Terra Incognita –A Navigation Aid for Energy Leaders

Presentation to UH-GEMI Refining ConferenceNovember 2006

Terra Incognita

1 Private and Confidential

Terra Incognita – A Navigation Aid for Energy Leaders

1. Global energy complex is entering its third phase change2. Demand trends are not sustainable - China and India rise to materiality changes

everything3. IOCs want to produce but have limited access; NOCs have access but want to

conserve their resource4. Society’s ascent of the Maslow hierarchy increases expectations of energy

companies – security and climate must be addressed5. Previous shareholder value propositions are unpersuasive

• But IOC capex has barely increased from depressed 1990s levels6. Old strategies are threatened7. The industry must reframe its purpose and boundaries8. New business models will emerge and old ones will be discarded9. This will require new strategies, execution and leadership

• And this will affect deeply the Gulf Coast Refining business10. The “phase change” demands a different approach to strategy development

Terra Incognita

2 Private and Confidential

Global energy complex is entering its third phase change

U.S. Energy Consumption

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1850 1875 1900 1925 1950 1975 2000

Year

Perc

enta

ge o

f Tot

al M

arke

Total Coal

Wood Waste Alcohol

Liquids

Gases, Nuclear,Renewable Energy

Electricity NetImports

Terra Incognita

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0102030405060708090

100

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

The conventional investment cycle may be overridden by the phase change

2004 $/BWorld Oil Prices 1965 – 2030

(This is not a forecast!)

?

Terra Incognita

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China and India rise to materiality changes everything

World Population (Billion in 2005)

1.1

1.2

1.3

2.8

China IndiaMore Developed Less Developed

Oil Consumption(MMBD in 2005)

2.5

49.3

7.023.7

China IndiaMore Developed Less Developed

Terra Incognita

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IOCs want to produce but have limited access; NOCs have access but want to conserve their resource

Liquids OutputLOC7.6%

INOC14.3%

NOC40.1%

NSC10.8%

IOC27.2%

Liquids Reserves

IOC8%

NSC13%

LOC3%

NOC70%

INOC6%

Source: PIW’s Top 50: How the Firms Stack Up (www.energyintel.com)

Top 50 Share of Global Total = 79% Top 50 Share of Global Total = 84%

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Society requires attention to two big externalities

Global Hydrocarbon Reserves

125

6540

0

100

200

300

400

500

Oil Gas Coal

Mto

e

020406080100120140

R/P

(Yea

rs)

Russia China & India North AmericaMiddle East Other R/P

0

1000

2000

3000

4000

5000

MMT

Coal Oil Nat Gas

1990

2010

2030

CO2 Emissions - North America

0

1000

2000

3000

4000

5000

MMT

Coal Oil Nat Gas

1990

2010

2030

CO2 Emissions - China

• 61% oil reserves in Middle East

• 67% natural gas reserves in Middle East and Russia

• 50% of coal reserves in North America, China and India

Terra Incognita

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Old strategies are threatenedIOCs have lost competitive position to INOCs and NOCs for mature conventional resources in traditional places

Embryonic

Unproven

Embryonic

Unproven

Growing

Unconventional

Growing

Unconventional

Mature

Conventional

Mature

Conventional

Aging

Depleting

Aging

DepletingCompetitive position

Maturity

Clear leaderClear leader

StrongStrong

FavorableFavorable

DefendableDefendable

WeakWeak

NOC

NOC

Low:Medium:High:Competitive intensity:

Develop

Selective investment

Prove viability

Divest/close

Response

IOCDepleter

IOC

Consolidator

IOC

New EntrantNew Entrant

INOCNew Entrant

Terra Incognita

8 Private and Confidential

Prior shareholder value propositions are unpersuasive99-05 ROACE vs TSR

R2 = 0.0077

0%

10%

20%

30%

40%

15% 17% 19% 21% 23% 25% 27% 29% 31% 33%

Return on Average Capital Employeed(%, Average)

Tota

l Ret

urn

toSh

areh

olde

rs(C

AG

R, %

) Production growth has replaced ROACE as a

predictor of shareholder returns

99-05 Production vs TSR

R2 = 0.6662

0%

5%

10%

15%

20%

25%

30%

35%

40%

-5% 0% 5% 10%Production

(Percentage Change, Average)

Tota

l Ret

urn

to S

hare

hold

ers

(CA

GR

, %)

ENI

Murphy

Petro-CanadaPetrobras

TotalHess

Marathon

XOM BPChevron Shell

Terra Incognita

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IOC Capex has barely moved from depressed 1990s levels

0

2

4

6

8

10

12

14

16

18

1980

1985

1990

1995

2000

2005

Cap

ex in

200

5 $/

B o

f Pr

od/ R

un Upstream

Downstream

Real Capex per barrel of production or refinery runs for XOM, BP, Shell and Chevron

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“If a problem cannot be solved, enlarge it.”Dwight D. Eisenhower

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Electricity On

Demand

Emissions Control

Societal Needs

Crude Oil Natural Gas Coal

Bio-fuels

Wind, Tides, Currents,

Waves, Solar

NuclearEngineered

Crops

Hydrocarbons

Carbon Neutral

ICEFuel Cell

Gasoline & Diesel

Gasification

Combined Cycle

Chemical Separation

Syngas

Hydrogen

Fischer TropschRefining

CO2 Flue Gas

PC

Sequestration

Nuclear Waste Transportation

Bio-refiningChemical

Processing

Transmission

Batteries

Transmission

Personal Mobility

The industry must reframe its purpose and boundaries…

Terra Incognita

12 Private and Confidential

Electrons On

Demand

Emissions Control

Crude Oil Natural Gas Coal

Bio-fuels

Wind, Tides, Currents,

Waves, Solar

NuclearEngineered

Crops

ICEFuel Cell

Gasoline & Diesel

Gasification

Combined Cycle

Chemical Separation

Syngas

Hydrogen

Fischer TropschRefining

CO2 Flue Gas

PC

Sequestration

Nuclear Waste Transportation

Bio-refiningChemical

Processing

Transmission

Batteries

Transmission

Personal Mobility

The new map opens up new business model possibilities

Terra Incognita

13 Private and Confidential

The refinery of the future will be more flexible to achieve lowest variable costs

Source: CRA International

The New Refinery Extends its Product Markets into Chemicals and Power

syngas

H2

Coke

EOR/Sequestration

Diesel

Gasoline

Aromatics

Ethylene/Propylene

Lubes

Bitumen/ Hy Crude

Natural Gas

FCC Coking

Refinery

Gasification Complex

Ethylene Cracker Complex

Aromatics Complex

Hydro-treating/ cracking Complex

Fischer Tropsch

CO2Power

C2-C5+

BTX

wax

H2naphtha

intermediates

C2-C5+

C1

raffinate

Solids

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Global refining must be retooled to accommodate oil sands and convert more resid to transportation fuels

0

1000

2000

3000

4000

2001 2005 2010 2015

Projected Canadian Bitumen Production

The JV between ConocoPhillips and EnCana is the first announced to integrate previously un-integrated players

Un-IntegratedIntegrated to refineries

mbd

ROW (ex FSU)

OECD

0

2000

4000

6000

8000

10000

12000

14000

16000

1975 1985 1995 2005

Residual Fuel Oil Consumptionmbd

High oil prices will cause residual fuel oil demand destruction

Terra Incognita

15 Private and Confidential

Distributed manufacturing will challenge commodity refiners

ImportedCane-Ethanol

Coal-to-Liquids

Major Uncertainties

• Crude oil price• Natural gas price• Light-heavy spreads• Refinery investment

cycle--------------------------------------• Vehicle efficiency• Public transportation• Plug-in hybrids• Ethanol subsidies• Cellulosic ethanol• Greenhouse gas limits• FT/ CTL learning curve• Sequestration costs• Product flows/ blending

Synbit

Extra-HeavyCrude

Terra Incognita

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Organization Design will need to balance functional excellence with integration benefits

Supply and Trading

TraditionalMature

Emerging Country

DevelopmentDeepwater Unconventional

Resources

Risk Management

Supply ChainIntegration

Trading

BasinOps

Refinery Ops

- OECD Basins- Other mature operations

- “Non-integrated”refineries (Europe/NA)

M&A

Portfolio Strategy

Development/Offshore Project

Offshore Production

Resource Development

Renewables

Integrated Chains

-Integrated Refineries

-Storage, Transport, Processing, etc-LNG- Acquisitions

and Divestitures

EstablishedMarket Retail

- Retail in OECD, otherestablished markets

Traditional

Expanding NOC’s

Russia

Self Sufficient

- Nigeria- Algeria

- Norway- China

- Saudi Arabia

-Solar-Wind-Biomass

-Heavy Oil-Coal-Shale-Stranded Gas

CEO

Exploration

ILLUSTRATIVE

Terra Incognita

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The “phase change” demands a different approach to strategy development

Today’s Strategic

Challenges

Far From Agreement

Close to Agreement

Close to Certainty

Far From Certainty

TraditionalStrategicChallenge

ImplicationsExplore multiple futuresChallenge mental modelsSeek new insightsApply multiple lensesDevelop leadership alignmentEstablish clear directionDeal with ambiguityPlan for experimentationRigorously test business logicArticulate strategic metricsEmbed learning processesEmphasize organizational capability

Direction: Position downwind of major trends; redefine corporate boundaries; Refine business model

Execution: Secure commitment; access opportunities; deploy resources; organize; address stakeholder needs

Leadership Convey purpose; shape values & culture; establish decision rights; motivate and renew people

Terra Terra NovaNova

Terra Terra IncognitaIncognitaTerra FirmaTerra Firma

Terra Incognita

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“The winds and waves are always on the side of the ablest navigators.”

Edward Gibbon, Decline and Fall of the Roman Empire

Terra Incognita

19 Private and Confidential

Chris RossCRA International1600 Smith Street

Houston, TX 77002(713) 646-2211

cross@crai.com