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LITASCO SA

LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY

International Oil Market and Oil Trading
Gati Al-Jebouri, CEO LITASCO SA Haute Ecole de Gestion, Geneva, September 19, 2008

4 billion (about 60% of OAO LUKOIL turnover) • Operating profit of USD 315 mln • Crude oil sales of 44. LUKOIL .8 million mt • Product sales of 55.KEY DETAILS OF THE LITASCO GROUP LITASCO Corporate structure • 100% subsidiary of OAO LUKOIL (Moscow) • Headquarters and company registration in Geneva • Over 300 staff in 14 countries (~ 180 in Geneva) 2007 Results • Total sales of USD 53.8 million mt 1 Source: LITASCO SA.

is to add value to LUKOIL’s crude and products after they leave the export location point Point of final sale Wellhead Refinery gate Inland transportation LITASCO value add area Shore tanks Sea transport Delivered to end customer Hydrocarbon flow .WHERE DOES LITASCO ADD VALUE? LITASCO’s mission as LUKOIL’s trading arm.from wellhead to pump 2 .

4 8.3 9. Litasco SA analysis 3 .8 31.5 7 4 8.7% per year over the next 25 years Source: History: Energy Information Administration (EIA).9 16 17.9 6.9 84.6 7.1 OECD North America Demand 18 Production 2007 2020 2030 • World overall oil consumption is forecast to grow at 1.2 3. Generate World Oil Balance Model (2008).2 15.1 25.7 26.2% per year over the next 25 years • OECD world oil demand is forecast to grow at 0. International oil outlook 2008.3 17 5.4 30.9 9.9 3. 2008.3 84.Office of Energy Markets and End Use.5 0.4 7.8 4.6% per year • Large oil consumers will see their local production lag behind: • North America: +0.2 10.9 28 25.4 0.5 0.6 2.2 24.2 17.7 15.GLOBAL OIL DEMAND VS PRODUCTION BY REGION THROUGH 2030 Trading is the natural result of regional demand and supply imbalances Central and S.4% per year over the next 5 years) • World oil production capacity is forecast to grow at 1.4% per year over the next 25 years • Large oil producers are forecast to meet the increase in demand over the same period: • OPEC: +1.2 6.3% per year over the same period while non-OECD world oil demand is forecast to grow at 2.9 8. Projections: EIA.46 103.4 Demand Production Demand Production 33.46 101.0 9.5 7.5 5.7 14.3 90.6 15.5 112.3% per year • Caspian area: +3.9 90.2% per year • The fastest growing market will be China (+3.7 18. America Africa Middle East Non-OECD Asia Non-OECD Europe & Eurasia OECD Asia OECD Europe Mln bbls per day 112.7 12.7 6.5 4.5 12.3 9 16 8.

shipping optimization and price structure. they ensure that customer’s demand requirements are met while sourcing from prevailing.WHAT DOES A TRADING COMPANY DO? • Buy and sell physical and paper barrels • Match supplier and consumer requirements through: • flexible pricing / financing • customized delivery patterns • price risk management • Trading companies take advantage of location or quality imbalances. They rely on financial instruments to hedge or manage their price risk exposure • By doing so. most commercially attractive supply region 4 .

7 5 .8 Africa-Western Europe IntraScandinavian (GothenburgCopenhagen) 10.1 6.W Europe Black Sea – Mediterranean NW Russia .3 Volume traded 2007 million mt 4.Europe 85.2 0.7 3.TRADING FOCUS OF LITASCO’S MAIN INTERNATIONAL OFFICES Stockholm Rotterdam New Jersey Hamburg Geneva Dubai Singapore LUKOIL Pan Americas Focus of operations Crude oil and all products LUKOIL Benelux Local market fuel oil and marine fuels LITASCO Geneva Crude oil All products Petrochemicals LUKOIL Hamburg Naphtha Gasoil Gasoline LITASCO Sweden Local market gasoil sales LUKOIL Asia Pacific Marine fuels in Singapore Trading all products in Singapore and the Middle East Persian Gulf– India–SE Asia Main markets served Transatlantic Caribbean US Benelux coast Baltic-Benelux Benelux-Far East/US Baltic .

etc International Oil Majors and Their Trading Arms – ExxonMobil. Aron. LUKOIL . Trafigura. etc – – Financial houses and non industry speculators 6 . PDVSA. Total. J. because an important part of it is devoted to the needs of their own supply chain system Majors have a risk aversion corporate profile that discourages high levels of exposure to price risks and the resulting “speculation” Trade energy and other commodities while holding few or no production assets Actively trade in spot physical and derivatives markets Trade a wide spectrum of commodities while offering other financial products and services Have a controlled speculative exposure in oil derivatives markets. Sempra. etc – Morgan Stanley. Shell. Glencore. KPC. similar to other financial markets Independent Oil Trading Companies – Vitol. refining. hedge funds. ConocoPhillips. trading. INOC. BP.MAIN CATEGORIES OF PARTICIPANTS IN THE INTERNATIONAL OIL MARKET Examples National Oil Companies (NOCs) Participation in the market – – NOCs mostly sell under term contracts (NOCs account for 70% of world production and for most of the OPEC production) Limited number of term contracts prevent re-selling to third parties Saudi Aramco. downstream distribution and marketing through fuel distribution networks) Majors do not trade all of their production. etc – – Privately owned international majors are large vertically integrated companies that are present in all the activities along the supply chain (upstream exploration and production. Chevron.

such as gasoline and gasoil (motor vehicles). petroleum plays a central role in satisfying the demand: its contribution is around 36% of total energy consumption World share of petroleum consumption by sector* Sector Transportation Industrial Electric power generation Residential Commercial % of total consumption 51% 33% 7% 6% 3% • The transportation and the industrial sectors are the main consumers of petroleum • The consumption of these two sectors is projected to continue to grow in the future. jet fuel / kerosene (aviation) • The industrial sector is composed by the chemical and the petrochemical industries that use products. such as LPG and naphtha as feedstock 7 * Source: EIA – International Energy Outlook 2007 . bunker fuel oil (marine transportation).OIL AND TOTAL ENERGY WORLD CONSUMPTION The world’s total energy consumption is over 460 quadrillion BTU. while consumption of the other sectors will stay stable • Transportation consumes petroleum products. natural gas and coal. Along with electricity.

physical oil prices are driven by the paper market  Financial players and “speculators” such as hedge funds trade on these markets in addition to traditional industry participants (producers. far greater volumes are traded on the derivatives (paper) markets than on physical markets  Because of the vast liquidity and transparency of the futures contracts.Physical commodity markets. end users) 8 .Evolution of oil trading . derivatives markets and price determination Volumes Traded Annually 3% 5%  Crude oil and all major refined petroleum products trade on international markets  Liquid and transparent futures markets allow participants to « hedge » their spot and term supply contracts prices in the forward months 92% Paper market =10 to 15 times the size of the physical market  Appropriate financial instruments enable industry participants to manage their price risk exposure and offer additional profit opportunities  The main price indexes known to the general public today are futures – – WTI: traded on the NYMEX Brent: traded on the ICE in London OPEC production Rest of the world production Total volume (physical+papaer) traded  In the modern oil markets. refiners.

000.3 Lots traded monthly in 2007-2008 30.00 80. 5 2 .4 5 112 .000 1120.Paper market growth – what does it mean in US$ terms? Value of WTI trades at NYMEX 22612.000 20.3 0 11 6 .7 4 9 1 .000 10.4 0 6 7 .00 50.00 100.00 40.5 8 102 .4 52.3 7 9 2 . 2 37.00 140.00 128.00 100.00 0 .000 15.8 4 6 3 .000.0 0 731.0 M SE P L L .1 4 5 9 .00 Million lots USD/bbl 150.9 3 133 .1 26 45.7 2194.2 973.0 66 0 .5 71.000 bbls USD billion 15.9 8 9 5 .00 40.9 7 .000 0 10.3 6 7 9 .00 90.00 70.0 3506.00 110.00 60.00 USD/bbl 59 6.3 1 60 .00 20. 1 37.9 8 8 5 .4 60.9 5 JA N M AR M AY JU L P SE NO V JA N M AR M AY JU L P SE 200.00 Average monthly WTI price 2007-2008 5 4 .2 5.00 31 9.4 41 9 .6 2 6 3 .0 4691.9 25.00 120.1 N AY P V N AR M AY JA AR JU JA 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 SE JU M NO M Annual trades and WTI price 250.00 99 19 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 9 Source: Nymex.0 14 1 120.3 8 1 33 .00 130. 3 198.5 6 .000 20.000 1195.1 0 7 2 .6 3 125 .2 72 80.3 9 105 .1 50.00 150.7 07 1.8 7 9 4 .9 62.000 Lots.00 100.3 30 93 5.000 5.4 4 7 4 .000 Since the start of crude price rise in 1999 NYMEX paper market grew 30+fold from $700 billion to $23 trillion 9275.000.1 1411.00 0. 1 Lot = 1.000.9 45. Litasco * 2008 Extrapolated from Jan-Sept 2008 results 36.000.00 0.000.

investors and entities with no direct involvement in oil) drive the market prices according to their global investment positions  When building up long net positions oil prices rise…  …Conversely when those long positions are unwound or when they initiate short positions first oil prices decline  As traded paper barrels outnumber physical barrels (about: x10 times) oil producers have limited leverage to drive prices Source: CFTC / LITASCO 10 *Net position: “Longs” minus “Shorts” .Paper market influence over oil prices  Non commercial players (hedge funds.

THE OIL MARKET EVOLUTION Before Price Participants Market Forces Trade  Stable  Limited  Fundamentals  Regional Today  Volatile  Numerous  Fundamentals and Sentiments  Global  Paper (Derivatives = 10/15x Physical Volumes) Type of Business  Physical Only 11 .

NEW OIL MARKET PARTICIPANTS CHANGE MARKET NATURE BEFORE NOW Banks related to oil trade Oil companies Banks related to oil trade Oil traders Global trading housess Oil traders Oil companies Hedge funds Other Financial institutions The market today features a radically different set of players with varied agendas and targets as well as the capability of playing various commodity markets against each other and against stock market or money market 12 .

Fears of a – – – hard USA economic landing Non-OPEC growth Despite OPEC cuts spare capacity concerns remain More Bio fuels capacity  Near term outlook – – – – Stronger than expected – – – Spread of US banking crisis and global demand deterioration Non-OPEC growth lower than expected. LITASCO . PIRA. EIA. Low inventories New capacity added Bio fuels economic and oil demand growth Less non-OPEC supply growth. hurricanes – Same risks – Same risks Greater investors’ interest in commodities  Investors keep on buying commodities  Too high prices affect demand and prices fall Source: IMF. OPEC keep sustained production. Less OPEC spare capacity Refining capacity near maximum utilisation  Medium/ L-T supply-demand tightness OPEC Lack of increases in OPEC capacity  Medium term outlook – Bio-fuels/CO2 – Slower growth/peaking – non-OPEC Lack of increases in OPEC capacity  Medium term outlook – Lower demand due to global – Slower growth in both OPEC – and non-OPEC Lack of increases in OPEC capacity economy downturn – Projected L-T demand growth – Slower growth/peaking non–   13 Concerns over supply disruptions  Concerns over supply disruptions  Concerns over supply disruptions – Geopolitical risks.Key elements affecting prices and price trends 2004 to mid 2006 2007 2008  Near term demand-supply tightness  Near term outlook – Warm weather.

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