CORRAL PETROLEUM HOLDINGS AB (PUBL) - Preem

Year ended December 31,%2008 2009 Change 2010%ChangeFixed expenses excl. depr. $/bbl................................................ (1.52) (1.31) 14% (1.54) (18)%Net cash margin, $/bbl............................................................... 8.52 4.24 (50)% 3.92 (8)%Depreciation $/bbl ..................................................................... (1.00) (0.85) 15% (0.91) (7)%Net margin, $/bbl....................................................................... 7.52 3.39 (55)% 3.01 (11)%Total production (1,000 barrels) ................................................ 70,999 72,958 3% 70,663 (3)%Preemraff GothenburgGross refining margin $/bbl....................................................... 3.85 1.81 (53)% 2.31 28%Variable refining costs $/bbl...................................................... (0.51) (0.49) 4% (0.50) (2)%Refining margin $/bbl................................................................ 3.34 1.32 (60)% 1.81 37%Timing effects $/bbl................................................................... 0.27 0.62 130% 0.22 (65)%Business margin $/bbl................................................................ 3.62 1.94 (46)% 2.03 5%Sales other $/bbl ........................................................................ 0.37 0.21 (43)% 0.11 (48)%Fixed expenses excl. depr $/bbl................................................. (1.11) (1.28) (15)% (1.08) 16%Net cash margin, $/bbl............................................................... 2.88 0.88 (69)% 1.06 20%Depreciation $/bbl ..................................................................... (0.87) (0.84) 3% (0.83) 1%Net margin, $/bbl....................................................................... 2.01 0.04 (98)% 0.23 475%Total production (1,000 barrels) ................................................ 42,454 37,427 (12)% 42,135 13%In 2009, demand for refined products fell in connection with the global financial crisis. According to data fromthe International Energy Agency, worldwide global oil demand for refined products decreased by 1.6% in 2009. Thedecreased demand caused increased inventories of middle distillates, which depressed prices and resulted in much lowerdiesel crack in 2009 compared to 2008. Consequently, as illustrated in the table above, our refining margins decreasedby 51% at Preemraff Lysekil and by 60% at Preemraff Gothenburg in 2009 as compared to 2008. Our refining marginsat Preemraff Lysekil were further negatively impacted by the narrowing of the price differential between Dated Brentcrude oil and the historically lower-priced Urals that was on average approximately –$0.8 per barrel for the year endedDecember 31, 2009.In 2010, demand for refined products rose by 3.4% compared to 2009 according to data from InternationalEnergy Agency. The increased demand caused upward pressure on product prices resulting in higher diesel crack (+25%)in 2010 compared to 2009. In 2010, our refining margins improved by 9% at Preemraff Lysekil and by 37% at PreemraffGothenburg as compared to 2009. Increased product cracks, partly due to maintenance at European refineries and strikein France, was a contributing factor to our improved refining margins. Furthermore, our refining margins at PreemraffLysekil were positively impacted by the widening of the price differential between Dated Brent crude oil and Urals,which was on average approximately -$1.4 per barrel in 2010. On the other hand, planned maintenance at PreemraffLysekil had a negative impact on the refining margins in 2010.Price Effect on Inventories and MarginsThe value of our inventories of crude oil and refined products is impacted by the effects of fluctuations in themarket prices for crude oil and refined products. To the extent that crude oil and refined product prices rise in tandem,our gross profit would generally be positively affected because we compute the gross profit as the excess of sales revenue(determined at the time of sale at the higher refined product prices) over the cost of goods sold (determined at the earliertime the crude oil is purchased at lower prices). Conversely, a portion of the gross loss that we record during a period offalling prices may be attributable solely to the decrease in prices during the period after we buy the crude oil and prior tothe time we finish refining it and sell it. Thus, our inventory is valued at the acquisition cost and the subsequentmovements in the price of the refined product will have a corresponding impact on our gross profit. In 2008, we had aprice loss on inventory of SEK 4,523 million with Dated Brent crude oil increasing from approximately $97 per barrel atthe beginning of 2008, peaking at approximately $144 per barrel in July 2008 and falling to approximately $37 per barrelat the end of 2008. In 2009, we had a price gain on inventory of SEK 3,171 million with Dated Brent crude oil pricesincreasing to approximately $78 per barrel by December 31, 2009. As of December 31, 2010, Dated Brent crude oilprices increased to approximately $93 per barrel, resulting in a price gain on inventory of SEK 1,212 million.However, during periods of rising crude oil prices, the cost of replenishing our crude oil inventories and, thus,our working capital requirements similarly increase. Because changes in refined product prices tend to lag behindchanges in crude oil prices, we generally experience the increased working capital requirements from higher crude oilprices sooner, and to a greater degree, than the benefits to our gross profit that may arise from selling products at higherrefined product prices.Depending on the rate and the duration of the increase, and the degree to which crude oil prices move more thanrefined prices, our gross profit margins may actually decline during periods of rising crude oil prices. During periods ofdeclining crude oil prices, we believe that we experience the opposite effects. Both the crude oil market and the refined19