01 Arnold Volkenborn - Asia Oil Week - 26 Sep 2014

2014 Schlumberger Business Consulting. All Rights Reserved.

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Transforming Reserves into Production:The Challenges of Effective Delivery

Arnold Volkenborn Managing Director Asia Schlumberger Business Consulting

September, 2014


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Challenges in the industry

Reserves need development

Performance needs improvement

Industry levers

Enhance operations

Staff productivity

Governance practices

Implications

Discussion points


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50

45

40

35

30

25

20

0

5

10

15

55

2000 20051995199019851980 2010 2013

-8%

+2%

2P OIL DISCOVERIES, FIVE-YEAR AVERAGE

Note: 2P discoveries curve does not include unconventional unproved resources. Data excludes Canada onshore and US lower-48 onshore.Source: IHS Edin; SBC analysis

Billion bbl

Deep and ultra-deep waterOnshore and shallow water

The industry has stopped the decline in oil and gas discoveries, and Asia is not an exception.

Oil

Brazil, US, Russia and China

Turkmenistan, Iran China and Mozambique

Major contributors of last decades discoveries:

Gas


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Source: Rystad Energy; SBC analysis

Bn USD Bn USD, USD/boe

Upstream expenditures have grown consistently

GLOBAL UPSTREAM CAPEX EVOLUTION GLOBAL UPSTREAM OPEX EVOLUTION

0

2

4

6

8

10

750

600

450

300

150

0

12111009080706052004 13

x3

OPEX

OPEX/barrel

Upstream OPEX OPEX/boe

450

150

600

750

300

0

x3.6

12111009080706052004 13


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EVOLUTION OF GOVERNMENT TAKES FROM COMPANIES O&G REVENUES

1 Includes: Royalties, income tax, profit oil and bonuses.2 Average government takes between 1985 and 1990 compared with average between 2008 and 2012 (as % of O&G revenues).3 In the last decade some changes on American fiscal policies for the energy sector have given generous tax relief to O&G companies (e.g. American

job creation act /2004 and 2005 Energy bill).Source: Rystad Energy; SBC Analysis

% of O&G revenues paid to local governments1

0

10

20

30

40

50

60

70

80

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Government takes have been increasing

Latin America

Europe

CIS

Asia US & Canada Sub-Saharan Africa

SE Asia and OceaniaNorth Africa

Middle East

Fiscal benefits have pulled NAM out of global trend3

Globally, government takes have increased 7pp since late 80s2


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GLOBAL REVENUES FROM O&G PRODUCTION1 AND OIL PRICES

1 Upstream revenue is provided by Rystad Energy. According to Rystads analysts, revenue numbers are calculated based on yearly O&G production, oil prices, destiny of gas exports and local gas prices.

Source: BP Statistical Review; Rystad Energy; SBC analysis

MMboe/dayTrillion USD; USD/bbl

Limited O&G production growth and stable prices constrain revenues

GLOBAL O&G PRODUCTION

+2%

2012

147

86

61

2011

144

84

59

2010

141

83

58

2009

135

81

54

2008

138

83

55

Gas Oil

0

20

40

60

80

100

120 9

8

0

4

3

1

2

5

6

7

Trillion USDUSD/bbl

2012/13

6.1

2011

6.0

2010

4.2

2009

3.1

2008

5.5

RevenuesBrent Oil prices

2013

86

61

147


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COMPANIES AVERAGE RETURN ON CAPITAL EMPLOYED1

1 Average values from a group of 5 major, 12 NOCs and 22 Independent companies.Source: Evaluate Energy; SBC analysis

% %

Companies margins and returns have been declining

COMPANIES OPERATING MARGIN AS % OF GROSS REVENUE1

0

5

10

15

20

25

30

2006 2007 2008 2009 2010 2011 2012

NOC IndependentMajor

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011 2012


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MAJORS CAPEX ANNOUNCEMENTS

1 Net cash used in operating, investing and financing activities.2 IHS Herold selection includes 312 O&G companies.3 Organic CAPEX (excludes acquisitions).

Source: IHS Herold; Companies 2013 Financial Reports; Quartz; SBC analysis

Bn USD

2013 year-end and 2014 plan

The industry cash position is decreasing and most Majors have reduced their CAPEX

CUMULATIVE INCREASE/DECREASE IN CASH & EQUIVALENT1 OF O&G COMPANIES2

-3,000

-500

-1,000

0

-2,500

-2,000

-1,500

2000 20122002 2004 2006 2008 2010

2013 2014E Inc./Dec.

44.3 37 -16%

41.2 39.2 -5%

24.63 24-253 Flat

283 263 -7%

Five O&G Majors are expected to spend $155 Bn in 2014, 8% less than last year


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INDUSTRY PERFORMANCE LEVERS

Source: SBC analysis

Economics and talent are at the top of industrys challenges

Operations excellence

Mega-projects management

Talent management

Local content development

Supply chain optimization

Safely maximizing production and optimizing OPEX

Ensuring capital discipline

Managing the shortage of experienced staff while adapting to the changes in the industrys demography

Promoting long term industry development in the countries hosting oil & gas operations

Increasing collaboration between operators and service providers throughout the value chain


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Source: DECC, Oil & Gas UK, IHS EDIN, SBC analysis

Many mature basins, like the UK North Sea, face production decline and increased operating costs

UKNS O&G PRODUCTIONMMboed

2.9

1.60.9

-6%

-11%

1.6

2012

0.6

2007

2.8

1.2

1999

4.5

1.6 Oil

Gas

bn, /boe

UNIT AND TOTAL OPERATING COSTS (NOMINAL)

bn (bars)

Production decline has accelerated Unit operating costs have sharply risen

/ boe (line)

0

2

4

6

8

10

12

14

7

8

5

4

9

1

6

3

2

0

20052003 20072001 20112009

+75%

Unit Operating costs

Operating Costs



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NORTH SEA PRODUCTION EFFICIENCY

Source: 4 years over 180,000 boed North Sea production (3 companies); DECC; SBC analysis

%

Production efficiency has been declining consistently and causes are easy to manage individually

Other surface equipment and facilities

Metering

Injection

Artificial lift systems

Pumps

TAR overrun

Instrumentation & control systems

Flowlines/ pipelines/ risers/ exports

Safety systems

Wellhead & subsea equipment

Power generation & distribution

Wells

Tanks/ vessels

Compression train

MAIN SOURCES OF LOSSESPercentage of Maximum Production Potential

55%

60%

65%

70%

75%

80%

85%

121110090807060504

Benchmark

Efficiency is not correlated with

facility age



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1 Projects with budget >$1bn (real 2011$).Source: IHS Upstream database, February 2012; Rystad Energy; US PPI

More companies manage Megaprojects, with delays and overruns increasing

E&P COMPANIES SPENDING >$5BN (2011 US$) CAPEX PER YEAR AND MEGA-PROJECTS1

DELAYS

34

6 5

79

13

16

17 1816

15

17

2012

37

7

13

2011

33

7

11

2010

32

7

9

2009

31

7

6

2008

31

7

7

2007

27

7

4

2006

23

7

3

2005

18

7

2

2004

15

7

1

2003

10

5

2002

11

5

2001

9

5

2000

7

4

# of companies; years of delay

Majors

NOCs

Independents

0.0

0.5

1.0

1.5

2.0

2.5

Ye

ars o

f de

lay

Average delay

Mg-proj. management


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Source: SBC Capital Projects Survey 2013; Post-Survey Interview notes

Main project challenges are internal to Oil & Gas companies

MAIN CHALLENGES FACED BY COMPANYNormalized % of Survey replies

6%8%

8%

Governance

Supply chain

20%28%

30%

People & organisation

.Safety & environmentTechnical & economic challenges

External stakeholders Talent availability / skill

pool management

Team alignment

Availability & quality:

Critical equipment

Engineering service

Contracting and Procurement

Assurance & risk management

Framing, decision-making and FEL

Aggressive targets

Internal to O&G companies

Mg-proj. management


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PTPS PER AGE BRACKET ON A GLOBAL BASIS

Note: Excluding China and oilfield services companiesRetirement rate: 20% for 55y-59y, 50% for 60y-64y, 70% for 65y+Recruitment targeted inputted in the demographic profiles as follows: 40% in 20y-24y, 60% in 25y-29yAttrition at 2% (people leaving the E&P industry)

Source: SBC O&G HR Benchmark 2013

Percentage of PTPs

Changes on industry demography lead to three distinct challenges

Talent management


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0 15000100005000

0

0

0 14000100005000 0 470019000

R = 0.95

R = 0.96

EXPLORE

G&G Eng.

PTPS BY DISCIPLINE VS. RESERVES AND OPERATED PRODUCTION1

2012, Numbers of PTPs, Reserves in mmboe, Operated Production in kboe/d

For mid-career PTPs, it is all about productivity

Oil-weighted2

Gas-weighted

DEVELOP PRODUCE

2P reserves (mmboe) 1P reserves (mmboe) Operated Production (kboe/d)

Drilling&

Completion Eng.

Reservoir&

Production Eng.

# of PTPs

Product

effect

R = 0.95

Note: 1 For confidentiality reason, company data and numbers of PTPs have been modified to mask sensitive information2 Oil-weighted: oil production >50% of total production

Source: SBC O&G HR Benchmark 2013

n2

n1

n3

Talent management


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EDUCATION AND TRAINING TIMELINE

Source: SBC analysis

Cumulative number of people (FTE)

Industry can forecast future employment potential and education and local content requirements

EXAMPLE: JOB CREATION IN A SUB-SAHARAN AFRICAN COUNTRY

Mechanical

Engineers

Mechanical

Technicians

Driver heavy duty

Machine Operator

Operators

Electrical

Civil Craftsmen

Welders pipe

Craftsmen

Lead time to certify/train to work in industry Formal education time when needs to be supported

Time to start workTime to start recruitment for training/certification

Years

2030202520202015

Operators

Craftsmen

Technicians

Engineers

Today

ILLUSTRATIVE


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Transform itself once again

New technology enabling new reserves

These reserves need development

Change the way they do business from within

Enhance operations

Staff productivity

Governance practices

Operator-supplier relations

It may sound like a big task, but the industry has conquered more complex obstacles

Will surmount these too

Summary

Transforming Reserves into Production:The Challenges of Effective DeliveryDiscussion pointsThe industry has stopped the decline in oil and gas discoveries, and Asia is not an exception.Upstream expenditures have grown consistentlyLimited O&G production growth and stable prices constrain revenuesThe industry cash position is decreasing and most Majors have reduced their CAPEXMany mature basins, like the UK North Sea, face production decline and increased operating costsMore companies manage Megaprojects, with delays and overruns increasingChanges on industry demography lead to three distinct challenges Industry can forecast future employment potential and education and local content requirements

01 Arnold Volkenborn - Asia Oil Week - 26 Sep 2014

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