final reportfinal report - socar trading · been benchmarked to competing crudes using bcg- - tary...

SOCAR TRADING – Trading Performance ReviewSOCAR TRADING Trading Performance Review

Final ReportFinal Report

Geneva, May 2014

AgendaAgenda

Summary report

How did SOCAR TRADING extract the value?

SOCAR TRADING'S strategic journey

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SOCAR TRADING S strategic journey

What methodology was used to calculate the value?• Calculation: Marketing Azeri

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• Data and model

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Report Trading Performance Socar 21 May_public report.pptx 1

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Scope: BCG was asked to analyze SOCAR TRADING'sperformance since starting trading operations in 2008performance since starting trading operations in 2008

Study compilation

• BCG has conducted a three-week study to review the key questions asked

Questions asked to BCG

1. By being active in trading market, how does SOCAR

• BCG senior experts conducted interviews with SOCAR TRADINGto understand the business models

• To assess SOCAR TRADING impact since 2008, Azeri Light has been benchmarked to competing cr des sing BCG proprie

TRADING create value for Socar, esp. when com-mercializing Azeri crude?

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been benchmarked to competing crudes using BCG-proprie-tary refinery model

• The model was fed with data provided by SOCAR TRADING1: market price data (mainly Platts quotations), selected freight

2. How much additional value has been added to the value of Azeri crude compared to previous

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deal overview of equity sales (incl. volumes and counterparty)• BCG conducted experts interview to compare SOCAR TRADING

against other trading houses

crude tendering?

3. How does the develop-ment of SOCAR TRADING

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oagainst other trading houses• BCG compiled this report to summarize the study findings and

explained the model to ensure transparency on how the quantitative results were obtained

compare to other oil-trading operations?


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1. BCG did not audit the data provided by the client. BCG assumes that the data are sound and correctSource: BCG analysis

Summary (I): SOCAR TRADING has significantly increased prices of Azeri crude through active trading/marketingprices of Azeri crude through active trading/marketing

The establishment of SOCAR TRADING has enabled Azerbaijan to significantly increase the j g yvalue it gets from its crudes on the international market

• BCG estimates that average increase in price realization has been around $1.7/bbl1 after the establishment of SOCAR TRADING, leading to an average gain above $360M/year1 since 2009

• On top of that, SOCAR TRADING is much more reactive and agile, adapting to short-term market opportunities/disruption in oil markets

– As seen in 2011 during the Libyan crisis, SOCAR TRADING realized additional gains which ld lik l h d d i th h d f h t t d if S h d t d d it

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ed.would likely have ended in the hands of merchant traders if SOCAR had tendered its

cargos

Thi l ti h b th lt f l t t

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• 3rd party crude trading: enabled SOCAR to increase its understanding of the oil market and the supply-demand balance of crudes of similar quality as Azeri Light

• Direct marketing: Allows to sell at maximum prices acceptable for the respective refiners by

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o• Direct marketing: Allows to sell at maximum prices acceptable for the respective refiners by good understanding of availability/prices of alternative sweet crudes for Azeri Light customers

• Supply-demand-balance: By diverting cargos to Asia-Pacific, SOCAR TRADING avoids a surplus of sweet crude volumes in the Mediterranean and protects Azeri price premium


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2of sweet crude volumes in the Mediterranean and protects Azeri price premium

1. For insights into calculation, please refer to the later part of the report this reportSource: BCG analysis, based on information and data provided by SOCAR TRADING

Summary (II): SOCAR TRADING is creating value beyond Azeri crude marketingcrude marketing

In addition to marketing SOCAR equity crude, SOCAR TRADING has engaged in international g q y , g g3rd-party trading

• Averaging $25M/year of gross margin since 20101

Finally, SOCAR TRADING has exploited its asset position in Azerbaijan to originate profitable 3rd-party business in the region

• Including the transport of Turkmen, Kazakh, Russian crudes, Turkmen products and 3rd party

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ed.crude with a $90M/year2 additional revenues impact since 2010

SOCAR TRADING is now considering expansions in international assets to

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• Bring more optionality to its trading portfolio• Increase its share of 3rd-party business and leverage its trading capabilities• Remain competitive in asset-backed trading when the merchant traders are acquiring assets

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1. Data has been provided by SOCAR TRADING. BCG did not audit the numbers 2. BCG analysis based on data provided by SOCAR TRADING. Source: SOCAR TRADING data and BCG analysis

Summary (III): SOCAR TRADING has established a credible presence in short timepresence in short time

The setup of SOCAR TRADING has been done very effectively, compared to most of its peersp y y, p p• Setup in 2008• Full ramp-up in two years (already achieving $108M1 in 2009)• Able to capture additional value during the Libyan crisis in year 3 (2011)Able to capture additional value during the Libyan crisis in year 3 (2011)

– compared to other sweet crudes sold in Europe during the crisis

SOCAR has chosen an effective way to build up capabilities

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SOCAR has chosen an effective way to build up capabilities• Joint venture with experienced traders• Most successful energy trading companies have been created with experienced traders

Trafigura Gunvor Mercuria EDFT

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• Avoided attrition in early years (compared to others)

SOCAR TRADING is now a well established player in the oil trading market respected by its

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oSOCAR TRADING is now a well established player in the oil trading market, respected by its peers and well positioned to grow its trading business, and thus strengthens SOCAR'scommercial footprint


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Source: SOCAR TRADING data and BCG analysis

Sustainable contribution: SOCAR TRADING captures additional value for SOCAR and the state of Azerbaijan

E it k ti f A i 3 d t ff t

value for SOCAR and the state of Azerbaijan

Value added 2008-2013 (in M$ )Equity marketing of Azeri 3rd-party effects

351

98150

900

320

1,819

1 370

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Total value contribution

Value add forAzerbaijan’sAzeri crude

Value without trading Impact on

Platts' Azeri assessment

Additional performance improvement

Revenue effect from adding

3rd-party

Additional value created by trading 3rd

1 2 3 4Libyan-crisis

uplift effect

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Main assumptions/sources/remarks:Compared to the average price level 2005-2007; assessment methodology developed by BCG based on both SOCAR TRADING and proprietary data; Platts' price assessments provided by SOCAR TRADING, with the exception of Arabian Heavy and El Sharara (Bloomberg); Platts' product price assessments for key products (e.g. Prem10, Jet, Gasoil 0.1%, ULSD10) provided by SOCAR TRADING; Azeri crude

through better marketing 5

linked to spot-pricing vs.

Platts

volumes to BTC

party crudes and products

1

on Platts6


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2assays provided by SOCAR TRADING, those of other crudes from company websites; Bloomberg freight cost assessments usedBased on a sample of cargoes differential for he year before and after the inception of SOCAR trading3rd-party crude and product trading profits provided by SOCAR TRADINGCurrent BTC tariff, Turkmen volumes provided by SOCAR TRADING5. Impact has been corrected by the Libyan crisis effect which has temporarily uplifted the value of light crudes. SOCAR TRADING could capture additional $150M. The number is not shown here 6. One time effect

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Marketing Azeri: Direct marketing positively impacted Platts' assessment by over $900M in five years1 assessment by over $900M in five years

Description of value creation through better marketing of Azeri

SOCAR TRADING created added value by actively managing the sales of Azeri instead of

Additional value created

(M$) 1.045

tender offers• Proactively developing profitable client

relationships based on market knowledge• Assessing optimal timing to sell crude based

208

240Including effect of Libyan oil

crisis

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g p gon refinery needs

• Increasing bargaining power of SOCAR by managing supply and demand in MED

• Positioning Azeri as premium light crude in the130

402

65

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region

CIF trading instead of FOB sales allowed SOCAR TRADING to beat the market and protect

0.8 1.1 1.8 1.9 1.7

20132010 20112009 Total2012

2.4

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oSOCAR TRADING to beat the market and protect a price premium for Azeri

Value created in $/bbl


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Note: Assessment methodology developed by BCG based on both SOCAR TRADING and proprietary data; Platts' price assessments provided by SOCAR TRADING, with the exception of Arabian Heavy and El Sharara (Bloomberg); Platts' product price assessments for key products (e.g. Prem10, Jet, Gasoil 0.1%, ULSD10) provided by SOCAR TRADING; Azeri crude assays provided by SOCARTRADING, those of other crudes from company websites; Bloomberg freight costs assessments usedSource: BCG analysis

Marketing Azeri: SOCAR TRADING has improved the value of Azeri Light Platts' quotation by $1.7/bbl from 2008 to 20131

Backup

Azeri Light Platts quotation by $1.7/bbl from 2008 to 2013

Increasing differentials between quoted prices and netback values vs. benchmark crudes

Sarroch type refinery MiRo type refinery

$/bbl

Trecate type refinery

Value added on Azeri against $/bbl $/bbl

(eliminating impact of both crude quality differentials and contango/backwardation)

Value added on Azeri against

Value added on Azeri against

-6-4-2024

Forties

$ Azeri against benchmark1

2.0 $/bbl

-6-4-202

$

1.8 $/bbl

-4-2024

$

2.0 $/bbl

Azeri against benchmark1

Azeri against benchmark1

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Bonny Light 2

0246

1.4 $/bbl

-8

20246

1.5 $/bbl

-6

0246

1.5 $/bbl

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2

20

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202

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Ekofisk

-10

-4-6-8

-20.6 $/bbl

-10-8-6-4-2

0.6 $/bbl-6-4-2

-10-8

0.7 $/bbl

Jan 11

Jan 14

Jan 08

Jan 05

Jan 11

Jan 14

Jan 08

Jan 05

Jan 11

Jan 14

Jan 08

Jan 05


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1. Average value added is calculated for time period 2008-2013 compared to reference years 2005-2007Source: Assay data provided by SOCAR TRADING as well as Platts' market data, BCG netback calculation analysis leveraging refinery model to calculate the respective yields

11 140805 11 140805 11 140805

Premium: In addition SOCAR improved its marketing performance against Platts quotations2 performance against Platts quotations

Description of activity

By negotiating directly with refineries, SOCARTRADING is able to generate a high price for

Realized additional premiums1

quotation for Azeri Light. This results in a premium above market price for Azeri 32061

71

Value add in M$

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Equity crude 153 185 222 185 190

Total2013201220112010200920082

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oEquity crude volumes1 (M bbl)

153 185 222 185 190


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1. Compared to tender approach employed until 2008 2. Transition yearNB: these differentials are abased on a representative samples of Cargoes for each year provided by SOCAR trading, BCG extrapolated the impacts of the evolution of differentials to all volume marketed by SOCARSource: Data provided by SOCAR, BCG analysis

Leverage logistics: Creates extra revenues adding Turkmen crude volumes to BTC pipeline4 crude volumes to BTC pipeline

Description

Since 2010, SOCAR TRADING has been buying extra crude volumes (~70M bbl) from Caspian

Additional revenues

Additionalrevenues in ($M)

countries (Turkmenistan, Russia, Kazakhstan)

Blended with Azeri, this crude flows through the BTC pipeline to Ceyhan and is sold as

($ )

400

300113

351109

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the BTC pipeline to Ceyhan and is sold as Azeri BTC

The Turkmen volumes increase the volume transported through the BTC pipeline

200

100

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By receiving transport fees, extra revenues are generated for the state of Azerbaijan

100

02013 Total

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20122010 2011

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4,85 4,85 4,85 5,00

9 18 23 22

Tariffs($/bbl)

Turkmen. (M bbl) 72


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1. Azeri volumes going through BTC pipeline, belonging to SOCARSource: Data provided by SOCAR TRADING, BCG analysis

(M bbl)

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Trading strategy: Active marketing and trading allows to realize additional margins and protect value of Azeri Light (I)realize additional margins and protect value of Azeri Light (I)

Before starting its trading operations in 2008, SOCAR was mainly marketing its equity crude g g p , y g q ythrough tenders to merchant and refinery traders (like Vitol, Glencore, Arcadia, Trafigura, Total, BP, Litasco, OMV). The realized sales price was determined by the highest bid in each respective tender campaign

The winner of the respective tender either used the crude in their own refineries or sold it to 3rd party. When reselling the crude, they realized an additional margin on top of the paid tender price

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p

As every refinery has a different configuration, each one uses a different mix of crudes to run optimally. The optimizers at the respective refineries can calculate the value (also referred to as netback value) of every crude offered to them

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To optimally negotiate and price their crude, traders need to understand what type of crude slate is processed by each refinery, what alternative in crude supply do they have and what

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op y y, pp y yare the netback values for the alternative crudes of similar quality. Before 2008, SOCAR was lacking these capabilities


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Trading strategy: Active marketing and trading allows to realize additional margins and protect value of Azeri Light (II)realize additional margins and protect value of Azeri Light (II)

In case of temporary oversupply, a certain crude grade, not only the prices of "excess" p y pp y, g , y pcargos gets under price pressure but also the ones of similar crude qualities. I.e., as a producer and trader of crude, one is interested to keep the supply and demand of the respective grade qualities in balance

To maintain the right balance, traders need to constantly monitor the supply-demand balance of their grade qualities in their target market deciding whether to place the cargo in another region if the core market is saturated. To protect the value of Azeri Light, one would

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g p g ,need to constantly monitor the amount of sweet crudes in the Mediterranean, and decide to target Mediterranean refineries or sell to Asia

By starting to trade SOCAR was not only able to de intermediate the merchant traders and

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get access to the trading margin beyond the tender price, but it also became a price maker of sweet crudes, ensuring a better market value for its Azeri Light, taking responsibility in matching supply and demand in the Mediterranean

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Marketing Azeri: What can the netback value analysis show us about the performance of SOCAR TRADING?us about the performance of SOCAR TRADING?

A crude has an intrinsic value based on its chemical property. The value fluctuates with the price of theA crude has an intrinsic value based on its chemical property. The value fluctuates with the price of the produced refined products, and is different depending on the type of refinery configuration. The intrinsic value of a specific crude to a specific refinery configuration is called "netback value [NBV]".

R fi i th i d b d NBV l l ti Th NBV i ti di t thRefineries source their crude based on NBV calculation. The NBV varies over time according to the dynamics of the refinery sector. Under normal conditions, the quoted price (Platts) of crude should follow the development of the NBV. Extraordinary events (e.g., the Libyan crisis) can affect the quoted price independently of NBV development

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By comparing the development of the quoted price to the development of the NBV, one can assess if some extra value has been created by trading activities. Comparing this value to the one of competing crude gives an estimate of the marketing performance of the crude producer.

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What did we do?• Identified the key types of refineries that SOCAR TRADING sales Azeri Light, namely Sarroch, MiRo, and

Trecate For each of the refineries the yields are calculated

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oTrecate. For each of the refineries the yields are calculated• Based on the yields, the NBVs for a basket of crudes was calculated and compared for a reference period

2005-2007. I.e., we have used the spread between the 2005-2007 average, and the respective NBV as a sign of how much the direct marketing has influenced the Platts quotation


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Marketing Azeri: Netback value were calculated using BCG'srefinery modelrefinery model

Target refinery configurations1

Crude AssaysInput

Product Prices

Operating Expenses

Refinery modelRefinery model

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• By refinery configuration• Product value from processing crudes

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Output modelp g

(Product Prices x Product Yield)• Net refining value of crudes

(Product value – operating costs)

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Comparison(outside model)

• Calculate trading contribution, i.e., calculate delta netback value between Azeri and reference crudes (per refinery)


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1. Using theoretical process parametersSource: BCG

( ) reference crudes (per refinery)

Marketing Azeri: High added value proves robust compared to different crude baskets1 to different crude baskets

Add d l ti t d ith b th

20 15 15 40 3520

10 10 10

80

100

% of crude

UralsBrent

Added value estimated with both a base and a low case

Simulation with different crude slates to d fi li ti l dd d

1515 20

2020 15

20

35 40

45

40

40

60

80

0 0 0 0

CPC Blend

Bonny LightUrals

Ekofisk

Troll

define realistic value-added range

Base case: mix of crudes of comparable and differing quality

API 32° 45°

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15 15 25 2535

2020 20

1020

0

40

5

0 00 0

5 0 0

0 0

5 0El ShararaArabian Heavy

GullfaksForties

• API: 32°- 45°• Sulphur: 0.15%-1.80%

Low case: selective crude slate with t titi d i th MED

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TrecateMiRoSarrochTrecateSarroch MiRo

Base case:mixed crude slate

Stress case:competitive crude slate

Es Sider most competitive crudes in the MED• Urals• Bonny Light• El Sharara

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Value creation:$1,045M

prior to Libyan-crisisadjustment

(after that $900M)

Value creation:$823M


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Source: BCG analysis based on market and assay data provided by Socar Trading. Base case reference basket has been agreed with SOCAR TRADING. Methodology to calculate the value as described on previous page. Simulations were run for base and stress case crude basket separately

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Data and models: Commonly available market data and BCG proprietary models have been used in calculationproprietary models have been used in calculation

Information/approach Source

Time series (2005-14) of price assessments for (competing) crudes

Crude price data

Time series (2005-14) of price assessments for (competing) crudes• Azeri BTC, Azeri Light, Dated Brent, Urals, CPC Blend, Ekofisk, Bonny Light, Forties,

Es SiderPlatts (SOCAR TRADING)

Time series (2005-14) of price assessments for other crudes• Arabian Heavy, El Sharara, Gullfaks Bloomberg

Product market data

Time series of mean price assessment for key products ('05-'14)• Prem10, Jet Gasoil 0.1%, ULSD10, FO 1%, FO 3.5%, Naphtha Platts (SOCAR TRADING)

Complementary if missing in Platts assessments• Time series ('05-'14) for key products from Bloomberg

BloombergBP

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SOCAR TRADINGvolumes

Market equity crude volumes (Azeri Light, BTC) per deal, including• Year• Counterparts• Load and discharge location

SOCAR TRADING

• Calculated product prices based on BCG Pricing Model and other sources BCG

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Refinery model

Calculation of NBV (2005-14) based on proprietary BCG refinery model BCG

Crude assays for the modeling of product yields

Premiums Realized price premiums on Azeri (Light, BTC) deals 2008-14 SOCAR TRADING

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omodel C ude assays o t e ode g o p oduct y e ds• Azeri crude assays of different qualities (2007, 2008, 2013)• Assays of competing crudes from company websites

SOCAR TRADING, Statoil, BP, Totsa

Modelingspecifics

Contango/backwardation consideration for crudes outside of MED (e.g. Bonny Light, Forties, Brent, Ekofisk), using first-line, second-line and third-line contracts ICE

Varying quality of Azeri (before and after Turkmen) based on provided assays SOCAR TRADING

Model-ing


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NBV: Netback ValueSource: BCG

specifics Varying quality of Azeri (before and after Turkmen) based on provided assays SOCAR TRADING

Freight cost according to distance traveled for delivery of crude to refineries BloombergExample of modeling tool on following slide

Modeling: Excel model put in place to handle all required calculations and to assess SOCAR TRADING performancecalculations and to assess SOCAR TRADING performance

Netback value calculation with crude and Consideration of logistics cost and refinery as variable parameters

gcontango/backwardation per crude and refinery

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Feeds from several input sheets, e.g.• Product prices• Refinery parameters

Calculates netback values according to the

Logistics cost implemented on a per-route basis between crude origin and refinery

Contango/backwardation based on estimated journey between crude origin and refinery


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Calculates netback values according to the configuration of the refinery

between crude origin and refinery

Source: BCG

Trading margin: Trading performance needs to be separated from effects influencing the crude pricefrom effects influencing the crude price

$

Why does the crude price change? How to isolate trading performance?

• Need to compare Azeri with another light crude

• For a specific refinery, both crudes produce different amounts of

?

Ch i i f

Change in trading performance

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produce different amounts of products (and thus value)

• Correct the price delta of the crudes by the value difference in the refined product value (i e

?Change in prices for refined products and thus the intrinsic value of the crude

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netback value)

Azeri PriceAzeri

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crude price next cargo

deltacrude price last cargo

BCG approach: Trading performance was calculated by comparing Azeri


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Source: BCG analysis

pp g p y p gLight with a basket of crude for different refineries

Netback value calculation: The reference refineries have been selected by detailed allocation of SOCAR TRADING volumesselected by detailed allocation of SOCAR TRADING volumes

List of refineries and types

231

Overview of volumes per type of refineryyp

based on marginal configuration1

SOCAR sales allocated per refinery type (M bbl) Type 1: HCK Type 2: VB/FCC Type 3: FCC

Sarroch Karlsruhe Antwerp965All sales

15322

74

39

19518643

196

52

Sarroch Karlsruhe Antwerp

Gonfreville l'Orcher Cadiz Huelva

Milazzo, Messina Aliaga-Izmir S. Martino Di Trecate

230

965All sales

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26

22

33

52

38

26

3221

37 41 Melilli, Sicily (south) Donges Augusta, Siracusa

Tarragona Sines Aspropyrgos

Priolo, Sicily (north) Haifa Fos sur Mer

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2013 2014

72 72

2010

3

83

2009

80

2012

86

2011

, y ( )

Alexandria Schwechat Castellon de la Plana

Falconara Rijeka

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Non-allocated salesSales to ref. type 3Sales to ref. type 2Sales to ref. type 1 Ashdod

Sisak

Busalla


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1. Classified in decreasing order of crude capacityNote: HCK: hydrocracker, VB: visbreaker, FCC: fluid catalytic cracking Source: Volume and counterparty allocation based on data provided by SOCAR TRADING. BCG proprietary data, BCG analysis

BizerteTotal per type

Managing supply and demand: Details on approach, assumptions, and NBV differentialsassumptions, and NBV differentials

Overview on netback value differentials: Approach and assumptions

Approach: We compare the netback value of Azeri to most likely competitors Bonny Light and CPC in order to estimate the premium obtained by SOCAR through

Azeri vs Bonny light and Azeri vs CPC

Ref type 1: Sarroch HcK

Ref type 2: MiRo VB/FCC

Ref type 3: Trecate FCC/Refestimate the premium obtained by SOCAR through

managing supply and demand

Qualitative assumption: SOCAR would have to lower its price in order to sell in the MED the volumes currently sold

Sarroch HcK MiRo VB/FCC Trecate FCC/Ref

Bonny Light CPC Bonny

Light CPC Bonny Light CPC Average

2009 ‐1.8 0.3 ‐1.3 0.3 ‐2.0 ‐0.2 ‐0.8

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ed.to non-MED. This would negatively affect the price of a

part of the other volumes

Quantitative assumption I: SOCAR would need to lower its price by the amount of the NBV differential to

2010 ‐1.8 0.1 ‐1.3 0.1 ‐2.0 ‐0.4 ‐0.9

2011 ‐1.9 1.0 ‐1.4 0.7 ‐2.3 0.0 ‐0.7

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its price by the amount of the NBV differential to competing crudes Bonny and CPC.

Quantitative assumption II: The price of 20-30% of Socar volume is likely to be affected by the price drop, the rest being sold term or otherwise negotiated conditions

2012 ‐1.5 0.9 ‐1.0 1.0 ‐1.8 0.2 ‐0.4

2013 ‐1.7 0.9 ‐1.3 0.6 ‐2.0 0.0 ‐0.6

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orest being sold term or otherwise negotiated conditions

Remark: This value add is already part of the total value add calculated through the NBV differential analysis, as it is reflected in the quoted prices obtained by Azeri against

2014 ‐1.9 0.9 ‐1.3 0.7 ‐2.2 ‐0.1 ‐0.7

Average ‐1.8 0.7 ‐1.3 0.6 ‐2.1 ‐0.1 ‐0.7


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2its NBV benchmarked to other crudes

Source: BCG proprietary data, BCG analysis

2014 is not included in the analysis due

to reduced size

General BCG disclaimer – Additional special agreements with SOCAR TRADING applySOCAR TRADING apply

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nc. Athis document shall be deemed agreement with and consideration for the foregoing.

BCG does not provide fairness opinions or valuations of market transactions, and these materials should not be relied on or construed as such. Further, the financial evaluations, projected market and financial information, and conclusions contained in these materials are based upon standard valuation methodologies, are not definitive forecasts, and are not guaranteed by BCG. BCG has used public

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oare based upon standard valuation methodologies, are not definitive forecasts, and are not guaranteed by BCG. BCG has used public and/or confidential data and assumptions provided to BCG by the Client. BCG has not independently verified the data and assump-tions used in these analyses. Changes in the underlying data or operating assumptions will clearly impact the analyses and con-clusions.


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