SPE%20DISTINGUISHED%20LECTURER%20SERIES

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SPE DISTINGUISHED LECTURER SERIES is funded
principally through a grant of the SPE
FOUNDATION The Society gratefully
acknowledges those companies that support the
program by allowing their professionals to
participate as Lecturers. And special thanks to
The American Institute of Mining,
Metallurgical, and Petroleum Engineers (AIME) for
their contribution to the program.
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E PA Dynamic Growth Business
Aidan McKay, SPE Shell Exploration Production
Company SPE Paper 84433 Originally presented at
SPE ATCE Denver, CO October 2003
3
History of Supply / Demand and Growth
Potential Investment Levels Required
Six Competitive Forces Shaping the EP Industry
Profits
Conclusions
SPE 84433 A McKay
4
Hydrocarbon (Oil Gas ) Demand from Wellbores
240
200
Gas (?)
160
128 mln boe/d
Daily Production (Million Boe/d)
120
Current estimated decline rate
80
Oil (?)
40
0
1980
1990
2000
2010
2030
1995
1985
2005
2020
2015
2025
Aggregate global production decline is 5 per
annum. Aggregate long term oil gas growth is
1.5 per annum average.
SPE 84433 A McKay
5
Number of Vehicles Globally (History and
Forecast)
1400
USA 200 mln vehicles (adding 15 mln pa) China
5 mln (Growth undefined)
1200
1000
800
Number of Cars Light Trucks Globally (millions)
Range of Forecasts
600
400
200
0
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
Assumes an 8 Bln population by 2030
SPE 84433 A McKay
6
Number of Commercial Aircraft
35
30
25
Range of Forecasts
20
Number of Commercial Aircraft (thousands)
15
10
5
0
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
Time (Years)
SPE 84433 A McKay
Assumes an 8 Bln population by 2030 AND economic
progress
7
World Proven Hydrocarbons (Bln Boe)
6000

• The planet may have 40 - 100 years supply
• 80 of hydrocarbons are in onshore areas 20
  offshore
• Much is low cost access..most owned by
  governments
• New ones (mature) opening each day.

5000
Hydrocarbon Demand from Wellbores Growing at
1-2 pa
4000
?
1000-3000 Bln boe Oil sands/Bitumen Heavy etc
Hydrocarbon Reserves Demand (Bln boe)
3000
2000
Oil 1100 Bln bbl (Expect Undiscov. 2000 Bln)
1000
2002 2030 44 Bln boe 88
Bln boe
Gas 700 Bln boe 4000 Tcf
0
SPE 84433 A McKay
8
Private Oil Company Annual EP Capex Actuals
Forecasts
Excludes OPEC Countries and Russia Spend
300
1 Bln scale giant projects, start of
offshore, DW etc Big 5 oil companies 93 18
Bln pa, 2003 34 Bln to increase oil by 15
Gas by 20 in 10 years to 14.8 mln Exxon, BP,
Shell, Chev, TFE Big US Independents 8 Bln
pa, for 2 mln boe/d
250
200
Capital Investment Capex ( Bln)
150
100
50
0
1960
1970
1980
1990
2000
2010
2020
2030
Time (Years)
SPE 84433 A McKay
9
THE TRADITIONAL S CURVE FOR TECHNOLOGY
Business Benefits
Creaming of Candidates for Technology
Widescale Implementation of Technology
Obvious Candidates
Initiation Of New Technology
First Trials
INNOVATION
GROWTH
MATURITY
Time
SPE 84433 A McKay
10
New Well Technology S Curve Evolution
GAINS CONTINUE ?
Business Benefits
?
Intelligent Wells
Underbalanced Drilling Offshore
Coiled Tubing Drilling
Multilateral Multi-fracced Wells
Multilateral Wells
Horizontal Wells
Slim Hole Exploration
Hydraulic Fracturing
Horizontal Wells with Hydraulic Fracturing
Vertical Deviated Wells
Time
1970
1980
1990
2000
2010
SPE 84433 A McKay
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Private Oil Company Annual EP Capex Actuals
Forecasts
300
Assumed Reduced Impact of Technology (30
Reduction in Investment)
250
10 Bln scale projects large scale devt of
marginals Major infrastructure supplier
cost increases
200
Capital Investment Capex ( Bln)
150
100
50
0
1960
1970
1980
1990
2000
2010
2020
2030
Time (Years)
SPE 84433 A McKay
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Industry Sector Research and Development Spend
2001
80
70
60
50
3.3 Bln in total EP 2 Bln in total
40
Annual RD Investment ( Bln)
30
20
10
0
Telecoms
Chemicals
Oil Gas
Personal Care
IT Hardware
Pharmaceuticals
Automotive Industry
Aerospace Defense
Electronics Electrical
Software IT Services
Diversified Industrials (Conglomerates)
Industrial Sector
NB 1995 equivalent RD spend was 4 Bln
Source UK Financial Times Monday 14th October
2002 pages 10 -11
SPE 84433 A McKay
13
Oil Gas Company Research and Development Spend
900
Source Company Annual Reports
2001
800
2000
700
1999
600
500
Annual RD Spending ( mln )
400
300
200
100
0
BP
ENI (AGIP)
Halliburton
ExxonMobil
Total, Fina Elf
Schlumberger
ChevronTexaco
Shell/Royal Dutch

• Pressures from Shareholders to cut RD spending
  in 1990s.
• Service Industry starts to do material tech
  devt,
• but significantly lower profits mean less RD
  funding

SPE 84433 A McKay
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Six Competitive Forces Shaping the EP Industry

• Cost Structure Need for Continual Improvement

• EP Portfolio Restructuring

• Shifting to Gas

• The Quest for Growth

• Need for improved financial management

• Industrial consolidation

SPE 84433 A McKay
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Where to Exploit the Hydrocarbons in Longer Term
BIG 5 MEO
SAUDI, KUWAIT, IRAN, IRAQ, UAE
NEW EP Business
OLD EP Business
Brazil, Angola, Iran, CIS, Sakhalin, Kazakhstan,
China Other OPEC Countries, S. America,
Pakistan, Bangladesh
BIG GAS
USA, Canada, North Sea, Small ME
Countries Selected others
QATAR, Russia

• Low Govt Take, stable terms
• - High UTCs
• - Mature Basins (limited growth)
• Capital intensive,
• high costs on supply curve
• Long asset tenure
• High upside at higher prices
• gas markets are developed

- High Govt Take, less stable terms -
Commercially risky - Limited upside _at_ higher
prices - gas markets are emerging - ultra
competitive (loss leading) - Lower degree of
control with govt Green/Brownfield (high
growth) Low UTCs- MRH DW High UTCs
- High Govt Take, - Commercially risky - Limited
upside _at_ higher prices - gas markets are
emerging - ultra competitive (loss leading) -
Low degree of control with govt
Green/Brownfield (high growth) Low UTCs
resources
Natural Shift with Declines
Where EP Industry made most of the money in the
past .. But margin is small _at_ low prices and
where capex treadmill potential exists
Where the EP industry must go in the future, but
where EP margin may be thin..... at all oil/gas
prices like RM or Chemicals
SPE 84433 A McKay
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EP UNIT MARGINS (/bbl) FOR EP ENVIRONMENTS
11.5
11
16/bbl oil 3/mln scf gas
OLD EP (examples)
10.5
10
22/bbl oil 3.5/mln scf gas
9.5
9
8.5
30/bbl oil 4.75/mln scf gas
8
7.5
7
BIG- GAS Qatar (likely rents)
6.5
NEW EP (examples)
6
Net Income After Tax per Boe (/boe)
5.5
5
4.5
4
3.5
BIG5MEO (likely rents)
3
2.5
2
1.5
1
0.5
0
UK
USA
Egypt
Brazil
China
Saudi
Nigeria
Gabon
Angola
Russia
Kuwait
Canada
Denmark
Germany
Thailand
Venezuela
Abu Dhabi
Kazakhstan
Netherlands
Which is better bond-like investments or
investments with more risks but with price upside?
SPE 84433 A McKay
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50 years of EP Consolidation Continues, Nationals
Join, What Next?
1980
1990
2000
2005
1950
1960
1970
Exxon /Mobil
Standard Oil (NJ) Socony Vacuum Superior Oil
Mobil
Standard Oil (IN) Standard Oil (OH) Atlantic Richf
ield Sinclair British Petroleum
Amoco
Arco Vastar
TNK
BP
Britoil
Royal Dutch /Shell
Royal Dutch/Shell Shell Oil
The Texas Co. Tidewater Pacific Western
Getty Skelly
Texaco
Chev/Tex
Chevron
Gulf Standard Oil (CA) Standard Oil (KY)
Occidental
Occidental Cities Service
Phillips Aminoil General American Oil
ConocoPhillips
State Oils Former State Oils TFE, ENI, REPSOL,
PETROBRAS,
Continental
Union Oil Pure Oil
Unocal
Marathon
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Will Consolidation Continue? In What Form?
2005 - 2010
2003
Exxon/Mobil

• Alignment around geography cultures
• Regulatory involvement is likely
• National Oils rightly playing away from home
• Does Aramco marry or eat the survivors
• How will Gasprom play going forward ?

Royal Dutch/Shell
BP
Chev/Tex
Phillips/Conoco
TFE
ENI
GaZprom (?)
YUKOS
Sibneft (?)
Rosneft
Norske Hydro (?)
Statoil
Repsol (?)
Petrobras
SPE 84433
SPE 84433 A McKay
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An Growth Example of Similar Behaviour in
Independents
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Devon
Hondo Alta Worland
Kerr McGee (N America) North Star Penz
Energy Santa Fe
USA Companies
Mitchell
Ocean Energy
United Meridian
Seagull
Anderson
Home
Canada Companies
Ulster
Numac
A 650,000 boe/d company with a 2.5 Bln pa capex
requirement, All cash flows re-invested.
SPE 84433 A McKay
Source Devon Annual Reports
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Big Four Major Oils EP Net Income (CCS)
40
35
30
25
20
Annual Net Income after Tax ( Bln)
15
10
5
US Vehicle Industry
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Time (Years)
Large pressures to increase dividends and Share
buybacks in a bear market
Source Company Annual Reports
SPE 84433
SPE 84433 A McKay
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The Ten Largest US Market Capitalisations Versus
Time
1928
1969
1999
2003
Mkt Cap (S Bln )
Mkt Cap ( Bln )
Mkt Cap ( Bln )
Mkt Cap ( Bln )
Rank
Company
Company
Company
Company
General Motors
1.
22
IBM
159
GE
459
266
Microsoft
ATT
2.
18
ATT
102
Microsoft
335
GE
256
US Steel
3.
9
General Motors
76
Citigroup
314
ExxonMobil
231
S..O. N.J. (Exxon)
4.
9
Eastman Kodak
51
Cisco
306
Wal-Mart
217
G.E.
5.
9
Exxon
51
ExxonMobil
284
Pfizer
178
DuPont
6.
8
Sears Roebuck
40
Pfizer
271
Citigroup
173
F.W. Woolworth
7.
7
Texaco
32
Intel
244
Johnson J
163
S.H. Kress
8.
7
Xerox
31
Wal-Mart
239
IBM
137
S.Oil of California
9.
6
GE
27
IBM
194
AIG
128
NY Central Railroad
10.
6
Gulf Oil
24
Nokia
187
Merck
114
Oil Companies will continue to play huge global
role
Source Various
SPE 84433
SPE 84433 A McKay
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Conclusions

• EP is a dynamic, profitable, growth business
• EP business is capital intensive and requires
  high technology like space travel or the defence
  industry
• We have interesting conflicts in meeting global
  hydrocarbon demand whilst meeting the needs of
  stakeholders
• The scale of investment required will be
  challenging and is not recognised in society.
• Sustaining the industry success will require RD
  success levels at least equal to those of the
  past to keep future investment costs down. We
  need to avoid under-investing in the research we
  need.
• We have met the energy needs of the planet in the
  past and will do so in future. This is a great
  place to work.

SPE 84433
SPE 84433 A McKay
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Key Points to Reflect on

• Can we get OEDC individuals out of cars, into
  buses/trains ?
• Quality EP investments are very, rare (ie
  risk/reward balance)
• Portfolio Management Mergers add nothing to
  global supply
• Selling assets in production returning WACC, is
  dubious.
• Role of Exploration 2005 2030 is very uncertain,
  If so then where
• BI5MEO, BIGGAS, NEW EP, or Frontier exploration
• Impact of Technology in Future in Cost Redn (Is
  it large or small)
• Not at all clear that material steps are being
  made
• RD Spend is low (vs industries history), so
  what breakthroughs
• Majors Service Industry may not be doing enough
  
• Cash Today is Mantra, (Dividends Buybacks) not
  investment
• Having a large surplus of cash today, is not
  valued in market.

SPE 84433
SPE 84433 A McKay
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Backup Slides Not likely to be Used
SPE 84433 A McKay
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Possible Outlooks on Oil Prices?
38
36
Volatile Or Low Oil Price World again
34
32
30
28
26
24
22
20
?
Oil Price (/bbl) Actual
18
16
14
12
10
Volatile Oil Price World 1971-2002
Low Oil Price World 1910-1970
8
6
4
2
0
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
SPE 84433 A McKay
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We Tend To Get Overly Pessimistic in Downturns
March 1999
SPE 84433 A McKay
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Then rapidly revert 12-18 months later
.Yet the big supply demand did not change?
September 2000
SPE 84433 A McKay
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The Individual Optimum May not be Optimum for
Society
Happy with HUMMER II
Happy with HYBRID
It is a symbol of my success
It is my contribution to a problem, We need to
leave it in better shape
It costs me 3000/yr more in fuel
It is safe , fashionable, and Has loads of
utility
It is very efficient, and is the future
It has all the functionality I need
Would he still buy it if it had a 0.6-1 ltr vs
3 ltr engine
Long term fuel issues and Environment are not
his problem
SPE 84433 A McKay
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Annual Car Sales By Top Ten Manufacturers
10
9
(Does not include Trucks or buses etc)
8
7
6
Number of Cars (Mlns)
5
4
3
2
1
0
Nissan
Honda
Ford
Renault
Toyota
Volkswagon
General Motors
DamlierChrysler
Hyundai Automotive
PSA/Peugeot/Citroen
SPE 84433 A McKay
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Alternative Fuel Vehicle Penetration in USA
Growing Strongly, but only 0.6 mln out of 205 mln
vehicles
0.6
Electricity (incl Hybrids)
0.5
0.4
Number of Cars (Mlns)
Ethanol (85/Gasoline15)
0.3
Compressed Natural Gas
0.2
Liquified Petroleum Gas
0.1
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
SPE 84433 A McKay
Ref USA Dept of Energy
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EP Technology S Curve Evolution
GAINS CONTINUE ?
Business Benefits
?
Intelligent Wells
Underbalanced Drilling Offshore
Coiled Tubing Drilling
Multilateral Multi-fracced Wells
Multilateral Wells
Horizontal Wells
CREAMING OCCURS ? Capital Intensity rises
Slim Hole Exploration
Hydraulic Fracturing
Horizontal Wells with Hydraulic Fracturing
Vertical Deviated Wells
Time
1970
1980
1990
2000
2010
SPE 84433