Oil & Gas UK London Breakfast Briefing – Cost Efficiency

Tuesday 19 May 2015

Introduction and Welcome

Stephen Marcos Jones

Business Development Director

Oil & Gas UK

Declining efficiency and rising costs threaten the UKCS

• Costs per barrel have escalated 20% pa over the last decade with declining production and rising costs

• Such cost escalation was not sustainable at $110 per barrel – and even less so today

• At $55 54% of fields on the UKCS are break-even

3

Recent announcements affecting UK

• Over 5,000 UK jobs lost and 1100 at risk – 32 Companies

• 40,000 global jobs lost – Operators and Tier 1 Contractors

- (100,000 global jobs estimated by Douglas-Westwood)

• £1.9bn reduction in spend by UK Operators

• £20.5bn cuts globally by Majors will impact UK

• Offshore rotas – move to 3:3 by 6 UK Operators

• UK Contractor Rate cuts 10 - 20%

• UK staff salary cut -5%

• 10 rigs stacked in the UK

• 34 rigs to be scrapped globally

• UK projects being stalled

• Company mergers

Simon Brew

Consulting Strategy and Operations Partner

Deloitte

Gaining Ground in Volatile Times

Lessons from Leaders

Oil & Gas Breakfast Briefing

19th May 2015

© Deloitte LLP and affiliated entities.

The agenda for today’s session:

Topic

Volatility and Uncertainty

Setting the Right Ambition

Lesson Learned – What We See

Lessons Learned – What they Say

Summary

© Deloitte LLP and affiliated entities.

Volatility and Uncertainty: What is your view on recovery………..?

• Analysts view – liking organisations who have:

• Cost reduction stories, coupled with;

• Disciplined capital spend and;

• A strategy to drive long term value

• There is no consensus on the shape of the recovery:

• There are many divergent views on recovery strategy and actions

• What lessons can be drawn from other industries who won in a period of

crisis?

8

V, W, or L ?

© Deloitte LLP and affiliated entities.

Setting the right cost ambition is dependant on financial and

competitive necessity

9

• Asset / service /

geographic restructure

• M&A + network

integration

• Operating Model

• Activity reduction

• Consolidation

• Organisation design

• Digital / Technology

• Spend reduction

• Tactical process

improvements

• Cost avoidance

Imp

rove

me

nt (%

)

Category

12 – 36 months5 – 18 months3 – 9 months

TransformEfficiencyCost Out

Practical Observations:

• At least 30% more £s of initiatives need to be identified to achieve overall target saving

• Benefits are normally overstated, implementation costs are understated (typically 75p to 125p per £ of

benefit)

• A raw set of initiatives will typically contain up to 25% £ double counts / errors

• Allocate run rate targets, not target reductions

• Clear consistent approach for known difficult areas where executive and budgetary responsibility

may be shared

• Underpin expectations with a common language and approach i.e. Lean

Timing

10-15 %

15-25 %

25-40 %

© Deloitte LLP and affiliated entities.

Current Issues Industries with History

• Rapid market price change

• Uncompetitive assets

• Increased production costs

• Increasing complexity

• Significant volume drops

• Change in long term market

outlook……

These are not unique challenges in your own industry nor in others

10

© Deloitte LLP and affiliated entities.

What we see: Leaders used five fundamental principles to deliver

success

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1. Sober Optimism

• Ability to describe a

credible future to

stakeholders

• Recognition of current

circumstances

2. High Definition

View

• Take a high definition

view of the market and

own performance

• Identification of options

beyond the enterprise

3. The Profitable Core

• Is the existing operating

model working in the

current condition?

• Where is the profitable

core of the business and

where is value lost?

4. Creating Options

• Practical options to face

the challenges of volatility

• Options for the entity, the

network and the

stakeholders

• First movers get the

advantage

5. Urgency to Act

• Creating an environment

of action

• 360 degree engagement

• Use the right tools for the

job

© Deloitte LLP and affiliated entities.

What they say: Leaders in their own words

Breakthrough –

“ We have to

demonstrate

commitment”

Tipping points –

“Tackling the sacred

cows”

Change of View –

“Re-organise the

industry, not just

yourself”

Aligning actions and

results to outcomes –

“It’s consumption AND

unit cost”

Alignment –

“Vision, accountability

and ownership”

Engagement -

“Everyone is in”

New ways of

working–

“Collaborate [and mean

it]”

Culture –

“Medium and long term

ambitions”

Initiative mix –

“Profit through

portfolio”

© Deloitte LLP and affiliated entities.

Summary

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Ensure alignment to your strategy

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Act now4

Industry changes will result in new

opportunities and risks21

Stick to the script3

Line Kaldestad

Logistics Manager

Statoil Production (U.K.) Limited

Lean logistics in StatoilBy Line Kaldestad

Logistics Manager Statoil Petroleum U.K. 2015-04-24Classification: Internal

where are we heading?

competitiveness

smarter solutions

right solution first time

productivity

ne

w s

tan

da

rds

commercial

intensity

efficiency

value for money

Hammerfest

Sandnessjøen

Brønnøysund

Bergen

Mongstad

Kristiansund

Florø

Ågotnes

Stavanger

Heli

Supply

Trondheim

Total cost supply MGBP 70

Supply Bases 7

Tonnage 600.000

Bulk: 1.000.000

Total cost transportation MGBP 40

# calls 160.000

>90% Bring Cargo

Vessel cost total MGBP 350

Platform Supply Vessels 20 - 27

Emergency Response Vessels 20

Anchor handler Vessels 4-8

Total cost air transport MGBP 170

Passengers 400.000

Terminals 6

Helicopters 19 (+ Search and Rescue)

Logistics on NCS– a huge logistics cooperation…

Leaner logistics - Reducing crew-change capacity

2015-04-2418 Classification: Internal

Consequences

POB-reduction – reduce capacity

Efficiency measures

• Start earlier – later evenings

• Less back-up capacity

• Lower service level

• Dynamic allocation of resources

on NCS

• Cooperation with other operators

– cost sharing

And… renegotiating contracts

Leaner logistics – reducing PSV capacity

2015-04-2419 Classification: Internal

Consequences

Tonnage reduction and less

exploration – remove capacity

Efficiency measures

• Changed sailing pattern – 2

main supply bases in the south

• Reducing calls per installation

• Strict prioritisation concerning

requests outside plan

And… renegotiating contracts

Moving from 44 to 24 vessels

Leaner logistics – Area emergency preparedness

ConsequencesEnsure lean, but still robust EP -

arrangements

Efficiency measures

• Include Aasta Hansteen in AEP -

Halten

• Merge Tampen/TrollOSE AEP

• Implement a new AEP south

alongside Johan Sverdrup

• Ensure members and cost

sharing among all potential

operators

21

BNOK

8

2013

BNOK

6

2016

LLP – Lean

Logistics Program

Attacking the cost base through a change program

and the lean methodology

www.statoil.com

2015-04-2423 Classification: Internal

John Catlow

Cost Efficiency Project Manager

TOTAL E&P UK Limited

© Laurent Pascal/Total

COST EFFICIENCY IN TOTAL E&P UKOil & Gas UK Breakfast Briefing

London : 19 May 2015

TOTAL E&P UK LIMITED ...

Cost Efficiency in TOTAL E&P UK : O&G UK London Breakfast Briefing : 19 May 2015 26

● 3 production hubs

● 2015 key figures (100% operated) :

- ~ 180 boe/d production (~70% gas)

- ~ £2 Bn expenditure

● 1,000+ personnel

● major projects in execution :

- Laggan / Tormore / Shetland Gas Plant

- Edradour / Glenlivet

● rigs & wells to drill :

- 2 platform rigs ( 1)

- 6 mobile rigs ( 4)

- 10 development wells

- 12 workovers

- 1 exploration well

West of

Shetland(start-up 2015)

Northern

North Sea(Nov 1987)

Central

Graben Area(Mar 2001)

TOTAL COST EFFICIENCY PROJECT : “4C&D” ...

27

Change Culture,

Compete on Costs,

& Deliver

Cost Efficiency in TOTAL E&P UK : O&G UK London Breakfast Briefing : 19 May 2015

THE 4C&D PROJECT ...

28

● launched in March 2014 when oil > 100 $/bbl

● has a 3 year execution phase 2015 - 2017

● Group-wide scope : corporate, exploration & production,

refining & chemicals, & marketing & services

● exploration & production scope includes HQ functions plus

over 50 affiliates

● includes in scope all operating, capital & exploration

expenditure, whether TOTAL operated or operated by

others

● utilises common methodology & tools

● targets sustainable culture change & reduction in cost

Cost Efficiency in TOTAL E&P UK : O&G UK London Breakfast Briefing : 19 May 2015

STRONG TOTAL RESPONSE TO 2015 ENVIRONMENT ...

29

● ~ $4 Bn cash impact from cost reduction initiatives :

- CAPITAL INVESTMENT reduced from 26.4 B$ to 23-24 B$

(~ 3 B$ upstream)

- OPERATING COST savings of 1.2 B$ (~ 0.8 B$ upstream)

- EXPLORATION budget reduced by 30% to 1.9 B$

● ~ 1.5 B$ additional cash flow from 8 upstream start-ups

● ~ 3 B$ incremental net asset sales

... 8 B$ CASH IMPACT REDUCES BREAKEVEN BY 40 $/B

Cost Efficiency in TOTAL E&P UK : O&G UK London Breakfast Briefing : 19 May 2015

STRONG FOCUS ON ...

30

● SAFETY : always our “priority of priorities”

● DELIVERY : projects on time & budget

● COST : increasing savings & capital discipline

● CASH : new start-ups & dynamic portfolio management

... TO INCREASE PROFITABILITY

Cost Efficiency in TOTAL E&P UK : O&G UK London Breakfast Briefing : 19 May 2015

ROADMAPPING ...

31

● project comprises a number of discreet action plans – “roadmaps”

– currently numbering 77 for TEPUK

● roadmap potential for savings range from <1 M$ to >10 M$ 100%

● roadmaps cover key areas of activity :

- well construction & maintenance

- field operations

- geosciences

- contracts & procurement

- projects

- logistics

- information services

- structure (organisation, finance, facilities management etc)

Cost Efficiency in TOTAL E&P UK : O&G UK London Breakfast Briefing : 19 May 2015

SOME EXAMPLES ...

32

well construction & maintenance

field

operations

geosciences

contracts &

procurement

implement simpler, less

complex well design

implement ‘Lean’ & ‘Six

Sigma’ process

improvement principles

optimise seismic

acquisition & interpretation

programmes

review & renegotiate

contracts with contractors

& suppliers

Cost Efficiency in TOTAL E&P UK : O&G UK London Breakfast Briefing : 19 May 2015

challenge design

requirements & implement

“good enough” solutions

logistics

information

services

structure

projects

minimise vessel fuel

consumption through

improved planning

optimise spend on support

desk, telecommunications

& printing

actively manage staff &

contractor benefits

SUPPLY CHAIN ACTIONS ...

33

● creation of ‘Key Account Negotiator’ role at Group level for 20+ strategic

world-wide contractors/suppliers (representing ~50% of Group spend)

● enhance ‘Category Management’ process to apply sourcing strategies in

~ 20 major market segments

● review &, if appropriate, renegotiation of ~150 TEPUK contracts

representing ~75% of spend

● enhance contract management through training

● stock optimisation & reduction

● supply chain efficiency review & improvement

● strong support for O&G UK initiatives :

- rig time offered for 2015 & 2016

- participating in spares sharing

- investigating potential for wider supply vessel sharing

- investigating potential for synergies during TARs at St Fergus

Cost Efficiency in TOTAL E&P UK : O&G UK London Breakfast Briefing : 19 May 2015

COMMUNICATION & CULTURE ...

34

● substantial effort being made to communicate “case for change” &

expectations with all stakeholders – particularly staff & supply chain

● strong participation by all sought :

- web-based ‘iSave’ tool implemented producing ~ 450 improvement

suggestions to date

- work-face “buy-in” during the first phase of ‘Lean’ very high

● good practice examples shared / communicated within TEPUK &

with other affiliates

● e-Learning support developed around cost awareness / behaviour

● training provision being updated & reinforced with competence

matrix to be established for all

● explicit objectives being set in annual appraisal process

Cost Efficiency in TOTAL E&P UK : O&G UK London Breakfast Briefing : 19 May 2015

FINALLY ...

35

● TOTAL has a strong, substantial, long term presence on the

UKCS, centred on 3 production hubs

● we must however adapt so as to be able run our business in a

sustainable & profitable manner over the longer term

● this is not just a short term reduction cutting exercise, the drive

to achieve cost efficiency is here to stay

● we will work with all our stakeholders to achieve this

Cost Efficiency in TOTAL E&P UK : O&G UK London Breakfast Briefing : 19 May 2015

Oil & Gas UK London Breakfast Briefing – Cost Efficiency

Tuesday 19 May 2015

Panel Discussion

Chaired by Stephen Marcos Jones, Oil & Gas UK

Our panellists are:

Simon Brew, Deloitte

Line Kaldestad, Statoil Production (U.K.) Limited

John Catlow, TOTAL E&P UK Limited

Speakers joined by:

John Pearson, Amec Foster Wheeler

Summary and Vote of Thanks

Stephen Marcos Jones

Business Development Director

Oil & Gas UK