20150423_Falling Oil Prices and the Offshore Oil and Gas Industry

Falling oil prices and the offshore oil and gas industry: assessing the state of the market

April 2015

Speakers: Chris Rachwal, Senior Strategic Advisor, Gaffney, Cline & Associates Robin Mann, Partner, Deloitte, Resource Evaluation & Advisory Jim Honefenger, Regional Manager for Americas, Gaffney, Cline & Associates Moderator: Bruce Beaubouef, Managing Editor, Offshore

Sponsor:


Resource Evaluation & Advisory

Oil Prices in the Past 12 Months

Crude oil prices have dropped by 55% since October 2014 Differential widened in the last 2 months due to growing North American oversupply

Source: EIA

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/bbl

US$

/bbl

Benchmark oil prices over the last 12 months

WTI Brent Brent-WTI Differential

Global Supply Increasing

Shale oil production in US has largely made up for losses due to conflict in Middle East Prices began to fall in Q3 2014 as Libya increased exports and US production continued to climb There may be further downward pressure on oil prices if Iranian sanctions are lifted

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Estimated production outages vs. increasing US production

Iran Iraq Nigeria Libya US

Source: Deloitte, EIA

Effects of Supply and Demand

Current depressed prices are expected to increase demand

EIA forecasts world production to recede in Q4 2015 and stabilize with consumption, with prices expected to rise thereafter

Some have concerns that EIA forecast consumption growth may be optimistic with the threat of potential recessions in some world economies

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Year-over-year changes in consumption

North America Central and South America Europe Middle East Asia and Oceania

Worldwide consumption has been slowing year-over-year, most prominently in Asia

Little growth is expected in North America or Europe

EIA forecast

EIA forecast

Source: EIA Short-Term Energy Outlook April 2015

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World petroleum supply and demand balance

Net supply World production World consumption

Global Offshore Oil and Gas Industry

W. Africa 58 rigs contracted

Brazil 53 rigs contracted

E. Africa 3 rigs contracted

NW Australia 12 rigs contracted

E. Mediterranean 12 rigs contracted

Arctic 3 rigs contracted

GOM (U.S.) 76 rigs contracted

GOM (Mexico) 60 rigs contracted

Source: Deloitte REA, adapted from Rigzone, April 2015

Areas of Growth in Offshore Activity Number of Rigs Contracted

Offshore Utilization by Area April 2015 April 2014

Region Number of Rigs Contracted

Number of Rigs

Available Utilization Number of Rigs Contracted

Number of Rigs Available Utilization Change

Africa - Other 3 6 50.0% 5 8 62.5% -12.5% Africa - West 58 92 63.0% 63 98 64.3% -1.3%

Asia - Far East 25 30 83.3% 20 23 87.0% -3.7% Asia - South 34 41 82.9% 39 43 90.7% -7.8%

Asia - SouthEast 72 121 59.5% 89 125 71.2% -11.7% Australia 12 16 75.0% 12 14 85.7% -10.7%

Black Sea 3 5 60.0% 2 3 66.7% -6.7% Europe - East 1 2 50.0% 1 1 100.0% -50.0%

Europe - North Sea 87 100 87.0% 82 96 85.4% 1.6% Mediterranean 12 21 57.1% 13 19 68.4% -11.3%

MidEast - Persian Gulf 77 106 72.6% 80 105 76.2% -3.6% MidEast - Red Sea 10 14 71.4% 13 16 81.3% -9.9%

N. America - Canadian Atlantic 3 5 60.0% 2 2 100.0% -40.0% N. America - Mexico 60 88 68.2% 67 84 79.8% -11.6%

N. America - US Alaska 3 4 75.0% 1 3 33.3% 41.7% N. America - US GOM 76 197 38.6% 104 194 53.6% -15.0%

S. America - Brazil 53 58 91.4% 63 67 94.0% -2.6% S. America - Other & Carib. 11 20 55.0% 5 13 38.5% 16.5%

S. America - Venezuela 2 3 66.7% 2 2 100.0% -33.3% Total / Average 602 929 66.7% 663 916 75.72% -9.1%

Source: Adapted from Rigzone, April 2015

Areas of Growth in Offshore Activity

W. Africa

Brazil E. Africa

NW Australia

E. Mediterranean

Arctic

Shallow Water (< 500 ft)

Ultra-deep Water (> 5,000 ft)

Deep Water (500 - 5,000 ft)

GOM (U.S.)

GOM (Mexico)


Number of Rigs Contracted at each Water Depth Interval

Offshore Rigs Contracted versus Stacked

Rigs Stacked (~330)

Rigs Contracted

(~600)

Shallow Water

Ultra-Deep Water

Deep Water

Shallow Water

Ultra-Deep Water Deep

Water


Shallow Water (< 500 ft) Deep Water (500 - 5,000 ft)

Ultra-deep Water (> 5,000 ft)

Offshore verses Onshore activity

Worldwide Offshore April 2015 April 2014 Change

Available 929 916 +1.4%

Contracted 602 663 -9.2%

Utilization 66.7% 75.7% -9.0%

U.S. Onshore Rigs

Contracted 917 1,765 -48.0%

Reduced utilization More competition between suppliers Reduced daily rig rates

Source: Adapted from Baker Hughes Data & Rigzone, April 2015

Typical Impact Time of Reduced Product Prices

Typical impact time Immediate 3 Months 6 Months 9 Months 1 Year 2 Years 3 Years 4 Years 5 Years

Onshore Lease permitting activity

New Geophysical surveys

Rig contracting

Drilling

Completions

Production

Offshore Lease permitting activity

New Geophysical surveys

Rig contracting

Drilling

Facility Manufacture

Completions

Production

Source: Deloitte REA, April 2015

Impact of Low Price and Recent Announcements

Low Product Price Environment Weed out under-performing projects

Reduce exploration activity

Focus on operational efficiency

Favor low cost investments completing uphole zones, re-fracturing etc.

Encourage innovation

Force service providers to reduce prices

Cause deferral of some house-keeping projects well abandonments, decommission of pipelines and equipment reduced to the minimum regulatory requirements

Contractual obligations may cause a company to continue spending even if a project is currently unattractive

Financially strong companies are generally less affected

Provides opportunities for contrarians and those with cash

Short life projects with a short timeframe from first expenditure to first production may be deferred pending stronger product prices

Long term or long life projects are typically unaffected unless low product price persists for a number of years

Off-shore projects generally slower to slow down and slower to ramp up in a recovery

Recent Events

April 14, 2015 Exploration drilling in two offshore blocks in India and Vietnam

April 9, 2015 Two exploration programs offshore east coast Canada - drilling off Nova Scotia and a seismic program in the Jeanne dArc Basin off Newfoundland

April 9, 2015 Major discovery in the subsalt 220 miles south of New Orleans, GOM

April 8, 2015 Major acquisition in the upstream Oil and gas industry for $70 billion based on the global LNG market and future deep water drilling

April 6, 2014 Five deepwater rigs shut down off the coast of Brazil due to the drilling contractor filing for bankruptcy

March 31, 2015 Two rig contracts terminated in the GOM for $160MM termination fee

March 30, 2015 Super Major cuts capital spending by $15 billion US from 2015 to 2017, but is sticking to plans to drill offshore in the Arctic

March 30, 2015 Production Sharing Contract signed to explore for oil and gas in the Rakhine Basin, located offshore Yangon, Myanmar.

Recent Events Continued

March 30, 2015 Production began at the Hadrian South Field, located about 250 miles off the coast of Louisiana in water depths of approximately 2,332 meters

March 30, 2015 Additional offshore discoveries in Block 2, Tanzania

March 30, 2015 Rig contract terminations with various service companies in the GOM

March 18, 2015 Cyprus has signed an agreement to extend a search for natural gas off the east Mediterranean Islands southern coast after disappointing results from an initial exploration round

March 16, 2015 Drilling to start in the Stabroek Block offshore Guyana

March 13, 2015 Major Eastern European explorer terminates five-year contract with large offshore drilling operator

February 24, 2015 A number of major offshore explores have terminated drilling contracts for a total of 6 rigs with Drilling companies in Brazil, the GOM and the UK North Sea

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Resource Evaluation & Advisory

2015 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of Gaffney, Cline & Associates and includes valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the United States of America and other countries. The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior written consent of Gaffney, Cline & Associates, and may not be used directly or indirectly in any way detrimental to Gaffney, Cline & Associates interest.

Offshore Gulf of Mexico

Gaffney, Cline & Associates

April 23, 2015

Major Themes

Low oil prices resulted in dramatic decline in worldwide and US drilling Offshore GOM rig counts Until now, remained within normal seasonal levels

Since March, dropped dramatically Currently, offshore day rates under pressure because of NOC and IOC renegotiations Despite short-term pain, long-term GOM outlook strong because of deep water (shallow

water declining) New projects

Growing production

New discoveries

Interest in new leases Mexico Lots of interest in southern shallow water

Northern deepwater likely delayed by low oil prices

Offshore Gulf of Mexico

State Waters

Shallow/Shelf

Deepwater

N. DW

S. SW

S. DW

Pain Likely in 2015 but Deepwater should be Better

Rig activity in the Gulf of Mexico has historically not been driven by price. Since March, rig activity in the Gulf of Mexico has fallen.

US GOM Percent Rig Utilization

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Source: Rigzone, April 10, 2015

Deepwater, greater than 1,000 ft, represents the majority of the production. Deepwater is the focus of future activity.

Source: BSEE

Production from Gulf of Mexico is Deepwater

2014: Eight new fields

- Production 2015/16 2015/16: Thirteen new fields

- Exceeds start-ups since 2007

Projected Production - New projects + redevelopment

+ expansion of older fields - Forecast

2015: 1.52 MMBbl/d 2016: 1.61 MMBbl/d

Forecasted Production

Rate of Return & Cashflow Illustrations

Full cycle break even prices for selected worldwide deep water projects range from $30/bbl to $100/bbl to achieve a 10% rate of return

Significant difference in the cash flow between onshore unconventional projects and deep water GOM projects.

Much higher rates of return for deep water GOM projects than onshore unconventional projects at crude prices under $90/bbl

2011 Gaffney, Cline & Associates. All Rights Reserved.

Source: Global Data Source: Global Data

Trends in the Gulf of Mexico

Costs Reduction in rig day rates

- Renegotiation of contracts - Cancellation of contracts

Use of subsea tieback to reduce the high cost of surface structures

Collaborative efforts Lower lease sales

Risks Use of partners:

- 2014 lease sale 1/10 partners - 2015 lease sale 7/10 partners

Mexico Reform Offshore

Shallow water exploration 39 companies purchased data packages

Shallow water extraction 9 have purchased and 14 more have applied

North Deepwater Lots of interest close to US Target data availability July/August

South Deepwater Little interest now

Low oil prices threaten near-term activity; mitigate investor enthusiasm immediately following opening

Looking Ahead

Long-term

Strong commitment in deepwater

Dominance of Majors

Diversity of investments

Short-term vulnerability

Recent drop in drilling

Impact on near-term activity

Time frame of future projects

Trends

Deepwater producers are staying the course

Continued lease sale interest

Risk mitigation

Increase use of partnerships

Cost reduction

Use of subsea tiebacks

Changes in drilling contracts

Cost-effective use of capital through calibration

Mexico has a lot of interest, but

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2014 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of Gaffney, Cline & Associates and includes valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the United States of America and other countries. The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior written consent of Gaffney, Cline & Associates, and may not be used directly or indirectly in any way detrimental to Gaffney, Clines & Associates interest.

Offshore Africa

Gaffney, Cline & Associates April 23, 2015

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Major Themes

Offshore Africa rig counts in decline but drop is not uniform 60 of 94 rigs active (Rigzone) = 63.8% utilization

Offshore day rates under pressure, ENI negotiated a day rate for a jack-up in Nigeria that is directly

linked to oil price, varies from $75K to $125K/day Deep Water exploration and appraisal drilling declining,

Cairns Senegal finds SNE-1 and Fan-1 a beacon of hope Existing mega-projects in Ghana and Angola proceeding

Support 4-6 multi-year high spec Drillship contracts Pressure on satellite tie-back projects, as subsea tie-back costs

slower to respond to oil price decline SW Bonga rejected bids received, re-tender underway

Shallow water development drilling holding up well in Angola, Congo, Gabon, Cote dIvoire, Cameroon, Nigeria

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Bullish Africa exploration view from 2013

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South Sudan

Uganda Kenya

Tanzania

Angola

Algeria

Morocco

Libya Egypt

Tunisia

Ethiopia

Somalia

Botswana

DR Congo

Congo

Cameroon

Benin

Cote dIvoire

Gabon

EG

Ghana

Guinea-Bissau

Guinea Nigeria

Liberia

Namibia

Mauritania

South Africa

Sierra Leone

Senegal

Sudan

Zambia

Mali

Togo

Burkina Faso

Niger

Chad

Central African Republic

Eritrea

Zimbabwe

Pre-Salt West Africa The Big Upside? But where is it working?

Rest of Africa

Focus countries

Aptian Salt Basin

Aptian Salt Basin marked in Blue, spans offshore Gabon, Republic of Congo, DRC and Angola.

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Tectonic setting The opening of the South Atlantic

Heine et al. (2013)

During the late Jurassic and throughout the Cretaceous a large scale rifting event led to the break-up of the Gondwana supercontinent and the development of the South Atlantic ocean.

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How similar is W. Africa to Santos/Campos Basin?

Plate reconstruction by GeTech, published in GEO ExPro (2013).

The Santos and Campos basins of Brazil were formed adjacent to those in Angola during the rifting event and therefore stratigraphy and structure will be analogous despite the fact that the South Atlantic now separates the two.

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The West African pre-salt Shift towards pre-salt exploration

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Proportion of Pre/Post salt exploration wells in the Aptian salt basins of Gabon, Republic of Congo, DRC & Angola, from 1954-2014.

Post-Salt Wels

Pre-Salt Wells

Data from Deloitte Petroview Sub Saharan Africa October 2014 dataset

Tupi (Lula) discovered in 2006

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West African margin Rio Muni Basin Pre-Salt largely untested

Adapted from: Brownfield & Charpentier (2006)

Rio Muni basin

W E

Pre-salt clastic reservoir targets

Basin borders (Fracture zones, structural arches and highs) West African Coastal basins

Gulf of Guinea basins

Niger Delta

West African Aptian salt basins

Orange River coastal basins

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West African margin Gabon Basin Pre-Salt Mature oil play under shelf but Diaman-1B (Total), Leopard-1 (Shell) tested thick gas pays in Water depths 5,500-6,500


Gabon basin W E




Niger Delta



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SW NE

West African margin Congo Basin Pre-salt Deep Water under evaluated Shelf plays very successful


Congo basin


Patchy carbonate reservoir targets



Niger Delta



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Angola

DRC

Republic of the Congo

Gabon Zam

bia

Namibia 0 250 500

Kilometres

The West African pre-salt Pre-salt clastics Republic of Congo

Deloitte Petroview October 2014 Sub Saharan Africa Dataset

The first pre-salt clastic field discovered was Pointe Indienne in the Republic of the Congo in 1957.

Multiple discoveries in the pre-salt clastic play through to present.

Hydrocarbons encountered are a combination of oil and gas.

All in

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West African margin Kwanza Basin


Kwanza basin

W E

Neocomian-lower Aptian clastic reservoir targets Neocomian- Barremian carbonate reservoir targets


Pre-salt carbonate reservoir targets

Potential basement reservoir targets Basin borders (Fracture zones, structural arches and highs)

West African Coastal basins


Niger Delta



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The West African pre-salt Kwanza Pre-salt carbonate play

Deloitte Petroview October 2014 Sub Saharan Africa Dataset

Angola

DRC

Republic of the Congo

Gabon Zam

bia

Namibia 0 250 500

Kilometres

OMBOVO-1

LONTRA-1 KAMOXI-1

MAVINGA-1

CAMEIA-2

BICUAR-1

CAMEIA-1

LOCOSSO-1

AZUL-1

PUMA-1

OGONGA-1

DISCOVERY

P&A

Map of Southern Kwanza

Basin

DRILLING

BALEIA-1

ORCA-1

Statoil cancelled

rig contract

MUPA-1

JACARE-1

Statoil cancelled

rig contract

DILOLO-1

Only dry holes and CO2 gas outboard of this area so far

First well to test the pre-salt carbonate was Baleia-1 in 1996.

No further wells drilled until 2011 Several significant discoveries

Hydrocarbons encountered are gas-rich.

Six+ recently announced failures at greater water depth may shift focus to an inboard pre-salt carbonate sweet-spot.

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The Brazilian analogue Is this an appropriate analogue?

Adapted from Brownfield & Charpentier (2006) & Feijo (2013).

Sandstone Shale and Siltstone Salt Carbonate Basement rocks

Fault

Break-up Unconformity

Santos

Tupi (Lula)

Kwanza

Cameia

The stratigraphic sequence is comparable, with pre-salt clastic and carbonate lithologies encountered on both margins.

There are however a number of differences between the two margins, most notably of which is the ubiquitous thickness of salt of the Santos basin which is often thin or even absent in parts of the Kwanza.

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Gas Developments Many of the Deep Water West African pre-salt discoveries are gas rich,

in contrast to the predominance of oil found in the pre-salt of Brazil Under current Angolan contract terms, operators are not entitled to

any gas discovered. Gabon, Republic of the Congo and DRC have more favourable gas

development terms, but lack of infrastructure or clustered resources will delay gas developments

African Gas Demand Ghana, Cote dIvoire, Cameroon, Gabon, Mauritania & Nigeria all have

local gas market developments that are not linked to oil prices Thus developments can proceed as long as funding for gas

utilization projects based on Power Generation or Petrochemicals proceed as planned

Backed by International Agencies with gas payment guarantees

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Image source: Wikipedia

Thank you


April 2015

Questions ?

Thanks to our speakers: Robin Mann Jim Honefenger Chris Rachwal

Thanks to our sponsor:

Falling oil prices and the offshore oil and gas industry: assessing the state of the marketSlide Number 2Oil Prices in the Past 12 MonthsGlobal Supply IncreasingEffects of Supply and DemandGlobal Offshore Oil and Gas IndustryAreas of Growth in Offshore ActivityOffshore Utilization by AreaAreas of Growth in Offshore ActivityOffshore Rigs Contracted versus Stacked Offshore verses Onshore activityTypical Impact Time of Reduced Product PricesImpact of Low Price and Recent AnnouncementsLow Product Price EnvironmentRecent EventsRecent Events Continued Slide Number 17Offshore Gulf of MexicoMajor ThemesOffshore Gulf of MexicoPain Likely in 2015 but Deepwater should be BetterUS GOM Percent Rig UtilizationSlide Number 23Slide Number 24Rate of Return & Cashflow IllustrationsTrends in the Gulf of MexicoMexico Reform OffshoreLooking AheadOffshore AfricaMajor ThemesBullish Africa exploration view from 2013Pre-Salt West AfricaTectonic settingHow similar is W. Africa to Santos/Campos Basin?The West African pre-saltWest African marginWest African marginWest African marginThe West African pre-saltWest African marginThe West African pre-saltThe Brazilian analogueGas DevelopmentsSlide Number 44Falling oil prices and the offshore oil and gas industry: assessing the state of the market

Documents

20150423_Falling Oil Prices and the Offshore Oil and Gas Industry