leveraging a dynamic management model for success in · pdf filesources: analyst reports,...

Leveraging a Dynamic Management Model for Success in Upstream

October 2017

3esi-Enersight 2017 Upstream Planning Conference

2© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Several transformative factors are impacting the upstream oil and gas sector

Commodity Price Downturn

Unconventional Boom

Field Innovation and Productivity

Capital Performance Challenges

Data & Analytics and Technology

Transformative Factors


Both independents and majors have made the shale asset class a priority investment

Unconventional Boom

% Company CAPEX in Shale (2016 – 2030)

Sources: IHS Vantage; KPMG AnalysisNotes: (1) CAPEX is the net investment in new projects as a percentage of total company Upstream spend. Includes shale, oil sands, conventional (onshore and offshore), LNG, GTL.


There are fundamental differences between conventional and unconventional asset classes, requiring new approaches

Unconventional Boom

— Smaller number of large projects

— Unique, highly engineered

— Longer cycle portfolio considerations

— Large number of small projects

— Similar, repetitive (e.g., pad drilling)

— High degree of optionality in portfolio

Example Differences

Conventional Unconventional


The upstream sector is facing a challenging price environmentCommodity Price Downturn

Commodity price futures(2016 – 2019)

D&C cost inflation estimates(2017)

Sources: Analyst Reports, Earnings Calls, Woodmac, KPMG Analysis, NYMEX Futures, Schlumberger, CNBC

“The 2018 oil market balance now points to rapid levels of inventory build which, absent continued

OPEC support, should depress oil prices” – JPMorgan, June 2017

“There is an impending cost inflation avalanche coming from the service industry, which

continues to operate at unsustainable pricing”– Schlumberger, March 2017


Industry leaders are voicing longer-term concerns about the upstream sector and its future


"Lower for Longer" "Lower Forever"

"I do think that the [Oil & Gas] industry needs to prepare for lower for longer…the

industry will work through it." – Bob Dudley, CEO of BP

"We're operating under what we call a lower forever mindset…if policies and innovation work well, I can see liquids

peaking in demand in the early 2030s…“– Ben Van Beurden , CEO of Shell

Source: EIA, Woodmac, Goldman Sachs; KPMG analysis


Unconventional producers have yet to achieve positive free cash flow


Sources and uses of cash for U.S. onshore-focused E&Ps1

(2012 – 2016)

CAPEX vs. Operating cash flow ($B) Outside sources of cash $B)

Sources: U.S. Energy Information Administration, based on Evaluate EnergyNotes: (1) Data consists of 44 publicly traded, U.S. onshore-focused E&Ps


The upstream industry is failing to deliver acceptable returnsCapital Performance Challenges

Capital Efficiency of Independent E&Ps1

ROCE (2012-2016)

Note (1): Analysis conducted on 17 of the largest independent shale producersSource: CAP IQ

— Most return levels are lower than common investor benchmark

— Issue before commodity price collapse

— Wide differential between best and worst performers

Summary


Upstream sector is achieving significant productivity gainsField Innovation and Productivity

New Well Production per RigPermian (2013-2017)

— Longer laterals

— Better well designs

— Tighter intervals

— Higher intensity fracs

— More proppant

— Geosteering capabilities

Example Productivity Levers

Source – E.I.A. Drilling Performance Report

0

100

200

300

400

500

600

700

20172016201520142013

+242%

Rigs Production per Rig (oil bbl/d)


Continued field innovations show promising potential Field Innovation and Productivity

Subsurface Engineering

Artificial LiftOptimization

Conventional Methods New Methods Being Applied

Facilities Management

Reliance on seismic data to predict stimulation techniques (e.g. pools of oil)

Significant investments in statistical analysis to model previous completions and incorporate learnings into future wells

Monitoring of a relatively smaller number of wells with steady production declines, determining when to intervene

Deployment of proprietary apps to evaluate when and what artificial lift method to use, reducing costs and optimizing production (e.g. Oxylift)

Construction of individual well site facilities to manage production on a per well basis

Implementation of technology to enable central, comingled well facilities and remote monitoring to create operational scale

Example Shale Technology Advancements


Many companies are leveraging 3rd party data and analyticsData & Analytics and Technology

Increasing Complexity

Prescriptive AnalyticsData Aggregation

Land

Drilling

Completions

Reservoir

Production

Production Equipment

Surf

ace

Sub-

surf

ace

Multi-domain Master Data Management to allow access across business units to real time data

Predictive failure analytics using sensor data to minimize down-time and optimize production

Platform to consolidate data using existing tools and optimize well production

Utilizing Predix IoTplatform to gather real time data at the asset level to enhance recovery and accelerate development DecisionSpace

platform integrates existing analytical software across the E&P lifecycle to:— Delineate

Reservoirs— Optimize

Production— Accelerate

Development

Predictive and diagnostic analytical tools to optimize production utilizing emerging technologies

Compilation of data to provide peer performance insights – recently expanded into forecasting through Wellcast and Prodcastapplications

Aggregation of drilling and production data for reporting and management dashboards


Significant advancements in planning tools are allowing E&Ps to make better, more informed decisions


Enabling Tools and Technologies

Adaptive Field Development Planning

Models

Advanced Enterprise Portfolio Modelling Tools

Next Generation Corporate Finance and Budgeting

Systems

Advanced Integrated Well Planning and Execution Scheduling Capabilities

Integrated Data Systems &

Architecture


Significant advancements in planning tools are allowing E&Ps to make better, more informed decisions


Enabling Tools and Technologies


These transformative factors are challenging heritage upstream management approaches and planning practices

“The game is still about capital, but the rules have changed…we need to develop dynamic plans that compete with conventional projects, while retaining optionality” - Global Major – EVP Unconventionals

“Investor questions are increasingly granular…we need to really understand our performance narrative and go forward plan” - Independent E&P – VP Investor Relations

“After fixing your portfolio and balance sheet, its all about execution…and today, superb planning is what drives superb execution”- CEO, Unconventional focused IOC

Transformative Factors E&P Planning Challenges


Unconventional Boom

Field Innovation and Productivity




While a great first step, technology alone isn’t the answerExample Client Case

Typical Capital Management Issues

OneLack of strategicguidance needed

to inform allocation process

TwoData input quality

ThreeLack of a

dynamic process (not reflecting up-to-date conditions)

FiveDisconnect

between Target and actual deployed

SixLack of

corrective action rigor

SevenTime intensity of processes

SevenTime intensity of processes


We believe that winning upstream companies will be those that leverage a dynamic, integrated planning process model

Best Practice Integrated Planning Process Model


There are several key benefits to the more dynamic, integrated planning process model

High-level scenario modeling without requiring significant asset involvement

Optimization of different planning activities at the appropriate intervals (e.g., monthly, quarterly, annually)

More standardized data and increased accessibility of data across the organization

Increased inclusion of competitor data for setting targets

A “line of sight” into asset performance, with a focus on value metrics

More rigor around conducting program lookbacks and reappraisals


To achieve full benefits, companies will also need to align key elements of their operating model

Future State Operating Model Governance

Managementprocesses

Information flow and tools

Behaviors and culture

Metrics and incentives

Roles and Structures

New process model requires increased clarity of decision rights due to shared

information, increased collaboration, as well as segmented organizational roles

A defined, integrated, dynamic and well understood process model; quarterly cycle, which allows more frequent plan updates with more forward-looking information

System architecture tailored to accommodate unconventional requirements; standardized and accessible information; common tools with less manual work-arounds; robust management of change Adherence to agreed-upon behavioral

norms and standards reflecting heightened speed and quality of

decisions; increased collaboration and transparency across organization

Well-defined roles in a streamlined, fit-for-purpose structure that is aligned

with new process model; elimination of duplication of work tasks; clear

accountabilities

A common view of value drivers and performance objectives; cascading

metrics through the organization fostering “line of sight” and stewardship;

competitive comparisons


We are looking to develop a deeper perspective on planning challenges and best

practices across the upstream sectorWe encourage everyone here to participate!

KPMG - 3esi-Enersight Partnership

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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