Commodity Price Risk Management

Prepared by Goldman, Sachs & Co.

February 2008
(212) 902-0776
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Commodity Price Risk Management
Global Liquid Commodities Markets

Power

Electricity (North America & Europe)

Weather (North America & Europe)

Energy

Natural Gas (North America & Europe)
Over 30 natural gas basis locations

Crude Oil (Global)

Crude Types

Refined Products

Nymex WTI

NGLs (North America & Europe)

WTS

Coal

LLS

Petrochemicals and Plastics

Brent

Maya

Mars
Metals

Dubai

Precious Metals: Platinum, Palladium, Rhodium, Gold, Silver

Tapis

Base Metals: Aluminum, Nickel, Lead, Copper, Alloy

Midway Sunset

Buena Vista
Agriculture Products and Soft Commodities
Refined Products

Corn/Wheat/Soybeans/Soybean Oil/Palm Oil
Nymex Heating Oil

Cocoa/Sugar/Cotton/Coffee
Nymex Unleaded Gasoline

Lean Hogs
USGC Heating Oil

USGC Jet Fuel

USGC Diesel
Forest Products
Nymex Fuel Oil

EIA/DOE Diesel
Freight

NGL Locations
Carbon Emissions
Mt. Belvieu

Conway
GSCI/Investor Products
US West Coast

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I. Market Update

3
Crude Oil
Overview

Throughout its trading history, crude oil prices have generally converged to $20 per barrel, the market determined equilibrium
price.

Recent history, however, has seen the price of crude oil rise substantially as the market struggles to find a new equilibrium to
accommodate substantial increases in the marginal cost of production, as market supply has attempted to keep pace with
market demand.

Despite supply-driven increases in long dated oil prices, the cost per marginal barrel of production has grown at an even
faster pace, making a material decrease in crude prices unlikely.

Although crude oil producers have responded to increasing demand by increasing capacity, these marginal projects have
required expensive undertakings that will continue to impact on crude oil prices as global demand forces the market to seek
new supply sources.

Meanwhile, global refining capacity has been unable to keep pace with rising petroleum product demand, boosting margins
for the last several years, and resulting in fundamental product tightness. *
Rising Cost Structure Global Refining Capacity
3324033828344223501335611362033679437386379773857639170
80 90
World Petroleum
Marginal cost is defined as the Demand
70 average of the highest cost (or 80 Global Refining
Capacity
bottom quartile) producers
60 70
Marginal

Million bbl/day
50 Costs
60
$/bbl

40
Long-dated oil prices 50
30
40
20 World Petroleum
Supply
30
10

20
0
66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
1991 1993 1995 1997 1999 2001 2003 2005 2007E

*
Source: Goldman Sachs

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Crude Oil
Fundamentals

Fundamentals of the current market environment:

 Since the third quarter of 2007, Nymex WTI prices have increased as a result of declining US inventories and geopolitical
threats to supply.
 After hitting the $100 mark at the beginning of the year, crude oil prices have held firm, despite being pressured by last
week’s inventory build, a weakening US dollar, and fears of a US economic recession.
 Despite early January builds in US crude oil inventories, stocks remain at historically low levels.

Nymex WTI Crude Oil Historical Forwards US Crude Oil Inventories

100 370

90
350
80
330
70

Million bbls
$/gal

60 310

50
290
40
270
30

20 250
2003 2004 2005 2006 2007 2008 2009 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2008 2007 2006 2005 2004

*Source: Goldman Sachs

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Natural Gas Market
Fundamentals

For most of the market’s history, Nymex natural gas has traded at $2-$4 per mmBtu as excess supplies relative to demand
kept natural gas at low price levels. However, similar to the crude oil market the natural gas market has seen structural price
changes. Increased demand, driven largely by the power sector and increased heating needs, has further supported the
rising consumption pattern for natural gas.

GS Research is currently forecasting a Nymex natural gas price of $9.75 per mmBtu for the balance of 2008 and a $10.50 per
mmBtu price for 2009.
 Reasons for this view include:
 US LNG imports have declined dramatically since July due to increased Asian LNG demand on the back of nuclear
outages in Japan coupled with overall increasing power generation demand in Japan, China, and India.
 Nymex natural gas prices continue to lag both residual fuel oil and UK NBP prices.
 As long as the incremental US natural gas btu is sourced from LNG, a weak dollar, which has supported virtually all
other commodities including crude oil, agricultural products, and metals, should also support US natural gas prices.
 Carbon emission legislation (which we anticipate to happen no sooner than the end of 2012, in line with the expiration
of Kyoto) will be bullish for natural gas prices in the long term.
Historical and Forward Prompt Prices
20
Historical Forward
18
16
14
$/mmBtu

12
10
8
6
4
2
2003 2004 2005 2006 2007 2008 2009 2010
Nymex Natural Gas New York Harbor 1% Fuel Oil UK NBP Natural Gas

*Source: Goldman Sachs **Fuel Oil converted at 6.23 mmBtu per 1 barrel

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Natural Gas Liquids
Market Growth

In the United States, NGL forward markets first began to develop in the late 1980s when various price reporting services (e.g.
OPIS, Argus, Platts) began recording prices for Mt. Belvieu, Texas ethane, propane, butane, and natural gasoline.

Despite the existence of price reporting services, direct price risk management tools in liquids – particularly long-dated tools –
did not exist in a meaningful way until recently. In years past, in order to manage the floating product price risk, market
participants relied on the deeper liquidity of the oil market.

Partially as a result of the lack of a deep, liquid forward market in light end products, NGLs historically traded in direct
correlation with the oil market.

Increasing demand for energy in the United States analagously led to growth in the NGL market.
 1990: Total supply of NGLs in the US was approximately 2.2 million barrels per day.
 2.0 million barrels per day were domestically produced while the remainder was imported.
 1.55 million barrels per day were produced by gas plants with the rest produced by refineries.
 2000: Total US supply of NGLs grew to approximately 2.93 million barrels per day.
 2.67 million barrels per day of domestic production while the rest came from imports.
 1.91 million barrels per day were produced by gas plants with the rest produced by refineries.
 The growing US economy required additional sources of cheap energy spurring demand growth in the NGL market.
Specifically, increasing petrochemical demand for cheap energy led demand for NGLs to increase at a rate of over 3
percent per annum from 1990 to 2000. As prices in natural gas and the crude complex increased, additional uses for
NGLs were instituted, including gasoline blending and incremental home heating, which further spurred demand growth
in the NGL market.

In 2000, forward markets began to develop in the US liquids markets. This forward market development allowed the liquids to
begin trading according to their own unique fundamentals.
 Many reasons for this development:
 Acquistion or project finance driven hedges – fixed prices needed
 Petrochemical feedstock risk management – e.g. ethane/propane versus naptha
 Refiners – gasoline blending
 Record processing (fractionation) spreads

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Natural Gas Liquids
Recent Developments

NGL prices have continued to rally on lower than normal US stock levels, strong petrochemical demand and robust
international markets.

NGL forward curves currently project sustained high prices as fundamentals in the hydrocarbon carbon complex remain
bullish.

NGL Forwards*

2.40

2.20

2.00

1.80

1.60
$/gal

1.40

1.20

1.00

0.80

0.60
Feb-08 Jan-09 Dec-09 Nov-10
Mt. Belvieu Purity Ethane Mt. Belvieu TET Propane
Mt. Belvieu non TET Iso Butane Mt. Belvieu non TET Normal Butane
Mt. Belvieu non TET Natural Gasoline

*Source: Goldman Sachs

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Oil, Natural Gas & NGLs†
Market Structure

Tenor and Size:

— Nymex WTI crude oil forward markets trade daily out through December 2014. A standard Nymex WTI crude oil contract
is 1,000 barrels, also know as 1 lot. An average Nymex WTI crude oil trade is approximately 100,000 barrels per month
or 100 lots per month.
— Nymex natural gas forward markets trade daily out through December 2012. A standard Nymex natural gas contract is
10,000 mmBtus, also know as 1 lot. An average Nymex natural gas trade is 100,000 mmBtus per month of 10 lots per
month.
 Mt. Belvieu forward markets in NGL trade daily out 12-24 months. Liquidity beyond two years exists, but large and/or
long-dated transactions require a thoughtful execution strategy to ensure optimal pricing. Despite general tenor limitations,
it is possible to structure hedges in natural gas liquids extending out as far as eight years and regularly make two-way
markets in all five liquids 48 months forward. NGLs are generally quoted in $ per gallon and an average NGL trade is
approximately 20,000 barrels per month.

Location
 The delivery point for physical Nymex WTI crude oil is Cushing, Oklahoma.
 The price of Nymex natural gas is determined on delivery at the Henry Hub in Louisiana, which serves as the nexus of 16
intra- and interstate natural gas pipeline systems. This pipeline system serves markets throughout the US East Coast, the
Gulf Coast, the Midwest, and up to the Canadian border.
 While the Argus, Platts, and OPIS publications post daily prices for multiple pricing locations, virtually all of the over-the-
counter forward market liquidity resides at Mt. Belvieu, Texas and virtually all forward contracts settle against OPIS. It is
possible to hedge NGLs at locations other than Mt. Belvieu, Texas, but forward liquidity is slight. Thus, most hedgers
exposed to NGLs in other US physical locations such as Conway, Kansas or the US West Coast, choose to hedge their
exposure using Mt. Belvieu, Texas prices in order to obtain better liquidity and highly correlated pricing.

Hedge Tools:
 Tools available to hedge the oil, natural gas and NGL markets include, but are not limited to:
 Swaps – fixed price for a term
 Options – puts, calls, collars, etc.
 Spread Swaps & Options – frac spread swap & options, cross commodity spread swaps & options
†
Source: Nymex and Goldman Sachs

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II. Hedging Strategies

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Hedge Structures

Swap Call Collar

Description
Consumer buys
Consumer owns the right,
Consumer owns the right
commodity at a fixed price but not the obligation, to to buy commodity at the
in the future buy commodity at a fixed call strike, and may have
price in the future the obligation to buy
commodity at the put
strike in the future

Advantages
Full upside protection
Full upside protection

Full downside participation

Limited credit implications

Can be zero cost upfront

Protects against upward
price moves

Maintains some downside
participation

Disadvantages
Consumer loses any
Upfront premium payment
Consumer loses potential
potential gain from gain below the put strike
downside price moves

Credit support required
below the swap price

Credit intensive
Net Price
Payoff Diagrams Hedged
Net Price Net Price
Hedged Hedged
Unhedged Unhedged Consumer receives
Unhedged
Swap Strike Price difference
Consumer Consumer
Price
receives receives
difference difference Put Strike
Swap
Consumer pays
difference
} Premium Paid Call Strike
Consumer pays
difference

*Source: Goldman Sachs Market Price Market Price Market Price

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Key Hedging Considerations and Variables

Hedging Considerations

Terms Considerations

Tenor
Short, medium or long term

Volume
Percentage of consumption

Commodities Hedged
Specifications and location

Instrument
Swaps or Options

Credit Support
Collateral requirements

Unhedged Risk

Changes in prices on unhedged volumes

Changes in the basis differentials (location and grade) between chosen hedge and actual purchases

Changes in consumption patterns

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Price Indications
Indications as of 2-26-08 Close of business

Nymex WTI Nymex Non-TET Non-TET Natural

Crude Oil Natural Gas Purity Ethane TET Propane Iso Butane Normal Butane Gasoline
Period ($/bbl) ($/mmbtu) ($/gallon) ($/gallon) ($/gallon) ($/gallon) ($/gallon)
Mar-08 $100.77 $9.21 $0.9500 $1.5125 $1.8150 $1.7600 $2.1950
Apr-08 $100.46 $9.25 $0.9375 $1.4850 $1.8050 $1.7350 $2.1900
May-08 $100.07 $9.27 $0.9275 $1.4825 $1.8050 $1.7350 $2.1825
Jun-08 $99.74 $9.33 $0.9175 $1.4825 $1.8085 $1.7385 $2.1750
Jul-08 $99.43 $9.40 $0.9100 $1.4855 $1.7835 $1.7435 $2.1700
Aug-08 $99.16 $9.46 $0.9050 $1.4895 $1.7750 $1.7500 $2.1650
Sep-08 $98.91 $9.47 $0.9015 $1.4935 $1.7800 $1.7575 $2.1600
Oct-08 $98.63 $9.54 $0.8980 $1.4975 $1.7850 $1.7650 $2.1550
Nov-08 $98.37 $9.82 $0.8945 $1.5015 $1.7875 $1.7725 $2.1550
Dec-08 $98.06 $10.15 $0.8920 $1.5055 $1.7950 $1.7800 $2.1550
Jan-09 $97.76 $10.38 $0.8895 $1.5095 $1.8010 $1.7860 $2.1550
Feb-09 $97.52 $10.35 $0.8745 $1.4895 $1.7760 $1.7610 $2.1475
Mar-09 $97.25 $10.08 $0.8595 $1.4545 $1.7460 $1.7260 $2.1400
Apr-09 $96.99 $8.68 $0.8445 $1.4095 $1.7085 $1.6785 $2.1325
May-09 $96.75 $8.59 $0.8395 $1.3945 $1.6935 $1.6635 $2.1250
Jun-09 $96.55 $8.65 $0.8370 $1.3945 $1.6935 $1.6635 $2.1175
Jul-09 $96.32 $8.71 $0.8345 $1.3970 $1.6920 $1.6670 $2.1100
Aug-09 $96.13 $8.76 $0.8320 $1.4015 $1.6870 $1.6720 $2.1050
Sep-09 $95.95 $8.77 $0.8295 $1.4065 $1.6925 $1.6775 $2.1000
Oct-09 $95.78 $8.83 $0.8270 $1.4115 $1.6985 $1.6835 $2.1000
Nov-09 $95.66 $9.13 $0.8245 $1.4165 $1.7050 $1.6900 $2.1000
Dec-09 $95.54 $9.48 $0.8220 $1.4215 $1.7115 $1.6965 $2.1000
Jan-10 $95.45 $9.69 $0.8220 $1.4280 $1.7180 $1.7030 $2.1000
Feb-10 $95.37 $9.70 $0.8095 $1.4105 $1.6905 $1.6755 $2.0925
Mar-10 $95.27 $9.47 $0.7970 $1.3805 $1.6580 $1.6380 $2.0850
Apr-10 $95.17 $8.38 $0.7845 $1.3455 $1.6280 $1.5980 $2.0775
May-10 $95.09 $8.33 $0.7845 $1.3390 $1.6230 $1.5930 $2.0725
Jun-10 $95.01 $8.39 $0.7845 $1.3415 $1.6230 $1.5930 $2.0675
Jul-10 $94.94 $8.44 $0.7845 $1.3445 $1.6220 $1.5970 $2.0675
Aug-10 $94.88 $8.50 $0.7845 $1.3490 $1.6170 $1.6020 $2.0675
Sep-10 $94.84 $8.52 $0.7845 $1.3540 $1.6220 $1.6070 $2.0675
Oct-10 $94.81 $8.59 $0.7875 $1.3595 $1.6280 $1.6130 $2.0675
Nov-10 $94.79 $8.87 $0.7910 $1.3650 $1.6340 $1.6190 $2.0725
Dec-10 $94.77 $9.19 $0.7945 $1.3705 $1.6400 $1.6250 $2.0775

Nymex Calendar Average WTI Crude Oil; Nymex Natural Gas Last 1 Day; Mt. Belvieu
NGLs settling vs. OPIS monthly average Source: Goldman Sachs

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Disclaimer

This material has been prepared by personnel in the Equities or Fixed Income, Currency and Commodities Sales/Trading Departments of one
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Commodity Risk Management.

— Goldman Sachs has been making long-dated markets for over 10 years. We routinely execute hedges on behalf of clients that extend
through 2010. Our product offerings include Crude Oil, Natural Gas, multiple grades of Gasoline, Heating Oil, Diesel, Jet Fuel, Naptha,
Fuel Oil, Electricity, Gold, Silver, Platinum, Palladium, Aluminum, Copper, Alloy, Lead, Nickel, NASAAC, Corn, Wheat, Soybeans,
Soybean Oil, Palm Oil, Cocoa, Sugar, Cotton, Coffee and Lean Hogs. Our over the counter swaps and options can be structured to
settle against the Nymex or one of the various regional price postings.
(C) Copyright 2007 The Goldman Sachs Group, Inc. All rights reserved.

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