Restoring Economic

Health to the North Sea

DEVEX 2015
Underpinning the future: Discovery, Development, Recovery

21 May 2015
Aberdeen

CONFIDENTIAL AND PROPRIETARY

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 GBP 2.69
SOURCE: Source McKinsey
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The cost challenge in the UKCS

Annual inflation rates, 2000–14

Percent

Big Mac 2.5

1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average

SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys McKinsey
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The cost challenge in the UKCS

Annual inflation rates, 2000–14

Percent

Big Mac 2.5

North Sea platform

lifting costs1 12

1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average

SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys McKinsey
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The cost challenge in the UKCS

Annual inflation rates, 2000–14

Percent

Big Mac 2.5

North Sea platform

lifting costs1 12

UK lifting cost per

barrel of oil equivalent 18
(2004–14)2

1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average

SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys McKinsey
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The cost challenge in the UKCS

Annual inflation rates, 2000–14

Percent

Big Mac 2.5

North Sea platform

lifting costs1 12

UK lifting cost per

barrel of oil equivalent 18
(2004–14)2

UK development cost per

barrel of oil equivalent
21
(2004–13)2

1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average

SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys McKinsey
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 GBP 13!
SOURCE: Source McKinsey
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The increase was largely unforeseen

Growth in operating cost forecast from UKCS operators

GBP billions

2014 actual (9.6)

9.0 2013 actual (8.9)

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0
01 2003 2005 2007 2009 2011 2013 2015 2017 2019

SOURCE: Oil & Gas UK 2012 Economic Reports and 2015 Activity Survey McKinsey
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The fall in oil price has made the North Sea a lot less profitable

Share of UKCS production

Oil price
that breaks even1

USD 99 bbl
88

1 Price below which NPV of the remaining reserves of the field will be zero based on end 2014 cost and production forecast.

SOURCE: WoodMac GEM (2015); McKinsey analysis McKinsey

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The fall in oil price has made the North Sea a lot less profitable

Share of UKCS production

Oil price
that breaks even1

USD 99 bbl
88

USD 55 bbl 54

1 Price below which NPV of the remaining reserves of the field will be zero based on end 2014 cost and production forecast.

SOURCE: WoodMac GEM (2015); McKinsey analysis McKinsey

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The number of UKCS wells plugged and abandoned per year now exceeds
those drilled for exploration and appraisal

Well activity in the UKCS

Number of wells drilled

125

100

75 Plugged and
abandoned wells

50
Exploration and
appraisal wells
25

0
2008 09 10 11 12 13 14 2015F

SOURCE: DECC; Oil & Gas UK, Annual Activity Surveys and Decommissioning Insights McKinsey
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Cost increase not due to increased activity …

Deck cargo
shipped
Tonnes
+1.5%

SOURCE: McKinsey Energy Insights McKinsey

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Cost increase not due to increased activity …

Deck cargo
shipped
Tonnes
+1.5%

Helicopter
hours
Hours
+2.0%

Wells drilled
Number
- 4.0%

SOURCE: McKinsey Energy Insights McKinsey

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… or higher supplier margins

EBITDA margin1 of OFSE companies

Percent
2009-2011
39 2012-2014
36

23 22
19 18

10
8

Assets Services Equipment EPC

1 Margin as announced - adjusted for different accounting/disclosure policy. Sample includes 18 equipment, 13 EPC, 38 assets and 9 services companies

SOURCE: McKinsey Energy Insights McKinsey

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So what has been behind the large cost increase?

Increased activity 20%

SOURCE: McKinsey Energy Insights; “Meeting the challenge of increasing North Sea costs” McKinsey article McKinsey
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So what has been behind the large cost increase?

Increased unit cost 40-50%

Increased activity 20%

SOURCE: McKinsey Energy Insights; “Meeting the challenge of increasing North Sea costs” McKinsey article McKinsey
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So what has been behind the large cost increase?

Greater inefficiency 30-40%

Increased unit cost 40-50%

Increased activity 20%

SOURCE: McKinsey Energy Insights; “Meeting the challenge of increasing North Sea costs” McKinsey article McKinsey
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Opex example: integrity inspections cost

Comparison of topsides integrity inspection costs per asset

GBP thousands per installation, gross

SOURCE: Sanitised client example McKinsey

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Capex example: new greenfield developments

Development cost
index; 100 equal to full cost in year 2000

SOURCE: Sanitised client example McKinsey

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This is something other highly technical industries appear to have avoided

Nominal price inflation for a new Nominal price inflation for a new
commercial airliner 5-door hatchback in Western Europe

+ 0.2 – 1.5% + 1.0%

SOURCE: A2Mac1; manufacturer’s public data; Airline Monitor: McKinsey analysis McKinsey
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Step up activity where it makes sense: e.g., well interventions

Incremental production from well interventions

% of total production

▪ Intervene every 15th well

Operator A 2 ▪ Range of intervention types = 1-2

▪ Intervene every 3rd well

Operator B 9-10
▪ sRange of intervention types = 7-8

SOURCE: Energy Insights Well Intervention Benchmark McKinsey

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Get core practices and approaches in place: e.g., offshore reliability

2010-2014 McKinsey offshore reliability survey results Practices covered

North Sea
▪ Asset bottleneck
Production efficiency management
% of MPP Offshore Operators
▪ Equipment operations
100
▪ Optimise care regime
90 ▪ Repair in appropriate
timeframe
80
▪ Performance management
70 ▪ Reliability organisation
▪ Continuous improvement
60
▪ Equipment history
50 ▪ Operator mindsets

40
▪ Organisational capability

30
Common Good Best
Reliability practices score

SOURCE: McKinsey’s Global Offshore Asset Efficiency Database McKinsey

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Address gaps in capability and expertise: e.g., operating standards

SOURCE: McKinsey Upstream Operations Service Line McKinsey

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Tackle inefficiency: e.g., well delivery

Well delivery process

Prospect Logistics and Drilling and Hook-up and

Portfolio and rig Wells
maturation and supply chain completion post-mortem
strategy engineering
high-grading management execution learning
Improvement levers

Drive learning
curves across
1
the well delivery
process

Standardize and
simplify
2 specifications,
designs and
processes

Lean drilling
3
execution

Procurement
and supply
4
chain
optimizaton

Rigorous
5 performance
management

SOURCE: McKinsey Upstream Operations Service Line McKinsey

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Tackle inefficiency: e.g., well delivery

Well delivery process

Prospect Logistics and Drilling and Hook-up and

Portfolio and rig Wells
maturation and supply chain completion post-mortem
strategy engineering
high-grading management execution learning Potentials
Improvement levers % of total well cost
 Rigs to work on  Planning teams to  Rig teams work
Drive learning long series of specialize on type on long series of
curves across similar jobs of jobs similar jobs
1 20-25%
the well delivery  Long range plans  Minimize rotation
process with strategic of crews
suppliers
 “Perfect well”  Defined std well
Standardize and planning and
simplify and options,
estimation
2 specifications, approach based on drivers 10-15%
designs and  Use of std wells of costs
processes as basis for 80%
of portfolio

 Lean execution  Active planning

principles to drive and debottle-
Lean drilling down NPT necking of hook-
3 5-10%
execution  Drive actively up towards asset
operational
efficiency

 Contracts  Capitalize on std

Procurement incentivize real specs to drive
and supply productivity down unit costs of
4 10-15%
chain improvements procured services
optimizaton  Use down-turn to and equipments
reduce unit costs

 Active monitoring  Execution daily

Rigorous and target setting monitored against
5 performance for engineering ‘Perfect well’ 5-10%
management productivity

10-15% 5-10% 5-10% 10-15% 20-25% 3-5% 50%

SOURCE: McKinsey Upstream Operations Service Line McKinsey

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The impact can be enormous; e.g., SWN in the Fayetteville Shale

Days to drill Lateral length

18
5,356 5,440
4,836 4,819
14 4,528
4,100
12
11 3,619

8 2,657
7 7
6

2007 08 09 10 11 12 13 2014 2007 08 09 10 11 12 13 2014

SOURCE:
SOURCE:Source
Southwestern Energy Investor Presentation 2015 McKinsey
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Recap

McKinsey
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