VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

San Donato Milanese – 20 November 2014

L’esplosione dei costi – il nemico N°1

Daslav Brkic

Senior Vice President Business and Technology Development

Saipem

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VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

The cost explosion

Upstream Capital Costs Index

250

200

150

100

Q4 2014: 238

Q1 2014: 232

Costindex (

2000=

100)

Source: IHS Energy (August 2014 )

2000 2002 2004 2006 2008 2010 2012 2014 2016

0

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VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

Russia

3

Nigeria

Many causes: difficult and inaccessible locations…

Kazakhstan U.A.E.

VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

But also…

Underestimation of project costs

Inaccurate designs

More expensive new reserves

Incredibly more complex projects

Higher costs throughout the entire supply chain

Tight labor market

Skills shortage

Bureaucratic barriers, regulatory and permitting issues

Geopolitical challenges

Exchange rate fluctuations

Source: KBR (2007) from Oxford Institute for Energy Studies (2014)

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VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

ROCE data include Anadarko, Apache, BG Group, BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Hess, Marathon Oil, Occidental, Repsol, Shell, Statoil, and TOTAL. Upstream ROCE defined as [Upstream Net Income / Upstream Year-End Net Capitalized Costs].

Consequences: Declining oil company returns even in a high oil price environment

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VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

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Consequences: Declining growth rate and margins for EPC contractors

VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

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Consequences: Investment contraction

Numerous project cancellations, postponements

Tighter Capex discipline from oil companies

VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

• Reduced expectations of economic growth

• Abundance of oil and gas supply

• Stronger US $

• OPEC’s quest for market share

Impact of oil price sudden collapse?

It is early to draw long–term conclusions

and clear forecasts for the future

Source: EIA - US Energy Information Administration

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VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

More accurate, more realistic initial project estimates

Broader acceptance of alternative Vendors and subcontractors from low cost markets (particularly China)

More design optimization and value engineering

Re-visitation of execution approaches and contractual forms

CAPEX reduction efforts

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Smaller EPC LSTK packages

Return of PMCs

Direct execution of certain EPC components by some IOCs

Technology development programs for cost reduction

Frame agreements with quantity discounts - Collaborative sourcing

Alternative contractual arrangements e.g. "Hybrid Convertible"

VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

Source: Author, Oxford Institute for Energy Studies (2014)

Example: LNG liquefaction plants capital cost escalation (US $)

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VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

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Rapidly growing project costs - A major obstacle for new LNG projects

VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

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Source: KPMG (2013)

Australia: A boom in oil & gas and mining investments

VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

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Source: KPMG (2013)

Numerous new projects on the drawing board

But:

"A$ 150bn of projects at

feasibility or FEED stage

were delayed or cancelled

over the past 12 months"

VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?

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Conclusions

While today the oil and gas industry certainly has many challenges, rising costs are a major factor

The causes are numerous, and our industry is actively looking for several mitigating programs