies qMajor service offerings include online trading of chemicals products, transaction risk management services, trading infrastructure services and supply chain management qLaunched 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 Confidential Page 22 Potential On-line Competitors - Oil Products Petromarket.co.kr qPrivately owned online auction site for refined oil products in Korea launched in May 2000 qAn 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 qIntermediary between oil refiners/ refined oil importers and buyers (small & medium sized companies and gas stations) Net-Oil.com qPrivately owned online auction site for all oil products launched in July 2000 qProprietary automated two-way system for extracting optimal trading counterparties Cyberpetro.co.kr qPrivately owned online auction site for oil products launched in July 2000 qServing mainly gas stations and small and medium sized companies e-OSN.com qOnline Naphtha trading exchange in Asia promoting transparency and liquidity of naphtha trading market qSamsung 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 qProvides information exchange, auction facilities, bid & offer matching on real-time basis

23 Confidential Page 23 5. Enron Strategy & Initial Market Response

24 Confidential Page 24 Short-Term EnronOnline Product Focus qDue 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 âNo online competition in trading financial products âWhen the capability of physical delivery arrangements becomes available in the Asian region, physical commodity trading can be considered qEnron can take advantage of the availability of crude and refined oil financial products immediately qEnron can also explore introducing nonferrous metals, which are currently most actively traded by Korean companies, upon integration of MG Korea qWith regulatory/ legal issues resolved, weather derivatives can be introduced EnronOnline Availability NoYes Overseas Futures Trading Activity in Korea NoneLowHigh Crude Oil Refined Oil Gas (Natural) Petrochemicals Plastics Pulp & Paper Power Plastics Coal Emission Allowance LPG Weather Bandwidth Grains Cotton Sugar Nonferrous metals Precious metals Financial futures * Coffee & Cocoa Rubber Meat EnronOnline products in bold letters * Include interest rate, FX, stock index and commodity index futures Aluminum Copper (physical products)

25 Confidential Page 25 Potential Customer Contacts - Oil Financial Products qWith 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 qMost 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 qActual transaction volume of the financial oil products is quite limited due to the limited physical trading of oil products qMore than half the companies contacted trade their oil products through their Singapore (off-shore) branches âSeoul HQ’s get daily reports from the branches and make final trading decisions - some Singapore branch acts only as an execution office âSingapore is the information center for oil product trading and networking hub for connection with traders and brokers âOff-shore Korean entities don’t have the BOK report filing requirement qMany companies are interested in seeing EnronOnline’s pricing information for comparison purpose and for future trading needs

26 Confidential Page 26 6. Next Steps

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

28 Confidential Page 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 Confidential Page 29 Appendix

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

31 Confidential Page 31 Potential Customers for Oil Products SK Corp qKorea’s largest oil refiner with a 33.8% share of domestic market; NCC and general chemicals company qDaily refining capacity of 810,000 barrels of crude oil (located in Ulsan) qBusinesses include petroleum refining and marketing, oil exploration & production, gas, coal mining, lubricants, and chemicals (manufacturing of petrochemicals) qCrude 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) qMajor shareholders: SK Global 12.7% and Daehan Investment Trust 5.6% qEngaged in oil futures and swap trading 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 qKorea’s first private oil refining company, the second largest oil refiner, after SK Corp qDaily refining capacity of 650,000 barrels of crude oil (located in Yocheon) qAffiliate of LG-Caltex Gas, who is a major supplier (39% of domestic market) of LPG in Korea qBusinesses include oil refining, lubricants, petrochemicals and other related products and services qCrude oil imports - 50% through long-term contracts and 50% through spot market qMajor shareholders: LG & Caltex qNo futures or financial swaps trading

32 Confidential Page 32 Potential Customers for Oil Products (Cont’d) SsangYong Oil Refining Co. qKorea’s third largest oil refiner, supplying refined oil, lubricants and petrochemicals for various industries qDaily refining capacity of 525,000 barrels of crude oil (located in Onsan) qOwns one of the largest bunker-C cracking center in the world qBusinesses include oil refining, manufacturing of refined oil products, lube products, and petrochemicals qCrude oil imports - mostly through long- term contracts with companies in Saudi Arabia qMajor shareholder: Saudi Aramco 35% qNo futures or financial swaps trading Hyundai Oil qSoon to be Korea’s third largest oil refiner upon completion of merger with Inchon Oil Refinery qDaily refining capacity of 310,000 barrels of crude oil (located in Daesan) qBusinesses include oil refining, BTX projects, international oil explorations, gas businesses, and clean energy projects qCrude oil imports - 70% through long- term contracts and 30% through spot market qMajor shareholders: Honocal Holdings (Hyundai controlled company) 50% and Hyundai Heavy Industries 27.6% qEngaged in oil futures trading

33 Confidential Page 33 Potential Customers for Oil Products (Cont’d) Inchon Oil Refinery qFormer Hanwha Oil Refinery, acquired by Hyundai and changed its name to Inchon Oil Refinery qDaily refining capacity of 275,000 barrels of crude oil (located in Inchon) qBusinesses include oil refining, resource exploration and petrochemicals qCrude oil imports - 70% through long- term contracts and 30% through spot market qMajor shareholder: Hyundai Oil 38.9% qEngaged in oil futures trading qMost of the trading activities are done in sync with Hyundai Oil -soon to be one company Korea National Oil Corporation qGovernment organization for oil-related businesses qBusinesses 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)

34 Confidential Page 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 Confidential Page 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 Confidential Page 36 Responses to EOL Oil Financial Products

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

38 Confidential Page 38 Weather Information Sources qKorea Meteorological Administration (KMA), a government organization, collects and distributes weather data for public and private uses âKMA has the authority to approve the operations of private weather forecasting companies in Korea âKMA sells raw data only to the private forecasting companies; KMA does not serve other non weather forecasting companies âThere are seven private weather forecasting companies in Korea âThese 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 Confidential Page 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 Confidential Page 40 Potential Customers for Weather Derivatives

41 Confidential Page 41 Potential Customers for Weather Derivatives (Cont’d)

42 Confidential Page 42 Potential Customers for Weather Derivatives (Cont’d)

43 Confidential Page 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 Confidential Page 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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