OIL & GAS MANAGEMENT

Artic Development Project – Kara Sea Blocks 1,2,3

Exxonmobil and Rosfneft Artic Collaboration

November 2011Manuel Suarez

Artic Exploration Development ProjectKara Sea – East Prinovozemelskiy Blocks 1,2,3

Project Fundamentals -Activity 4

Manuel Suarez

November 2011

Agenda1. Project Background/Rationale2. Option Appraisal3. Benefits and Goals4. Success Factors/Criteria5. Scope of Work6. Work Breakdown Structure7. Critical Path Analysis8. Schedule9. Organization Structure10. Responsibility Matrix11. Stakeholder Analysis

Agenda12. Risk Analysis13. Assumptions/Constraints14. References15. Questions

• Energy cannot be under emphasized as it is vital to even the most basic unit of the society.

• According to 2010 annual summary and report global energy demand is likely to increase about 35 percent from 2005 to 2030. Virtually all the growth in energy use will occur in developing countries, where demand will increase more than 70 percent.

• The fastest growing major energy source will be natural gas, reflecting strong demand for clean-burning fuels to meet rising power generation needs.

• By 2030, natural gas will displace coal as the second most prominent source of energy worldwide. Oil will remain the world’s largest source of energy.

1. PROJECT BACKGROUND/RATIONALE

• Keeping pace with the increase in global demand will require unprecedented levels of investment, advanced technologies, and access to resources.

• Energy efficiency will be a key contributor to meeting the world’s needs for reliable and affordable energy.

• Meeting rising demand, safely and with minimum impact on the environment, is a key challenge facing not only ExxonMobil, but also governments and societies around the world.

• The Kara Sea located in the arctic region is touted to be among the most promising and least explored offshore areas globally prompting a mad scramble by the world’s oil majors to acquire access to perform exploratory activities.


Project Life Cycle

Negotiation License Award

(1 Year)

Exploration (9 Years)

Development (6 Years)

Operation (15 Years)

Decommissioning(4 Years)


(1 Year)





Kara Sea – Block 1- 47.000 km2

Kara Sea – Block 2-38.000 km2


Kara Sea – Block 3 – 40.000km


(1 Year)






Exploration

Seismic

•Develop a picture of geological structures below the surface

•If results show structures exist. It will be proceeded to site surveys

Site Surveys

•To get more information about the area of potential prospect, including data of the environment around the potential area

•If safe and environmentally viable drilling location is identified, then proceed to the exploration drilling

Exploration

Drilling

•Explorations wells are drilled to determine if a prospect exists and to get further data including flow rate, temperature and pressure

•If the reservoir is viable to production, then proceed to appraisal drilling

Appraisal Drilli

ng

•Field appraisal is to establish the size of the field and most appropriate production methodology to assess whether the field is commercial

1

2

3

Explorat ion

Phase

Development


Exploration Phases

2. OPTION APPRAISAL

General PESTEL Analysis

Project Options Identification

Individual Option SWOT Analysis

Individual Option Investment Appraisal

Option Appraisal - Selection

P

•Political Dynamics in both Countries: Split Composition of US Congress, Upcoming Elections in Russia next year

E

•The inflation rate in Russia was last reported at 7.2 percent in October of 2011.

•Volatility of Oil and Gas Prices

S

•lack of expertise to deal with ethnic questions

•Environmental degradation of ice sheets, fishing plots, hunting grounds

T

•Open water in the Arctic has resulted in another potential obstacle to shipping, namely unpredictable ice flows

•Exxonmobil has performed in similar climate conditions (HIBERNIA) as such can adopt similar technological strategy

E

•Harsh environmental conditions in the artic

•Arctic oil, gas, and mineral exploration; endangered Arctic species

L

•The region warrants particular attention in terms of governance.

•Transit through the shallow and congested Bosporus Straits is limited by Turkey for environmental and safety reasons, limiting the effective capacity of pipelines to Novorossiysk.

2. OPTION APPRAISAL

Options:

1. ExxonMobil will finance 100% of the exploration phase of Kara Sea focusing on rapid development of block 1 which will lead to shortened time elapsed for operation by 2027, and then plough back benefit (financial and improved technology) incurred from the early operation to block 2 and 3 respectively. Rosneft will not reimburse ExxonMobil its share of the exploration cost but Russian government shall provide 100% Tax relief during Exploration, Development Decommissioning and 20% tax relief during operation.

2. ExxonMobil will finance 100% of the exploration phase of Kara sea focusing on rapid development of both block 1 and 3 respectively, and then plough back benefit incurred from early operation into accelerating exploration and development of blocks 2. The Russian government shall provide 100% tax relief during Exploration, Development and Decommissioning

2. OPTION APPRAISAL

Options:

3. ExxonMobil will finance 100% of the exploration phase of all 3 blocks simultaneously due to proven evidence of larger oil deposits. The Russian government shall provide 100% tax relief during Exploration and Development. Rosneft will finance 100% the cost of decommissioning.

2. OPTION APPRAISAL

Individual SWOT Analysis:

2. OPTION APPRAISAL

Kara Sea – Blocks 1,2,3 Characteristics

2. OPTION APPRAISAL

BlockArea

(km2)Area(%)

Total (bln boe)

Total(M boe/km2)

Exploration Investment

(bln $)

Total Project Investment

(bln $)

Gross Expected Income (bln $)

Investment/Expected Income

(%)

Block 1 47.000,00 37,30% 36,11 0,77 0,8206 128,22 2.646,56 4,84%

Block 2 39.000,00 30,95% 24,46 0,63 0,6810 106,40 1.597,47 6,66%

Block 3 40.000,00 31,75% 49,43 1,24 0,6984 109,13 2.082,23 5,24%

Total 126.000,00 100,00% 110,00 - 2,2000 343,75 6.326,26 -

Kara Sea - Blocks 1,2,3 Characteristics

BlockGas

(bln m3)Oil

(bln tons)Gas

(bln boe)Oil

(bln boe)

Block 1 3,32 3,33 17,00 19,11

Block 2 2,73 1,82 14,01 10,45

Block 3 8,54 1,12 43,01 6,42

Total 14,59 6,27 74,02 35,98

Kara Sea - Blocks 1,2,3 Characteristics

OptionsNPV

(MM $)PP

(Years)

Discount Factor

(%)

Oil and Gas Tax (%)

Average Oil($/BOE)

Average Gas($/BOE)

Operating Cost($/BOE)

1 $12.543,33 17,00

2 -$31.313,17 -

3 -$32.316,19 -

20,00

Data for AnalysisCost-Benefit Analysis

110,0060,00%10,00% 32,00

Investment Appraisal

2. OPTION APPRAISAL

Investment Appraisal – (NPV and PP)

2. OPTION APPRAISAL

Option Appraisal

2. OPTION APPRAISAL

3. BENEFITS/GOALS

ID Benefits Goals

01Development of new technology to undertake future projects in similar environmental conditions

To double Exxonmobil’s proven oil reserve by 2020

02 Access to 1/5 of the oil and gas reserve of the world

To be the leading oil and gas operator worldwide with cutting edge technology

03

Increased dominance of emerging oil and gas market (China, Brazil, etc) by meeting the future global demand

To expand our operational base in the arctic

4. SUCCESS FACTORS/CRITERIA

ID Success Factors Success Criteria

01 Development of Artic Oil/Gas Reserves

Successful completion of exploration phase of all 3 EPS blocks as at 2031

02 Technology/Expertise Transfer

Establishment of an Artic oil&gas reseach and design centre in St Petersburg to be jointly staffed by both companies in 2012

03Expansion of Exxon’s dominance in oil and gas industry

Increase of Exxon’s proven world oil and gas reserves by 12,00 bln BOE due 2020

04Reduction of corporate liabilities in Artic oil and gas reserves development

Early profit generation from 2026 for futher investment in the in the remaining 2 blocks

05Improve on oil spill response techniques in the Artic Region

Develop a Spill Management system for Artic Conditions by the end of exploration phase in Block 1 (2025)

5. SCOPE OF WORK

In-Scope

• Exxon will finance 100% ($2.2 billion) of exploration of potentially giant oil fields with state-run. Rosneft in the Kara Sea, 1, 2 and 3 Blocks. Rosneft will take 66,7% of the blocks and Exxonmobil the remaining 33,3%.

• ExxonMobil and Rosneft will create an Arctic Research and Design Center for Offshore Developments (ARC) in St. Petersburg which will be staffed by Rosneft and ExxonMobil employees. The center will use proprietary ExxonMobil and Rosneft technology, and will develop new technology to support the joint Arctic projects, including ice-class drilling and production ships and platforms, as well as other Rosneft projects.

5. SCOPE OF WORK

In-Scope

• Rosneft equity interest in a number of exploration and operating ExxonMobil assets in North America, including offshore fields in the Gulf of Mexico, tight oil fields in Texas (USA), Canada and projects in other countries (Limited to 33,3%).

Out-of-Scope

• $1 billion looking for oil in the Black Sea, in the Tuapse Block.

• Joint study of developing tight oil resources in Western Siberia.

6. WORK BREAKDOWN STRUCTURE

ARTIC COLABORATION PORTFOLIO (0)

KARA SEA PROJECTS

(1)

BLOCK1 (1.1)

EXPLORATION (1.1.1)

SEISMIC EXPLORATION

(1.1.1.1)

SITE SURVEY (1.1.1.2)

EXPLORATION DRILLING (1.1.1.3)

APPRAISALDRILLING (1.1.14)

DEVELOPMENT (1.1.2)

OPERATION (1.1.3)

DECOMMISSIONING (1.1.4)

BLOCK 2 (1.2)

BLOCK 3 (1.3)

BLACK SEA PROJECTS

(2)

Level 0

Level 1

Level 2

Level 3

TYPICAL WBS

7. CRITICAL PATH ANALYSIS

8. SCHEDULE

9. ORGANIZATION STRUCTURE

PORTFOLIO DIRECTOR

DIRECTOR KARA SEA DEVELOPMENT

BLOCK PROJECT MANAGER

ENGINEERING MANAGER

MONITORING & CONTROL

MANAGERHSE MANAGER ENVIRONMENTAL &

LEGAL MANAGERFINANCIAL MANAGER

COMMUNICATION MANAGER

10. RESPONSIBILITY MATRIX

11. STAKEHOLDER ANALYSIS

12. RISK ANALYSIS

13. ASSUMPTIONS/CONSTRAINTS

Assumptions

• Oil and Gas Taxation 60%• Average barrel of oil during the project 110$• Average (gas) barrel of oil equivalent 32$• Operating Cost per Barrel of Oil Equivalent 20$• Political backing by both countries for the deal• Mutual cooperation by both countries• Availability of funds for the exploration phase • 110 bln BOE of recoverable oil available

Constraints

• Nature of region (Environmental conditions)• Gloomy world economic forecast• Energy policy regulations• Accessibility of the vessels to access the harsh region

14. REFERENCES

1. ASSOCIATION OF PROJECT MANAGEMENT (2008). APM COMPETENCE FRAMEWORK. NORFOLK, ENGLAND: BRECKLAND LTD. 2-60.

2. ERNST & YOUNG (2011). THE FUTURE OF RUSSIAN OIL EXPLORATION BEYOND 2025. USA: EYGN LIMITED. 1-20.

3. ERNST & YOUNG (2011). CAPITAL PROJECT LIFE CYCLE MANAGEMENT FOR OIL AND GAS. USA: EYGN LIMITED. 1-16.

4. INTERNATIONAL ENERGY AGENCY (2010). NATURAL GAS INFORMATION 2010. PARIS: CORLET. 11-194.

14. REFERENCES

5. ERNS & YOUNG (2011). NAVIGATING JOINT VENTURES IN THE OIL AND GAS INDUSTRY. USA: EYGM LIMITED. 1-20.

6. IUCN (THE WORLD CONSERVATION UNION) (1993). OIL AND GAS EXPLORATION AND PRODUCTION IN ARTIC AND SUBARTIC ONSHORE REGIONS. CAMBRIDGE UK: WORDS AND PUBLICATIONS. 6-67

7. OIL AND GAS UK (2010). OIL AND GAS UK - 2010 DECOMMISSIONING INSIGHT. UK: OIL AND GAS UK. 2-26.

8. BRODRICK, S., 2011. TEN GREAT READS TO KICK OF 2011. (ONLINE): HTTP://BLOG.UNCOMMONWISDOMDAILY.COM/10-GREAT READS-TO-KICK-OFF-2011-6031 ACCESSED 15 AUGUST 2011

14. REFERENCES

9. ENGINEER LIVE 2011. EXXON MOBIL STRIKES ARCTIC EXPLORATION DEAL WITH ROSNEFT. (ONLINE): HTTP://WWW.ENGINEERLIVE.COM/OIL AND GAS ACCESSED 3 SEPTEMBER2011ENGINEER/EXPLORATION DRILLING/EXXONMOBIL STRIKES ARCTIC EXPLORATION DEAL WITH ROSNEFT/23663

10. INMAN, P., 2011. EXXONMOBIL-ROSNEFT OIL DEAL UNLIKELY TO OPEN THE TAPS OF TRANSPARENCY. WHERE THERE'S OIL, THERE'S CORRUPTION – AND RUSSIA. GUARDIAN.CO.UK.(ONLINE):HTTP://WWW.GUARDIAN.CO.UK/BUSINESS/2011/AUG/30/EXXONMOBIL-ROSNEFT-DEAL-TRANSPARENCY. ACCESSED 3 SEPTEMBER 2011

11. MARKET WATCH 2011. WALL STREET JOURNAL. ROSNEFT: EXXON DEAL EXPECTED TO CLOSE IN 2012. (ONLINE): HTTP://WWW.MARKETWATCH.COM/STORY/ROSNEFT-EXXON-DEAL-EXPECTED-TO-CLOSE-IN-2012-2011-08-31 ACCESSED 1 SEPTEMBER 2011

14. REFERENCES

12. PIPELINES INTERNATIONAL, 2009. OVERCOMING THE CHALLENGES OF ARCTIC PIPELINES (ONLINE): HTTP://PIPELINESINTERNATIONAL.COM/NEWS/OVERCOMING THE CHALLENGES OF ARCTIC PIPELINES/008037/ ACCESSED 2 SEPTEMBER 2011

13. VASILYEVA, N., 2011. RUSSIAN OIL TEAMS UP WITH EXXON MOBIL. FORBES.COM (ONLINE): HTTP://WWW.FORBES.COM/FEEDS/AP/2011/08/30/GENERAL-ENERGY-EU-RUSSIA-EXXONMOBIL_8651154.HTML ACCESSED 1 SEPTEMBER 2011

15. QUESTIONS

OIL & GAS MANAGEMENT

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