Impact of COVID-19 on the Oil & Gas Sector

April 2020
Agenda

Agenda

1 Executive Summary

2 Industry Structure Impact

3 Impact & Mitigation per Segment

2
Agenda

Agenda

1 Executive Summary

2 Industry Structure Impact

3 Impact & Mitigation per Segment

3
 Executive Summary

COVID-19 will accelerate the Oil & Gas industry’s transformation journey
with oversupply and low prices expected to last for years
Oversupply and Low Price Impact on Oil & Gas Sector

OPEC vs Shale War + COVID-19

◼ Russia/Saudi Arabia battle has the US as an implicit party
◼ COVID-19 demand crisis deepens oversupply and exaggerates the drop in crude prices
◼ The national budgets of OPEC countries, and Russia, are under severe challenge at low oil prices

Massive Cancellation of Projects
◼ Investments shrink because of economics and
funding constraints
◼ Operational shutdown of some high-cost oil
◼ Major capital projects cancelled or delayed
More Vulnerable Refineries
◼ Low utilization rates lie ahead
◼ Low/negative margins will accelerate
expected shutdowns
◼ No CAPEX/financing available for quality/
conversion upgrades or greenfield projects
to adjust the product balance demanded
Source: Arthur D. Little
Energy Transition
◼ World leaders have already decided to go
“greener” (COP-21)
◼ Governments will be critical to transition
continuity and continuing support
◼ Majors likely to continue their own energy
transition as some renewable projects will
show better economics than many E&P
developments
◼ Cheap oil may slow the trend to renewables
Industry Concentration
Asset Portfolio Restructuring ◼ Limited budget for reserves addition
◼ Many asset classes become less attractive for oil ◼ OPEC gains market share power from IOCs
companies, leading to extensive restructuring ◼ Efficiency gains will be achieved during crisis
◼ Active transaction markets with many distressed and after consolidation
assets becoming available on the market
4
 Executive Summary
The oil price war, together with COVID-19, has created a perfect storm
generating a highly negative short term impact for the industry
Status
◼ No agreement for reducing OPEC production
quotas
Production
◼ Saudi Arabia sees over-supply as a way to limit
Russian and halt US shale production
◼ Strong immediate impact of isolation measures ◼ >30% drop of flights, light vehicle transit close to
◼ Short to medium term impact from recession
Demand
◼ World was already claiming for an oil
reduction for CO2 targets
◼ Strong drop in crude oil price
Prices &
◼ Refining margins low, even negative in some
Margins
regions
◼ No storage for upcoming production, with
shut-in of some crude oil production
Supply Chain
◼ Financing issues along the full value chain and
Disruptions
budget concerns for some oil producers
Source: Arthur D. Little
Short Term Impact
◼ Some immediate crude production shutdowns in Nth
America
◼ Fracking activity may come to an almost a complete
halt and a majority of deep-water projects may be
cancelled
zero in many regions
◼ 5-10 MMBD annual average demand drop
depending on how long COVID impact lasts
◼ Would take years to recover 2019 levels, with
part of demand recovery going to other energies
◼ Some operations cannot cover production cash
costs
◼ Refining shutdowns and/or do not start after
turnarounds
◼ Pessimistic outlook for any CAPEX program
◼ Financial disruptions along full value chain. Many
high leveraged US independents will not survive
◼ Oil Field Services strongly impacted by low
activity levels and producers cash constraints
5
 Executive Summary

All industry segments are impacted by the volume and price drops, the
resulting financial collapses and related supply chain/operational disruptions
Field Oil Field Transport &
Refining
Operations Services Distribution
Est. size of
impact
(illustrative)

▪ Storage restrictions for ▪ Spare part access will be ▪ Already contracted crude ▪ Some production halt
oversupply critical, especially from China needs to be re-sold because of lack of storage
▪ Drill bits / tools limited ▪ Storage restrictions for crude, downstream
Supply impact given low activities for intermediate and final products
chain
new wells / exploration
▪ Manpower at minimum ▪ Exploration / appraisal / new ▪ Limited to minimum staff ▪ Limited to minimum staff
possible level wells will halt ▪ CAPEX initiatives and ▪ CAPEX initiatives reduced or
▪ Operators to prioritize low- ▪ Well intervention/workover turnaround stopped stopped
Operations
cost assets to remain steady especially ▪ Daily vs. monthly optimization
for rig-less activities
▪ Some production assets ▪ Many contracts will be ▪ Low utilization rates drive low ▪ Lower revenues because of
cannot cover cash costs renegotiated /cancelled to negative margins for some volume drop
▪ Negative economics for ▪ Little room for additional locations and configurations ▪ Financial stress for retail
some shale, deepwater and efficiency gains dealers requires support
Price/Margin Canadian operations
▪ High level of oversupply ▪ Demand will reduce until ▪ Demand decrease under ▪ Demand decrease until
▪ Penalization for non-standard operators stabilize strategy minimum production level for isolation ends and economy
crudes ▪ Brownfield activities will be some refineries recovers
Customers dominant ▪ Demand mix change towards
(incl. demand) heavier fuels

Critical High negative Moderate Low negative

Source: Arthur D. Little Limited impact Positive impact 6
impact impact negative impact impact
 Executive Summary

The crisis will severely impact the oil industry, accelerating its transition
to renewables, already underway, and altering its climate change approach
Transition to renewables would accelerate

◼ Governments/municipalities pressure for ◼ Fossil fuels may be more competitive

low CO2 emissions
◼ EU commitment to align emergency
funding with “green targets”
◼ So, oil demand was expected to peak
and fall in the coming decades anyway
◼ With high oil prices, it used to be
attractive to invest in E&P projects
◼ But oil projects now have lower returns,
and higher uncertainty than before
◼ Renewables have lower technical risks
and now potentially lower commercial
risk and higher return rates than oil
Source: Arthur D. Little
◼ Cheap oil would change customer
feeling about “going greener”
◼ Power generation prices already lower,
partly due to lower fossil fuel prices
◼ Higher renewable subsidies will be
required to reach customer breakeven
◼ Governments would give priority to
economy recovery support after
recession (i.e. reducing EV rebates)
◼ US & Canada would support oil
industry from collapse
7
 Executive Summary

Immediate and lasting impacts on the industry are likely to drive a

structural transformation, leaving fewer, smaller players after the crisis
Who would be the survivors of current crisis?

Low prices/margins will last for years

Production and refining shutdowns in many areas
Financial collapse already underway for some companies
Asset sales and consolidation by small and large companies
Ongoing major projects no longer profitable
Cost of capital for fossil fuel projects to increase even further

Transform and survive Shrink/collapse or acquired

◼ Low cost /XL NOCs ◼ NOCs with high cost/low reserve base
◼ Super Majors able to transform ◼ Shale focus producers
◼ Global oil field service companies ◼ Small scale independent refiners
◼ Some niche players/regional “Mini Majors” ◼ Heavy oil/Canadian tar sands players
◼ ….. ◼ ……

Some new business models would emerge and success in the new industry ecosystem
Source: Arthur D. Little 8
 Executive Summary
There is still a chance for the market to get “back to normal” sooner than
expected, but it is likely that the oil industry will continue to lose appeal
Scenario
“Stagnation”
• Oversupply lasts 2+ years
• “L-Shape” demand pattern, and persistence of
high inventory levels
• Crude price below $40/Bbl
• Low refining utilization rates and margins
“Back to Normal”
• Saudi Arabia/Russia agreement at OPEC
• Oversupply balanced
• “V-Shape” demand bounce/market rebalance
• Crude @$50/Bbl at Q4 2020
Industry Outlook
◼ Larger market share concentrated in few OPEC countries
◼ Majors transform to survive
◼ Many production and refining shutdowns. Major projects cancelled as
defined pre-COVID
◼ Significant downsizing of fracking activities
◼ International Oil Companies accelerate energy transition and new
business models emerge
◼ 2020 industry financial impact will collapse some high cost producers
◼ Companies with already diversified portfolios will have lower impact and
capitalize on market bounce
◼ Major capital projects will be delayed and executed later considering
higher risk and lower price forecast
◼ International Oil Companies will focus on healthier project portfolios and
efficiency gains
9
 Executive Summary

Under any scenario, lower expected returns, climate and CO2 challenges
will drive companies to search for new pathways to survive

Key Survival Dimensions

Less CO2 & CH4 emissions, less CO2 in

Less
products, more PetroChem. output
CO2 & Re-balance to stronger gas
CH4 value-chain share
More
Build strong, low-carbon Gassier
Renewable
electricity value-chain positions
Smarter Reduce costs by AI, automation and digitalization

Shorter reserves life gives agile Lower Drive to low-breakeven assets

response to policy changes Quicker cost due to price competition

Smaller Portfolio re-alignment, mergers,

focus, return capital to shareholders

10
Agenda

Agenda

1 Executive Summary

2 Industry Structure Impact

3 Impact & Mitigation per Segment

11
 Industry Structure Impact

Saudi Arabia see oversupply as a way to limit Russian supply influence and
halt US shale production growth
US-Russia-KSA production of crude oil
MMBD, 1998-2019

◼ US became the top oil

11
producer taking advantage of
10
technology evolution after a
9 period of high crude prices
8
◼ Russia-Saudi Arabia supply
7
quota and price battle has
6 created an oversupply
5
◼ Small imbalances in crude oil
4
supply cause high price
3 reactions
2
◼ US players (and others in
1
the world) are not be able
0 to maintain current
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
production level at current
Saudi Russia United States crude prices
Source: BP Statistical Review 2040, EIA International Energy Outlook, ADL Estimates 12
 Industry Structure Impact

As in the 2014-16 oil crisis, US production will be strongly impacted and

will not recover at our expected price-track of less than $40/bbl
US Hydrocarbon Production, WTI Prices & old DUC Inventory
2013- 2022
USD/ Mbbl/ Number
Barrel Day of Wells
120 18 ◼ Unconventional hydrocarbons
16 production has tight economics
100
14 and reacts rapidly to price
reductions
80 12
10 ◼ Some producers have their
60 prices hedged for some months
8
into the future, but would not be
40 6 able to maintain production at
4 any lower than $40/Bbl
20
2 ◼ Localized US demand reductions
0 0 also limit production due to
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 logistics restrictions
Conventional Tight WTI Price Old DUCs (LHS) ADL View

Source: Arthur D. Little estimates, EIA, Rystad 13

 Industry Structure Impact

Demand forecasts change every week, but average global reductions of

more than 10 MBD are expected for 2020
Economic Growth
Aviation (7MBD) Road (47MBD)
(40MBD*)

Peak Impact on jet fuel demand Peak Impact on road fuel demand GDP annual growth rate
MBD MBD 2,4%
1,6%
1%
Q1 2020 Q2 2020 Q3 2020 Q4 2020 1Q 2020 2Q 2020 3Q 2020 4Q 2020
0
-0,3 -0,9%
-0,5
5 -1,9%
Oil demand annual decrease MBD
-1,1
-0,25
-1,5 11 -0,6
-0,8
-1

-2,5
OECD IMF UN best UN worst Fitch
scenario scenario Ratings
25

0,85 MBD 10 MBD 0,25 - 2.5 MBD

annual average annual average annual average
*Oil demand for non-transport activities
Source: Arthur D. Little; IATA; OECD; IMF; UN; Fitch Ratings; Rystad; Goldman Sachs. 14
 Industry Structure Impact

Oil prices have been affected by the Russia/Saudi Arabia disagreement, the
outbreak of the global pandemic and the resulting increased oversupply
Brent Spot Price Dollars per Barrel (from Jan 2, 2020 to March 30, 2020)
Covid-19 Oil Price War
80 ◼ Russia did not accept
-72% Saudi Arabia production
70 Russia deny
support to OPEP+ decrease proposal after
new agreement negative forecast from EIA
60 -23% for global demand
Oil War
First Covid-19 because of COVID-19 and
50 notification in
WHO declared VS Saudi Arabia stated it
Wuhan
Global Public-
Health Emergency would increase its exports
40
First infected in ◼ The global pandemic,
the US Death Toll by Covid-
30 19 surpasses SARS declared by WHO
increased crude oil
20 WHO declared
Covid-19 Global oversupply and impacted
Pandemic prices still further
10
January February March April◼ OPEC would soon decide
soon cut production after
over 70% price drop
Low prices support Saudi Arabia’s intention of increasing its market share but they would ultimately
accept a production cut in order to support oil prices sufficient to balance its national budget
Source: Arthur D. EIA, Forbes, World Health Organization, Press release, El País 15
 Industry Structure Impact

Natural gas prices have also dropped significantly, with the LNG sector
being greatly impacted, reducing its expected growth in the coming years
Monthly Brent vs Natural Gas Henry Hub (HH) Price

USD/ USD/
Barrel Brent Prices Gas Prices Barrel ◼ Economic crisis impacted on industrial
80 6 demand for gas and gas-fired power globally
70
5 ◼ Henry Hub prices are now below
60 $2/MMBTU and JKM futures prices are
4 below $3/MMBTU
50

40 3 ◼ LNG liquefaction already has excess

30
capacity, with oversupply and depressed
2 prices, even before COVID-19
20
1 ◼ Major capex cuts and the deferral of
10
several multi-billion dollar LNG projects
0 0 (i.e. Australian) are already announced. Shell
19- 19- 19- 19- 19- 19- 19- 19- 19- 20- 20- 20-
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar* for example is walking away from the Lake
Charles gas export project.
Source: ADL Estimates, EIA 16
 Industry Structure Impact

Crude oil oversupply has created an economic storm for the oil industry,
with prices and margins in their lowest level this century
Oil Sector Supply vs. Demand Unbalance

Supply Demand

◼ Additional Saudi production would flood
the market
◼ Some immediate shutdowns, but some
production will take more than a year to fall
off-stream, including by natural decline
◼ Storage capacity is filling and already
contracted crude is re sold to the market
◼ Impact of over 10 MMBD, or about 10% of
global consumption
◼ Demand mix changes challenges the use of
refining capacity and configuration
◼ Even when isolation ends, recession will
continue impacting fuel demand

◼ Crude prices below $30/Bbl now and are expected to remain below $40/Bbl for >2 years
◼ Tight refining margins, at least until 2019 fuel demand is restored
Economic
} ◼ Immediate financial crisis or collapse for many players; with widespread consolidation and portfolio
Storm for the reshaping
Oil Industry
◼ Much new CAPEX projects and most exploration either cancelled or delayed
◼ Supply chain disruptions
Source: Arthur D. Little 17
 Industry Structure Impact

Global refining margins took a severe hit, mainly on falling gasoline and jet
fuel demand, due to progressive lockdowns in multiple countries
Refining Margin Averages ($/b)

US Atlantic Coast US Gulf Coast US West Coast

14.3 13.5 13.6 21 20
13.2 18 19 17
12.0 17 17 18
10.1 9.9 9.3 10.0 6.5 16 16 15 16
8.9 8.8
7.3 8.5 9.3 7.6 6.9 8.5 8.2 8.5
7.1
5.9 6.3 6.6 10
5.0 2.8 4.6 2.0 5.4 8 7
2.6 2.8 3.5 4.4 4.3 7 6 6
1.6 2.6 2.2 3.4
0.6 4
2

-1.8 Q3 Q4 Q1 Week 13 Week 20 Q3 Q4 Q1 Week 13 Week 20

Q3 Q4 Q1 Week 13 Week 20 2019 2019 2020 March March 2019 2019 2020 March March
2019 2019 2020 March March
Bonny Arab Bakken CPC Arab Medium Maya Mars WCS ANS Napo Arab Arab
Light Light Crude Blend Medium Light

Singapore ARA Italy

4.2 7.6 8.9
3.6 3.6 8.5 6.3 7.7
2.1 7.3 7.2
1.7 5.6 6.0
1.1 1.0 0.5 1.1 6.0 6.4 6.0 5.3 5.3 4.9 4.4 4.3
5.3
4.3 3.6 4.2
4.0 3.4 5.0 3.8
2.4 2.2 2.2
-0.4 -0.9 -0.6
-1.4 1.0 1.0 1.4 1.3 0.1 0.0
-2.5 -2.8 -2.4
-3.8 -3.4 -3.5 -0.2
-0.3 -1.5
-6.3 -2.2 -1.9 -3.2
Q3 Q4 Q1 Week 13 Week 20 Q3 Q4 Q1 Week 13 Week 20 Q3 Q4 Q1 Week 13 Week 20
2019 2019 2020 March March 2019 2019 2020 March March 2019 2019 2020 March March

Dubai Arab ESPO WTI WTI Bonny Arab Urals Urals CPC Arab WTI
Light MEH MEH Light Light Blend Light MEH

Source: Arthur D. Little, S&P Global 18

Note: Q1 2020 (January 1 to March20)
 Industry Structure Impact

Demand decrease, and a strong decline in refining margins that will not
recover soon, will accelerate an ongoing restructuring in global refining
Global Oil Refineries

Distillation Capacity in MMBD

900 ◼ The global refining asset base was
◼ Global refineries: 674 already under transformation, with
800 ◼ Global Total Capacity: ~90 MMBD large scale high complexity additions in
◼ Conversion Capacity: ~28 MMBD Middle East and Asia displacing small
700 low conversion capacity elsewhere
600 ◼ The current drop in margins has
500 already forced shutdowns, with some
plants being unable to cover their cash
400 operating costs

300 ◼ Revamps, turnarounds and capital

projects have been cancelled in many
200 units
100 ◼ Restructuring of the refining sector
will accelerate since strong margins
0
Simple Conversion (227) Medium Conversion (295)
High Conversion will not return until 2019 demand
(152) levels have been recovered
# refineries

Source: O&G Journal, Arthur D. Little analysis, only > 40MBD reported, Reuters, Press Release 19
 Industry Structure Impact

We expect OPEC to gain more power, relative to the IOCs, as oil supply
becomes more concentrated in a few low cost producing countries
Reserves By Country (Thousand MMBbls)

350 ◼ In a low oil-price scenario

303 OPEC NON-OPEC funding commitments by the
300
267 IOCs for finding and
250 developing new reserves will
decrease sharply
Reserves, Thousand Million bbl

200
168 ◼ With an average reserve life
156 147
150 of about 10 years, top IOCs
106 102 98 reserves position will
100 progressively shrink and their
61 share of total oil production
48
50 38 30
26 25
13 12
(and power) will reduce
9 8 8 7
0 ◼ OPEC’s reserves life of above

Mexico
Iran

Kuwait
Iraq

Qatar
Nigeria

Brazil
Saudi Arabia

Russia

UAE

Kazakhstan

Norway
Angola

Azerbaijan
Venezuela

Canada

USA
Libya

China

Algeria

50 years, combined with their

generally low production
costs will ultimately displace
much IOC market access
Source: BP Statistical Review 2040, EIA International Energy Outlook ,ADL Estimates 20
 Industry Structure Impact

Current prices and oil production costs favor OPEC’s ability to increase
market share, but challenge their national budgets and political stability
Oil Production Cost By Country $/Bbl

18
17.8 ◼ Much of OPEC’s generally very
large reserves volumes could be
16
14.2 produced at only very low cost
14 13.2 13.3
◼ But, current oil prices are too
12
10.4 10.6 low for petroleum based
10 9.0 economies to support their
US$/barrel

7.9 8.4 8.6

8 7.4 national social and economic
6.7
6 5.7 programs. This places their
4.8 5.1
4.0 4.3 4.4 political stability at risk
4 2.8 3.1
2 ◼ Nevertheless, there are also
0 significant reserves volumes,
Qatar

Kuwait

Mexico
Saudi Arabia

Nigeria
Brazil
UAE

Norway
Angola
Russia
Azerbaijan
Kazakhstan

Canada

USA
Iraq

Iran

Venezuela

China
Libya

Algeria

outside OPEC, that will not be

able to maintain their current
production levels at prices
below $40/bbl, reducing this
oversupply pressure
Source: BP Statistical Review 2040, EIA International Energy Outlook ,ADL Estimates 21
 Industry Structure Impact

A global commitment to a “green economy” has been underway, driven by

declining renewables costs, but lower fossil fuel prices may challenge this
Competitiveness of Renewables vs Fossil Fuels 2018
Fossil Fuel Cost Range 2018 LCOE for utility scale power (ranges and averages), 2010 and 1018 USD/kWh*
0.5

0.4

0.3

0.2

0.1

0.0
2010 2018 2010 2018 2010 2018 2010 2018 2010 2018 2010 2018 2010 2018 … 2020

Solar Concentrating Offshore Onshore

Bioenergy Geothermal Hydro
Photovoltaic Solar Power Wind Wind
Lower fossil fuel prices, combined with lower demand for power and lower power prices, industrial and
transportation traditional energy sources cost, defines a lower cost competition for renewables penetration
Source: IRENA 2018, Arthur D. Little estimate 22
 Industry Structure Impact

The crisis will severely impact the oil industry, accelerating its transition
to renewables, already underway, and altering its climate change approach
Transition to renewables would accelerate

◼ Governments/municipalities pressure for ◼ Fossil fuels may be more competitive

low CO2 emissions
◼ EU commitment to align emergency
funding with “green targets”
◼ So, oil demand was expected to peak
and fall in the coming decades anyway
◼ With high oil prices, it used to be
attractive to invest in E&P projects
◼ But oil projects now have lower returns,
and higher uncertainty than before
◼ Renewables have lower technical risks
and now potentially lower commercial
risk and higher return rates than oil
Source: Arthur D. Little
◼ Cheap oil would change customer
feeling about “going greener”
◼ Power generation prices already lower,
partly due to lower fossil fuel prices
◼ Higher renewable subsidies will be
required to reach customer breakeven
◼ Governments would give priority to
economy recovery support after
recession (i.e. reducing EV rebates)
◼ US & Canada would support oil
industry from collapse
23
 Industry Structure Impact

The oil & gas industry will accelerate its transition to a cleaner and more
diversified portfolio of energy sources, products and service offerings

Potential ecosystem for future oil companies

Trading Houses
Global Global Service /Operations Companies

Regional Majors Diversified Energy Holdings

Regional XL Oil Co (IOCs)
Special-Purpose Vehicles
Local US Drillers Retailers

Fossil fuel focus Diversified energy

Source: Arthur D. Little 24

 Industry Structure Impact

Immediate and lasting impacts on the industry are likely to drive a

structural transformation, leaving fewer, smaller players after the crisis
Who would be the survivors of current crisis?

Low prices/margins will last for years

Production and refining shutdowns in many areas
Financial collapse already underway for some companies
Asset sales and consolidation by small and large companies
Ongoing major projects no longer profitable
Cost of capital for fossil fuel projects to increase even further

Transform and survive Shrink/collapse or acquired

◼ Low cost /XL NOCs ◼ NOCs with high cost/low reserve base
◼ Super Majors able to transform ◼ Shale focus producers
◼ Global oil field service companies ◼ Small scale independent refiners
◼ Some niche players/regional “Mini Majors” ◼ Heavy oil/Canadian tar sands players
◼ ….. ◼ ……

Some new business models would emerge and success in the new industry ecosystem
Source: Arthur D. Little 25
 Industry Structure Impact
There is still a chance for the market to get “back to normal” sooner than
expected, but it is likely that the oil industry will continue to lose appeal
Scenario
“Stagnation”
• Oversupply lasts 2+ years
• “L-Shape” demand pattern, and persistence of
high inventory levels
• Crude price below $40/Bbl
• Low refining utilization rates and margins
“Back to Normal”
• Saudi Arabia/Russia agreement at OPEC
• Oversupply balanced
• “V-Shape” demand bounce/market rebalance
• Crude @$50/Bbl at Q4 2020
Industry Outlook
◼ Larger market share concentrated in few OPEC countries
◼ Majors transform to survive
◼ Many production and refining shutdowns. Major projects cancelled as
defined pre-COVID
◼ Significant downsizing of fracking activities
◼ International Oil Companies accelerate energy transition and new
business models emerge
◼ 2020 industry financial impact will collapse some high cost producers
◼ Companies with already diversified portfolios will have lower impact and
capitalize on market bounce
◼ Major capital projects will be delayed and executed later considering
higher risk and lower price forecast
◼ International Oil Companies will focus on healthier project portfolios and
efficiency gains
26
 Industry Structure Impact

Under any scenario, lower expected returns, climate and CO2 challenges
will drive companies to search for new pathways to survive

Future success trends

Less CO2 & CH4 emissions, less CO2 in

Less
products, more PetroChem. output
CO2 & Re-balance to stronger gas
CH4 value-chain share
More
Build strong, low-carbon Gassier
Renewable
electricity value-chain positions
Smarter Reduce costs by AI, automation and digitalization

Shorter reserves life gives agile Lower Drive to low-breakeven assets

response to policy changes Quicker cost due to price competition

Smaller Portfolio re-alignment, mergers,

focus, return capital to shareholders

27
 Industry Structure Impact SIMPLIFIED

This industry crisis would in fact only accelerate the transformation and
diversification that we had expected to occur after 2030
◼ Nationalization ◼ Get scale in core
◼ Disintegration businesses Crisis will accelerate
◼ Independent business ◼ Mergers, acquisitions, transformation process
units in oil companies joint ventures
“XL Oil” or
Participation Consolidation Energy Holdings
1970’s/1980’s Late 1990’s 2025?

Pre 1970’s Early 1990’s 2000+

Seven Sisters Virtualization Globalization

◼ Vertical integration ◼ Get scale in non core activities ◼ Horizontal expansion
◼ Global expansion of ◼ Shared services ◼ Downstream divestment from
markets and ◼ Outsourcing majors
resource base

Source: Arthur D. Little 28

Agenda

1 Executive Summary

2 Industry Structure Impact

3 Impact & Mitigation per Segment

29
 Impact & Mitigation per Segment

All industry segments are impacted by the volume and price drops, the
resulting financial collapses and related supply chain/operational disruptions
Field Oil Field Transport &
Refining
Operations Services Distribution
Est. size of
impact
(illustrative)

▪ Storage restrictions for ▪ Spare part access will be ▪ Already contracted crude ▪ Some production halt
oversupply critical, especially from China needs to be re-sold because of lack of storage
▪ Drill bits / tools limited ▪ Storage restrictions for crude, downstream
Supply impact given low activities for intermediate and final products
chain
new wells / exploration
▪ Manpower at minimum ▪ Exploration / appraisal / new ▪ Limited to minimum staff ▪ Limited to minimum staff
possible level wells will halt ▪ CAPEX initiatives and ▪ CAPEX initiatives reduced or
▪ Operators to prioritize low- ▪ Well intervention/workover turnaround stopped stopped
Operations
cost assets to remain steady especially ▪ Daily vs. monthly optimization
for rig-less activities
▪ Some production assets ▪ Many contracts will be ▪ Low utilization rates drive low ▪ Lower revenues because of
cannot cover cash costs renegotiated /cancelled to negative margins for some volume drop
▪ Negative economics for ▪ Little room for additional locations and configurations ▪ Financial stress for retail
some shale, deepwater and efficiency gains dealers requires support
Price/Margin Canadian operations
▪ High level of oversupply ▪ Demand will reduce until ▪ Demand decrease under ▪ Demand decrease until
▪ Penalization for non-standard operators stabilize strategy minimum production level for isolation ends and economy
crudes ▪ Brownfield activities will be some refineries recovers
Customers dominant ▪ Demand mix change towards
(incl. demand) heavier fuels

Critical High negative Moderate Low negative

Source: Arthur D. Little Limited impact Positive impact 30
impact impact negative impact impact
 Impact & Mitigation per Segment – Field Operations

Field operations face a drastic change on their economics and requires

reengineering of exploration and production plans and investments
Field Operations
Mitigation actions
Potential threats

◼ Look for long term capacity contract if low cost production

Downstream storage Swap crude and/or storage among different locations
1 restrictions
◼

◼ Consolidate current and future shutdowns for 2020 and optimize plans
◼ Review and prioritize operating assets, new developments, and production enhancement
2 Potential staff limitations programs
◼ Reduce and optimize operational runtime to a minimal in certain assets to avoid unplanned
shutdowns, and manage manpower limitations

◼ Close monitor of point forward cash flow and economics by field/asset/project

Tight or negative economics
3 for some assets
◼ Take advantage of available equipment and/or suppliers to be prepared to produce as soon as
crude price is back above break-even level
◼ Develop fast recovery programs to immediate commence operations – monitor and establish
trigger points
Oversupply ◼ Be commercially proactive and flexible when looking for new production outlets
4
Crude traveling far

Source: Arthur D. Little 31

 Impact & Mitigation per Segment

OFS players in Exploration / Greenfield developments will be most

impacted while producing assets may continue but at a minimal / optimal
Oil Field Services
Mitigation actions
Potential threats

◼ Consider flexibility in contract guarantee of work (such as contract expiry extension) if price
Contract renegotiations / negotiations are being sought by Operators
1 cancellations ◼ Consider accelerate price normalization once the situation returns to stabilization

◼ Conduct full asset rationalization and prioritization across all operated regions
Establish asset-readiness programs to ensure immediate deployment once market stabilizes
2 Low utilised assets ◼

◼ Collaborate with other OFS players to sub-contract work to maintain high utilization of assets
and manpower

◼ Monitor potential M&A opportunities

Consolidation / M&A Develop recovery plans to include grow and diversify using inorganic strategies
3 activities
◼

◼ Conducting an asset rationalization assessment will provide full transparency on sparing

Delayed spare parts to philosophy
4 maintain operations ◼ Establish local ‘pooling’ of assets and services with other OFS players to optimize OPEX

Source: Arthur D. Little 32

 Impact & Mitigation per Segment - Refining

Refineries need to do frequent re programing, isolation of shifts, operate

at minimum staff levels and cancel non critical CAPEX initiatives
Refining Segment
Mitigation actions
Potential threats

◼ Contracted feedstock/crude re sale or contract re negotiation

High frequency of operations optimization and re scheduling
1 Storage restrictions ◼

◼ Minimize number of staff entering refineries and depots

CAPEX initiatives and Delay non critical CAPEX initiatives
2 turnaround stopped
◼

◼ Stop or delay and reschedule turnarounds

◼ Close monitor of marginal economics of process unit to avoid hidden suboptimal production
Low utilization rates drive Run at minimum operational rate as son as does not compensate to shutdown plant
3 low to negative margins
◼
◼ Assess buy-import vs. maintain refinery running
◼ Continue with operational efficiency initiatives as soon as quarantine period ends

◼ Close monitor marginal economics and evaluating shutdowns of light products units
Demand decrease and mix Assess buy-import vs. high processing rates
4 change
◼
◼ Look after markets for intermediate products (i.e. naphtha) to maintain refinery running

Source: Arthur D. Little 33

 Impact & Mitigation per Segment – Transport & Distribution

Transport and distribution segment faces logistics disruptions and financial

restrictions that will need support from refiners/integrated companies
Transport & Distribution
Mitigation actions
Potential threats

◼ More frequent and strict pipeline capacity planning, shipping only crude with a secure outlet
1 Lack of storage downstream ◼ Benefit by open access to own available storage
◼ Swap storage among geographies with trading and midstream companies
◼ Assess use of floating storage

◼ Work with isolated shifts and minimum staff levels

2 Limited to minimum staff ◼ Avoid delayable contractors intervention to facilities
◼ Cancel non critical CAPEX initiatives

◼ Offer flexible payment conditions to retail stations dealers

Lower revenues because of
3 volume drop
◼ Consider flexibilization take or pay contracts considering force majeure conditions
◼ Extend timing for product delivery of a contract (i.e. delivering total amount when market
conditions improve)

◼ Re negotiate contracted freight/trucks

4 Demand decrease ◼ Re assess key client portfolio for future expected market conditions
◼ Re assess channel strategy for B2B customers

Source: Arthur D. Little 34

 Michael Kruse Rodolfo Guzmán Daniel Monzón Nick White

Global Energy Practice Leader, Partner, Americas Partner, LATAM Partner, London
Central Europe E: guzman.rodolfo@adlittle.com E: monzon.daniel@adlittle.com E: white.nick@adlittle.com
E: kruse.michael@adlittle.com

Stephen Rogers Trung Ghi Saverio Caldani Adnan Merhaba Juan González

Partner, London Principal, Asia Pacific Partner, Italy Partner, Middle East Partner, Spain
E: rogers.stephen@adlittle.com E: ghi.trung@adlittle.com E: caldani.saverio@adlittle.com E: merhaba.adnan@adlittle.com E: gonzalez.juan@adlittle.com
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