Focused on Group III Base Oil

Introduction

Backgrounds for Group III Base Oil

Past and Present of Group III Base Oil

Future (focused on Merchant Market)

Price Overview

Summary and Issues

Conclusion

No.1 energy & chemical company in Korea

– largest refining capacity(1.1Mil B/D), market share and marketing network in Korea

Leading player in other major energy sector in Korea

– E&P, Refining & Marketing, Coal, City Gas & Lubricant

World largest Group III base oil manufacturer

– Hydro-Cracked / IDW /Hydro Treating Process– Total Capacity 950,000 MT/Y– 370,000MT/Y new capacity from mid 2008

SK Corp.

SKTelecom

SKNetworks

OtherSubsidiaries

SK Holdings

Holding

Company

SKTelecom

SKNetworks

SK Energy

Operating

Company

OtherSubsidiaries

• Mixed Corporate Structure with

Businesses & Investment Securities

• Splitting into a Holding Company and

an Operating Company

Source: SK Corp. IR Dept.

Current Structure Holding Company Structure

API Category

Viscosity Index

Saturates(%)

Sulfur(%)

Group I 80-120 < 90 ＞0.03

Group II 80-120 ≥ 90 ≤ 0.03

Group IV PAO

Group V All others

Definition

• Inherent High Viscosity Index

• Excellent Low Temperature Performance

• Low Volatility, High Flash Point

• Excellent Thermal and Oxidative stability

※ Can be marketed as ‘Synthetic’

Features

ItemASTM

MethodYUBASE 4 YUBASE 6 YUBASE 8

KV @ 40°C, cSt D445 19.6 36.9 47.0

KV @ 100°C, cSt D445 4.25 6.46 7.60

Viscosity Index D2270 123 130 128

NOACK Volatility, wt% D5800 14.7 7.1 5.0

Pour Point, °C D92 -15 -12 -12

Flash Point, °C D97 230 240 260

YUBASE Properties

2000

Group III

Group II

Group I

25,000

20,000

15,000

10,000

5,000

30,000

[KMT]

2005

4%2%

2010

7~8%

2015

10~%

Source: Lubes n Grease, 2006

Introduction

Backgrounds for Group III Base Oil

Past and Present of Group III Base Oil

Future (focused on Merchant Market)

Price Overview

Summary and Issues

Conclusion

Legislation Consumers

OEMsLubricant

Manufacturers

Global Economy

• Very Low Sulfur (≤ 0.03 %)

• Very High Viscosity Index (120 + )

• Excellent Low Temperature Performance

• Low Volatility

• High Flash Point

• Excellent Thermal and Oxidative stability

※ Can be marketed as ‘Synthetic’

Features

Group III Base Oils

Introduction

Backgrounds for Group III Base Oil

Past and Present of Group III Base Oil

Future (focused on Merchant Market)

Price Overview

Summary

Conclusion

1st

2nd

3rd(e)

3rd(e)

2nd

1st

Small capacity for own captive use

Unaccustomed product

Doubts on investments

Economics of scale

Over-qualified quality

Lack of commercial formulation

3rd(e)

2nd

1st

Demand has been well grown

To substitute PAO

As correction fluid blended with

Group I base oils

Formulation started to bloom

Commonly acknowledged

1st

3rd(e)

2nd Formulation development accelerated

Demand is larger than Supply

in a short term

Demand differs by grades

Interests in future investments

Introduction

Backgrounds for Group III Base Oil

Past and Present of Group III Base Oil

Future (focused on Merchant Market)

Price Overview

Summary

Conclusion

S-Oil Petronas Neste

+5.5KBD

+7.5KBD

Meet the demand deficit

But, sudden oversupply?

Then, severe competition

Even against Group I/II/II+?

Quality Differentiation

GS Caltex

+3KBD

+7.7KBD

Accelerating technical changes

Increasing commercial demands

Market expansion

S-Oil Petronas GS CaltexNeste

GTLGTL

GTL base oils emerge ?

Group III+ Merchant market

GTL vs. Group III?

Destiny of Group IV & V?

GTL S-Oil PetronasNesteGS

Caltex?

+00 KBD

+0 KBD

+0 KBD

Introduction

Backgrounds for Group III Base Oil

Past and Present of Group III Base Oil

Future (focused on Merchant Market)

Price Overview

Summary

Conclusion

* Source: SK Corp, ICIS-LOR Report

100

300

500

700

900

1,100

1,300

Diesel

DUBAI

WTI

Group III Posting(US)

Group II+ Posting (US)

Group I (S’pore)

Group I Posting (US)

Group I (NWE)

Group I (Asia)

Group I (Europe)

[USD/MT]

Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May

‘04 ‘05 ‘06 ‘07

100

200

300

400

500

600

700

800

900

1,000

Diesel

DUBAI

WTI

Group I (S’pore)

Group I (NWE)

Group I (Asia)

Group I (Europe)

[USD/MT]

Crude oil and fuel prices have

increased dramatically

Short supply of fuels & base oils

Competition on Production

Base Oil vs. Fuel

Concerns on pricing mechanism

Time Lagging Issue

* Source: SK Corp, ICIS-LOR Report

Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May

‘04 ‘05 ‘06 ‘07

Group III Posting(US)

Group II+ Posting (US)

Group I Posting (US)

* Source: SK Corp, ICIS-LOR Report

May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May

‘06 ‘07

Diesel

DUBAI

WTI

Group I (S’pore)

Group I (NWE)

Group I (Asia)

Group I (Europe)

Group III Posting(US)

Group II+ Posting (US)

Group I Posting (US)

Crude oil/fuel prices fluctuated

Base oil prices increased

continuously

Short supply of base oils

Pricing mechanism was changed

Enjoyed hugh margins ever

* Source: SK Corp, ICIS-LOR Report

100

300

500

700

900

1,100

1,300

Diesel

DUBAI

WTI

Group I (S’pore)

Group I (NWE)

Group I (Asia)

Group I (Europe)

[USD/MT]

Crude oil/fuel prices increased

Base oil prices have decreased

Domestic & Export prices differ

Balance or Surplus

Margins get squeezed

Group III Posting(US)

Group II+ Posting (US)

Group I Posting (US)

Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May

‘04 ‘05 ‘06 ‘07

Demand

Specification changes

Opportunity cost

Competitive dynamics

Raw Material Costs

Competition against fuels

Supply

Cost

Value

New production

Turnaround

Disasters Economic growth

Car/Industrial market

Base Oil Prices

0

50

100

150

200

250

300

350 Group III Premium

Group II+ Premium

[USD/MT]

* Source: SK Corp, ICIS-LOR Report

Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May

‘04 ‘05 ‘06 ‘07

Importance of ‘Raw Material price’ has been increased

– Base Oil and Additive price for Lube blenders

– Feedstock price for Base Oil Manufacturers

Pricing mechanism get diversified

– Fixed price vs. Spot pricing vs. Using price indicators

Price Indicating System

– Prices of Crud Oils or Fuels

– Base Oil Prices on ICIS Report (US vs. Europe/Asia)

– Positive or Negative price circulation

– Any other options?

Introduction

Backgrounds for Group III Base Oil

Past and Present of Group III Base Oil

Future (focused on Merchant Market)

Price Overview

Summary and Issues

Conclusion

Demand is growing rapidly

Supply is catching up the demand step by step

Increased familiarity

Reasonable Price Premium

Supply in the region

Demand in the region

Regional mismatch of supply & demand

Supply in the region

Demand in the region

Regional mismatch of supply & demand

Trends encourage new investments

- Technical trends require high quality base oils

- Economic trends for higher return

- Supply will over the demand in short term

Technical DemandsProduction Capacity

Commercial DemandsTechnical Demands

Production Capacity

Commercial Demands

?Production Capacity Commercial Demands

Economic Risks

Logistic Cost

− Shipping

− Tanks

R&D Cost

− Formulation

− Approvals

Marketing & Operating Cost

Cost Burdens

Feedstock Cost

Base Oil Price Movement

Competition against Fuel

Severe Competition

in high quality base oil market

− Group III Premium will be changed

− Full Production is the matter

Do you have enough CAPTIVE USE or PARTNER?

Viscosity Index

Pour Point

Oxidation & thermal stability

Volatility

Viscosity Grades

Viscosity Index NOACK

Expecting quality differentiation in Group III base oils

80

90

100

110

120

130

140

Gr-Ⅰ100N

Gr-Ⅱ100N

Gr-Ⅲ4cSt

New YUBASE4

PAO4

10

12

14

16

18

20

Gr-Ⅰ100N

Gr-Ⅱ100N

Gr-Ⅲ4cSt

New YUBASE4

PAO4

Introduction

Backgrounds for Group III Base Oil

Past and Present of Group III Base Oil

Future (focused on Merchant Market)

Price Overview

Summary and Issues

Conclusion

DemandSupply

Group I

Group II

Group II+

PAO

Group III

Group III

Group III/GTL

DemandSupply

Group III

Oversupply of high quality

base oils could put Group III

in lower performance tiers

Oversupply may push

demand growth

Group I

Group II

Group II+

PAO

DemandSupply

Group III

Increasing demand of high

quality base oils can put

Group III in premium tiers

in long term view

Group III/GTL

Group I

Group II

Group II+

PAO

Group III base oil market will continue to grow

− Technical needs - Applications and regulations

− Marketing needs - Cost effective, Synthetic labeling

− Emerging new market

More competition is expected in high quality base oil market

− GTL and other new Group III base oil manufacturers

− Oversupply of Group III base oils might bring an impact on other tier market

Leading Group III base oil manufacturer

- Production Quantity

- Product Quality

Customized Service Provider

- Logistics

- Technology

Supply Stability

Globalized & Localized Service

Long-term Relationship

Strategic Partnership

Branch Office Storage Tank Agent/Distributer

Houston Tokyo

Jakarta

London

Tianjin

SK Corp.