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LITASCO SA - LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY

LITASCO SA/ LUKOIL The “Integrated Trader’s Compromise”
Gati Al-Jebouri, CEO LITASCO SA

Discussion with CASS Business School

17.02.2009

INTRODUCTION
LITASCO SA - LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY

• LITASCO SA is the international marketing, supply and trading subsidiary of LUKOIL • This presentation includes the highlights of LUKOIL’s and LITASCO SA’s full range of business activities and reflects on the challenges for a trading company operating under the umbrella of a major integrated oil company

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AGENDA LITASCO SA .LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY 1 2 3 Introduction to LUKOIL Introduction to LITASCO SA The “Integrated Trader’s Compromise” 2 .

22 mln bpd* Crude and products export: 1.LUKOIL GROUP – KEY FACTS LITASCO SA .3% of global oil production • 18.6% of Russian oil production and 18.000 employees • Market cap near $29 bln** • 1.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Net income 2008: circa $12 bln* Proven hydrocarbon reserves: 20.1% of Russian oil refining • The second largest private company worldwide by proven reserves of hydrocarbons • The 6th largest private oil company worldwide by production of hydrocarbons • The largest Russian private oil group with annual turnover near $ 100 bln • The first Russian company to receive full listing on the LSE • The only private Russian oil company whose share capital is dominated by minority stakeholders • The largest corporate taxpayer in Russia: $33 bln of taxes and duties paid in 2008 due to highest export volumes amongst peers Refining in Europe: 0.3% of global oil reserves and 2.12 mln bpd • LUKOIL is one of the world’s largest private vertically integrated oil and gas companies • Operations in over 30 countries and more than 150.4 bln bbls Production of marketable hydrocarbons: 2.36 mln bpd* * Preliminary data based on the results announced at Bod 13/01 and Litasco SA analysis **at closing 09/02/09 (RTS&MICEX) 3 .06 mln bpd* Refineries throughput: 1.

LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY • Our purpose is to harness natural energy resources for human benefit • We aim to support long-term economic growth. 4 . as well as caring for the environment and ensuring sustainable use of natural resources • We want to achieve consistent and long-term growth of our business • We have transformed LUKOIL into a leading global energy company • We want to be a reliable supplier of hydrocarbons on the international energy market. social stability.LUKOIL GROUP – MISSION AND GOALS LITASCO SA . • LUKOIL sets the objectives to create new value. maintain business stability and provide shareholders with high return on their investments through asset value appreciation and cash dividends. prosperity and progress in the regions where we operate.

926 0.978 5.1 1.9 1.4 119.054 6.7 88.9 15.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY 9 months 2008 Total revenue ($ bln) EBITDA ($ bln) Total sales volume (million tons) Crude oil production (million barrels per day) Refined products (million barrels per day) Petrol stations worldwide 89.7 16.830 5 .820 0.3 115.793 2005 55.6 1.LUKOIL GROUP – KEY FIGURES LITASCO SA .953 1.7 12.895 1.4 112.758 2007 81.135 6.8 10.5 1.090 2006 67.946 5.

LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Murmansk Vitino Timan Pechora Usinsk Varandey West Siberia FINLAND Vysotsk Tallinn ESTONIA LATVIA Ventspils LITHUANIA Primorsk Ukhta Urals Refineries Perm Norsi Production regions Pipelines Rail Main export ports St Petersburg RUSSIA Svetly POLAND BIELORUSSIA Volga Volgograd Kerch Novorossiysk Tuapse UKRAINE Odessa ROMANIA MOLDOVA Export sea cargoes Kumkol Yuzhny KAZAKHSTAN Caspian Petrotel Burgas BULGARIA ISAB TURKEY 6 .LUKOIL OPERATIONS ON THE MAP LITASCO SA .

LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY 1 2 3 Introduction to LUKOIL Introduction to LITASCO SA The “Integrated Trader’s Compromise” 7 .AGENDA LITASCO SA .

1 mln mt 8 .KEY DETAILS OF THE LITASCO GROUP LITASCO SA .6 mln mt • Product sales of 56.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Corporate structure • 100% subsidiary of OAO LUKOIL (Moscow) • Headquarters and company registration in Geneva • Over 300 staff in 10 countries (204 in Geneva) 2008 Results (Unaudited) • Total sales of $67.5 bln (about 60% of OAO LUKOIL sales) • Operating profit of $330 mln • Crude oil sales of 41.

MISSION AND VISION OF LITASCO SA LITASCO SA .LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Our vision: To be the leading oil-trading and supply company in Europe and the FSU. and to challenge the majors in international markets To ensure the successful export of LUKOIL crude and products while achieving the highest possible netback To develop a global worldclass multicommodity trading business based on entrepreneurial (third-party) trading To support the growth and value-added marketing activities of LUKOIL’s downstream operations outside Russia To develop a strong and profitable presence in local markets through the development of specialized businesses LITASCO SA’ s mission is to maximize the value of LUKOIL’s crude oil and petroleum product exports and to expand its trading activities into new areas in the most efficient and safest way possible 9 .

Trades at own account Refining (Russia) Products International Markets Marketing (Russia) LITASCO SA participates in key transactions along the petroleum value chain: • Markets LUKOIL crude and refined products to international markets • Supplies LUKOIL and 3rd party crude to LUKOIL refineries 10 .LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY LUKOIL LITASCO SA LUKOIL/LITASCO SA Business Activities Refining (International) Marketing (Wholesale / Retail) Exploration and production (Russia) Crude Products International Marketing.LITASCO SA SITS IN THE MIDDLE OF THE LUKOIL SUPPLY CHAIN. BRIDGING RUSSIA AND INTERNATIONAL MARKETS LITASCO SA . Supply and Trading Handles logistics between Russian and international business units and markets.

DES) Sea transport (FOB) Increasing product value / increasing margin 11 .LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY LITASCO SA. as LUKOIL’s trading company.WHERE DOES LITASCO SA ADD VALUE? LITASCO SA . exists to add value to LUKOIL crude and products over and above the FOB value Point of final sale (typical incoterm) Refinery gate (FCA) Inland transportation (DAF) Shore tanks (CPT. DDU) LITASCO value add area Delivered to end customer (CIF.

LITASCO SA’S CONTRIBUTION TO THE LUKOIL GROUP IS BASED ON THREE KEY BUSINESS ACTIVITIES LITASCO SA . Black Sea and Mediterranean regions Managing crude oil purchases (supply) on behalf of LUKOIL‘s refining and marketing operations in Eastern Europe (LUKOIL’s Romanian & Bulgarian refineries and the newly acquired refinery stake in ISAB. Sicily. Italy) System supply Geneva & Moscow International trading Geneva and Entrepreneurial (third-party) trading of crude oil international offices and refined products in international markets from a network of global trading offices 12 . currently focused in the North-West European.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Location Export marketing Geneva Core activities Marketing crude oil and refined product exports to customers outside the Russia and Caspian region.

4 2.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Stockholm Rotterdam Geneva Hamburg New Jersey Dubai Singapore LUKOIL Pan Americas LUKOIL Benelux LITASCO SA Geneva LUKOIL Hamburg LITASCO SA Sweden LUKOIL Asia Pacific Focus of operations Crude oil and all products Local market fuel oil and marine fuels Crude oil All products Petrochemicals Naphtha Gasoil Gasoline Local market gasoil sales IntraScandinavian (GothenburgCopenhagen) Main markets served Transatlantic Caribbean US Benelux coast Baltic-Benelux Benelux-Far East/US Baltic .6 5.7 3.5 0.W Europe Black Sea – Mediterranean NW Russia .TRADING FOCUS OF LITASCO SA’S MAIN INTERNATIONAL OFFICES LITASCO SA .Europe 90.6 AfricaWestern Europe Marine fuels in Singapore Trading all products in Singapore and the Middle East Persian Gulf– India–SE Asia Volume traded 2008.3 13 . mln mt 8.

LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY 1 2 3 Introduction to LUKOIL Introduction to LITASCO SA The “Integrated Trader’s Compromise” 14 .AGENDA LITASCO SA .

NOT EVERYONE TRADES LITASCO SA . with increasing volatility and inactive participants there is significant scope to develop a large and profitable trading position 15 . and even actively trading oil companies do not trade all of their production • Majors have a risk aversion and corporate profile that discourages ‘speculation’ • Majors assume that investors can hedge and are seeking long exposure to absolute crude prices and refining margins In a large market. they do not trade them • Only approx. heavy) have specific applications (high-conversion refineries). Refineries with deep conversion prefer time contracts to ensure security of supply • The oil majors are not necessarily large traders • Many oil companies market products.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY • The majority of crude is sold under long term contract • National Oil Companies mostly sell under long term contracts (NOCs account for 70% of world production) • Many contracts prevent selling onwards to third parties • Specialized crude types (sour. 20% of non-NOC volume is potentially traded.

LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Business model Pure-play independent trading companies • Exist solely to trade energy and other commodities while holding few to no assets • • • • • • • • • • • • • • • • • • • • • • • • • Examples Glencore Vitol Marc Rich Sempra Cargill Trafigura Total (TOTSA) ExxonMobil British Petroleum (BP) Petróleos Mexicanos Koch Shell (STASCO) Petrobras Statoil (stopped all products trading) ConocoPhillips Morgan Stanley (credit impaired) Goldman Sachs/J Aron (drastically reduced activity) Louis Dreyfus (stopped trading crude) Bank of America (stopped all commodity tradings) UBS (stopped all commodity tradings) Lehman Brothers (bankrupted) Barclays (acquired UBS trading activities) Credit Lyonnaise (drastically reduced activity) Societe Generale (drastically reduced activity) Hedge Funds: Citadel stopped all tradings Trading arms linked to integrated asset businesses • Optimize supply procurement and product off-take • Monetize asset positions held by core business • May also trade for own account and offer financial trading instruments and financial services Financial houses • Trade a wide spectrum of commodities while offering other financial products and services (e.CATEGORIES OF OIL TRADING COMPANIES LITASCO SA . derivatives) 16 .g.

unique knowledge.SEVERAL TYPES OF BUSINESS MODEL ARE AVAILABLE TO TRADING COMPANIES LITASCO SA . and risk management expertise to create additional value Arbitrage • Leverages price differentials in different markets for the same or related commodities to capture profit • To profit from superior market knowledge without taking on large additional risks Position taking • Takes naked.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Trading role Asset optimization Characteristics Value proposition Examples • Trades only to fulfill basic operational • To maximize day-to-day needs and contractual obligations margins by optimizing asset economics Increasing trading complexity System trading • Purchases and sells in excess of system needs to capitalize on favorable market prices • To leverage asset position. long. or short positions in physical / financial markets to achieve profits through the successful anticipation of future price movements • To profit from anticipated but uncertain changes in prices by leveraging proprietary information 17 .

POTENTIAL IMPACT OF TRADING APPROACH ON SYSTEM PROFITS LITASCO SA .LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Trading enhancement to system profits 100% Profits for oil majors tend to plateau as incremental data is less relevant to the physical business “Pure” traders extend profits by taking speculative risks 50% System profits increase as the organization gets access to incremental market data Trading approach System supply System optimization Physical arbitrage Financial arbitrage Position taking Relative position of majors Trend toward increasing trading sophistication 18 .

but also have to: • Ensure timely lifting of all system production • Supply system with appropriate feedstocks and finished products • Minimize inventory levels (in order to satisfy financial analysts) • Comply with corporate guidelines on return on working capital employed • Fulfill corporate requirements on safety and environmental protection • Use corporate IT systems.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY INDEPENDENT • Maximizes earnings INTEGRATED • Maximizes earnings.FOCUS OF INDEPENDENT VS INTEGRATED TRADERS LITASCO SA . financial and accounting procedures • Meet corporate cash pooling requests Integrated traders must make a number of compromises to serve the interests of their parent company 19 .

LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY • Guaranteed volumes • Low financing costs with the help of the parent company’s credit rating • Strong market position. bargaining power • Participation in system optimization and resulting participation in profits • Access to and influence on logistical and asset investments 20 .ADVANTAGES OF THE INTEGRATED APPROACH LITASCO SA .

23 0.63 21 .15 19.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Sales by product category.62 14.46 2.50 44.52 14.87 41.76 0. 2005-2008 Million metric tons 60 50 40 30 20 10 0 CRUDE OIL FUEL OIL GASOIL GASOLINE OTHER PRODUCTS 2005 2006 2007 2008* * Unaudited account 50.17 18.30 18.63 29.80 16.30 0.04 3.87 45.63 11.39 3.19 0.24 3.LITASCO SA TRADING RESULTS LITASCO SA .

4 246.3 329.1 227.9 277.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY 500 Profit.3 22 .1 420.2 330.6 342.8 198.LITASCO SA FINANCIAL RESULTS LITASCO SA .0 223. 8 251.1 345. 2005-2008 USD million 450 400 350 300 250 200 150 100 50 0 GROSS PROFIT OPERATING PROFIT NET INCOME 2005 2006 2007 2008* * Unaudited account 465.

LITASCO SA .LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY BACK UP 23 .

PLAYERS WILL ASSUME VARIOUS BACK UP TRADING ROLES LITASCO SA . Arbitragers avoid risk by simultaneously buying in one market and selling in another. Leveraging proprietary information and acceptance of additional risks with the objective of capturing profits System trading • • Leverages asset position. A system trader might purchase excess quantity with intent to store and resell at a later date for profit.WITHIN EACH TRADING MODEL. Market makers quote a buy price lower than their sell price and capture the spread (bid-ask spread) Taking naked. Asset optimizers purchase and sell commodities at levels supportive of their assets and do not look to profit from purchases or sales in excess of system needs Using operational needs of a system as the basis for trading decisions. long. or short positions in physical/financial markets with the objective of achieving profits through the successful anticipation of future price movements. Continual transaction with market participants in attempt to match buyers and sellers to maintain a net neutral position.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Trading role Description Value proposition • Maximizes day-to-day margins by optimizing asset economics Asset optimization • Trading to fulfill basic operational needs and contractual obligations of an organization. unique knowledge. but extending beyond asset optimization to purchase and sell in excess of system needs to capitalize on favorable market prices. and risk management expertise to create additional value • Profits from superior knowledge of market dynamics without taking on significant additional risk • Provides liquidity by offering to buy and/or sell at all times • Profits from anticipated but uncertain changes in prices by leveraging proprietary information 24 Arbitrage • Market making • Speculation • . Leveraging price differentials in different markets for the same or related commodities to capture profit.

Pemex. the trading arm of Mexico’s national oil company. refined products. and chemicals trading PMI. and arbitrage opportunities that exist among power.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Company Pure-play independent trading companies Glencore Vitol Hetco Cargill Trafigura Trading arms linked to asset businesses TotalFinaElf Equiva ExxonMobil BP Pemex Koch Dynegy Description Switzerland-based. and affiliates of Shell and Texaco that trades crude and refined products Based in Irving. trading. Motiva. global trader of crude. involved in crude. ExxonMobil is the world’s largest oil company and is involved in crude. and metals. and operations in petroleum. metals. refined products. trades principally refined products Koch. investment. natural gas. natural gas. and coal that can be enhanced by the control and optimization of related physical assets and its alliances with leading utility companies 25 . metals. purchasing. Netherlands-based company focused on marketing physical oil. chemicals. Switzerland French oil company with substantial upstream and downstream activities supported by international trading in both crude and refined products Shell’s Houston-based supply and trading arm of Equilon.S. and agricultural commodities (formerly Marc Rich/Clarendon) Private. natural gas. owns a diverse group of companies engaged in trading. and power Trafigura is a private. natural gas. natural gas. with corporate headquarters located in Lucerne. and agricultural products (primarily sugar) With limited link to Hess Energy (U. behind only ExxonMobil and Royal Dutch Shell in size. and supply of energy.OVERVIEW OF PROFILED COMPANIES BACK UP LITASCO SA . and natural-gas liquids Houston-based Dynegy Marketing and Trade focuses on marketing. private company engaged in the physical trading. refined products.) Hetco covers the full range of energy Commodities and weather products Cargill’s energy division and Cargill-Alliant (Minnesota) trade and distribute crude and refined petroleum products. a privately held company based in Wichita. and chemicals trading and marketing London-based oil company. Texas.

) Company Trading arms linked to asset businesses Reliant Mirant Description BACK UP LITASCO SA . natural gas. base metals.OVERVIEW OF PROFILED COMPANIES (CONT. crude oil. selling. fully integrated energy marketer providing the buying.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Reliant (Houston) uses their natural-gas and power trading skills and extensive asset positions to better understand key regions and create sophisticated commercial insights Atlanta-based Mirant pursues an integrated business model that merges risk management and marketing knowledge with operational excellence (leveraging its investment-grade credit) to provide energy commodity and wholesale energy solutions Williams Energy Marketing & Trading (Tulsa) is a top-tier. and transportation of natural gas. specializes in over-the-counter options trading of energy. the commodities division of Goldman Sachs. and natural-gas liquids. and precious metals J Aron. as well as an extensive menu of risk management products The commodities department of MSDW trades physical commodities as well as related derivatives for oil. and agricultural products Williams Financial houses MSDW J Aron 26 . electricity. precious metals. power. refined products.

mark-up) Individual trader position limits and risk monitoring Sophisticated crossmarket risk analysis management Sophisticated pricing capabilities Revenue desegregation by source Separate trading and risk monitoring functions. research. back office) Arbitrage More customer-focused. positioning.…WHICH INFLUENCES THE REQUIRED MANAGEMENT SYSTEMS… BACK UP LITASCO SA . transaction. systematic measurement of intramarket and intermarket risks Increasing trading complexity System trading Product dominated by close origination / trading interaction. high-volume dedicated systems Risk management Simple systems with relatively small limits Explicit measurement relative to benchmark Risk monitoring and individual online trader position limits Limited cross-market capabilities Revenue desegregation by source (spread capture. and analytical support Highly skilled single and cross-market traders and analytical specialists who support client relationship generalists Front and back-office staff Large. traders. with links among client relationship people.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Structure Asset optimization Asset operations/ managers communicate with dealing room Staff Large number of clerks Few traders/risk managers Systems Relatively unsophisticated Linked to asset optimization/ logistics/scheduling Low-cost. supported by product research and back office Large number of skilled specialists (trading. and risk management support Position taking Trader-dominated organization with centrally coordinated risk taking Few exceptional risk takers supported by traders to access deal flows and research staff to interpret information Large investment especially in position monitoring 27 . origination. continual investment in analytical.

rather than organizationally-based risk reduction methods Best practice strategy / organization characteristics 28 .…AND ULTIMATELY THE RISK CONTROL SYSTEMS BACK UP LITASCO SA . flat organization Interface of these requirements points to system-based.LUKOIL INTERNATIONAL TRADING AND SUPPLY COMPANY Best practice risk control organization for various trading strategies Risk control is the most important factor determining the organization’s shape Risk control organization    Asset optimization Straight-forward nature of trading activities allows assets to be “siloed” along functional and organizational lines  Mainly Organization -based Components of both Mainly system based System trading Increasing complexity demands additional communication between asset managers Benefit to organization’s total returns through information sharing Arbitrage Position taking High complexity of activities demands significant risk level of risk monitoring Information flow requires highly connected.