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What has been astonishing has been the recent rebound in oil demand. The increase of 2.8million barrels per day in 2010 was the second highest in 30 years. Demand was not onlystrong in the emerging economies, but also in the US clearly demonstrating that demanddestruction was not permanent. The average demand increase in 2011 from the threeprincipal forecasting agencies is for a further 1.4 million barrels per day. While sparecapacity, almost exclusively concentrated in the Middle East OPEC countries is significantlyhigher than in 2006, it is not enough to absorb a rapid increase in demand and the rate atwhich new supply is added will decrease in the coming year as most of the large non-OPEC

j t ti d b t 2004 d 2008 t Oil i h tl bprojects sanctioned between 2004 and 2008 are now on-stream. Oil prices have recently begunto reflect a fear of supply shortage and increased attention to geopolitical events that coulddisrupt supply.US natural gas prices remain subdued with high levels of storage and the perception thatsupply is abundant and can be quickly increased. Following a 1.8% decrease in demand in2009, the EIA recently estimated a 5.4% increase in 2010 followed by a flat 2011 at 66.2 billioncubic feet per day. The 2010 increase is the largest year-on-year growth since 2007.

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Longer term, the 2010 IEA World Energy Outlook projects fossil fuels to remain dominant by2035 even if low carbon policies are implemented They also predict natural gas to show the2035 even if low carbon policies are implemented. They also predict natural gas to show thelargest increase in absolute terms by that time.To enable such growth in oil and gas supply, investment of some 450 billion dollars isestimated to be needed every year in upstream activity for the next 25 years. With the age ofeasy oil over, and the consequent higher costs of new supply, the challenges of matchingsupply and demand are not likely to decrease.

The International Energy Agency tells us that world energy demand will grow by some 40% by 2030. They also tell us that hydrocarbon fuels will continue to dominate the global energy mix with coal, oil and natural gas

l i l 80% f i d b hsupplying almost 80% of primary energy needs by the same year.

To enable such growth in oil and natural gas supplies, investment of some 350 billion dollars is estimated to be needed every year in upstream activity for the next twenty years. With the age of easy oil over, and the consequent higher costs of new supply, the challenges of matching supply and demand are not likely to decrease.

In addition to the Deepwater Triangle of the Gulf of Mexico, Brazil and West Africa and more mature offshore basins such as the North Sea, new offshore regions such as Greenland, Southeast Asia and the Caspian Sea are g palready characterizing the challenges of new supply. Across these and other areas the industry will be challenged by more remote operations, deeper waters, more difficult logistics, increasingly complex geological settings, and greater degrees of temperature and pressure.

As a result, we will face an increasingly harder task in turning resources into reserves, and reserves into production. At current oil prices, most most oil resources except possibly oils in arctic areas are economic—although I would add that the additional control and oversight that deepwater operations in general can now expect following the Gulf of Mexico accident will undoubtedly add cost.

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To illustrate the size of this task, you only have to look at future oil production forecasts. The IEA estimates that approximately half of the conventional oil production needed by the end of the next decade has yet to be developed or found. By 2030 that fraction may have increased to about two thirds.

In the last ten years, more than half of all new oil and gas reserves discovered worldwide were discovered offshore. Partly as a result, offshore oil production is expected to be supplying approximately one third of the world’s needs late in the next decade And withinsupplying approximately one third of the world s needs late in the next decade. And within that same period, deepwater production will increase steadily to about one third of offshore supply, corresponding to approximately 10% of global oil supply. Offshore activities therefore—and deepwater operations in particular—merit significant attention.

Under these circumstances, the challenges to which technology must respond are two-fold. First, offshore operating costs are high and we will need technology that can mitigate both technical and economic risk. Second, the complexities of deepwater operations require sophisticated measurement and modeling to ensure that the right well is drilled, and the right information collected. This is becoming more and more a matter of integration across previously discrete technologies.

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Manifests into growth of nearly 40% over the period on the left. The graph on the right shows the D/W additions. 2011 deepwater growth in the mid teens

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maintaining production and bringing new reserveson line would require an increase in drilling intensity The emphasis is not just on the numberon line would require an increase in drilling intensity. The emphasis is not just on the numberof wells to be drilled, but also on the increasing complexity and cost be it on expensivedeepwater wells or on the technology required to make unconventional hydrocarbonseconomic through the introduction of practices such as factory drilling. In factory drilling, ourresponse has been through IPM where the technology applied in managing large drillingcampaigns has made a huge difference. Last week we celebrated the 5,000th well drilled byIPM, a figure that includes wells in conditions varying from simple land to deepwater offshoreat all ranges of pressure and temperature, and in all sorts of geological conditions. However,the biggest prize of improved drilling performance comes from complex offshore or extended reach

ienvironments.

Given this context, in addition to investment in new technology, it is becoming increasinglyapparent that the old adage of the oil industry holds truer than ever. If you want to find oil youhave to drill. And if you want to produce unconventional gases or oils it is even truer.I have already referred at length to the increase in exploration and development offshore andin deepwater. At the same time differing hydrocarbon types require greater degrees of drillingtechnology—both to improve the reliability of operations and to reduce overall finding anddevelopment costs.p

Current & expected financial problems, constraints & trends (1-2 slides)Meeting the demand for services?

If we accept that Operators need to spend $350B each year to meet the world’s energy demands and the complexity of wells continues to increase then the biggest Financial problem or constraint facing the service industry could simply be the availability of capital to meet the needed investment. The Drilling Services industry has tripled in the first decade of this century and could possibly tripleThe Drilling Services industry has tripled in the first decade of this century and could possibly triple again in just the next 5 years.

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Nearly 200 projects worldwide have budgets in excess of $1B.

The reliability of technology, as well as the operating efficiency in project planning andexecution, and the regulatory consequences of Macondo, will add a new dimension to offshoreoperations in three areas—regulation, technology and capability. Stricter standards ofregulation will require much improved process from the service industry. Technology will bedeveloped to improve both safety as well as operational performance and finally capabilitydeveloped to improve both safety as well as operational performance and finally capabilitywill need to be managed through improved processes to demonstrate competency withmanagement systems ensuring effective control as well as new behaviour.

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Seismic industry working to mitigate the challenges through:-Industry support for scientifically based Cetacean studies in active and frontier basins-Cetacean mitigation technology being incorporated into seismic vessels (passive acoustic monitoring / marine mammal observers onboard)-Continued investment into improved Cetacean mitigation technology

Challenges to Environmental Assessments in Lease Sales & Exploration Plans-It will take time for BOEMRE and the industry find a common ground withIt will take time for BOEMRE and the industry find a common ground with Environmentalists

Clarity in permitting requirements-Operators are still struggling with BOEMRE requirements-People and Equipment remain idle and/or deployed globally

Reduced Operational Efficiency-Some indications are that BOP testing alone could add 15% to 20% to Drilling Time-Depth Curves-Requires the Service industry to have that many more assets

Potential contraction in customer base-If we move toward a GoM with only IOC’s, the business rigs will be greatly reduced and willIf we move toward a GoM with only IOC s, the business rigs will be greatly reduced and will look more like a remote basin

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Integrated Optimization

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Another important initiative has been the continued digitization of our operations and the deployment of a l b l k f O i S C (OSC ) F i i i l i i 2004 i h N h S dglobal network of Operation Support Centers (OSCs). From initial experiments in 2004 in the North Sea and

the Gulf of Mexico, the OSC initiative has evolved to an industrialized and global deployment of over 30 OSCs that provide 24x7 Performance Assurance for drilling operations world-wide.

Remote support and interventions from the experts in our OSCs have allowed us to deliver sustained reduction in NPT in drilling operations to our clients. The chart on the right shows Non-productive Rate (NPT Rate) in red over the last 5 quarters. In the back drop is shown the number of proactive interventions from the global network of OSCs. In green is shown the impact of OSC interventions in reducing NPT over the same period. The OSCs have also provided improved operational visibility, that in turn has helped accelerate organizational learning and process improvements. Recurring patterns of issues can be quickly identified and addressed at various levels of the organization such as local spot training, updates to regional guidelines or improvements to global standards and systems. This tightening of the improvement cycle is allowing us to reduce the variability in service quality - locally, regionally and globally.

I should also add that the OSC platform provides the optimal usage of our domain expertise to perform higher value real-time workflows such as real-time geo-mechanics, well placement, and drilling optimization. As we get into increasingly challenging drilling from a reservoir and operations perspective, the OSC will provide an effective operational platform to manage performance.

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For us in Schlumberger, our goal is to keep our pipeline of talent full so we don’t have gaps in experience levels or a lack of successors for our experienced people who retire. In Schlumberger we have over 4,700 PTPs and if you look at our age distribution our median age is 38 and we are not in danger of losing our core PTP population to retirement any time soon. What we need to make sure is that we don’t allow this bubble to shift over time with no young people coming up to replace this experience.

In order to maintain this pipeline of talent in Schlumberger and in the industry, our performance and commitment to our core HR processes including recruiting, developing, succession planning and knowledge transfer is critical. It takes continual focus and investment in these processes to ensure we continue to build a long-term sustainable pool of talent needed to support the industry.

Each of these processes brings unique challenges, and I would like to share with you some of the challenges we are facing as a company and as an industry.

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This summary slide addresses both “The Most Serious Threats to the Offshore Industry” question as well a summary of what has been presented.

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