The Structural Change in the Oil and Gas Industry · Oil price outlook revised down Oil Search –...

Oil Search Limited ARBN 055 079 868

UBS Superannuation Conference, Melbourne

“ What’s Next for Australia?”

5th March 2015

The Structural Change in

the Oil and Gas Industry

Disclaimer

While every effort is made to provide accurate and complete information, Oil Search Limited does not

warrant that the information in this presentation is free from errors or omissions or is suitable for its

intended use. Subject to any terms implied by law which cannot be excluded, Oil Search Limited accepts

no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a

result of any error, omission or misrepresentation in information in this presentation. All information in

this presentation is subject to change without notice.

This presentation also contains forward-looking statements which are subject to particular risks

associated with the oil and gas industry. Oil Search Limited believes there are reasonable grounds for

the expectations on which the statements are based. However actual outcomes could differ materially

due to a range of factors including oil and gas prices, demand for oil, currency fluctuations, drilling

results, field performance, the timing of well work-overs and field development, reserves depletion,

progress on gas commercialisation and fiscal and other

government issues and approvals.

2 Oil Search – Structural Change in Oil and Gas

What is Driving Oil Prices?

Oil Search – Structural Change in Oil and Gas 3

Source: IEA Oil Market Report, Dec 2014

Global Oil Demand is weak

2014 demand growth up only ~ 0.6mn b/d

Weaker than expected in China and OECD

2015 economic outlook is weak in EU, Asia

Major stock-build forecast globally in 1H15

Global Oil Supply / Demand Outlook

(mn b/d)

Source: Bloomberg, Morgan Stanley Commodity Research

Record Oil Supply growth in 2014

+1.5mn b/d increase from US “shale” or tight oil

Record supply from Russia and Iraq

Libya oil returned to the market in July

Market is oversupplied

Crude Oil Front - Month Price

($/bbl)

OPEC not cutting production -

creating structural change


OPEC is no longer the swing producer:

Historically OPEC has balanced the oil market, by cutting production in response to demand events

Saudi Arabia and others have low production costs and spare production capacity to respond to supply crises

OPEC has been losing market share to higher cost producers such as US shale

OPEC has clearly signalled it will now compete for market share and will accept lower prices

OPEC Crude Production vs call on OPEC

Source: IHS Energy

US crude production is set to overtake Saudi crude

output in the next 12months


Source: EIA, OSH analysis

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5

6

7

8

9

10

11

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Saudi Crude Production US Crude Production

Saudi Crude Production vs US Crude Production

(mm b/d)

Oil price outlook revised down


Global oil market undergoing a structural change:

Most analysts see prices below $80/bl until 2017, and no analyst sees a return to 2014 outlook before 2020

Market will be highly volatile in this period

40

50

60

70

80

90

100

110

120

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Broker Consensus (July 2014) FACTS Woodmac

Deutsche Goldman Sachs JPM

Morgan Stanley Citi UBS

Brent Oil Price Forecasts to 2020

(US$/bbl Real)

Source: Brokers, OSH analysis

A Brent price of $40/bl or below could put material

volumes of existing global supply at risk


Volume of production that becomes cash negative as oil prices fall

Source: Wood Mackenzie, Q1 2015

Share prices under pressure


Source: Bloomberg, OSH analysis

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OSH Brent

Share price performance reflects relative strength of companies:

OSH down -2.7% in 2014

ASX Energy index down -15%, and OSH global peer group down up to 60%

OSH peer group relative FY 2014 share price performance vs Brent

Dividends and buybacks threatened below $80/bl


Source: Wood Mackenzie

Company responses to lower oil prices / revenues:

Actively revising 2015 budgets and capital spending downwards

Some companies already in financial distress, looking to raise capital

Brent price required to maintain current debt levels in 2015


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Source: Wood Mackenzie, company reports

Capital spending reduced and projects postponed

Company responses to lower oil prices / revenues:

Discretionary expenditure, including exploration, slashed

Development expenditure deferred, and aggressive value engineering for projects in construction

Service company contracts renegotiated

OPEX improvement programs, and alignment of corporate cost and structure to activity

Year on year change in upstream capital budget (%)

Project costs to decline as activity reduces

» Upstream capital costs are expected to

decline globally by approximately 12% on

average between 2014 and 2016 offshore

and 7% onshore

» Falling demand will ease labour pressures

both onshore and offshore

» Offshore floating drilling rig rates had been

dropping as new supply came into the

market, and will now be hit with lower

demand as well going forwards


Source: IHS Energy Cost Service

Upstream Capital Cost Index (UCCI)

Nominal $

Impact on LNG Prices and Markets

Falling oil prices have already seen LNG spot, medium and long term contracts stall, with buyers expecting LNG

prices to fall.

Many proposed greenfield LNG projects are not economic at $50/bbl without reductions in capital costs.

LNG from PNG may find reduced competition for customers when it begins marketing


Medium to Long term LNG Volumes for Asian Delivery vs Benchmark Prices

“Grassroots LNG

projects will stall.

Costs are simply

too high…”

Dr. Fesharaki,

Feb 2015

Source: FACTS Global Energy

*Capacity per Department of Energy authorization to Free Trade Agreement countries, in addition to capacities under construction

**Project partners’ plan includes expansion up to 50 mmtpa

New LNG Suppliers….

13

Canada

Announced >160 mmtpa

Russia

Announced 63.9 mmtpa

Mozambique

Announced 20 mmtpa**

US

Under Construction ~20 mmtpa

Announced >290 mmtpa*

Australasia

Under Construction 68.1 mmtpa

Planned 3.2 mmtpa

Oil Search – Structural Change in Oil and Gas

PNG

Planned >10 mmtpa

Mediterranean

Planned >15 mmtpa

Source: Goldman Sachs, FGE

Future LNG projects from PNG are highly

competitive versus global alternatives


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LNG Projects under construction, selected probable and possible

Source: Oil Search and Wood Mackenzie, Q1 2015, Project names removed

Global LNG plant break-even costs

(US$/mmbtu)

….but how much will come to market??

15

Other LNG proposed projects (not shown in the diagram above) have not progressed beyond conceptual – Bonaparte FLNG, Cash/Maple

FLNG, Scarborough FLNG, Darwin Expansion

Browse (JPP)

Browse FLNG1

Gorgon Train 4

Queensland Curtis LNG Train 3

GLNG Train 3

Arrow LNG

APLNG Train 3

APLNG Train 2

Sunrise FLNG

Pluto Expansion Train 2

Pluto Expansion Train 3

Source: Oil Search and Wood Mackenzie

X

X X

X

X

Lines indicates when FID date first

proposed and WM current view Operator target FID

date - Project cancelled

FID taken

X FID date

continuing to drift

(2 Train greenfield development)

Oil Search – Structural Change in Oil and Gas

PNG LNG is competitive versus LNG projects from

Australia


Source: Oil Search and Wood Mackenzie, Q1 2015, Project names removed

LNG Projects recently commissioned, or under construction, in Australasia

PNG LNG well placed compared to recently commissioned Australian projects

Debottlenecking at PNG LNG offers opportunity to further improve economics

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A B C D E F G H I PNG LNG J

Australian LNG plant break-even costs

(US$/mmbtu)

Many projects possible and speculative projects

been muted


Global LNG Capacity and Utilisation versus Demand

(mn t/yr)

Source: Wood Mackenzie, Q4 2014

XOM: Global Gas Supply demand


Source: ExxonMobil, The Outlook for Energy, Dec 2014

Gas resource evaluation ongoing in NW

Highlands and Gulf

» Key resource evaluation activities currently

underway:

– Structural remapping and reservoir modelling based

on information from Hides development wells

commenced in 2014. Will help further constrain Hides

resource

– Hides F1 well – material Koi Iange exploration target

underlying Hides field, currently drilling towards target

– P’nyang: initial preparations for further drilling to

assess resource potential

– Antelope 4 and 5 appraisal wells: will likely establish

whether resource can underpin one or two trains

– Antelope 6 (to assess resource upside) and Antelope

Deep (exploration well) to be drilled in 2015, both

wells subject to JV approval

» Resource clarity will determine progression

through to Concept Select/pre-FEED/FEED

19 LNG Supplies for Asian Markets Conference - March 2015

Hides F1 Deep

Antelope 4

Antelope 5

Antelope 6*

Antelope Deep*

Evaluation of Hides

development wells

P’nyang resource evaluation

Commitment of 1 well with

additional drilling subject to JV

approval

» Availability of commissioning gas from oil fields in Aug-13, prior to first

deliveries from the Hides field in Apr-14, enabling early start-up and rapid

production ramp-up at LNG plant

» Stick built (vs modular built), enabling issues to be ironed out prior to

production. Competitive labour costs

» Conventional LNG project, located onshore, with existing infrastructure

base from oil operations

» Productive wells with high flow rates – only 12 wells required to sustain

production for 30 years, resulting in low ongoing capex

» Substantial 1P certified reserves base with high heating value, attracting

premium pricing and suitable for Asian reticulation network

» High liquids, enhancing economics

» Located close to growing Asian LNG markets

» Stable fiscal regime with strong Government support

» Aligned Joint Venture. Exxon highly respected as able to deliver and

operate major LNG projects, augmented by OSH’s 86 years of in-country

experience

» Provides attractive returns and is robust to product price movements

20

Reasons for success-Some detail

LNG Supplies for Asian Markets Conference - March 2015 20

Image courtesy ExxonMobil

OSH Reassessed Strategic Review

» Review conclusions:

– OSH in strong position to manage lower oil price environment

– Proposed LNG growth projects remain attractive based on current assumptions

– Lower oil prices will impact future cash flows but with careful management, OSH can fully fund

its equity share of two new gas development projects

– Industry capital cost deflation likely

» With production profitable even at current oil prices, opportunity to recalibrate

business, improve efficiencies, sharpen fiscal discipline and underscore

investment returns

» 2015 work programmes re-prioritised:

– Reduce capex, with cuts primarily in exploration, other non-gas discretionary spend

– Reduce 2015 opex

– Actively engage with contractors to further reduce costs by targeted 15 – 25%

– Defer activities not required for safety or priority projects

– Monitor market for distressed sellers or opportunities for expansion with low cash

commitments

» Proportional payout ratio of 35 - 50% core NPAT, remains appropriate

» Focus is to maintain top quartile returns to shareholders


2015 Spending Cuts

PNG Oil and Gas

production costs ~20%

Exploration and

evaluation spend ~25%

Production capital

~20%

Corporate capital ~40%

Summary

» Oil and Gas industry is undergoing a major structural change, driven by low oil prices

» Industry response has been to cut capital spending and defer projects

» Impact extends to LNG supply and cost environment

» OSH 2014 Strategic Review has been updated. OSH in excellent position to recalibrate

cost base and refocus business on potentially high returning growth projects:

– Potential expansion of PNG LNG Project and Elk/Antelope developments - both have robust project economics

and remain attractive

– PNG country stability initiatives remain a priority

» Capex and opex reductions planned, focused on reducing/deferring exploration, other

discretionary items

» Dividend pay out ratio of 35 – 50% of core NPAT unchanged

» Strong balance sheet and ample liquidity to pursue growth


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