THE FUTURE OF NORTH SEA OIL & GAS OPTIMISING RECOVERY OF RESERVES IN THE UKCS 4 DECEMBER 2014 Thorsten Querfurt Waldorf Hilton, London ENERGY & UTILITIES © Oliver Wyman | LON-UTL93401-024 Would I invest in the UKCS © Oliver Wyman | LON-UTL93401-024 1 Dropping oil price is adding pressure to an already underperforming basin PRICES -30% FRAGMENTATION 300 fields AGE 30+ years HEADCOUNT ~10–15% TAXES Variable ASSET SALES 40% Source: FT.com Market Data © Oliver Wyman | LON-UTL93401-024 2 Finding costs are rising and reserves gap is narrowing, but finding and recovery efficiency compare well Exploration Developments Capital efficiency of the UKCS 30 Z $ cost per boe found 25 Cumulative reserves discovered and produced (BN boe) 55% Current believed potential from remaining reserves 70 UKCS +18% CAGR 50 50% 50% NCS GoM 24 BN boe stretch 60 20 Decommissioning % avg. oil recovery rate 80 GoM $38 UKCS $25 NCS $23 Production 12 BN boe min expectation 40 15 30 10 20 5 10 0 2004 0 2006 2008 2010 2012 2014 1965 1975 1985 1995 Discovered Source: OGUK, Econ. Report 2014 © Oliver Wyman | LON-UTL93401-024 Source: OGUK, Econ. Report 2014 2005 2015 UKCS Produced Source: UK: BP, NCS: Norway O&G Business Monitor Report 2013, GoM: RPSCA 3 Production levels and efficiency are declining Exploration Developments Production Production values & production efficiency on the UK Continental Shelf %, million boe Decommissioning Oil & Gas production UKCS vs. Norway 2005–13 (in 0,000s boe/day) -18% 90% 4.0 80% 3.5 70% 3.0 5,000 -52% 4350 4050 4,000 3550 3250 60% 2.5 50% 3,000 2500 2.0 40% 1.5 30% 2,000 1550 1.0 20% 1,000 Production efficiency (LHS) Production – million boepd (RHS) Source: OGUK Activity Survey 2014 © Oliver Wyman | LON-UTL93401-024 2013 2012 2011 2010 2009 2008 2007 0.0 2006 0% 2005 0.5 2004 10% 0 2005 2009 UKCS 2013 Norway Source: UBS “What does the future hold for the North Sea”, 2014 4 Managing operating costs remains a challenge Major cost drivers Lifting cost 2010–13 (in $ per boe) 30 UKCS +24% CAGR • Age / production efficiency • Ownership & operator density 22 20 • Scale • Complexity 27 GoM +5% CAGR 18 14 12 13 14 12 10 • Oil field inflation 0 2010 2011 2012 2013 Sources: UKCS: UBS “What does the future hold for the North Sea”, 2014. GoM: Ernst & Young US Upstream: Costs, prices & the unconventional treadmill, Wood Mackenzie, US Bureau of Ocean Energy Management Ranking Operator by Oil 2014, Bloomberg © Oliver Wyman | LON-UTL93401-024 5 Future liabilities are ever increasing Exploration Developments Production Decommissioning Historic estimates of the total cumulative cost to decommission North Sea (UK) assets ($BN) 60 2014 50 40 2011 30 2008 20 2005 10 0 2010 2020 2030 2040 2050 2060 Source: DECC, Wood Review, 2014 OGUK Activity Survey (for 2014 data) © Oliver Wyman | LON-UTL93401-024 6 There remains a sizeable opportunity, albeit difficult to access There is plenty left: 12–24 BN barrels of oil and gas remain Reserves (billions boe) 25 20 Yet to find 15 Potential additional resources 10 New field reserves Brownfield reserves 5 Existing fields and sanctioned investments 0 Source: DECC, Oil & Gas UK © Oliver Wyman | LON-UTL93401-024 7 The cost of doing business in the North Sea must come down There are three cost levers Tax regime • Appropriate incentives (esp. Exploration) • Reliable, stable operations • Risk/return balance 2 Lowering operating costs • Operationally practicable • Materials, supply chain, manpower costs • Maintain safety! 3 New industry model – redefine the nature of how the industry works to reduce costs © Oliver Wyman | LON-UTL93401-024 • Collaboration, more positive interactions between operators and owners • Access to infrastructure, data, technology, decommissioning… • Savings (e.g. legal fees) High 3. New industry model Level of behavioural change needed 1 1. Tax regime 2. Lowering operating costs Low Low Level of control/influence High 8 Lowering operating costs Creating stable operations requires balance across multiple areas Asset strategy and planning Process efficiency Organisational capability COST EFFICIENT, STABLE OEPRATIONS Operational risk Supply chain management © Oliver Wyman | LON-UTL93401-024 9 New Industry Model Key recommendations from the Wood Review Effective stewardship and regulation MER UK 2 1 Wood Review 4 Sector strategies © Oliver Wyman | LON-UTL93401-024 3 Additional powers 10 New Industry Model The biggest challenge ahead is a change in behaviours • Change in behaviours • Requires significant shift in how we are used to doing business – a new operating model • Potential barriers to collaboration • How to define “economic” for all players in the value chain? • Strong and credible OGA • Stakeholder management © Oliver Wyman | LON-UTL93401-024 11 Conclusion – “Would I invest in the UKCS?” • Crisis situation • Resource base still considerable • Radical change is needed, in particular in how the industry behaves and operates New operating model to lower cost of doing business Operational excellence Supportive Tax system Oil Price © Oliver Wyman | LON-UTL93401-024 12
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