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Leveraging a Dynamic Management Model for Success in Upstream
October 2017
3esi-Enersight 2017 Upstream Planning Conference
2© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Several transformative factors are impacting the upstream oil and gas sector
Commodity Price Downturn
Unconventional Boom
Field Innovation and Productivity
Capital Performance Challenges
Data & Analytics and Technology
Transformative Factors
3© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Both independents and majors have made the shale asset class a priority investment
Unconventional Boom
% Company CAPEX in Shale (2016 – 2030)
Sources: IHS Vantage; KPMG AnalysisNotes: (1) CAPEX is the net investment in new projects as a percentage of total company Upstream spend. Includes shale, oil sands, conventional (onshore and offshore), LNG, GTL.
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There are fundamental differences between conventional and unconventional asset classes, requiring new approaches
Unconventional Boom
— Smaller number of large projects
— Unique, highly engineered
— Longer cycle portfolio considerations
— Large number of small projects
— Similar, repetitive (e.g., pad drilling)
— High degree of optionality in portfolio
Example Differences
Conventional Unconventional
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The upstream sector is facing a challenging price environmentCommodity Price Downturn
Commodity price futures(2016 – 2019)
D&C cost inflation estimates(2017)
Sources: Analyst Reports, Earnings Calls, Woodmac, KPMG Analysis, NYMEX Futures, Schlumberger, CNBC
“The 2018 oil market balance now points to rapid levels of inventory build which, absent continued
OPEC support, should depress oil prices” – JPMorgan, June 2017
“There is an impending cost inflation avalanche coming from the service industry, which
continues to operate at unsustainable pricing”– Schlumberger, March 2017
6© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Industry leaders are voicing longer-term concerns about the upstream sector and its future
Commodity Price Downturn
"Lower for Longer" "Lower Forever"
"I do think that the [Oil & Gas] industry needs to prepare for lower for longer…the
industry will work through it." – Bob Dudley, CEO of BP
"We're operating under what we call a lower forever mindset…if policies and innovation work well, I can see liquids
peaking in demand in the early 2030s…“– Ben Van Beurden , CEO of Shell
Source: EIA, Woodmac, Goldman Sachs; KPMG analysis
7© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Unconventional producers have yet to achieve positive free cash flow
Capital Performance Challenges
Sources and uses of cash for U.S. onshore-focused E&Ps1
(2012 – 2016)
CAPEX vs. Operating cash flow ($B) Outside sources of cash $B)
Sources: U.S. Energy Information Administration, based on Evaluate EnergyNotes: (1) Data consists of 44 publicly traded, U.S. onshore-focused E&Ps
8© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The upstream industry is failing to deliver acceptable returnsCapital Performance Challenges
Capital Efficiency of Independent E&Ps1
ROCE (2012-2016)
Note (1): Analysis conducted on 17 of the largest independent shale producersSource: CAP IQ
— Most return levels are lower than common investor benchmark
— Issue before commodity price collapse
— Wide differential between best and worst performers
Summary
9© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Upstream sector is achieving significant productivity gainsField Innovation and Productivity
New Well Production per RigPermian (2013-2017)
— Longer laterals
— Better well designs
— Tighter intervals
— Higher intensity fracs
— More proppant
— Geosteering capabilities
Example Productivity Levers
Source – E.I.A. Drilling Performance Report
0
100
200
300
400
500
600
700
20172016201520142013
+242%
Rigs Production per Rig (oil bbl/d)
10© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Continued field innovations show promising potential Field Innovation and Productivity
Subsurface Engineering
Artificial LiftOptimization
Conventional Methods New Methods Being Applied
Facilities Management
Reliance on seismic data to predict stimulation techniques (e.g. pools of oil)
Significant investments in statistical analysis to model previous completions and incorporate learnings into future wells
Monitoring of a relatively smaller number of wells with steady production declines, determining when to intervene
Deployment of proprietary apps to evaluate when and what artificial lift method to use, reducing costs and optimizing production (e.g. Oxylift)
Construction of individual well site facilities to manage production on a per well basis
Implementation of technology to enable central, comingled well facilities and remote monitoring to create operational scale
Example Shale Technology Advancements
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Many companies are leveraging 3rd party data and analyticsData & Analytics and Technology
Increasing Complexity
Prescriptive AnalyticsData Aggregation
Land
Drilling
Completions
Reservoir
Production
Production Equipment
Surf
ace
Sub-
surf
ace
Multi-domain Master Data Management to allow access across business units to real time data
Predictive failure analytics using sensor data to minimize down-time and optimize production
Platform to consolidate data using existing tools and optimize well production
Utilizing Predix IoTplatform to gather real time data at the asset level to enhance recovery and accelerate development DecisionSpace
platform integrates existing analytical software across the E&P lifecycle to:— Delineate
Reservoirs— Optimize
Production— Accelerate
Development
Predictive and diagnostic analytical tools to optimize production utilizing emerging technologies
Compilation of data to provide peer performance insights – recently expanded into forecasting through Wellcast and Prodcastapplications
Aggregation of drilling and production data for reporting and management dashboards
12© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Significant advancements in planning tools are allowing E&Ps to make better, more informed decisions
Data & Analytics and Technology
Enabling Tools and Technologies
Adaptive Field Development Planning
Models
Advanced Enterprise Portfolio Modelling Tools
Next Generation Corporate Finance and Budgeting
Systems
Advanced Integrated Well Planning and Execution Scheduling Capabilities
Integrated Data Systems &
Architecture
13© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Significant advancements in planning tools are allowing E&Ps to make better, more informed decisions
Data & Analytics and Technology
Enabling Tools and Technologies
14© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
These transformative factors are challenging heritage upstream management approaches and planning practices
“The game is still about capital, but the rules have changed…we need to develop dynamic plans that compete with conventional projects, while retaining optionality” - Global Major – EVP Unconventionals
“Investor questions are increasingly granular…we need to really understand our performance narrative and go forward plan” - Independent E&P – VP Investor Relations
“After fixing your portfolio and balance sheet, its all about execution…and today, superb planning is what drives superb execution”- CEO, Unconventional focused IOC
Transformative Factors E&P Planning Challenges
Commodity Price Downturn
Unconventional Boom
Field Innovation and Productivity
Capital Performance Challenges
Data & Analytics and Technology
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While a great first step, technology alone isn’t the answerExample Client Case
Typical Capital Management Issues
OneLack of strategicguidance needed
to inform allocation process
TwoData input quality
ThreeLack of a
dynamic process (not reflecting up-to-date conditions)
FiveDisconnect
between Target and actual deployed
SixLack of
corrective action rigor
SevenTime intensity of processes
SevenTime intensity of processes
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We believe that winning upstream companies will be those that leverage a dynamic, integrated planning process model
Best Practice Integrated Planning Process Model
17© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
There are several key benefits to the more dynamic, integrated planning process model
High-level scenario modeling without requiring significant asset involvement
Optimization of different planning activities at the appropriate intervals (e.g., monthly, quarterly, annually)
More standardized data and increased accessibility of data across the organization
Increased inclusion of competitor data for setting targets
A “line of sight” into asset performance, with a focus on value metrics
More rigor around conducting program lookbacks and reappraisals
18© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
To achieve full benefits, companies will also need to align key elements of their operating model
Future State Operating Model Governance
Managementprocesses
Information flow and tools
Behaviors and culture
Metrics and incentives
Roles and Structures
New process model requires increased clarity of decision rights due to shared
information, increased collaboration, as well as segmented organizational roles
A defined, integrated, dynamic and well understood process model; quarterly cycle, which allows more frequent plan updates with more forward-looking information
System architecture tailored to accommodate unconventional requirements; standardized and accessible information; common tools with less manual work-arounds; robust management of change Adherence to agreed-upon behavioral
norms and standards reflecting heightened speed and quality of
decisions; increased collaboration and transparency across organization
Well-defined roles in a streamlined, fit-for-purpose structure that is aligned
with new process model; elimination of duplication of work tasks; clear
accountabilities
A common view of value drivers and performance objectives; cascading
metrics through the organization fostering “line of sight” and stewardship;
competitive comparisons
19© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
We are looking to develop a deeper perspective on planning challenges and best
practices across the upstream sectorWe encourage everyone here to participate!
KPMG - 3esi-Enersight Partnership
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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