1. Terra Incognita: a Continuity ofEnergy SurprisesEnergy Recruiting ForumAugust 1,2012 1

2. Outline Myths and realities of the sunset industry narrative The energy industry offers fulfilling career opportunities Reasons to think the next forty years will be at least asinteresting 2 3. The legacy: 22 years of downsizing and 8 years of recoveryDifficulties mastered are opportunities won Winston S. ChurchillTotal Employment in Oil and Gas ExtractionSource: Bureau of Labor Statistics 3 4. The myths of the sunset industry narrativeCriticism is easy; achievement is difficult Winston S. Churchill Were running out of oilOil and gas is low techOil and gas is a dying industryOil and gas employs good ole boys from Texas Oil and gas companies manipulate oil and gas prices Oil and gas companies are indifferent to the environmentOil and gas companies ride roughshod over indigenous peoples Oil and gas companies are in denial over climate changeOil and gas companies are hostile to energy efficiencyOil and gas companies are unable to operate safelyIts a bad idea to own oil and gas company sharesRenewables represent the future Oil & Gas is not a viable career choice 4 5. The reality: 2001 proved reserves are double those in 1981 World Proved Oil Reserves (Billion Barrels)18001600140012001000From 1980 through 2011, 820 Billion800barrels of oil were produced globally,while proven reserves increased from 680600Billion to 1652 Billion Barrels40020001980 19821984 19861988 19901992 19941996 19982000 20022004 20062008 2010 Source: BP Statistical Review of the World Oil Industry5 6. The industrys ability to generate new resources is astounding!Deep water explorationVisualizing the subsurface 20,000 below the sea bed under layers of saltDrilling, designing and installing platforms in 10,000 of waterRemote operated vehicles doing unimaginable tasksMoving towards subsea processing and power generation LNG projectsThe Gorgon project, costing ~$40 billion, with reinjection of produced carbon dioxideThe PNG LNG project with a pipeline through land owned by multiple tribes secured by a benefits sharing agreementThe AP LNG project liquefying coal seam methaneShale oil and gasHorizontal wells with 10,000 laterals and up to 40 fracturing stagesMicro-seismic analysis to understand fracturing mechanicsOil sandsTransition to SAGDExperimentation with solvent extraction to reduce energy intensity 6 7. But there is a legacy of neglecting communicationsPolitics are almost as exciting as war, and quite as dangerous. In war you can only be killed once, but in politics many times Winston Churchill 1921Arthur D. Little report to the NPC on Future Issues , 1995 Over the past 25 years, the petroleum industry has faced a series of difficult challenges of significant consequencefor its various stakeholders From periodic supply disruptions and price volatility, to the rising tide of environmentalregulations, entrenched public distrust, shareholder disaffection and subsequent cost-cutting programs, the barrageof dissatisfaction expressed from many quarters customers, communities, shareholders and employees has leftthe industry reactive and defensive.However, our research shows that the petroleum industry has a rare historic opportunity to reposition itself fromthe largely defensive and reactive posture of the past quarter century, into a more positive, proactive and forwardlooking force in national and international communities.Pat Yarrington, Chevron 2005 (interviewed for Terra Incognita) The industry abdicated a very important role of communicating to people the value proposition of energy: theefficiency of the industry; the size of the industry; the reliability of the industry; the relative affordability of ourproducts over time; and the values of the industry. Weve also not communicated sufficiently about theenhancements in the industry, whether it be through technology, or whether its through the environmentalfootprint. A lot of the progress thats been made in the industry in the last 20 years we havent communicated in asustained, comprehensive, impactful way at all.Prophet, 2015-2016 Reputation Survey Oil & Gas industry reputation improved substantially in the industry rankings with markedly higher scores for ethicsand openness 7 8. Renewables have a role, but are not the answerThis is one of those cases where the imagination is baffled by the facts Winston Churchill 1941, referring to Rudolf Hess parachuting into Scotland Biofuels suffer from serious challenges of energyBiofuels as a % of total liquidsdensity consumption3.0% Land and water requirements Energy used in planting, harvesting, processing2.5% Intermittency Consequently, they are generally expensive and2.0%unreliable sources of energy, requiring subsidies ata time when government funding is underpressure1.5% Algae have the potential to address the biofuelsenergy density challenge, but naturally occurring 1.0%algae may need genetic modification Onshore wind is close to economic, but requires 0.5%back-up generation capacity and extensive newtransmission Solar panel prices are distressed, but solar power is 0.0%still not economic 2010 2015 2020 2025 2030 2035 2040 XOM WEO CPWEO NP EIA BP8 9. All super-majors except BP created TSR above S&P and Brent oil price increase Company TSR (CAGR) Vs. Indices14.00% Over the period 2001-2011, all the super-majors exceeded the returns provided by the12.00%S&P 500 and all except BP significantlyexceeded the oil price increase.10.00% Chevron provided highest total shareholder 8.00%returns among the Super-major oil and gas TSRsegment 6.00% S&P500 TSR ConocoPhillips also delivered relatively high 4.00% Brentreturns, and ExxonMobil exceeded the group Rivals Average average. 2.00% Shell TSR exceeded Brent crude oil price 0.00%increase, Total TSR was just below the groupaverage, while BP lagged its rivals 10. Large independents showed more variability with oil/gas mixIndependents TSR June 2007-June 2012 OXY49.0% High oil weighting; balanced portfolio NBL29.2% Levant Basin opener; balanced portfolioWest African Margin, Mozambique Basin APC14.0%opener; balanced portfolioN. America focus; successful shift from gas EOG13.1%to oilRedeveloper; balanced portfolio but-2.2%APAconcern over Egypt unrest -40.9%ECAOver-weighted to natural gas-48.0% CHKOver-weighted to natural gas. Financialand governance issues-60.0% -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 10 11. For more excitement, there are the smaller independents Dividend Adjusted Share Prices Small Independents400.00%350.00%300.00%250.00%200.00%150.00%100.00% 50.00%0.00% -50.00%-100.00%CIEPXDROSE OAS 11 12. Outline Myths and realities of the sunset industry narrative The energy industry offers fulfilling career opportunities Reasons to think the next forty years will be at least asinteresting 12 13. Affordable energy is the foundation on which the economy is builtCrude Oil Prices over Three Eras (2011 $/B)140.00Standard OilTRC/ Seven Sisters OPEC/ NOCs Standard Oil120.00First OPEC Meeting100.00 80.00 60.00State of Insurrection in Texas (Gov. Ross) 40.00 20.000.0013 14. The past 40 years have seen astonishing changeOPECNationalization 14 15. Oil industry issues addressed over one career Real Oil Prices 1966-2011 ($2011/B)Renaissance,120.00 New Frontiers v2New Frontiers v1, Demand Destruction,100.00 80.00OPEC Emerges,Growth AgendaNationalizationPrivatizationVs. Peak Oil Fears 60.00Downsizing, 40.00 SuezVirtualizationCanalClosed 20.00Environmentalism0.00 196619681970 19721974 197619781980 19821984 19861988 1990 19921994 19961998 2000 20022004 20062008 2010 BP Management Consulting Bauer SONATRACH Majors PDVSA NPC TerraSupply Chain LP ModelingCrude oil, LNG International- YPF ArgentinaFuture IssuesIncognita Major ProjectsIndustry negotiationsization PrivatizationPDVSAWhite SpaceValueDecision TreesReopening Maxus PMIIssues IndependentsCIEDTechnologyCreation OPECMarket outlookConsolidation Independents StrategiesDiversificationPDVSA Quotas Upstream, & Portfolio growth for Oil & Association Shell Messagingdownstream ExplorationGasPricing contracts SustainablestrategyOil sands ResearchCarlos Development Technology15 16. Twilight of the Seven Sisters era Majors Comparative Crude Production, 1950-19701966-73: Burning Issues for BP KBD6000 LP Modeling of BPs global refining system, then for SFBP in Paris Standard Oil adapting to Suez closure in 1967Shell5000BP and disruption of Nigerian oilGulf supplies during the Biafra warTexaco4000Socal Back in LondonMobil What should senior executives3000say about rising prices andnegotiations with OPECcountries?2000 Should BP diversify beyond oiland gas?1000 How should BP use decisiontrees in capital project s 019501955 19601965 1970analysis? Source: British Petroleum and Global Oil 1950-75 by James Bamberg 16 17. Early days of OPEC and National Oil Companies1974-78: Burning Issues for SONATRACH Holding on in 1975 to oil prices negotiated in 1974.Setting quality and location differentials. Negotiating innovative, oil linked LNG and LNGtanker contracts with U.S. and European utilities. Should OPEC index oil prices to recover value lostdue to inflation and dollar depreciation? First OPEC Meeting in 1960 Should Algeria reopen to foreign investment in theoil and gas sector? How should OPEC coordinate oil pricing and setproduction quotas? What would happen to ADL when our client waskidnapped with various OPEC ministers by Carlosthe jackal? OPEC Meeting March 197317 18. Maturing and evolving NOCs in Latin AmericaBurning Issues in Venezuela (1980-2000) How can we create security of demand for ourheavy crude oil while demand for residual fuel oil isbeing destroyed? Which U.S. refineries should we buy and how much shouldwe pay (1990s)? How can we minimize market damage from fraternal rivalryamong PDVSA subsidiaries (Lagoven, Maraven, Corpoven,CITGO) Should we IPO CITGO (2000)? How can we make the case to Congress to open theOrinoco tar belt for foreign investment? Can we create a world class training function forcrafts, professional and management development(CIED)? Should we consolidate the subsidiaries into a singlePDVSA operating company?Burning issues in Argentina (1990-95) How should we transform and restructure YPFArgentina so we can privatize it with an IPO? How do we integrate the Maxus acquisition? 18 19. Back to North America in the 2000s Burning North American Issues (2000-Present) Should we continue to support our LNG regasification project? What are realistic scenarios for natural gas supply, demand and price? Should we integrate oil sands into refining through acquisitions or jointventures? Are our strategies right for the changing business environment? What are we missing in the white space between our functional businesses? What overall corporate portfolio will provide greatest shareholder value? What should be our Gulf of Mexico deep water strategy and how can we bid successfully at lease sales? How do we add most value through technology? Is our organization effective? How can we improve our supply chain function? Are we heading in the right direction to achieve world class project management?19 20. Outline Myths and realities of the sunset industry narrative The energy industry provides fulfilling career opportunities Reasons to think the next forty years will be at least asinteresting 20 21. Our framework for thinking about value creation strategiesSuperiorShareholderSuperior Management Performance Superior Financial PerformancePerformance GrowthStrategy Choices(e.g. Portfolio Shape)Leadership and Total IntrinsicOrganizational ProfitabilityShareholderValue EffectivenessReturnsOperating Model andCapabilities Risk Investor Value Proposition 21 22. So whats next? I always avoid prophesying beforehand because it is much better to prophesy after the event has taken place. Winston Churchill, Cairo in 1943 Global Oil Consumption (Excluding Biofuels) 105000 World oil demand will continue to grow 100000 Oil Consumption (KBDOE) 95000Robust oil prices and technological 90000advances will open new resourceopportunities world wide 85000 80000 Natural gas demand will grow strongly 75000 Secure electricity supplies depend on a 700002010 20152020 2025 2030 2035 2040robust generation portfolio with intelligentinfrastructureXOM WEO CPWEO NPEIABP Oil companies will continue to add Dictators ride to and fro upon tigers which they dare not personnel, providing exciting opportunitiesdismount. And the tigers are getting hungry. Churchill, 1937 for international careers Social and environmental performancemanagement will be even more important We will understand more about climatechange Competition for access to resources will beintense Geopolitics will continue to present moredifficult challenges than geology and this isthe basis for a dark side scenario 22 23. Shifting battlefields but continued high competitive intensityPlayersCompetitive StrengthsLocals (MLPs)Low CostsIndependents Basin Opening1(e.g. Anadarko)Technology Deployment Difficult Resources Redevelopment2 IOCsIOCs Finance, Technology, Project(e.g. Chevron) Management Independents1 Stakeholder engagement Diversified marketsIndependents2iNOCsINOCsLow cost of capital(e.g. CNPC)Government supportNOCs Growing local markets LocalsNOCLocal political mandateDifficult Places(e.g. Sonangol)Note: IOC = Integrated Oil Company; INOC = Internationalizing National Oil Company; NOC = National Oil Company23 24. Project portfolios are being built around the new frontiersProject Portfolios by Asset Type ($M)120,000 NA SHALE GAS ExxonMobil has the most valuable future100,000NA SHALE OIL project portfolio, the execution of which willHEAVY OILincrease the firms rate of reinvestment in 80,000 SG growth and thus TSR.ARCTIC 60,000 Relatively low weighting to GoM deep waterLNG 40,000 OIL SANDS Includes Point Thompson requiring AGPLDW - OECD 20,000DW - NON OECD Chevron is highly weighted to (Australian) LNG: -CONVXOMCVX RDS BP COP TOTAL No new oil sands projects planned Project Portfolio "Shape" Will become less oily over the next decade 100%90%NA SHALE GAS Shell reports a balanced but small portfolio80%NA SHALE OIL Highest proportion of deep water projects70%HEAVY OIL60%SG BP has a legacy of conventional oil projects50%ARCTIC LNG ConocoPhillips has highest weighting to oil40% OIL SANDS sands and to NA oil shales30%20%DW - OECD Total has a high weighting to LNG and Stranded10%DW - NON OECD (pipeline) gas 0%CONVXOM CVXRDS BP COP TOTAL1. Weighted by value 24 25. All the portfolios include substantial technical and location riskOverall Project Portfolio Risk 8.00SHELL Shell is undertaking the highest technical risk 7.00 TOT project portfolio; ExxonMobil the least.Technical DifficultyBP Total has the highest location risk projects 6.00 (many in Africa); COP the least (US, Canada,COP CVXAustralia). The same rankings apply forXOM aggregate risk 5.00 Shell, BP and CVX have similar aggregate risksin their portfolios, with ExxonMobil slightly 4.002.003.00 4.00 5.00 6.00 lower.Location Difficulty We constructed an aggregate risk index (low Aggregate Risk risk > 1) by averaging location and technical Risk Index risks for each portfolio. This was used to riskCOP4.56 1.13the project portfolios, amplifying for the lowXOM4.86 1.06risk, high index companies the value of theirCVX5.18 0.99portfolios and lowering the value of the higherSHELL5.28 0.97risk portfolios.BP 5.29 0.97TOTAL5.65 0.91AVERAGE5.14 1.0025 26. Commitment to organic growth is an important driver of value Results of regressions undertaken to explain TSR1 Value Driver Indices variations in TSR were surprisingly strong.Past Performance Future Results for TSR suggest that over the period 2001- CAGR Growth3Returns4Risked Project Portfolio511, commitment to growth (in terms of organic capital expenditures/ total assets) was the mostChevron 12.80% 0.1040.2220.248 important driver of TSR: one point increase in theConoco-Phillips 12.53% 0.0960.1910.259 growth index produces a 2.1 point increase in TSR.Exxon-Mobil 9.86%0.0770.2490.331 We assessed the technical and location risks of each portfolio to derive a risked projectTotal 8.10%0.0930.2290.180 portfolio value. This variable as a manifestation ofShell 4.62%0.0880.1710.141 future growth potential was also statistically significant: a one point increase in its valueBP1.83%0.0650.1390.138 relative to end 2011 total assets produces a 0.43 Adjustedpoint increase in TSR. TSR Regression 2.09-0.17 0.43 R2=0.94 Average returns (in terms of EBITDA/Total Assets) were less important drivers: Higher returns were inversely related to higher TSR, but the variable Notes;had low statistical significance. 1. Total Shareholder Return from stock appreciation and dividends paid 2. Alpha is the return adjusted for overall market moves, Brent crude oil price changes, size of the firm and market/book ratio 3. Organic capital spending/ total assets 4. EBITDA/ Total assets 5. (NPV of future project portfolio/ Total Assets at end 2011) * relative risk 27. Thank youChristopher RossExecutive Professor, Bauer School of Businesscross@bauer.uh.edu27 28. Final thoughtsI dont know if there will still be five Super-majors in ten yearstime, but I do think that if there are, the things they will be doing will surprise us. Ian Howat, Head of Strategy for Total (2005) The winds and waves are always on the side of the ablest navigators. Edward Gibbon, Decline and Fall of the Roman Empire (1776)28