us to produce biofuel diesel.After processing, refined products are stored in the facility’s 70 storage tanks and three underground caverns with atotal capacity of approximately 6.5 million barrels. The products are pumped by pipeline from the refinery to an oil terminalin the harbor of Skarvik, two kilometers south of <strong>Preem</strong>raff Gothenburg. From there, we distribute the product to the marketby ship, rail and truck.<strong>Preem</strong>raff Gothenburg has two integrated systems for the utilization of waste or surplus heat with a total capacity inexcess of 100 megawatts. These systems enable us to sell surplus heat, which would otherwise be wasted, corresponding toapproximately 200,000 barrels of fuel oil per year to the district heating system of the city of Gothenburg and approximately100,000 barrels of fuel oil per year to <strong>AB</strong> Volvo. <strong>Preem</strong>raff Gothenburg generated additional operating profit from theseactivities of SEK 64.1 million (€7.0 million) in 2009 and SEK 90.4 million (€9.9 million) in 2010 and for the six monthsended June 30, 2011, an additional operating profit from the sale of surplus heat of SEK 54.2 million (€5.9 million) withrelatively little additional operating cost.Every four years, <strong>Preem</strong>raff Gothenburg is completely shut down for turnaround maintenance, which includesinspection of all processing units. The maintenance period typically lasts four to six weeks. The most recent majorturnaround maintenance was in the second quarter of 2007 and the next major turnaround maintenance is scheduled for thethird quarter of 2011. We aim to reduce the occurrence of these turnarounds to once in every six years going forward.The following table shows <strong>Preem</strong>raff Gothenburg’s feedstocks and production for the periods indicated below, alongwith the relevant percentage of total feedstock and production.For the year ended December 31, For the six months ended June 30,2008 2009 2010 2010 2011Thousandbbls %Thousandbbls %Thousandbbls %Thousandbbls %Thousandbbls %FeedstocksSweet Crude Oil .................................... 40,573 92 35,238 91 40,654 93 20,727 95 18,602 89Sour Crude Oil....................................... — — — — 167 — 69 — 22 —Unfinished and Blend Stocks................. 3,447 8 3,688 9 3,029 7 1,062 5 2,239 11Total Feedstock ............................... 44,020 100 38,926 100 43,850 100 21,858 100 20,862 100Utilization Rate .................................... 88 88 88 91 88ProductionLiquefied <strong>Petroleum</strong> Gas....................... 1,029 2 742 2 913 2 555 3 446 2Gasoline................................................. 11,195 27 10,446 28 11,407 27 5,388 26 5,613 28Diesel..................................................... 12,857 30 10,104 27 11,879 28 5,836 28 5,815 29Heating Oil ............................................ 5,115 12 5,448 14 3,957 9 2,376 11 1,543 8Heavy Fuel Oil ...................................... 11,863 28 10,043 27 13,379 32 6,623 32 6,285 31Other...................................................... 396 1 643 2 600 2 243 1 306 2Total Production ............................. 42,455 100 37,426 100 42,135 100 21,023 100 20,007 100DistributionBoth <strong>Preem</strong>raff Lysekil and <strong>Preem</strong>raff 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 the location ofour refineries on harbors in western Sweden provides us with a competitive advantage in our target markets. <strong>Preem</strong>raffLysekil ships approximately 100% of its production, and <strong>Preem</strong>raff Gothenburg ships approximately 75% of its production,by sea to domestic and international markets. <strong>Preem</strong>raff Gothenburg’s location near Gothenburg, Sweden’s second largestcity, also provides excellent access to truck and rail transport. We also own a strategically located network of terminalswhere we store inventory and operate depots in Sweden. In addition, we generate additional revenue from third parties in theform of depot throughput fees and we cooperate with other oil companies to optimize depot use and cost.ProductsOur two refineries produce liquefied petroleum gas, gasoline, diesel, heating oil and fuel oil. In addition, <strong>Preem</strong>raffGothenburg produces jet fuel and kerosene. There are, from time to time, substantial transfers of intermediates andcomponents between the refineries in order to optimize the profitability of the refinery system. The volume of these transfersvaries considerably from month to month and from year to year depending on the market prices of the components.42
SalesOur supply and refining segment exports over one half of its products each year (approximately 68% in 2009 andapproximately 64% in 2010). For 2011, we anticipate that our export share will be as high as or slightly higher than in 2010.Our exports are primarily to northwest Europe, including to other countries in Scandinavia, France, Germany and the UnitedKingdom. In 2010, our supply and refining segment sold approximately 80% (by value) of its products to third parties and20% (by value) to our marketing segment. With respect to third-party sales, we sell our refined products on the spot marketand pursuant to sales agreements with terms generally not exceeding 12 months. Our third-party customers arepredominantly other oil companies, including <strong>AB</strong> Svenska Statoil and OK-Q8 <strong>AB</strong>. We sometimes sell liquefied petroleumgas and naphtha to petrochemical companies. All third-party sales of gasoline, jet fuel and diesel are sales to other oilcompanies or traders. Approximately 90% of our third-party sales of heavy fuel oil are sales to oil companies, bunkerdistributors in the local market and traders, with the remaining 10% sold directly to industrial customers.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. Our objectiveis to minimize production costs (cost of crude oil, transportation and refining) and maximize sales revenue from the sale ofthe refined products that are most in demand. We occasionally supplement this purchasing strategy with various hedginginstruments and forward sales contracts on refined products when we believe it would be more beneficial to reduce the effectsof 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 extent thatcrude oil and refined product prices rise in tandem, our gross profit would generally be positively affected because wecompute 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 earlier time the crude oil is purchased at lower prices). Conversely, a portionof the gross loss that we record during a period of falling prices may be attributable solely to the decrease in prices during theperiod 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, ourworking capital requirements similarly increase. Because changes in refined product prices tend to lag behind changes incrude oil prices, we generally experience the increased working capital requirements from higher crude oil prices sooner, andto a greater degree, than the benefits to our gross profit that may arise from selling products at higher refined 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 refinedproducts market are volatile.We believe that, although the price effect on inventories may impact our results for a given period, over the longterm,the effects of rising and falling oil prices tend to offset each other. In addition we believe that, from a cash flowperspective, the effects of rising and falling oil prices on gross profit and working capital tend to offset each other.Therefore, in comparing our results from period to period, we believe that it is important to note that these price effects oninventories are unrelated to, and do not reflect, the underlying efficiency of the refineries. See also “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures aboutMarket Risk—Commodity Price Risk” included elsewhere in this <strong>Business</strong> <strong>Update</strong>.Inventory Management. We employ several strategies to minimize the impact on our profitability of the volatility infeedstock costs and refined product prices. Our inventory management strategies include the purchase and sale ofexchange-related, oil-related futures and options with a duration of 12 months or less. To a lesser extent, we also use oilswap agreements similar to those traded on international exchanges such as the ICE Futures Europe, including crack spreadsand crude oil options that, because they contain certain terms customized to the market in which we sell, such as point ofdelivery, are better suited to hedge against the specific price movements in our markets. The number of barrels of crude oiland refined products covered by such contracts varies from time to time. Nevertheless, we seek to maintain our “normalposition” of crude oil, finished products and intermediates. Our “normal position,” which is 1,840,000 cubic meters(approximately 12 million barrels), is evaluated based on the average optimal inventory level in our depot system, therequired inventory levels to allow for continuous flow and operations and the amount of crude oil and products that arepriced, but not delivered. When the volume in our inventories deviates from the normal position, both above and below, we43