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Restoring Economic Health to the North Sea DEVEX 2015

Underpinning the future: Discovery, Development, Recovery

Aberdeen

21 May 2015

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company | McKinsey & Company 1 1 | McKinsey & Company SOURCE: Source

GBP 2.69

McKinsey & Company | McKinsey & Company 2 2 | McKinsey & Company

The cost challenge in the UKCS

2.5

Percent

Annual inflation rates, 2000–14

Big Mac

SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys

1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average



2.5

12

Percent


Big Mac

North Sea platform

lifting costs1





2.5

18

12

Percent


Big Mac

North Sea platform

lifting costs1

UK lifting cost per

barrel of oil equivalent

(2004–14)2





21

18

12

2.5

Percent


Big Mac

North Sea platform

lifting costs1

UK lifting cost per


(2004–14)2

UK development cost per


(2004–13)2



McKinsey & Company | McKinsey & Company 6 6 | McKinsey & Company SOURCE: Source

GBP 13!


The increase was largely unforeseen

SOURCE: Oil & Gas UK 2012 Economic Reports and 2015 Activity Survey

Growth in operating cost forecast from UKCS operators GBP billions

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

2013 actual (8.9)

2014 actual (9.6)

01 2003 2005 2007 2009 2011 2013 2015 2017 2019


The fall in oil price has made the North Sea a lot less profitable

USD 99 bbl 88

SOURCE: WoodMac GEM (2015); McKinsey analysis

1 Price below which NPV of the remaining reserves of the field will be zero based on end 2014 cost and production forecast.

Share of UKCS production

that breaks even1 Oil price


The fall in oil price has made the North Sea a lot less profitable

USD 99 bbl 88

54 USD 55 bbl

SOURCE: WoodMac GEM (2015); McKinsey analysis

1 Price below which NPV of the remaining reserves of the field will be zero based on end 2014 cost and production forecast.

Share of UKCS production

that breaks even1 Oil price


The number of UKCS wells plugged and abandoned per year now exceeds

those drilled for exploration and appraisal

SOURCE: DECC; Oil & Gas UK, Annual Activity Surveys and Decommissioning Insights

Plugged and

abandoned wells

Exploration and

appraisal wells

10 2015F 14 13 12 11 09 2008

Well activity in the UKCS

Number of wells drilled

0

25

50

75

100

125


Cost increase not due to increased activity …

+1.5%

SOURCE: McKinsey Energy Insights

Deck cargo

shipped Tonnes


- 4.0%

Cost increase not due to increased activity …

Helicopter

hours Hours

Wells drilled Number

+1.5%


Deck cargo

shipped Tonnes

+2.0%


… or higher supplier margins

1 Margin as announced - adjusted for different accounting/disclosure policy. Sample includes 18 equipment, 13 EPC, 38 assets and 9 services companies


EBITDA margin1 of OFSE companies Percent

10

19

23

39

8

18

22

36

Assets EPC Services Equipment

2012-2014

2009-2011


So what has been behind the large cost increase?

SOURCE: McKinsey Energy Insights; “Meeting the challenge of increasing North Sea costs” McKinsey article

Increased activity 20%



Increased unit cost

Increased activity 20%

40-50%




Increased unit cost

Increased activity

Greater inefficiency

20%

40-50%

30-40%



Opex example: integrity inspections cost

SOURCE: Sanitised client example

Comparison of topsides integrity inspection costs per asset GBP thousands per installation, gross


Capex example: new greenfield developments

SOURCE: Sanitised client example

Development cost index; 100 equal to full cost in year 2000


This is something other highly technical industries appear to have avoided

Nominal price inflation for a new

commercial airliner

Nominal price inflation for a new

5-door hatchback in Western Europe

+ 0.2 – 1.5% + 1.0%

SOURCE: A2Mac1; manufacturer’s public data; Airline Monitor: McKinsey analysis

McKinsey & Company | McKinsey & Company 20 20 | McKinsey & Company SOURCE: Energy Insights Well Intervention Benchmark

Step up activity where it makes sense: e.g., well interventions

2Operator A

Operator B 9-10

Incremental production from well interventions % of total production

▪ Intervene every 15th well

▪ Range of intervention types = 1-2

▪ Intervene every 3rd well

▪ sRange of intervention types = 7-8


2010-2014 McKinsey offshore reliability survey results

▪ Asset bottleneck

management

▪ Equipment operations

▪ Optimise care regime

▪ Repair in appropriate

timeframe

▪ Performance management

▪ Reliability organisation

▪ Continuous improvement

▪ Equipment history

▪ Operator mindsets

▪ Organisational capability

Practices covered

North Sea

Offshore Operators

Get core practices and approaches in place: e.g., offshore reliability

SOURCE: McKinsey’s Global Offshore Asset Efficiency Database

Good Common Best

Reliability practices score

Production efficiency % of MPP

30

40

50

60

70

80

90

100


Address gaps in capability and expertise: e.g., operating standards

SOURCE: McKinsey Upstream Operations Service Line


Tackle inefficiency: e.g., well delivery


Well delivery process

Drive learning

curves across

the well delivery

process

Standardize and

simplify

specifications,

designs and

processes

Lean drilling

execution

Procurement

and supply

chain

optimizaton

Rigorous

performance

management

Improvement levers

1

2

3

4

5

Portfolio and rig

strategy

Prospect

maturation and

high-grading

Wells

engineering

Logistics and

supply chain

management

Drilling and

completion

execution

Hook-up and

post-mortem

learning


Tackle inefficiency: e.g., well delivery


Well delivery process

10-15% 50%

Drive learning

curves across

the well delivery

process

Rigs to work on

long series of

similar jobs

Long range plans

with strategic

suppliers

20-25%

Standardize and

simplify

specifications,

designs and

processes

10-15%

Lean drilling

execution 5-10%

Procurement

and supply

chain

optimizaton

Contracts

incentivize real

productivity

improvements

Use down-turn to

reduce unit costs

10-15%

Rigorous

performance

management

5-10%

Improvement levers Potentials

% of total well cost

1

2

3

4

5

Portfolio and rig

strategy

5-10%

“Perfect well” planning and estimation approach

Use of std wells as basis for 80% of portfolio

Prospect

maturation and

high-grading

5-10%

Planning teams to

specialize on type

of jobs

Defined std well

and options,

based on drivers

of costs

Active monitoring

and target setting

for engineering

productivity

Wells

engineering

10-15%

Capitalize on std

specs to drive

down unit costs of

procured services

and equipments

Logistics and

supply chain

management

20-25%

Rig teams work

on long series of

similar jobs

Minimize rotation

of crews

Lean execution

principles to drive

down NPT

Drive actively

operational

efficiency

Execution daily

monitored against

‘Perfect well’

Drilling and

completion

execution

3-5%

Active planning

and debottle-

necking of hook-

up towards asset

Hook-up and

post-mortem

learning


The impact can be enormous; e.g., SWN in the Fayetteville Shale

SOURCE: Source SOURCE: Southwestern Energy Investor Presentation 2015

76

7

8

1112

14

18

08 09 2007 11 2014 10 12 13

5,4405,356

4,8194,836

4,528

4,100

3,619

2,657

12 09 11 2014 13 10 08 2007

Days to drill Lateral length


Recap

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