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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
Trusted commercial intelligencewww.woodmac.com
5
Agenda
1. Capital investment
2. Production and exploration
3. Project analysis
Trusted commercial intelligencewww.woodmac.com
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
Trusted commercial intelligencewww.woodmac.com
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
Source: Wood Mackenzie
Trusted commercial intelligencewww.woodmac.com
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
Source: Wood Mackenzie
Trusted commercial intelligencewww.woodmac.com
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.
Source: Wood Mackenzie
Trusted commercial intelligencewww.woodmac.com
10
Agenda
1. Capital investment
2. Production and exploration
3. Project analysis
Trusted commercial intelligencewww.woodmac.com
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
Source: Wood Mackenzie
Trusted commercial intelligencewww.woodmac.com
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
Source: Wood Mackenzie
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
Trusted commercial intelligencewww.woodmac.com
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
Source: Wood Mackenzie
Trusted commercial intelligencewww.woodmac.com
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
Source: Wood Mackenzie
Trusted commercial intelligencewww.woodmac.com
15
Agenda
1. Capital investment
2. Production and exploration
3. Project analysis
Trusted commercial intelligencewww.woodmac.com
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
Source: Wood Mackenzie
Trusted commercial intelligencewww.woodmac.com
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.
Source: Wood Mackenzie
Trusted commercial intelligencewww.woodmac.com
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
Source: Wood Mackenzie
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
Trusted commercial intelligencewww.woodmac.com
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
Source: Wood Mackenzie
Trusted commercial intelligencewww.woodmac.com
20
Cost deflation - near-term pre-FID projects will see the biggest reductions
Source: Wood Mackenzie
-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)
?
Trusted commercial intelligencewww.woodmac.com
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
Source: Wood Mackenzie
Trusted commercial intelligencewww.woodmac.com
22
Sub commercial fields could offer a big prize …
NPV10 of potentially economic fields in the UKPotentially economic recoverable reserves
Source: Wood Mackenzie
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.
Trusted commercial intelligencewww.woodmac.com
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
Trusted commercial intelligencewww.woodmac.com
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 erin.moffat@woodmac.com
T +44 131 243 4327
Trusted commercial intelligencewww.woodmac.com
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
Europe +44 131 243 4400
Americas +1 713 470 1600
Asia Pacific +65 6518 0800
Email contactus@woodmac.com
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
$/B
bl
Ultra DeepwaterTraditional
Heavy Oil Shale OilDeepwater
Source: Goldman Sachs, 420 Projects to Change the World, May 2015
Shale technology has lowered the oil cost curve
Cumulative Peak Production (kbls/d)
This change is having a significant impact on the OFS sector
31
Reservoirs
Market Segment
Wells
Facilities
Marine & Subsea
Support & Service
Cross OFS sector implications
• Margin reduction (10-30%)
• Capex and domestic focused industries hit hardest
• Easier cost savings already achieved
• Export market increasingly important
Today we are focusing on three of the largest sub-sectors
32
Reservoirs
Wells
Facilities
Marine & Subsea
Support & Service
Drilling and Well Equipment
Design and Manufacture
(DWEDM)
Engineering, Operations,
Maintenance and
Decommissioning Contractors
(EOMD)
Marine and Subsea
Contractors and Equipment
(MSCE)
£2.4B 84%
£5.7B 39%
£5.7B 72%
2013 revenue 2009-13 Growth
2013 revenue 2009-13 Growth
2013 revenue 2009-13 Growth
Market Segment Focus subsectors
33
Drilling and well equipment design and manufacture (DWEDM)
Prolonged period of challenge requiring extensive cost discipline
Implications
• Drilling programmes in
decline – especially
exploration wells
• Companies currently
working through backlog
• Companies increasingly
focused on onshore E&P
• Consolidation of market
Global capex forecast vs. historical ($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.
Budget 2015 Page 37
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