Patrick Long and Steve Roberts May 2014 Overview of Midstream and Downstream: Highlighting Current Events and Their Impact on the Back Office Patrick Long and Steve Roberts May 2014

Did You Know… …the 42 gallon barrel originated with John D. Rockefeller? Some oil was spilled during one of his early shipments. The result was 50 gallons a barrel now being 42…

Agenda Introduction to Opportune Process & Technology Downstream Overview Crude Origin Logistics Refining Final Thoughts

Introduction to Opportune Opportune at a glance Opportune is a leading energy consulting firm, serving clients throughout North America and Europe from offices in Houston, Denver, and London. We are unique in that we have the deep energy expertise of a large firm, but the nimbleness of a smaller firm. We bring heavily experienced teams to deliver value to our clients in addressing complex strategic, transaction, process and technology issues. Practice Areas Process and Technology Corporate finance Complex financial reporting Strategy and organization Restructuring & Bankruptcy Strategic Tax Energy Segments Energy trading and risk management Upstream oil & gas Refining & marketing Power generation Transport/distribution and storage

How Downstream Fits Into Oil Production UPSTREAM MIDSTREAM DOWNSTREAM

Downstream’s Role Within the Industry Upstream Midstream Downstream Representative Companies Integrated Oils

Senate Asks EIA to Study Crude Oil Export Energy is in the News Senate Asks EIA to Study Crude Oil Export Administration Delays Keystone XL Decision Crude by Rail Costs Rival Pipeline Environmental Groups Want Extensive Oil Review

North American Unconventional Basins

Crude Origin Crude at the Wellhead Complexities Almost no value without the ability to get it to market First Purchaser usually makes initial logistical move towards liquid market Small pipeline gathering system or limited well-site storage and truck transport to pipeline or storage Complexities Geographically dispersed supply Divisions of interest Economics of transportation Leased Crude

Complexities / Challenges Crude Origin The increase in drilling technology has outpaced the industry’s ability to absorb the change efficiently. Complexities / Challenges Leased Crude Limited infrastructure to support boom Health and safety uncertainty around methods of drilling (e.g., fracking debate) Inventory tracking and reconciliation New Suppliers with Limited Credit History New Logistical Processes (Transloading) New crude types Current Events Shale boom has generated production in new regions Fracking technologies have generated increased production in existing regions

Crude Origin – Accounting Impacts New crude sources have created opportunities for many new companies to emerge almost overnight in this space. Accounting Impacts Boom has created new companies to support the value chain, many of which are focused on operations and have limited accounting capabilities Secondary costs are often “invisible” to commercial deal teams, and only reveal themselves during actual transactional flow Significant transactional volume for royalty, tax, and other associated payments Increased regulatory reporting requirements (permitting, first purchaser reports)

Complexities / Challenges Crude Logistics Two primary modes of logistics from initial gathering to market: Bulk Non-Bulk Complexities / Challenges Pipelines have limited and fixed operating locations and throughput Vessels / barges are limited by access Trucks have flexible operating locations, but high costs and limited per truck volume Rail has wide operating range, similar capacity to barge Current Events New oil production onshore has outpaced the available pipeline capacity in the region Cyclical swings in marine utilization has current costs very high Wellhead gathering demand has driven up truck costs High profile rail incidents have increased scrutiny on operations

Crude Logistics – Accounting Impacts Two primary modes of logistics from initial gathering to market: Bulk Non-Bulk Accounting Impacts Most pipelines very automated and provide volumetric and invoice integration, but work on a monthly cycle Marine movements have numerous line item costs, events to manage, and mode of transport is highly paper based Limited tank car capacity leads to high number of transactions for equivalent volume of crude (vs bulk) Crude by rail is relatively new in industry, and organizations are slow to evolve processes to support the transactions

Rail Delivery System Under Lots of Pressure Rail is in the News Railroad Fills Void as Oil Pipelines Fall Short Railway Car Manufacturers Won’t Talk Safety Despite Concerns Rail Delivery System Under Lots of Pressure Oregon oil train shipments increased 250% in 2013

Rail Specific Complexities…in Accounting Crude rail creates many complexities not typically seen with other modes of bulk transportation…they all have accounting implications! Hydrocarbon Pricing, Costs, Commercial Terms Transloading Costs Inspections Railcar Leases and Riders Destination Offloading Costs Cleaning Track Repair Yard Fees Car Location Messages (CLM): Locations, Sight Codes, Dates / Times, Destinations, Railroads, ETA’s Freight Costs Fuel Surcharge Customs Charges Equipment Surcharge

Crude Types Around the World Different regions of the world have different crude types... 40 35 30 25 20 15 10 5 0 0.5 1 1.5 2 2.5 3 3.5 High Low Light Heavy API Gravity (API) Sweet Sour Sulfur (%) Libyan USA WTI North Sea Brent Nigerian Forecados Indonesian Duri Arab Light Dubai Arab Medium Arab Heavy Alaskan North Slope Venezuelan BCF-17 Mexican Maya Venezuelan Pilon Ural Bakken Need to add brent crude 3 5

Crude Properties Light or heavy designation depends on the average molecular weight of the crude oil. Heavy oils are high in either tar (asphaltic) compounds, polyaromatics, or both. Light oils are high in low molecular weight compounds, like small alkanes. Light crude is easier to process which brings a higher price. Sweet or sour depends on the sulfur content. Sweet crudes have a low sulfur content. Sour crudes have a high sulfur content. Sweet crude is easier to process which brings a higher price.

Converting Crude to Refined Product Refineries convert crude oil into finished (refined) products Processes With Assistance of Separation Heat Conversion Pressure Blending Catalysts Treatment Additives Oil Refinery Clean up colors

What Goes Into the Cost of Gasoline? Update

Refinery Types and Crude Optionality Every refinery is different in terms of what units it has and how big each unit is. Major groups: margin vs investment Topping plant Cracking plants Coking plants Determined by crudes to be run and products to be produced Far East: run light crude to produce distillates West Coast: run heavy crude to make gasoline Rocky Mountain: limited crude access East Coast: must produce home heating oil

Crude Conversion Happens in Different Ways Hydrocraking Breaks up the next heavies components using hydrogen / catalysts Fluidized Catalytic Cracking (FCC) Breaks up diesel quality components using catalysts Alkylation Combines light ends from crude tower with by products from FCC Needs work

Refining Current Events North American domestic oil production has increased, adding to the crude optionality for refineries In US, Jones Act restricts export of domestically produced crude Anything that is processed can be exported, leading to new construction of splitters that run crude through a single process then export the refined products Global political instability has a constant impact on crude and refined product markets Formatting and tailor to accountants and Tech

Accounting Impacts Numerous sources of crude coming into refinery must be tracked and measured Changing economic landscape is bringing new counterparties with which to transact Inventory Reconciliation Yield Accounting Production or increased supply from new areas brings new locations Master Reference Data impact Potential new tax implications New points at which to hold inventory Formatting and tailor to accountants and Tech

Final Thoughts Transaction Processing and Scaling Organization and Processes to Support Focus on larger trends and analysis Health Checks to catch issues early (Over) Communicate with the Business Formatting and tailor to accountants and Tech

Appendix Formatting and tailor to accountants and Tech

PADD: Petroleum Administration for Defense Districts The United States is divided into five Petroleum Administration for Defense Districts, or PADDs. These were created during World War II under the Petroleum Administration for War to help organize the allocation of fuels derived from petroleum products, including gasoline and diesel (or "distillate") fuel. Today, these regions are still used for data collection purposes. When the looking at market share for M&A purposes the regulatory agencies look at how big a company is in the PADD’s that would be affected. Source: eia.gov

Key Numbers and Stats to Remember Gallons of Oil per Barrel 42 Barrels of Oil per Metric Ton (U.S.) 7.33 U.S. Petroleum Consumption 18.5 million barrels/day Dependence on Net Petroleum Imports 45.6% Motor Gasoline Retail Prices U.S. City Average $3.41/gallon Regular Grade Motor Gasoline Retail Prices U.S. City Average (2011) $3.32/gallon Premium Motor Gasoline Retail Prices U.S. City Average $3.68/gallon Federal Motor Gasoline Tax 18.3 cents/gallon U.S. Motor Gasoline Consumption 9,120,000 barrels/day (383 million gallons/day) Share of US Oil Consumption for Transportation 69% U.S. Average Home Heating Oil Price $4.23/gallon (excluding taxes) Number of U.S. Operable Petroleum Refineries 148 Largest U.S. Refinery by Capacity – Port Arthur, TX (Motiva) 600,000 barrels/day Top U.S. Petroleum Refining States - Texas 4,717,199 barrels/day Need to update

Did You Know… …U.S. oil demand in 2013 was 18.5 million barrels per day? …every day the US consumes enough oil to cover a football field with a column of oil 2500 feet tall? That's 121 million cubic feet. … the current U.S. refining capacity is 16.1 Million BPD Need to update

What to Know About Gas Prices As this year’s driving season begins, gas prices this week reached a nationwide average of $3.17 per gallon, four cents per gallon higher than the previous record set last year. The media stories are increasing, and as friends and family start to ask about gas prices, it’s important to understand the facts about what goes into the price at the pump: Crude price drives the price of gasoline Gasoline is a global product Taxes take a toll Consumers are in control

What Are the Most Common Refined Products? Application Specifications Gasoline Transportation Octane, Vapor Pressure, Oxygen & Sulfur Jet Fuel Power Generation & Transportation Freeze, Flash & Smoke Points Diesel Fuel Sulfur, Cetane Index, Viscosity & Pour Point Home Heating Oil Heating Sulfur, Viscosity & Pour Point Residual Fuel Oil Industrial Uses, Power Generation & Transportation Others – LPG, Lubricants, Naphtahs, Greases, Asphalt, Coke & Waxes Heating, Industrial Uses, Transportation & Petrochemicals

Measuring Crude Oil Using Density and Gravity The lighter the crude, the more desirable the components it naturally contains are. Measured in degrees API Light crude > 30 API / Heavy crude < 30 API EX: Roofing Tar = 8 API; Motor Oil = 40 API

Quality and Price of Various Marker Crudes Gravity Sulfur Price WTI 39.6 0.24% $100.32 Brent 38.3 0.37% $111.30 ANS 30.0 1.09% $110.46 Maya 21.8 3.33% $107.05 Update and come back as to keep or not

Classifying Refineries by Major Processes When looking at an oil refinery from a technical perspective items are the most relevant. Complexity - an oil refinery’s ability to process feedstocks, such as heavier and higher sulfur content crude oils, into value-added products. Generally, the higher the complexity and more flexible the feedstock slate, the better positioned the refinery is to take advantage of the more cost effective crude oils. The result is incremental gross margin opportunities for the refinery. Capacity – is a measurement of how much crude oil can be processed on a daily basis. The measurement is determined based on the standard crude slate that is run through the refinery. By adjusting the crude slates, there is the ability to slightly adjust the maximum amount that a refinery can run on a daily basis.

Distillation: A Boiling Process Crude oil boils at a number of temperatures… BOILING TEMPERATURE of 100 200 300 400 500 600 700 800 900 1000 10 20 30 40 50 60 70 80 90 LIGHT NAPHTHA BUTANES & LIGHTER HEAVY NAPHTHA GAS-OIL CAT PLANT FEED RESIDUE CUMULATIVE PERCENT VOLUME Crude Oil Distillation Curve and Its Fractions KEROSENE Crude oil boils at 150o… 450o… 750o… 900o... 150 450 750 900 Each type of crude has a unique distillation curve that characterizes the kinds of chemical compounds in that crude Petroleum Refining: Leffler

Major Components of Distillation: Crude Tower Vaporizes crude oil Separates components Sends lighter gas to top Settles heavier liquid to bottom Directs components to other processes Keeps chemical nature the same

Major Components of Distillation: Vacuum Tower Receives heavier crude from the crude tower Heats crude again Distills under a vacuum to prevent decomposition Distills lighter vapor into gas oil Sends heavier crude to coker unit Produces Fuel Oil

Major Components of Distillation: Summary The outputs of these two units are sent throughout the refinery, either as finished products or components that need more refining Going from lightest to heaviest distilled component, natural gas (or methane) comes first Methane is used as fuel in the refinery

Major Components of Conversion: Delayed Coker Receives heavy crude from the vacuum tower Breaks up the heaviest components with high temperature and pressure Makes heavy components lighter Sends some components for further processing Produces solid industrial fuel called coke

Improving Octane Through Conversion Low Octane – Molecules in straight line Higher Octane – Molecules in shape or branch Two processes for reshaping molecules Reforming Forms a ring of molecules Isomerization Rearranges molecules geometrically Maybe too technical

De-sulfurization: Getting It Out Removes sulfur using catalysts and pressurized hydrogen Low pressure – 600 to 800 psi (reduces sulfur to 500 ppm) Medium pressure – 800 to 1,200 psi (reduces sulfur to 50 ppm) High pressure – 1,200 to 1,800 psi (reduces sulfur to 5 ppm)

Gasoline Blending: Getting the Right Mix Mixes components from: Crude / vacuum tower Hydrocracker FCC Alkylation And creates products with specifics, desired characteristics Regular Premium Aviation gasoline

Top 10 List: Largest Global Refineries Rank Company Location Crude Capacity (b/cd) 1 Paraguana Refining Center Cardon/Judibana, Falcon, Venezuela 940,000 2 SK Corp. Ulsan, South Korea 817,000 3 GS Caltex Corp. Yeosu, South Korea 750,000 4 Reliance Petroleum Ltd. Jamnagar, India 660,000 5 ExxonMobil Refining & Supply Co. Jurong/Pulau Ayer Chawan, Singapore 605,000 6 Reliance Industries Ltd. 580,000 7 S-Oil Corp. Onsan, South Korea 565,000 8 Baytown, Texas, USA 560,500 9 Saudi Arabian Oil Co. (Saudi Aramco) Ras Tanura, Saudi Arabia 550,000 10 Formosa Petrochemical Co. Mailiao, Taiwan 540,000 Check for updates

Top 10 List: Largest US Refineries Rank Corporation State Site Barrels per Calendar Day 1 Motiva Texas Port Arthur 600,000 2 ExxonMobile Baytown 584,000 3 Marathon Louisiana Garyville 522,000 4 Baton Rouge 503,000 5 Texas City 451,000 6 PDV AMERICA INC Lake Charles 427,800 7 BP PLC Indiana Whiting 405,000 8 Chevron Corp Mississippi Pascagoula 370,000 9 Beaumont 348,500 10 Sunoco / ETP Pennsylvania Philadelphia 335,000 Check for updates

Top 10 List: Petroleum Refining States Rank State Operating Crude Oil Distillation Capacity (1000/day) # of Operating Refineries 1 Texas 4,241 24 2 Louisiana 2,534 16 3 California 2,005 20 4 Illinois 904 5 Pennsylvania 770 6 New Jersey 655 7 Washington 624 8 Ohio 511 9 Oklahoma 487 10 Indiana 433 Check for updates

Did You Know… …U.S. oil demand in 2013 was 18.5 million barrels per day? …every day the US consumes enough oil to cover a football field with a column of oil 2500 feet tall? That's 121 million cubic feet. … the current U.S. refining capacity is 16.1 Million BPD Need to update

The Largest U.S. Refiners Are… Company Name (2013 Fortune 500) Rank Revenues ($b) Profits ($mm) Exxon Mobil 2 449.9 44,880 Chevron 3 233.9 26,179 Phillips 66 4 169.6 4,124 Valero Energy 9 138.3 2,083 Marathon Petroleum 33 76.8 3,389 Hess 75 38.4 2,025 Tesoro 95 32.5 743 Murphy Oil 104 28.8 971 PBF Energy 142 20.1 HollyFrontier 143 1,727 Western Refining 283 9.5 399 Update

What to Know About Gas Prices As this year’s driving season begins, gas prices this week reached a nationwide average of $3.17 per gallon, four cents per gallon higher than the previous record set last year. The media stories are increasing, and as friends and family start to ask about gas prices, it’s important to understand the facts about what goes into the price at the pump: Crude price drives the price of gasoline Gasoline is a global product Taxes take a toll Consumers are in control

Refining Take Aways – Remember these… Refined products are designed with specific properties based on engine requirements. Refineries convert crude oil into finished products. Distillation separates hydrocarbons into fractions using different boiling temperatures. Quality improvement operations increase gasoline octane and remove sulfur impurities. Conversion operations break larger hydrocarbons (fuel oil) into smaller ones (gasoline). Refineries are built using combinations of different processing units. Formatting and tailor to accountants and Tech