In the current marketplace, navigating the challenges facing businesses today can be difficult. We collaborate withclients to create unique solutions to provide results now that will move them closer to NextGen Performance in thefuture. We offer:

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Oil Refining: Asset sales signal the start of a new era for the Atlantic BasinThe landscape of the oil refining industry is in transition, with familiar faces taking a step back and a new, more globalised cohort of refiners buying up unwanted assets. Will these new owners find profits where their predecessors saw only trouble ahead? Will more refineries close? Will it be business as usual for the refining sector or do unprecedented transformations lie ahead?

The market realities include many of the super-major international refiners divesting assets on the order of 20- to 35-percent of their existing refining capacity many refocusing on upstream investments. Yet other players seem primed for entry, including national energy companies expanding into new markets, sovereign wealth funds adding to their portfolios, conventional and counter-cyclical private equity players and trading and marketing companies.

This Perspective covers the rapidly changing dynamics within the Atlantic Basin refining sector, analysing recent trends and implications. Coming on the heels of KBCs 2011 Outlook for the World Refining Industry, the KBC team considers questions including:

Whats next for refining margins?

Who are the class of 2011 the new refinery owners entering the sector?

Are more refineries facing closure?

This 8-page Perspectives also includes likely attractive opportunities for future investment and identification of some of the key associated risks. To obtain a copy, visit our website at www.kbcat.com/perspectives/

Issue III - 2011

Continued on pg. 2

In a globally competitive environment, those with asset portfolios in the refining and petrochemical sectors are evaluating opportunities to achieve greater leverage from existing assets with relatively low investment or payback in periods as short as six months. Supply chain optimisation is one area in which substantial reductions in working capital can be achieved, as well as improved operating efficiency. Working together with several super majors, KBC has specifically targeted storage and logistics optimisation and inventory reduction opportunities (two components as part of its broader supply chain optimisation offering). In certain cases, excess inventories (crude and feedstocks, intermediates, blend stocks, and end product) of up to 40-percent have been identified, which at current prices (US$80/bbl crude), and typical inventory holdings, represents a potential working capital reduction of approximately US$240 million. In these scenarios, approximately 50-percent of the reduction opportunities were agreed upon with the client as being immediate and the remainder required further study, such as linear programme (LP) quantification of the impact on the refinery. Thus, the opportunity to reduce tied up cash can be substantial.

The key to optimising supply chain value is to have comprehensive knowledge of the entire technical and commercial processes of a refinery, not just inbound logistics or inventory management. In certain cases, instead of reducing the number of tanks or inventory, a facility may leverage additional capacity.

For example, certain opportunity crudes may increase the yield of higher value products, thus increasing refining margins. `Therefore it is important to understand all the potential trade-offs. If a given refinery typically runs

three to five crudes and a LP analysis has validated that by running seven to eight crudes greater value could be achieved from the existing process configuration, then the study outcome might be such that with greater efficiency in tank utilisation, the refinery could in fact bring in additional crudes and the overall inventory level may not significantly decline because of the additional crudes. However, the refinerys margin may be significantly enhanced because of the revised crude slate and greater value of end products produced due to the increased number of crudes. Accordingly, a comprehensive analysis will allow for a variety of possibilities for improved working capital efficiency and margin improvement.

Basic Storage and Logistics Review: A Three-Step Process1. Benchmarking

The first step in the process is to develop a benchmark for the facility in which improvement is being considered. This involves collecting existing tank utilisation and logistical management data for comparison to global leading practices, which will identify the potential gap. This gap represents the potential opportunity for improvement.

Portfolio Value Creation StrategiesReducing Working Capital and other Benefits of Storage and Logistics Optimisation

Representative Results

Up to 40-percent inventory reduction

Equivalent to US$240 million (based on $80/bbl crude price)

With typically 50-percent implementable immediately

2 | Issue III - 2011 | NextGen Performancen Realised

2. Operational Review

Once a benchmark has been established and the opportunity gap identified, an important element of a storage and logistics optimisation exercise is the operations review, since a number of operating practices have generally crept in over time. Accordingly, a site-by-site, unit-by-unit analysis is performed to address current working practices

3. Modelling

To truly optimise the entire supply chain, statistical analysis and modelling are required to effectively assess the optimal levels of inventory as well as offloading of crude to avoid a potential interruption to operations. The push/pull of supply and demand around a facility, in addition to the facilities throughout, will determine the realistic inventory that is required. Poor supply chain management will lead to increased inventories being held at the facility. With an effective model and once optimal levels are computed, it is easier to justify removing tanks, or changing their service e.g., to leverage previously utilised tanks for alternative crudes, increasing the flexibility of the particular facility. Similar analysis is performed on a unit-by-unit basis for the storage of intermediates, required blending stocks, and end product storage.

To evaluate supply chain opportunities, certain major oil companies prefer to use discrete event simulation (a/k/a stochastic) modelling which has been traditionally applied to production and operating systems in order to identify debottlenecking and management opportunities, and to allow the analysis of a variety of what-if scenarios. Such simulation typically involves Monte Carlo simulation programmes, utilising statistical sampling techniques, in order to predict future performance of the system. The advantage of such simulation is the ability to develop models of complex, integrated systems including product flows, pipelines, tankage, supply, and production schedules. Current experimentation is to link these types of models into scheduling systems, linking production parameters with tankage utilisation and logistics management, in order to generate scenarios which more fully optimise the overall supply chain. Through this combination, the desired production and oil movement rates can be forecast.

Coupling KBCs TankStatTM data with different stochastic modelling solutions, a variety of analysis can be completed, from the facility on a stand-alone basis to an extended model including the facility, terminals, and distribution points. Using Monte Carlo simulation, KBC has developed a process unit-by-unit database which includes possible unit upset occurrences that can be readily tailored for a specific site to test

the impact of various tankage scenarios on the refinerys service factor. Further, the LP analysis can determine the value of crude flexibility in terms of the plants operations.

This same analysis can be used for greenfield investments to determine the tankage capacity required for each unit to meet a specified production objective, taking into account the critical logistic and scheduling constraints of a location. For example, a European client invested in a hydrocracker expansion for which the EPC contractor had included a certain number of tanks at certain volumes as part of the project. Generally, the EPC contractor will use broad estimates which tend to be extremely conservative. However, by being able to develop a statistical model and integrate it with the refinerys LP, a more accurate estimate could be made in terms of the right number of tanks and the right volumes of these tanks, significantly less than proposed by the EPC contractor and significantly reducing the required capital expenditures. The advantage of statistical modelling both an existing facility and a greenfield project are that they refine broad range estimates and increase overall efficiency.

Storage and Logistics Optimisation Results

By using the three-step process of benchmarking, operational review, and modelling, storage and logistics functions and inventory held can be most effectively optimised. In certain cases, this maybe a reduction in inventory and associated working capital. In other cases, it can increase the flexibility of a facility to accept additional feedstocks which may not reduce the number of tanks utilised or the overall level of inventory, but can significantly increase production efficiency or the ability to create higher end products, which can also increase refinery margins. Accordingly, the analysis must consider all aspects of the operation, from work practices, to available feedstocks, to front-end trading practices, to the ability to produce higher end products with increased flexibility. Regardless of which scenario is ideal for a given client, the ability to optimise the storage and logistics across the facility creates significant opportunities for margin improvement and likely the opportunity to reduce working capital required in the business. Further, the return on investment for a storage and logistics optimisation study is often very significant because most opportunities for improvement do not require substantial investments. A solution might include revised work practices, revised job performance profiles (JPPs), and revised operator training for those involved along the supply chain. In fact, changes in work practices alone can produce significant improvements, and when coupled with modelling, produce optimal results.

Portfolio Value Creation Strategies: Reducing Working Capital and other Benefits of Storage and Logistics Optimisation (continued from pg. 1)

Shale Gas: How to Hedge the Value PropositionShale gas is one of the hottest topics in international energy markets and has the potential to be a true game changer. Large quantities of shale gas have been introduced to the markets and in the US have adversely affected domestic prices. As the shale gas phenomenon spreads globally, its impact will be uneven but significant. KBC believes one near-term hedge against price risk is exploitation of the associated liquids production.

There are significant reasons to exploit shale gas reserves, particularly in countries which are currently net gas importers, or require gas to fuel industrial expansion. As an example, Poland an importer of Russian gas now regards development of domestic shale gas reserves as an option to both replace coal-fired power generation to meet European Union emission restrictions and as a path forward to energy independence. While shale gas has already revitalised the US petrochemicals sector, there is a real risk of overcapacity as other countries such as China develop their shale gas reserves. Thus, while euphoria over shale gas seems to have captured the attention of the global energy market, there are underlying risks and challenges still to be considered.

This Perspective covers the changing dynamics and challenges introduced by shale gas into global gas markets, addressing topics such as:

An unfolding global phenomenon Impact on clean fuels Potential to alter global gas trade flows Revitalisation of US petrochemicals, once again creating a low-cost

advantage Environmental concerns that could hinder short-term production

This 8-page Perspectives also includes likely attractive opportunities for future investment and identification of some of the key associated risks. To obtain a copy, visit our website at www.kbcat.com/perspectives/

REFINING MARKET UPDATERefining margins widened in July thanks to the seasonal surge of gasoline cracks as well as ongoing support from middle distillates.

The coordinated release of emergency stocks by the International Energy Agency, part of which was delivered to the market as products, particularly in Europe and Asia, dented crack spreads in all regions when it was first announced.

In Europe, high conversion refining margins increased by around a dollar per barrel compared to the previous month, reaching $3.55/bbl in July. This was largely the result of strength in gasoline cracks partly reflecting good demand from Muslim countries in the Middle East and North Africa. Middle distillate margins also remained healthy. Heating oil cracks were buoyed by around a dollar per barrel by early buying for the winter season in Germany, where residential stocks remain unusually low. Fuel oil cracks were $0.25-50/bbl stronger in July than the previous month.

In Asia, KBC Energy Economics HS&C margin assessment improved to $6.95/bbl in July, having dropped in June to $6.30/bbl. Improvement resulted from a $3/bbl gain in gasoline cracks. As in Europe, naphtha cracks also became less negative, contributing to a better margin but scarcely a sign of an overall change in the fortunes of the petrochemical feedstock. Seasonal demand for electricity remains strong in northern Asia, and this tightened the

market for lower sulphur fuel oils in the region, although higher sulphur residues came under pressure.

Strong gasoline cracks also boosted US margins in July. Continued strong exports to South America lend support to gasoline and distillate margins. It should be noted that WTI weakness has led to a sharp gain in cracks and margins across the board when measured against the traditional US benchmark. Midwest refineries that have access to WTI or WTI pricing related crude are increasing operating rates close to 95% to take advantage of favourable margins.

NextGen Performancen Realised | Issue III - 2011 | 3

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(This article continues from the last issue that discussed the significant number of transactions occurring within the refining and petrochemical sectors, and the importance of due diligence.)

Phase 1 Due Diligence is Only a First Step

Phase 1 Due Diligence is not meant to be the only due diligence performed on a potential transaction. Rather, it is intended to provide the potential acquirer with an initial go-no go decision with regard to the assets of interest. Should the acquirer, after an initial round of due diligence activities, decide to advance in terms of the transaction, typically further investment in due diligence is required in order to determine how best to unlock the sources of value embedded within the transaction as well as to develop a plan to mitigate potential risks. If done effectively, this can also be the precursor to integration planning. Typically, Phase 2 Due Diligence might include:

Detailed asset assessments including physical, mechanical, and operational assessments.

Refined validation of synergy assumptions developed during Phase 1, including the cost and effort to capture these synergies (including whether some of the investments required to capture the synergies will need to be made during a turnaround or require a unit shutdown).

Assessment of personnel and operating practices.

Review of capital expenditure plans.

Because the buyer and seller are potential competitors, advanced due diligence and initial integration planning may often progress in a clean-room environment whereby an independent third-party is provided

confidential information from the both the seller and buyer, in order to develop analysis on an as combined basis. This can significantly accelerate synergy capture planning, leveraging the time before a potential buyer and seller can formally exchange information (e.g. prior to regulatory or shareholder approvals). Such clean-room analysis can be everything from synergy calculations such as obtaining the lowest prices for feedstock and its implications on a combined basis to the development of a linear programme for the combined entity, preparing scenarios for post-closing operations. Even in an environment where not all information can be initially shared between a buyer and seller, ongoing analysis can be performed in preparation for a contemplated merger via a third-party, independent intermediary who can perform the necessary analysis behind the scenes without revealing the specific data from either company. Generally, such analysis is generally extremely valuable to a potential buyer who must hit the ground running in terms of achieving the promised transaction value. This is particularly true of financial investors who generally have shorter term investment horizons.

Anyone contemplating the purchase of assets in either the refining or petrochemical sector should carefully consider the merits of having an independent party performing at least Phase 1 Due Diligence in order to identify potential sources of value as well as potential risks. Similarly, those interested in investing in new capital projects or facilities should also consider various levels of due diligence to adequately assess potential returns on investment and avoid potentially costly mistakes.

KBC has significant experience in performing technical, commercial, and environmental services in a variety of investment scenarios, being very experienced in synergy and risk identification as well as synergy capture planning and implementation and risk mitigation. Clients have included a variety of national energy companies, independent companies, and

Phase 1 Due Diligence: Identifying Sources of Value; Mitigating Risk (part 2)

KBC Advanced Technologies, Inc.15021 Katy FreewaySuite 600Houston, Texas 77094, USAT +1 281 293 8200 +1 800 726 5914F +1 281 616 0900

KBC Process Technology LtdKBC House42-50 Hersham RoadWalton on ThamesSurrey KT12 1RZ, UKT +44 (0) 1932 242424F +44 (0) 1932 224214

KBC Advanced Technology Pte Ltd 435 Orchard Road #16-02/03 Wisma AtriaSingapore 238877T +65 6735 5488F +65 6736 4759

NextGen Performancen Realised | Issue III - 2011 | 4

LEAD STORY: Portfolio Value Creation Strategies: Reducing Working Capital and other Benefits of Storage and Logistics Optimisation

Where do You Want to be on the Performance Curve?

P = People M = Methodologies T = Technologies

Your Company + KBC Produces NextGen PerformancenWe collaborate with our clients to create unique solutions to their specific challenges. Some of these challenges may include:

Strategic Challenges Creating effective business strategy/decisions Increasing return on investments Enhancing returns on acquisitions/divestitures Reducing strategic/capital/market/investment risk Enhancing yields Creating effective response to crude/feedstock/product markets Improving financial performance

Capital Challenges Increasing return on capital investment Rationalising/optimising environmental

compliance capital expenditures Reducing capital risk

Operating Challenges Improving yield Increasing availability Reducing maintenance costs Improving safety performance Implementing/improving Managing operational risk

behaviour-based reliability Improving supply chain performance

Organisational Challenges Increasing organisational effectiveness Improving employee competency/capability Enhancing employee support systems Improving shift team function

Environmental Challenges Reducing emissions Ensuring compliance Reducing/managing Improving energy efficiency

environmental liabilities Rationalising compliance expenditures