Achieving

Innovation through Dynamic Change

Industry Perspective presented by J. Robinson West

7 April 2016 PESA Annual Meeting

1

"Generals always fight the last war"

Boom and bust cycle continues as operators aggressively

cut capex in response to price

-18.4

3.37.8

14.510.8

20.918.2

21.7

5.2

29.0

-60

-45

-30

-15

0

15

30

45

60

75

(%)

2014 20152013201220112010

12.2

2009

-7.1

2008

21.0

200720062005

28.1

20042003

18.9

2002

1.8

20012000

E&P Expenditure (YoY Delta) Brent Crude Oil (YoY Delta)

Annual Change in Global E&P Capex vs Oil Price

Source: Rystad UCube (Feb 2016); EIA, BCG

2

50

100

150

200

250

2009 2010 2011 2012 2013 2014

50

100

150

200

250

1999 2000 2001 2002 2003 2004

Value of $100 invested in Dec 1999 ($)

Average annual TSR

Big Oil1 : 6.7%

S&P 500: (2.3)%

Average annual TSR

Big Oil1 : 2.9%

S&P 500: 13.6%

50

100

150

200

250

2004 2005 2006 2007 2008 2009

Average annual TSR

Big Oil1 : 7.3%

S&P 500: 0.4%

Big Oil

S&P 500

Big Oil

S&P 500

Big Oil

S&P 500

1999 – 2004 Dec 1999 – Dec 2004 Dec 2004 – Dec 2009 Dec 2009 – Oct 2015

Value of $100 invested in Dec 2004 ($) Value of $100 invested in Dec 2009 ($)

1. 'Big Oil' is: Chevron, ExxonMobil, Shell, Total, BP, ConocoPhilips, Statoil, Eni, Repsol; 2. Dec 2009-July 2014 TSRs for Big Oil: 10.3% and S&P 500: 15.1%. 3. Brent

Note: 'Big Oil' index uses equal-weighted median returns, rebalanced monthly and will not equal the average return of all peers shown previously. Statoil is not included in Dec 1999 – Dec

2004 index because its initial public offering did not take place until 2001. Source: S&P Capital IQ, BCG ValueScience Center, Thomson Reuters, BCG analysis

18 29 24 25 29 38

Avg. oil

price

($/bbl)3 :

38 55 65 72 98 61 10080 111 112 10961 55

YTD

The model of the Oil & Gas industry is broken Big oil value creation has disappointed investors prior to the oil price decline

Value creation

challenges

already emerged

with high oil price2

3

A fundamental misunderstanding of the industry has

underpinned this failure

It is a rich industry

• Net profit margin >8%prior to 2009

Margins are tight

• Net profit margin <5% since 2009

It is a vehicle to deliver dividends

• Historic dividend coverage of >200%

Capex consumes most cash flow

• $0.97 of every new $1 of cash flow

dedicated to capex

You need scale to be successful

• Consolidation of the 1990s-2000s

created value

Smaller players are more nimble

• One-size-fits-all model not well suited to

new challenges, e.g. shale

Industry is internally focused and

doesn't learn from the outside

• New, lean operating models are needed

Operators are run by smart engineers

• A cultural shift is required to focus on

cost and continuous improvement

Myths of the industry Reality of the industry

Industry is adaptable and flexible

• Successful growth into new basins and

development of new technologies

Operators run efficient businesses

• Established operating models worked

Source: BCG

4

Peak oil price$115.19

Brent - 19th July 2014

Majors

Integrated

operators

Independent

operators

Jun

'14

Jan

'15

Q4

'15

-38% -24% -8%

-41% -23% -8%

-74% -62% -39%

Oil price2015 Q4 '15

100

75

Jan-16

50

25

Jul-15Jan-15Jul-14

Index 100

Service companies and operators are in this together, and

must solve it together as well

Updated: January 2016Note: Companies included: Majors: Total, Shell, ExxonMobil, Eni, ConocoPhilips, Chevron, BP, Integrated: Suncor Energy, Santos, Pluspetrol, Oxy, Novatek, Murphy Oil, Mitsui, Lukoil, Inpex, Imperial Oil, Hess, Gazprom, CNRL, BG, AGL Energy, Independant: Southwestern Energy, Marathon Oil, EOG Resources, Encana, Devon Energy, Chesapeake, Apache, Anadarko. Source: Bloomberg, BCG Analysis

OFS companies -65% -46% -23%

5

However, you behave as suppliers to customers

You are not advisors to anticipate change

You adjust prices responsively based on market conditions

You are not actively seen as helping to bring cost structures down

Your "solutions" are often just baskets of your services

Unless we change this dynamic, the whole industry will be

in even deeper trouble

6

So what to do?

Most operators are attacking cost in similar areas

Choosing

appropriate

standards and

limiting choices

Rethinking

schedules and

policies

Optimizing head

count and

upgrading talent

Adjusting contracts

and optimizing

asset utilization

Reducing

administrative

costs and

bureaucracy

Cooperating with

peers to reduce

infrastructure and

asset costs

Leveraging

partnership

opportunities and

overhauling

agreements

Exercising greater

discipline in—and

thinking more

strategically about-

cost management

Technical

standardization

and

de-averaging

Maintenance

optimization

Organizational

right-sizing

Optimization of

aviation,

trucking, and

marine logistics

Improved

workforce

efficiency

Greater

cooperation

with other

industry players

Supply chain

partnering and

renegotiation

Streamlining

overhead, real

estate and

support service

costs

1

2

3

4

5

6

7

8

7

Most of you know this "what" – Why is it so hard in

practice?

You don't understand one another's

businesses

You don't have mechanisms to solve

problems together

You may not trust each other or have had

adversarial relationships in the past

It is new/different and can be perceived

as risky

Typical barriers to genuine supplier-

operator collaboration

8

An example of what is possible: Supplier collaboration in

the automotive industry

0

200

400

600

800

1965 1970 1975 1980 1985 1990 1995 2000 2005

Value added per employee

(Index 1968=100)

US OEMs

Japanese Suppliers

Japanese OEMs

US Suppliers

Japanese OEMs & Suppliers

• Close collaboration through R&D and

design processes

• Results in a high degree of outsourcing

(>75% for Toyota)

Source(s): US Census Bureau Annual Survey of Manufacturers, Toyota Data Book 2003, Japanese Census of Manufacturers, Dyer and Nobeoka, "Creating and Managing a High

Performance Network: The Toyota Case, SMJ, 2000; BCG analysis

Japanese automotive suppliers achieved 4x value over US

suppliers in the same period

VS.

US OEMs & Suppliers

• More transactional and reactionary

sourcing relationships

• Results in lower degree of outsourcing

(~50% for GM)

9

Environment and Climate

• Challenging License to Operate

• “Fossil” fuel industry

• Targeting infrastructure

• Fracking success/fiasco

• Service sector on point

10

Responding to climate change is an emerging area for

collaboration with your customers

Context: Operators launched the Oil &

Gas Climate Initiative (OGCI) Commitments

• Improve efficiency and reduce GHG

emissions from own operations

• Invest in long-term solutions, including

R&D and scaling up of new technologies

• Increase natural gas substitution for other,

higher carbon intensity fuels

• Develop common methods for reporting

efforts and measuring impacts

• Share best practices and engage across

industries to find solutions

OGCI member declaration: "We are

committed to playing our part. Over the

coming years we will collectively strengthen

our actions and investments to contribute to

reducing the GHG intensity of the global

energy mix"

Members include: BP, CNPC, Eni,

PEMEX, Reliance Industries, Repsol, Saudi

Aramco, Shell, Statoil and TOTAL

Source: OGCI, BCG

11

Use the current environment as an opportunity for change

"Never let a good crisis

go to waste"

– Winston Churchill

12

Yes, but how?

Change relationships between operators and service companies

Transform from customer/transactional to partners/collaboration

Shift from cost to value creation

Redefine brand

Think pennies before dollars – for yourself and your customers

Environment/climate

Recognize this is a serious threat

Be and be seen to be part of the solution, not the problem

Must address critics not just admirers

Answer the questions behind the questions