Finding Value in the UKCS - Oil & Gas...

Finding Value in the UKCSChaired By

Michael TholenEconomics and Commercial Director

Oil & Gas UK

UKCS – is there light at the end of the tunnel?

Erin MoffatSenior Analyst, UK Upstream Research

Wood Mackenzie

UKCS – is there light at the end of the tunnel?Erin Moffat

Senior Analyst, UK Upstream Research

Trusted commercial intelligencewww.woodmac.com


5

Agenda

1. Capital investment

2. Production and exploration

3. Project analysis


6

0

20

40

60

80

100

120

140

160

US

$ b

illi

on

Recent spend at peak levels but expected to start declining

UK capital investment

0%

10%

20%

30%

40%

50%

60%

70%

0

5

10

15

20

25

2014 2015 2016 2017 2018 2019 2020

US

$ b

illi

on

(20

15

term

s)

Pre-FID

Under Development

2014 development capex – top 10 countries

Source: Wood Mackenzie


7

UK investment profile is changing

UK development spend by resource theme % of production by resource theme

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018 2019 2020

Conventional WoSHeavy oil HPHTLow permeability Sour oil

0

2

4

6

8

10

12

14

16

18

2015 2016 2017 2018 2019 2020

US

$ b

illi

on

Conventional Heavy oilWoS HPHTLow permeability Sour oil



8

0

1

2

3

4

5

6

US

$ b

illi

on

(20

15

term

s)

As the UK matures, companies are investing more in technically challenging fields to access material reserve volumes

Capital investment 2015-2019 – top 25 fields

West of Shetlands

Heavy Oil

HP/HT

Conventional new developments

Low permeability reservoirs

Later life investment



9

Budget impact – radical change was essential for the UKCS

Total value change from Budget 2015 International fiscal comparison*

0

20

40

60

80

100

120

Pre Budget Post BudgetPo

st

Ta

x R

em

ain

ing

PV

(£

bil

lio

n)

Operator Value Government Take

0

10

20

30

40

50

60

0

10

20

30

40

50

60

70

80

90

100

IRR

%

% G

ove

rnm

en

t ta

ke

* Comparison of fiscal competitiveness measured using a 50 mmboe model oil field

Brent oil price assumption (nominal terms) is US$60.00/bbl in 2015, US$65.00/bbl in 2016, US$70.00/bbl in 2017, then

long-term assumption of US$85.00/bbl (real, 2014 terms) from 2018 onward.



10

Agenda



3. Project analysis


11

UK production set to stabilise in the short term

Liquids production forecast Gas production forecast

0

1

2

3

4

5

6

2010 2012 2014 2016 2018 2020 2022

bc

f/d

Yet-To-Find New Developments Onstream

0

200

400

600

800

1000

1200

1400

2010 2012 2014 2016 2018 2020 2022

'00

0 b

/d

Yet-To-Find



12

0%

20%

40%

60%

80%

100%

2004 2006 2008 2010 2012 2014

Su

cc

es

s R

ate

Sub commercial Commercial

Playing with numbers – what is the real state of UK exploration?

*Includes tight holes and sidetracks


UK success rates* UK 2006-2014 well costs and mmboe per well

0

2

4

6

8

10

12

14

0

10

20

30

40

50

60

2006 2008 2010 2012 2014

Ave

rag

e m

mb

oe

pe

r w

ell

Ave

rag

e c

os

t p

er

we

ll (

US

$m

)

Average spend per well

Average mmboe per well


13

Why are UK volumes per exploration well so small?

Run of bad luck lasting three years?

Explorers are ignoring economics and drilling wells with negative EMVs?

Well success rates are below prognosis?

Discoveries sizes are below prognosis?

86 wells completed 2012-2014 added just 166 mmboe – less than 2 mmboe per well

UNLIKELY

UNLIKELY

POSSIBLY

POSSIBLY

Part of the answer is better pre-drill

analysis – helped by improved access

to data and sharing of knowledge



14

What should the UK exploration industry do?

Try another 100 similar wells?

Stop exploring?

Try a different kind of prospect?

Try a different kind of explorer?

If the next 100 wells are similar to the last 100, we can expect a similar result

DEFINITELY NOT

MAYBE

MAYBE

MAYBE

This is likely to mean bigger, riskier

prospects – new plays, new seismic

Perhaps more private equity backed or

focused specialists – need access to

acreage



15

Agenda



3. Project analysis


16

How healthy is the project pipeline?

0

100

200

300

400

500

600

700

800

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Rec

ove

rab

le R

es

erv

es

(m

mb

oe

)

Under Development Pre-FID

Under Development and pre-FID reserves brought onstream by year



17

AlliginArran

Bentley

Bressay

Cheviot

Crossans

Culzean

Darwen

Jackdaw

Kells

Lowlander

Padon

Peel

Perth

Platypus Rosebank

Vulcan East

20

30

40

50

60

70

80

90

2017 2019 2020 2021 2023 2024

10

% B

rea

ke

ve

n (

US

$/b

bl)

Production start-up

Robust

At risk

of delay

Likel

y

delay

Bubble size relates to

reserves

500 mmboe

250 mmboe

100 mmboe

UK Pre-FID projects still under pressure

Greenfield project breakevens (Pre-FID)

More delays to already delayed projects? 900 mmboe at risk if Brent below US$60/bbl.



18

Wood Mackenzie’s expectation for capital cost deflation

Capital costs – expected deflation

-55% -45% -35% -25% -15% -5%

Installation

Pipelines

Platforms

FPSO

Subsea kit

Drilling services

Drilling rig

2015

2016


Rig rates quickest to respond

UK has more rig redundancy

Long lead items will take time to deflate

FPSO market is limited – so less scope

for movement


19

Wood Mackenzie’s expectation for operating cost deflation

-30% -20% -10% 0%

G&A

IRM

Labour

Logistics

Well services

2015

2016

Vessel costs to see most movement

Labour costs first to move

Norway labour costs to stay flat, rather

than deflate

Further scope for reductions in 2016

Operating costs – expected deflation



20

Cost deflation - near-term pre-FID projects will see the biggest reductions


-30%

-20%

-10%

0%

10%

20%

30%

40%

Rem capex shift Rem PV shift IRR shift

Pre-FID

Projects based on pre/post deflation Capex/boe new projects at sanction

0

5

10

15

20

25

30

35

40

2004 2006 2008 2010 2012 2014 2016 2018

Cap

ex

/bo

e (

US

$, n

om

ina

l)

?


21

Decommissioning spend will overtake capex in the UK in 2022 – but with work, this can be delayed

Commercial projects

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018 2019 2020 2021 2022

Development Capex

Commercial + sub commercial projects

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2017 2019 2021 2023 2025

Development Capex



22

Sub commercial fields could offer a big prize …

NPV10 of potentially economic fields in the UKPotentially economic recoverable reserves


1.3 billion boe US$10.8 billion NPV10*

Atlantic Margin

Central North Sea

Northern North Sea

Other

Southern Gas Basin Atlantic

Margin

Central North Sea

Northern North Sea

Other

Southern Gas Basin

* Indicative valuation for sub commercial fields, of which a

subset are likely to progress to commercial projects.


23

Summary

Key takeaways

UK upstream is at a crossroads, production set to stabilise in the short term but will decline terminally unless exploration is revitalised.

Near term investment decisions are complicated; cost deflation and price vs capital discipline and return on investment

Industry needs to put in place sustainable responses to high costs and low efficiency

If sub commercial projects can be harvested, the prize could be large


24

Erin Moffat

Erin joined Wood Mackenzie in 2006 and currently works as a senior analyst in the UK Upstream team. In this

role she is responsible for updating and maintaining Wood Mackenzie’s coverage of the UK.

In addition to this, Erin has also contributed to consulting projects including regional overviews, asset

valuations, infrastructure studies, opportunity screening and cost and peer group benchmarking.

Erin has previously been responsible for Wood Mackenzie’s coverage of Albania, Greece and Italy.

Erin holds a BA(Hons) in Geography and Environmental Planning from the University of Strathclyde.

Prior to joining Wood Mackenzie, Erin worked as an analyst for Scottish Water.

Senior Analyst, UK Upstream Research

E [email protected]

T +44 131 243 4327


25

Disclaimer

This report has been prepared for delivery to OGUK on 17 June 2015 by Wood Mackenzie

Limited. The report is intended solely for the benefit of attendees and its contents and

conclusions are confidential and may not be disclosed to any other persons or companies

without Wood Mackenzie’s prior written permission.

The information upon which this report is based comes from our own experience, knowledge and

databases. The opinions expressed in this report are those of Wood Mackenzie. They have been

arrived at following careful consideration and enquiry but we do not guarantee their fairness,

completeness or accuracy. The opinions, as of this date, are subject to change. We do not

accept any liability for your reliance upon them.

Strictly Private & Confidential

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Americas +1 713 470 1600

Asia Pacific +65 6518 0800

Email [email protected]

Website www.woodmac.com

Wood Mackenzie* is a global leader in commercial intelligence for the energy, metals and mining industries.

We provide objective analysis and advice on assets, companies and markets, giving clients the insight they

need to make better strategic decisions. For more information visit: www.woodmac.com

*WOOD MACKENZIE is a Registered Trade Mark of Wood Mackenzie Limited

Oilfield Service Sector Outlook

Alex MilwardAdvisory Partner

EY

Oilfield Service Sector Outlook)Alex Milward, EY Advisory Oil and Gas Lead

17 June 2015

Reservoirs

Offshore Decommissioning TerminologyThe OFS sector is a significant part of the UK Economy

Market Segment Market overview

29

£25B

2012

44%

2013

£27B

46%

20112009 2010

£31B

44%

£35B

42%

£39B

42%

+56%

Wells

Facilities

Marine & Subsea

Support & Service UK Exports X% Growth (2009-13)

250kSupply chain

jobs

£2.7BTax receipts

(2009-13)

£

Source: EY, Review of the UK Oilfield Services Market, March 2015

Offshore Decommissioning Regulation

30

The global oil and gas industry is in a period of structural change

Implications for UKCS

• Pressure to improve

productivity and reduce

costs

• Declining competitiveness

of UKCS vs. global basins

• Decommissioning activity

moved forward

• Composition of the UKCS

is changing

0 4500 9000 13500

$90

$60

$30

$0

$120

Bre

ake

ve

n -

US

$/B

bl

Ultra DeepwaterTraditional

Heavy Oil Shale OilDeepwater

Source: Goldman Sachs, 420 Projects to Change the World, May 2015

Shale technology has lowered the oil cost curve

Cumulative Peak Production (kbls/d)

This change is having a significant impact on the OFS sector

31

Reservoirs

Market Segment

Wells

Facilities

Marine & Subsea

Support & Service

Cross OFS sector implications

• Margin reduction (10-30%)

• Capex and domestic focused industries hit hardest

• Easier cost savings already achieved

• Export market increasingly important

Today we are focusing on three of the largest sub-sectors

32

Reservoirs

Wells

Facilities

Marine & Subsea

Support & Service

Drilling and Well Equipment

Design and Manufacture

(DWEDM)

Engineering, Operations,

Maintenance and

Decommissioning Contractors

(EOMD)

Marine and Subsea

Contractors and Equipment

(MSCE)

£2.4B 84%

£5.7B 39%

£5.7B 72%

2013 revenue 2009-13 Growth



Market Segment Focus subsectors

33

Drilling and well equipment design and manufacture (DWEDM)

Prolonged period of challenge requiring extensive cost discipline

Implications

• Drilling programmes in

decline – especially

exploration wells

• Companies currently

working through backlog

• Companies increasingly

focused on onshore E&P

• Consolidation of market

Global capex forecast vs. historical ($B)**

Global offshore rig utilisation (%)*

*IHS-Petrodata, Morgan Stanley Research (Floater and Jack-up Rigs) **Goldman Sachs, 420 Projects to Change the World, May 2015

60

70

80

90

2016e2015e20142013 2017e

300

0

100

200

Traditional

His

torical -

2011-1

4

Ultra Deepwater

US Unconventional Liquids

Deepwater

LNG

0 100 200Forecast – 2014-17

Near-term Decommissioning Market

34

Engineering, operations & maintenance and decommissioning (EOMD)

Engineering hit hardest – O&M and decommissioning provide a buffer

Implications

• Significantly impacted by

UKCS drivers – 84% of

revenue in UK

• Engineering severely

impacted

• Operations and

Maintenance will remain

fairly stable

• Decommissioning increases

moderately in mid term.

UKCS – Capex and Opex 2011-18

UKCS - Decommissioning market forecast

£3B

£10B £7B£3B

£9B£15B

£7B

OpexUnsanction Capex Sanctioned Capex

2011 2014 2018

2014 2015 2016 2017 2018 2019

£1B

£0B

£2B

£3B

2015 forecast 2014 forecast

Source: Oil and Gas UK, Activity Survey, 2015

35

Marine and subsea contractors and equipment (MSCE)

Short term pressures but long term prospects remain sound

Implications

• Short term decrease in new

builds / installations

• Long term growth story due

to tech advancement

• Companies working through

backlogs

• New alliances likely to form

• Rising challenge to UK as a

subsea hub

Subsea capex ($B)

$0B

$10B

$20B

$30B

20

12

20

10

20

11

20

18

20

19

20

17

20

16

20

13

20

14

20

15

Forecast

Source: Infield, 2015

Wrap up and close

36

We are seeing 4 typical response from supply chain companies

1. Rationalisation – improving balance sheet, reducing costs

2. Expansion – acquiring competitors, entering new markets

3. Innovation – investing in new technology

4. Collaboration – forming alliances to reduce cost

Disclaimer

► The information in this pack is intended to provide only a general outline of the subjects covered. It

should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in

place of professional advice.

► Accordingly, EY accepts no responsibility for loss arising from any action taken or not taken by

anyone using this pack.

► The information in this pack will have been supplemented by matters arising from any oral

presentation by us, and should be considered in the light of this additional information.

► If you require any further information or explanations, or specific advice, please contact us and we

will be happy to discuss matters further.

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Finding Value in the UKCS - Oil & Gas...

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