Its all in the Economics!

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Its all in the Economics!

• Presented by
• Roger Burrows
• La Garde Associates LLP

2
What is a marginal field?

• Some statistics
• 1 to 1000 mmbbls can all be marginal
• Discoveries in UK 1996-1999 averaged 29 mmbbls
• 315 Undeveloped Discoveries in UK as at beginning
  2000
• Economically
• There are good fields
• no serious questions about development decision
• There are bad fields
• forget it for a few years
• And there are marginal fields

Sources, UKOOA, PILOT and Wood Mackenzie
3
What drives the economics of a project?

• Technology
• Can give productivity
• Can provide new and low cost engineering
  solutions
• Covered elsewhere today
• and tomorrow!
• Oil Price
• Reservoir

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Oil Prices and Marginal Fields

• Rule 1
• Do not believe todays oil price
• Rule 2
• Do not believe your companys economic
  assumptions
• Rule 3
• Believe the market
• Rule 4
• Be patient

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Rule 1 - Do not believe todays oil prices
Opec cuts production coupled with cold snap in US
Iraq stops exports raising under supply worries
Supply fears following the events of September 11
Worries over economic slowdown and oversupply
Fear of oversupply coupled with economic slowdown
Fears of the demand impact of recession coupled
with oversupply
Sources Platts, UKOOA and the BBC
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Rule 2 - Do not believe your assumptions
Source Wood Mackenzie
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Rule 2 - Do not believe your assumptions

• Remember what they are for
• Budgets
• Medium to Long Term Planning
• Ensuring comparability for decisions
• For projects that have an economic life through
  the cycle
• e.g. exploration, larger fields
• typical economic lives of 5-15 years
• Not appropriate for the small marginal field
• oil price cycle is not relevant to most Marginal
  Projects
• economic life is too short

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Rule 3 - Believe the market

• Offer management the ability to lock in the oil
  price
• you can guarantee them a return if they are
  willing to lock in
• (if they do not wish to lock in
• implies they believe the market will go higher!)
• So they should still be willing to sanction

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Rule 4 - Be Patient

• If the available price is not good enough
• be patient
• put the project on the shelf and wait.

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A Small but Marginal 10 mmbbl Field

• Project is ready to go
• happy with technology and reserves
• development plan written
• first oil 18 months from sanction
• Project Manager
• Wants his project sanctioned!
• Project needs 18 to deliver required return
• Economic Life only 2 years from first oil

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Forward Oil Price Trends
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Timing is everything
Early 1999
Our project is not economic We can only lock in
ca 15/bbl
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Timing is everything
Spot Prices
30
Late 2000
20
Our project generates a high return We can lock
in 20 to 25/bbl
2005 prices
14
Timing is everything
30
Spot Prices
Late 2001
20
Delay has lost us the super returns but.. Our
project can still give a good return We can still
lock-in ca 20bbl
2005 prices
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Reservoir

• Economists worry about Reservoir Engineers
• especially what they tell us about the reservoir!
• Reality is
• like price, reserves are not guaranteed
• we can lock in the price
• but we cannot lock in the reserves

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Our Marginal 10 mmbbl Field

• Not actually a 10 mmbbl field
• It has a range of Reserves
• Say 3 to 15 mmbbls
• Risk of losing money significant if we end up at
  lower end of reserve range
• even after locking in high prices!

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Coping with Reserves Uncertainty

• Some thoughts
• Each project has a project manager
• His/Her objective for field development decisions
• give management a return
• reduce risk
• studies, reprocessing seismic, more studies
• costs time, effort and money
• all value destructive
• but point forward economics still look good!!!
• For developments we tend to become risk averse
• Not appropriate for small discoveries

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Exploration Mindset

• Drill a portfolio of opportunities
• Some work
• Most dont!
• Accept the possibility of loss
• because it is balanced by value derived from
  successes

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Development Mindset

• Develop a portfolio of opportunities
• Most work
• Some dont
• Accept the possibility of loss
• because it is balanced by value derived from
  successes

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Think Portfolio

• Most companies have several marginal discoveries
• Should consider small discoveries more like
  exploration
• Treat them like an exploration portfolio
• Accept uncertainty
• Dont work them to death and destroy value
• Each project sanctioned is just part of your
  portfolio
• If it fails it is NOT a disaster
• Some will work better then expected
• Spreading Risk
• improves chance of obtaining required return
  overall

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In Summary

• Do not be ruled by oil price uncertainty
• Be patient
• and overrule it by locking in when advantageous
• Think Portfolio
• Do not overwork the problem
• Spread the risk and improve the certainty of
  return

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