1. Energy Trading Rebuilding the Business Chris Conway UH GEMI Conference January 20, 2005

2. Rebuilding the Business  What does energy trading look like inside an integrated major company?  What are some notable trends in the evolving energy markets?  How might these trends influence the trading business? An integrated company perspective.

3. Upstream and Downstream produce and manufacture, assets are the primary focus. Uptime, yields, lifting costs, are typical performance indicators. Capital programs are planned, estimated, scheduled and reviewed. Processes and schedules stretch out over fairly long time periods. Decisions are typically vetted through accountability hierarchies. Decision impacts generally evolve over time. Individuals tend to work within team structures. The trading unit does not operate assets. Its’ assets are people, information and commercial contracts. There is no trading production line. Assets offer option value. Capturing option value requires factual information and people willing to act quickly. Trading work process cycles are typically short in duration. To act quickly, decision hierarchies are flattened. Decision impacts are recorded daily and accountability is clear. Individuals are more likely to be independent contributors. Asset Operations Trading Unit Different environments... Alignment is critical.

4. Expectations  Sell produced oil and gas at favorable market values.  Avoid shut-in production. Deliver crude oil supplies and refined products at the lowest possible cost. Manage varying oil and gas qualities and producing unit logistics issues. Encourage and take advantage of refinery feedstock flexibility. Distribute finished products to a highly decentralized wholesale network. Deal with an increasing number of finished product specifications. Understand and communicate fair market values. Clear on the surface... Complicated below.

5. Business Model  To what degree do we participate in price discovery? What is our risk tolerance? Who will bear the results of our risk-taking activities? How much capital are we willing to commit to trading? How much are we willing to invest to develop and maintain a measurement model? What is the value for engaging third party transactions unrelated to the assets operations? It makes money... May not be enough.

6. Implications  Some may choose to minimize trading unit costs or outsource. Others may invest in trading infrastructure. Enhanced ability to manage inherent risks. May also share some risks of the customers business. Engaging in fixed price transactions and becoming both a buyer and a seller, supporting liquidity. Participating in transport and storage markets, understanding current and future constraints. Extending market knowledge to influence investment decisions and the structure of contractual relationships. Direct benefits important... Indirect may be greater.

7. Trends The environment in which people operate is changing. The possibility we have entered a period of sustained higher commodity price levels. Rapid energy demand growth in Asia. Consolidation of large integrateds and independents. Major Chinese and Russian companies stepping into the global trading marketplace. Arrival of LNG to North America. Continued movement towards cleaner fuels. Restructuring of the North American power market. One list... What’s your market view?

8. Conclusion If you enjoy change, energy trading is one of the places to be. Foresee change, or embrace it early. Which changes are lasting, and which ones not? Being a follower does not routinely lead to acceptable results. If you don’t make dust... You eat dust!