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CHRISTOPHER BIRD - MANAGING DIRECTOR THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR 1 st February 2017 - Park Inn Aberdeen
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Page 1: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

CHRISTOPHER BIRD - MANAGING DIRECTOR

THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR

1st February 2017 - Park Inn Aberdeen

Page 2: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

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?

Page 3: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

CO

ULD W

E PR

EDIC

T OIL P

RIC

E Global Risk Tracker January 2013

Page 4: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

UK

CS W

OR

KS IF TH

ERE IS LO

WER C

OR

PO

RA

TE RISK

UK Competitiveness January 2014

Page 5: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

HISTO

RY O

F OIL P

RIC

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

Oil price stability 30 yrs Growth 7 yrs

Fall 6 yrs

Some variation 16 yrs Growth 11 yrs

What Next?

Dec 98 $16

Jan 02 $26

Feb 09 $46

Jan 15 $50

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

Cost base

UK Challenge

Page 6: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

HO

W O

IL PR

ICE A

FFECTS EC

ON

OM

IES So how does Oil price work

$75

$56

$35

$0

$100

Sub economic range For investment

Non competitive for GDP and other energy sources

Convenience Fee

Discount

Base price

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

Consider • Market Dynamics • Global uncertainties • Industry risks

Under supply

Low price volatility

Over supply

Page 7: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

IT WILL A

LWA

YS BE C

ERTA

IN TH

AT TH

ING

S WILL C

HA

NG

E Market Dynamics

Transportation

Energy Efficiency & Technologies

Petrochemical Market

Environmental Stability

Power Generation

Page 8: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

WO

RLD D

YNA

MIC

S IS BEC

OM

ING

MO

RE C

OM

PLEX

Uncertinities affect our industry but we have no control

Geopolitics

Macroeconomic Situation

Supply and Demand

FOREX Rates

Financial Markets

Environmental Impact

Page 9: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

RISK

S AR

E SOM

ETHIN

G TH

AT W

E CA

N M

AN

AG

E Risk factors that effect our competitiveness

Complexity

Loss of Scarce Resources

Low Deliverability

High Unit Cost

Access to Finance

Environmental Management

Page 10: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

WH

Y DID W

E END U

P HER

E? So where was the UKCS at the end of 2015

$28 oil price

$28 oil price

Invest cost

Invest cost

Retu

rn o

n in

vestmen

t negative to

a max o

f 3%

In

vestable b

asins

Needs unit costs to

drop to sub $40 / boe

and Oil price to be

above $55/boe for

future investment

Production decline Cost of assets Inefficiencies Increased taxes Over specified Too competitive

Page 11: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

IT IS MO

RE TH

AN

JUST LIFTIN

G O

R OP

ERA

TING

CO

STS 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

Gro

ss C

ost

s

Cost Centre

Operating Costs = 30 to 60% of gross cost

Capital cots Tomorrow

Barrels Asset performance Maximising wells New developments

Page 12: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

SH

OR

T TERM

FOC

US H

AS B

EEN TH

E NO

RM

Do we really focus on collaborative relationships

Booz | Allen | Hamilton report on

capital projects

Key concern areas:

• Risk Management

• Performance

Management

• Resources

• Knowledge

Management

Page 13: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

WE H

AV

E TO M

AN

AG

E IN A V

UC

A W

OR

LD Developing 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

Page 14: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

EFFEC

TIVE R

ISK MA

NA

GEM

ENT IS K

EY Some 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/H

13

H/M

28

M/H

18

H/L

23

L/H

4

M/M

33

Page 15: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

NEED P

RO

FIT FOR FIN

AN

CE, O

PER

ATO

R AN

D SUP

PLY C

HA

IN

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)

Equity

Expected IRR: 25%+

Accessible without

collateral to pledge!

Management rights

constrained

(Private equity, IPO)

Senior debt: Expected IRR: 10%+

Reserve based lending Project finance Project bonds

Comfort zone for O&G

industry

Increasing leverage

Page 16: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

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 K

EY METR

ICS FO

R INV

ESTOR

S

Page 17: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

TH

ERE A

RE STILL SO

ME M

AJO

R CH

ALLEN

GES A

HEA

D 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 2014 this was $19/bbl)

$32

$54

$0

Unit Costs

Cost Centre

Page 18: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

TH

E CH

ALLEN

GE W

ILL NO

W R

EMA

IN FO

R THE N

EXT 4

0 YR

S 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 change 1985 2020

Discovery Performance/Growth Health/Costs

first production 1972

Page 19: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

WE N

EED A BETTER W

AY O

F WO

RK

ING

TOG

ETHER

Maximising competitiveness – using the dynamic framework

Creating knowledge

Improving understanding

Developing Alignment

Effective application

ABIS Energy Business model

Page 20: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

TH

E OP

PO

RTU

NITY IS +£

1.2

TRILLIO

N SA

LES UP TO

20

50

So 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

Page 21: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

WE C

AN

STILL OP

ERA

TE INTO

20

50

AN

D BEYO

ND

So 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

Page 22: THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL … · THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR ... THE FUTURE COMPETITIVENESS OF THE UKCS AGENDA A brief

TH

ERE IS SO

MU

CH

OP

PO

RTU

NITY A

HEA

D 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-use 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


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