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Falling oil prices and the offshore oil and gas

industry: assessing the state of the market


Speakers:
Chris Rachwal, Senior Strategic Advisor, Gaffney, Cline & Associates
Robin Mann, Partner, Deloitte, Resource Evaluation & Advisory
Jim Honefenger, Regional Manager for Americas, Gaffney, Cline & Associates
Moderator:
Bruce Beaubouef,
Managing Editor, Offshore
Sponsor:

April 2015

Resource Evaluation & Advisory

Falling oil prices and the offshore oil


and gas industry: assessing the state of
the market

Oil Prices in the Past 12 Months

120

16

110

14

100

12

90

10

80

70

60

50

40

30

-2

20
Apr 2014

-4
May 2014
WTI

US$/bbl

US$/bbl

Benchmark oil prices over the last 12 months

Jun 2014

Jul 2014
Brent

Aug 2014

Sep 2014

Oct 2014

Nov 2014

Dec 2014

Jan 2015

Feb 2015 Mar 2015

Brent-WTI Differential

Crude oil prices have dropped by 55% since October 2014


Differential widened in the last 2 months due to growing North American oversupply
Source: EIA

Global Supply Increasing

4,500

4,500

4,000

4,000

3,500

3,500

3,000

3,000

2,500

2,500

2,000

2,000

1,500

1,500

1,000

1,000

500

500

0
2009

2010
Iran

Incremental US Production (Mbbl/d)

Estimated production outage (Mbbl/d)

Estimated production outages vs. increasing US production

2011
Iraq

2012
Nigeria

2013
Libya

2014
US

Shale oil production in US has largely made up for losses due to conflict in Middle East
Prices began to fall in Q3 2014 as Libya increased exports and US production continued to climb
There may be further downward pressure on oil prices if Iranian sanctions are lifted
Source: Deloitte, EIA

Effects of Supply and Demand


World petroleum supply and demand balance
7
EIA forecast

(MMbbl/d)

96
94

92

90

88

86

84

82

-1

80
2010

(MMbbl/d)

98

-2
2011
Net supply

2012

2013
World production

2014

2015

2016

Current depressed prices are expected to


increase demand
EIA forecasts world production to recede in
Q4 2015 and stabilize with consumption, with
prices expected to rise thereafter
Some have concerns that EIA forecast
consumption growth may be optimistic with
the threat of potential recessions in some
world economies

World consumption

Year-over-year changes in consumption

Worldwide consumption has been slowing


year-over-year, most prominently in Asia
Little growth is expected in North America or
Europe

Year-over-year change (MMbbl/d)

3
EIA forecast
2

-1

-2
2010
North America

2011

2012

Central and South America

2013
Europe

2014
Middle East

2015

2016

Asia and Oceania

Source: EIA Short-Term Energy Outlook April 2015

Global Offshore
Oil and Gas Industry

Areas of Growth in Offshore Activity


Number of Rigs Contracted
Arctic
3 rigs contracted

GOM (U.S.)

E. Mediterranean

76 rigs contracted

12 rigs contracted

GOM (Mexico)
E. Africa

60 rigs contracted

W. Africa

3 rigs contracted

58 rigs contracted

Brazil
53 rigs contracted

NW Australia
12 rigs contracted

Source: Deloitte REA, adapted from Rigzone, April 2015

Offshore Utilization by Area


April 2015
Region

Number of Rigs
Contracted

Africa - Other

Number of
Rigs
Available
6

Africa - West

58

Asia - Far East

April 2014
Utilization

Number of Rigs Number of


Utilization Change
Rigs Available
Contracted

50.0%

62.5%

-12.5%

92

63.0%

63

98

64.3%

-1.3%

25

30

83.3%

20

23

87.0%

-3.7%

Asia - South

34

41

82.9%

39

43

90.7%

-7.8%

Asia - SouthEast

72

121

59.5%

89

125

71.2%

-11.7%

Australia

12

16

75.0%

12

14

85.7%

-10.7%

Black Sea

60.0%

66.7%

-6.7%

Europe - East

50.0%

100.0%

-50.0%

Europe - North Sea

87

100

87.0%

82

96

85.4%

1.6%

Mediterranean

12

21

57.1%

13

19

68.4%

-11.3%

MidEast - Persian Gulf

77

106

72.6%

80

105

76.2%

-3.6%

MidEast - Red Sea

10

14

71.4%

13

16

81.3%

-9.9%

N. America - Canadian Atlantic

60.0%

100.0%

-40.0%

N. America - Mexico

60

88

68.2%

67

84

79.8%

-11.6%

N. America - US Alaska

75.0%

33.3%

41.7%

N. America - US GOM

76

197

38.6%

104

194

53.6%

-15.0%

S. America - Brazil

53

58

91.4%

63

67

94.0%

-2.6%

S. America - Other & Carib.

11

20

55.0%

13

38.5%

16.5%

S. America - Venezuela

66.7%

100.0%

-33.3%

Total / Average

602

929

66.7%

663

916

75.72%

-9.1%

Source: Adapted from Rigzone, April 2015

Areas of Growth in Offshore Activity


Number of Rigs Contracted at each Water Depth Interval
Arctic

GOM (U.S.)
E. Mediterranean

Brazil

E. Africa

GOM (Mexico)
W. Africa

NW Australia

Shallow Water (< 500 ft)


Deep Water (500 - 5,000 ft)
Ultra-deep Water (> 5,000 ft)

Source: Deloitte REA, adapted from Rigzone, April 2015

Offshore Rigs Contracted versus Stacked

Rigs
Contracted
(~600)

Rigs
Stacked
(~330)

UltraDeep
Deep Water
Water

UltraDeep
Water
Deep
Water

Shallow
Water
Shallow Water (< 500 ft)

Shallow
Water

Deep Water (500 - 5,000 ft)


Ultra-deep Water (> 5,000 ft)

Source: Deloitte REA, adapted from Rigzone, April 2015

Offshore verses Onshore activity


Worldwide Offshore

April 2015

April 2014

Change

Available

929

916

+1.4%

Contracted

602

663

-9.2%

Utilization

66.7%

75.7%

-9.0%

917

1,765

-48.0%

U.S. Onshore Rigs


Contracted

Reduced utilization
More competition between suppliers
Reduced daily rig rates

Source: Adapted from Baker Hughes Data & Rigzone, April 2015

Typical Impact Time of Reduced Product Prices


Typical impact time
Immediate 3 Months

6 Months

9 Months

1 Year

2 Years

3 Years

4 Years

5 Years

Onshore
Lease permitting activity
New Geophysical surveys
Rig contracting
Drilling
Completions
Production

Offshore
Lease permitting activity
New Geophysical surveys
Rig contracting
Drilling
Facility Manufacture
Completions
Production

Source: Deloitte REA, April 2015

Impact of Low Price and


Recent Announcements

Low Product Price Environment

Weed out under-performing projects

Reduce exploration activity

Focus on operational efficiency

Favor low cost investments completing uphole zones, re-fracturing etc.

Encourage innovation

Force service providers to reduce prices

Cause deferral of some house-keeping projects well abandonments, decommission of


pipelines and equipment reduced to the minimum regulatory requirements

Contractual obligations may cause a company to continue spending even if a project is


currently unattractive

Financially strong companies are generally less affected

Provides opportunities for contrarians and those with cash

Short life projects with a short timeframe from first expenditure to first production may be
deferred pending stronger product prices

Long term or long life projects are typically unaffected unless low product price persists for
a number of years

Off-shore projects generally slower to slow down and slower to ramp up in a recovery

Recent Events

April 14, 2015 Exploration drilling in two offshore blocks in India and Vietnam

April 9, 2015 Two exploration programs offshore east coast Canada - drilling off Nova Scotia
and a seismic program in the Jeanne dArc Basin off Newfoundland

April 9, 2015 Major discovery in the subsalt 220 miles south of New Orleans, GOM

April 8, 2015 Major acquisition in the upstream Oil and gas industry for $70 billion based on
the global LNG market and future deep water drilling

April 6, 2014 Five deepwater rigs shut down off the coast of Brazil due to the drilling
contractor filing for bankruptcy

March 31, 2015 Two rig contracts terminated in the GOM for $160MM termination fee

March 30, 2015 Super Major cuts capital spending by $15 billion US from 2015 to 2017, but is
sticking to plans to drill offshore in the Arctic

March 30, 2015 Production Sharing Contract signed to explore for oil and gas in the Rakhine
Basin, located offshore Yangon, Myanmar.

Recent Events Continued

March 30, 2015 Production began at the Hadrian South Field, located about 250 miles off the
coast of Louisiana in water depths of approximately 2,332 meters

March 30, 2015 Additional offshore discoveries in Block 2, Tanzania

March 30, 2015 Rig contract terminations with various service companies in the GOM

March 18, 2015 Cyprus has signed an agreement to extend a search for natural gas off the
east Mediterranean Islands southern coast after disappointing results from an initial exploration
round

March 16, 2015 Drilling to start in the Stabroek Block offshore Guyana

March 13, 2015 Major Eastern European explorer terminates five-year contract with large
offshore drilling operator

February 24, 2015 A number of major offshore explores have terminated drilling contracts for
a total of 6 rigs with Drilling companies in Brazil, the GOM and the UK North Sea

Resource Evaluation & Advisory

17

Offshore Gulf of Mexico


Gaffney, Cline & Associates
April 23, 2015

2015 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of
Gaffney, Cline & Associates and includes valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the
United States of America and other countries. The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior
written consent of Gaffney, Cline & Associates, and may not be used directly or indirectly in any way detrimental to Gaffney, Cline & Associates interest.

Major Themes

Low oil prices resulted in dramatic decline in worldwide and US drilling


Offshore GOM rig counts
Until now, remained within normal seasonal levels
Since March, dropped dramatically

Currently, offshore day rates under pressure because of NOC and IOC renegotiations
Despite short-term pain, long-term GOM outlook strong because of deep water (shallow
water declining)
New projects
Growing production
New discoveries
Interest in new leases

Mexico
Lots of interest in southern shallow water
Northern deepwater likely delayed by low oil prices

Offshore Gulf of Mexico


State Waters
Shallow/Shelf
Deepwater

N. DW

S. DW
S. SW

Pain Likely in 2015 but Deepwater should be Better

Rig activity in the Gulf of Mexico has historically not been driven by price.
Since March, rig activity in the Gulf of Mexico has fallen.

US GOM Percent Rig Utilization


90

80

70

Percet Utilization

60

50

40

30

20

10

0
Apr-14

Source: Rigzone, April 10, 2015

Nov-14

Mar-15

Apr-15

Production from Gulf of Mexico is Deepwater

Source: BSEE

Deepwater, greater than 1,000 ft, represents the majority of the production.
Deepwater is the focus of future activity.

Forecasted Production

2014: Eight new fields


-

Production 2015/16

2015/16: Thirteen new fields


-

Exceeds start-ups since 2007

Projected Production
- New projects + redevelopment
+ expansion of older fields
- Forecast

2015: 1.52 MMBbl/d


2016: 1.61 MMBbl/d

Rate of Return & Cashflow Illustrations

Full cycle break even prices for selected


worldwide deep water projects range from
$30/bbl to $100/bbl to achieve a 10% rate of
return

Significant difference in the cash flow


between onshore unconventional projects
and deep water GOM projects.

Much higher rates of return for deep water


GOM projects than onshore unconventional
projects at crude prices under $90/bbl

Source: Global Data


Source: Global Data
2011 Gaffney, Cline & Associates. All Rights Reserved.

Trends in the Gulf of Mexico


Costs
Reduction in rig day rates
- Renegotiation of contracts
- Cancellation of contracts

Use of subsea tieback to


reduce the high cost of surface
structures
Collaborative efforts
Lower lease sales

Risks
Use of partners:
- 2014 lease sale 1/10 partners
- 2015 lease sale 7/10 partners

Mexico Reform Offshore


Low oil prices threaten near-term activity; mitigate investor enthusiasm
immediately following opening
Shallow water exploration
39 companies purchased data packages

Shallow water extraction


9 have purchased and 14 more have applied

North Deepwater
Lots of interest close to US
Target data availability July/August

South Deepwater
Little interest now

Looking Ahead
Long-term

Trends

Strong commitment in deepwater

Deepwater producers are staying the


course

Dominance of Majors
Diversity of investments

Continued lease sale interest

Short-term vulnerability

Risk mitigation

Recent drop in drilling

Increase use of partnerships

Impact on near-term activity

Cost reduction

Time frame of future projects

Use of subsea tiebacks


Changes in drilling contracts
Cost-effective use of capital through
calibration
Mexico has a lot of interest, but

Offshore Africa

2014 Gaffney, Cline & Associates. All Rights Reserved.

Gaffney, Cline & Associates


April 23, 2015

29

2014 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of
Gaffney, Cline & Associates and includes valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the
United States of America and other countries. The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior
written consent of Gaffney, Cline & Associates, and may not be used directly or indirectly in any way detrimental to Gaffney, Clines & Associates interest.

Major Themes
Offshore Africa rig counts in decline but drop is not uniform
60 of 94 rigs active (Rigzone) = 63.8% utilization

Offshore day rates under pressure,


ENI negotiated a day rate for a jack-up in Nigeria that is directly
linked to oil price, varies from $75K to $125K/day

Deep Water exploration and appraisal drilling declining,


Cairns Senegal finds SNE-1 and Fan-1 a beacon of hope

Existing mega-projects in Ghana and Angola proceeding


Support 4-6 multi-year high spec Drillship contracts
2014 Gaffney, Cline & Associates. All Rights Reserved.

Pressure on satellite tie-back projects, as subsea tie-back costs


slower to respond to oil price decline
SW Bonga rejected bids received, re-tender underway

Shallow water development drilling holding up well in Angola,


Congo, Gabon, Cote dIvoire, Cameroon, Nigeria
30

2014 Gaffney, Cline & Associates. All Rights Reserved.

Bullish Africa exploration view from 2013

31

Rest of Africa

Pre-Salt West Africa

Focus countries
Tunisia

Aptian Salt Basin

Morocco

The Big Upside?


But where is it working?

Algeria

Libya
Egypt

Mauritania
Mali

Niger
Sudan

Chad

Eritrea

Senegal
Burkina
Faso

Guinea-Bissau

Benin
Togo

Guinea
Cote
dIvoire

Sierra Leone

Nigeria
Ethiopia

Liberia

South
Sudan

Central African
Republic

Ghana
Cameroon

Somalia
EG
Gabon

Uganda
Congo
DR
Congo

Aptian Salt Basin marked in Blue,


spans offshore Gabon, Republic of
Congo, DRC and Angola.

Tanzania

2014 Gaffney, Cline & Associates. All Rights Reserved.

Angola
Zambia

Zimbabwe
Namibia

Botswana

South
Africa

32

Kenya

Tectonic setting

2014 Gaffney, Cline & Associates. All Rights Reserved.

The opening of the South Atlantic

During the late Jurassic and throughout the Cretaceous a large scale
rifting event led to the break-up of the Gondwana supercontinent and the
development of the South Atlantic ocean.
33
Heine et al. (2013)

2014 Gaffney, Cline & Associates. All Rights Reserved.

How similar is W. Africa to Santos/Campos Basin?

34

The Santos and Campos basins of Brazil were formed adjacent to those
in Angola during the rifting event and therefore stratigraphy and structure
will be analogous despite the fact that the South Atlantic now separates
the two.
Plate reconstruction by GeTech, published in GEO ExPro (2013).

The West African pre-salt


Shift towards pre-salt exploration
Proportion of Pre/Post salt exploration wells in the Aptian salt basins of Gabon,
Republic of Congo, DRC & Angola, from 1954-2014.
100%
90%
80%

Tupi (Lula)
discovered in 2006

70%

% of wells

60%
50%
Post-Salt Wels
Pre-Salt Wells

40%

2014 Gaffney, Cline & Associates. All Rights Reserved.

30%
20%
10%
0%

Year

35
Data from Deloitte Petroview Sub Saharan Africa October 2014 dataset

West African margin


Rio Muni Basin
Pre-Salt largely untested
Rio Muni
basin

2014 Gaffney, Cline & Associates. All Rights Reserved.

Pre-salt clastic
reservoir targets

Basin borders (Fracture zones,


structural arches and highs)
West African Coastal basins
Gulf of Guinea basins
Niger Delta
West African Aptian salt basins

36

Orange River coastal basins


Adapted from: Brownfield & Charpentier (2006)

West African margin


Gabon Basin Pre-Salt
Mature oil play under shelf but
Diaman-1B (Total), Leopard-1
(Shell) tested thick gas pays in
Water depths 5,500-6,500
W

2014 Gaffney, Cline & Associates. All Rights Reserved.

Pre-salt clastic
reservoir targets

Basin borders (Fracture zones,


structural arches and highs)
West African Coastal basins
Gulf of Guinea basins
Niger Delta
West African Aptian salt basins

37

Orange River coastal basins


Adapted from: Brownfield & Charpentier (2006)

Gabon
basin

West African margin


Congo Basin Pre-salt
Deep Water under evaluated
Shelf plays very successful
NE

SW

Congo
basin

Pre-salt clastic
reservoir targets

2014 Gaffney, Cline & Associates. All Rights Reserved.

Patchy carbonate
reservoir targets

Basin borders (Fracture zones,


structural arches and highs)
West African Coastal basins
Gulf of Guinea basins
Niger Delta
West African Aptian salt basins

38

Orange River coastal basins


Adapted from: Brownfield & Charpentier (2006)

Gabon

The West African pre-salt

Republic of
the Congo
DRC

Pre-salt clastics Republic of Congo


Vandji Marine
Angola

Zambia

Kilometres
0

Nene Marine

250

500

Namibia

MBoundi
Minsala Marine

Tilapia
Kouakouala
Pointe Indienne

Mengo

Loufika

Litchendjili
Viodo
Lidongo X Marine

Bindi

2014 Gaffney, Cline & Associates. All Rights Reserved.

Loussima

Kundji
Tchiniambi
Emeraude
Manzi

39

Move
Deloitte Petroview October 2014 Sub Saharan Africa Dataset

Pre-salt clastic fields


discovered before 2006
Pre-salt clastic fields
discovered after 2006

The first pre-salt clastic field


discovered was Pointe
Indienne in the Republic of
the Congo in 1957.
Multiple discoveries in the
pre-salt clastic play through
to present.
Hydrocarbons encountered
are a combination of oil and
gas.
All in <200m water depth.

West African margin


Kwanza Basin

2014 Gaffney, Cline & Associates. All Rights Reserved.

Pre-salt clastic
reservoir targets

Pre-salt carbonate
reservoir targets

Potential basement
reservoir targets

Basin borders (Fracture zones,


structural arches and highs)
West African Coastal basins
Gulf of Guinea basins
Neocomian-lower Aptian clastic
reservoir targets
Neocomian- Barremian carbonate
reservoir targets

40

Niger Delta
West African Aptian salt basins
Orange River coastal basins

Adapted from: Brownfield & Charpentier (2006)

Kwanza
basin

Gabon

The West African pre-salt

Republic of
the Congo
DRC

Kwanza Pre-salt carbonate play


OMBOVO-1

Map of
Southern
Kwanza
Basin

BALEIA-1
ORCA-1

KAMOXI-1

MAVINGA-1

Kilometres
0

CAMEIA-1

CAMEIA-2
JACARE-1

BICUAR-1
MUPA-1

LOCOSSO-1

DILOLO-1
AZUL-1

2014 Gaffney, Cline & Associates. All Rights Reserved.

Statoil
cancelled
rig contract

Only dry holes and


CO2 gas outboard
of this area so far

PUMA-1

DISCOVERY
P&A

OGONGA-1
41
Deloitte Petroview October 2014 Sub Saharan Africa Dataset

Zambia

LONTRA-1

Angola

DRILLING

250

500

Namibia

First well to test the pre-salt


carbonate was Baleia-1 in 1996.
No further wells drilled until 2011
Several significant discoveries
Hydrocarbons encountered
are gas-rich.
Six+ recently announced failures
at greater water depth may shift
focus to an inboard pre-salt
carbonate sweet-spot.

The Brazilian analogue


Is this an appropriate analogue?
Cameia

Tupi (Lula)

2014 Gaffney, Cline & Associates. All Rights Reserved.

Santos

Kwanza

Fault

Shale and Siltstone

Sandstone

Break-up Unconformity

Basement rocks

Carbonate

Salt

The stratigraphic sequence is comparable, with pre-salt clastic and


carbonate lithologies encountered on both margins.
There are however a number of differences between the two margins,
most notably of which is the ubiquitous thickness of salt of the Santos
basin which is often thin or even absent in parts of the Kwanza.
42
Adapted from Brownfield & Charpentier (2006) & Feijo (2013).

Gas Developments
Many of the Deep Water West African pre-salt discoveries are gas rich,
in contrast to the predominance of oil found in the pre-salt of Brazil
Under current Angolan contract terms, operators are not entitled to
any gas discovered.
Gabon, Republic of the Congo and DRC have more favourable gas
development terms, but lack of infrastructure or clustered resources
will delay gas developments
African Gas Demand

2014 Gaffney, Cline & Associates. All Rights Reserved.

Ghana, Cote dIvoire, Cameroon, Gabon, Mauritania & Nigeria all have
local gas market developments that are not linked to oil prices
Thus developments can proceed as long as funding for gas
utilization projects based on Power Generation or Petrochemicals
proceed as planned
Backed by International Agencies with gas payment guarantees
43

2014 Gaffney, Cline & Associates. All Rights Reserved.

Thank you

44
Image source: Wikipedia

Falling oil prices and the offshore oil and gas


industry: assessing the state of the market

Questions ?
Thanks to our speakers:
Robin Mann
Jim Honefenger
Chris Rachwal
Thanks to our sponsor:

April 2015