CHRISTOPHER BIRD - MANAGING DIRECTOR
THE FUTURE COMPETITIVENESS OF THE UKCS UPSTREAM OIL AND GAS SECTOR
1st February 2017 - Park Inn Aberdeen
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?
CO
ULD W
E PR
EDIC
T OIL P
RIC
E Global Risk Tracker January 2013
UK
CS W
OR
KS IF TH
ERE IS LO
WER C
OR
PO
RA
TE RISK
UK Competitiveness January 2014
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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