Shell Trading Energy Commodity Trading OTC Derivatives Jim

Shell Trading Energy Commodity Trading/ OTC Derivatives Jim Harren April 20, 2006

Shell Trading Agenda • • Overview of Shell Trading Energy Commodity Trading Hedging vs. Speculation Options OTC Swaps Shell Trading Rotational Program Ideal candidate profile Questions

Shell Trading is… • The world’s largest energy trader • A global business in Shell’s portfolio • A professional group of people who are dedicated to the fast-paced and exciting business of marketing and trading • Experiencing continued success and growth with ambitious plans for the future

The Shell Trading Network Calgary Shell Trading Russia Moscow STASCO London STR Rotterdam STUSCO STGP Houston SETL London Shell WEST Barbados Shell Japan Trading Tokyo SITME Dubai SIETCo Singapore Crude Oil Trading LPG Trading Products Trading Power Trading Natural Gas Trading Environmental Products Trading SGTAP Philippines Spot Chartering Shipping

Shell Trading Energy Commodity Trading • Commodity Trading – Energy Basics – – – – Commodity Market Terms Physical (cash) vs. Financial (paper) Futures/Options Market Players (participants) “Over the Counter” Derivatives vs. Exchange Traded Hedging vs. Speculation Fundamental Trading/Analysis Technical Trading/Analysis

Shell Trading Energy Basics • Crude Oil – Get it out of ground - Producers – Ship it – Transportation Companies – Heat it up (Refinery) • Propane – Agriculture, Home Heating, Vehicles • Butane – Blend into Gasoline/Commercial Uses • Jet - Airlines • Gasoline • Heating Oil- Huge Northeast market • Asphalt -Commerical

Shell Trading Commodity Market Terms • • Backwardation/Contango Bid Ask……Hit Bids/Lift Offers Spreads (Front to Back) Cross Commodity (Cracks /Heat vs Gas) Outrights Arbitrage Fundamental vs. Technical Trading Pricing Agencies (Platt’s, Argus, OPIS)

Shell Trading Futures vs. Options • Futures (ICE and NYMEX) – Crude Oil 36 months – Heating Oil 18 months – Gasoline 12 months • Options (Review) – Puts • buy gives you the “right to sell” • Sell gives you the “obligation to buy” – Calls • buy gives you the “right to buy” • Sell gives you the “obligation to sell”

Shell Trading

Shell Trading

Shell Trading

Shell Trading Hedging • Hedging – Provides matching exposure to price fluctuations – Why? • Stake holders (banks) prefer companies that perform as planned. • Hedging stabilizes cash flows Reduces cost of capital • Secures company objectives • Enables management to measure performance • In Energy – Price moves of 3 cents per gallon on a 250 mb cargo can cost over $315, 000

Shell Trading Speculation • Speculation – Educated Decision to Buy/Sell given Technical and/or Fundamental information – $5, 000 per day 20 days per month 12 months =$1. 2 mm – Speculation always involves a gamble as to where one thinks prices will be in the future.

Shell Trading Physical vs. Financial • Physical Commodities Crude Oil – Heating Oil – Jet fuel – Truck Diesel – Gasoline (grades) – LPG’s – Feedstocks • Financials (We trade Derivatives and OTC instruments on all of the above) – Futures – Options – Over the Counter Derivatives

Shell Trading Option Pricing • Pricing – Black Scholes – Greeks • Delta/Gamma/Vega/Theta/Rho – Other Models • Calendar Spread Options

Shell Trading Option Strategies • Strategies – Strangles – Market view? – Collars (typically a hedge for) • Producers • End users – – Straddles – Market View? Fences Butterflies Exotics

Shell Trading OTC SWAPS and STRATEGIES • • • Fixed Price Swap – example follows Collars – Example follows Swap options Knock out Options Cross Commodity Index Swaps – Very Common in Energy - Refiner Margins

Shell Trading Swap Applications FIXED PRICE SWAP: • An Oil Producer of 300, 000 bbl/month sells crude oil to its customers at an agreed-upon index price. The firm wants more predictable cash flows in order to determine its ability to capitalize on exploration and production opportunities next year.

Shell Trading Swap Applications (cont’d) • To help accomplish this objective, the Producer enters into a one-year swap with Shell to hedge 1/3 of its production at a fixed price of $60. 00/bbl. This swap hedge is financially equivalent to a forward sale of 100, 000 barrels of crude oil per month for 12 months.

Shell Trading Swap Applications (cont’d) • If the price of Crude averages over 60. 00 for the next 12 months. The producer will pay Shell the difference between the 12 month average price and $60. 00. • If the price of Crude averages under 60. 00 for the next 12 months. Shell will pay the producer the difference between the 12 month average price and $60. 00.

Shell Trading Swap Applications - Collars A Collar Contract allows a customer to keep its costs within an agreed range, effectively putting a "Collar" around purchase or selling prices

Shell Trading Collars (continued) Producer – Concerned about falling crude prices Would sell call buy put Sell Call if he is happy with “maximum” price Buy put if he is concerned about a drop in prices Zero cost collar allows him to finance his downside protection (purchase of put) with his sale of the upside call

Shell Trading Collars (continued) Airline - Concerned about rising Jet prices Would sell put buy call Sell put if he is willing to lock in a floor price for his jet fuel Buy call to protect the company from rising jet prices Zero cost collar allows him to finance his upside protection (purchase of call) with his sale of the downside (floor) put

Shell Trading Exchange vs. Over the Counter • Exchange – No/limited credit risk – Delivery of product – Rules • Over the Counter – Unlimited Credit Risk – Not limited to exchange products – ISDA’s International Swaps and Derivatives Association (http: //www. isda. org) in place

Shell Trading The Successful Shell Trader • • • Commercial – interested in making money Self-motivated High level of personal accountability Makes decisions Focused Analytical Comfortable with risk Action oriented Numerate Strong interpersonal / communications skills Operates with Honesty, Integrity and Respect for People

Shell Trading Shell Quality in Trading • Unparalleled global reach and coverage of energy trading markets (physical locations & variety in product offerings) • Leverages the Shell brand asset base to create unique opportunities • Brings integrity to the marketplace by offering competitive pricing, consistency in performance and delivery of energy products

Shell Trading Typical Paths into Shell Trading • Hiring goals are met by experienced external recruiting, internal resourcing & development, and intern placement into formal rotational programs • The intern program is coordinated on behalf of both STUSCo and STGP • Limited but exciting opportunities are available for select students

Shell Trading Commercial Internship Examples of Trading Intern projects include: • Trading deal entry to gain familiarity with deal structures and understand system requirements • Analysis of pricing relationships and markets – Analysis of historical pricing information and relationships – Product demand analysis • Creation of charts and graphics for the benefit of a trading team • Reconciliation of actual trades to trade book financial statements • Assist with data mining & collection, data conversion and data integrity issues – Assist traders in creating value from data

Shell Trading Employment Opportunities for Interns At the conclusion of a successful summer internship, the most likely opportunities that students may be offered upon graduation: • A slot in the Trader Development or Commercial Operations Development program – Traders & Commercial Operators at Shell participate in a market competitive compensation program with opportunity to earn larger incentive bonuses than other similar level roles in Shell • A position as a Trading / Marketing analyst • A Finance position for another Shell business

Shell Trading Rotational Development Programs Oil Trader Development for Jr. Traders • Rotations in Pipeline or Marine Scheduling, Contracts, Risk Control and Demurrage • Possible rotation as Trading Analyst Gas & Power Trader Development for Jr. Traders • Rotations in Scheduling, Contracts, Risk Control and Marketing / Trading Analyst Commercial Operations Development for Operators and Commercial / Contract Administration • Rotations in Pipeline or Marine Scheduling, Contracts, Financial Services and Financial Advice - Credit

Shell Trading Development Program Structure • Four rotations of six-months each, to build foundation of knowledge • Participants report directly to a single commercial manager to provide consistency – Daily supervision is provided by a rotational leader – Assigned coach provides mentoring and participates in assessment • Individual Learning and Development plans are created to address gaps vs. the competence framework ideal • Additional training events are planned throughout the rotations • Camaraderie, teamwork & networking are necessary for success

Shell Trading Questions?