PETROLEUM REFINING
AGENDA
• Introduction
• Industry Overview
• Risk Analysis
• Company Analysis
• Valero Energy Corporation
• Provident
• Inter Pipeline
•Conclusion
•Recommendations
INDUSTRY OVERVIEW
Main Sector in Oil and Gas Industry
Petroleum Refining
• A refinery takes a raw material (crude oil) and
transforms it into petrol and hundreds of
other useful products.
• What refining does:
– Adjusts and reshapes molecules
– Standardizes product
– Removes contaminants to meet requirements for:
• end-user performance
• environmental regulations
Major Products
Light distillates
Middle distillates
Heavy fuel oil
• LPG
• Gasoline
• Naphtha
• Kerosene
• Diesel
• Heavy
distillates and
residuum
• Lubricating oils
• Wax
• Asphalt
Main Processes
• All refineries perform three basic steps:
 Separation: fractional distillation)
 Conversion: cracking and rearranging the
molecules
 Treatment: blending, purifying, fine-tuning and
improving products to meet specific
requirements
Refinery System
World’s Top Refineries Companies in 2011
1,400
Jamnagar Refinery (Reliance
Industries Limited)
Paraguana Refinery Complex
(PDVSA)
SK Energy Co., Ltd. Ulsan
Refinery (SK Energy)
GS-Caltex Yeosu Refinery (GS
Caltex)
Singapore (ExxonMobil)
1,240
Thousand barrel per day
1,200
1,000
940
850
800
600
400
200
0
730
605 572
550
503
446
Baytown Refinery
(ExxonMobil)
Ras Tanura Refinery (Saudi
Aramco)
Baton Rouge Refinery
(ExxonMobil)
Texas City Refinery (BP)
Geographic distribution in U.S.
U.S. Top Refineries Companies in 2011
600
500
561
502 500
464
428
400
300
EXXON MOBIL
CORP (Taxes)
EXXON MOBIL
CORP-Louisiana
HOVENSA LLC
407 405
362
345
MARATHON OIL
CORP
PDV AMERICA INC
BP PLC-Taxes
200
BP PLC2-Indiana
100
0
WRB REFINING LLC
EXXON MOBIL
CORP3
Refineries in Canada
Thousand of Cube Meters per day in 2007
Canada Top Refineries Companies 2010
Refining Capacity Changes for Integrated Majors
Refining Capacity Changes for Integrated Majors
IMPLICATIONS:DOWNSTREAM DIVESTMENTS
• Integrated majors continuing to exit refining business –
some through divestment of refining assets and some
through spinning off of Downstream business as a
separate corporate entity.
• Result is that refinery ownership is moving away from
integrated majors towards non-integrated companies.
• To remain viable, refining businesses will need to be able
to generate sufficient cash to provide an adequate
return to their owners
Evaluation of Refinery Capacity
Future Capacity Forecast
Factors Determining Gas Price
5%
Crude oil costs
18%
47%
Taxes and GST
Refiner's margin
30%
Marketing (or retail)
margin
Refinery Margin and Major Costs
• Refining margin = total value of petroleum products the price of the raw material-other costs
• Major Costs
– Fixed operating costs: labour, maintenance, taxes and
overhead costs
– Variable operating costs: feed-dependent costs for power,
water, chemicals, additives, catalyst and refinery fuels
beyond own production
– Transport costs
– Marginal crude freight
– Insurance and ocean loss
– Applicable fees and duties
Regional Refining Margins
$/barrel
REGULATION ENVIRONMENT
Green House Gas Regulation
• EPA has started to propose regulation of
GHG’s under existing CAA programs such as
Vehicle Emissions standards rule, Prevention
of Significant Deterioration, and New Source
Performance Standards
• Under these regulations, permits will be
required for projects that emit threshold
levels of CO2 (regardless of emissions of other
criteria pollutants such as SOx, NOx, etc.
Implications
• Significantly more permits will be required for refinery
modifications
• Require installation of BACT (Best Available Control
Technology) for managing CO2 emissions. BACT to be
determined on case-by-case basis.
• EPA is currently working on approach for refinery
GHG measures: Energy management
Command and control (source specific emission limits)
Benchmarking
• In any case, greater focus on energy reduction projects
will likely be required.
Reformulated Fuel Standard (RFS2)
– RFS program was created under the Energy Policy
Act of 2005. Established first renewable fuel
mandate – 7.5 billion gallons by 2012
– Established new categories of renewable fuel and
mandates for each, and increased volumes of
renewable fuel (9 billion gallons in 2008 to 36
billion gallons by 2022)
Reformulated Fuel Standard (RFS2)
Implications
• Growth in biofuels exceeds overall growth in
transportation fuels – increased pressure on
refining
• Significant expansion in facilities required to
manufacture, store, transport, and blend biofuels
• Impact of increasing biofuels volumes will result
in changes to mix of fuel blending components –
refinery configuration and/or new technologies
Other Regulations
• Clean Air Act
– Dominant regulatory effect on refinery operations
• Reformulated gasoline (RFG) standards
– Affects operations indirectly through restrictions on
product mix
•
•
•
•
Clean Water Act
RCRA
State regulations
Corporate Average Fuel Economy (CAFE) standards
– Indirect effect through performance requirements on
products
Risk Analysis
Typical Risks in the Oil and Gas Industry
Key drivers and Challenges in Refinery
Risk Exposure
•
•
•
•
•
•
•
Operational Risk
Environmental Consideration
Economic and Political Risk
Commodity Risk
Financial Risk
Regulatory Limitations
Limitation on Capacity
Environmental Impacts and Risks
• Air
Refinery emissions contain several major ozone
precursors. The associated impacts would be most
significant near and downwind of a given facility.
• Water and soil
Potential for contamination from leaks and spills
• Carcinogens
Benzene is a significant component of refinery air
emissions
• Global warming
Future Regulation: Waxman-Markey Legislation
• Market Environment Characterized by Rising Regulatory
Costs and Excess Capacity Abroad
– Rising costs of production from recently enacted environmental
and regulatory requirements.
– Rising competition from foreign competitors – 7.6 – 8.8 million
barrels per day (mb/d) of new refining capacity is expected to
come online by 2015 – 80% of which will be built outside of the
OECD. Flat or declining demand for transportation fuels in the
U.S. market.
– Rising taxes, and biofuel mandates will further shrink margins
and place 2.5 mb/d of the current 17.5 mb/d of domestic operable
capacity at high risk of permanent closure early in the 2015-2030
forecast period.
Future Regulation: Waxman-Markey Legislation
Future Regulation: Waxman-Markey Legislation
Implications
Gasoline Prices
• In the 2015-2030 gasoline prices could rise by an
average of $0.20 to $0.40 per gallon under the
carbon costs calculated by the U.S.
Environmental Protection Agency (EPA).
• Gasoline, and all other petroleum based
transportation fuels, could rise by over $1/gallon
under some CO2 allowance cost forecasts by the
U.S. Energy Information Administration (EIA).
Risk Measurement
• Sensitivity analysis
• Simulation Analysis
• Probability Estimation
• Value at Risk (VaR)
Risk Management
• Diversification and Insurance
• OTC Forward Contracts
• Exchange-Traded Energy Futures
• Foreign Exchange Futures
• Hedging through Options
Valero Energy Corporation
VLO - NYSE
Overview




Fortune 500 company based in San Antonio, Texas
Incorporated in 1981 – Valero Refining & Marketing
Company
Changed name in 1997 to Valero Energy
Corporation
22,000 employees
Executives
Bill Klesse
Chairman of the Board,
CEO and President
•
Started out as chemical
engineer
•
BSci Chem Eng
•
MBA in Finance
Jay Browning
Senior Vice PresidentCorporate Law and Secretary
•
Responsible for Corporate
Governance, Finance,
Securities and Exchange
Commission, and
Information Systems
Support.
•
BBA & MBA in Finance
Mike Ciskowski
Executive Vice President
and Chief Financial Officer
•
Responsible for Treasury,
Finance, Accounting,
Internal Audit, Trading
Controls and Insurance
•
BBA & MBA in Finance
Donna Titzman
Vice President and
Treasurer
•
Responsible for the
company’s banking, cash
management, customer
credit and investment
management areas.
•
BBA Accounting, CPA
Segments
Refining

Refining operations, wholesale marketing, product supply and
distribution, and transportation operations
Ethanol


Sales of internally produced ethanol and distillers grains
Our ethanol operations are geographically located in the central plains
region of the U.S.
Retail


Company-operated convenience stores, Canadian dealers/jobbers,
truckstop facilities, cardlock facilities, and home heating oil operations.
Segregated into Retail-US and Retail-Canada
Competitors
2010 Refining Capacity in USA
Financial Statements
Segment Revenues
Gross margin:
9.2%
Operating
margin: 3%
Operations - Petroleum







16 petroleum refineries are located in the United
States (U.S.), Canada, the United Kingdom (U.K.),
and Aruba
Conventional gasolines
Distillates
Jet fuel
Asphalt
Petrochemicals
Lubricants




Premium products including
CBOB and RBOB1
Gasoline meeting the
specifications of the California
Air Resources Board (CARB)
CARB diesel fuel
Low−sulfur and ultra−low−sulfur
diesel fuel
Refining Capacity
Refining Yields
Feedstock Supply
•
•
Approximately 63 percent of our current crude oil
feedstock requirements are purchased through
term contracts while the remaining requirements
are generally purchased on the spot market.
The majority of the crude oil purchased under our
term contracts is purchased at the producer’s
official stated price (i.e., the “market” price
established by the seller for all purchasers) and not
at a negotiated price specific to us.
Feedstock Supply
•
•
Approximately 63 percent of our current crude oil
feedstock requirements are purchased through
term contracts while the remaining requirements
are generally purchased on the spot market.
The majority of the crude oil purchased under our
term contracts is purchased at the producer’s
official stated price (i.e., the “market” price
established by the seller for all purchasers) and not
at a negotiated price specific to us.
Marketing

We market our refined products through an
extensive bulk and rack marketing network and we
sell refined products through a network of
approximately 6,800 retail and wholesale branded
outlets in the United States (U.S.), Canada, the
United Kingdom (U.K.), Aruba, and Ireland under
various brand names including Valero®, Diamond
Shamrock®, Shamrock®, Ultramar®, Beacon®, and
Texaco®
Operations - Ethanol
•
10 ethanol plants in the Midwest
Operations - Retail
Retail – U.S.



Sales of transportation fuels

Average 119,780 BPD

Fuels sold under Valero
brand
Convenience store merchandise
and services
998 company-operated sites
under Corner Store brand name
Retail – Canada
Sales of transportation fuels
Average 76,100 BPD
Fuels sold under Ultramar
brand
791 outlets
381 owned
410 independent dealers
and jobbers
Sales of home heating oil to
residential customers
Growth Strategy
“leads in shareholder value growth through
innovative, efficient upgrading of low cost feedstocks
into high value, high quality products.”

Aggressive “growth through acquisitions” strategy

Since 1997


1,000 to 22,000 employees

1 to 16 refineries

0.2 to 3 million BPD capacity
Risk Oversight


The Board considers oversight of Valero’s risk
management efforts to be a responsibility of the
full board
Risk management is an integral part of Valero’s
annual strategic planning process, which addresses,
among other things, the risks and opportunities
facing Valero
Risk Management Policies
“The Board had a Finance Committee in 2010. The Finance
Committee reviewed and monitored the investment policies
and performance of our Thrift Plan and pension plans,
insurance and risk management policies and programs, and
finance matters and policies as needed. During 2010, the
members of the Finance Committee were Irl F. Engelhardt
(Chairman), Ruben M. Escobedo, Bob Marbut, Susan Kaufman
Purcell, and Stephen M. Waters. The Finance Committee met
three times in 2010. The Board has determined that it will not
have a separately appointed Finance Committee in 2011.”
Risk Factors
1. Volatility of refining margins & global economic
activity
• Primarily affected by the relationship, or margin,
between refined product prices and the prices for crude
oil and other feedstocks
• Affected by regional/global supply & demand for crude
oil and refined products, US & global economies, US
relationships with foreign governments, governmental
regulation
Risk Factors
2. Uncertainty and illiquidity in credit and capital
markets
• Can impair our ability to obtain credit and financing on
acceptable terms, and can adversely affect the financial
strength of our business partners
Risk Factors
3. Compliance with and changes in environmental
laws
• Emissions into the air and releases into the soil, surface
water, or groundwater
• Level of expenditures required for environmental
matters could increase in the future due to more
stringent and new environment laws and regulations
Risk Factors
4. Disruption of our ability to obtain crude oil could
adversely affect our operations
• Supplies originating in Middle East, Africa, Asia, North
America & South America
•Political, geographic and economic risks
• Possibility for unavailability of alternative sources or
volumes at unfavourable prices
Risk Factors
5. Reliance on third-party transportation of crude oil
and refined products
• Subject to interruptions in supply and increased costs
•Weather events, accidents, governmental regulations, or
third-party actions
Risk Factors
6. Competitors that produce their own supply of
feedstocks, have more extensive retail outlets, or
have greater financial resources may have a
competitive advantage
• Do not produce any of our crude oil feedstocks
•Many competitors obtain significant portion of feedstocks
from company-owned production
Risk Factors
7. A significant interruption in one or more of our
refineries could adversely affect our business
• Refineries are principal operating assets
• Interruption: lost production and repair costs
Risk Factors
8. Insurance may not cover all potential losses from
operating hazards
• We maintain insurance against many, but not all,
potential losses arising from operating hazards
•For example, coverage for hurricane damage is very limited, and coverage
for terrorism risks includes very broad exclusions
• Failure by one or more insurers to honor its coverage
commitments for an insured event
Risk Factors
9. Compliance with and changes in tax laws could
adversely affect our performance
•Extensive tax liabilities imposed by multiple jurisdictions,
including
• income taxes,
• transactional taxes (excise/duty, sales/use, and value-added
taxes),
• payroll taxes,
• franchise taxes,
• withholdingtaxes, and
• ad valorem taxes.
Risk Factors
10. Losses as a result of our forward-contract
activities and derivative transactions
• Currently use derivative instruments
• Expect to continue their use in the future
• If these instruments we use to hedge are not effective,
we may incur losses
Item 7A

Commodity Price Risk

Interest Rate Risk

Foreign Currency Risk

Compliance Program Price Risk
Commodity Price Risk
• Future markets for liquidity
• Swaps for price exposure
• Certain commodity derivative instruments for
trading purposes to take advantage of existing
market conditions related to future results of
operations and cash flows
Commodity Price Risk
“Our positions in commodity derivative instruments
are monitored and managed on a daily basis by a risk
control group to ensure compliance with our stated
risk management policy that has been approved by
our board of directors.”
Commodity Price Risk
Sensitivity Analysis
Commodity Price Risk
For risk management, we use:
• Fair Value Hedges
• Cash Flow Hedges
• Economic Hedges
• Trading Derivatives
Commodity Price Risk
Fair Value Hedges


Hedge price volatility in certain refining inventories and firm commitments to
purchase inventories
Level of activity for our fair value hedges is based on the level of our operating
inventories, and generally represents the amount by which our inventories differ
from our previous year-end LIFO inventory levels
Commodity Price Risk
Cash Flow Hedges
• Price volatility in certain forecasted feedstock, refined product
purchases, refined product sales & natural gas purchases
Commodity Price Risk
Economic Hedges
• Manage price volatility in certain (i) refinery feedstock, refined product, and
corn inventories, (ii) forecasted refinery feedstock, refined product, and corn
purchases, and refined product sales, and (iii) fixed-price corn purchase
contracts
Commodity Price Risk
Trading Derivatives
• Take advantage of existing market conditions related to
future results of operations and cash flows
Interest Rate Risk
No outstanding interest rate derivatives as of Dec 31,
2011 & 2010

Foreign Currency Risk


As of December 31, 2011, we had commitments to
purchase $751 million of U.S. dollars
Our market risk was minimal on the contracts, as
they matured on or before January 26, 2012,
resulting in a $3 million loss
Compliance Program Price Risk


Exposed to volatility in the price of financial
instruments associated with various governmental
and regulatory compliance programs that we must
purchase in the open market to comply with these
programs.
As of December 31, 2011, we had purchased
futures contracts – long for 68,000 metric tons of
EU emission allowances that were entered into as
economic hedges.
Fair Value Measurements
Fair Values of Derivative Instruments
Corporate Overview
Calgary based corporation that owns and operates NGL midstream
services

Provides natural gas liquids midstream processing and marketing in
western and central Canada and the United States

4th largest integrated oil and gas company in Canada

Energy products include: ethane, butane, propane, condensate

Non energy products: storage, processing, terminalling and
transportation
Corporate Overview
The Midstream business unit extracts, processes,
stores, transports and markets natural gas liquids
(NGLs) for Provident and offers these services to third
party customers
Three operations:


Empress East

Redwater West

Commercial Services
Map of Operations
Empress East
Extracts NGLs from natural gas at the Empress straddle plants and sells finished
products into markets in central Canada and the eastern United States.

The margin in this business is determined primarily by the “frac spread ratio”, which is
the ratio between crude oil prices and natural gas prices

Demand for propane is seasonal and results in inventory that generally builds over
the second and third quarters of the year and is sold in the fourth quarter and the first
quarter of the following year

.
Redwater West
Purchases an NGL mix from various producers and fractionates it into finished products at the
Redwater fractionation facility, the feedstock for this business line is primarily NGL mix rather than
natural gas, the frac spread ratio has a smaller impact on margin than in the Empress East business
line

Captures supply from northeast British Columbia and northwest Alberta and generates revenues
through extraction, gathering, transportation, storage and fractionation of NGL into finished
products

Has several significant competitive advantages including the ability to process sour NGL and is one
of only two fractionation facilities in the Fort Saskatchewan area capable of processing ethane-plus

Located at the Redwater facility is rail-based condensate terminal, which serves the heavy oil
industry and its need for diluent

Commercial services
Commercial Services - generates income from relatively stable fee-forservice contracts to provide fractionation, storage, loading, and marketing
services to upstream producers. Income from pipeline tariffs from
Provident's ownership in NGL pipelines is also included in this business line
Redwater facility has a rail unloading capacity of 110 rail cars per day or 75,000 bpd
Storage facilities at both Empress East and Redwater West facilities


seven million gross barrels at Empress East
50% ownership of 2.5 mm-bbl storage cavern and 100% ownership of 1000 acre
12 million barrel storage cavern at Redwater West
Stock Details
Financial Statements
Provident Midstream business performance
Risk Factors
1. Frac Spread and Commodity Price


Exposed to possible price declines between the time Provident
purchases NGL feedstock and sells NGL products, and to
narrowing frac spreads
Also a differential between NGL product prices and crude oil prices
which can change prices received and margins realized for
midstream products separate from frac spread ratio changes
Risk Factors
2.Facilities Throughput and Product Demand




Volumes of natural gas processed through Provident's natural gas
liquids midstream processing and marketing business and of NGLs
and other products transported in the pipelines depend on production
of natural gas in the areas serviced by the business and pipelines
Without reserve additions, production will decline over time as
reserves are depleted and production costs may rise
Producers may shut in production at lower product prices or higher
production costs
Producers in the areas serviced by the business may not be successful
in exploring for and developing additional reserves, and the gas plants
and the pipelines may not be able to maintain existing volumes of
throughput
Risk Factors
3.Operating and Capital Costs
Operating and Capital Costs may vary considerably from current and
forecast values and rates and represent significant components of the
cost of providing service

Risk Factors
4.Reliance on Principal Customers and
Operators


Rely on several significant customers to purchase product from the
Midstream Business
If for any reason these parties were unable to perform their
obligations under the various agreements with Provident, the
revenue and dividends of Provident, and the operations of the
Midstream Business could be negatively impacted
Risk Factors
5.Operational Matters and Hazards


Subject to common hazards of the natural gas processing and
pipeline transportation business
The operation of Provident's natural gas liquids midstream
processing and marketing business could be disrupted by natural
disasters or other events beyond the control of Provident
Risk Factors
6.Competition


Subject to competition from other gas processing plants which are
either in the general vicinity of the gas plants or have gathering
systems that are or could potentially extend into areas served by
the gas plants
Producers in Western Canada compete with producers in other
regions to supply natural gas and gas products to customers in
North America and the natural gas and gas products industry also
competes with other industries to supply the fuel, feedstock and
other needs of consumers
Risk Factors
7.Regulatory Intervention

Pipelines and facilities can be subject to common carrier and
common processor applications and to rate setting by regulatory
authorities in the event agreement on fees or tariffs cannot be
reached with producers
Risk Factors
8.Environmental Considerations


Major equipment failure, release of toxic substances or pipeline
rupture could result in damage to the environment and Provident's
natural gas liquids midstream processing and marketing business,
death or injury and substantial costs and liabilities to third parties
The gas processing and gathering industry is regulated by federal
and provincial environmental legislation
Risk Factors
9.Variations in Interest Rates and Foreign
Exchange Rates


Variations in interest rates could result in a significant change in
the amount Provident pays to service debt, potentially impacting
dividends to Shareholders.
Variations in the exchange rate for the Canadian dollar versus the
U.S. dollar could affect future dividends
Risk Management Philosophy
Provident has an Enterprise Risk Management program that is
designed to identify and manage risks that could negatively impact
the business, operations, or results

Utilizes a hedging program that protects a portion of the company's
cash flow and supports continued unitholder distributions, capital
programs, and bank financing

Has an insurance program in place to mitigate the economic costs
associated with risks to the business, its assets, and its people

Manages counterparty exposure with a credit policy that establishes
limits by counterparty based on an analysis of financial information
and other business factors

Risk Management overview
Enterprise Risk Management program that is designed to identify and
manage risks that could negatively affect its business, operations or results.
The program’s activities include risk identification, assessment, response,
control, monitoring and communication of derivative instruments

Provident uses include put and call options, costless collars, participating
swaps, and fixed price products that settle against indexed referenced
pricing

Provident’s commodity price risk management program utilizes derivative
instruments to provide for protection against lower commodity prices and
product margins, as well as fluctuating interest and foreign exchange rates.

Provident may also use derivative instruments to protect acquisition
economics. The program is designed to stabilize cash flows in order to
support cash distributions, capital programs and bank financing

Fair Values
Fair value measurement of assets and liabilities recognized on the
consolidated statement of financial position are categorized into
levels within a fair value hierarchy based on the nature of valuation
inputs
Level 1 – Unadjusted quoted prices in active markets for identical
assets or liabilities;

Level 2 – Inputs other than quoted prices that are observable for the
asset or liability either directly or indirectly; and

Level 3 – Inputs that are not based on observable market data

Provident’s financial derivative instruments have been classified as
Level 2 instruments
Financial Derivative Sensitivity Analysis
Market Environment
Market Risk
Market risk is the risk that the fair value of a
financial instrument will fluctuate because of
changes in market prices

Price risk

Currency risk

Interest risk
Market Risk Management Program
Utilizes financial derivative instruments to provide protection against
commodity price volatility and protect a base level of operating cash
flow

Protect the relationship between the purchase cost of natural gas and
the sales price of propane, butane and condensate and to protect the
relationship between NGLs and crude oil in physical sales contracts

Reduces foreign exchange risk due to the exposure arising from the
conversion of U.S. dollars into Canadian dollars, interest rate risk and
fixes a portion of Provident’s input costs

Risk Management Contracts
Settlement of Contracts
Liquidity Risk
Credit Risk
Net Financial Derivative Instruments
Commodity Price Risk Program
Provident's commodity price risk management program
utilizes commodity hedges to protect against adverse price
movements

Provident's intention is to routinely hedge approximately 50
percent of its natural gas and NGL volumes on a rolling 12
month basis. Subject to market conditions, Provident may
add additional hedges as appropriate for up to 24 months

Frac Spread Volumes
Contracts In Place
Contracts In Place
Historical Stock Price
Corporate Profile – IPL
Petroleum transportation, storage and natural gas liquids
extraction business

Operating approximately 6,100 kilometres of petroleum
pipelines and 4.8 million barrels of storage in western
Canada


Made the 100 Venture’s list
Executives
CEO: David W. Fesyk



President since 1997
Senior executive and general
partner at Koch from 1991 to 2002
Director of South Saskatchewan
Pipeline Company
Operation Overview
Conventional Pipelines
Oil Sands Transportation
NGL Extraction
Bulk Liquid Storage
Operation Overview
Conventional Pipelines
Through a total of approximately 3,700 kilometres (almost
2,300 miles) of pipeline and over 975,000 barrels of storage,
the conventional gathering business transported
approximately 170,000 b/d of crude in 2011

Crude for the conventional systems is gathered from
approximately 160 producer owned batteries and 20 truck
terminals throughout southern Alberta and southwest
Saskatchewan for delivery to key market hubs in Alberta and
Saskatchewan.

Conventional Pipelines
Oil Sands Transportation
The Oil Sands Transportation business is the largest
oil sands gathering business in Canada - transporting
in 2011 roughly 786,000 b/d of bitumen blend or
approximately 35% of Canada’s oil sands production

Consisting of the Cold Lake, Corridor and Polaris
pipeline systems, this business segment has nearly
2,500 km of pipeline and 3.8 million barrels of storage

Oil Sands Transportation
NGL Extraction
Facilities process pipeline quality natural gas to
remove natural gas liquids (NGL) comprised of
ethane, propane, butanes and pentanes-plus

The NGL stream is then partially fractionated to
produce a specification ethane product and a mix of
propane, butane, and pentanes-plus

NGL Extraction
Bulk Liquid Storage
Inter Pipeline's bulk liquid storage business segment
is the fourth largest independent storage business in
Europe

Operating under two wholly owned entities, the bulk
liquid storage business operates 12 deep-water
terminals and approximately 19 million barrels of
storage

Bulk Liquid Storage
Financial Statements
Performance Overview
Fourth quarter FFO* increased to $90 million, 12%
higher than fourth quarter 2010 levels
Payout ratio before sustaining capital* of 72% for the
quarter
Cash distributions to unitholders were $65 million or
$0.2475 per unit
Inter Pipeline’s oil sands and conventional oil
pipelines systems transported 945,100 b/d

Performance Overview
Performance Overview
Cont’
Risk Factors
1. Demand risk
 Inter Pipeline’s business will depend, in part,
on the level of demand for petroleum in the
geographic areas in which deliveries are made
by the pipelines and the ability and willingness
of shippers having access or rights to utilize
the pipelines to supply such demand
Risk Factors
2. Supply Risk


Future throughput on the pipelines and replacement of petroleum
reserves in the pipelines’ service areas is dependent upon the
success of producers operating in those areas in exploiting their
existing reserve bases and exploring for and developing additional
reserves
Reserve bases necessary to maintain long term supply cannot be
assured, and petroleum price declines, without corresponding
reductions in costs of production, may reduce or eliminate the
profitability of production and therefore the supply of petroleum
for the pipelines
Risk Factors
3. Competition and Contracts



While Inter Pipeline attempts to renew contracts on the same or
similar terms and conditions, there can be no assurance that such
contracts will continue to be renewed or, if renewed, will be
renewed upon favourable terms to Inter Pipeline
Inter Pipeline's supply contracts with producers in the areas
serviced by the conventional oil pipelines business are based on
market-based toll structures negotiated from time to time with
individual producers
The pipelines are subject to competition for volumes transported
by trucking or by other pipelines near the areas serviced by the
pipelines
Risk Factors
4. Operational Factors


The pipelines are connected to various third party mainline
systems such as the Enbridge system, Express pipeline, the
Trans Mountain pipeline, and the Plains Milk River system,
as well as refineries in the Edmonton area
Operational disruptions or apportionment on third party
systems or refineries may prevent the full utilization of the
pipelines
Risk Factors
5. Multi-Jurisdictional Regulation

The pipelines are subject to intra-provincial and multijurisdictional regulation, including regulation by the Energy
Resources Conservation Board in Alberta, and the Ministry
of Energy and Resources in Saskatchewan
Risk Factors
6. Natural Gas Availability and Composition


The volumes of natural gas processed by the NGL extraction
business depend on the throughput of the Foothills and
TransCanada Alberta systems from which the NGL
extraction facilities source their natural gas supply
The production of NGL from the NGL extraction facilities is
largely dependent on the quantity and composition of the
NGL within the natural gas streams that supply the NGL
extraction business
Risk Factors
7. Competition


The NGL extraction facilities are subject to natural gas
markets and, as such, are subject to competition for gas
supply from all natural gas markets served by the
TransCanada Alberta System or the Foothills System
The NGL extraction facilities are subject to competition
from other extraction plants that are in the general vicinity
of the NGL extraction facilities or that may be constructed
upstream of or in parallel to the NGL extraction facilities
Risk Factors
8. Execution Risk and Reputational Risk


Inter Pipeline’s ability to successfully execute the
development of its growth projects may be influenced by
capital constraints, third party opposition, changes in
customer support over time, delays in or changes to
government and regulatory approvals, cost escalations,
construction delays, shortages and in-service delays
Reputational risk is the potential for negative impacts that
could result from the deterioration of Inter Pipeline’s
reputation with key stakeholders. The potential for harming
Inter Pipeline’s reputation exists in every business decision
and all risks can have an impact on reputation
Hedging Philosophy
Inter Pipeline utilizes derivative financial instruments to
manage liquidity and market risk exposure to changes in
commodity prices, foreign currencies and interest rates
Risk management policies are intended to minimize the
volatility of Inter Pipeline’s exposure to commodity
price, foreign exchange and interest rate risk to assist
with stabilizing FFO*

Derivative financial instruments:
•commodity price swap agreements
•foreign currency exchange contracts
•power price hedges
•heat rate and interest rate swap agreements
Frac-Spread Risk Management
Frac-spread risk : The difference between the
weighted average propane-plus price and the
Monthly index price of AECO natural gas
Frac-Spread Risk Management
Power Price Risk Management
Inter Pipeline uses derivative financial instruments to
manage power price risk in its NGL extraction and
conventional oil pipelines business segments

Inter Pipeline enters into financial heat rate swap and
power price swap contracts to manage power price risk
exposure in these businesses.

Foreign Exchange Risk Management
Inter Pipeline uses derivative financial instruments to
manage power price risk in its NGL extraction and
conventional oil pipelines business segments. Inter
Pipeline enters into financial heat rate swap and power
price swap contracts to manage power price risk
exposure in these businesses.
Interest Rate Risk Management
Based on the variable rate obligations outstanding at
December 31, 2011, a 1% change in interest rates at
this date could affect interest expense on credit
facilities by approximately $14.7 million, assuming all
other variables remain constant

The entire $14.7 million relates to the $1.55 billion
Corridor credit facility and is recoverable through the
terms of the Corridor FSA, therefore there would be no
after-tax income impact

Fair Value Through Profit or Loss
Fair Value Through Profit or Loss
Credit Risk
Inter Pipeline’s credit risk exposure relates primarily to
customers and financial counter-parties holding cash
and derivative financial instruments, with a maximum
exposure equal to the carrying amount of these
instruments

Credit risk is managed through credit approval and
monitoring procedures
