Global Upstream Investment Outlook 2014

Information | Analytics | Expertise
APRIL 2014
KEY QUESTIONS FOR UPSTREAM

IN 2014 AND BEYOND
Global Upstream Investment Outlook
Dylan Mair, Senior Director, Head of Upstream Asia-Pacific

+65 9834 5531
Dylan.Mair@ihs.com
Rebecca Fitz, Director, Upstream Research
+1 202 572 0514
Rebecca.Fitz@ihs.com
2014 IHS / ALL RIGHTS RESERVED
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
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2014 IHS
Top 10
1.
Will Global Player strategies continue to diverge?
2.
Will Independents accelerate strategic repositioning?
3.
Will relief from crude bottlenecks & differentials be

sustained?
4.
Will large projects continue to be curbed by escalating

costs?
5.
Can large companies succeed in unconventional plays?
6.
Will returns recover in the coming year?
7.
Will we see a sharp recovery in asset sales and M&A?
8.
Will opening Mexico Upstream launch greater direct

foreign investment in Latin America?
9.
Will looming challenges stall deepwater developments?
10. Will INOCs position in frontiers, or return to acquisition?

3
1. Will the strategies

of the Global Players
continue to diverge?
The separation of strategies amongst the

Global Players widened in 2013:
XOM working through deepening exposure

to unconventional resource plays
BP re-positioning with Rosneft for growth in
Russia while doubling down DW exploration
TOTAL strategic associations to accelerate
development in oil sands & Brazil pre-salt
Chevron deepening its focus on large-scale
project development
Shell steps back from 4 MMboe/d target by
2017-2018, focus on financial performance
Will these moves deliver the differentiating
returns that shareholders are demanding?
2014 IHS
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
Definition of Peer Groups used for analysis

Global
Players
Tier I
Independents
Tier II
Independents
Majors or Super-majors;
Largest of the IOCs;
Integrated (as opposed to
Upstream only);
Require scale &
materiality in Projects and
Transactions;
Compete on ROCE and
Efficiency
Large Independents;
One or two Core areas,
one usually in a Domestic
basin;
International growth
portfolio;
Captured portfolio has
potential to deliver
production in excess of
1.0 MMboe/d
Smaller E&P players

with tight basin focus
(resource plays, oil
sands, onshore
conventional, US GOM
deepwater);
Leverage technology,
skill application, basin
knowledge
BP, Chevron, Eni,

ExxonMobil, LUKOIL,
Petrobras, Shell, Statoil,
TOTAL
Apache, Anadarko, BG
Group, ConocoPhillips,
Occidental, Suncor
BHP Billiton, Hess,

Marathon Oil, Murphy,
Noble Energy, OMV,
Repsol, Santos,
Talisman, Tullow,
Woodside
2014 IHS
BP doubles down on deepwater exploration

Canada: Awarded four
deepwater blocks in 1Q:2013
in Nova Scotia's bid round.
Norway: Awarded two

blocks in Barents Sea
in 22nd licensing round
in 2Q:2013.
Russia: Rosneft alliance

completed 1Q:2013 brings
exposure to Russia Arctic frontier.
China: Acquisition of an
interest in deepwater S.
China Sea block from
CNOOC in 2012.
GOM: Acquisition of
43 deepwater leases in
2Q:2012 lease sale.
Brazil: Farmed-in to four

Equatorial Margin blocks with
Petrobras in 2012; awarded
eight deepwater offshore
exploration blocks in bid Round
11; farmed-in to five additional
deepwater blocks in 2013.
Uruguay: Acquisition of
three deepwater
exploration blocks in
Uruguays Round II in 2012.
2014 IHS
India: 2011 strategic

association with
Reliance, yielding a
30% w.i. in 23
blocks, majority
offshore in K-G Basin.
Angola and Namibia:
Farmed-in to five deepwater
blocks in each country over
2011-2012, all operated by
Petrobras. Testing the Brazil
pre-salt analog play.
Source: IHS Upstream Competition Service
Australia: Acquisition of 4
deepwater exploration
blocks in the Ceduna
Sub Basin, Greater
Australian Bight in 2011.
6
Total enters into strategic alliances driving non-operated new

source production increases
2014 IHS
2. Will strategic
repositioning among
the Independents
accelerate?
Challenges of resource access and regional

market imbalances prompt reconsideration of
growth strategies and objectives.
Million Barrel per Day Club: only BG then
Anadarko on pace to join ConocoPhillips.
Suncor pulls back, focus value over volume
Apache still searching for new growth
signature
America First peers: poor 2013 returns and
an outlook of continued challenges to North
American markets & prices prompts
reconsideration of North America dedication
Will these trends accelerate? Will staying
the course be rewarded or disciplined for
commitment to the growth challenges?
2014 IHS
Output from the Tier I Independents: 2012-2022

Few are on target for a million-barrels-per-day
Mboe/d
2014 IHS
Global Production among North America-focused

Tier II Independents
2014 IHS
10
Upstream ROCE (3-year roll) North America-focused Tier II

Independents compared with Global Tier II Independents
2014 IHS
11
3. Will relief from

crude bottlenecks &
price differentials be
sustained?
Or will it evolve into deepening price cycles

within North American oil & gas markets?
West Texas- & LLS-Brent differentials reemerging with coastal capacity constraints.
Will an annual cycle in crude discounts
to Brent re-appear & deepen in 2014?
Does uncertainty dampen prospects for
new plays, intensify established plays?
Will US remove restrictions on crude exports
to boost the North American shale play value
proposition?
Will challenged 2013 performance lead to
consolidation?
2014 IHS
12
Expanded pipeline capacity and growth in rail shipments

removed Inland Discount prevailing 2011-2012
Differentials cost Canada oil

producers ~$2.7 billion/month vs
historic revenues
Also cost billions to provincial and
federal governments
2014 IHS
13
4. Will development
projects continue
to be curbed by
cost escalation?
Capacity utilization among major service

companies remains high yet order books
are starting to show signs of weakness.
Upstream companies likely slowing
FEED work pace & sanction decisions in
response to rising unit costs & concern
over weakening commodity prices.
Will upward unit cost metrics continue?
Low interest rates keep pressure on E&P
companies to boost shareholder returns
through dividends and share buy-backs.
How will this impact reinvestment rates?
For larger Independents, will investment
dollars freed from delays in project
sanction transfer to more (& downward
rigid) returns to shareholders?
2014 IHS
14
The reality of a world with shrinking returns
2014 IHS
15
Cost categories, year-on-year change

Q4 2012-to-Q4 2013 compared with Q4 2013-to-Q4 2014
2014 IHS
16
Global Players peer group

Financial performance
2014 IHS
17
5. Can large
companies succeed
in unconventional
resource plays?
Large IOCs engage in shale plays in North

America & abroad to varying degrees.
Organizational, technical, and
commercial skills required to succeed are
much different to large-scale, large
capex, distinct project development.
Can the unconventional resource plays

deliver the high returns upon which the
large IOCs have traditionally competed?
Can larger IOCs succeed in treadmill, cost
driven unconventional play developments?
Or will they buy the expertise to do so?
Or will they move aggressively back into
deepwater, Arctic, and frontier basin areas,
with implications for next tier competitors?
2014 IHS
18
Big reserve plays bring more exposure and risk related to oil
price fluctuations
2014 IHS
19
millions
Global Players exploration spend
$10,000
$8,000
$6,000
2010
2011
2012
$4,000
$2,000
$0

2014 IHS
20
6. Will returns
recover in the
coming year?
2013 filings are not expected to show gains for

IOCs seeking to reverse a declining returns.
Majors, with value reliant upon a high returns

model, av. Upstream ROCE declines for 5 yrs
From average 33% in 2008 to 20% in 2012
Led by XOM with drop from 44% to 23%

Will companies well positioned in productive
plays with accelerated operational efficiency
see a recovery in Upstream ROCE in 2014?
The financial community demands improved
earnings, returns & dividends to shareholders.
Will upstream players turn increasingly to
radical portfolio moves to reposition on the
basis of returns? Who does so successfully?
2014 IHS
21
Majors average upstream ROCE (3-year rolling average)
2014 IHS
22
Global Players peer group

2012 growth vs efficiency (3-year roll)

2014 IHS
23
7. Will we see a
sharp recovery in
asset sales and M&A
in 2014?
M&A in 2013 was one of the weakest in

recent years. A large number of IOCs
executed on material portfolio
restructuring over the last two years.
Will we see aggressive movement on
what appears to be a buyers market for
this large inventory of assets, both
onshore US and internationally?
E&P companies attention on resource
development put them on the sidelines of
North America onshore positioning
What kind of opportunities does this
open up?
Which companies are best positioned to
benefit from these asset sales?
2014 IHS
24
8. Will opening Mexico

Upstream swing
greater investment in
Latin America?
Global E&P players watch closely the

much anticipated opening of the Mexican
upstream sector to private and foreign
investment.
Potential production and profit sharing
contracts allow forbooking of reserves.
Will this transition encourage other

jurisdictions with current or future energy
supply constraints to relax restrictions on
foreign IOCs in upstream activity?
2014 IHS
25
Latin America: The failure of economic populism drives

official efforts to attract upstream investment
Source: IHS National Oil Company Strategy Service
2014 IHS
26
Mexico: Energy
reform to transform
sector
Dec. 13, 2013: Constitution amended to

enable foreign companies in upstream,
ending PEMEX 75-year monopoly.
Source: National Oil Company Strategy Service
Reform allows profit and

production sharing contracts,
and licenses.
Foreign companies able to
book oil & gas reserves.
PEMEX has maximum five

years to deliver stateapproved development plans
of current E&P acreage.
Failure reverts acreage to the
state for potential licensing to
private and foreign energy
companies.
Secondary legislation
detailing fiscal terms for each
contract to be negotiated.
Finalized contracts likely not
available for private and
foreign companies until 2015.
Source: IHS National Oli Company Strategy Service

2014 IHS
27
Latin America bid round monitor summary

Guatemala
Unconfirmed 2013 Bid Round
Mexico
Announced Round Zero and
Closed Chicontepec Bid Round Part 2
Trinidad and Tobago

Closed Deepwater Round
and Closed Onshore Round
Suriname
Closed
International Bid Round and
Unconfirmed 6th International Bid Round
5th
Colombia
Open Bid Round 2014
Ecuador
Closed 11th Licensing Round
and Unconfirmed 12th
Licensing Round
Peru
Unconfirmed 2014 Offshore Bidding Round
and Unconfirmed 2014 Onshore Bidding Round
Announced
Open
Suspended
Closed
Unconfirmed
2014 IHS
Brazil
Announced Small & Medium Producers
Rounds
and Unconfirmed 13th Bid Round
Uruguay
Unconfirmed Uruguay Round III
Argentina
Open Onshore Licensing Round 001/2014,
Unconfirmed Offshore Round, and
Unconfirmed 2014 Neuquen Basin Licensing Round
28
9. Will looming
above-ground
challenges stall
deepwater resource
development?
Deepwater development remains a

leading driver of global production growth
36-37% of new source growth 2013-22
for Global Players & large Independents
Volumes are projected from a handful of
play areas. Company positioning and
risk exposure varies a lot in these plays.
Consensus builds for a weakening
medium-term price scenario.
IOCs to reconcile project economics of
technically challenging, high cost plays
in demanding fiscal terms jurisdictions.
How will this impact investment decisions
and capital allocation between onshore
plays & new offshore development?
2014 IHS
29
Deepwater production remains a leading driver of global

production growth
2014 IHS
30
PEMEX vast acreage in Mexico deepwater

(over 1000 feet water depth)
2014 IHS
31
Breakeven range of deepwater regions as consensus

builds for weakening medium-term prices
2014 IHS
32
10. Will INOCs position

in emerging frontier
plays, or return to
corporate acquisition?
INOC growth strategies have matured,

opportunism replaced by more focus on
returns, materiality, and tangible results.
INOCs seek to expand both resource

base and technical capability often
securing material positions in global
growth plays, particularly North America
onshore unconventionals.
To meet aggressive growth targets will

INOCs return to the emerging global
buyers market in 2014, or do they
represent new competition in accessing
frontier areas?
2014 IHS
33
Priority access advantage NOCs have at home largely

disappears when competing internationally
2014 IHS
34
Asian NOCs acquisition spend by region

2009-2013
INOCs notably absent from North America transactions in 2013.

INOCs continue material moves in Africa & elsewhere, largely still pursuing de-risked basin entry.
2014 IHS
35
Chinese NOCs
open more doors
as upstream cost
pressure mounts
Sinopec and CNPC announced opening

of new oil and gas segments to outside
investors
Outside investors provided access to
minority stakes
Implications and outlook
CNPC plan for PSCs with private, foreign participation
leads to more un- and conventional opportunities
Without further regulatory, structural reform, minority
private capital will not increase competition
Degree of openness is uncertain. Near-future JVs likely
limited to frontier and unconventional assets
2014 IHS
36
In closing
Companies continue to balance growth

and value across complex regions and
asset types.
Lower returns from long-term production

North American onshore may drive
companies large enough to have multiple
core asset types to refocus on
conventional resources to gain value
Planning against a trend for higher costs

may lead to further FID delays, freeing
cash flow for consolidation or dividends
Or, $100 has become the new $20.
2014 IHS
37
Contact us
Americas:
+1.800.IHS.CARE (+1.800.447.2273);
customercare@ihs.com
Europe, Middle East, and Africa:

+44.(0).1344.328.300;
customer.support@ihs.com
Asia and the Pacific Rim:

+604.291.3600;
supportapac@ihs.com
2014 IHS. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent, with the exception of any internal
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Information | Analytics | Expertise

KEY QUESTIONS FOR UPSTREAM

Dylan Mair, Senior Director, Head of Upstream Asia-Pacific

KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014

The accompanying materials were prepared by IHS

KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014

Will Global Player strategies continue to diverge?

Will Independents accelerate strategic repositioning?

Will relief from crude bottlenecks & differentials be

Will large projects continue to be curbed by escalating

Can large companies succeed in unconventional plays?

Will returns recover in the coming year?

Will we see a sharp recovery in asset sales and M&A?

Will opening Mexico Upstream launch greater direct

Will looming challenges stall deepwater developments?

10. Will INOCs position in frontiers, or return to acquisition?

KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014

1. Will the strategies

The separation of strategies amongst the

XOM working through deepening exposure

POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014

Definition of Peer Groups used for analysis

Smaller E&P players

BP, Chevron, Eni,

BHP Billiton, Hess,

POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014

BP doubles down on deepwater exploration

Norway: Awarded two

Russia: Rosneft alliance

Brazil: Farmed-in to four

India: 2011 strategic

Source: IHS Upstream Competition Service

POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014

Total enters into strategic alliances driving non-operated new

Source: IHS Upstream Competition Service

KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014

Challenges of resource access and regional

POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014

Output from the Tier I Independents: 2012-2022

Source: IHS Upstream Competition Service

POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014

Global Production among North America-focused

Source: IHS Upstream Competition Service

POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014

Upstream ROCE (3-year roll) North America-focused Tier II

Source: IHS Upstream Competition Service

KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014

3. Will relief from

Or will it evolve into deepening price cycles

POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014

Expanded pipeline capacity and growth in rail shipments

Source: IHS Upstream Competition Service

Differentials cost Canada oil

KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014

Capacity utilization among major service

POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014

The reality of a world with shrinking returns

POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014

Cost categories, year-on-year change

POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014

Global Players peer group

Source: IHS Upstream Competition Service

KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014