The Future of the North Sea:

Tackling the Challenges Facing our

Industry

Dan Cole

Presentation to DEVEX
6th May 2014

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited
A view of the oil industry from the late 1990s

“$10 might actually be too optimistic. We may be heading

for $5.”

“Thanks to new technology and productivity gains, you

might expect the price of oil, like that of most other
commodities, to fall slowly over the years. Judging by the
oil market in the pre-OPEC era, a ‘normal’ market price
might now be in the $5-10 range.”

- The Economist, March 4th 1999

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1997 forecast of UK decommissioning

Expected decommission dates for U.K. end of field life assets

Expected 2006
21 kboe/d
production

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Just three fields actually decommissioned

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UK North Sea: Hugely successful

Number of giant discoveries Value generated in UK North Sea since 1970

(500MMboe of more) GBP billion

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What we are going to need to get right

Delivering safety & asset integrity

Keeping production efficiency high

Ability to manage costs

Adding resources

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What we are going to need to get right

Delivering safety & asset integrity

Keeping production efficiency high

Ability to manage costs

Adding resources

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Offshore efficiency decreased in the North Sea over the last decade
Country averages, % of estimated production potential based on monthly production

Asset Efficiency

SOURCE: McKinsey Global Offshore Asset Efficiency Database McKinsey & Company | 7
Norway appears to follow the UK trend – with a 10-year lag
Country averages, % of estimated production potential based on monthly production

Asset Efficiency

SOURCE: McKinsey Global Offshore Asset Efficiency Database McKinsey & Company | 8
The range of AE performance in the North Sea has widened sharply over
the past decade
% of estimated production potential based on monthly production

Note: North Sea includes UK and Norway only, and excludes dry gas fields

SOURCE: McKinsey Global Offshore Asset Efficiency Database McKinsey & Company | 9
Possible causes for the fall in efficiency
Changes in the structural
characteristics of the assets,
infrastructure, reservoir
▪ Increasing average age
▪ Higher dependency on
more vulnerable export
routes
▪ Different types of asset
(e.g., more subsea)
▪ Less redundancy in
production systems
▪ More challenging
production (e.g., higher
water cut, more HPHT)
▪ More challenging locations
Changes in operator
approaches
▪ Poorer maintenance and
reliability practices
▪ Low previous investment
▪ Lower risk appetite/ and
increased focus on asset
integrity
▪ Changes in contracting
strategy (e.g., outsourcing)
▪ Lower focus in operators’
portfolios
▪ Changes in organizational
set-up
Changes in operating
environment, and other
external factors
▪ Higher commodity prices
“allowing” lower efficiency
▪ Regulatory changes
▪ Supply chain constraints
▪ Increasing impact of “train-
wreck” events
▪ Increasing exposure to
harsh weather (e.g., more
production in NNS, WoS)
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Possible causes for the fall in efficiency
Changes in the structural
characteristics of the assets,
infrastructure, reservoir
1▪ Increasing average age
2▪ Higher dependency on
more vulnerable export
routes
▪ Different types of asset
(e.g., more subsea)
▪ Less redundancy in
production systems
▪ More challenging
production (e.g., higher
water cut, more HPHT)
▪ More challenging locations
Changes in operator
approaches
3▪ Poorer maintenance and
reliability practices
▪ Low previous investment
▪ Lower risk appetite/ and
increased focus on asset
integrity
▪ Changes in contracting
strategy (e.g., outsourcing)
▪ Lower focus in operators’
portfolios
▪ Changes in organizational
set-up
Changes in operating
environment, and other
external factors
▪ Higher commodity prices
4
“allowing” lower efficiency
▪ Regulatory changes
▪ Supply chain constraints
▪ Increasing impact of “train-
wreck” events
▪ Increasing exposure to
harsh weather (e.g., more
production in NNS, WoS)
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 1 Age alone does not explain lower asset production efficiency

Asset production efficiency of UK installations by age

% of estimated production potential based on monthly production

SOURCE: McKinsey Global Offshore Asset Efficiency Database McKinsey & Company | 12
 2 Indirect hubs have significantly lower efficiency than direct hubs

Asset efficiency of UK installation by network position

% of estimated production potential based on monthly production

SOURCE: McKinsey Global Offshore Asset Efficiency Database McKinsey & Company | 13
 3 Practices correlate with performance, and the reward for good
performance has increased

2005-2006 McKinsey reliability survey results

SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database McKinsey & Company | 14
 3 Practices correlate with performance, and the reward for good
performance has increased

2010-2013 McKinsey reliability survey results

SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database McKinsey & Company | 15
 4 Clear correlation with the oil price – but is there any causation?

SOURCE: McKinsey Global Offshore Asset Efficiency Database, BP Statistical Review McKinsey & Company | 16
What we are going to need to get right

Delivering safety & asset integrity

Keeping production efficiency high

Ability to manage costs

Adding resources

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Cost inflation

Change in costs 2001-2010

% of 2001 costs

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Cost inflation

Change in costs 2001-2010

% of 2001 costs

1 Unweighted average of total lifting cost for 14 platforms (total cost, not cost per barrel)

SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database McKinsey & Company | 19
We have remained optimistic that improvements are around the corner!

SOURCE: Oil & Gas UK 2012 Economic Report McKinsey & Company | 20
But no sign of them yet

Lifting cost trends (North Sea example)1 #% Annual change

Index, 1992 = 100, GBP base currency

1 Money of the day; based on a “basket” of installations

SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmark McKinsey & Company | 21
What is behind the 10% increase?

Increased activity

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What is behind the 10% increase?

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What is behind the 10% increase?

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Wide range of performance among operators

Change in performance during 2000s

Production Opex per
Opex Efficiency capacity boe

Operator A -1%/yr +0%/yr +3%/yr -4%/yr

Operator B +10%/yr -1%/yr +16%/yr -4%/yr

Operator C +14%/yr +5%/yr +1%/yr +8%/yr

Operator D -1%/yr 0%/yr -11%/yr +12%/yr

Operator E +12%/yr -4%/yr -11%/yr +17%/yr

Operator F +11%/yr -5%/yr -9%/yr +28%/yr

UK average +10%/yr -2%/yr -8%/yr +20%/yr

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What might help?

Ownership and operatorship

▪ Consolidation of asset ownership and operatorship around key infrastructure?
▪ Exit of players from positions that are no longer material?
▪ Entry of additional experienced mature asset focused players?

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What might help?

Ownership and operatorship

▪ Consolidation of asset ownership and operatorship around key infrastructure?
▪ Exit of players from positions that are no longer material?
▪ Entry of additional experienced mature asset focused players?
Operating practices and technology
▪ Systematic adoption of global operating best practices?
▪ Adoption of remote operations, “big data”, other technologies?
▪ Shared standards by operators and contractors for field integrity and reliability?

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What might help?

Ownership and operatorship

▪ Consolidation of asset ownership and operatorship around key infrastructure?
▪ Exit of players from positions that are no longer material?
▪ Entry of additional experienced mature asset focused players?
Operating practices and technology
▪ Systematic adoption of global operating best practices?
▪ Adoption of remote operations, “big data”, other technologies?
▪ Shared standards by operators and contractors for field integrity and reliability?
Regulation
▪ Full transparency of data on operating reliability?
▪ Inspection regime to ensure shared infrastructure is operated and maintained
to high standards?
▪ Even sanctions for operators who consistently fail to meet reliability
expectations?

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