Energy Forecast and Fuel Management

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Energy Forecast and Fuel Management
Procurement Strategies

• February 19, 2008
• Ryan Mossman
• VP/GM Fuel Management, FuelQuest

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Agenda

• Introductions
• How the Fuel Supply Chain Works
• Pricing
• Fuel Management Best Practices
• Industry Trends Forecasts
• Summary Questions

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Introductions
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FuelQuest

• FuelQuest provides fuel related software and
  services to a global client base. Over 15 billion
  gallons of motor fuels over 50 billion in
  excise tax payments flow through our systems each
  year.

MAJOR OIL COMPANY
SUPPLIERS
BIOFUELS PRODUCERS, MARKETERS, DISTRIBUTORS
RETAIL, COMMERICAL INDUSTRIAL FLEETS
PETROLEUM DISTRIBUTION
GOVERNMENT AGENCIES AND TAX FILERS
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A Little About Me A Little About You

• About Me
• FuelQuest
• UPS, US Freightways, etc.
• FuelQuest Fuel Management Services
• A Career in the Energy Industry
• Economics
• About You?
• Fleet Size?
• Bulk Fuel vs. Over the Road?
• Geographic Distribution?
• International?

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How the Supply Chain Works
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Motor Fuel Supply Chain
Secondary Distribution
Primary Distribution
Upstream

Transaction Movement
CI Govt. Buyers
Wells
Fuel
Trucks
Vessels
Fuel
Racks
Trucks
Fuel
Fuel
Refinery
Retail Buyers
Pipelines
Terminal
Fuel
Pipelines
Fuel
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PADD Districts
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Consumption vs. Production
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Refined Products Pipelines
Source GAO Report June 2005
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Biofuels Plants
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Pricing
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What Makes Up a Gallon of Diesel?
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Paper Market Influences All Prices

• NYMEX Impacts
• Spot Market Impacts
• Rack Market Impacts
• Retail
• Variable Time Lag between Each

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The Cash/Spot Market

• East of the Rockies
• New York Harbor
• Gulf Coast
• Group 3
• Chicago
• West Coast
• LA
• San Francisco
• Pacific Northwest
• Pricing Providers

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Rack Pricing

• Rack prices are set independently by oil
  companies and independent marketers
• Ultimately local or regional supply and demand
  conditions determines the rack price
• Minimum rack price Spot Transportation
  Terminal Cost of Capital Margin
• Example of why multiple sourcing options
• St Louis Platts US GC Spot (2.5410) .05
  adder (PipelineTerminalCapitalMargin)
• St Louis Platts CHI Spot (2.5685) .03 adder
  (Pipeline TerminalCapitalMargin)
• Primary Pricing Providers

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Retail Prices
Source Energy Information Administration
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Fuel Management Best Practices
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Evaluate All Areas of Potential Savings
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5 Steps to Better Fuel Management

• Spend Analysis a comprehensive market-by-market
  and site-by-site analysis
• Benchmarking to industry best practices and
  published market metrics
• Supply Strategy balance cost and supply
  security
• Contracting requires procurement to coordinate
  operations, accounting, and legal
• Execution! automation is most important in this
  area to empower rigorous execution day after day
  on national or global scale

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Steps 1 2 - Analyze Benchmark

• The spend analysis process for fuel and energy
  commodities must encompasses a full review of
• purchase volumes
• geographic distribution of demand
• fuel systems infrastructure
• fuel taxation exemption status by location and
  use
• actual invoice line item charges
• Once you understand how, what, when and where
  you purchase fuel, the next question to ask is,
  How well are you doing?
• Benchmark to your Industries Best Practice
• Benchmark to Published fuel price indexes from
  OPIS and Platts
• Conduct Time Series Analysis against Published
  Indexes
• Establish Ongoing Performance Improvement
  Targets
• Now that you have a good idea what savings are
  available developing the right supply strategy
  to extract those savings this requires
• A market by market, city-by-city approach
• An understanding of supply logistics and
  infrastructure
• A balanced approach to maximize savings and
  ensure supply security

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Step 3 - How You Buy / Where in the Supply Chain
You Buy

• Retail Facilities Card Locks
• Street Price
• Electronic Payment Process
• Using Fleet Cards
• Cost Plus
• Retail Minus Discount
• Wet Hosing / Mobile Refueling
• Bulk
• Fuel at Fleet Maintenance providers tanks
• Distributor owns tank on your site
• Spot or contract delivered basis to tanks on your
  site that you own
• Spot or contract FOB rack to tanks on your site
  that you own
• Fixed price contracts
• Hedging/Risk Management

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Step 3 - How You Buy / Where in the Supply Chain
You Buy
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Competitively Strongest
Fuel Management System
Strategic and Automated Fuel Management Practices
Outsourced Fuel Management Services
Tactical and Manual Fuel Management Practices
Wholesale at Rack
Bulk and Wholesale
Supplier Managed
Delivered Daily Spot
Delivered on Contract
Single Supplier Managed

• Buys all volumes on a delivered business at
  published price
• Numerous suppliers
• Price floats w/ delivery

• Delivered from few Strategic providers via
  contracts
• Advanced inventory controls and contract
  management capabilities

• Buys most volume on contracts from the rack
• Robust freight procurement process
• Licensed distributor in few key tax jurisdictions

• Buys volume at both the rack and in bulk on
  contract
• Licensed distributor for most if not all
  operating locations
• Robust tax calculation and compliance
  capabilities

• Buys all volumes on a delivered basis Single
  Supplier or Marketer
• No Transparency Price/Freight

Level 1
Level 2
Level 3
Level 4
DECREASING
Level 5
NET
FUEL
COST
Decreasing net fuel price (Typically 4 - 6
cents/gallon)
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Step 3 - Where You Buy Geographically / Who You
Buy From
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• Where are my sites in relation to supply sources?
• Who owns product at those supply sources?
• Who is reselling product from other suppliers at
  those supply sources?
• How do I discover suppliers and make my business
  attractive to obtain the best terms and prices
  while meeting my operational requirements?

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Step 4 - Contracting

• Allow adequate time for this process
• Requires procurement to coordinate operations,
  accounting, and legal
• Specify required products at the price
  identification level (E.g. Dyed ULSD) and fuel
  product requirements (e.g. 7.2 RVP)
• Specify required processes (e.g. electronic bill
  of lading)
• Specify credit and payment set up and associated
  time (e.g. EFT)
• Identify insurance requirements
• Be conservative on quantity commitments
• Ensure operational and reconciliation issues
  specified

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Step 5 - Execution Through People, Process,
Technology

• Implement technologies processes to drive
  optimal inventory levels and manage complexities
  around sourcing and delivery
• Drive tactical procurement savings - knowing when
  to buy and where to buy from real time
• Balance inventory needs with price of fuel
• ATGs and protocols to drive savings in
  environmental compliance
• Add controls and visibility to catch invoicing
  errors
• Automate processes where possible to lower
  administrative costs

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Industry Trends Forecasts
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Industry Trends

• Price escalation and volatility
• Increased regulations
• Integrated oil companies leaving retail and
  delivered gallon businesses
• Consolidation of Jobber Market
• Improved technology / more automation
• Rise in use of Biofuels
• Rise in Global Demand
• Geopolitical instability in oil
• producing regions

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More Taxes? More Regulations?

• Possible 40 cent hike in federal gas tax
• Thursday, January 17, 2008 A federal commission
  created by Congress called for big increases to
  the federal gas tax as part of a sweeping
  overhaul of how the United States builds and pays
  for highways, bridges and transit systems.
• The proposal for a 40 cent increase over five
  years touched off a stormy debate in Washington
  that is expected to last until at least 2009,
  when legislation governing scores of
  transportation programs expires and must be
  rewritten.
• More Regulations
• More Biofuel mandates Minnesota, New Mexico,
  Louisiana, Washington
• Consideration of lower gasoline aromatics which
  have now been implicated in secondary formation
  of particulate matter
• Consideration of even lower sulfur (Home Heating
  Fuel, Marine Bunker Fuel)

Source Dallas Morning News Source EPA
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Lower Sulfur Diesel
Source EPA
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Broader Biofuel Adoption Headlines over last 3
Weeks

• Oregon now required to sell 10 percent ethanol
  fuel
• General Motors takes stake in a biofuels firm
  that will widely market 1-a-gallon ethanol
  produced by bacteria as soon as 2011
• Safeways Fleet to Use Biodiesel in its 1000
  truck fleet
• Corporate Express to Use B20 Biodiesel Blend
• UK MPs call to scrap biofuel targets

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Recession?

• Good News
• December Durable Goods Orders Jump 5.2 -
  Trucking is a major beneficiary of durable goods
  manufacturing, hauling both components and
  finished goods - Transport Topics
• December truck tonnage increased by 1.4 -
  American Trucking Associations national index
• We haven't had one month with a job loss (so far)
  in the last four years
• 3Q 2007 GDP rose 4.9 , industrial production
  rising at 3.9 rate and the economy still
  creating jobs
• Federal funds rate was cut from 4.25 to 3.5
  (the biggest one-day move since 1984)
• President Bush, Nancy Pelosi and John Beohner
  agree in principle on 40 billion stimulus
  package
• The biggest benefit of the rate cut may be
  psychological. If people say there is going to be
  a recession, its a self-fulfilling prophecy,
  Gary Petty, president of the National Private
  Truck Council (NPTC), told Fleet Owner
• Bad News
• The economists' standard rule of thumb is that
  rate cuts take six to nine months to work their
  way into the "real" economy, Jim Meil, chief
  economist for Eaton Corp., told Fleet Owner.
• As Trucking often leads both slowdowns and
  recoveries, we have yet to see freight volumes
  recover to a level that suggests economic growth
  is about to accelerate.  We continue to be
  concerned about the near-term economy. Bob
  Costello, chief economist vp of the American
  Trucking Assns. (ATA)
• Credit market still not out of the woods
• Result Tough to predict what will happen, but
  there are strong worries for at least short term

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Supply vs. Demand

• 2007 Supply
• U.S. fuel production reached a record high as
  refinery capacity expanded for the 11th straight
  year (API)
• 2007 Demand
• US oil demand was flat, while Global demand grew
  (API)
• Distillate fuel oil demand rose 1.5 percent amid
  rising diesel demand and higher home heating
  demand (API)

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Falling Prices?

• Jan 17th - The retail diesel fuel price
  decreased a nickel to 332.6 cents per gallon,
  86.3 cents higher than last year. Source
  Energy Information Administration
• Jan 22nd Diesel Drops 5.6 to 3.27 Diesels
  price is now 84 cents higher than the same week
  last year according to DOE figures. Oil,
  meanwhile, closed at below 90 a barrel Tuesday
  for the first time in six weeks - Bloomberg
• Impact of higher crude-oil costs were not fully
  recovered in the sales price of refined products.
  Dave O'Reilly, Chairman CEO, Chevron Corp
• Feb 2 2008 OPEC cuts and refinery fire send
  prices up
• DOE says prices will peak in May or April
• Oil up almost 3 today!

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Conclusion
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Summary

• Future Price Of Fuel Unknown
• High Volatility Is Here To Stay
• Complexity And Regulations Are Increasing
• Implement Best Practices
• Consider Holistic Savings Not Just Contract Price
  
• Understand Your Fuel Expenditures Today To
  Understand Your Options For Tomorrow
• Balance Lower Costs With Supply Security
• Determine Right Mix Regarding Buying Portfolio
• Automate And Validate

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Contact Info

• Ryan Mossman
• VP/GM Fuel Management
• FuelQuest
• rmossman_at_fuelquest.com
• 713-222-5755

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Execution With Technology

• What if? planning coupled with operational
  insight has expanded with increased volatility

• Value of daily put and call option to lift or not
  lift based on todays rack price vs. expected
  tomorrow rack price based on being able to
  shift 25 of liftings between days.
• Source Accenture Research

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