Oil Industry Trends Rob Arnott 26 th January 2004 3/29/2004 1
Oil Industry Trends Overview of global industry trends Regional costs and capital migration Industry costs and implications Why is further consolidation likely? Company specific growth Where will growth come from? Conclusions How much more risk are companies taking on? 3/29/2004 2
Global proved reserves base North 6% Africa 7% FSU 6% Asia Pacific 4% Europe 2% R/P Ratio (Years) 100 80 60 40 20 0 Middle East World S&C R/P Ratio Africa FSU Asia Pacific North Europe S&C 9% Middle East 66% 1050 bn barrels R/P 40 Years 3/29/2004 3
Annual discoveries 1900-2002 Emphasis switches from exploration to exploitation 60 Annual discoveries bn bbls 50 40 30 20 Cumulative discoveries OPEC ~ 1100 Gb Non-OPEC~ 1000 Gb OPEC 10 Non- OPEC 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 3/29/2004 4
Global Oil Supply 1990-2020 OPEC will start to gain market share after 2010 120 0.6 100 0.5 80 0.4 Total Non-OPEC MMb/d 60 0.3 OPEC less Saudi Saudi % OPEC 40 0.2 20 0.1 0 1990 2003 2005 2010 2015 2020 0 3/29/2004 5
Cost of Supply Cost ($/bbl) 14.0 12.0 10.0 8.0 6.0 4.0 Under $8/bbl for 90 per cent of new capacity 2.0 0.0 2003 2020 0 20,000 40,000 60,000 80,000 100,000 120,000 Cumulative Production ('000 bbl/d) 3/29/2004 6
OPEC remains the low cost producer For private companies access to OPEC is key 14.0 12.0 Cost ($/bbl) 10.0 8.0 6.0 4.0 2.0 0.0 0 20,000 40,000 60,000 80,000 100,000 120,000 Production (mbbl/d) OPEC Non-OPEC 3/29/2004 7
Global Upstream Investment 98-02 Private Oil Companies drive upstream investment 120000 100000 80000 $MM 60000 40000 20000 0 1998 1999 2000 2001 2002 Development Cost Exploration Cost 3/29/2004 8
Recent Sources of Non-OPEC growth Russia has been the big surprise.. But for how long? Russia Kazakhstan Brazil Angola Canada Mexico China Eq. Guinea Colombia UK average annual increase 2000-02, 000 b/d -150 0 150 300 450 600 3/29/2004 9
Incremental production 2002-2007 2007 Deepwater developments driving near term growth DW Atlantic Basin total increment 2002-2007, 7.3 million b/d Russia Caspian Canada 0 1 2 3 4 3/29/2004 10
Replacement figures are deceptive Reserves Replacement Cost $/boe $14.0 $12.0 $10.0 $8.0 Canada $6.0 Europe US $4.0 Latin Africa/Middle East $2.0 Asia-Pacific $0.0 0% 50% 100% 150% 200% 250% 300% Reserves Replacement % Source: Company data, JS Herold 3/29/2004 11
Acquisitions a cheaper route to growth $8.00 Consistent pattern explains industry consolidation $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 1998 1999 2000 2001 2002 Proved Acquisition Cost ($/boe) Finding and Development Cost ($/boe) Source: Company data, JS Herold 3/29/2004 12
US, Canada and Europe overheated $14.0 Companies overpaying to achieve growth $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0.0 Europe Latin Asia-Pacific Canada US Africa/Middle East Proved Acquisition Cost ($/boe) Finding and Development Cost ($/boe) Source: Company data, JS Herold 3/29/2004 13
Migration of capital away from US 80% 60% 40% 20% 0% Spending changes 2000-2002 2002 69% 47% 40% -20% -40% -24% -8% US Canada Europe Africa/Middle East Asia-Pacific Source: Company data, Harrison Lovegrove 3/29/2004 14
Private oil company growth targets ENI to 2008 Total to 2007 Royal Dutch Shell ExxonMobil to 2008 ConocoPhillips BP Chevron Texaco 2002-2008 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% Source: Company data 3/29/2004 15
The real cost of growth Smaller companies chase growth at shareholders expense Annual production growth (%) 20 E and P companies 15 10 Majors 5 0-5 -10 $3.00 $5.00 $7.00 $9.00 $11.00 $13.00 $15.00 Spending per boe produced Source: Company data, JS Herold 3/29/2004 16
Growth without acquisitions unrealistic Even revised targets are unlikely to be achieved 3-Year Avg. F&D Cost $/boe 20 18 16 14 12 10 8 6 4 2 0 0% 3% 5% Small US.-EP Can.-EP Can.-Int US.-Int Super-EP Mid US.-EP Int.-EP Large US.-EP Int.-Integrated Super-majors 80% 100% 120% 140% 160% 180% 3-Year F&D Replacement % Source: Company data, JS Herold, OIES 3/29/2004 17
Decline versus growth More and more growth projects are needed to infill decline Annual decline rate (%) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Chevron Texaco BP ConocoPhillips ExxonMobil Royal Dutch Shell Total ENI 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% % new growth used up Annual decline 2002-2007 (%) % of new growth used infilling decline Source: Company data, OIES 3/29/2004 18
Industry costs rising Unit costs rise as oil price climbs and decline rates increase F&D costs in $ per barrel 8 7 6 5 4 3 2 1 0 2-year lagged Brent Price in $ per barrel 30 25 20 15 10 5 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 3/29/2004 19
BP s oil production growth 2002-2007 2007 1400 Reliance on Russia a high risk strategy? 1200 Production mboe/d 1000 800 600 400 200 0-200 -400 Europe North Africa Latin Asia- Pacific Middle East Russia Total Source: Company data, OIES 3/29/2004 20
Shell s oil production growth 2002-2007 2007 500 Growth reliant on Nigeria (Bonga, NLNG liquids) 400 Production mboe/d 300 200 100 0-100 -200-300 Europe North Africa Latin Asia- Pacific Middle East Russia Total Source: Company data, OIES 3/29/2004 21
Exxon s oil production growth 2002-2007 2007 1200 Growth from Bonga (Nigeria) + Kizomba/Dalia (Angola) Production mboe/d 1000 800 600 400 200 0-200 Europe North Africa Latin Asia- Pacific Middle East Other Total Source: Company data, OIES 3/29/2004 22
Total s oil production growth 2002-2007 2007 Production mboe/d 450 400 350 300 250 200 150 100 50 0-50 -100 Deepwater Africa the key (Nigeria: BongaMain, Congo: Moho, Angola: Dalia) Europe North Africa Latin Asia- Pacific Middle East Other Total Source: Company data, OIES 3/29/2004 23
BP s gas production growth 2002-2007 2007 150 A switch from Europe and North to Egypt, Algeria and Trinidad LNG Production mboe/d 100 50 0-50 -100-150 Europe North Africa Latin Asia- Pacific Middle East Russia Total Source: Company data, OIES 3/29/2004 24
Shell s gas production growth 2002-2007 2007 200 NW shelf Australia and Nigeria LNG the drivers Production mboe/d 150 100 50 0-50 -100-150 Europe North Africa Latin Asia- Pacific Middle East Russia Total Source: Company data, OIES 3/29/2004 25
Exxon s oil production growth 2002-2007 2007 Middle East gas project (RasGas( LNG trains 3 and 4 + Qatar) driving growth Production mboe/d 300 250 200 150 100 50 0-50 -100-150 Europe North Africa Latin Asia- Pacific Middle East Other Total Source: Company data, OIES 3/29/2004 26
Total s gas production growth 2002-2007 2007 Production mboe/d 300 250 200 150 100 50 0-50 -100 A more even spread from Indonesia, Venezuela (Yucal), Argentina (Carina/Aries), Europe North Africa Latin Asia- Pacific Middle East Other Total Source: Company data, OIES 3/29/2004 27
Oil is still driving production growth Targets will only be met if oil developments proceed as planned 7.0% 6.0% CAGR (%) 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% BP Chevron Texaco ConocoPhillips ENI ExxonMobil Royal Dutch Shell Total Oil Growth Gas Growth Source: Company data, OIES 3/29/2004 28
Oil regaining share of production mix Only in Total does gas increase proportionately % Gas 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% BP Chevron Texaco ConocoPhillips ENI ExxonMobil Royal Dutch Shell Total 2002 2007 Source: Company data, OIES 3/29/2004 29
OPEC exposure is increasing OPEC Oil as a percentage of total production 3.6 million b/d out of 15.8 million b/d will come from OPEC in 2007 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Figure show oil production mb/d 220 628 270 553 639 719 BP Chevron Texaco ConocoPhillips ENI ExxonMobil Royal Dutch Shell 581 Total 2002 2007 Source: Company data, OIES 3/29/2004 30
Capital growth is key to equity investors Source: LSE, NYSE 3/29/2004 31
Reserve growth influences share price Source: LSE, NYSE, Morgan Stanley 3/29/2004 32
The equity market expects growth but delivery is at risk Source: Morgan Stanley 3/29/2004 33
The Opportunity Annual expenditure 2001-2030 2030 required to meet demand Annual expenditure ($bn) 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 North Middle East Africa Russia Latin Europe South East Asia China Pacific Source: IEA 3/29/2004 34
Main trends and outlook Further consolidation inevitable US, Canada and Europe are ex-growth Acquisition costs still below FD costs Oil continues to drive POC production growth Companies are not shifting to gas Increasing differentiation between companies Capital flowing from low risk to high risk OPEC exposure increasing Technical and political risk increasing 3/29/2004 35
Oil Industry Trends Rob Arnott Presentation to Paradigm 26 th January 2004 3/29/2004 36