Oil Search Limited ARBN 055 079 868
Turning Challenge into Opportunity Living in the Real World
ASX: OSH | POMSoX: OSH US | ADR: OISHY www.oilsearch.com
AmCham, October 2015
Oil Search: a PNG company » Oil Search
– 86 years of operations in country
– Largest investor in country
– Operates all producing oil fields, supplies 20% of gas to PNG LNG, manages liquids exports
– Interests in PNG LNG Project and Elk/Antelope Fields
– Extensive discovered resource to commercialise
– Large active exploration portfolio
– Grown from $250m market cap in 1992 to $11.6bn today
– ASX Top 25
» Successful delivery of PNG LNG is transformational for PNG and Oil Search: – Demonstrates PNG’s ability to successfully manage complex
logistics, social and financial challenges
– Two further world-class LNG expansion/development projects in PNG
– Tremendous platform for further growth
2 Turning Challenge into Opportunity, AmCham
Core strategies have delivered steady long term share price appreciation – PNG has delivered
Turning Challenge into Opportunity, AmCham 3
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2
4
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12
OSH Brent oil price
Manage transition to PNG
LNG Project
PNG LNG FID
PNG LNG production
commences
PRL 15 acquisition
2010 Strategic Review
2007 Strategic Review
2014 Strategic Review
10 year TSR To 30 Sept 2015
OSH 152.7%
ASX200 Energy 19.7%
ASX200 101%
Shar
e Pr
ice
(A$)
Nameplate operating capacity reached at PNG
LNG plant
Oil Search licence interests, PNG PNG LNG Project
Gas Fields
PNG LNG Project Facilities
Non PNG LNG Gas/Oil Fields
Oil Field
Gas Field
Oil Pipeline
Gas Pipeline
Oil Facility
Gas Facility
OSH Operated OSH Interest
Condensate Pipeline
PPL260
Juha
Kutubu
Proposed Juha Facility
Hides
Angore
LNG Plant
Gobe Main
Hides Gas Conditioning Plant
& Komo Airfield
Uramu
P’nyang
Kimu
SE Gobe
Hagana
Flinders
Juha North
Barikewa Elk/Antelope
Moran
Agogo
Papua New Guinea Hides
Kutubu
Port Moresby
4 Turning Challenge into Opportunity, AmCham
30
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120
130
Sep
-13
Dec
-13
Mar
-14
Jun-
14
Sep
-14
Dec
-14
Mar
-15
Jun-
15
Sep
-15
US$
/bbl
WTI Brent
Living in the Real World: What has happened in the last 12 months?
5
Large and rapid decline in oil prices since mid 2014, demand rebound helping » Oil price decline driven by OPEC (Saudi) protection of market share, combined with increase in North American
production facilitated by new technology and substantial equity funding » Crude prices slipping back towards year lows driven by poor fundamentals, Iran and China concerns
Source: Bloomberg, OSH analysis
Crude Oil - Front Month Price
Turning Challenge into Opportunity, AmCham
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-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
84
86
88
90
92
94
96
98
Q12009
Q32009
Q12010
Q32010
Q12011
Q32011
Q12012
Q32012
Q12013
Q32013
Q12014
Q32014
Q12015
Q32015
Q12016
Q32016
Mm
b/d
Mm
b/d
Implied Stock Change (RHS) Supply Demand
Supply growth is slowing, though inventories remain at record levels » Squeeze on capex and costs but high levels of pain resulting in drilling decline » Supply growth slowing in USA and other non-OPEC; global supply forecast to decline slightly through 2016 » Market appears oversupplied into 2016, inventories will take months to come down
Global oil supply/demand outlook
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Source: IEA Oil Market Report, September 2015
Global Oil Supply / Demand and Inventory Outlook
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$/m
mbt
u
Mm
tpa
HH linked Hybrid Oil Linked
Brent parity (RHS) Asian Spot LNG* (RHS) Henry Hub (RHS)
Falling oil prices are impacting LNG prices and markets
» Falling oil prices have already seen LNG spot, medium and long term contracts stall, with buyers expecting LNG prices to fall » Many proposed greenfield LNG projects are not economic at US$50/bbl without reductions in capital costs » LNG from PNG may find reduced competition for customers when it begins marketing
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“Grassroots LNG projects will stall. Costs are simply
too high…”
Dr. Fesharaki, Feb 2015
Source: FACTS Global Energy, *Argus Northeast Asia (ANEA) LNG spot price
Birt
h of
US
LNG
Medium to Long term LNG Volumes for Asian Delivery vs Benchmark Prices
Brent falls below $100/bl
Turning Challenge into Opportunity, AmCham
Outlook: The experts all have their views » Significant divergence of opinion on the outlook
– these are the experts
» US drilling rates slowing but can return quickly – many uncompleted wells
» Saudi producing block remain firm on market share (Saudi stocks building)
» High cost projects adjusting but will continue production
» Other supplier overhang (Libya, Iran etc.)
» Geopolitics impact relatively minor
» ‘Lower for Longer’ pervasive in management thinking
» Establishing the floor… but is there a new ceiling?
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Source: FACTS Global Energy, Wood Mackenzie, Various Brokers, OSH analysis
Brent Oil Price Forecasts to 2025
40
50
60
70
80
90
100
110
120
US$
/bbl
(Rea
l) Consultant Forecast
Broker Consensus (Jul 14)
Broker Consensus (Oct 15)
Brent Forward Curve (20 Oct 15)
Turning Challenge into Opportunity, AmCham
Industry reaction to changed price dynamics
» Clear focus on capital efficiency and prioritisation: – Dividends – Debt management – Strong Balance Sheet a prerequisite – Investment prioritisation – Cost reduction and efficiency
» Significant downsizing, led by contractors
» Major capital projects stalled, especially in high cost conventional oil and LNG
» Capital deflation likely to exceed 30%
» Operating efficiencies yielding 20%+ cost reductions
» Significant reduction in discretionary spending
» Consolidation and acquisition – the buy : sell spread
Turning Challenge into Opportunity, AmCham 9
» 2015 capex and opex reduced by targeted15 – 25% * – Take advantage of current business climate to reset cost base and negotiate lower supplier costs
– Ensure we have the right people in the right places and appropriate cost structure in lower oil and gas price environment
– Identify where processes can be improved/streamlined, operating costs reduced and efficiency improved, without compromising safety performance
» Business Optimisation Programme initiatives launched. Focused on: – Slimmer, fit for purpose organisation with recalibrated cost base
– Enhanced production for oil and LNG
– Retain focus on attractive LNG growth projects with measured spend on other activities
– Safety, citizen development and PNG country stability initiatives remain a priority
» Focus is to maintain top quartile returns to shareholders, underpinned by delivery of at least two new LNG trains in PNG
Oil Search: Plan for the worst, hope for the best
*Based on OSH-controllable costs only and excludes any cost reduction initiatives delivered by PNG LNG Project operator
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LNG industry undergoing fundamental change
» Markets and LNG pricing: – Oversupply through commissioning of major projects
– Gas prices globally have normalised, now trading in US$7 - 8/mmBtu range
– More globally connected and significantly more LNG being traded
– Subdued demand, looking for pricing and delivery flexibility with short–medium term commitments
» Projects structures and outlook: – N America leads flexibility: Can they really penetrate Asia at these prices?
– New entrants, no longer the domain of the majors
» In Australia: – Project structures and economics challenging
– Search for capital efficiency
– Impacts on local gas pricing - there is only so much cheap resource
Turning Challenge into Opportunity, AmCham 11
LNG Project delays » Since Q4 2014, a number
of key LNG projects worldwide have been delayed from 2015 to 2016
» Large level of uncertainty
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Pacific North West, US
Woodfibre, US
Jordan Cove, US
Corpus Christie T3, US
Golden Pass, US
Lake Charles, US
Mozam Area 1
Mozam Area 4
Browse FLNG, Australia
Tangguh Train 3, Indonesia
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2014 2015 2016
Planned FID at Q4 14 Expected FID at Q3 15
to
to
to
to
Source: Woodmac LNG Tracker
to
PNG LNG Project – performing above expectations, a strong platform for future growth » PNG LNG Project – a major success story:
– Delivered ahead of expectations and within revised US$19bn budget
– >150 cargoes loaded since Project start-up in 2014
» Consistently operating above nameplate capacity of 6.9 MTPA: – Annualised production of 7.4 MTPA in 3Q15. OSH confident Project can produce
at least 7.3 MTPA in 4Q15 and into 2016
– Supported by strong upstream deliverability and LNG plant reliability
» Project has established excellent reputation as a reliable gas supplier
» Full contractual volumes being taken, with contract ramp-up underway to plateau of 6.6 MTPA in 2Q16
» Good demand for spot volumes, >80% of spot cargoes have been sold to contract customers
» Major focus on production optimisation/debottlenecking – substantial incremental value
» Project has delivered major infrastructure, Government and landowner support, Tier 1 LNG customers, financier confidence
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Images courtesy ExxonMobil
Turning Challenge into Opportunity, AmCham
» Conventional LNG projects with no new technology utilised in development
» Substantial reserves base with high heating value, suitable for Asian reticulation networks
» High liquids, enhancing economics
» Onshore location with existing infrastructure base from oil and LNG developments
» Located close to growing Asian LNG markets
» Stable fiscal regime with strong Government support
» Aligned Joint Ventures. Highly respected Operators able to deliver and operate major projects, augmented by OSH’s 86 years of in-country experience
» Provide attractive returns and robust to product price movements
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LNG from PNG has competitive advantages
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Image courtesy ExxonMobil
Turning Challenge into Opportunity, AmCham
Key focus for OSH is commercialising PNG’s undeveloped gas » PNG LNG Project has delivered strong platform
for growth
» PNG can deliver at least two more LNG trains underpinned by existing undeveloped resources in NW Highlands and Gulf areas and a third train with modest drilling success
» Unprecedented opportunity to participate in PNG LNG expansion and Papuan LNG development over the next 18 months - Both world-class Projects
» Major appraisal and exploration programme underway, multiple opportunities to provide gas for expansion, additional trains and industrial development
» Delivery of near-term additional trains is common objective for industry, communities and Government
Oil Field
Gas Field
Oil Pipeline
Gas Pipeline
OSH Operated OSH Interest
Juha
Moran Agogo
SE Mananda
Uramu
P’nyang
Kimu
Kutubu
Hides Angore
PNG LNG facility
SE Gobe
Mananda Gobe Main
Hagana
Flinders
Barikewa Elk-Antelope
Gulf of
Papua
NW HUB PNG LNG FIELDS
GULF HUB
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US$
/mm
Btu
FOB Shipping
LNG projects from PNG competitive versus Australian and global alternatives (WoodMac)
Source: Wood Mackenzie, full-life breakeven, 12% discount rate, Shipping costs are to Japan
» PNG LNG well placed compared to recently commissioned Australian projects » Production optimisation and debottlenecking at PNG LNG offers opportunity to further improve economics » Potential Train 3 at PNG LNG and Papua LNG 1 or 2 train options highly competitive with global LNG project alternatives
LNG project break-even comparison
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Total LNG demand to exceed contracted supply by 32 MTPA in 2022
» LNG supply increasing, but opportunity for competitive supply to meet demand also increasing
» Global contractual supply >30 MTPA short of demand by 2021, >120 MTPA by 2025 as demand increases, old contracts roll off: – Few LT contracts have been signed in
past 2-3 years
» >25 MTPA of net existing contracts expire in Japan, Korea and Taiwan between 2020 and 2025, leaving region >40 MTPA short
» Strong spot market expected in 2016/17, though plant commissioning impacting Asian price
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South America
South & East Africa
North America
North Africa
Middle East
Europe
Asia Pacific
LNG Contracted Supply
LNG Demand v Contracted Supply
Total Demand
Contracted Supply
A PNG Context – Living in the Real World
» PNG has one and potentially two world-class LNG Projects – Potential to majorly impact economy over next 5-7 years
» Landowner and community expectations will not change with halving of oil and gas prices
» Requirement to have transparent, efficient benefits distribution
» Budget stresses and impacts of drought represent major challenges
» Partnership between State and Private Sector has never been more important: – Partnerships on infrastructure development – roads, schools, power
– Partnerships on health programmes – TB, malaria, HIV, Tari Hospital
– Capacity Development: education (both ways), PNG leaderships, New Colombo Plan initiative
» Contributing to long-term sustainability a key to success
Turning Challenge into Opportunity, AmCham 19
Summary » PNG has delivered an investment environment
which can create significant value, along with social development
– Much more to come on this – but platform is set
» PNG LNG Project delivered ahead of schedule and within revised budget is now performing above expectations
» PNG LNG expansion and Papua LNG are both globally competitive even in lower price environment
» Potential for OSH to more than double production by 2021/22
» Well defined lowest cost, top quartile return potential with PNG building reputation for delivery
» Business model must include bringing the people of PNG along the development road
Turning Challenge into Opportunity, AmCham 20
DISCLAIMER While every effort is made to provide accurate and complete information, Oil Search Limited does not warrant that the information in this presentation is free from errors or omissions or is suitable for its intended use. Subject to any terms implied by law which cannot be excluded, Oil Search Limited accepts no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omission or misrepresentation in information in this presentation. All information in this presentation is subject to change without notice. This presentation also contains forward-looking statements which are subject to particular risks associated with the oil and gas industry. Oil Search Limited believes there are reasonable grounds for the expectations on which the statements are based. However actual outcomes could differ materially due to a range of factors including oil and gas prices, demand for oil, currency fluctuations, drilling results, field performance, the timing of well work-overs and field development, reserves depletion, progress on gas commercialisation and fiscal and other government issues and approvals.
21 Turning Challenge into Opportunity, AmCham