IEEJ: October 2005

Crude Oil and Product Price Outlook:
Rising to the Challenge
Y.H.LeeVice President, GS Caltex Corporation
Northeast Asia Petroleum Forum
September 21, 2005

CONTENTS
IEEJ:October 2005

1. Introduction
2. Factors that drive market change
3. Change in price structure
4. Other factors influencing the oil industry
5. Long term price forecast
6. Strategy to cope with current challenges
7. Conclusion

11. Introduction
IEEJ:October 2005

◆ Will the Market continue to stay strong and rise ?
WTI PRICE TREND FOR THE LAST 4 YEARS
7570656055504540353025
20
15
10
1-Jan

2002

1-Feb

1-Mar

1-Apr

1-May

1-Jun

1-Jul

2

1-Aug

1-Sep

2003

1-Oct

2004

1-Nov

2005

1-Dec

2. Factors that drive the market changes
IEEJ:October 2005

◆ Multiple factors are moving the market changes with complexity.

China
China&&India’s
India’sStrong
StrongEconomic
Economic
Momentum
Momentum
BullishBullishDeferredDeferredPrice
Price&&Higher
HigherE&P
E&P
Cost
Cost

Significant
Market Changeand High
Volatility inPrice

Increased
IncreasedUncertainty
Uncertaintyregarding
regardingSecure
SecureSupplies
Supplies
Depletion
Depletionof
ofNon-OPECNon-OPECProduction
Production

Continued
ContinuedFlow
FlowofofInvestment
InvestmentMoney
Money

TougherTougherEnvironmental
EnvironmentalRegulation
Regulation
32. Factors that drive the market changes
IEEJ:October 2005

◆ We are in the peak period of global economic growth .

Global Economic Growth Outlook

2004

2005(E)

2006(E)

S. Korea

4.6

4.5

5.3

China

9.5

8.8

8.5

Japan

2.7

2.0

2.8

US

4.2

3.4

3.1

Euroland

1.7

1.1

1.7

Russia

7.2

5.6

5.0

Taiwan

5.7

4.5

5.0

India

8.2

6.3

6.7

CanadaBrazil2.9
4.92.7
3.9

2.9
4.1

World

4.7

3.9

3.9

World Economic Growth Trend

Source : Goldman Sachs Economics Research, Aug.17, 2005

42. Factors that drive the market changes
IEEJ:October 2005

World Oil Supply Demand Balance

OPEC Basket Price (Jan~Aug ’05)

89.0

60.00

88.0

55.00

87.0
50.00

86.0
85.0

45.00

84.0
40.00

83.0
82.0

35.00

81.0
30.00

80.0
25.00

79.0
78.0

20.00

77.0
1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06

Supply (IEA)

Demand (IEA)

Supply Forecast (PIRA)

15.00
Jan-01

Supply Forecast (DOE)5

Jul-01

Jan-02

Jul-02Jan-03

Jul-03Jan-04

Jul-04Jan-05Jul-05

3. Changes in Price Structure
IEEJ:October 2005

◆ On top of change in crude oil price in extensive scale, other significant changes
in the price structure is prevailing.

Need to Setup new
Strategy to copewith these
Challenges

High
HighVolatility
Volatilityin
inPrice
Price

Large
LargeDifferential
Differentialbetween
between
Sweet
SweetandandSour
SourCrude
Crude
Large
LargeDifferential
Differentialbetween
between
Light
LightandandHeavy
HeavyProductProductSulfur
SulfurPremium
Premium

63. Changes in Price Structure
IEEJ:October 2005
◆ In addition to spike in price, volatility in crude price and price differential has increased.

Volatility of NYMEX WTI Price
2.00

Sweet/Sour Crude Spread (Murban/AH)
10.00

1.97

9.40

1.90

9.00

1.80
1.70

1.72

8.00

1.60

7.00

1.50
6.00

1.40
1.30

5.00

1.20
4.00

1.10
1.00

3.00

0.90
2.00

0.80
0.70
0.60

1.00

Volatility

Murban-AH

Year Avg.

Year Avg.
0.00

0.50

Jan'01 May'01 Sep'01 Jan'02 May'02 Sep'02 Jan'03 May'03 Sep'03 Jan'04 May'04 Sep'04 Jan'05 May'05 Sep'05

Jan'01 May'01 Sep'01 Jan'02 May'02 Sep'02 Jan'03 May'03 Sep'03 Jan'04 May'04 Sep'04 Jan'05 May'05 Sep'05

7

3. Changes in Price Structure
IEEJ:October 2005
◆ Differential trend between grade and sulphur content also shows significant change.

Gasoline - HSFO Price Spread

Gasoline(0.05%) –Gasoil(0.5%)

30.00

5.00
28.04
4.50

Gasoil(0.05%)-Gasoil(0.5%)
Year Avg.

4.53
4.04

25.00
4.00
3.50
20.00
3.00
15.00

2.50
2.00

10.00
1.50
1.00
5.00
Gasoil-HSFO
Year Avg.

0.50
0.00

0.00
Jan'01 May'01 Sep'01 Jan'02 May'02 Sep'02 Jan'03 May'03 Sep'03 Jan'04 May'04 Sep'04 Jan'05 May'05 Sep'05

Jan'01 May'01 Sep'01 Jan'02 May'02 Sep'02 Jan'03 May'03 Sep'03 Jan'04 May'04 Sep'04 Jan'05 May'05 Sep'05

8

4. Other Factors influencing the Oil Industry
IEEJ:October 2005

4-1) Korea’s Economy Outlook

Emerging (~1987)

Until the mid 80’s, Korea
joined the ride in global
economical growth thru labor
intensive commodities but
inflation, deficit and falteringof competitiveness ofenterprise were co-existent.

Globalization(1987~1997)

After getting over thefinancial turmoil, Korean
Economy was experiencing
a sluggish economical
growth as it faced a decline
in investments, rise in
unemployment, and rapid
increase of the aging
population

During the mid 80’s ~ end of
90’s, Korea promoted open
market economy

9Paradigm Shift(1997~)

It is forecasted that Korean
economy growth in 2005 isestimated to be onlyaround 4% and this trend
will continue for the time
being.

Excluding specific productsuch as Diesel,
domestic consumption of
petroleum product has
almost reached its plateau
and needs to aggressively
seek a foreign market due
to surplus in capacity.

4. Other Factors influencing the Oil Industry
IEEJ:October 20054-2) Environmental Regulation (Kyoto Protocol)

Change in businessenvironment- Introduction of new policy by
the government

Crisis- Constraints on Business
Activity- New Barrier in Trading Activity- Development of newtechnology and establishmentof a new market- Modification in structure ofexisting Market

Opportunity- Improvements in Process andreduction of cost throughdevelopment of technology- Strengthening the currentposition through acquisition ofnew technology- Create new business- Increase in preference for Ecofriendly enterprises- Consumer's boycotting ofproduct- Faltering of Company’s
image

10

- Establishment of sustainable
management system

4. Other Factors influencing the Oil Industry
IEEJ:October 20054-3) Supply and Demand▶ China, the decisive country in influencing the supply/demand balance,
will have to depend on imports in the near term considering the gap between
expansion of the refining capacity and rapid demand growth.

▶ India will play the role of net exporter by acclerating the establishment of new facilities
which exceed its demand growth.

▶ Overall, the shortfall of product is predicted to continue due to global economic growthand limited refining capacity . Refining margins are likely to remain relatively healthy inthe near term.

114. Other Factors influencing the Oil Industry
IEEJ:October 20054-3) Supply and Demand – Especially China
OECD, Oil Demand

World, Oil Demand

50.5

1.550.0<2004>

1.0

49.5

0.5

49.0

0.0

48.5

78

-0.548.0* World : +2.9 mmb/d (+3.7%)* OECD : +0.9 mmb/d (+1.9%)* Non-OECD less China: +1.3 mmb/d (+5.2%)* China : +0.8 mmb/d (+14.3%)

76-1.086

3.084

2.082

1.080

0.0
-1.0

47.5
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06

1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06

Change Y-o-Y<2005>
Change Y-o-Y

Year Av. Demand

Non-OECD less China, Oil DemandYear Av. Demand

China, Oil Demand

2.0

28.5

1.5

27.5

1.0

26.5

0.5

25.5

0.0

24.5

7.5

1.5

7.01.023.5
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06

Change Y-o-Y

Year Av. Demand* World : +1.6 mmb/d (+1.9%)* OECD : +0.4 mmb/d (+0.8%)* Non-OECD less China: +0.8 mmb/d (+3.0%)* China : +0.3 mmb/d (+4.7%)

6.5
6.0

0.5

-0.5

Y-o-Y Change in Demand

2.0

4.0

5.5
5.0

0.0

4.5
-0.5

4.0
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06

Change Y-o-Y

12Year Av. Demand<2006>* World : +1.8 mmb/d (+2.2%)* OECD : +0.5 mmb/d (+1.0%)* Non-OECD less China: +0.7 mmb/d (+2.6%)* China : +0.6 mmb/d (+9.0%)

5. Long Term Price Forecast
IEEJ:October 20055-1) Long Term Price Forecast by analysts

WTI Price Forecast
100.00

90.00

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00
2002

2003

2004 2005Q1 2005Q2 2005Q3 2005Q42005

FACTS

2006

2007

2008

PIRA

132009

2010

2012

2015

2020

5. Long Term Price Forecast
IEEJ:October 20055-2) Market Comments▶ Oil price forecasters/consultants have predicted high oil prices for the next 15 years.
▶ Crude prices are likely to remain bullish due to supply/demand imbalances andperiodic surges in speculative fund trading and political unrest .
▶ Unpredictable and destabilizing events such as terrorism, accidents, strikes and weather
will significantly impact supply stretching a market that already lacks of spare capacity.
▶ Unlike the past, the current capability of the global economy is enough towithstand continued high crude oil prices.
▶ Overall, the shortfall of product is forecast to continue due to robust global
economic growth and limited downstream capacity, leaving refining margins relatively
healthy14

6. Strategy
IEEJ:October 2005

General Remarks▶ Korea is the 5th largest oil importing country in the world and spends 20% of its revenue
on energy resources.
▶ Rises in crude prices lead to increases in petroleum product prices which result in
weakening of competitiveness in exports due to basic cost increases.
▶ Considering the strong dependency on oil imports, the rise in demand will result in
an increase of imports and declining exports -- this ultimately aggravates trade balance
leading to slowdowns in the domestic economy.
▶ Sudden changes in cooperation management are also a burden in coping with thischallenge . However, these can be perceived as the beginnings of a new era and newopportunities to be seized if we prepare ourselves properly.

15

6. Strategy
IEEJ:October 2005

6-1. Expand upgrading Capacity and Facility▶ Korean Refineries have demonstrated investment strategy oriented towards increasing
the scale of refining capacity in order to support demand during economic growth.

▶ It is necessary to undertake plans for investment and front run facilities insynchronization with the changing environment.

▶ Considering the characteristics of the refining industry , ongoing support and cooperationfrom the government is essential.

▶ In GS Caltex’s case, it is speeding up its construction of 150MBD vacuum distillation
unit and 55MBD hydrocracker which are expected on-stream by 2007 toadapt to rapidly changing market conditions▶ To cope with the high volatility in price, companies need to expand their storage
capacity, the government should increase its reserves and establish an optimal supply
logistics system to enhance efficiency.

16IEEJ:October 2005

◆ Korea’s Refining Capacity is about 2,735MB with limited Upgrading units.

3,000
2,735MB

2,500

2,000

1,500
31%
846M B

1,000
21%
8%

500
207M B

12%

572M B
5%

327M B

9%245M B

150M B0CDU

FCC

FCC(Inc. Plan)

Cracker

17

Cracker(Inc. Plan)

Hou Total

Hydro Treating

IEEJ:October 2005
◆ Due to changes in demand patterns, the differential between simple and Cracking
Margin is widening significantly
8.0

Hydroskimming

Cracking

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

-1.01995

1996

1997

19981999

2000

2001

2002

2003

Source : Facts Energy Advisory

18

2004

2005

2006

2007

2008

2009

2010

6. Strategy
IEEJ:October 2005

6-2) Energy Business Diversification▶ Korea’s Petroleum Market has entered a phase where demand has slowed and the market has
become saturated.
▶ It is time to diversify those segments of the business landscape offering high growth potential.
▶ Considering the changes in the economy and environmental regulation, it is imperative to diversify
the main business domain into Petrochemical, Gas, Power generation/distributionand Fuel Cell which are Eco-friendly and technologically sophisticated energy sources.

6-3) Diversify the Crude import source▶ To alleviate the factors influencing the price risk, we should break away frompurchasing crude from specific territory and vigorously examine the possibility ofimporting new grades and sources of feedstocks.
▶ Crude from the Caspian, West Africa, Sakhalin and Canadian Oil Sands where out is expected
to rise, should be reviewed as alternative energy sources.
▶ Northeast Asian Countries should collaborate on co-freighting policy or devise othermethods such as utilizing long-distance pipeline to reduce the transportation costs and address
potential energy security threats.
19

6. Strategy
IEEJ:October 20056-4) Expand the E & P project▶ Three nations import about 24% of the global crude import volume; hence, crude
cost becomes a crucial factor in charting the future economic growth of importing nations.
▶ Importing countries and corporation must extend the search for independent sources of energy.
▶ GS Caltex’s efforts have been successful to date in finding sweet crude from 4 wells in Cambodia
block A. The Company is presently examining the economical feasibility of commercial production .

6-5) Diversification of sales outlets and strengthening of businessalliances among the neighboring countries▶ The intra-trade between countries that have entered into the FTA has become morecritical The coalition among the neighboring countries can enhance mutual optimization.
▶ China has already proven itself as our largest energy market. The business relationship withJapan should be strengthened further especially in technology and finance.

20

7. Conclusion
IEEJ:October 2005

▶ Living in front of the flood of change▶ Accurate analysis of current phenomena▶ Adequate selection of and concentration on effective strategies▶ Create distinguished quality and competitiveness thru active
implementation21

Thank you !

Contact: report@tky.ieej.or.jp