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SPE DISTINGUISHED LECTURER SERIES
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The Society gratefully acknowledges
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to participate as Lecturers.
And special thanks to The American Institute of Mining, Metallurgical,
and Petroleum Engineers (AIME) for their contribution to the program.
E&P
A Dynamic Growth Business
Aidan McKay, SPE
Shell Exploration & Production Company
SPE Paper 84433
Originally presented at SPE – ATCE Denver, CO
October 2003
History of Supply / Demand and Growth
Potential Investment Levels Required
Six Competitive Forces Shaping the EP Industry
Profits
Conclusions
SPE 84433 A McKay
Hydrocarbon (Oil & Gas ) Demand from Wellbores
Daily Production (Million Boe/d)
240
200
Gas (?)
160
128 mln boe/d
120
80
Oil (?)
40
0
1980
1985
1990
1995
2000
2005
2010 2015
2020
2025 2030
Aggregate global production decline is ~ 5+% per annum.
Aggregate long term oil & gas growth is 1.5% per annum average.
SPE 84433 A McKay
Number of Cars & Light Trucks Globally (millions)
Number of Vehicles Globally (History and Forecast)
1400
1200
USA ~ 200 mln vehicles (adding 15 mln pa)
China ~ 5 mln (Growth undefined)
1000
800
Range of Forecasts
600
400
200
0
1940
1950
1960
1970
1980
1990
2000
2010
[Assumes an 8 Bln population by 2030]
SPE 84433 A McKay
2020
2030
Number of Commercial Aircraft (thousands)
Number of Commercial Aircraft
35
30
25
Range of
Forecasts
20
15
10
5
0
1940 1950 1960 1970 1980 1990 2000 2010 2020 2030
Time (Years)
SPE 84433 A McKay
[Assumes an 8 Bln population by 2030 AND economic progress ]
Hydrocarbon Reserves & Demand (Bln boe)
World Proven Hydrocarbons (Bln Boe)
6000
5000
4000
3000
•
•
•
•
The planet may have 40 - 100 years supply
80% of hydrocarbons are in onshore areas; 20% offshore
Much is low cost access…..most owned by governments…
New ones (mature) opening each day.
Hydrocarbon
Demand from
Wellbores
Growing at ~12% pa
?
1000-3000 Bln boe
Oil sands/Bitumen
Heavy etc
2000
Oil 1100 Bln bbl
1000
(Expect+ Undiscov.= 2000 Bln)
2002
44 Bln boe
0
SPE 84433 A McKay
2030
88 Bln boe
Gas 700 Bln boe
4000 Tcf
Capital Investment Capex ($ Bln)
Private Oil Company Annual EP Capex Actuals & Forecasts
Excludes OPEC Countries and Russia Spend]
300
250
200
150
~ $1 Bln scale “giant” projects, start of offshore, DW etc
Big 5 oil companies ’93 ~18 Bln pa, 2003 ~$34 Bln to
increase oil by 15 % & Gas by 20 % in 10 years to 14.8 mln
Exxon, BP, Shell, Chev, TFE
Big US Independents ~ $8 Bln pa, for 2 mln boe/d
100
50
0
1960
SPE 84433 A McKay
1970
1980
1990
2000
Time (Years)
2010
2020
2030
THE TRADITIONAL “S” CURVE FOR TECHNOLOGY
Business
Benefits
Creaming
of Candidates
for Technology
Widescale
Implementation
of Technology
Initiation
Of New
Technology
Obvious
Candidates
First
Trials
INNOVATION
SPE 84433 A McKay
GROWTH
MATURITY
Time
New Well Technology S Curve Evolution
GAINS
CONTINUE ?
Business
Benefits
?
Intelligent Wells
Underbalanced
Drilling Offshore
Coiled Tubing
Multilateral
Drilling
Multi-fracced
Wells
Multilateral
Wells
Horizontal
Wells
Slim Hole
Exploration
Hydraulic
Fracturing
Horizontal
Wells with
Hydraulic Fracturing
Vertical &
Deviated
Wells
Time
1970
SPE 84433 A McKay
1980
1990
2000
2010
Capital Investment Capex ($ Bln)
Private Oil Company Annual EP Capex Actuals & Forecasts
300
Assumed Reduced Impact of Technology
(30% Reduction in Investment)
250
200
150
~ $10 Bln scale projects
~ large scale devt of marginals
~ Major infrastructure
~ supplier cost increases
100
50
0
1960
SPE 84433 A McKay
1970
1980
1990
2000
Time (Years)
2010
2020
2030
Annual R&D Investment ($ Bln)
Industry Sector Research and Development Spend 2001
80
70
60
50
40
30
20
10
0
$3.3 Bln in total
EP ~ $2 Bln in total
Industrial Sector
NB : 1995 equivalent R&D spend was ~ $4 Bln
SPE 84433 A McKay
Source: UK Financial Times Monday 14th October 2002 pages 10 -11
Annual R&D Spending ($ mln )
Oil & Gas Company Research and Development Spend
900
800
700
600
Source : Company Annual Reports
2001
2000
1999
500
400
300
200
100
0
SPE 84433
• Pressures from Shareholders to cut R&D spending in 1990s.
• Service Industry starts to do material “ tech devt”,
A McKay but significantly lower profits mean less R&D funding
Six Competitive Forces Shaping the E&P Industry
• Cost Structure – Need for Continual Improvement
• E&P Portfolio Restructuring
• Shifting to Gas
• The Quest for Growth
• Need for improved financial management
• Industrial consolidation
SPE 84433 A McKay
Where to Exploit the Hydrocarbons in Longer Term
BIG 5 MEO
SAUDI, KUWAIT,
“NEW” EP Business
“OLD” EP Business
IRAN, IRAQ, UAE
BIG GAS
USA, Canada, North Sea,
Small ME Countries
Selected others
+ Low Govt Take, stable terms
- High UTCs
- Mature Basins (limited growth)
- Capital intensive,
- high costs on supply curve
+ Long asset tenure
+ High upside at higher prices
+ gas markets are developed
QATAR, Russia
Brazil, Angola, Iran, CIS,
Sakhalin, Kazakhstan, China
Other OPEC Countries,
S. America, Pakistan, Bangladesh
- High Govt Take,
- High Govt Take, less stable terms
- Commercially risky
- Commercially risky
- Limited upside @ higher prices - Limited upside @ higher prices
- gas markets are emerging
- gas markets are emerging
- ultra competitive (“loss leading”)- ultra competitive (“loss leading”)
- Low degree of control with govt - Lower degree of control with govt
+ Green/Brownfield (high growth) + Green/Brownfield (high growth)
+ Low UTCs resources
+ Low UTCs- MRH ; DW High UTCs
Natural Shift with Declines
Where EP Industry made most of
the money in the past …..
But margin is small @ low prices
and where capex treadmill
potential exists
SPE 84433 A McKay
Where the EP industry must go in the future,
but where EP margin may be thin.....
at all oil/gas prices like R&M or Chemicals
Net Income After Tax per Boe ($/boe)
E&P UNIT MARGINS ($/bbl) FOR E&P ENVIRONMENTS
11.5
11
10.5
10
9.5
9
8.5
8
7.5
7
6.5
6
5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
OLD E&P
(examples)
$16/bbl oil & $3/mln scf gas
$22/bbl oil & 3.5/mln scf gas
$30/bbl oil & $4.75/mln scf gas
NEW E&P
(examples)
BIG- GAS
Qatar
(likely rents)
BIG5MEO
(likely rents)
0
SPE 84433 A McKay
Which is better: “bond-like” investments
or investments with more risks but with price upside?
50 years of EP Consolidation Continues, Nationals Join, What Next?
1950
Standard Oil (NJ)
Socony Vacuum
Superior Oil
Standard Oil (IN)
Standard Oil (OH)
Atlantic
Richfield
Sinclair
British Petroleum
1960
Royal Dutch/Shell
Shell Oil
The Texas Co.
Tidewater
Pacific Western Getty
Skelly
Gulf
Standard Oil (CA)
Standard Oil (KY)
1970
1980
1990
2000
Exxon
/Mobil
Mobil
Amoco
Britoil
Arco
Vastar
+ TNK
BP
Royal Dutch
/Shell
Texaco
Chev/Tex
Chevron
Occidental
Occidental
Cities Service
Phillips
Aminoil
General American Oil
Continental
Union Oil
Pure Oil
2005+
State Oils & Former State Oils
TFE, ENI, REPSOL, PETROBRAS,
ConocoPhillips
Unocal
Marathon
Will Consolidation Continue? In What Form?
2005 - 2010
2003
Exxon/Mobil
Royal Dutch/Shell
BP
Chev/Tex
Phillips/Conoco
• Alignment around geography & cultures
• Regulatory involvement is likely
• National Oils rightly playing away from home
• Does Aramco marry or eat the survivors
• How will Gasprom play going forward ?
TFE
ENI
YUKOS
Sibneft (?)
Rosneft
Statoil
+ Norske Hydro (?)
Petrobras
+ Repsol (?)
SPE 84433 A McKay
GaZprom (?)
An Growth Example of Similar Behaviour in Independents
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Devon
Hondo
Alta
Worland
Kerr McGee (N America)
North Star
Penz Energy
Santa Fe
Mitchell
USA Companies
Ocean Energy
United Meridian
Seagull
Anderson
Home
Ulster
Numac
Canada Companies
A 650,000 boe/d company with a $2.5 Bln pa capex requirement,
All cash flows re-invested.
SPE 84433 A McKay
Source: Devon Annual Reports
Big Four Major Oils E&P Net Income (CCS)
Annual Net Income after Tax ($ Bln)
40
35
30
25
20
15
10
5
US Vehicle Industry
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Time (Years)
Large pressures to increase dividends and Share buybacks in a bear market
SPE 84433 A McKay
Source: Company Annual Reports
The Ten Largest US Market Capitalisations Versus Time
1928
Rank
1.
2.
3.
4.
Company
1969
Mkt Cap
(S Bln ) Company
General Motors
AT&T
US Steel
S..O. N.J. (Exxon)
1999
Mkt Cap
($ Bln ) Company
2003
Mkt Cap
($ Bln ) Company
Mkt Cap
($ Bln )
22
18
9
9
IBM
AT&T
General Motors
Eastman Kodak
159
102
76
51
GE
Microsoft
Citigroup
Cisco
459
335
314
306
Microsoft
GE
ExxonMobil
Wal-Mart
266
256
231
217
5. G.E.
6. DuPont
9
8
Exxon
Sears Roebuck
51
40
ExxonMobil
Pfizer
284
271
Pfizer
Citigroup
178
173
7. F.W. Woolworth
8. S.H. Kress
9. S.Oil of California
7
7
6
Texaco
Xerox
GE
32
31
27
Intel
Wal-Mart
IBM
244
239
194
Johnson & J 163
IBM
137
AIG
128
10. NY Central Railroad
6
Gulf Oil
24
Nokia
187
Merck
Oil Companies will continue to play huge global role
SPE 84433 A McKay
Source: Various
114
Conclusions
 E&P is a dynamic, profitable, growth business
 E&P business is capital intensive and requires high
technology like space travel or the defence industry
 We have interesting conflicts in meeting global hydrocarbon
demand whilst meeting the needs of stakeholders
 The scale of investment required will be challenging and is not
recognised in society.
 Sustaining the industry success will require R&D success
levels at least equal to those of the past to keep future
investment costs down. We need to avoid under-investing in
the research we need.
 We have met the energy needs of the planet in the past and
will do so in future. This is a great place to work.
SPE 84433 A McKay
Key Points to Reflect on:
 Can we get OEDC individuals out of cars, into buses/trains ?
 Quality E&P investments are very, rare (ie risk/reward balance)
 Portfolio Management & Mergers add nothing to global supply
Selling assets in production returning WACC+, is dubious.
 Role of Exploration 2005 –2030 is very uncertain, If so then where
BI5MEO, BIGGAS, NEW EP, or Frontier exploration
 Impact of Technology in Future in Cost Redn (Is it large or small)
Not at all clear that material steps are being made
 R&D Spend is low (vs industries & history), so what breakthroughs
Majors & Service Industry may not be doing enough
 Cash Today is Mantra, (Dividends & Buybacks) not investment
 Having a large surplus of cash today, is not valued in market.
SPE 84433 A McKay
Backup Slides
Not likely to be Used
SPE 84433 A McKay
Oil Price ($/bbl) Actual
Possible Outlooks on Oil Prices?
38
36
34
32
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
Volatile
Or Low Oil
Price
World
again
?
Low Oil Price World
1910-1970
Volatile
Oil Price
World
1971-2002
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030
SPE 84433 A McKay
We Tend To Get Overly Pessimistic in Downturns
March 1999
SPE 84433 A McKay
Then rapidly revert 12-18 months later
….Yet the big supply demand did not change?
September 2000
SPE 84433 A McKay
The Individual Optimum May not be Optimum for Society
Happy with HUMMER II
Happy with HYBRID
It is a symbol of my success
It costs me $3000/yr more in fuel
It is “safe” , fashionable, and
Has loads of utility
It is my contribution to a problem,
We need to leave it in better shape
It is very efficient, and is the future
It has all the functionality I need
Long term fuel issues and
Environment are not his problem
Would he still buy it if it had a
0.6-1 ltr vs 3 ltr engine
SPE 84433 A McKay
Number of Cars (Mlns)
Annual Car Sales By Top Ten Manufacturers
10
9
8
7
6
5
4
3
2
1
0
SPE 84433 A McKay
(Does not include Trucks or buses etc)
Alternative Fuel Vehicle Penetration in USA
Growing Strongly, but only 0.6 mln out of 205 mln vehicles
Number of Cars (Mlns)
0.6
Electricity (incl Hybrids)
0.5
0.4
Ethanol (85%/Gasoline15%)
0.3
Compressed Natural Gas
0.2
Liquified Petroleum Gas
0.1
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
SPE 84433 A McKay
Ref : USA Dept of Energy
EP Technology S Curve Evolution
GAINS
CONTINUE ?
Business
Benefits
?
Intelligent Wells
Underbalanced
Drilling Offshore
Coiled Tubing
Multilateral
Drilling
Multi-fracced
Wells
Multilateral
Wells
Horizontal
Wells
Slim Hole
Exploration
Hydraulic
Fracturing
CREAMING OCCURS ?
[Capital Intensity rises]
Horizontal
Wells with
Hydraulic Fracturing
Vertical &
Deviated
Wells
Time
1970
SPE 84433
1980
1990
2000
2010