Its all in the Economics!

Presented by

Roger Burrows

La Garde Associates LLP

What is a marginal field?

Some statistics– 1 to 1000 mmbbls can all be marginal– Discoveries in UK 1996-1999 averaged 29 mmbbls– 315 Undeveloped Discoveries in UK as at beginning

2000

Economically – There are good fields

– no serious questions about development decision– There are bad fields

– forget it for a few years

– And there are marginal fieldsSources, UKOOA, PILOT and Wood Mackenzie

What drives the economics of a project?

Technology– Can give productivity– Can provide new and low cost engineering solutions

– Covered elsewhere today– and tomorrow!

Oil Price

Reservoir

Oil Prices and Marginal Fields

Rule 1– Do not believe today’s oil price

Rule 2– Do not believe your company’s economic assumptions

Rule 3– Believe the market

Rule 4– Be patient

Rule 1 - Do not believe today’s oil prices

Sources Platts, UKOOA and the BBC

2001 Brent Oil Prices $/bbl

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Worries over economic slowdown and oversupply

Opec cuts production coupled with cold snap in US Iraq stops exports raising

under supply worries

Fear of oversupply coupled with economic slowdown

Supply fears following the events of September 11

Fears of the demand impact of recession coupled with oversupply

Rule 2 - Do not believe your assumptions

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Source Wood Mackenzie

Rule 2 - Do not believe your assumptions

Remember what they are for– Budgets– Medium to Long Term Planning– Ensuring comparability for decisions– For projects that have an economic life “through the

cycle”– e.g. exploration, larger fields

– typical “economic” lives of 5-15 years

Not appropriate for the small “marginal” field– oil price cycle is not relevant to most Marginal Projects

– economic life is too short

Rule 3 - Believe the market

Offer management the ability to lock in the oil price– you can “guarantee” them a return if they are willing to

lock in– (if they do not wish to lock in

– implies they believe the market will go higher!)

So they should still be willing to sanction

Rule 4 - Be Patient

If the available price is not good enough– be patient

– put the project on the shelf and wait….

A Small but Marginal 10 mmbbl Field

Project is ready to go – “happy” with technology and reserves– development plan written– first oil 18 months from sanction

Project Manager– Wants his project sanctioned!

Project needs $18+ to deliver required return – Economic Life only 2 years from first oil

Forward Oil Price Trends

Timing is everything

Early 1999

Our project is not economic

We can only lock in ca $15/bbl

Spot Prices

2004 prices

Timing is everything

2005 prices

$20

$30

Spot Prices

Late 2000

Our project generates a high return

We can lock in $20 to $25/bbl

Timing is everything

2005 prices

$20

$30 Spot Prices

Late 2001

Delay has lost us the super returns but..

Our project can still give a good return

We can still lock-in ca $20bbl

Reservoir

Economists worry about Reservoir Engineers– especially what they tell us about the reservoir!

Reality is – like price, reserves are not guaranteed

– we can lock in the price– but we cannot lock in the reserves

Our Marginal 10 mmbbl Field

Not actually a 10 mmbbl field

It has a range of Reserves– Say 3 to 15 mmbbls– Risk of losing money significant if we end up at lower end

of reserve range – even after locking in high prices!

Coping with Reserves Uncertainty

Some thoughts– Each project has a project manager– His/Her objective for field development decisions

– give management a return– reduce risk

– studies, reprocessing seismic, more studies– costs time, effort and money– all value destructive

– but point forward economics still look good!!!

For developments we tend to become risk averse

Not appropriate for small discoveries

Exploration Mindset

Drill a portfolio of opportunities– Some work– Most don’t!

Accept the possibility of loss – because it is balanced by value derived from successes

Development Mindset

Develop a portfolio of opportunities– Most work– Some don’t

Accept the possibility of loss – because it is balanced by value derived from successes

Think Portfolio

Most companies have several marginal discoveries

Should consider small discoveries more like exploration– Treat them like an exploration portfolio– Accept uncertainty

– Don’t work them to death and destroy value – Each project sanctioned is just part of your portfolio

– If it fails it is NOT a disaster– Some will work better then expected

Spreading Risk – improves chance of obtaining required return overall

In Summary

Do not be ruled by oil price uncertainty– Be patient

– and overrule it by locking in when advantageous

Think Portfolio– Do not overwork the problem– Spread the risk and improve the certainty of return

Tel +44 1732 352591