Global Offshore Oil Drilling Prospects

1Global Offshore Prospects - SUT London 26 February 2009

Global Offshore Prospects

SUT London, 26 February 2009

John Westwood & Steven Kopits

picture: Rowan

2Global Offshore Prospects - SUT London 26 February 2009 2

The winter 2008/9 series of ‗Global Offshore Prospects‘ by energy

business analysts Douglas-Westwood has been presented in:

• Doha, Qatar

• Singapore

• Perth, Australia

• Houston, USA

• New York, USA

• Stavanger, Norway – February 10

• London, England (this edition) – February 26

• Southampton, England – April 1

• Aberdeen, Scotland – June 18

For details of future presentations / venues please contact us or

visit our website.

Copyright – reproduction of the information contained must state

‗source: Douglas-Westwood‘.


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offshore

onshore

downstream

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Published Market Reports

• The source of much of the data used in this presentation


Oil & Gas Trends

Offshore Oil & Gas

Offshore Renewables

The Future


Two amazing years

• The rise and fall of oil prices

• The financial crash and stock market collapse

• The oil & gas sector has still greatly outperformed the market

• How should we interpret recent events?

Source: Barclays Stockbrokers


Recessions are not unusual

• Recessions happen about every

five years (e.g. 20 in past century)

• It is the relatively unbroken

prosperity of the past 25 years

which is unprecedented

• Most last about 18 months

• This is a very serious recession—

probably among the worst 3-4 in

the last century


US oil consumption recovers strongly after recessions

• Oil demand falls during

recessions

• Biggest fall in September

• Demand recovery: Feb

gasoline +1.7% YOY

• A recession in two parts?

Source: EIA January 08

16.5

17

17.5

18

18.5

19

19.5

20

20.5

Jan-0

8

Mar-

08

May-0

8

Jul-08

Sep-0

8

Nov-0

8

Jan-0

9

Mar-

09

May-0

9

Jul-09

Sep-0

9

Nov-0

9

Jan-1

0

Mar-

10

May-1

0

Jul-10

Sep-1

0

Nov-1

0


The near-term oil demand impact

• North American oil demand contracted by 1.3 million bpd in 2008

• Europe & N America further demand destruction of 0.5 M bpd in 2009?

• Developing economies demand continues to grow albeit at a slower rate

109

-1,345

-3372007 2008 2009

441

341 331

2007 2008 2009283

253

199

2007 2008 2009

-370

-49

-206

2007 2008 2009

295

427

300

2007 2008 2009

113

52 49

2007 2008 2009

66

119100

2007 2008 2009

North

America

Latin

America

Africa

Europe

Middle

East

Asia

FSU

Source: IEA OMR 11/12/2008


Recession and oil demand in perspective

0

10

20

30

40

50

60

70

80

90

100

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

mill

ion b

arr

els

/ d

ay world oil demand

• Oil is now more affordable

• US demand – some recovery?

• World demand to fall 1% in 2009?

• Decline is a small % on a long term view


The long-term oil supplies issue has not gone away

• ‗The effects of peak oil will be felt in

the next five years‘

• ‗Risks far greater than terrorism‘

• ‗The impacts are more likely to arrive

before climate change‘

World will struggle to meet oil demand

FT page 1 headline Oct 29 2008 (re IEA Report)


Is peak oil on the way?

0

20

40

60

80

100

120

1995 1999 2003 2007 2011 2015 2019 2023

mill

ion b

arr

els

per

day

BIOFUELS

CTL

GTL

OIL SHALES

OIL SANDS

REFINERY GAIN

OFFSHORE DEEP

OFFSHORE SHALLOW

ONSHORE

<200252

countries past peak

by 200866

countries pastpeak

• Decline in existing fields challenges future supplies

• Global peak revised down by 4 Mbpd to 89 Mbpd (Total CEO,16 Feb ‗09)

• IEA warns of ‗serious supply crunch from 2010 due to delayed investment‘ 16 Feb

• The big offshore opportunities are in deepwater

Source: Energyfiles


Ultimately, oilfield production cannot be replaced

• World‘s fields‘ annual average production declining at 4%? (some say 7%, UK N Sea is 11%)

• Current oil production = 84 million bpd

• So 3.3 million bpd needs replacing per annum

• Saudi production = 8 million bpd

We need to find and get into production one NEW Saudi Arabia

every THREE years just to offset production decline!

Plus….

For emerging economies per capita oil use to reach European

levels we need 8 more Saudi Arabia‘s producing!


The ―Easy oil‖ has gone – the remainder is in difficult places

Iraq

Venezuela

Nigeria

The Arctic

Canada


Many OPEC members‘ budgets need oil prices >$50

91.0

57.3

42.9 43.6

33.5

16.9 14.8

0

10

20

30

40

50

60

70

80

90

100

110

Ve

ne

zu

lea

Iran

Sau

di

Ara

bia

Ku

wait

UA

E

Alg

eri

a

Qata

r

2000

2008

2010

• OPEC members have invested trillions of dollars in recent years

• Some now face current account deficit and will push for production cuts

• Will members adhere to agreed production quotas?

• Or must Saudi make drastic production cuts?


Two decades of underinvestment – will the same happen again?

0

20

40

60

80

100

120

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007

Newbuild Drilling Rigs

Oil Price ($2007)

• The oil & gas industry needs to spend $10 trillion by 2030

• The world cannot afford another energy investment famine

Offshore rig builds & oil price

Some 157 offshore rigs

in construction Feb ‗09

(population 872 inc C.S)

"It is unrealistic to think that 5

years of increased spending in an

inflationary environment can

compensate for 20 years of

underinvestment" Andrew Gould, CEO Schlumberger


• A ‗clean‘ fuel

• Local depletion (e.g. UK, US GoM)

• Strong demand growth

• Major investments ongoing

• Drive to develop coal bed methane

• LNG to grow 86% by 2016

• But ….most remaining reserves

controlled by NOCs & Russia

• Will GOPEC happen? (RIQ own 55%

of the world‘s reserves)

• Long-term gas supply security a threat

as demand rises (IEA 7 Oct 08)

NATURAL GAS – huge global reserves / local shortages


EUROPE – Increasing gas imports as reserves deplete

• Europe‘s production is falling

• 61% of EU‘s gas is imported. Russia largest supplier

• Security of supply issues (winter 08/9 ‗thousands without fuel‘

• Imports to rise to 73% by 2030

• Developing import difficult – offshore / floating solutions increasingly preferred

• UK particularly exposed – NS decline & little storage.

16% others0

10

20

30

40

50

60

70

80

90

100

Top European gas markets (bcm)


Oil & Gas Trends

Offshore Oil & Gas

Offshore Renewables

The Future

DEEPWATER

(>500m)FLOATING

PRODUCTION

SUBSEA

PRODUCTION


Offshore oil & gas production and spend to grow

0

50

100

150

200

250

300

350

400

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ca

pe

x &

Op

ex (

$b

illio

ns)

AfricaAsiaAustralasiaEastern Europe & FSULatin AmericaMiddle EastNorth AmericaWestern Europe

Source: EnergyFiles

• Most regions to see growth

• W Europe to decline

• Strong underlying Opex growth as

a function of both increased

volume of activity and complexity

• Capex to dip by 3% from

$157bn to $152bn in 2009

• But total spend to grow from

$260 bn (2008) to $360 bn

(2013)


Offshore Drilling – deepwater to show strongest growth

• Surge in expenditure driven by escalating oil prices / rig shortages

• 2007 spend of $68 bn. To reach $82 bn in 2012

• Deepwater spend to grow by 38%

• Petrobras, Mitsubishi plan $830 million drillship (Feb ‗09)

• Growing importance of deepwater gas

0

10

20

30

40

50

60

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Capex &

Opex (

$ b

illio

n)

. shallow water

deep water

Source: “ World Offshore Drilling Spend Forecast 2008-2012”

EnergyFiles & Douglas-Westwood


Deepwater Capex to reach new highs

• Deepwater production: to grow 99%

(shallow water 20%)

• Future deepwater investment:

$137 billion over the next five years

• Most Brazil sub-salt spend likely to be

beyond 2013Source: “The World Deepwater Market

Report 2008-2012” Douglas-Westwood

$0

$5

$10

$15

$20

$25

$30

$35

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Exp

end

iture

($b

illio

ns)

Africa

Asia

Australasia

Latin America

Others

North America

Western Europe


Continued increase in floating production spend

• Floater spend to grow from $4.3 bn in 2009 to $9.9 bn by 2013

• FPSO systems to account for 72%

• MMS now permitted the use of FPSO systems in the GoM

$0

$2

$4

$6

$8

$10

$12

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Exp

end

iture

($ b

iillio

ns)

TLP

Spar

FPSS

FPSO

Picture: trelleborg

Source: The World Floating Production Report

Douglas-Westwood


Subsea production to double. Capex growth to continue

0

5

10

15

20

25

30

35

40

45

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012C

ap

ex ($

billio

ns)

Africa

Asia

Australasia

Latin America

North America

Western Europe

Others

• Deepwater – increasing activity, most deepwater wells are subsea

• Marginal fields – tiebacks to existing infrastructure

• Fast route to first oil – tiebacks enable early production

• Development of complementary technology – e.g. subsea processing

• Gas developments – ‗subsea-to-shore‘ developments

Source: Douglas-Westwood


ROV spend to double

• Work-class fleet to grow from 584 to 771

• Five year spend to double to $2 billion

• Annual spend to exceed $400 million by 2012

• ROV operations market grow from $1.6bn to $2.4 bn

Source: The World ROV Report

Douglas-Westwood

0

100

200

300

400

500

600

700

800

900

Wo

rld

wo

rk-c

lass f

leet

Western Europe

North America

Middle East

Latin America

E Europe/FSU

Asia Pacif ic

Africa


Oil & Gas Trends

Offshore Oil & Gas

Offshore Renewables

The Future


• 2008 annual expenditure $0.56 bn, rising to $5.2 bn in 2012

• UK became world-leading market in 2008, surpassing Denmark

• Developers chosen for 10 Scottish sites totalling 6 GW. EIAs beginning

• Emerging Asian market – both in projects and supply chain

• High costs, long lead times, installation vessels, low investor confidence

0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Cap

ex ($ b

illio

n)

Others

UK

Sweden

The Netherlands

Germany

Denmark

Belgium

Offshore Wind


Wave & tidal current stream – developing sectors

0

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Annual in

sta

llatio

ns M

W

Others

USA

UK

Spain

Portugal

Ireland

France

Canada

Australia

• Many concepts

• Devices only now

being installed in

commercial

projects

• 95 MW installed

capacity by 2013

• UK to be world-

leading market

• N America &

Australia emerging


Offshore renewables Capex in context

0.2 2

47

152

0.6 5.2

200

0

20

40

60

80

100

120

140

160

180

200

Marine Renewables

Offshore Wind

All Wind Offshore O&G

Cap

ex ($ b

illio

n)

2009

2012

• Offshore still a ‗new‘ sector

• Small markets in 2009, but

high growth expected

• Still subsidy dependent

• Major ‗pan-European‘

offshore power cable grid

under consideration (10

cables, $4bn)


Oil & Gas Trends

Offshore Oil & Gas

Offshore Renewables

The Future

• Huge potential reserves

• Major technical challenges

• Deepwater + extreme environment

• Very high costs

• National borders still uncertain

Arctic offshore


Brazilian sub-salt

• ‗Development of Brazil's promising subsalt oil deposits in the

Santos Basin will require investments of approximately $400 billion

over 10 years‘ National Petroleum Agency, Nov12, 2008

• China to loan Brazil $10 bn for supply of up to 160,000 bpd 19Feb 09


• Challenges: capital cost, plant size & weight, motion problems

• Vessels now on order

• Shell out to tender for large-scale unit

“We have devoted substantial

engineering hours to FLNG

and we now believe that its

time has come……., this

technology increases the rate

at which we can expect to get

LNG into the world’s

energy-hungry markets" Jon Chadwick, VP Shell

FLNG – floating liquefaction & regasification


2009 – total global E&P spend to fall 12%?

0

50

100

150

200

250

300

350

U.S. Canada International

$ b

illio

n

2008E

2009E

Source: ‗The Original E&P Spending Survey‘ (Barclays Capital)

• Small & marginal projects are likely to take the hit

• Mainly onshore? Then discretionary (seismic, exploration?)

• And activity that relies on the credit market

• We think the bigger offshore projects & Opex will be less effected

• Oil companies delay orders to get better prices (e.g. BP statement)

• Petrobras plans suggest survey‘s ‗international‘ may be pessimistic

375

417450 458

400

0

50

100

150

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250

300

350

400

450

500

Jun-07 Dec-07 Jun-08 Dec-08 2009 (E Dec-09)

$ b

illio

n


• Sept – Nov: OES shows strong fall

• But some recovery since December

Past 3 years:

• E&P fairly flat despite high oil price

• Contractors boom time

• OES index doubles in value, then

• dramatic July crash

Are the prospects looking up?


• ‗Will keep investing for the eventual return of demand for oil

and refined products once the current recession ends‘. Clarence Cazalot CEO Marathon Oil

• ‗Demand for rigs that can fetch more than $600,000 a day to

rent hasn't diminished‘ Gregory Cauthen, CFO Transocean, 10 Feb ‘09

• ‗Our capital spending plans, which include exploration and

development projects, are unaffected by the recent

reduction in oil prices‘. Alan Jeffers. Exxon Mobil, 10 Feb 09

• Petrobras plans $174 bn 5-year total spend (54% increase) 28 Jan ‗09

It‘s not all bad news


• 17 Feb – Russia: Beijing to lend $25 bn in

return for agreeing to supply 300,000 b/d

• 19 Feb – Brazil: China to loan $10 bn for

supply of up to 160,000 b/d

• 20 Feb – Venezuela: China to contribute $8

billion to a strategic fund for oil development

which aims largely to increase Venezuelan oil

exports to China 2015 by 650,000 b/d

The return of the dragon – China invests in future supplies

image: earthstarshop


China – implications of Russian investment

• Beijing lends Russia $25 bn in return

for agreeing to supply 300,000 bpd

from new fields in E Siberia for the

next 20 years

• Transneft (oil pipelines) $10 bn

• Rosneft (oil group) $15 bn

• But Russia‘s production is declining

(500,000 / day in ‗09?)

• Significant implications for supplies

to the West


What happens next?

Short term (2-3 years)

• Many projects underway – more production coming onstream

• China will use its financial reserves to buy future production

• Oil prices will be determined by OPEC production cuts

• E&P co‘s ‘exploration on Wall Street’?

• Some OES companies reasonably protected by large backlogs

• But contractors costs have to fall (‗$60 costs v $40 oil prices)

• M&A opportunities in OES sector

• The recession will end


What happens next?

Longer term (4-10 years)

• The Douglas-Westwood view is unchanged

• Oil demand will increase

• Non-OPEC production will fall and oil prices will rise

• And all energy costs will increase

• Will the oil majors will hit the ‗limits to growth‘ ?

• Well positioned oil services companies will outperform


www.douglas-westwood.com

Thank You

• The financial meltdown has resulted in recession

• Oil demand has fallen as new capacity comes onstream

• But the underlying issues have not gone away

• We need massive investment in energy

• Low oil prices will restrict investment and impact on skills (again!)

• Thereby accelerate the onset of peak oil

• And fuel the next oil price explosion

• Oil is a cyclical business – long-term views are essential

• 2009 could be a great time to invest in oilfield services companies

Global Offshore Oil Drilling Prospects

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