CORRAL PETROLEUM HOLDINGS AB (PUBL) - Preem

Heating Oil ............................................................................. 5,115 12 5,448 14 3,951 9Heavy Fuel Oil ....................................................................... 11,862 28 10,043 27 13,378 32Other....................................................................................... 396 1 643 2 600 2Total Production............................................................... 42,454 100 37,426 100 42,131 100DistributionBoth Preemraff Lysekil and Preemraff Gothenburg are well situated for the efficient distribution of products tomarket. Transportation costs are a significant cost component of refined products. Given this, we believe that thelocation of our refineries on harbors in western Sweden provides us with a competitive advantage in our target markets.Preemraff Lysekil ships approximately 100% of its production, and Preemraff Gothenburg ships approximately 75% ofits production, by sea to domestic and international markets. Preemraff Gothenburg’s location near Gothenburg,Sweden’s second largest city, also provides excellent access to truck and rail transport. We also own a strategicallylocated network of terminals where we store inventory and operate depots in Sweden. In addition, we generate additionalrevenue from third parties in the form of depot throughput fees and we cooperate with other oil companies to optimizedepot use and cost.ProductsOur two refineries produce liquefied petroleum gas, gasoline, diesel, heating oil and fuel oil. In addition,Preemraff Gothenburg produces jet fuel and kerosene. There are, from time to time, substantial transfers of intermediatesand components between the refineries in order to optimize the profitability of the refinery system. The volume of thesetransfers varies considerably from month to month and from year to year depending on the market prices of thecomponents.SalesOur supply and refining segment exports over one half of its products each year (approximately 68% in 2009and approximately 64% in 2010). For 2011, we anticipate that our export share will be as high as or slightly higher thanin 2010. Our exports are primarily to northwest Europe, including to other countries in Scandinavia, France, Germanyand the United Kingdom. In 2010, our supply and refining segment sold approximately 80% (by value) of its products tothird parties and 20% (by value) to our marketing segment. With respect to third-party sales, we sell our refined productson the spot market and pursuant to sales agreements with terms generally not exceeding 12 months. Our third-partycustomers are predominantly other oil companies, including AB Svenska Statoil and OK-Q8 AB. We sometimes sellliquefied petroleum gas and naphtha to petrochemical companies. All third-party sales of gasoline, jet fuel and diesel aresales to other oil companies or traders. Approximately 90% of our third-party sales of heavy fuel oil are sales to oilcompanies, bunker distributors in the local market and traders, with the remaining 10% sold directly to industrialcustomers.Raw MaterialsSupply. We purchase the majority of our crude oil on the spot market, which provides us with flexibility inobtaining a supply of crude oil that is in line with our raw material requirements. This allows us to take advantage of therapid price fluctuations in the crude oil supply market through our crude oil purchasing strategy. This strategy involvesregularly monitoring market conditions for various types of crude oil as well as demand for refined products. Ourobjective is to minimize production costs (cost of crude oil, transportation and refining) and maximize sales revenue fromthe sale of the refined products that are most in demand. We occasionally supplement this purchasing strategy withvarious hedging instruments and forward sales contracts on refined products when we believe it would be more beneficialto reduce the effects of fluctuations in crude or refined product prices.Price Effect on Inventories. We hold large inventories of crude oil and refined products and, thus, our financialresults are impacted by the effects of fluctuations in the market prices for crude oil and refined products. To the extentthat crude oil and refined product prices rise in tandem, our gross profit would generally be positively affected becausewe compute the gross profit as the excess of sales revenue (determined at the time of sale at the higher refined productprices) over the cost of goods sold (determined at the earlier time the crude oil is purchased at lower prices). Conversely,a portion of the gross loss that we record during a period of falling prices may be attributable solely to the decrease inprices during the period after we buy the crude oil and prior to the time we finish refining it and sell it.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 of41