CHRISTOPHER BIRD - MANAGING DIRECTOR

THE FUTURE COMPETITIVENESS OF THE UKCSUPSTREAM OIL AND GAS SECTOR

1st February 2017 - Park Inn Aberdeen

THE FUTURE COMPETITIVENESS OF THE UKCS

AGENDA

A brief history lesson

The supply and demand curve and key factors

The unit costs

Some factors affecting our competitiveness

So what do we need

Conclusions

Can we manage the future in a better way?

COU

LD WE PREDICT O

IL PRICEGlobal Risk Tracker January 2013

UKCS W

ORKS IF THERE IS LO

WER CO

RPORATE RISK

UK Competitiveness January 2014

HISTORY O

F OIL PRICE

Decreasing volatility is always going to cause a problem - August 2014

Oil price stability 30 yrs Growth7 yrs

Fall6 yrs

Some variation 16 yrs Growth11 yrs

WhatNext?

Dec 98$16

Jan 02$26

Feb 09$46

Jan 15$50

QuestionLonger term low price or just a blip as in 02/2009

Cost base

UKChallenge

HOW

OIL PRICE AFFECTS ECO

NO

MIES

So how does Oil price work

$75

$56

$35

$0

$100

Sub economic rangeFor investment

Non competitive for GDP and other energy sources

ConvenienceFee

Discount

Baseprice

Base price - $56/bbl• History of oil price• Other energy costs• Global economics

Consider• Market Dynamics• Global uncertainties• Industry risks

Undersupply

Low pricevolatility

Oversupply

IT WILL ALW

AYS BE CERTAIN THAT THIN

GS WILL CHAN

GEMarket Dynamics

Transportation

Energy Efficiency & Technologies

Petrochemical Market

Environmental Stability

Power Generation

WO

RLD DYNAM

ICS IS BECOM

ING M

ORE CO

MPLEX

Uncertinities affect our industry but we have no control

Geopolitics

Macroeconomic Situation

Supply and DemandFOREX Rates

Financial Markets

Environmental Impact

RISKS ARE SOM

ETHING THAT W

E CAN M

ANAGE

Risk factors that effect our competitiveness

Complexity

Loss of Scarce Resources

Low DeliverabilityHigh Unit Cost

Access to Finance

Environmental Management

WHY DID W

E END U

P HERE?So where was the UKCS at the end of 2015

$28 oil price

$28 oil price

Invest cost

Invest cost

Return on investment negative to a m

ax of 3%Investable basins

Needs unit costs to drop to sub $40 / boe

and Oil price to be above $55/boe for future investment

Production declineCost of assetsInefficienciesIncreased taxesOver specifiedToo competitive

IT IS MO

RE THAN JU

ST LIFTING O

R OPERATIN

G COSTS

So what is the gross cost for producing oil

Lifting Costs

Sustainable Capex

General and Administration

Capex Depreciation

Decommissioning

Amortisation

Special items

Operating Costs

TODAY

Gros

s Cos

ts

Cost Centre

Operating Costs = 30 to 60% of gross cost

Capital cotsTomorrow

BarrelsAsset performanceMaximising wellsNew developments

SHORT TERM

FOCU

S HAS BEEN THE N

ORM

Do we really focus on collaborative relationships

Booz | Allen | Hamilton report on capital projects

Key concern areas:• Risk Management• Performance

Management• Resources• Knowledge

Management

WE HAVE TO

MAN

AGE IN A VU

CA WO

RLDDeveloping the right people

Resources relocated to more competitive

destinations

Skill shortages and supply chain bottlenecks

Cost inflation and project management

problems

Further deterioration in

profitability

Lack of people development and a

vicious cycle for resources

EFFECTIVE RISK MAN

AGEMEN

T IS KEYSome of the risks to consider

Managing all the interfaces

Suppliers taking bullish approach to

signing contracts

Competitors fighting for the same

resources

Consistent and reliable information

Single point failures

HH

HH

HM

MH

HL

H/H13

H/M28

M/H18

H/L23

L/H4

M/M33

NEED PRO

FIT FOR FIN

ANCE, O

PERATOR AN

D SUPPLY CHAIN

Finance IRR on top of Oil comany investment IRR deck

Growth upside,

Risk sharing,Cost of capital

Increasing business model maturity and predictability of cashflows

Corporate Mezzanine:

Expected IRR: 15%+Brings in project

management skills (Subordinated notes,

high yield bonds, convertible shares)

EquityExpected IRR:

25%+Accessible without

collateral to pledge! Management rights

constrained (Private equity, IPO)

Senior debt:Expected IRR: 10%+

Reserve based lendingProject financeProject bonds

Comfort zone for O&G industry

Increasing leverage

So what does the UKCS need to be competitiveness and access finance and investment

Gross unit costs need to be competitive on Global oil and gas investment basis Against other energy sources for investment Meets the macro economic and geopolitical risks

Opportunity for growth Local market opportunities UKCS, North Sea, Europe International markets and exports Gaining knowledge, know-how and technologies for other markets

Predictability and consistency Bench marked performance of operating assets / new developments Bench marked performance of new developments Meet the schedule and cost promises Maintain the right levels of quality / minimise failures Managing environmental and sustainability challenges

Maintain the right culture Clear sense of purpose and embedded values Behaviours and attitudes that have integrity and accountability Collaboration and development of people /organisations

Government political and economic risk Effects of BREXIT and potential Scottish Referendum Cost of living and doing business in the UK Changes in tax and other key policies

5 KEY METRICS FO

R INVESTO

RS

THERE ARE STILL SOM

E MAJO

R CHALLENGES AHEAD

Need to plan on $54 / barrel longer term as a working oil price

Current operating costs $16/bbl

Target of gross DDA + SI $16/bbl

Operating profit companies $11/bbl

Government take - Tax $11/bbl (Pre 2104 this was $19/bbl)

$32

$54

$0

Unit Costs

Cost Centre

THE CHALLENGE W

ILL NO

W REM

AIN FO

R THE NEXT 40 YRS

Challenge is maintaining unit cost competitiveness with decline in production

JUVENILE ADULT OLD AGE

transition transition

18 years 35 years 40 years

competitive highly competitive collaborative

major change major change1985 2020

Discovery Performance/Growth Health/Costs

first production1972

WE N

EED A BETTER WAY O

F WO

RKING TO

GETHERMaximising competitiveness – using the dynamic framework

Creating knowledgeImproving

understanding

Developing Alignment

Effective application

ABIS EnergyBusiness model

THE OPPO

RTUN

ITY IS +£1.2 TRILLION

SALES UP TO

2050So what can you do to help the UKCS competitiveness

Minimise the wastage and non value costs Simplify the processes ad documentation Standardized what we do and remove preferential engineering Minimise the interfaces and wastage across them Be clear on the business objective and key drivers Do not hide information and knowledge Collaborate with the teams and different organisations

Speed up delivery Benchmark what is high performance for delivery Reduce all activities that delay the process unnecessarily Commit to closing out actions, obligations and commitments ahead of time Improve what you do to remove rework and misunderstandings Have accountability for the outcome

Maximise quality of every component Don’t live with second best or ensure everything is fit for purpose Use the carpenters rule – measure twice and cut once Feel responsibility for the quality of the services

Maintain and improve production as every barrel counts help minimise shutdown and production losses Maximise the performance of each well and the overall asset Accelerate sustainable capex and new projects to increase barrels

WE CAN

STILL OPERATE IN

TO 2050 AN

D BEYON

DSo focus on what is important

Focus on barrels across every asset Speed gives us the highest NPV as long as we get it right

Development engineering Delivery of products Effective execution and handover

Quality gives us the next highest NPV as cash-flow is king Minimise rework and interface problems Maximise asset integrity and HSE performance Availability of over 97% from day one

Manage cost so IRR creates an investable solution Remove all unnecessary costs Focus on unit costs – economic engine Focus on value and not just lowest cost

Create the right stories Positive stories of all the good things Challenge and improve our culture Commit to a collaborative approach

Need to maintain flexibility and agility in a VUCA world Knowledge, alignment, understanding, application

THERE IS SO M

UCH O

PPORTU

NITY AHEAD

Conclusions –it is there for the taking

THE UKCS oil and Gas industry will be here to 2050 and beyond 20+ billion barrels yet to produce Decommissioning activities and recycling Moving into other energy sectors Export potential

Operation costs are now down from over $30/bbl to less than $16/barrel stimulating investment

Independents and new companies coming into the North Sea IOC’s tending to shed assets to lower cost more nimble operators OGA with MER and collaboration requirements Need to keep on top of this as production continues to decline

Huge opportunities in decommissioning, re-sue and recycle New technologies and reserve engineering

Big challenge is capital development Many of the current BIG project complete by the end of 2019 Loss of a lot of highly experience staff Need to reduce capital costs and improve delivery

Need for a real transformation utilising the next generation Changing mind-set, attitude and behaviour There is definitely a will to make this happen