Oil Refineries Ltd. Periodic Report 2016 This translation of the financial statement is for convenience purposes only. The only binding version of the financial statement is the Hebrew version. WorldReginfo - 00078499-689f-4c0b-8233-365718200b07 Contents Chapter A - Description of the Business of the Company Chapter B - Directors' Report on the State of the Company's Affairs Chapter C - Consolidated Financial Statements as at December 31, 2016 Chapter D - Separate Financial Information as at December 31, 2016 WorldReginfo - 00078499-689f-4c0b-8233-365718200b07 Bazan Ltd. Chapter A – Description of the Company’s Business Table of Contents Part A – General .............................................................................................................................. 2 1.1 Company Operations and Description of the Development of its Business ................................ 2 1.2 Company's areas of operation ......................................................................................................... 5 1.3 Investments in equity and share transactions ................................................................................ 8 1.4 Dividend Distribution ....................................................................................................................... 8 1.5 Financial information concerning the Company’s areas of activity .......................................... 10 Part B – Refining ............................................................................................................................ 13 1.6 Refining Segment of Operations .................................................................................................... 13 Part C - Polymer Segment - Carmel Olefins ............................................................................... 27 1.7 Polymer Segment - Carmel Olefins ............................................................................................... 27 Part D - Aromatics Segment ......................................................................................................... 35 1.8 Aromatics operations...................................................................................................................... 35 Part E - Polymers (Ducor) ............................................................................................................. 41 1.9 Polymers - Ducor ............................................................................................................................ 41 Part F - Additional Operations (Others)...................................................................................... 44 1.10 Basic oils and waxes ........................................................................................................................ 44 1.11 Trade Segment ................................................................................................................................ 45 Part G - Additional Information about the Company ................................................................ 46 1.12 Property, Plant and Equipment .................................................................................................... 46 1.13 R&D ................................................................................................................................................. 48 1.14 Intangible Assets ............................................................................................................................. 48 1.15 Human Capital ................................................................................................................................ 49 1.16 Investments ...................................................................................................................................... 53 1.17 Taxation ........................................................................................................................................... 53 1.18 Environmental Risks and Risk Management Methods ............................................................... 53 1.19 Restrictions and supervision of the Company's operations ........................................................ 63 1.20 Insurance ......................................................................................................................................... 72 1.21 Working capital .............................................................................................................................. 73 1.22 Credit and financing ....................................................................................................................... 73 1.23 Substantial agreements .................................................................................................................. 77 1.24 Legal proceedings ........................................................................................................................... 77 1.25 Business strategy and objectives .................................................................................................... 77 1.26 Information regarding unusual change in the Company's business affairs .............................. 79 1.27 Events or issues that deviate from the Company's regular business ......................................... 79 1.28 Risk Factors ..................................................................................................................................... 79 This translation of the financial statement is for convenience purposes only. The only binding version of this document is the Hebrew version. A - 1 WorldReginfo - 00078499-689f-4c0b-8233-365718200b07 Bazan Ltd. Part A – General The description of the Company’s business as detailed in this Chapter below was prepared on the assumption that the reader has before him/her the full periodic report of the Company, including all of its parts. 1.1 Company Operations and Description of the Development of its Business 1.1.1 Terms 1.1.1.1 Raw materials – Materials purchased by the Company and used by it in the production process: including, but not limited to, crude oil, which it purchases from its suppliers. 1.1.1.2 LPG - Liquefied Petroleum Gas, also known as cooking gas, and is one of the refining products of crude oil. 1.1.1.3 Naphtha – One of the refining products of crude oil. Used as one of the components for the production of gasoline, and in industry as a raw material for the production of petrochemical products. 1.1.1.4 Gasoline – One of the refining products of crude oil. Used for transport. 1.1.1.5 Gasoil – One of the refining products of crude oil. Used for transport and heating. 1.1.1.6 Kerosene – One of the refining products of crude oil. Used mainly as jet fuel and for heating. 1.1.1.7 Vacuum Gasoil or Heavy Vacuum Gasoil (VGO/HVGO) – An interim material produced by way of primary refining, and used in advanced refining processes for manufacturing oil products with high added value, primarily gasoil and kerosene. 1.1.1.8 Fuel Oil – A product obtained after initial refining processes. Used mainly for heating. 1.1.1.9 Bitumen – One of the refining products of crude oil. Used mainly as a principal component in road building and for insulation. 1.1.1.10 Feedstock – Materials produced by the Company and used as interim materials for its other facilities or as raw materials for its subsidiaries that are engaged in the production of petrochemical products. 1.1.1.11 Propylene – A colorless, odorless gas at room temperature, used as a raw material in the petrochemical industry, mainly for the production of polypropylene. 1.1.1.12 Ethylene – A colorless, odorless gas at room temperature, used as a raw material in the petrochemical industry, mainly for the production of polyethylene, the most common plastic in the world. 1.1.1.13 Polypropylene – A polymer, the main uses of which are in engineering, for the production of consumer goods (such as diapers, toys, bottles, containers, household plumbing, tool boxes, office equipment), fibers and threads for making carpets, for use in the vehicle industry, and others. 1.1.1.14 Polyethylene – A polymer, the main uses of which are for agriculture (such as sheeting used for greenhouses), for making flexible and hard packaging (such as bags and bottles), insulation products and household utensils. 1.1.1.15 Benzene – An aromatic material made from refining products. For details see section 1.8.6 below. 1.1.1.16 Paraxylene –An aromatic material made from refining products. For details see section 1.8.6 below. 1.1.1.17 Orthoxylene – An aromatic material made from refining products. For details see section 1.8.6 below. 1.1.1.18 Toluene – An aromatic material made from refining products. For details see section 1.8.6 below. This translation of the financial statement is for convenience purposes only. The only binding version of this document is the Hebrew version. A - 2 WorldReginfo - 00078499-689f-4c0b-8233-365718200b07 Bazan Ltd. 1.1.1.19 Solvents – Materials made from refining products. For details see section 1.8.6 below. 1.1.1.20 Phthalic Anhydride – A solid material produced from orthoxylene, which is made from refining products. For details see section 1.8.6 below. 1.1.1.21 Basic Oils – Oils made from refining products and used as raw material to produce finished oils for vehicles, ships, hydraulic systems and others. 1.1.1.22 Natural Gas – A gaseous substance that forms naturally underground (similarly to oil), composed (in Israel) mostly of methane. Natural