The 21st Century Oilpatch

1

• The 21st Century Oilpatch

The Role of Service Companies and Technology
Tom Bates September 10, 2001
2
AGENDA

• Oil Gas Markets
• Service Company Landscape
• Technology and the Value Paradox

3
Global Energy Demand
8000
7000
6000
5000
Million tonnes oil equivalent
4000
3000
2000
1000
0
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
Source BP Amoco Statistical Review - 1999
4
Primary Energy Consumption
6
5
4
3
Tonnes oil equivalent, per capita-annual
2
1
0
North America
Europe
FSU
Rest of World
World
Source BP Amoco Statistical Review - 1999
5
World Oil Reserves
Billion Barrels of Oil
8
6
2
65 bbo
20 bbo
North America 18 years
FSU 25years
Europe 9Years
7
4
9
43 bbo
Africa 28 years
Asia 16 years
S. Cent. America 37 years
Source BP Amoco Statistical Review - 1999
6
World Gas Reserves
Trillion Cubic Feet
1750 tcf
6
295 tcf
34
North America 11 years
Middle East
7
4
361 tcf
219 tcf
Africa
S. Cent. America 71 years
Source BP Amoco Statistical Review - 1999
7
Oil Price History1860 2000
OPEC Oil Embargo
World War 1
Great Depression
Gulf War
World War 2
8
Free Market Pricing
Schwarzkopf Visits Saddam
Fahd Gets Angry, Opens Taps
Low Inventories, Iraq Cold Winter
OPEC cuts production
Iran-Iraq Tanker Wars
Saddam Gets Greedy Visits Kuwait
MG Liquidation
High Inventories, Iraq, Warm Winter Asia
Bush Visits Fahd
9
Distribution of Oil Prices
WTI near month contract closing price 1990-1999
90s average 19.61 91-93 avg. 20.19 94-96
avg. 19.21 97-99 avg. 18.00
10
Oil Price 2000-2001
Source Simmons Company International
11
Supply and Demand
API - U.S. Inventory Data - Total Liquid Stocks
WTI
U.S. Inventories
12
World Gas Forecast
Forecast
Source Petroleum Economist, CERA
13
Twenty Year Forecast US Natgas
Consumption by Sector
15
Electricity Generation
10
Industrial
Tcf
Residential
5
Commercial
0
1990
1995
2000
2005
2010
2015
2020
Source Energy Information Agency, Baker Hughes
14
Natural Gas
Major Trade Flows (billion cubic meters)
77
41
10
43
13
4
2
87
10
3
20
7
24
2
9
2
Natural Gas
LNG
Source BP Amoco Statistical Review - 1999
15
Natural Gas - Supply Demand
North American natural gas supply and demand is
about 26 TCF (trillion cubic ft.) per year. The
US is a net importer of roughly 3 TCF per year
mostly supplied via pipeline from Canada. North
American daily natural gas consumption runs at 71
billion cubic feet per day
Source various industry
16
Depletion
60
50
40
Drilling Year
1998 1997 1996 1995 1994 1993 1992 1991 1990 Pre-1
990
30
Bcf/d
Bcf/d
20
10
14
0
Jan-99
Source EOG, Baker Hughes
17
Reserve Additions Decline
Gulf of Mexico shallow water
Billions of barrels discovered
Source Purvin Gertz, Oil Gas Journal
18
Nymex Gas Price
Source Simmons Co., Bloomberg
19
U.S. Gas Drilling Activity
Source Baker Hughes, Simmons Co.
20
Q1-01 U.S. Gas Supply Response
3.0

• Best case up 0.4 Y-Y and up 1.9 Q-Q
• May be flat due to NGL bypass
• Texas up 0.5 on 56 rig count increase
• GOM down 6 on 46 rig count increase

2.5
1.9
2.0
1.5
1.0
0.4
0.5
0.0
1Q - y/y
1Q - q/q
Source Simmons Company International
21
Storage Shows Demand Weakness
November 1st Target Storage Levels
1998
Injection Season
Bcf
2000
1999
2001
Source Bloomberg, Baker Hughes
22
Demand Response
Analysis of April/May storage
8

• 60 day injection average up 4 bcf/d versus normal
• May injection up 6bdf/d
• Fuel switching economics may turn around
• Ammonia margins are still negative
• Weak manufacturing sector due to recession

6
4
Demand Impact, bcf/day
2
0
Fuel Switching
Industrial Demand
Mild Weather
Source Simmons Company International
23
Fuel Switching
Source Deutsche Bank
24
Ammonia Margins
Source Simmons Company International
25
62 Year Forecast - Gas
Worldwide Regional R/P ratio
Years
Years
Source BP Amoco Statistical Review - 2000
26
40 Year Forecast - Oil
Worldwide Regional R/P ratio
Years
Years
Source BP Amoco Statistical Review - 2000
27
Oil Gas Summary

• Oil markets tight OPEC is in control
• Excess supply is overstated
• Prices will reach a new equilibrium
• North American gas supply tight
• Growth in power will stretch capacity
• 2001 demand response unexpected
• New energy supplies must be found

28
Service Company Landscape
29
Demand, Price and Capex
CAPEX
Worldwide Oil Demand
Oil Price
Sources Baker Hughes Chase EIA Salomon
Brothers
30
Rig Count History
Activity
International
U.S.
31
Impact on People
Headcount Reduction
Down 23 from Peak
Source BHI reports
32
Pre-merger Environment
January 1, 1998
Source 1997 revenues based on public filings
33
The New Landscape
Jun
May
Mar
Feb
Source 1997 revenues based on public filings
34
The Big Three
Revenue (billions)
92
64
42
Source 1997 revenues based on public filings
35
Focus on the Reservoir
Infrastructure Platforms Pipelines Sub-Sea
Reservoir Technology Computer Assisted
Exploration Seismic Geo-Steering Multi-Laterals In
telligent Completions
36
Integrated Services

• Boom or Bust?

Major client push BP/Shell One stop
shopping Early successes publicized Poor
financial returns to service industry Promised
performance not delivered Customer
dissatisfaction Evolution to focused
service? BHI vs SLB/HAL What can we learn from
ATT?
37
Service Company Mandate

• New Value Model
• Improve ROCE
• People
• Capital
• Review organizational models
• Return to customer focus

38
Technology and the Value Paradox
39
Key Technologies of the 90s
3D Seismic, Computer Assisted Exploration
Horizontal Drilling, Geosteering, Rotary
Steering Systems
Deep-water, Sub-sea, FPSO
Source Baker Hughes
40
Designer Profile Well
Golden Gate Bridge 2737m (8981ft)
Source Baker Hughes
41
Satellite Fields in North Sea
Recoverable oil
8.96

• Dunbar D-05 redesigned
• as horizontal multi-target
• Reservoir defined by 3D
• Leverage infrastructure
• Cost per barrel 1.42
• Typical of subsea and
• ERD wells

Million Standard Barrels Oil
4.39
Source Total
42
3D Seismic Imaging
Subsalt application to Gulf of Mexico
Source Baker Hughes
43
Global Exploration Success Rates
1987 to 1997
Source EIA
44
Subsea Trends
Floating Production Systems

• Floaters 27 of all new offshore fields
• 43 of 2001 O/S fields will be subsea
• Fast track option
• 5/bbl in 94 to 2.50/bbl in98 for GOM
  developments

Source Oil Gas Journal
Douglas-Westwood
45
Deepwater Reserves
Source Baker Hughes
OG Executive Volume 2, 2 1999
46
Value of Technology
10
9
Finding Cost Per Barrel
8
7
6
5
/BOE
Real 99
Dev. Cost Per BOE
4
3
2
1
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
1985
Data from paper presented by BP
47
Oil Company RD
, millions
Note Shell and Chevron have created
internal venture capital groups to
fund new technology
Source EIA.
48
Contribution to Falling EP Costs
Schroders Oilfield Value Survey 3D Seismic
voted 1 (three years running) Technology
deemed to provide the most value to customer
success
Source Schroders
49
Contribution to Falling EP Costs
1995 to 1997
4
5
11
46
8
26
Source Salomon Smith Barney
50
Economic Value Added
Top 8 Seismic Companies - 1995 to 1999
Revenue - 17.6 B Net Income - .4
B 2.2
Capital Charge - 2.0 B Value Destroyed
1.6
Too many seismic boats Too much spec seismic
Source Simmons Company, Baker Hughes
51
ROCE Oil Service
WACC 12.2
Source Simmons Co.
52
Technology Directions
53
Traditional Value Proposition
Rig Cost Skyrockets
2000 cost -- 400M?
Mid-70s cost -- 25M
54
Technology in Limbo
Promise not delivered
Downhole Refining
The Downhole FactoryTM
Source Baker Hughes
55
Virtual Capital

• Multi-branch, intelligent wells
• Improve drainage
• Remote intervention
• Two wells for the price of one

• Expandable tubulars
• Reduce casings - Monobore well
• Downsize rig equipment
• One well for the price of 1/2

Source Baker Hughes
56
Virtual People

• Rig-site generalistequipped with computer and
  video camera
• Real-time communicationto town
• Expert support at office
• Fewer people at rig

Source Baker Hughes
57
Rotary Steerable System
Virtual Technology

• Aerospace technology based
• 2-4000 parts now down to less than 80
• Fully rig repairable
• 80 reduction in system cost

Source Rotary Steerable Tools
58
Visual Immersion Technology
Virtual Problems

• More 3D data than ever before
• 50 fewer people in industry
• Interpret thousands of lines at one time
• Goal No dry holes
• Surround teams with 3D data displayed in 3D

Source Magic Earth
59
The Magic Earth Story
Virtual Solutions

• Texaco technology -- could/would not support
• Offered to seismic industry and was declined
• 1999 startup with Texaco scientists
• Dramatically increased productivity and
  exploration success rates
• Sold to HAL for 100M in 2001

Source Magic Earth
60
The Virtual Oilfield
61
Summary

• Supply/demand getting tighter
• OPEC controls world oil markets again
• Insignificant gas supply response to US drilling
  activity
• Demand growth fueled by power generation cannot
  be met
• Import requirements (LNG) will increase
• Service industry must get better
• Returns are inadequate
• Organizational chaos?
• Technology paradox
• Value creation can be significant
• Funding is down
• The virtual oilfield will restructure capital and
  personnel requirements
• Innovation will reside in startups

62
Full Cycle Cost of Oil
Source CERA
63
Funding New Technology
Major Oil Company Upstream RD of Top 25 U.S. Oil
Gas Companies
-28
Note Shell and Chevron have created
internal venture capital groups to
fund new technology
Source EIA
64
Funding New Technology
Big Three Oil Service Companies
50 Increase In three years
Source Company reports
65
Total - Alwyn / Dunbar
Dunbar
Alwyn
U.K. North Sea
Source Total
66
ROCE EP Companies
WACC 11.8
Source Simmons Co.
67
The New Natural Gas Cycle
The bubble has burst!!
Even Less Production
Even More Drilling
Price Continues Up
Less Production
More Drilling

Price Increases
Less Production
Low Drilling
Time
68
Impact on Depletion
Top 11 GoM Shelf Gas Producers (Bcf/mo)
Top 11 GoM Shelf Oil Producers (mbo/mo)
Source Chevron
69
Decreased FD Cost
70
Visual Immersion Technology
Virtual Solutions

• More 3D data than ever before
• 50 fewer people in industry
• Interpret thousands of lines at one time
• Goal No dry holes
• Surround teams with 3D data displayed in 3D

Source Magic Earth
71
Funding New Technology
Major Oil Company Upstream RD of Top 25 U.S. Oil
Gas Companies
-28
Note Shell and Chevron have created
internal venture capital groups to
fund new technology
Source EIA
72
Same data different view
Pre-stack depth migration
Post-stack time migration
73
Supply and Demand
World Oil Supply and Demand
1997 1998 1999 99avg.
Q1 Q2 Q3 Q4 Supply 74.3 75.3 75.1 72.8 73.2 74
73.8 Non-OPEC Prod. 44.4 44.7 44.6 44.0 44.4
45.2 44.6 OPEC Prod.(incl. NGLs) 29.9 30.6 30
.5 28.8 28.8 28.8 29.2 Demand 73.5
74.0 76.0 72.8 74.6 77.0 75.1 Excess (to/from
stock) .8 1.3 (0.9) (0.0) (1.4) (3.0) (1.3)
(million b/d)
(million b/d)
Stock Build 800 mb
Stock Draw 500 mb
Source IEA, PIW
74
Old Natural Gas Cycle
How the cycle works...
Supply Excess
Supply Excess
Price Decreases
Drilling Activity Increases
Drilling Activity Decreases
Price Increases
Supply Shortfall
Time
75
Impact of Technology on Supply
Multilateral Systems
3D Seismic, Computer Assisted Exploration
Horizontal Drilling, Geosteering, Rotary Closed
Loop Systems
Deep-water, Sub-sea, FPSO
76
The New Natural Gas Cycle
How the new cycle works...
Even Less Production
Even More Drilling
Price Continues Up
Less Production
More Drilling

Price Increases
Less Production
Low Drilling
Time
77
Natural Gas Price
Gas storage slows
40 drop in 12 months
Source various industry
78
Illusion of Oversupply

• High deliverability from G of M gas wells
• Venezuela conversion to horizontal drilling
• Extended North Sea production from subsea
• High exploratory success in mature areas