Global Offshore Oil Drilling Prospects

Global Offshore Prospects
SUT London, 26 February 2009
John Westwood & Steven Kopits

Global Offshore Prospects - SUT London 26 February 2009 picture: Rowan
The winter 2008/9 series of Global Offshore Prospects by energy business analysts Douglas-Westwood has been presented in:
Doha, Qatar
Singapore
Perth, Australia Houston, USA New York, USA Stavanger, Norway February 10 London, England (this edition) February 26 Southampton, England April 1 Aberdeen, Scotland June 18
For details of future presentations / venues please contact us or visit our website. Copyright reproduction of the information contained must state source: Douglas-Westwood.
Global Offshore Prospects - SUT London 26 February 2009
22
About Us
Established 1990 Offices in Aberdeen, Canterbury & New York
Activities & service lines

offshore
Market research & analysis Commercial due-diligence

power
Business strategy & advisory

Published market studies
Industry sector coverage
onshore
Oil & Gas

Power Renewable Energy
LNG LNG
Clients in 50 countries
>550 projects completed for: government agencies energy majors and their suppliers
Global Offshore Prospects - SUT London 26 February 2009 downstream
investment banks & PE firms
renewables
33
Published Market Reports
The source of much of the data used in this presentation

44
Oil & Gas Trends

Offshore Oil & Gas
Offshore Renewables
The Future
Two amazing years
Source: Barclays Stockbrokers
The rise and fall of oil prices The financial crash and stock market collapse The oil & gas sector has still greatly outperformed the market How should we interpret recent events?
Recessions are not unusual
Recessions happen about every

five years (e.g. 20 in past century)
It is the relatively unbroken

prosperity of the past 25 years which is unprecedented
Most last about 18 months

This is a very serious recession
probably among the worst 3-4 in the last century
US oil consumption recovers strongly after recessions
20.5
20
19.5
19
18.5 18 17.5 17
Oil demand falls during

May-08 May-09 May-10 Nov-08 Nov-09
Nov-10
16.5
Jul-08 Jul-09 Mar-08 Mar-09 Sep-08 Sep-09
Mar-10
Jan-08
Jan-09
Jan-10
Jul-10
Sep-10
recessions Biggest fall in September Demand recovery: Feb gasoline +1.7% YOY A recession in two parts?
Source: EIA January 08

The near-term oil demand impact

119
2007 2008 2009
100 66
Europe
-370 109
-49
-206
2007
2008
2009
427 295 300
FSU Asia
341 331
2007
2008
2009
North America
-1,345
-337 441
2007 2008 2009
Africa
283
Middle East
2007 2008
113 253 199 52

49
2009
Latin America
2007 2008
2009
2007
2008
2009
Source: IEA OMR 11/12/2008
North American oil demand contracted by 1.3 million bpd in 2008 Europe & N America further demand destruction of 0.5 M bpd in 2009? Developing economies demand continues to grow albeit at a slower rate
Recession and oil demand in perspective

100
million barrels / day
90
world oil demand
80
70 60 50 40
30
20 10 0
Oil is now more affordable US demand some recovery? World demand to fall 1% in 2009? Decline is a small % on a long term view
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
10
The long-term oil supplies issue has not gone away
World will struggle to meet oil demand

FT page 1 headline Oct 29 2008 (re IEA Report)
The effects of peak oil will be felt in

the next five years Risks far greater than terrorism The impacts are more likely to arrive before climate change
11
Is peak oil on the way?

120
<2002 52 countries past peak by 2008 66 countries past peak
Source: Energyfiles
100
million barrels per day
BIOFUELS CTL
80
GTL OIL SHALES OIL SANDS
60
40
REFINERY GAIN OFFSHORE DEEP
20
OFFSHORE SHALLOW ONSHORE
0 1995 1999 2003 2007 2011 2015 2019 2023
Decline in existing fields challenges future supplies Global peak revised down by 4 Mbpd to 89 Mbpd (Total CEO,16 Feb 09) IEA warns of serious supply crunch from 2010 due to delayed investment 16 Feb The big offshore opportunities are in deepwater
12
Ultimately, oilfield production cannot be replaced

Worlds fields annual average production declining at 4%? (some say 7%, UK N Sea is 11%)
Current oil production = 84 million bpd

So 3.3 million bpd needs replacing per annum Saudi production = 8 million bpd We need to find and get into production one NEW Saudi Arabia every THREE years just to offset production decline! Plus. For emerging economies per capita oil use to reach European levels we need 8 more Saudi Arabias producing!
13
The Easy oil has gone the remainder is in difficult places

Iraq
Canada
Venezuela
The Arctic
Nigeria
14
Many OPEC members budgets need oil prices >$50

110 100 90 80 70 60 50 40 30 20 10 0
91.0
2000 2008
57.3 42.9 43.6 33.5 16.9 14.8
2010
Venezulea
Algeria
Saudi Arabia
Kuwait
UAE
Iran
OPEC members have invested trillions of dollars in recent years Some now face current account deficit and will push for production cuts Will members adhere to agreed production quotas? Or must Saudi make drastic production cuts?
Qatar
15
Two decades of underinvestment will the same happen again?

"It is unrealistic to think that 5 years of increased spending in an inflationary environment can compensate for 20 years of underinvestment"
Andrew Gould, CEO Schlumberger
120 100 80 60 40 20 0
Newbuild Drilling Rigs Oil Price ($2007)
Some 157 offshore rigs in construction Feb 09 (population 872 inc C.S)
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007
Offshore rig builds & oil price
The oil & gas industry needs to spend $10 trillion by 2030 The world cannot afford another energy investment famine
16
NATURAL GAS huge global reserves / local shortages
A clean fuel Local depletion (e.g. UK, US GoM) Strong demand growth Major investments ongoing Drive to develop coal bed methane LNG to grow 86% by 2016 But .most remaining reserves
controlled by NOCs & Russia
Will GOPEC happen? (RIQ own 55%

of the worlds reserves)
Long-term gas supply security a threat

as demand rises (IEA 7 Oct 08)
17
EUROPE Increasing gas imports as reserves deplete

Top European gas markets (bcm)
16% others
100 90 80 70 60 50 40 30 20 10 0
Europes production is falling 61% of EUs gas is imported. Russia largest supplier Security of supply issues (winter 08/9 thousands without fuel Imports to rise to 73% by 2030 Developing import difficult offshore / floating solutions increasingly preferred UK particularly exposed NS decline & little storage.
18
FLOATING PRODUCTION
DEEPWATER (>500m)
Oil & Gas Trends

Offshore Oil & Gas SUBSEA
PRODUCTION
Offshore Renewables
The Future
19
Offshore oil & gas production and spend to grow

400 350
Capex & Opex ($billions)
300 250 200
Africa Asia Australasia Eastern Europe & FSU Latin America Middle East North America Western Europe
Source: EnergyFiles
150 100
50 0
Capex to dip by 3% from $157bn to $152bn in 2009

But total spend to grow from $260 bn (2008) to $360 bn (2013)
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Most regions to see growth

W Europe to decline Strong underlying Opex growth as a function of both increased volume of activity and complexity
20
Offshore Drilling deepwater to show strongest growth

60 50 40 30 20 10 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 shallow water deep water
Capex & Opex ($ billion) .
Surge in expenditure driven by escalating oil prices / rig shortages 2007 spend of $68 bn. To reach $82 bn in 2012 Deepwater spend to grow by 38% Petrobras, Mitsubishi plan $830 million drillship (Feb 09) Growing importance of deepwater gas
Source: World Offshore Drilling Spend Forecast 2008-2012 EnergyFiles & Douglas-Westwood
21
Deepwater Capex to reach new highs

$35 $30
Africa Asia Australasia Latin America Others North America Western Europe
Expenditure ($billions)
$25
$20
$15
$10 $5
$0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Deepwater production: to grow 99%

(shallow water 20%)
Future deepwater investment:

$137 billion over the next five years
Source: The World Deepwater Market Report 2008-2012 Douglas-Westwood
Most Brazil sub-salt spend likely to be

beyond 2013
22
Continued increase in floating production spend

$12 $10
TLP Spar FPSS
Expenditure ($ biillions)
$8 $6 $4 $2 $0
FPSO
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Picture: trelleborg
Source: The World Floating Production Report Douglas-Westwood
Floater spend to grow from $4.3 bn in 2009 to $9.9 bn by 2013 FPSO systems to account for 72% MMS now permitted the use of FPSO systems in the GoM
23
Subsea production to double. Capex growth to continue

45 40 35
Capex ($billions)
30 25 20
Africa Asia Australasia Latin America North America Western Europe Others
15 10
5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Douglas-Westwood
Deepwater increasing activity, most deepwater wells are subsea Marginal fields tiebacks to existing infrastructure Fast route to first oil tiebacks enable early production Development of complementary technology e.g. subsea processing Gas developments subsea-to-shore developments
24
ROV spend to double

900 800
World work-class f leet
700 600
500
400 300 200 100
Western Europe North America Middle East Latin America E Europe/FSU Asia Pacif ic Af rica
Source: The World ROV Report Douglas-Westwood
Work-class fleet to grow from 584 to 771 Five year spend to double to $2 billion Annual spend to exceed $400 million by 2012 ROV operations market grow from $1.6bn to $2.4 bn
25
Oil & Gas Trends

Offshore Oil & Gas
Offshore Renewables
The Future
26
Offshore Wind
6 Others 5
Capex ($ billion)
UK Sweden The Netherlands
4
3 2 1
Germany Denmark
Belgium
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2008 annual expenditure $0.56 bn, rising to $5.2 bn in 2012 UK became world-leading market in 2008, surpassing Denmark Developers chosen for 10 Scottish sites totalling 6 GW. EIAs beginning Emerging Asian market both in projects and supply chain High costs, long lead times, installation vessels, low investor confidence
27
Wave & tidal current stream developing sectors

25
Others USA
Annual installations MW
20 15
UK Spain Portugal Ireland
Many concepts Devices only now

being installed in commercial
10
5
France Canada
Australia
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
projects 95 MW installed capacity by 2013 UK to be world-
leading market N America & Australia emerging
28
Offshore renewables Capex in context
Offshore still a new sector

Capex ($ billion)
200
200
152
180 160
140 120 100 80 2009
Small markets in 2009, but

high growth expected
Still subsidy dependent Major pan-European

offshore power cable grid under consideration (10 cables, $4bn)
60 40
20 0 0.2 0.6 2 5.2
47
2012
Marine Renewables
Of f shore Wind
All Wind
Of f shore O&G
29
Arctic offshore
Huge potential reserves Major technical challenges Deepwater + extreme environment Very high costs National borders still uncertain
Oil & Gas Trends

Offshore Oil & Gas
Offshore Renewables
The Future
30
Brazilian sub-salt
Development of Brazil's promising subsalt oil deposits in the

Santos Basin will require investments of approximately $400 billion over 10 years National Petroleum Agency, Nov12, 2008 China to loan Brazil $10 bn for supply of up to 160,000 bpd 19Feb 09
31
FLNG floating liquefaction & regasification

We have devoted substantial engineering hours to FLNG and we now believe that its time has come., this technology increases the rate at which we can expect to get LNG into the worlds energy-hungry markets"
Jon Chadwick, VP Shell
Challenges: capital cost, plant size & weight, motion problems Vessels now on order Shell out to tender for large-scale unit
32
2009 total global E&P spend to fall 12%?

500 450 400 350 300 250 200 150 100 50 0
Source: The Original E&P Spending Survey (Barclays Capital)
450
458 400
350
300
417 375
250 200
$ billion
150
$ billion
2008E
2009E
100 50
Jun-07
Dec-07
Jun-08
Dec-08
2009 (E Dec-09)
U.S.
Canada
International
Small & marginal projects are likely to take the hit Mainly onshore? Then discretionary (seismic, exploration?) And activity that relies on the credit market We think the bigger offshore projects & Opex will be less effected Oil companies delay orders to get better prices (e.g. BP statement) Petrobras plans suggest surveys international may be pessimistic
33
Are the prospects looking up?

Past 3 years: E&P fairly flat despite high oil price Contractors boom time OES index doubles in value, then dramatic July crash
Sept Nov: OES shows strong fall But some recovery since December
34
Its not all bad news
Will keep investing for the eventual return of demand for oil
and refined products once the current recession ends.
Clarence Cazalot CEO Marathon Oil
Demand for rigs that can fetch more than $600,000 a day to
rent hasn't diminished Gregory Cauthen, CFO Transocean, 10 Feb 09
Our capital spending plans, which include exploration and

development projects, are unaffected by the recent reduction in oil prices. Alan Jeffers. Exxon Mobil, 10 Feb 09
Petrobras plans $174 bn 5-year total spend (54% increase)

28 Jan 09
35
The return of the dragon China invests in future supplies
17 Feb Russia: Beijing to lend $25 bn in

return for agreeing to supply 300,000 b/d
19 Feb Brazil: China to loan $10 bn for

supply of up to 160,000 b/d
20 Feb Venezuela: China to contribute $8

billion to a strategic fund for oil development which aims largely to increase Venezuelan oil exports to China 2015 by 650,000 b/d
image: earthstarshop
36
China implications of Russian investment

Beijing lends Russia $25 bn in return
for agreeing to supply 300,000 bpd from new fields in E Siberia for the next 20 years
Transneft (oil pipelines) $10 bn Rosneft (oil group) $15 bn
But Russias production is declining
(500,000 / day in 09?) Significant implications for supplies to the West
37
What happens next?
Short term (2-3 years) Many projects underway more production coming onstream China will use its financial reserves to buy future production Oil prices will be determined by OPEC production cuts E&P cos exploration on Wall Street? Some OES companies reasonably protected by large backlogs But contractors costs have to fall ($60 costs v $40 oil prices) M&A opportunities in OES sector The recession will end
38
What happens next?
Longer term (4-10 years) The Douglas-Westwood view is unchanged Oil demand will increase Non-OPEC production will fall and oil prices will rise And all energy costs will increase Will the oil majors will hit the limits to growth ? Well positioned oil services companies will outperform
39
www.douglas-westwood.com
Thank You
The financial meltdown has resulted in recession Oil demand has fallen as new capacity comes onstream But the underlying issues have not gone away We need massive investment in energy Low oil prices will restrict investment and impact on skills (again!) Thereby accelerate the onset of peak oil And fuel the next oil price explosion Oil is a cyclical business long-term views are essential 2009 could be a great time to invest in oilfield services companies
40

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Global Offshore Prospects

SUT London, 26 February 2009

John Westwood & Steven Kopits

Global Offshore Prospects - SUT London 26 February 2009

Activities & service lines

Market research & analysis Commercial due-diligence

Business strategy & advisory

Industry sector coverage

Oil & Gas

investment banks & PE firms

Published Market Reports

The source of much of the data used in this presentation

Oil & Gas Trends

Two amazing years

Source: Barclays Stockbrokers

Recessions are not unusual

Recessions happen about every

It is the relatively unbroken

Most last about 18 months

Global Offshore Prospects - SUT London 26 February 2009

US oil consumption recovers strongly after recessions

Oil demand falls during

Source: EIA January 08

The near-term oil demand impact

427 295 300

113 253 199 52

Source: IEA OMR 11/12/2008

Recession and oil demand in perspective

million barrels / day

world oil demand

The long-term oil supplies issue has not gone away

World will struggle to meet oil demand

The effects of peak oil will be felt in

Is peak oil on the way?

GTL OIL SHALES OIL SANDS

REFINERY GAIN OFFSHORE DEEP

OFFSHORE SHALLOW ONSHORE

0 1995 1999 2003 2007 2011 2015 2019 2023

Ultimately, oilfield production cannot be replaced

Current oil production = 84 million bpd

Global Offshore Prospects - SUT London 26 February 2009

The Easy oil has gone the remainder is in difficult places

Many OPEC members budgets need oil prices >$50

Two decades of underinvestment will the same happen again?

Newbuild Drilling Rigs Oil Price ($2007)

NATURAL GAS huge global reserves / local shortages

Will GOPEC happen? (RIQ own 55%

Long-term gas supply security a threat

EUROPE Increasing gas imports as reserves deplete

Oil & Gas Trends

Offshore oil & gas production and spend to grow

Capex to dip by 3% from $157bn to $152bn in 2009

Most regions to see growth

Global Offshore Prospects - SUT London 26 February 2009

Offshore Drilling deepwater to show strongest growth

Capex & Opex ($ billion) .

Deepwater Capex to reach new highs

Deepwater production: to grow 99%

Future deepwater investment:

Most Brazil sub-salt spend likely to be

Continued increase in floating production spend

Subsea production to double. Capex growth to continue

ROV spend to double