Group I Base Oils

GROUP I BASE OILS
Do They Have a Future?

Wayne Leiker CITGO Petroleum Corporation
Acknowledgements
Afton Chemical Chevron Oronite ICIS LOR Infineum USA Kline and Company Lithcon / SK PDVSA Petroleum Trends International Purvin & Gertz
Business Environment
Global Background Information
Quality requirements vary greatly across the world markets
Worldwide Finished Lubes Quality Requirements
EUROPE NORTH AMERICA FSU
+ 1-3
(10-12)
AFRICA
even
ASIA/PACIFIC
(8-10)
(8-10)
M. EAST
SOUTH AMERICA
(8-10) even
Years ahead (+) / behind (-)U.S.

Source: PDVSA
Quality requirements vary greatly across the world markets Emerging country growth is expected to average 1.5-2.0%
The China Factor
Economic growth spurring energy and petrochemical demand
Accounted for 40% of the world's growth in oil demand between 2000 and 2003 Driving petrochemical production rates to 100%+ - purchasing almost every incremental PC production pound In 2001, only seven of every 1,000 people in China owned a car. By 2030 half the country is expected to be driving.
China is becoming a strategic purchaser of oil, gas, and petrochemicals
Source: Chevron Oronite
WORLD LUBRICANT CONSUMPTION
Period Annual Growth Rate 1.9% 1.2%
MB/D
1.7%
2.2%
0.3%
0.3%
1995
2000
North America Africa/Middle East
2005
2010
Asia Latin America
2015
Western Europe Eastern Europe/FSU
Source: Purvin & Gertz
Asia/China Leads Future Lubricants Growth in Demand and Volume
World Paraffinic Base Oil Demand Estimates (Constant Production)
NORTH AMERICA YEAR: FSU EUROPE
TOTAL
2004 2008 2012
ASIA/PACIFIC
AFRICA SOUTH AMERICA M. EAST
Includes all announced expansions including E/M GTL but not Shell or ChevTex GTL
Source: PDVSA
Quality requirements vary greatly across the world markets Emerging country growth is expected to average 1.5-2.0% Demand in North America and Western Europe is essentially flat, with automotive sector demand declining in Europe
Quality requirements vary greatly across the world markets Emerging country growth is expected to average 1.5-2.0% Demand in North America and Western Europe is essentially flat, with automotive sector demand declining in Europe In summary, global demand is growing at about 1.1% annually, driven primarily by Asia/China
U.S. Background Information
U.S. Finished Lubes demand is essentially flat.
Business Environment U.S. Lubricant Demand MMBPD

180 160 140 120 100 80 60 40 20 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Other Automotive Oils
Industrial Oils
U.S. Finished Lubes demand is essentially flat. Number of major finished lubes competitors is shrinking.
U.S. Finished Lubes Only Pre-Mergers (1998)
10%
Share of Market
14 Primary Competitors with the largest companies relatively close in market share
5%
0%
Sun
Quaker State
Amoco
Source: Kline Data
U.S. Finished Lubes and Process Oils Combined
20%
Share of Market
15%
7 Primary Competitors with the top three having 44% share vs 22% Pre-mergers
10%
5%
0%
Quaker State
Volumes estimated from 2001 market volumes, Kline report and NPRA data. Includes finished lubricants and process oils; does not include base oils.
U.S. Finished Lubes demand is essentially flat. Number of major finished lubes competitors is shrinking. US specifications rapidly changing. PC-9 in 2003 GF-4 in 2004/05 Dexron III-H in 2005 PC-10 in 2008 GF-5 in 2009
U.S. Lubricant Demand MMBPD
180 160 140 120 100 80 60 40 20 0
97 99 93 87 89 91 95 85 19 19 19 19 01 03 05 07 09 11 13 20 19 19 19 19 20 20 20 20 20 20 20 15
API, SG GF-2 GF-3, API, CH4 GF-4, CI-4 Mercon V, Volvo, VDS III, Dexron III-H GF-5,Mack EON 03, Cat ECF-1, PC-10
ILSAC GF-6, HD, PC-11, Dexron X
Industrial Oils
Number and frequency of specification changes have increased dramatically.

PCMO Trends Quality
2004 2008 2012
GF-3/SL GF-4/SM
GF-5/SN
GF-4/SM
GF-5
SJ SH & Prior
SJ & Prior
SM
SL
SL & Prior
GF-4 entering July 2004 mandatory 2005, GF-5 entering Mid 2008 and mandatory 2009 Quality change forecasted on 3 year historical transition to (70% use of) new specification entering the market and considering some resistance due to backward applicability
PCMO Trends Viscosity Grade
2004 2008 2012
10w30
10w30
10w30 5w30
Others
Others 5w30
0wX
5w30
Others 5w20
5w20
5w20
0wX
Viscosity grades shifts forecasted based on OEMs recommendation for vehicles 2004+ (5W30 and lowers) to support new warranties (7 years or 70.000 miles) and evolution of overall vehicle population (national fleet change average age of 10 years)
HDEO Trends Quality
2004 2008 2012
CF/CF-2 CH-4 & Prior CI-4
CF/CF-2
CF/CF-2
CI-4 & Prior PC-10 or CJ-4
CJ-4 & Prior
PC-11 or CK-4
PC-10 entering 2007, PC-11 entering 2011. Conversion forecasted to follow 1 year historical transition to 100% of new specification Quality change based on projected response to future environment regulations and new engine technology such as EGR
HDEO Trends Viscosity Grade
2004
Others 10w30 Mono
2008
10w30 5w30/40 Mono
10w30
2012
Mono 5w30/40
15w40
15w40
15w40
Viscosity grade shift primarily based on pressure for fuel saving toward the end of the forecasted period. Today OEMs more concentrated on engine technology to meet environmental regulations
U.S. Finished Lubes demand is essentially flat. Number of major finished lubes competitors is shrinking. US specifications rapidly changing. PC-9 in 2003 GF-4 in 2004/05 Dexron 3H in 2005 PC-10 in 2008 GF-5 in 2009 Result: Increasing demand for higher quality base oils
Business Environment U.S. Lubricant Demand MMBPD

180 160 140 120 100 80 60 40 20 0
5W Effect
19 85
19 93
20 01
19 89
20 05
19 87
19 97
19 91
20 13
19 95
20 09
19 99
20 03
20 07
20 11
5 W Automotive Oil
Industrial Oils
20 15
Short Term Crank Case Specification Changes Impact
2002 Crank Case Base Oil Demand
Gr III Gr II+ Gr I Other

Gr III Other Gr I Gr II+
Gr II
Gr II
Total Volume = 1076 MM Gallons

Source: Petro Trends International
North American Base Oil Capacity
250 API Group II,III API Group I
Capacity (MBPD)
200
150
100
50
Source: NPRA
19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
For Group I Producers, This Is Not A Pretty Picture Is It ?

What Options Do They Have?
Future Options
Future Options
Exit The Business
Future Options Exit
Historically, Base Oil Prices Lag Crude Moves

Future Options Exit

US Light Base Oil vs. WTI
2.30 2.10 Base Oil Price ($/gallon) 1.90 1.70 1.50 1.30 1.10 0.90 0.70 O-03 F-03 M-03 M-03 M-04 M-04 O-04 S-03 A-03 A-03 N-03 D-03 F-04 J-03 J-03 J-03 J-04 S-04 J-04 A-04 J-04 A-04 60 55 50 45 40 35 30 25 20 WTI Price ($/BBL)
US Avg Light Base Oil
WTI
Source: ICIS LOR
Future Options Exit

Large Amount of Capacity with relative higher costs than CITGO
Relative Cost Position ($/BBL)
Lower Relative Cost

Base Oil Capacity (MBPCD)
CITGO
Future Options Exit

Competitive View of Base Oil Refining - Current
Refineries Shut Down Since 1998 34 MBPD Capacity (19%) Considerably less capacity with relative higher costs than CITGO
0
Lower Relative Cost

Base Oil Capacity (MBPCD)
CITGO
Future Options
Exit The Business Change Your Product(s)
Future Options Change

Change Product Quality Change Crude Slate Base Oil Impact

Dewaxed VI Capability of Crude Oils
100 90 80 70 60 50 40 30 20 10 0 Crude Type
(Source NPRA FL 94-112)
Dewaxed VI (-12 oC)
California Light Alaska North Slope West Texas Interm ediate Arab Light Brent Pennsylvania

Not All Group Is Are Created Equal
90.0
API Group I, S120N to S170N
85.0
Saturates Content, wt%
Group I+
80.0
Inc re
75.0
as ing P
70.0
erf orm an ce
65.0 14.0
15.0
16.0
17.0
18.0
19.0
20.0
NOACK Volatility, wt%

Source: Lithcon/SK

Group I+ Base Oil Formulations
Group I+/II+ 5W30 GF-4 Blend
Add.
Group I+/III 5W30 GF-4 Blend

Add.
Gr I+
Gr III Gr I+
Gr II+
Allows Maximizing Group I+ Content of GF-4 Blends

Change Product Quality Change Crude Slate Base Oil Impact Wax Impact

Wax Content of Crude Oils
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
% Wax in Whole Crude
SLS
Brent
WTI
Eko-Fisk
Palanca
Bancroft
Norne

Historical Pricing Information
2.25 2.00
Price ($/US Gal)
1.75 1.50 1.25 1.00 0.75 0.50

ay -0 2 Ju l-0 2 Ju l-0 3 Se p03 N ov -0 3 Ja n04 Ja n03 M ar -0 3 M ay -0 3 ay -0 4 Ju l-0 4 2 04 02 ov -0 ar Se pSe p04
LSVGO
Avg. Base Oil
125/140 MP Wax
Wax Market Historically Has Been A Very Stable Market

Source: ICIS LOR

Worldwide Forecast Wax Balance (MTM/Y)
NORTH AMERICA EUROPE/FSU/ME CHINA TOTAL
YEAR: 2004 2008 2012
AFRIC A LATIN AMERICA
ASIA/PACIFIC
Source: PDVSA

Change Product Quality Change Crude Slate Base Oil Impact Wax Impact Bright Stock Impact

Historical Spot Base Oil Differentials ( Versus LSVGO/LSFO)
1.40 1.20
Differential ($/US Gal)
1.00 0.80 0.60 0.40 0.20 0.00

98 A pr -9 8 Ju l-9 8 O ct -9 8 Ja n99 A pr -9 9 Ju l-9 9 O ct -9 9 Ja n00 A pr -0 0 Ju l-0 0 O ct -0 0 Ja n01 A pr -0 1 Ju l-0 1 O ct -0 1 Ja n02 A pr -0 2 Ju l-0 2 O ct -0 2 Ja n03 A pr -0 3 Ju l-0 3 O ct -0 3 Ja n04 A pr -0 4 Ju l-0 4 O ct -0 4 Ja n-
Avg. Light Base Oil
Bright Stock (LSVGO)
Bright Stock (LSFO)
Source: ICIS LOR
Bright Stock Holding/Gaining Differential in 2004 Marketplace

Change Product Quality Change Crude Slate Base Oil Impact Wax Impact Bright Stock Impact Change Extraction Level

Extraction Unit Yield Data
60
Volume Percent Yield
55
50
45
40
35
30 88 90 92 94 96 98 100
Viscosity Index (VI)
Very Expensive Alternative

Change Product Quality Change Crude Slate Base Oil Impact Wax Impact Bright Stock Impact Change Extraction Level Fractionation Changes

Not All Group Is Are Created Equal
90.0
API Group I, S120N to S170N
85.0
Saturates Content, wt%
Group I+
80.0
Inc re
75.0
as ing P
70.0
erf orm an ce
65.0 14.0
15.0
16.0
17.0
18.0
19.0
20.0
NOACK Volatility, wt%

Source: Lithcon/SK

Group I+ Base Oil Formulations
Group I+/II+ 5W30 GF-4 Blend
Add.
Group I+/III 5W30 GF-4 Blend

Add.
Gr I+
Gr III Gr I+
Gr II+
Allows Maximizing Group I+ Content of GF-4 Blends

Change Product Quality Change Crude Slate Base Oil Impact Wax Impact Bright Stock Impact Change Extraction Level Fractionation Changes Add Hydroprocessing Facilities

Group II/II+ Posted Differentials Over Group I (100 to 150 Vis)
0.45
Differential ($/ US Gal)
0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Aug-02 Aug-03 Aug-04 Apr-02 Apr-03 Jun-02 Jun-03 Apr-04 Jun-04 Feb-02 Feb-03 Feb-04 Oct-01 Oct-02 Oct-03 Dec-01 Dec-02 Dec-03 Oct-04
Group II Differential
Group II+ Differential
Source: ICIS LOR
Current Hydroprocessing Project Economics are Declining
Future Options
Exit The Business Change Your Product(s) Adapt to Different or New Markets
Future Options Adapt

Adapt to Different and/or New Markets Replace Group IIs in Some Markets

Short Term Crank Case Specification Changes Impact
Gr III Gr II+ Gr I Other

Gr III Other Gr I Gr II+
Gr II
Gr II


2007 Other Base Oil Demand
Gr III Naph Gr II+ Other
Gr II
Gr I


2007 Metal Working Fluid Base Oil Demand
Naph Other
Gr I
Gr II

Adapt to Different and/or New Markets Replace Group IIs in Some Markets Replace Naphthenics/Aromatic Extracts in Process Oil Markets

Worldwide Forecast Naphthenic Base Oils Balance, (MBD)
TOTAL NORTH AMERICA EUROPE FSU YEAR: 2004 2008 2012
ASIA/PACIFIC
AFRICA SOUTH AMERICA M. EAST
Source: PDVSA

2007 Process Oil Base Oil Demand
Arom Ext Other Gr I
Gr II Naph


Adapt to Different and/or New Markets Replace Group IIs in Some Markets Replace Naphthenics/Aromatic Extracts in Process Oil Markets Develop Niche Market Applications
Future Options Adapt Develop Niche Market Applications

After Market Applications (Unlicensed)
PCMO HDEO ATF
Future Options Adapt Develop Niche Market Applications

After Market Applications (Unlicensed)
PCMO HDEO ATF
New Markets Such As High Mileage Products That May Not Require Licensing

Adapt to Different and/or New Markets Replace Group IIs in Some Markets Replace Naphthenics/Aromatic Extracts in Process Oil Markets Develop Niche Market Applications Enter and/or Increase Export Business Finished Lubricants Base Oils

Worldwide Finished Lubes Quality Requirements
EUROPE NORTH AMERICA FSU
+ 1-3
(10-12)
AFRICA
even
ASIA/PACIFIC
(8-10)
(8-10)
M. EAST
SOUTH AMERICA
(8-10) even
Years ahead (+) / behind (-)U.S.

Source: PDVSA

Latin America Lubricant Supply/Demand Balance
Net Imports Production
Thousand Barrels per Day
Consumption
1995
2000
2005
2010
2015
Price ($/US Gal)

Ja
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Source: ICIS LOR
Historical Global Light Base Oil Prices
AP Light Avg Europe Avg US Light Avg
n9 Ju 5 lJa 95 n9 Ju 6 lJa 96 n9 Ju 7 lJa 97 n9 Ju 8 lJa 98 n9 Ju 9 l-9 Ja 9 n0 Ju 0 l-0 Ja 0 n0 Ju 1 lJa 01 n0 Ju 2 lJa 02 n0 Ju 3 lJa 03 n0 Ju 4 l-0 4
Price ($/US Gal)

Ja
1.00
1.20
1.40
1.60
1.80
2.00
2.20
Source: ICIS LOR
Historical Global Bright Stock Prices
AP Europe US
n9 Ju 5 l-9 Ja 5 n9 Ju 6 l-9 Ja 6 n9 Ju 7 lJa 97 n9 Ju 8 lJa 98 n9 Ju 9 lJa 99 n0 Ju 0 lJa 00 n0 Ju 1 lJa 01 n0 Ju 2 lJa 02 n0 Ju 3 lJa 03 n0 Ju 4 l-0 4
Conclusions
Group I Base Oils are here to stay.
Significant production will remain in place globally Preferred base oil for most Industrial and Grease formulations Developing country quality requirements will allow continued use
Numerous factors will improve Gr I plant viability:

Crude Source (Group I+, Wax, Bright Stock) Hardware (Group I+, Yields, Operating Costs) Location (Marine Capabilities)
Conclusions
Group I+ base oils will continue to be useable:
Large degree in GF-4 oils and possibly some into GF-5 oils 100% in CI-4 oils and possibly some into PC-10 oils Better diluent oil for additives. VM and DI packages tend to be more soluble in Group I than Group II
Maximizing other products will improve plant viability:

Wax market projected to be in a deficit Bright Stock market will continue to tighten w/plant closures
Conclusions
Replacement opportunities may develop for Group II base oils in:
Industrial and other oil markets Process oil markets Niche markets
If global growth estimates are valid, export opportunities should be available for:
Finished lubricants of older(lower) quality requirements Base oils
Conclusions
UNTIL
GTL

Group I Base Oils

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GROUP I BASE OILS

Do They Have a Future?

Years ahead (+) / behind (-)U.S.

China is becoming a strategic purchaser of oil, gas, and petrochemicals

Source: Chevron Oronite

Western Europe Eastern Europe/FSU

Source: Purvin & Gertz

Asia/China Leads Future Lubricants Growth in Demand and Volume

AFRICA SOUTH AMERICA M. EAST

Business Environment U.S. Lubricant Demand MMBPD

Other Automotive Oils

Source: Purvin & Gertz

Source: Kline Data

ILSAC GF-6, HD, PC-11, Dexron X

Other Automotive Oils

Number and frequency of specification changes have increased dramatically.

CF/CF-2 CH-4 & Prior CI-4

CI-4 & Prior PC-10 or CJ-4

CJ-4 & Prior

Business Environment U.S. Lubricant Demand MMBPD

Other Automotive Oils

Source: Purvin & Gertz

2007 Crank Case Base Oil Demand

Total Volume = 1076 MM Gallons

Total Volume = 1077 MM Gallons

For Group I Producers, This Is Not A Pretty Picture Is It ?

Exit The Business

Future Options Exit

Historically, Base Oil Prices Lag Crude Moves

Future Options Exit

US Avg Light Base Oil

Source: ICIS LOR

Future Options Exit

Relative Cost Position ($/BBL)

Lower Relative Cost

Future Options Exit

Lower Relative Cost

Exit The Business Change Your Product(s)

Future Options Change

Future Options Change

Dewaxed VI (-12 oC)

Future Options Change

API Group I, S120N to S170N

Saturates Content, wt%

NOACK Volatility, wt%

Future Options Change

Group I+/III 5W30 GF-4 Blend

Allows Maximizing Group I+ Content of GF-4 Blends

Future Options Change

Future Options Change

% Wax in Whole Crude

Future Options Change

Price ($/US Gal)

1.75 1.50 1.25 1.00 0.75 0.50

Avg. Base Oil

Wax Market Historically Has Been A Very Stable Market

Future Options Change

AFRIC A LATIN AMERICA

Future Options Change

Future Options Change