oil: implications of a shifting paradigm -...

© Oliver Wyman

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March 2015

OIL: IMPLICATIONS OF A SHIFTING PARADIGM

Authors Dr. Bernhard Hartmann (Partner, Oliver Wyman) Saji Sam (Partner, Oliver Wyman) Bruno Sousa (Principal, Oliver Wyman) Floris Ansingh (Former CEO Royal Dutch Shell KSA; Advisor, Oliver Wyman)

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2 © Oliver Wyman 2

About the Authors

Dr. Bernhard Hartmann Partner, Head of Energy practice

Saji Sam Partner, Energy

• 25+ years of experience with Oil & Gas, utilities and manufacturing industries across the Asia, Europe and the Middle East region

• Expertise in strategy development, operations improvement, procurement ,and localization

• 18+ years of experience with Oil & Gas E&P and Downstream manufacturing industries

• Expertise in strategy development, organizational design, operations improvement and localization

• 8 years prior leadership roles with Schlumberger

Email: [email protected]

Bruno Sousa Principal, Energy

• 11+ years of experience with Oil & Gas, Petrochemicals, and Utilities industries across Europe, South America, and the Middle East

• Expertise in strategy development, organizational design, performance management, and localization

Floris Ansingh Senior Advisor

• 35+ years of experience with Royal Dutch Shell, 10 years as CEO of Shell in Saudi Arabia

• Expertise in government negotiations, stakeholder management, and strategic positioning plan execution




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Contributors

Anton Hunsucker Consultant

• Master’s degree in Financial Economics from Erasmus University Rotterdam

• Bachelor’s degree in Computer Science, Leiden University

• Experience in Risk, Banking and Public Sector consulting work across Europe, GCC and Africa

Tobias Siebold Consultant

• Master’s in Management from ESCP Paris

• Bachelor’s degree in Mechanical Engineering from Germany

• Experience in Aviation Industry & Consulting in Malaysia, Germany, London & Dubai

Ismail Badrawi Consultant

• B.S. in Finance from the American University in Cairo

• Masters degree in Strategic Management from HEC Paris

• Consulting experience in public sector developing a comprehensive strategy and vision, and supporting a sector-wide restructuring initiative

Ali Abou Haidar Consultant

• B.S. in Mathematics and a Bachelor of Business Administration from the American University of Beirut

• Has experience in the energy and communications, media and technology practices focusing on research, benchmarks and modelling

Keric Morris Partner, Energy

• 20+ years of corporate and consulting experience in Oil and Gas, Utilities and Rail

• Expertise in strategy development, operational excellence, HSE / risk management

• Master’s Degree in Manufacturing Engineering from Cambridge University

Nic Singleton Manager, Energy

• 10+ years of experience with leading Oil & Gas institutions

• Specializes in upstream strategy and operations, and leads Oliver Wyman’s decommissioning thinking

• B.S. in Manuf. Engineering from Warwick University & Masters in Computing from Imperial College

Fergus MacLeod Senior Advisor

• 20+ years of experience in the Oil and Gas industry

• Head of Group Strategy & Planning, BP plc, reporting to CEO and board of directors Head of Group Investor Relations, BP plc

• Expertise in strategy, planning, communications, and investment in O&G

Roland Rechtsteiner Partner, Energy

• 15+ years of experience in O&G and consulting

• Global leader of the O&G and Risk & Trading Practice at OW

• Member of the Global Energy Leaders’ Summit of the World Energy Council

• Expertise in Strategy, energy mix planning, M&A and risk management

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4 © Oliver Wyman 4

Table of Contents

Executive Summary

Situation of Oil Markets

Implications of a Shifting Paradigm

Actions for Oil Industry Stakeholders

Conclusions

Oliver Wyman Energy Practice

Section 1

Section 2

Section 3

Section 4

Section 5

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Executive Summary

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6 © Oliver Wyman 6

In the last 5 decades oil price disruptions were mainly driven by political factors, while in the future supply-demand fundamentals gain importance

Oil price evolution In US$ per barrel, 1970-20151

1. 1970-1983 Arabian Light in Ras Tanura; 1984-2015 Brent 2. Based on 2014 US$ Source: BP, Bloomberg, US Energy Market Emergency Act of 2008, Oliver Wyman analysis

Real Nominal 2

Drivers

6 0

10

20

30

40

50

60

70

80

90

100

110

120

2015

2012

2008

2004

2000

1996

1992

1988

1984

1980

1976

1972

1968

• Demand slowdown • US Unconventional • Iraqi resurgence • Fight for market share

1 2 4

5

3

1 • Yom Kippur War 1973 • Iran revolution 1979 • Iraq-Iran war 1980+

2 • Economic slowdown • KSA links oil to spot market • Oil supply surplus

3

• Strong US & Asian Demand • Financial speculation • Iraqi Invasion ‘01 • Concept of peak oil

• Financial crisis ‘08 • Decreasing demand • Growing supply

4

Oil price disruptions – drivers and implications Non-exhaustive

6

5 • Returning demand ’11 - 12 • Geopolitical turmoil (e.g. Egypt,

Libya, Iraq, etc.)

Ø 35

Ø 54

Average historical real price per barrel of oil across major periods has ranged between $35 -$60

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The collapse of crude oil prices in 2014-15 can be mostly explained by a boom in unconventional oil in NA combined with lower demand growth for oil

Supply vs. demand growth % Growth pa 2013 - 2014

Demand growth

0.7%

1.4%

Supply growth

2.1%

0.6%

2014 2013

Source: IMF; IEA; EIA; World Bank; Oliver Wyman analysis

Market share

• OPEC led by KSA holding production rate defending market share

Storage and trading

• Unprecedented growth in global storage • High oil inventories buffers production cuts • Spare storage capacity can absorb surplus for

another 6-12 months

Capital

• Reduced cycle-time between capital deployment and production in unconventional

• Liquidity and availability of capital • Perceived price upside boosts investments and

supply side expectations

Hedging

• Oil producers hedged at higher prices than spot price fall in oil

• Producers able to continue selectively develop plays until their hedging contracts reach maturity

Other drivers

31% of the incremental production in 2014 coming from US unconventional oil

Supply • World production grew by 1.8 million barrels per day • Record growth of non-OPEC output (+1.6 MBPD),

boosted by boom in NA unconventional oil production • Stable OPEC output despite falling prices Demand • Slowdown in demand growth driven by economic

slowdown in China, Europe and Japan

Drivers for price collapse in 2014-15

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Energy efficiency

• Improving fuel efficiencies in transportation • Energy efficiency in industries • Drive towards overall lower energy intensity

Economic growth

• Economic growth correlation with demand • Rise of middle class • Urbanization

Supply portfolio shift

Supply

Geopolitics

Energy independence

Demand

Substitution

• Unconventional resources • New frontiers (deep-water, sub-salt, arctic ) • Conversion to liquids (CTL, GTL)

• Sanctions on producers (Iran, Russia) • Political stability in Iraq, Libya, Nigeria

• Energy independence of major demand centers

• Proliferation of shale development globally

• Electric cells, gas, hydrogen, biofuels in transportation

• Gas, renewables, nuclear substitution in Power

Major drivers impacting oil industry

Supply and demand factors are reshaping the global oil landscape – some may have the potential to become disruptive

Shale a “Quasi Swing Producer”?

Awakening of Sleeping Giants?

Regionalized Oil Markets?

Resurgence of Emerging Markets?

Environmental Renaissance?

Lower Energy Intensity?

4

5

6

1

2

3

Major drivers Potential Disrupters

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Unconventional development is a game changer for the global Oil & Gas markets and will act as a counter balance to OPEC swing production

Fast ramp-up through factory mode drilling

Relatively low level of capital outlay with limited E&P risk $

Large scale deployment of rigs and pad drilling to drill large number of wells

Large number of operators in a competitive environment adding to scale

Continuous cost and efficiency improvements

Fast production ramp down without shut-in taking advantage of high decline rates

Shale oil becomes a market driven counter balance for OPEC swing production

1

New innovative business model Potential for global roll out

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As conditions for shale development proliferates globally, it would decouple geographies towards regionalized oil markets in the long-term

Argentina

US

Venezuela

9

58

13

13

27

26

76

32

18

99

98

94

29

138

49

192

75

42

21

Algeria

122 6

South Africa

0 67

5

Brazil

Russia

Canada

Libya

Australia

Mexico

China

Access to cheap capital

Diversified base of market driven OFS industries

Innovation in technology and cost improvements

Availability of water in many basins

Entrepreneurial mindset

Well developed infrastructure

Mineral rights laws

Europe 13 81

Key factors contributing to unconventional boom in the US

Unconventional oil (total) 345 1241 Unconventional

gas (total) Potential for unconventional

Unconventional technical recoverable reserves and potential balanced geographic regions

9 18 Pakistan

India

Regions short of supply

Regionalized/ independent

2

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Political stability combined with attractive fiscal regimes for IOC participation could add significant low cost oil into the market in the long term

Oil production of select countries Million barrels per day

Theoretical production levels1 Million barrels per day

Oil proven reserves Billion barrels, 2013

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2014

20

13

2012

20

11

2010

20

09

2008

20

07

2006

20

05

2004

20

03

2002

20

01

1. Obtained by dividing reserves by the average reserves to production ratio of GCC countries (54.5) 2. Based on November 2014 Source: Oil & Gas journal, OPEC, EIA, Oliver Wyman analysis

Assuming an R/P ratio similar to the GCC, Iran, Iraq, and Libya could bring another 11 mbpd to the market – their low production cost would be competitive vis-à-vis other sources (e.g. DW or oil sands)

Libya Iran Iraq

157

150

48

Libya Iraq Iran

9.3

8.9

2.9

% of global reserves

5.1

2.4 0.6 1.8

7.5 3.4 4.2

7.9 2.8

Potential

2

3

Total incremental potential of 11 mbpd

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Any major political, economic, natural, technological disruption could throw the market into uncertain territory

Three price scenarios can be envisaged based on stakeholder behavior; the current “market driven” system could moderate into a “managed system”

Likely price regime Enablers

Price umbrella

• Super-OPEC including new producers

• Resource nationalism and tighter E&P fiscal regimes

• Slow carbon tax implementation

• Resurgence of economic growth

Managed systems

• Functional OPEC

• Renewed E&P fiscal regimes exploits cheap oil

• Moderate carbon tax roll out

• Alternates struggle economically with moderate regulatory support

Market driven

• Shale becomes market driven swing player

• Fight for market share

• Reformatory E&P fiscal regimes exploits cheap oil

• Tighter carbon reforms dampens demand growth

• Political stability brings large reserve bases to market

Scenario I

Scenario II

Scenario III

> $90

$60 - 90

< $60

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Governments, NOCs and IOCs who think longer term and act now to remain competitive will come out as the winners

Government NOC IOC

Actions that “winners” will take to remain competitive in the short, medium and long term

Withstand the storm

Survive the storm

Ride the storm

Short Term Implications Actions to stop the bleeding and prevent failure and loss of competitiveness in current “market driven” low price regime

Medium Term Implications Actions to remain competitive through a protracted low price regime in a “market driven” or “managed system”

Long Term Implications Actions to take advantage of market distress in order to come out a winner when cycle reverses in a “managed system” or “price umbrella” scenario

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Government NOC IOC

Withstand the storm

(short term)

Survive the storm

(medium term)

Ride the storm

(long term)

Cut discretionary non-value added expenditures

Reprioritize capital expenditure

Re-negotiate supplier contracts for favorable terms

Review and rationalize buybacks and dividend payouts

Realign energy policy to optimize resources and manage energy demand and efficiency

Localize supply industries to reduce imports and generate employment

Reform E&P fiscal regime to attract, transfer and retain capabilities

Review project portfolio to improve capital productivity and efficiency

Improve operational and supply chain efficiency

Grow and complement capabilities through acquisitions

Build local talent aligned to local industrial demand

Optimize human capital base and retain talent

Diversify export oriented industries

Expand, integrate and diversify along value chain

Regardless of where the oil price may head, there is a set of strategies that will enable players to remain competitive at low oil prices and come out as winners

Overriding strategies per key stakeholder

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Situation of Oil Markets Section 1

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16 © Oliver Wyman 16

An unexpected drop in the world’s most important commodity is generating significant turmoil for large producers

Selection of emerging perspectives in the media

Oil price - from decline to collapse

• "With no sign that Opec will do anything about over-production, it seems likely that we could well see further declines towards $40“ – BBC, 07Jan2015

• “Oil prices will reverse their recent gains as global crude inventories begin to increase again, with US crude likely to drop as far as $40 a barrel in the near-term” – Goldman Sachs, Reuters, 08March2015

Oil war – Saudi Arabia vs. US unconventionals producers

• “We are about to find out whether [US] shale producers, with their backs to the wall, can keep oil investment innovative and profitable”

– Alan Greenspan, FT, 19Feb2015

• “For years Saudi Arabia acted as a safety net in the market, but as prices fell the game changed” – Financial Times, 10March2015

• “The Saudis permitted a big surplus to grow and served notice on higher-cost rivals (Russia, Venezuela, US shale) that they would not prop up other people’s profit margins at the expense of their market share”

– The Economist Magazine, 21Feb2015

Russian economy Doomed?

• “Vladimir Putin has burnt a lot of bridges and there are some seriously big economic gorillas out to get him”

– Managing Director of a Swiss private bank, FT, 01March2015

• “It’s the biggest crisis since the collapse of the Soviet Union” – Vladimir Mirov, FT, 26Feb2015

• “Russia faces a perfect storm of lower prices, international sanctions and currency depreciation that could threaten its’ oil output” – Reuters, 10Feb2015

Venezuela headed for default?

• “Sliding oil prices deprived the government of its’ main source of dollar earnings, curbing Caracas’ ability to import even basic food items”

– FT, 19Feb2015

• “The government is running a budget deficit equal to more than 10 % of GDP. The strain on its’ ability to pay its debts is clearly great – FT, 10March2015

Non-exhaustive

Source: Press research

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A wave of nationalization and organized approach to set prices shifted the paradigm of a century-long low cost resource into a complex market & political price discovery regime

Average historical real price per barrel of oil across major periods has ranged between $35 -$60 1. 1861-1944 US Average; 1945-1983 Arabian Light in Ras Tanura; 1984-2015 Brent 2. Based on 2014 US$ Source: Bloomberg, BP, Oliver Wyman analysis

0

10

20

30

40

50

60

70

80

90

100

110

120

130

1900

18

90

1880

18

70

1860

2015

20

10

2000

19

90

1980

19

70

1960

19

50

1940

19

30

1920

19

10

Real² Nominal

Ø 34.2

Ø 58.1

1973-2015

0

5

10

15

20

25

30

35

40

45

50

55

60

65

2015 2010 2005 2000 1995 1990


Oil price volatility (Brent) Quarterly min/max price Δ in US$ 1988-2015

Ø 5.83

Ø 20

Resource Nationalization: Sonatrach 1963, Aramco 1973-80, Petronas 1974, PDVSA 1975, KOC 1975, Sonangol 1976, NNPC 1977 Organized price setting: OPEC membership more than doubled by 1972 controlling >50% of production; OPEC demonstrated the organisation’s power through coordinated supply restrictions in 1973 following the Arab-Israeli war

Departure from the average real price of oil (less than $40 over last century) has been accompanied with increased volatility

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In the last 5 decades oil price disruptions were mainly driven by political factors, while in the future supply-demand fundamentals gain importance


1. 1970-1983 Arabian Light in Ras Tanura; 1984-2015 Brent 2. Based on 2014 US$ Source: BP, Bloomberg, US Energy Market Emergency Act of 2008, Oliver Wyman analysis

Real Nominal 2

Drivers Implications

1

• Nationalization of oil concessions • Reduced dependence on OPEC

oil from the US • Significant investments in

alternative energy research

2

• OPEC unity challenged • Development budgets tightened in

oil-exporting countries • Decline in US exploration • Introduction of netback pricing

3

• Economic slowdown • Policies to limit commodity speculation • Oil-importing developing countries

under stressed • Investments in US unconventional

• Yom Kippur War 1973 • Iran revolution 1979 • Iraq-Iran war 1980+

• Economic slowdown • KSA links oil to spot market • Oil supply surplus (increased

output of KSA, North Sea, etc)

• Strong US & Asian Demand • Financial speculation • Iraqi Invasion ‘01 • Concept of peak oil

6

• Financial crisis ‘08 • Decreasing demand • Growing supply

0

10

20

30

40

50

60

70

80

90

100

110

120

2015

2012

2008

2004

2000

1996

1992

1988

1984

1980

1976

1972

1968

• Demand slowdown • US Unconventional • Iraqi resurgence • Fight for market share

• Significant supply cuts • Less investment in “expensive”

unconventional sources of oil • Post-mergers – Supermajor

momentum

4

?

1 2 4

5

3

Oil price disruptions – drivers and implications Non-exhaustive

6

5

• Returning demand ’11 - 12 • Geopolitical turmoil (e.g. Egypt,

Libya, Iraq, etc.)

• Global recovery from financial crisis • Mideast and North African turmoil

leads to a rise in oil prices • Fear of supply cuts

Objective of this paper

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The collapse of crude oil prices in 2014-15 can be mostly explained by an unconventionals boom in NA combined with lower economic growth

Main drivers for price collapse in 2014

1. Annual GDP growth rates for 2014 are Jan. 2015 forecasts Source: IMF; EIA; World Bank; Oliver Wyman analysis

Global crude oil and liquid fuels production Million barrels per day, 2013 - 2014

Global GDP and oil demand growth % Growth pa 2013 - 2014

About 40% of US production comes

from unconventional oil

• World production grew by 1.8 million barrels per day, resulting mainly from NA unconventionals boom

• US light tight oil production pushes non-OPEC production to record growth (+1.6 MBPD)

• OPEC did not cut their oil output despite falling prices, resulting in an unchanged output from the previous year

• China’s growth rates have been significantly below the levels observed over the past decade due to a shift from manufacturing to services and from investment to consumption

• Euro Area: The Euro area managed to eke out positive growth, despite a challenging external environment (sanctions ag. Russia)

• Japanese decline stems from structural factors, such as fuel substitution, a declining population, and government-mandated energy efficiency targets

1.5

0.2

7.7

2.23.3

0.91.4

7.4

2.23.3

-3.4

-1.0

2.5

-4.8

-1.1

3.4

0.51.0

3.2

1.5

Oil demand growth 2014

GDP growth 2013

Oil demand growth 2013 GDP growth 20141

World USA China Euro Area Japan

Global incremental surplus of ~1 MMbpd cannot alone explain the price collapse

31.3

10.512.3

36.0

90.2

31.5

10.613.9

36.0

92.0

+1.6

Others Russia US OPEC World

+1.8

2014 2013

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Market share

• Changes in OPEC objectives with leader Saudi Arabia holding back in terms of production cuts - arguing that OPEC needs to ride out lower prices in order to defend market share

• The Kingdom still recalls the 1980’s production cuts in response to the rapid growth of non-OPEC oil supplies – Siberia, North Sea and Alaska - which led to a significant market share loss for the Kingdom (10 mbpd peak in 1980 to a low point of 3 mbpd in 1986)

Storage and trading

• Unprecedented growth in global storage • High oil inventories buffers production cuts • Spare storage capacity can absorb surplus for another 6-12 months • Traders and tanker-owners with storage facilities cash-in on falling oil

prices, when market enters steep contango

Capital

• Reduced cycle-time between capital deployment and production in unconventional

• Liquidity and availability of capital • Perceived price upside boosts investments and supply side expectations

Hedging • Oil producers hedged at higher prices than spot price fall in oil

• Producers able to continue selectively develop plays until their hedging contracts reach maturity

Source: Oliver Wyman analysis

Other drivers impacting oil price

Other factors too that have contributed to the price drop to varying degrees

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Implications of a Shifting Paradigm Section 2

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Energy efficiency • Increased fuel efficiency in mature markets driven by carbon

friendly regulation – even during periods of low oil price • Drive towards overall lower energy intensity

Economic growth • Demand correlation with economic growth (or slowdown) • Growing demand through urbanization and emerging markets


Supply

Geopolitics

Energy independence

Demand

Substitution

• Production of unconventional resources such as shale oil & gas • Exploitation of new frontiers – deep-water, sub-salt, arctic • Conversion of alternate resources to liquids – CTL, GTL

• Continuation of Iranian crude embargo • Impact of Russian sanctions on oil production • Political stability in producing countries (e.g., Iraq, Nigeria)

• Drive towards long term energy independence of major demand centers – N. America, China, S. America

• Regional oil markets and global price de-coupling

• Oil demand in transportation substituted by electric cells, gas, hydrogen, biofuels

• Liquids demand in power generation substituted by gas, renewables, nuclear

a

b

c

d

e

f

Major drivers impacting oil industry

Supply and demand factors are reshaping the global oil landscape – some may have the potential to become disruptive

DRAFT


Resurgence of Emerging Markets • Will the trend of urbanization and growth in middle-class led

by Asia and Africa result in a demand surge?

Environmental Renaissance • Will transportation and power shift faster towards cleaner

alternatives resulting in oil demand destruction?

Lower Energy Intensity • Will technological advances lead to significant drop in

energy intensity and thereby oil demand?

4

5

6

On the supply side there are three factors that could shift the oil paradigm

Shale a “Quasi Swing Producer” • Will US shale development prove to be a counter-weight to

Saudi Arabia’s swing capacity?

Awakening of Sleeping Giants • Will political stability eventually see the production potential

of low-cost oil from Iraq, Iran and Libya in the market?

Regionalized Oil Markets • Will the blueprint of US Shale development transform other

basins around the world decoupling regional markets?

Major disruptive drivers impacting oil industry

Energy efficiency

Economic growth

Demand

Substitution


Supply

Geopolitics

Energy independence

1

2

3

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Since 2010, Shale oil has added over 3 MMBpd to global supply buoyed by technological advances making it increasingly competitive

Source: EIA – Energy outlook 2014; Rystad Energy Research and analysis; Oliver Wyman analysis

Shale Oil

2014

11.0

4.1 (37%)

2013

10.2

3.5 (34%)

2012

8.9

2.3 (25%)

2011

7.9 1.3

(17%)

2010

7.4 0.8

(11%)

2.4 (32%)

2.4 (30%) Onshore 2.4

(26%) 2.4

(23%) 2.5

(23%)

+11%

2.0 (18%)

2.5 (23%)

1.9 (18%)

1.9 (21%)

2.0 (25%)

2.3 (31%) Offshore

2.5 (24%)

2.2 (28%)

NGLs 2.4 (27%)

1.9 (26%)

7.3%

-3.6%

1.0%

CAGR

49.3%

1

Breakeven WTI price per unconventional play US$ per barrel, 2012 -2014

Drilling and completion cost per unconventional play US$ million per well, 2011 - 2014

4

6

8

10

2011 2012 2013 2014

Niobrara Shale Utica Shale

Wolfcamp Shale Bakken/Three Forks Shale

Bone Spring Avalon Eagle Ford Shale

Evolution of US liquids production In million barrels per day, 2010 - 2014

0

20

40

60

80

Eagle Ford Oil

Niobrara-Wattenberg

Eagle Ford Condensate

Wolfcamp (Delaware)

Wolfcamp (Midland)

Bakken-ND

2013 2014 2012

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With shale economics improving through supply chain efficiencies and technological advances, its position on the cost curve will remain competitive

1. Numbers are as of 2013 except for tight oil the number is for 2014 Source: IEA, Oliver Wyman analysis

Global Oil cost curve Production cost per barrel in US$1 , 2013

US$ per barrel

1

Remaining technically recoverable resources (bb)

Already Produced

20

1,500 2,000 2,500

120

60

100

40

4,000 0

7,000 6,500 6,000 5,500 5,000 4,500

80

3,500 3,000 1,000 500 0 -500 -1,000

Other conventional

CO2-EOR Non-CO2-EOR

Arctic Extra heavy oil & bitumen

Light tight oil MENA CTL Kerogen Ultra-deepwater

GTL

Cost economics of shale is continuously improving pushing it

down the cost curve

With improving economics, development of new shale basins adds volume widening the position of

shale and pushing it left on the cost curve

a

b

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11%

45%

16%

23%

10

8

9

2

Payback time1

Years IRR1

% Brent breakdown oil price1

US$ per barrel

Onshore

Oil sands

Unconventional Shale tight oil

Deepwater

Principal source

*Estimated based on the 30 largest projects within each group , which are expected to start up in the period 2014-2020 and it assumes US$90/bbl oil price Source: Rystad energy/research and analysis; Oliver Wyman analysis

For example, shale is already more attractive than other competing sources

42

80

66

45

80

Key economic metrics for principal sources of oil supply 2014

1

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Unconventional development is a game changer for the global Oil & Gas markets and will act as a counter balance to OPEC swing production

Fast ramp-up through factory mode drilling

Relatively low level of capital outlay with limited E&P risk $

Large scale deployment of rigs and pad drilling to drill large number of wells

Large number of operators in a competitive environment adding to scale

Continuous cost and efficiency improvements

Fast production ramp down without shut-in taking advantage of high decline rates

Shale oil becomes a market driven counter balance for OPEC swing production

1

New innovative business model Potential for global roll out

DRAFT

Unconventional oil and gas have reached maturity in the US providing a blueprint for other basins around the world

World total unconventional oil

1. Incudes Shale gas, CBM, and tight gas Source: EIA, Gulf Petroleum and Chemicals Association, Oliver Wyman analysis

345 1241

World total unconventional gas

Unconventionals – technically recoverable resources In billion barrels of oil equivalent, 2013

Argentina

US China

Europe

Venezuela

9

58

13

13

27

13

26

76

32

18

9

99

98

94

29

138

81

18

49

192

75

42

21

Algeria

122 6

South Africa

0 67

5

Brazil

Countries with significant potential for unconventional oil and gas recovery

Russia Canada

Libya

Pakistan

Australia

Mexico

Unconventional oil production Million barrels per day

0.3

2014

4.3

4.1 (94%)

2010

0.8

0.8

0.0

United States

Rest of the world

Unconventional gas production1 BCM

2013

627

459 (73%)

168 (27%)

2010

485

365 (75%)

120 (25%)

2

KSA: Unconventional gas estimates commonly exceed 600 tcf UAE: Substantial, but unquantified amount of tight gas in Diyab Qatar: not assessed Kuwait: Initial studies indicate onshore and offshore resources. Heavy oil, tight gas, shale gas & shale oil Oman: Khazzan-Makarem field has estimated 100-150 tcf tight gas. Block 65 has potential to contain LTO Bahrain: Preliminary estimates for possible unconventional gas exist; unconfirmed

Unconventional resources in GCC countries

DRAFT


• Easy access to cheap capital

• Strong base of diversified and market driven OFS industries

• R&D and Innovation focused on continuous technology and cost improvements

• Availability of water in many basins needed for fracking

• Entrepreneurial mindset

• Well developed midstream oil & gas evacuation & processing infrastructure

• Well developed transportation infrastructure to mobilize equipment and material

• Mineral rights laws that enable exploration and production on private lands

• Access to data

Key factors contributing to unconventional boom in the US

There are several success factors that enabled the shale revolution in the US that are hard to replicate but not impossible to do so eventually with time

2

DRAFT


Middle East & Africa Latin

America

North America

Europe Former Soviet Union

Note: 1. EIA total oil reserves (incl. EIA/ARI 2013 shale oil technically recoverable resources) 2. Countries included are India, China, Australia, Indonesia, Mongolia, Thailand and others. Source: IEA; EIA; Oliver Wyman analysis

Asia-Pacific2

Regions with shortage of supply might tap into their unconventional oil reserves

Regions short of supply

Regionalized/independent

Demand

594,096

87%

13%

Supply

7,555

Reserves

6,424

4,161

643,864

9%

91%

Demand

2,555

Supply Reserves

1,679 3,832

Demand

67%

33%

Supply

39,286

Reserves

6,387

Demand

17,447

Supply

3%

Reserves

1,373,770

97%

310,567

76%

4,416

Reserves

24%

Supply

1,898

Demand

Supply Demand

2,701

14,199

Reserves

193,697

62%

38%

Unconventional Reserves

Conventional Reserves

Overall oil demand and supply 2040 per region and respective oil reserves1 In million barrels, 2040

As conditions for shale development proliferates globally, it would decouple geographies towards regionalized oil markets in the long-term

2

DRAFT


Political stability map 2014

Most of the global oil is produced in countries with geopolitical risk

Source: Marsh Political risks and trends 2014;EIA, Business Monitor International, Oliver Wyman analysis

Top 10 oil exporter countries

in thousand barrels of oil equivalent per day, 2014e

Norway 1,653

Angola 1,704

Venezuela 1,705

Canada

Others 6,318

Russia 7,337

Saudi Arabia 8,630

2,084 Nigeria

2,440

Iraq 2,500

UAE

1,943

2,521

Kuwait

Extreme risk High risk Medium risk Low risk

22.2%

18.9%

6.5%

6.4%

6.3%

5.4%

5.0%

4.4%

4.4%

4.3%

16.3%

3

Involvement in Ukraine conflict combined with economic hardships

Arab Spring unrest and instability and the overthrow of old long-standing regimes

Syrian conflict and Iraq insurgency

Political instability, ethnic strives and militant group insurgency

Iran’s nuclear program lead to global economic sanctions triggering to economic hardships

Political instability, ethnic strives and militant group insurgency (ISIS

Having its’ economy and foreign reserve inflow highly dependent on oil exports, Venezuela is bound to experience political unrest, economic hardship and rising debt levels with declining prices

DRAFT


Political stability combined with attractive fiscal regimes for IOC participation could add significant low cost oil into the market in the long term

Oil production of select countries Million barrels per day

Theoretical production levels1 Million barrels per day

Oil proven reserves Billion barrels, 2013

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2014

20

13

2012

20

11

2010

20

09

2008

20

07

2006

20

05

2004

20

03

2002

20

01

1. Obtained by dividing reserves by the average reserves to production ratio of GCC countries (54.5) 2. Based on November 2014 Source: Oil & Gas journal, OPEC, EIA, Oliver Wyman analysis

Assuming an R/P ratio similar to the GCC, Iran, Iraq, and Libya could bring another 11 mbpd to the market – their low production cost would be competitive vis-à-vis other sources (e.g. DW or oil sands)

Libya Iran Iraq

157

150

48

Libya Iraq Iran

9.3

8.9

2.9

% of global reserves

5.1

2.4 0.6 1.8

7.5 3.4 4.2

7.9 2.8

Potential

2

3

Total incremental potential of 11 mbpd

DRAFT


On the demand side, there are three factors that continues to reshape the oil market landscape


Supply Geopolitics

Energy independence

Major disruptive drivers impacting oil industry

Energy efficiency

Economic growth

Demand

Substitution

Resurgence of Emerging Markets • Will the trend of urbanization and growth in middle-class led

by Asia and Africa result in a demand surge?

Environmental Renaissance • Will transportation and power shift faster towards cleaner

alternatives resulting in oil demand destruction?

Lower Energy Intensity • Will technological advances lead to significant drop in

energy intensity and thereby oil demand?

4

5

6

Shale a “Quasi Swing Producer” • Will US shale development prove to be a counter-weight to

Saudi Arabia’s swing capacity?

Awakening of Sleeping Giants • Will political stability eventually see the production potential

of low-cost oil from Iraq, Iran and Libya in the market?

Regionalized Oil Markets • Will the blueprint of US Shale development transform other

basins around the world decoupling regional markets?

1

2

3

DRAFT


Global oil demand growth for next 25 years is driven by Asia and Africa; 70% of this growth is expected within the next decade

Oil demand development per region Million tons of oil equivalent, 1990 - 2040

Source: ExxonMobil Energy Outlook 2040, Oliver Wyman analysis

31%

31%26% 22% 19%

22%

20%17%

12%11%

5%

7%

9%

11%12%

4%5%

6%8%

10% 13% 12% 11%12%

8%

3%

10%

3%

1990

137

13%

6%

3%

228

India

Latin America

Russia/Caspian 4%

8%

2040

Africa

Europe

North America

China

Middle East

Asia Pacific

18%

8%

2025

212

5%

8%

19%

6%

2010

178

5%

7%

15%

4%

2000

157

5%

6%

CAGR

3.55%

2010-25 2010-40

-1.05%

0.72%

2.47%

3.05%

2.78%

2.01%

0.06%

1.57%

3.20%

-0.81%

0.84%

1.33%

2.55%

1.81%

1.45%

-0.22%

0.77%

4

Beyond 2025 energy efficiency and substitution drivers decelerates oil demand growth

70% of incremental growth from 2010

DRAFT


Transportation remains the largest demand segment; advancement in fuel efficiency and alternates will slow demand growth for oil

Global Oil demand per sector Million tons of oil equivalent, 2010 – 2040

Source: ExxonMobil Energy Outlook 2040; Oliver Wyman analysis

Key Drivers of demand

Transportation

• Fuel efficiency, alternate fuel technology, aging demographics

• Population growth and urbanization in emerging countries

Industry • Growth in industry consumption

mainly driven by Petrochemicals

• Modern manufacturing equipment requiring energy dense fuels

Residential, commercial and agriculture

• Economic rise of ~3 billion people to the middle class in China, India etc. ,

• Consequently, new demand for food, housing, schools and hospitals

Electricity generation

• Increased preponderance of NG and additional renewables continue to displace oil from power generation

(55%)

0.8%

CAGR

1.1%

0.2%

0.9%

-0.5%

(53%)

5

385 405

2,411

3,122

2010 2040

Industry

Residential/ Commercial/ Agriculture

1,452

4,496

2,006

5,744

247 Electricity generation 211

Transport

Impact on demand

DRAFT


Natural Gas

• Due to its continuously decreasing price, natural gas has become a credible replacement for oil in heating and power generation, though at a slower pace in transportation

Biofuels • Reports indicate that biofuels could provide >37% of US transport fuel in the next 25 years

CTL/GTL • Coal/Gas to Liquid requires substantial capital investments and is only economical at a oil prices above $35

• An MIT study found that CTL might become economical in 2015 in coal-abundant countries like US and China

• Rising public concern about risks of nuclear facilities

• Possibility of small regional reactors in the future, which produce less radioactive waste

• Asian investment in nuclear projects could reach $780 billion by 2030

Emerging competing liquids supply Emerging substitutes for liquids demand

Nuclear

• Wind and solar world energy contribution will almost quadruple by 2035 according to the EIA

• Technological breakthroughs in energy storage and transportation are necessary

• Solar is forecasted to become competitive (grid parity without subsidies) in parts of the US within 5 years

Wind and Solar

• Hydrogen is environmentally friendly, produces no greenhouse gases, and is available abundantly

• Hydrogen production costs have significantly dropped in the past decade from around ~$6 per gasoline gallon equivalent to ~$1.5 per gasoline gallon equivalent

Hydrogen

1. Assuming high volume production (500,000 units per year) Source: EIA, Wood Mackenzie, World Nuclear News, UN International Energy Agency, National Mining Association, MIT, Worldwatch Institute, Oliver Wyman Analysis

Substitution of oil on both the supply and demand side will put downward pressure on oil in the long-run

6

2.0

2009

1.8

1.0 2008

1.6

2010

1.4

2011

1.2

2012

+8.4%

Biofuel production

Biofuel consumption

Biofuel production and consumption in millions barrels per day

DRAFT

Actions for Oil Industry Stakeholders Section 3

DRAFT


Any major political, economic, natural, technological disruption could throw the market into uncertain territory

Three price scenarios can be envisaged based on stakeholder behavior; the current “market driven” system could moderate into a “managed system”

Likely price regime Behavior of policy makers, regulators and operators

Price umbrella

> $90 Production curtailment of low cost oil in favor of marginal high cost barrel which props up prices

• OPEC strengthens its position and includes unconventionals • Other major non-OPEC produces align with OPEC to manage

output e.g. Russia, Mexico, Canada, etc. • Slow carbon tax implementation encouraging demand growth

for oil • Continued resource nationalism in fiscal regimes preventing

exploitation of cheaper but technically more difficult oil

Managed systems

$60 - 90 Some curtailment of cheap oil; highest cost produces fall off allowing medium to high cost sources to supply the marginal barrel

• OPEC producers realign and forms a reasonably functioning as in past decades

• Some protracted reforms in E&P fiscal regimes allowing some extraction of cheaper but technically more difficult oil

• Moderate implementation of carbon tax that does not significantly impact demand growth

• Regulations and subsidies encourages development of substitutes and alternates

Market driven

< $60 Cheaper conventional and unconventional oil proliferates and captures market share

• Return of political stability in large reserve bases allowing rapid exploitation of lowest cost resources e.g. Iraq, Iran, Libya

• Reform of fiscal regimes in E&P allowing private sector technology and operating know-how in mature oil fields

• Flight for market share with costly oil giving way to cheap oil • Market driven shale development acts as a counter balance to

OPEC swing and proliferates to other geographies beyond US • Regulations encourages efficiency & development of alternates

Scenario I

Scenario II

Scenario III

DRAFT


Governments, NOCs and IOCs who think longer term and act now to remain competitive will come out as the winners

• Capital productivity and asset portfolio optimization • Cost optimization beyond the obvious • Human capital optimization and talent retention • Operation and maintenance excellence • Procurement and supply chain optimization • Rigorous risk management

• Energy policy review to rebalance allocation of resources between domestic demand and exports

• Value chain expansion, integration, and diversification • Asset acquisition - acreage, capabilities, technology • Localization - supply chain and human capital development • Restructure and reform fiscal regimes in E&P to attract,

transfer, and retain capabilities

Government NOC IOC


• Cut of discretionary non-value added expenditures • Reprioritization of capital expenditure • Re-negotiation of supplier contracts for favorable terms • Review and rationalization of shareholder value

redistribution through buybacks and dividend payouts




A B C

Withstand the storm

Survive the storm

Ride the storm

DRAFT


This section will ponder on the actions that those governments emerging as winners will likely undertake





A

Withstand the storm

Survive the storm

Ride the storm

Government NOC IOC

Context of

governments in

current market

scenario and

actions that

those

governments

emerging as

winners will

likely undertake

A B C

DRAFT


In a low price regime there is high risk of collapse of socio-political systems with high population, low financial reserves, and over-dependence on oil

Ability to withstand current oil prices Figures in US$ billions, 2013

24

42

8

34

10048

114

138

439

303

78

1,000

100

10

1 10 + 9 8 7 6 5 4 3 2 1 0

Nigeria

Iraq

Libya4

103

Venezuela

Kuwait

Qatar

Iran

Russia

Saudi Arabia

Bahrain

Oman

UAE

1. All figures on graph are for 2013 government budgets in US$ billion 2. Oman and Iran oil and gas revenues are from 2012 3. In log scale; 4. Libya with a 6M population, will become more stressed once a fully functional Government is established and expenditure increases

Source: World Bank, IMF, Citi research, CIA World Factbook, Deutsche Bank, EIA, Market watch, Oliver Wyman analysis

High

Low

Low High

Scenario assumptions

• Deficit is calculated using $50 a barrel against the countries’ break even point per barrel

• For the purpose of this analysis, it is assumed that countries are unable to diversify their economy in the short-term to reduce their dependency in hydrocarbons

• Countries are keeping their export volumes constant with 2012 levels

• Static production costs are

assumed

• 0% interest applied to reserve funds during the depletion timeframe

Level of financial reserves robustness ─ Number of years to deplete reserves and

sovereign wealth funds based on 2013 levels

Non-oil and gas revenue Oil and gas revenue

Relative size of government budget in 2013, US$ Billions

Some countries will be obliged to issue debt in order to meet growing deficit

Withstanders

Cautious Heavyweights • Will lower oil export dependence focusing on

capital productivity to maximize local content and employment generation

• Will not be challenged to raise debt • Will allow a “markets driven” scenario to try shake

out new shale supply

• Robust with high flexibility on how they act in the short term

• Robust with less flexibility

• Will focus on export diversification

• Will push towards a “managed system” scenario

Social Pressure Total Population 3

A

• Higher stressed countries like Iran and Iraq will push to diversify away from oil & gas

• Raising debt will be costly • Will push towards a “price umbrella” scenario

Cautious Lightweights

1

Severely Stressed

103

2

DRAFT


In this context, Governments who will come out winners will pursue actions to stay competitive in the long term

• Cut non-critical public expenditure and focus on capital productivity • Renegotiate major government contracts to secure better terms • Manage short-to-medium fiscal deficit through reserves or raising debt • Rationalize social and industrial subsidies

• Energy policy: introduce renewables (e.g., solar, wind), and nuclear • Capital productivity: drive localization to further develop export based

industries to serve the regional and global markets • Energy efficiency: pursue demand side management to manage domestic

energy demand

• Energy policy: rebalance energy mix and allocate resources between domestic demand and exports

• Capital Productivity: prioritize projects that develops local content that reduces imports and generates employment

• Local Talent: align educational system to supply talent to meet the demands of the local industrial base

Governments: Actions “winners” will take to stay competitive in the short, medium and long term

Government

A

Withstand the storm

Survive the storm

Ride the storm

DRAFT


The evolution of oil price is largely an exogenous variable, however Governments of oil exporter countries may influence their growing internal demand…

Breakdown of Crude Oil Consumption In millions of barrels per day, 2014

32%

21%

53%

23%

20%

64%

31%

76%

41%Libya 1.0 59%

Mexico 2.8 24%

Venezuela 2.8 69%

Iran 2.8 36%

Kuwait 2.6 80%

UAE 2.8 98% 2%

Iraq 3.4 77%

Canada 4.5 47%

Saudi Arabia 9.6 79%

Russia 10.9 68%

Domestic Consumption Net Exports

…otherwise they risk that increases in local supply will be absorbed by growing local demand

Energy intensity of GDP1 Constant ppp (koe/$2005p), 2013

0.110.110.110.120.120.120.130.130.130.140.150.160.160.160.170.170.180.190.190.190.200.200.20

0.220.25

0.260.280.28

0.320.33

0.400.40

0.48

Turkey Japan Germany Chile Mexico Norway Argentina Netherlands France Brazil Sweden Australia US Belgium Egypt New Zealand Malaysia South Korea Indonesia India Finland UAE Canada Venezuela Kuwait China Iran South Africa Saudi Arabia Russia Ukraine Kazakhstan Uzbekistan

1. In bold GCC countries Source: BMI; Enerdata; Oliver Wyman analysis

A

DRAFT


Recent cuts in oil subsidies Observations

• Direct retail fuel subsidies have been a feature of many developing economies – not all of whom are producing nations – for decades

• Recent drops in oil prices have enabled developing country lawmakers to cut or eliminate these subsidies in the face of mounting budget pressure and widespread market inefficiencies

• Savings made from removing subsidies can be used to build up financial reserves

• Indirect (e.g. industrial) subsidies remain in many developed economies, despite G20 commitments to phase out fuel subsidies by 2020

• Reducing fuel subsidies increases the relative attractiveness of alternative (bio)fuels, while also freeing up government resources towards incentivising their development

“The IMF had lauded India's efforts to cut fuel subsidies, saying the fall in global crude oil prices provides a golden opportunity to reduce energy subsidies”

Indian Times,18 January 2015

“The government will save 230 trillion rupiah ($18 billion) in total from the fuel subsidy change and 60 percent of that will be spent on infrastructure” Bloomberg, 5 January 2015 “Malaysia also decided to abolish fuel subsidies, scrapping both gasoline and diesel support from December 1st last year, a move that will save the government nearly $6 billion a year” Reuters, 23 January 2015

“Venezuela will announce a change of policy soon on gasoline”

Reuters, 13 February 2015

In producing countries, these measures will also help to discipline internal consumption, and enable higher exports generating more revenues for the Government

India

Indonesia

Malaysia

Venezuela

In the short term, producing countries can increase the phasing-out of fuel subsidies to survive the storm

Source: Press research, Overseas Development Institute, IEA

A

DRAFT


In the medium term, Governments can ride the storm by developing more sustainable energy policies such as the Saudi Government is doing

KSA Energy System Energy Demand TWh, 2013 – 2030F

Generation portfolio GW, 2013 – 2030F

• Implement a comprehensive Energy Efficiency Program driven by the SEEC1 addressing the three largest consumer segments

Residential: Increasing the minimum energy performance standards for Air conditioning and lighting; Developing a new building code

Industrial: Setting aspirational energy intensity targets for Petchems and cement, and steel industries accounting for 80% of industrial energy consumption

Transportation: Introducing a new fleet average fuel economy standard for Light Duty Vehicles (LDVs)

• Shift energy mix from fossil fuel to renewables and nuclear

• Further develop the unconventional gas resources to replace burning fuel oil and diesel

• Further develop the transportation & distribution grid

• Develop a local value chain in the energy industry

Key initiatives to reduce energy intensity

1. SEEC – Saudi Energy Efficiency Center; Source: EIA, KACARE,CWC, MEED

600

265

+5%

2013 2030

+4%

Oil

Gas

Nuclear CSP PV

36 (55%)

Wind

132

30 (23%)

30 (45%) 31

(23%)

14%

2030

12% Other 7% 2%

66

2013

19%

A

DRAFT


In a scenario of lower oil rents, Governments should also rethink their economic development policies and their focus on heavy industries…

GDP composition per sector % of total, 2013

Initiatives for economy diversification from oil

Level of economy diversification

United Arab Emirates

• Traditional focus on heavy industries such as Metals (e.g., Dubal, and Emal)

• UAE is becoming a rival to Saudi Arabia in becoming the region’s manufacturing base

• Over 2/3 of UAE’s economic output now comes from non- oil sources

• Dubai has become a well-connected transport/aviation hub; overtaking London Heathrow as having the world’s busiest international airport

• In the past 10 to 15 years, Dubai focused on developing a service based economy taking advantage of its location and focusing on the following industries

Financial services Tourism Shipping

Saudi Arabia

• Traditional focus on heavy industries such as Petrochemicals

• More recently the Kingdom is pursuing a broader economy diversification agenda through NICDP1 aiming to develop five national clusters

Minerals and metals Automotive Plastics and packaging Solar Energy

Example - GCC

100

Mining and utilities

Agriculture, hunting…

Manufacturing

Construction

Wholesale, restaurants…

Transport & comm.

Other activites

Oman

40% 48%

Kuwait

16%

Qatar

42%

UAE

43%

KSA

30%

100 100 100 100 100

Bahrain

Exports composition per sector % of total, 2013

1. NICDP – National Industrial cluster Development Program Source: BMI, ITC, UN Comtrade Statistics, NICDP, IMF, Worldbank, OPEC, Oliver Wyman analysis

75%

50%

Kuwait

94%

Qatar

88%

UAE

67%

Oman

86%

Bahrain

100

KSA

100 100 100 100 100

Hydrocarbons

Organic Chemicals

Fertilizers

Machinery

Iron and steel

Plastics

Precious stones

Aluminium

Other

A

DRAFT

…in this context, medium-light industries may be the solution by generating substantially more jobs with lower energy requirements

1. 2010 data from MECS EIA 2. Considering USD 50per barrel of oil Source: EIA, Oliver Wyman analysis

Energy consumption per job in million BTU per year, US1

Energy consumption per dollar of value added in thousand BTU per year, US1

Industrial sectors

Hea

vy

indu

strie

s

Energy cost of industrial development Energy cost per 1,000 jobs in million USD per year

MMBTU at 9 USD/ MMBTU2

MMBTU at 0.75 USD/ MMBTU - KSA industrial tariff

110183224253259259408417512872

Furniture

Machinery and equipment

Textiles

Transport equipment

Consumer durables

Electronics and components

Pharmaceuticals

Packaging

Automotive

Food processing

Construction material 2,790 Mining and processing 2,790

Steel processing 12,697 Paper making 12,886

Petrochemical processing 66,746

1.10.92.4

1.01.71.7

0.73.2

1.34.3

25.5 25.5

29.8 34.1

16.9

1.6 2.0

1.0

2.3 2.3 2.3 3.7 3.8 4.6 7.8

25.1 25.1

114.3 116.0

600.7

Example - KSA

These estimates may be considered conservative for the GCC, as water consumption contributes heavily to its energy demand

Governments can jumpstart their medium-light industries development by focusing on those with high imports and potential to develop a globally competitive value chain

Med

ium

-Lig

ht

indu

strie

s A

DRAFT


This section will ponder on the actions that NOCs who will emerge as winners would likely undertake


B




Withstand the storm

Survive the storm

Ride the storm

Government NOC IOC

Context of

NOCs in current

market scenario

and actions that

those NOCs

emerging as

winners will

likely undertake

A B C

DRAFT


NOC’s have a major control over the global oil industry

4%

25%

Total Production

87

75%

Total Reserves

2,002

96%

Top 30 companies in proven reserves In billion barrels of oil equivalent - 2014

Top 30 companies in production Million barrel of oil equivalent – 2014

NOC IOC

2.32.8

4.2

36.09.4

0.50.71.92.52.6

2.82.8

3.39.5

90.2

36.0 (40%)

Can

ada

Rus

sia

Braz

il

Mex

ico

15.8

Chi

na

Oth

er

USA

2.2

4.2

52.0 (58%) 10.9

11.8

OPE

C

Oth

er

Liby

a

Tota

l

Nig

eria

Vene

zuel

a

Kuw

ait

UAE

Iran

Iraq

Saud

i Ara

bia

Qat

ar

Major OPEC producers control ~28% of global production

Major Non-OPEC producers control ~42%

1. Other includes Angola, Algeria, Ecuador, and Neutral Zone and OPEC NGLs 2. Processing Gains: Net volumetric gains and losses in refining and marine transportation losses. Source: Petrostrategies, IEA, Oil and Gas Journal, BP Statistical Review of World Energy 2014, Oliver Wyman analysis

2

1

Breakdown of liquids production In million barrels per day – 2013

B

DRAFT


NOC’s differ across many dimensions which will influence their strategy and performance going forward

Production Balance

Value Chain

Political Affinity

Geographic Footprint

Governance

Ownership

Export Domestic Supply

Downstream Integrated Upstream E&P

National Mandates Purely Commercial

Global Local

Operations separated

Operations not separate from Policy & Regulations

State Owned Public

Energy Importers

Energy Independents

Exporters Diversified Heavy Exporters

Heavy Exporters

Production per capita in boe Logarithmic scale

Oil & Gas industry as% of GDP

0

10

20

30

40

50

60

0.1 1.0 10.0 100.0 1,000.0

India China

Brazil

Nigeria

Egypt

Mexico

Malaysia

Iran

Iraq

Venezuela

Libya

Oman

Saudi Arabia

UAE

Norway

Kuwait Key challenges • Exposure to oil price moves, production

efficiency • New technology/substitute development, value

chain dependency, geo-political issues

Key challenges • Access to reserves • Exposure to oil price

moves

B

DRAFT


• Primary and secondary recovery of lowest-cost easy-oil has been declining for NOCs in the ME

• To maintain or improve production from maturing fields, NOCs are adopting tertiary recovery

• Technologies such as EOR are not only more costly but also require technical and operational capabilities that NOCs are beginning to build

• As production from current producing fields starts to deplete, NOCs would need to tap into new reservoirs and fields

• The portfolio of untapped reservoirs and fields are skewed towards lower quality and technically and operationally challenging oil

• Production from new sources are likely to be heavier, sourer, deeper and tighter bringing up the average cost of the barrel

NOC generally enjoy some of the lowest cost of production; however the cost is steadily rising as producing fields mature and new fields are developed

Average production cost per NOC US$ per barrel, 2014

Rosneft

4,3

Saudi Aramco

5,0

Statoil

7,3

Petro China

13,2

Petrobras

17,2

0

5

10

15

20

2008 2009 2010 2011 2012 2013

+7.32%

Petrobras Petro China Statoil Rosneft

NOC Production costs US$ per barrel of oil equivalent, 2004 - 2013

1. Saudi Arabia’s average production costs are based on a statement by KSA’s oil minister Source: Company Reports, Forbes, Oliver Wyman Analysis

Mature Field Development

New Field Development

• Technology

• Operational capabilities

• Capital efficiency

• Project management

• Surface infrastructure to transport and process new streams

B

1

Sample

DRAFT


NOCs also face other challenges ranging from cost performance, capital projects efficiency, talent development and catering to national duties

Cost and operational performance

• Manage increasing cost structure with higher level of human resources and less rigorous cost control

• Higher operational complexity with more complex plays and mature fields

Talent development

• Need to develop local talents to ensure its future sustainability

• Ensure skills development is aligned with international benchmarks and adjusted to the NOC assets

• Reduce dependency on external suppliers and expatriates

Capital project efficiency

• Address the typical cost and time overruns in the industry through better planning (e.g., value engineering)

• Implement a robust capital projects management process balancing control with agility (e.g., different gates procedures for large and small capital projects)

Diversification from core business

• Address the increasing demands from Government requiring the NOC’s capabilities to address pressing issues in their national agenda (e.g., power generation, major infrastructure)

• Ensure core business is treated as such and receives sufficient management attention and has the best resources allocated to it

Other challenges impacting NOCs in ME

`

B

DRAFT


In this context, NOCs who will come out winners will pursue actions to stay competitive in the long term

• Identify and eliminate waste; cut discretionary non-value added expenditures • Reprioritize and redefine CAPEX outlay • Re-negotiation of supplier contracts for favorable terms • Focus attention on core hydrocarbons business

• Acquire assets and integrate along the value chain • Build long term capabilities and localize for sustainability

(e.g., develop a competitive local supply chain) • Drive localization through being the key nexus between government, supply

chain, and educational institutes • Restructure and review existing business models

• Capital productivity and asset portfolio optimization • Cost optimization beyond the obvious • Drive operational excellence through rigorous cost analysis and optimization • Human capital optimization and talent retention • Work strategically with supply chain beyond typical discounts • Rigorous risk management

NOCs: Actions “winners” will take to stay competitive in the short, medium and long term

NOC

B

Withstand the storm

Survive the storm

Ride the storm

DRAFT


NOCs can play a pivotal role in driving localization by forming the nexus between the government, the supply chain, and the education system

Role of NOCs in driving localization

A&B and DJs

Growth

Organi-sational design

NOCs

Government

Key dimensions for sustainable localization

1 Strategy

• Define clear localization objectives with tangible metrics (e.g., GDP, jobs)

• Prioritize initiatives based on expenditure, localization impact and local competitiveness

• Adapt local content policies to O&G lifecycle (higher in development & production.)

2 Governance

• Align with Government which sectors to localize and the key enablers to achieve it

• Develop an articulated educational program to develop skills for sectors to be localized

• Involve O& supply chain in the process

3 Organization

• Consolidate NOC localization initiatives in one area and/ or have an integrated view of ongoing efforts to avoid redundancies

• Pursue localization initiatives across the organization (E&P, Downstream, SG&A)

4 Performance management

• Develop quantitative metrics to prioritize initiatives to develop and track its impact

• Ensure metrics are robust and provide an accurate view of localization (e.g., consider imports impact on local content)

B

DRAFT


To enhance the productivity of resource deployment NOCs will focus on localization efforts that maximizes employment and minimizes imports

Value creation mix in the Oil & Gas industry

Source: Exxon Mobil, Oliver Wyman Analysis

Drilling Facilities fabrication

Construction Drilling Support Services

Offshore Installation

Steel Fabrication

Operations & Maintenance Services

Tubular Fabrication

Valves & Fittings Major Equipment Repair Shops

Civil Works

Machine Tools/Spare Parts

QA/QC Services Transportation/Logistics/ Warehousing

Employment

GDP Value

Add

Well Testing Services

Design Engineering

Quick Wins

Medium effort / investment

High effort / investment

High Low Low

High

Recommendations for Governments • Activities that yield the

highest GDP and/or employment upside tend to be the costliest in terms of investment and effort

• Authorities should focus on high-impact initiatives informed by their relative policy preferences

• Focus area of each player should be aligned with Oil & Gas operators to realise maximum value

• The possibility of exporting services or becoming a regional centre should be an additional factor in building an action plan

B

DRAFT


Some NOCs will also leverage the bottom of the cycle to cherry pick distressed assets to broaden their portfolio and capabilities

Potential angles for M&A plays

B

Value Chain Extension Resource Addition Capability Acquisition

• Extend along the value chain into midstream and downstream

• Expand geographic footprint to secure crude outlets e.g., downstream assets in Asia

• Consider selective supply chain players e.g., rigs, chemicals, pipes

• Balance portfolio with conventional and unconventional resources

• Acquire proven unconventional acreage in North America

• Acquire stake in attractive oil & gas fields

• Acquire companies that adds critical capabilities ‒ Unconventional exploration

and development ‒ EOR technology and

operational expertise ‒ Operational & Maintenance

excellence ‒ Capital project management ‒ Value sourcing

DRAFT


This would be especially true for NOCs in net import countries

Crude oil price vs. market value of Top-25 IOCs and independents by production volume Weekly, rebased to 2014 price peak (w/s June 20)

Valuations for the Top-25 IOCs (by production) are ~25% lower which will drive M&A deals and lead to a new wave of industry reorganization and opportunities for NOCs

0.25

0.50

0.75

1.00

01/11/2014 01/01/2015 01/09/2014 01/07/2014

-23%

Top-25 companies

Oil price

Source: Bloomberg, OPEC Oliver Wyman analysis

Country Potential investment strategy to expand production footprint

• Shift to value-driven investing • Focus international M&A on

small, distressed companies in stable countries, such as US shale

• Build on existing relationships to participate in strategic projects in Mexico and Russia

• Improve and build infrastructure in line with world-class standards

• Design targeted policies at attracting investment from international players

• Diversify import links away from Middle East

China

India

Energy importer NOCs will look to expand their resource base seeking self-sufficiency

B

DRAFT


This section will ponder on the actions that IOCs who emerge as winners will likely undertake


C




Withstand the storm

Survive the storm

Ride the storm

Government NOC IOC

Context of IOCs

in current

market scenario

and actions that

those IOCs

emerging as

winners will

likely undertake

A B C

DRAFT


Going forward, there will be more focus on value growth vs. volume growth

2001 2013

$81.7

$186.4

Source: Thomson Reuters: Datastream, Oliver Wyman analysis

Total annual capital expenditures by the world's six largest international oil companies

Total annual depreciation and depletion for the world's six largest international oil companies

During the high oil price regime IOCs invested on production growth spending 5x more capital than 10 years ago, breaking the historical link with depreciation

Evolution of CAPEX and depreciation Six largest IOCs, in US$ billion, 2001 - 2013

C

DRAFT


Complex sources Conventional sources

During the high oil price period, IOC investment on hydrocarbons supply has been increasingly focused on complex resources

Source: IEA, IHS CERA, IHS Herold, LUKOIL, Oliver Wyman analysis

Forecasted replacement of global reserves of liquid hydrocarbons In million barrels per day, 2010-2025

Key implications for the industry

• Greater need for R&D and advanced technologies to access reserves

– NOCs lag behind in technology and need to partner with IOCs

• Increasing cost, risk and complexity of new projects

– Players increasingly do projects in consortia to diversity risk

– Unconventional project experience is key to success

• Challenges for traditional business models and integrated players

– Independents have all spun off downstream assets in recent years

– Companies have been changing their organizational designs

29

105

CTL/GTL

12

3

29 (28%)

76 (72%)

Cum. Growth in supply

(2010-2025)

12

NGL Biofuels

5

Tight oil in the US

Deep- water

Heavy Venezuelan

Oil, Canadian sands

18

26

Development of new

conventional reserves

(Iraq, KSA, CIS)

C

DRAFT


0

20

40

60

80

100

120

0 2 4 6 8 10 12 14 16 18 20

Cos

t Bre

akev

en &

Fis

cal B

reak

even

Pric

e

(Bre

nt U

S$/b

bl)

2020E Net Production, Mboe/d

Production from more complex resources is costly and operators will see their profitability under pressure during periods of low oil prices

Overview of crude oil production costs US$ per barrel, 2014

Source: IEA, Citi Research

Russia, $112 Algeria, $113

Libya, $100 Oman, $104

Saudi Arabia, $88

UAE, $67

Kuwait, $58

Qatar, $46

Producing Country Crude Oil Fiscal Breakeven Price 2014 (US$/bbl)

Canada Heavy Oil Kashagan

Low-cost conventional giants: Brazil, Norway

OPEC Production

Deepwater GoM W.Africa, US unconventional oil Rumaila

Johan Sverdrup Bina Bawi Zubair

West Qurna 1 Cepu Exp

Tempa Rossa Lucius

Wattenberg Ten Pao de Acucar

Canoca Sapinhoa

Dagny Whales park

Lula Franco

Hadhan

Skrugard

Lara Jupiter Carcara

Nganita

Shenandoah

Mars B Edvard Grieg

Heidelberg

Kirth North FCCI West Gunnaz

Vankor Halfaya Clear Ph2

Zeedyus COP Eagle Ford

BL 1506 East Mobo North Kirth South

CLO\Block 1 Permian STL Bakken

Kassida

Carabobo 3

Uganda Bl 1,2,3 Bl 1506, west

Block 32 LK – St Malo

Egina HESS Bakken

OXY Bakken BI 31 SE

Block 18W

Primary Heavy COP Bakken

Kearl

STL Eagle Form Sunrise Ph. 1+2

AOSP

W Siberia

Bost Mackay River Dover

Fort hill Lagul Mariner

Kashagan Ph 1 Bressay

Carmon Creek

IOCs will need to review their portfolios and capital projects – a halt can be expected for deep-water and new frontier conventionals

Iraq, $93

C

DRAFT


In this context, IOCs who will come out winners will pursue actions to stay competitive in the long term

• Reprioritize and redefine CAPEX deployment into major projects • Improve capital efficiency • Rationalize non-operating costs and CAPEX (e.g., HQ, SG&A) through reviewing SLAs,

and improving utilization (space and resources) • Renegotiate discounts with supply chain • Increase procurement of non-critical standard items from LCCs

• Drive operational excellence in across upstream assets • Work strategically with supply chain beyond typical discounts

(e.g., demand management, guarantees for critical parts, innovation) • Develop partnerships with competitors to reduce costs in non critical areas (e.g., logistics

fleets – helicopters, vessels) • Review shareholder value distribution policies in periods of lower FCF – namely through

share buybacks

• Review exploration and production portfolios • Acquire and integrate elements along the value chain • Increase shared services reach to eliminate regional redundancies • Review maintenance strategies to review level of preventative vs. breakdown maintenance

per major equipment (RBM) • Leverage opportunity to acquire distressed operators (e.g., unconventional players) • Gain access to reserves to take advantage of a market upturn

C

IOC

IOCs: Actions “winners” will take to stay competitive in the short, medium and long term

Withstand the storm

Survive the storm

Ride the storm

DRAFT


In the short term, IOCs will reduce their E&P spend while ensuring lower cost reserves are adequately replaced

Middle East

Latin America India, Asia & Australasia

Africa

North America

Russia

Actual and expected E&P spend by region In US$ millions, 2013 – 2015F

E&P spend by customer type In US$ millions, 2013 – 2015F

Europe

Source: Barclays 2015 E&P spending outlook; Oliver Wyman analysis Note: Surveys with 255 companies taken between 1/12/14 and 5/1/15 with Brent at $72-$54/bbl.

-14% +9%

2015E

168,377

2014E

196,088

2013

179,179

-5% +6%

2015E

74,934

2014E

78,671

2013

74,137

-17% 0%

2015E

38,248

2014E

45,921

2013

46,014

+14% +16%

2015E

46,000

2014E

40,180

2013

34,777

-13% +6%

2015E

44,606

2014E

51,348

2013

48,317

-6% +4%

2015E

105,735

2014E

112,499

2013

108,534 +5% +9%

2015E

27,725

2014E

26,286

2013

24,225

A continued decline or a U-shaped recovery to the current oil price levels will accelerate the reduction in E&P spend in 2015 as more operators delay or abandon their capital projects

-1% +6%

2015E

265

2014E

268

2013

253

-11% 0%

2015E

222

2014E

250

2013

250

-18% +16%

2015E

133

2014E

162

2013

139

NOCs

IOCs

Other -9% +6%

2015E

619,426

2014E

679,531

2013

642,145

Global

C

DRAFT


Top 20 IOC’s SG&A costs % of Revenue, 2013

Initiatives to reduce SG&A cost

1. Recently acquired by Repsol (Transaction completed mid-2015) Source: Morningstar; Oliver Wyman analysis

1.0

1.5

2.0

2.0

2.3

2.6

2.9

3.1

3.2

3.3

4.6

5.9

7.0

7.0

7.1

7.5

8.6

11.7

Canadian Oil Sands

ConocoPhillips

Chevron

EOG Resources

Husky Energy

Canadian Natural Resources

ExxonMobil

Apache

Royal Dutch Shell (A)

BP

Marathon Oil

Devon Energy

Occidental

Murphy Oil

Hess

EnCana

Noble Energy

Talisman Energy

In addition, IOCs will reduce non-operating costs through quick delivery initiatives to release cash flow to critical activities

1

C

SG&A costs have been increasing at a CAGR of 5.6% since 2005

• In the context of declining Oil prices, action is necessary to avoid losses and maintain healthy margins

• In order to address rising SG&A costs efficiently we suggest:

Review current size and utilization level of existing SG&A resources

Increase utilization of current resources at HQ (e.g., space, and FTEs)

Consolidate and retender SG&A contracts

Enhance shared services organizations to avoid redundancies across geographies and business units

Outsourcing of non-critical transactional activities

DRAFT


IOC will review their portfolio’s ability to withstand ‘market driven’ lower prices for a long period of time

During this review, it is important not to rush into decisions due to the long life span of existing assets and the historically proven inaccuracy of oil price predictions

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Shell ExxonMobil BP Chevron Total Conoco Phillips

Oil sands

Tight oil

Oil shale (kerogen)

Unconventional gas

Conventional

Extra heavy oil

Overview of liquid resources per IOCs In million barrels, 2014

Source: Rystad Energy Upstream UCube 2014, Oliver Wyman analysis

Total Conoco Phillips

BP Chevron Shell ExxonMobil

South Asia East Asia South America Southern Europe

South East Asia

Central Asia

Western Europe North Africa Russia East Africa

North America Middle East West Africa Australia

For example, higher exposure to Oil sands will have to be reviewed under a scenario of continued oil prices below USD60 per bbl

C

DRAFT


IOCs will address capital and operating costs that have been increasing

60

80

100

120

140

160

180

200

220

240

2000 2002 2004 2006 2008 2010 2012 2014

Evolution of upstream costs IHS-CERA cost indices

Increase in costs from 2008 peak to 2012 % change in costs

1. LCC – Low cost countries; 2. Non-core items (e.g., logistics for oil rigs) Source: IHS, CERA, Deutsche Bank

CAGR: 6.23%

Capital costs

Operating costs

CAGR: 5.09%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Con

stru

ctio

n la

bor

Eng

inee

ring

& PM

Sub

sea

Equ

ipm

ent

Bul

k m

ater

ials

Yar

ds a

nd fa

bric

atio

n

Offs

hore

inst

alla

tion

Land

rigs

Offs

hore

rigs

Ste

el

This can be achieved through a robust value sourcing consolidating volumes across regions, managing demand (e.g., standards), increasing non-critical purchases from LCCs1, working collaboratively with suppliers, and developing partnerships with competitors2

C

DRAFT


2001 2013

2012

Source: Thomson Reuters: DataStream, Oliver Wyman analysis 1. Levered free cash flow is defined as the amount of cash left over for stockholders and for investments after all obligations are covered

-$28.8

2013

-$52.9

2009

-$11.8

2008

-$1.8

2001

-$4.4

2002

-$11.9

Levered free cash flow1 for the world's six largest international oil companies

Total dividends paid and stock repurchases by the world's six largest international oil companies

In a scenario of continued low oil prices, IOCs will review their share buyback policy to align shareholder value distribution with free cash flow

Evolution of dividends, buybacks and FCF Six largest IOCs, in US$ billion, 2001 - 2013

Dividend + Repurchases Levered FCF Total Stock Repurchases Total Dividend payment

C

DRAFT


Players with strong balance sheets and financial flexibility will acquire high quality distressed assets and will come out winners when cycle reverses

1. Sellers will be forced to compromise on valuations should a low oil price environment persist Source: S&P Capital IQ, Oliver Wyman analysis

Financial size of cash and securities per company in 2014, $billion

Interest coverage ratio EBIT / Interest expense

Operational Excellence Return on Total Capital %

Top 15 Shale producers and Top 15 IOCs / Independents by Revenue, $USD, 2013

-2

0

2

4

6

8

10

12

14

16

20 140 50 45 40 35 30 25 15 10 5 0

Murphy Oil

Marathon Oil

Hess

EP Energy

EOG Resources

Devon Energy

Continental Resources

ConocoPhillips

Concho Resources Chesapeake Energy

Occidental Petroleum

Anadarko Petroleum

Husky Energy

MOL Galp Energia

Imperial Oil

Suncor Energy OMV

Repsol

Apache

Eni

Chevron Total

BP

Exxon Mobil

Royal Dutch Shell

Noble Energy

Newfield Exploration

PTT

Top Shale producers Top IOCs / Independents

Companies with less robust balance sheets; ones with good assets and cost improvement

opportunities become potential targets1

Companies with robust balance sheets combined with financial

flexibility (larger bubbles) are well set to acquire assets and companies

DRAFT

Conclusions Section 4

DRAFT


Government NOC IOC

Withstand the storm

(short term)

Survive the storm

(medium term)

Ride the storm

(long term)

Cut discretionary non-value added expenditures

Reprioritize capital expenditure

Re-negotiate supplier contracts for favorable terms

Review and rationalize buybacks and dividend payouts

Realign energy policy to optimize resources and manage energy demand and efficiency

Localize supply industries to reduce imports and generate employment

Reform E&P fiscal regime to attract, transfer and retain capabilities

Review project portfolio to improve capital productivity and efficiency

Improve operational and supply chain efficiency

Grow and complement capabilities through acquisitions

Build local talent aligned to local industrial demand

Optimize human capital base and retain talent

Diversify export oriented industries

Expand, integrate and diversify along value chain

Regardless of where the oil price may head, there is a set of strategies that will enable players to remain competitive at low oil prices and come out as winners

Overriding strategies per key stakeholder

DRAFT


Oliver Wyman’s capabilities lie in the sweet-spot to support Governments, NOCs, and IOCs in developing and implementing these strategies

Government agencies1 NOCs IOCs

1. Governments of oil producing nations

Our offering deliver significant value for the stakeholders

Growth Strategy & Corporate Portfolio N.a. Strategic Planning Mergers & Acquisitions Structured Finance Post-Merger Integration Performance Improvement

Operations Excellence Large Capital Projects EBITDA Improvement SG&A Cost Reduction

Supply Chain Optimization Purchasing Organization Supplier Quality Management

Organization Design and Operational Governance Organization Transformation

DRAFT

Oliver Wyman’s Energy Practice Section 5

DRAFT

Oliver Wyman is an international consulting firm with more than 40 years experience serving Global 1000 clients. Our staff of 3,700 operates from offices in more than 50 cities in 26 countries

• Revenue 2014: US$1.7 BN • Staff: ~3,700 • Offices: 50+ in 26 countries

To bring exceptional people together to create value by

making lasting contributions to our clients, industries and

societies

• Dedicated partners AND consulting staff, resulting in deep industry knowledge from day one

• Organized around global practice units, resulting in the best possible team for each client

• Practices include both consulting experts and former industry executives with hands-on experience

• Hundreds of engagements and transactions completed within each sector and niche sub-sectors

• Clients include many of the leading corporations and investors in each sector

Our Purpose:

What sets us apart:

DRAFT


Oliver Wyman is part of the $13 BN Marsh & McLennan Companies that provides specialized professional services to our clients worldwide

• Risk management, consulting and transfer

• Reinsurance and risk management

• Financial solutions and insurance program management services

• Revenue 2014 : US$7 BN • Staff: ~28,900 • Clients in over 130 countries

• 450 highly qualified economists • Public policy, regulations and

business strategies for government authorities

• Economic development, healthcare, and transportation

• 96 of the Fortune 100 corporations

• Staff: ~600 • 25 offices worldwide

• Branding, image, and strategy consulting

• Deep expertise, across all categories, in retail experience design

• 3,000 clients worldwide • Legacy includes some of the

world’s most recognized brands ranging from Mobily to McDonalds

• Personnel strategy • HR systems • Compensation • Incentive systems

• Revenue 2014 : US$4.3 BN • Staff: ~20,500 • Offices in more than

40 countries, operations in more than 130 countries

• Revenue 2014: US$13 BN

• Staff: 57,000

• Clients: in more than 130 countries

Economic analysis and tying in with governmental regulations and macro trends Brand strategy development

Risk management, operational examination and extensive benchmarking data

Talent management, reorganization, skill development

INSURANCE, REINSURANCE, AND RISK ADVISORY HUMAN RESOURCE CONSULTING

BRAND STRATEGY CONSULTING

• Strategy • Organization • Operations • Risk management • Transformation management

Marsh & McLennan Groiup profile

DRAFT


Organisation Effectiveness & Talent Management

Operational Risk

Operational Excellence

Strategy and Transformation

Commercial Risk and Trading

Technology Enabled Change

Func

tiona

l Are

as

Sourcing and Supply Chain

B

C

Global Footprint & Local Practices

• Specialisation by industry: consulting staff dedicated to specific industries

• Strong expertise in functional areas in different sectors, consolidating best practices

• Global view with Local knowledge: leveraging global trends with local experienced in each country to provide customized solutions

A

B

C

Fina

ncia

l Ser

vice

s

Ener

gy: o

il &

gas

and

util

ities

Info

rmat

ion

& C

omm

unic

atio

ns T

echn

olog

y

Ret

ail,

Con

sum

er G

oods

& H

ospi

talit

y

Avia

tion,

Aer

ospa

ce &

Def

ence

Infr

astr

uctu

re &

Tra

nspo

rt

Hea

lth &

Life

Sci

ence

s

Industry Sectors A

Customer Value Management

Publ

ic s

ecto

r

Oliver Wyman is organized globally combining deep industry expertise and functional capabilities to develop practical and impactful solutions to our clients

Middle East Asia South

America International

Europe North America

DRAFT


Specifically across the Oil & Gas value chain, we are leaders in strategic, organizational, operational and risk related advisory for clients

• Strategic and asset portfolio planning and growth strategy

• Business design evaluation and development

• Asset value maximization • Asset and project

portfolio optimization • Capex project delivery

improvement • Sourcing • Cost improvement • Organization processes,

and capabilities building

• Customer-driven retail and wholesale marketing

• B2B strategy • Network planning • Retail site/store

operations and customer service experience optimization

• Channel Strategy and Sales Force Effectiveness

• Fuels Pricing (retail/rack fuel and store)

• Commercial and industrial marketing

• Lubricants marketing

• Post merger integration program

• Supply chain improvement program

• Cost optimization and process enhancement

• Performance management

• Capital project evaluation • Brand transformation

• Asset strategies • Operations effectiveness • Growth strategies • Transportation

effectiveness • Pipelines, storage and

terminals strategy and planning

• Logistic operations optimization

• Depot optimization • Customer satisfaction

and retention

• Wholesale marketing and customer strategies

• Trading and commercial optimisation

• Commercial Risk Management

• Supply plan optimization and risk management

• Integrated channel optimization (wholesale, trading, retail, B2B,…)

• Portfolio management • Natural gas and LNG

value chain participation strategies

• Oil, NG, products trading strategy and operations

Upstream exploration and production

Midstream Transport & Logistics

Refining and Marketing Petrochemicals Supply, trading &

optimization

Oil and Gas

DRAFT


Similarly, across the utilities value chain, we are leaders in strategic, organizational, operational and risk related advisory services

• Meter-to-cash process management (meter reading, collections, call center and billing)

• Customer satisfaction

• New service delivery

• Generation strategy: nuclear, fossil and renewable (hydro, wind, solar, biomass)

• Asset sales • Fuels strategy • Power plant

competitiveness • Project

management

• Bulk power alliances and entry strategy

• Bulk power marketing strategy

• Gas supply and transportation

• Marketing and pricing strategy

• Branding strategy • Channel Strategy

and Sales Force Effectiveness

• Customer value engineering/in-market experimentation

• Diversification • Alliances

• Separation of assets, and operations

• Project planning and management

• Outsourcing and alliances

• Gas control

• Reliability • Asset management • Work management

and field force productivity

• Back office and support effectiveness

Utilities

Retail Delivery Generation

Wholesale Trading and Marketing Generation Distribution Transmission Retail Services Customer Service

DRAFT


Our clientele are Oil & Gas and utility companies around the world

Selected Oil & Gas clients Selected Utilities clients

KBR

Select Examples

DRAFT


We have a strong leadership team covering the energy sector across the world Oliver Wyman energy sector partners and principals

London

Zurich Roland Rechtsteiner Oil and Gas

Alexander Franke Oil and Gas

San Francisco Bridget McVerry Oil and Gas

Chicago Eric Nelsen Oil and Gas

Larry Pearlman Oil and Gas

Milan

Sandro Melis Oil and Gas

Frankfurt Ernst Frankl Oil and Gas

Toronto

Ryan Markle Utilities

Munich Joerg Staeglich Utilities

Dubai

Volker Weber Oil and Gas

Bernhard Hartmann Oil and Gas

Saji Sam Oil and Gas

Rafik Bennachour Oil and Gas

Bruno Sousa Oil and Gas

Alessandro Palmos Oil and Gas

Houston Rob Jessen Oil and Gas

Robert Orr Oil and Gas

Susie Scott Oil and Gas

Irfan Bidiwala Oil and Gas Karina Swette Oil and Gas Boston

Gerald Yurkevicz Utilities

Alan Feibelman Utilities

Curtis Underwood Utilities

Keric Morris Oil and Gas

Francois Austin Oil and Gas

Bill Heath Oil and Gas

Thorsten Querfurt Oil and Gas

Joanna Osbornne Oil and Gas

Georgina Simpson Oil and Gas

Kate Watson Oil and Gas

Dusseldorf

Veit Schwinkendorf Utilities

Alexander Lesch Utilities

Johannes Schmitz Utilities

Jens Lorkowski Utilities

Thomas Fritz Utilities

Kevan Jones Utilities

Pooniah Vijendra Utilities

James Basden Utilities

Damian West Utilities

Tim Wright Utilities

Calgary Robert Peterson Oil and Gas

Singapore Mike Brady Oil and Gas

DRAFT


We have built a strong team of energy experts focusing on the Middle East

Rafik Bennachour Principal, Energy • 10 years of experience with Oil &

Gas, industry in the Middle East

Mazen Taji Farouki Engagement manager, Energy • 6+ years of experience • Specialized in business and operating

model design, value chain opportunity development, operations improvement, project finance and large capital project management for major GCC clients

Eike Schuster Engagement manager, Energy • 6+ years of experience • Focus on energy, telecom and

information technology

Dr. Bernhard Hartmann Partner, Head of Energy practice • 25+ years of experience with oil &

gas, utilities and manufacturing industries across the Asia, Europe and the Middle East region

Saji Sam Partner, Energy • 18 years of experience with oil & gas

E&P and Downstream manufacturing industries

Dr. Volker Weber Partner, Energy • 15+ years of management

consulting experience in strategy, operations and performance management for clients across Europe and Middle East

Francois Austin Partner, Global Head of Oil & Gas • 20+ years of consulting experience

focused on translating business strategies and ideas into demonstrable results

Roland Rechtsteiner Partner, Energy • 15+ years of experience • Worked extensively with leading

companies with a focus on commodity trading and risk management issues

• Works globally in the Oil & Gas

James Basden Partner, Energy • 20+ years of consulting

experience focused on enabling senior management teams establish the right corporate structures to drive increased value

Floris Ansingh Senior Advisor – Upstream and Downstream • 35 years of experience with Royal

Dutch Shell, 10 years as CEO of Shell in Saudi Arabia

• Expertise in government negotiations, stakeholder management, and strategic positioning plan execution

Bruno Principal, Energy • 11+ years of experience with Oil &

Gas, Petrochemicals, and Utilities industries across Europe, South America, and the Middle East

Alessandro Palmos Principal, Energy • 14 years of experience with Oil &

Gas, Petrochemicals, and Utilities industries across Europe, and the Middle East

DRAFT


Our combined teams also bring significant experience working in the MENA energy sector

List of key topics addressed in Energy in the region1

Note: 1Detailed list of credentials in the region and worldwide can be found in appendix 1; 2Previous project experience from energy practice member prior to joining OW

UAE • Process and operation improvement plan definition

(‘Petrolean’) • Development of models to estimate EML (Estimated

maximum loses) potential • Operating safety policy and process review • Assessment of business continuity plan • Operational improvement plan • Energy demand-side planning and management

Oman • Organizational restructure and enhancement of

performance review metrics • Operational performance assessment and

improvement plan • Development of models to estimate EML (Estimated

maximum loses) potential • Operating safety policy and process review

Qatar • Business unit performance review and operational

improvement plan • Risk benchmarking of different upstream and

downstream topics • Risk improvement investment analysis and

prioritization of initiatives • Development of models to estimate EML (Estimated

maximum loses) potential

Iraq • Definition of the national energy strategy, including

implementation plan and varying economic impact scenarios2

• Definition of cost improvement initiatives oil upstream player

• Institutional and governance mechanisms required to implement the integrated national energy strategy

Saudi Arabia • Unconventional gas exploration master plan and

supply chain opportunities • Enterprise risk management plan • Strategic review of key assets • Alternative energies program • Risk improvement investment analysis and

prioritization of initiatives • EML (Estimated maximum loses) evaluations and

scenarios • Marketing and sales transformation program • Operating safety policy and process review

Bahrain • Risk engineering studies and key assets and facility

assessment • Site quality assessment • Operational performance review and optimization plan • Development of models to estimate EML (Estimated


Yemen • Risk benchmarking of different upstream and downstream

topics • Site quality assessment • Development of models to estimate EML (Estimated


Egypt • Benchmarking of different upstream and

downstream topics • Operational improvement plan and operating safety

policy and process review • Organization transformation including definition of

key governance structures, business processes, R&R and performance measurement

Select Examples

DRAFT


Where we chose to compete, Oliver Wyman are the preferred top-tier management consultants of CEOs and Executive Boards

6.0

6.4

6.9

7.1

7.6

7.6

1 2 3 4 5 6 7 8 9 10

McKinsey

Booz

Bain

AT Kearney

BCG

OliverWyman

Do not recommend

1. Based on 517 CEO responses with feedback on 140 consulting firms © 2008 Corporate Executive Board. Used with permission

Strongly recommend

Corporate Executive Board survey of 517 CEOs placed Oliver Wyman at the top for overall satisfaction out of 140 consulting firms

• Our clients are universally and routinely satisfied with our work • Exceptional client list, e.g. 75 of the global top 100 financial institutions; 3,500 staff; Global business

model to ensure first-hand experience of best-practice examples is delivered to clients by strong international staffing

Average recommendation by firm¹

oil: implications of a shifting paradigm -...

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