Growing Beyond The growth gap: how high performers are accelerating ahead Findings for oil & gas 18 January 2013 This version includes input from EMEIA

Growing BeyondThe growth gap: how high performers are accelerating ahead

Findings for oil & gas18 January 2013

This version includes input from EMEIA Oil & Gas

Growing Beyond – Findings for Oil & GasPage 2

Sector insights Oil & gas

► According to the IEA World Energy Outlook 2011, global energy demand is expected to increase by 40 % between 2009 and 2035, with 90% of that growth driven by non-OECD countries; over $19 trillion investment is required in Oil & Gas supply to meet demand.

► There is a major shift in power happening from the International Oil Companies (IOCs) to the National Oil Companies (NOCs) – today the NOCs own 85% of the world’s remaining reserves and are increasingly determined to lead the exploitation themselves.

Four megatrends are driving nine key issues across the entixt four slidere Oil & Gas value chain

If you want more detail, see nes

114 respondents from oil & gas completed the survey. This deck compares these responses to the high performers and low performers within this sector.

Macro trends

Upstream – Reserves replacement: managing increasing costs and risks associated with major upstream exploration, development and production projects and the increasingly complex supply chain

Downstream – Margin and volume pressure: economic downturn combined with overcapacity in certain geographies has led to a significant margin and volume decline in the OECD markets

Oil Field Services – Competitive pressures and market fragmentation driving restructuring and consolidation combined with changing buyer behaviors driven by risk management

Carbon management – Increasing focus on climate change and sustainability: oil companies facing increasing regulation and social pressure with regard to reducing emissions and increasing sustainability

1. Environmental standards, climate and regulation

2. Cost and operational efficiency

3. Changing fiscal terms

4. Price volatility

5. Human capital deficit

6. Supply shocks

7. Divestment

8. Operational challenges, joint venturing and access to reserves

9. Investment in infrastructure

Key issues


Sector megatrend: upstream Shaping the future of the oil and gas sector

What are the overall issues and implications?► With longer-term supply tightness and the return of volatility,

competition for reserves has increased, driving consolidation within the upstream sector and increasing investment in unconventionals.

► In the aftermath of the Gulf of Mexico (GoM) spill there is an increased focus on operational risk management, partner/supplier assessment and contractual relationships, incident response and financial contingency planning.

► Cost control remains firmly on the agenda due to the pressure of higher costs of capital, a squeeze on cash and the ongoing high levels of capital expenditure.

► Regulatory changes are creating risk and uncertainty as tax, fiscal and environmental framework and rate changes are made.

► Project planning and execution is becoming more challenging due to the technical nature of the projects as well as financial implications. There are increasingly large mega-projects in new/remote locations.

1. Divestment/acquisition/JV support: valuation and business modeling, transaction preparation and sales execution, transaction carve out services, transaction tax, international tax, strategic analysis, due diligence and transaction structuring, transaction integration, Audit support for new ventures and joint ventures.

2. Cost & capital management: capital project management, working capital, TESCM, planning budgeting & forecasting, legal entity rationalization, organizational structuring, IT effectiveness and cost rationalization, Global shared services, procurement process and spend optimization.

3. Regulatory compliance: Risk framework assessment, internal audit co-sourcing/outsourcing, audit optimization, environmental/HSE assurance and advisory, trading assurance and advisory, audit and financial accounting advisory services, business/IT controls assessment and advisory, fraud investigation & dispute services.

4. Growth enablement: human capital advisory/people operating model structuring/restructuring, IT Advisory, market analysis/new country entry support.

► More consolidation and asset rationalization among IOCs, NOCs and oil field services companies.

► Increasing numbers of joint ventures to share risk and capital ► Balance of oil and gas supply and demand shifting toward gas,

driven by price differentials, concern about nuclear power following Fukushima and environmental factors.

► Increasing NOC & IOC competition for reserves.► Increased regulation around fiscal compliance, corruption,

climate change and tax.► Geopolitical risks in various countries, MENA in particular

is impacting price, supply and operations.► Increased investment in unconventional hydrocarbon sources

(shale gas, tar sands, coal seam methane) and alternativefuels (biofuels).

► What is the right strategy and business mix? Upstream versus downstream, conventional versus unconventional, developed versus developing markets.

► In the aftermath of the GoM spill are the appropriate risk assessment measures, operational and financial contingency plans in place.

► How do you ensure that sustainability/environmental targets are clear, measurable and transparent?

► How do you ensure fiscal, legislative and regulatory changes are anticipated and implemented effectively?

► How can operational efficiencies and effectiveness, including cost reduction measures, be accomplished whilst improving operational integrity performance and standards?

► With an aging workforce and skills shortages how do you ensure critical staff retention and optimization of their skills.

► How do you maximize returns on past IT investments and decide what new IT investments should be made?

► What data security issues need to be addressed?

ManagingHSE, financial and regulatorycompliance

Managingbrand and reputation

Increased focus on new technologies,

unconventionals and new geographies

Carbon management and reduction

Cost and capital optimization

Access and reserves replacement

Identifying and mitigating partner,

supplier and counterparty

risk

What is happening in the marketplace? What are the critical issues to be addressing now?

How are we helping clients?


Sector megatrend: downstream Shaping the future of the oil and gas sector

What are the overall issues and implications?► Volume decline/stagnation in many OECD markets –

caused by fuel efficiencies and the economic downturn.► Growth coming from BRIC/non OECD markets.► Refining overcapacity in North America and Europe resulting in low

margins and refinery closures/change of use to storage terminals. ► Additional refining capacity coming on stream in developing

countries is focusing the problem.► Migration of capital from downstream to upstream.► New market entrants and NOCS growing their downstream profiles

and footprints.► Significant investment required in European refineries to meet

tightening environmental targets. ► Move away from owner operated to franchise model in retail

marketing.► Demand growth almost entirely in emerging/developing markets.

Huge growth potential, particularly in Asia. Market access may be limited. Issues with subsidized fuels pricing in many markets.





► Many IOCs and NOCs are looking to actively cut costs through: ► Headcount reductions ► Working capital improvements ► Shared services► Procurement efficiencies ► Operational efficiencies

► Many IOCs are actively looking to divest non-core downstream assets, markets and businesses i.e., Shell’s sale of downstream assets in Africa.

► Both Marathon and ConocoPhilips have separated their upstream and downstream businesses into separate entities

► Growing focus on carbon management and sustainability i.e., biofuels.

► Ensure there is a clear strategy and plan in place for the downstream business.

► Identify which markets/businesses are regarded as core and which non-core.

► Focus on cost leadership through cost reduction, working capital improvement, shared services, procurement optimization and other operational efficiencies and tax optimization.

► Ensure clear plans are in place for carbon reporting and reduction.



Focus onregulatorycompliance andgovernance

Portfolioreview andoptimization

Operationsoptimization

Carbonmanagement and sustainability

Costoptimization

Strategy andvision

Optimizingthe

business


Sector megatrend: Oil Field Services (OFS)Shaping the future of the oil and gas sector

What are the overall issues and implications?► According to IHS Herold global upstream spending

is expected to reach a record $1.3 trillion in 2012 (set to reach $1.6 trillion by 2016).

► Despite the Gulf of Mexico spill the most spectacular recovery has been in the US, where total spend should return close to peak levels by 2011.

► We are, seeing increasing activity in new geographic areas and in deepwater e.g., Brazil.

► Environmental regulation around Deepwater drilling likely to increase following the Gulf of Mexico spill.

► Growing calls for transparency and increased regulation around unconventionals e.g., shale gas.

► Investment required to modernize equipment so that it meets stricter standards demanded by customers and regulators.





► M&A activity is returning to the sector, lead by the $12bn Schlumberger acquisition of Smith International. This is an indication of returning confidence and of the need for further consolidation in the sector.

► Participating in joint ventures to share risk and capital – partnering with NOCs on various projects, traditionally the domain of the IOCs.

► Strong focus on cost-cutting and tax optimization.► A focus on workforce demographics and improving workforce

mobility – having the workforce where the work is.► Increased focus on ensuring regulatory, fiscal and environmental

compliance in all areas of operation.

► Review strategic alignment of the organization’s assets, people and locations versus longer-term market trends and organizational strategy.

► Ensure internal processes enable speed of response and flexibility in meeting client needs and regulatory requirements.

► Optimize working capital, costs and tax.► Complete assessment and strategy development for new market

opportunities – e.g., decommissioning, renewables and unconventionals.► Ensure the organization can meet the upcoming challenges as

customers look for greater levels of assurance in relation to HSE and regulatory changes, e.g., post Gulf of Mexico regulation and the UK Bribery Act.

► Complete assessment and strategy development of opportunities for merger/takeover to gain scale and exposure to growth markets and businesses.

Aligning business capabilities with market needs

Regulatory and environmentalcompliance

Cost andworking capital management

Flexibility of assets andworkforce

New opportunity assessment

Strategy andvision



Competitive pressures

driving consolidation


Sector megatrend: sustainability and carbon management Shaping the future of the oil and gas sector

What are the overall issues and implications?► Greater environmental regulation.► More transparency required by shareholders, environmental

pressure groups and regulators around environmental reporting.► Increasing focus and investment on CO2 capture and storage ► Pressure to drive carbon reduction through carbon trading has

reduced in the US since the financial crisis and fundamental concerns regarding ’gaming’ of carbon credits have been raised.

► Growth in unconventional energy (shale gas, tar sands and coal seam methane), creating new environmental concerns and issues.

► Increasing regulatory requirements driving increase in both use and R&D of biofuels.

► Increasingly complex tax incentives around renewables in different countries.

► Significant decommissioning liabilities looming.

1. Risk management: regulatory, financial and industry.

2. SEC guidance for climate change-related disclosures.

3. Financial reporting given environmental liabilities.

4. Tax implications due to climate regulations.

5. Renewables valuation, carbon footprint.

6. Global reporting initiative (GRI) and sustainability reports.

7. Developing the appropriate scorecards and KPI.

► Leading organizations supplementing traditional audit with environmental/emissions audit of their operations.

► Increasing investment in biofuels R&D.► Joint ventures to develop and market biofuels – e.g., Shell/Cosan.► Increasing investment in gas/LNG, which has the lowest emissions

of the major hydrocarbons and is touted as “the bridge fuel” to a greener tomorrow.

► Increased debate regarding the use of gas for power generation in the aftermath of the Fukushima nuclear disaster in Japan and record low gas prices in the US.

► Develop clear renewables and carbon reduction strategy, identifying key focus areas and plans.

► Ensure board-member accountability for carbon management ► Ensure emissions and future reduction targets are reported

transparently.► Ensure sustainability reporting requirements and regulations

are monitored and that the organization can react quickly to changes.

► Understand tax credits and incentives that exist in different geographies.

Current regulatorycompliance

Managing brand reputation

Preparing for increased

regulation

Carbon reductionprojects in place

Monitoring, and reporting carbon footprint

Renewablesstrategy

and vision



Sustainability


High performers are ahead with respect to how they:

High performers

are …

Cost competitiveness

Operational agility

Customer reach

Stakeholder confidence

Broaden product/service offer

Focus on key segments

Reinforce brand

Prioritize markets

Accelerate speed of response

Create flexible work/delivery platforms

Master innovation

Improve collaboration

Identify and explain risks

Enhance reporting

Anticipate regulatory compliance

Re-engage with internal talent

Inform pricing process

Sustain cost reduction

Pass on cost pressure

Optimize capital


Customer reachOil & gas


Change in the importance of business activities – Oil & gas

Q: Over the next 12 months, what change do you expect in the importance that your organization attaches to the following activities? (Five-point scale). Shown: percentage of respondents. Base: oil & gas; high performers (31), low performers (19), sector total (114).

69

69

72

68

73

15

27

32

11

-8

53

47

58

63

79

Shown in all charts: % increase

Securing the survival of your existing business

Protecting your current business/assets

Improving the performance of existing business/assets

Restructuring the business to meet new conditions

Taking advantage of the situation to pursue new market opportunities

68

74

90

74

71

High performers Low performers Gap: high vs. low All sector


Customer relationships

Market expansion

Brand

Cost optimization

Sustainability

Talent

Stakeholder relationships

Regulatory risk

Agility

Technology

Innovation

High performersLow performers

Most critical factors for competitiveness in the next two years – Oil & gas

Q: Which of the following factors does your organization/company consider most critical to your company being competitive over the next two years? (Select up to three). Shown: percentage of respondents. Base: oil & gas; high performers (31), low performers (19), sector total (114).

Stakeholder confidence

Customer reach

40% 50% 60%Operational agility

Cost competitiveness


Operational agilityOil & gas


Actions taken to increase flexibilityOil & gas

Q: Which of the following actions has your company taken to increase its flexibility over the past two years?Shown: percentage of respondents. Base: oil & gas; high performers (31), low performers (19), sector total (114).

51

43

35

36

25

27

39

20

18

33

25

16

13

21

-11

11

8

-11

15

15

-18

3

42

42

21

47

21

21

37

11

11

37

16

Made internal support functions more responsive

Increased use of technology

Decentralized decision making

Improved and/or broadened workforce skills

Increased the use of external partnerships

Decentralized operations

Made external partnerships more efficient

Made long term contracts and obligations more flexible

Increased outsourcing

Invested in more flexible manufacturing processes

Enlarged the product/service portfolio to meet different market needs

58

55

42

36

32

29

26

26

26

19

19



Objectives of current and future investment in use of technology – Oil & gas

Q: Considering your organization’s use of technology, please prioritize your organization’s current investment today, and in three years time? (Select up to three). Shown: percentage of respondents. Base: oil & gas; high performers (31), low performers (19), sector total (114).

Today In 3 years

Innovating your processes to increase your speed of response

Innovating your processes to increase your flexibility

Reducing your operating costs

Enabling a more collaborative environment within the organization and the supply chain

Improving your reporting

Engaging with and selling to new customers

Developing new products or services

Reducing your production costs

58

39

36

32

29

26

23

19

37

32

58

21

11

32

26

37

Low performers High performers

Innovating your processes to increase your speed of response

Innovating your processes to increase your flexibility

Enabling a more collaborative environment within the organization and the supply chain

Reducing your operating costs

Engaging with and selling to new customers

Developing new products or services

De-layering your organization

Improving your reporting

48

45

42

32

29

19

19

13

26

32

21

47

21

32

21

26


Cost competitivenessOil & gas


Most significant cost pressures Oil & gas

50

40

42

21

44

27

33

20

-5

19

13

18

-32

0

-40

-9

53

26

26

11

58

26

63

32

Increased regulatory and compliance requirements

Input cost inflation

Exchange rate fluctuation

Interest on and/or servicing debt

Labour cost inflation

Investor/stakeholder pressure

Price erosion

Demand decline

48

45

39

29

26

26

23

23


Q: Which of the following cost pressures are most significant for your company?Shown: percentage of respondents. Base: oil & gas; high performers (31), low performers (19), sector total (114).


Stakeholder confidenceOil & gas


Areas with increased demand for information by stakeholders – Oil & gas

Q: As a result of the recent economic and market volatility, for which of the following has demand for information from your company's stakeholders increased the most? Shown: percentage of respondents. Base: oil & gas; high performers (31), low performers (19), sector total (114).

50

42

44

28

23

36

19

23

-6

16

-8

18

0

-18

3

-3

58

26

47

21

32

47

16

16

Risk reporting and information on how risk will be managed

Financial information

Business planning and outlook

Reporting on corporate social responsibility and environmental sustainability

Frequency and detail of reporting requirements

Information on innovation and development

New channels of reporting, i.e., digital and mobile reporting formats

Information on Human Capital situation and expected future development

52

42

39

39

32

29

19

13



ContactsOil & gas

NameJob title

Tel:

Email:

Thank you

Documents

Growing Beyond The growth gap: how high performers are accelerating ahead Findings for oil & gas 18 January 2013 This version includes input from EMEIA