Strategic Advisors in Global EnergyStrategic Advisors in Global EnergyStrategic Advisors in Global Energy

The World Beyond:Opportunities and Challenges in Global Energy Investing

IPAA Private Capital Conference

By Robin West

25 February 2010

IPAA Lunch | Page 2

A Little Perspective

IPAA Lunch | Page 3

0

20

40

60

80

100

120

1995 2000 2005 2010 2015 2020 2025 2030

(mmb/d)

Non-OPEC Crude, NGL, & Condensate * Non-OPEC Oil Sands

Biofuels & Other Liquids OPEC Crude, NGL, & Condensate

0.5% Demand Growth 1.5% Demand Growth

1.0% Demand Growth

Danger of Future Supply Crunch Remains

* Includes Refinery Gain

2020 call on OPEC ~25–37 mmb/d

given 0.5% - 1.5% growth

Source: PFC Energy Global Liquids Supply Forecast

OPEC Crude NGL & Condensate

Non-OPEC Crude, NGL, & Condensate

IPAA Lunch | Page 4

Its Their Oil: Increasingly Limited Access—Particularly to the Easiest Reserves

Source: PFC Energy, Oil & Gas Journal, BP Statistical Review

1%

14%85%

Full IOC Access

1970

SovietReserves

NOC Reserves(Limited Equity Access)

NOC Reserves (Equity Access)

Full IOC Access

Reserves Held by Russian Companies

NOC Reserves(Limited Equity Access)

2009

IPAA Lunch | Page 5

0

1

2

3

4

5

mb

oe/

d

CVX XOM BP RDS

SuperMajors Seem Unable to Grow

Chevron – Texaco 2001

Exxon – Mobil 1999

BP – Amoco 1998

BP/Amoco – Arco 2000

TNK-BP 2003

Chevron – Unocal 2006

Source: PFC Energy

IPAA Lunch | Page 6

Value is Migrating to the Traded NOCs

In 1999, traded NOCS made up 1% of the combined value of the PFC Energy 50 companies; this share was 32% in 2009

In a decade, this set expanded from two companies (Petrobras, Gazprom) with a combined value of worth $22 bn to eleven companies worth $1.2 trillion

Unlike the SuperMajors, these companies promise

– Growing demand

– Access to resources

Value of PFC Energy 50 by segment (%)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

Combined Market Cap (US $ billion)

Other

Integrated NOC

Integrated IOC

Source: PFC Energy PFC Energy 50

IPAA Lunch | Page 7

There Are Exceptions, But NOC Control Means Less Investment

NOCs tend to invest less than IOCs in the upstream sector

NOCs with declining sectors need major investments

NOCs with growing production (e.g. Petrobras) need access to capital

ExxonMobil

BP

Shell

Chevron

COP

TOTAL

LUKoil

Eni

EnCana

PetroChina

Petrobras

Saudi Aramco

Gazprom

PEMEX

PETRONAS

PDVSA

Sinopec

Statoil

Rosneft

SonatrachNIOC

$-

$5

$10

$15

$20

$25

$30

$35

0 2,000 4,000 6,000 8,000 10,000

20

08

E&

P S

pe

nd

pe

r B

oe

Pro

du

ce

d (

$/b

oe

)

2008 Production (mboe/d)

2008 Production & Upstream Spend per Boe Produced:Largest IOCs vs. Largest NOCs

IOCsNOCs

Largest NOCs Spend Substantially Less than the Largest IOCs

IPAA Lunch | Page 8

Expect Dramatic Shifts in the Global Competitive Landscape 2010-2020

Independents focused on the “incremental” gas shale play (tight gas) with enormous impacts on aggregate North American supply

The number of NOCs overseas accelerated

Large mergers reached a stopping point with ChevronTexaco

Oil sands investment in Canada took off

The world’s largest deepwater play was led by a NOC

Independents made substantial impacts in new conventional plays overseas

2000-2010

Tight gas technology will spread overseas, with success & failure

Global Players move further into the North American tight gas play, reversing a 20 year pattern

Deteriorating downstream value makes global players disaggregate – opening way for large mergers

Independents continue substantial impacts in new conventional plays overseas

Tight oil play takes off in the US

Tight oil play spreads faster with greater impact overseas than tight gas

2010-2020

IPAA Lunch | Page 9

The New Hot International Destination: US!

Gazprom Marketing & Trading USA Inc. begins buying and selling wholesale gas in the US

Petrobras exercises its preference right to acquire 50% of Devon’s participation interest in the Cascade field in the GOM

Maersk Oil pays $1.4 billion for Devon’s 25% working interest in the Jack Lower Tertiary development in the GOM

BP, Statoil and TOTAL invest nearly $5 billion, plus similar amount in carried costs, in Chesapeake’s unconventional gas plays

ExxonMobil makes $41 billion purchase of XTO

Mitsui invests $1.4 billion to participate in Anadarko’s Marcellus Shale development

IPAA Lunch | Page 10

Going International

IPAA Lunch | Page 11

Cairn in India Led to Discovery of ~1 bnbbls of Recoverable Reserves – Extends Indian Plateau

0

100

200

300

400

500

600

700

800

900

1,000

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

20

15

20

20

Da

ily

Pro

du

cti

on

(m

bo

pd

)

ExplorationPUDsNew SourceBase ProductionActual Production

Cairn’s Mangala, Bhagyam, Aishwarya complex of oil fields onshore Rajasthan will add enough incremental oil production in 2009/10 to extend the production plateau of the last 20 years into the early part of the next decade

1996

Cairn Acquires Command Petroleum

(interest in Ravva)Corporate

Acquisition

1997

Bought 10% interest from Shell in Rajasthan

onshore block (RJ-ON-90/1)

1998

Bought 40% interest from Shell in

Rajasthan onshore block (RJ-ON-90/1)

2002

Bought 50% interest from Shell in Rajasthan

onshore block (RJ-ON-90/1) for $7.25 mm

Asset Acquisition

Source: PFC Energy Global Liquids Supply Forecast

IPAA Lunch | Page 12

0

50

100

150

200

250

300

350

400

450

500

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

20

15

20

20

Da

ily

Pro

du

cti

on

(m

bo

pd

)

Exploration

PUDs

New Source

Base Production

Actual Production

What Triton (Hess) did for Equatorial Guinea

Ceiba Volumes

North Block G Volumes

Provided new oil volumes as Zafiro was peaking

Source: PFC Energy Global Liquids Supply Forecast

IPAA Lunch | Page 13

Kosmos, Tullow and Anadarko Changed the West African Margin Play

Ghana: Oil Production Forecast by Reserve Category

0

100

200

300

400

500

600

19

85

19

90

19

95

20

00

20

05

20

10

20

15

20

20

20

25

20

30

Da

ily P

rod

uc

tio

n (

mb

/d)

Base Production New SourcePUDs ExplorationActual Production

Additional Success Outside Ghana

Source: PFC Energy Global Liquids Supply Forecast

IPAA Lunch | Page 14

Tullow Continued the East Africa Play

East Africa rift play was hot in the 1980s, but failed outside Sudan; Tullow came back to it

Uganda: Oil Production Forecast by Reserve Category

0

50

100

150

200

2501

98

5

19

90

19

95

20

00

20

05

20

10

20

15

20

20

20

25

20

30

Da

ily P

rod

uc

tio

n (

mb

/d)

Base Production New SourcePUDs ExplorationActual Production

Source: PFC Energy Global Liquids Supply Forecast

IPAA Lunch | Page 15

Excellent Opportunities Exist for Companies That Bring Real Expertise—e.g. Drilling Efficiencies

North America is far and away the world’s expert on land drilling. Of the 1.7 million wells that were drilled between 1980 and 2008, 90% were drilled in North America

US technology, expertise and competition have delivered extraordinary productivity improvements—resulting in step-function cost reductions—for unconventional gas

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

1980 1985 1990 1995 2000 2005

Cumulative Number of WellsDrilled Since 1980 (Land)

North America ROW

Gas Rig Count and Production

500

700

900

1,100

1,300

1,500

1,700

(2,000) (1,000) - 1,000 2,000 3,000 4,000 5,000

Yr-on-Yr Change in Gross Onshore Prod in mmcf/d

Gas

Rig

Co

un

t2000

2001

2002

2003

2004

2005

2006

2007

Source: EIA, Baker Hughes, PRC

Learning/Efficiency

Source: PFC Energy Global LNG Service

IPAA Lunch | Page 16

International Interest in Unconventional Gas, but Potential Looks Smaller…

Sources: PFC Energy Global LNG Service; NPC 2007; Rogner 1997

Coal Bed Methane

Tight Gas

Shale Gas

Estimated Resources

8.2

9.7

5.5

3.4

3.4

1.1

1.0

Continent total shown in quadrillion cubic feet

IPAA Lunch | Page 17

…and Few of the Prerequisites for Unconventional Gas Plays are in Place Elsewhere Today

Large and capable service sector with pre-positioned equipment

Experienced field and drilling personnel

Multitude of small players drilling aggressively and learning fast

Sophisticated land title system

Gas gathering infrastructure

Good roads, bridges and other physical access

Appropriate legislation/regulation

IPAA Lunch | Page 18

As More Countries’ Fields Mature, US EOR Expertise Will be in Demand Internationally

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

USA Romania

IndonesiaTunisia

PeruDem Rep Congo

CameroonOther Europe

EgyptPakistan

Papua New GuineaSyria

UKGabon

UzbekistanNorway

OmanNew Zealand

ArgentinaCongo

ColombiaAustralia

YemenDenmark

MexicoChad

Equatorial GuineaBrunei

MalaysiaIndia

ChinaTurkmenistan

SudanRussia

Countries in Plateau

Countries in Decline

Duration of Plateau

Onset of DeclineOnset of Plateau

Source: PFC Energy Global Liquids Supply Forecast

IPAA Lunch | Page 19

A Huge New Play

Areally extensive shale resource

– USGS estimated OOIP of 414 bbo

– Very low permeability (<5% recovery)

Accelerating development

– Started in 2000 with Elm Coulee field in Montana, but shifted to N. Dakota

– Intensive development from 2005- 1H 2008

– Squeezed into unprofitability by collapse of oil prices

– Window of profitability has re-opened as costs have plummeted

IPAA Lunch | Page 20

In the Bakken, Initial Month Production Per Well Has Doubled Since 2000

Well productivity has grown materially

Driver of real growth is ability raise both activity and the portion of wells in top productivity categories

– Learning spreads

– Experience grows, meaning fewer mistakes

IPAA Lunch | Page 21

Bakken Shale Production Forecast: 1200 Wells/yr

0

50

100

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300

350

400

450

500Ja

n-00

Jan-

01

Jan-

02

Jan-

03

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Vin

tag

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ion

(m

b/d

)

Pre-2000 2000 2001 2002 2003

2004 2005 2006 2007 2008

2009 2010 2011 2012 2013

Tight Shale Promises Incremental Gains – But Gas Shale Seemed Incremental, Until The Numbers Added Up

IPAA Lunch | Page 22

You Can Make Money: International Independents Delivered More Value

Average return for companies with operations in North Africa, Middle East and Central Asia: 41%

Average return for companies focused on North America: 13%Source: PFC Energy Upstream Competition Service

-40% -20% 0% 20% 40% 60% 80% 100%

StoneStratic

S&P 500Forest

SwiftPioneerCimarex

UnitHeritage

CalvalleyNewfield

PlainsTransglobe

MelroseChesapeakeQuicksilver

DevonQuestar

BerryCircleHusky

ATP Oil & GasEnCana

PetrocelticEOG

CabotUltraDNO

DenburyCNR

EmeraldDragon

PA ResourcesSouthwestern

Average AnnualTSR 2004 to 2009 (%)

IPAA Lunch | Page 23

Liquidity Ratio 20%Primary Fiscal Balance 20%Net External Financing Needs 20%Real per capita GDP Growth 20%Oil Sector Dependency 10%Economic Openness 10%

Total PRM Score

Country Economics 20%Country Politics 20%Oil Sector Entry 20%

Oil Sector Operations 20%Oil Sector Surprises 10%

Social 10%

Country Economics: 20% Country Politics: 20%

Political Violence 25%Rogue Factor 25%Political Legitimacy 15%Government Volatility 10%Rule of Law 15%Political Competition 10%

Oil Sector Entry: 20%

Government Take 35%International Openness 20%NOC Influence 15%NOC Mandate 15%Expeditiousness of Contract 15%

Oil Sector Operations: 20%

Facility and Personnel Violence 35%Sanctity of Contract 20%Expeditiousness of Operations 10%Regulatory Burden 15%Energy Sector Corruption 15%Contract Type 5%

Oil Sector Surprises: 10%

Natural Disasters 35%Export Risk 35%Labor Unrest 15%Ministerial Volatility 15%

Social: 10%

Civil Society Influence 50%Environmental Regulatory Capacity 30%Local Environment 20%

But Need To Assess Risk, Which Has Many Different Ingredients

Source: PFC Energy Petroleum Risk Manager

IPAA Lunch | Page 24

Conclusions

There are always international opportunities for companies that bring real expertise—but if they were easy, someone would already have done them

Independents can thrive in the gap between the ambitions and capabilities of NOCs with technically challenging portfolios

There are international opportunities to export US tight (oil and gas) reservoir technology

International E&P is not easy, but the breadth and depth of international opportunities can be very large—even those that appear “incremental” to the global players, at least initially

Companies that work to understand the real risks and manage these can be very successful

For companies with a comparative advantage funding is increasingly available

Strategic Advisors in Global Energy

Main regional offices:

AsiaPFC Energy, Kuala LumpurLevel 27, UBN Tower #2110 Jalan P. Ramlee50250 Kuala Lumpur, MalaysiaTel (60 3) 2172-3400Fax (60 3) 2072-3599

PFC Energy, ChinaKerry Center N-11371 Guanghua RoadChaoyang DistrictBeijing 100020, ChinaTel (86 10) 6599-7937Fax (86 10) 6530-5093

EuropePFC Energy, France19 rue du Général Foy75008 Paris, France Tel (33 1) 4770-2900Fax (33 1) 4770-5905

PFC Energy International,Lausanne19, Boulevard de la Forêt 1009 Pully, Switzerland Tel (41 21) 721-1440 Fax: (41 21) 721-1444

Middle EastPFC Energy, Bahrain Bahrain Financial Harbor (BFH)East Tower5th Floor P.O. Box 11118Manama- BahrainTel (973) 7705 8880    

North AmericaPFC Energy, Washington D.C.1300 Connecticut Avenue, N.W. Suite 800Washington, DC 20036, USATel (1 202) 872-1199 Fax (1 202) 872-1219

PFC Energy, Houston4545 Post Oak Place, Suite 312 Houston, Texas 77027-3110, USA Tel (1 713) 622-4447 Fax (1 713) 622-4448

www.pfcenergy.com | info@pfcenergy.comMain regional offices are shown in blue.

PFC Energy consultants are present in the following locations:

Beijing

Brussels

Delhi

Ho Chi Minh City

Houston

Kuala Lumpur

Lausanne

London

Manama

Mumbai

New York

Paris

Vancouver

Washington, DC