operational excellence

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

Operational Excellence

Peter J. Parry | Managing Partner Global Oil & Gas Consulting

Bain & Company, Inc. | 40 Strand | London | WC2N 5RW | United Kingdom

+44 7733 302 300 [email protected] | web:www.bain.com

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 2LON Finding Petroleum Presen ... 140612

Upstream Operations Excellence: trends and implications

• The large Upstream producer competitive landscape is shifting to profitability cost and operational metrics away from volume growth

NEW UPSTREAM

Source: ExxonMobil 2014 Analyst Meeting


The past decade has seen the upstream majors fall back

Major IOCs included: BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell, Statoil, Total

MAJOR IOC PRODUCTION AND UPSTREAM INVESTMENT 2002-2013

Cumulative Capex FY2002-FY2013

= $1.43T

NEW UPSTREAM


Mature fields challenge and EOR potential: Fields aged over 10 years dominate global liquids production

Source: Rystad Energy U-CubeNote: Based on 2012 liquid production including crude, condensate and NGLs

MATURE FIELDS


Nigeria2013 Law on fines on operators responsible

for oil spills

Ukraine2014

Conflict and renewed cold war

Instability and change continues to impact the industry

Gulf of Mexico :2010 - offshore

drilling moratorium following Macondo

incident

Argentina:2012 -

nationalisation of Repsol stake in YPF

Algeria:2013 – In Amenas gas plant attacked

Syria:2012 – civil war

leads to exit of IOCs

Libya/Egypt:2010-11

‘Arab spring’ uprisings impact oil and gas infrastructure and

activity

France 2012 –ban on

hydraulic fracturing

SELECTED INCIDENTS IMPACTING O&G INDUSTRYINSTABILITY

Alaska:2012 - Shell

exploration rig slips moorings

Syria:2012 – civil war leads

to exit of IOCs

ME and Azerbaijan – on-

going contract renewals

UK 2011 – Further changes to

fiscal regime hit mature field economics

Australia:2012 – inflation hits NWS LNG

economics

USOngoing

developments in shale gas and oil redefine industry

supply

On-going African

Exploration Boom

Violence

Commercial

Environmental

Supply

NON-EXHAUSTIVE

Source: Bain analysis, Literature search

Kazakhstan2014 - fines by

government due to production halt/gas

leaks

Nigeria:2014

Large-scale theft by thieves

Venezuela2014

Series of protests, political demonstrations,

and civil unrest

ScotlandSpeculation on O&G industry based on

independence


Shortage of talent remains an industry challenge

• Many oil provinces will grow by at least 50% in the next 20 years

• Shift to unconventionals and new frontiers requires new capabilities

• 50% of staff with over 25 years experience will have left the industry in 7-8 years

• Requirements to ensure use of national staff and content will become increasingly significant

% OF LARGE NOCS STATING AS KEY RISKNORTH SEA: % STATING AS KEY CHALLENGES

IN NEXT 12 MONTHS

TALENT SHORTAGE


Asset Full Potential: Delivery at an individual asset level is ever more vital, four areas can make a big impact

1. Capabilities

- People

- Processes

2. Business Performance

- Financial Impact

- Emissions

3. Productivity and Potential

- Consistency and uptime

- Recovery factor

4. Stakeholder Management

- Delivery vs. expectations

- Engagement, support and learning

DELIVERING ASSET FULL POTENTIAL

ASSET FULL POTENTIAL


1. Capability: Building a baseline picture of people and process strength along with a development plan is vital

OPERATIONAL CAPABILITY TENABLE AREAS

Production Operations

Reservoir Management

OBO

Technology

HSE

Maintenance planning & execution

Processing storage and

transportation

Production management &

optimization

Land, marine and aviation

logistics

Integrated activity planning

Reservoir appraisal and development

Reservoir Modeling

Well & reservoir

surveillance

Technology application &

EOR

OBO strategy OBO operating model

OBO management resourcing &

capability

Technology strategy

Technology application

HSE Management

Systems

Behaviors & Culture

Performance Management

Occupational Health

People & Process Safety

Environment

WellsWell

engineeringDrilling

operationsWell planning &

approvals Completions Well work overs

Drilling technology

Technology performance

feedback

Weak Tenable Strong World-class

Legend



OutputOutput

TotalcostTotalcost

Capital employed

Capital employed

RisksRisks

Shareholder value

Shareholder value

• Availability and reliability

• Throughput

• Product yield

• Emissions

• Operating expenses

• Raw materials/chemicals

• Energy costs

• Productivity

• Working capital

• On time/on budget projects

• CAPEX optimization

• Cash management

• Process/Personal safety

• Environment protection

• Asset integrity

• Capabilities / Human capital

As low as reasonably practicable

*Excludes feedstock costSource: Bain & Company

0% 8%

% output improvement

3%

0% 15%

% unit cost reduction

7%

0% 5%

% capital employed reduction

3%

Level of operating risk

2. Business Performance: Linking operations directly to shareholder value provides clarity of full potential

POTENTIALELEMENTS

LINKING OPERATIONS TO SHAREHOLDER VALUE



3. Productivity and Potential: Typical UKCS large and mature fields show performance well below potentialASSET FULL POTENTIAL


3. Productivity and Potential: Understanding predictability and volatility are the first steps to change performance

Step 1

Understand the pattern of asset

performance

Step 2

Determine how predictable

performance is and what is

driving volatility

Step 3

Reduce standard deviation

Step 4

Move toward full potential


4. Stakeholder Management: Increasing emphasis on stakeholders role and NTR impacts

Increased technical

complexity

Declining production efficiency

Rising costs

Agingworkforce

Operatingperformance


Stakeholders and NTR: Corporate, Shareholders, Asset Partners, staff, contractors, communities, NGO’s


The upstream Oil and Gas industry is experiencing a growing Operational Excellence gap

A. Production shortfall vs. plan

B. Slower than anticipated project starts

C. HSE and sustainability challenges widespread

D. Inflationary pressure and bottleneck in the supply chain and midstream

E. Maintenance and plant availability backlog

F. Multiple initiatives and limited sustained improvement

• Predictability of major project and production volume outcomes needs to improve markedly

• Affordability of new investments is coming under increased pressure

OPERATIONAL PROBLEMS BUSINESS CONSEQUENCES


Operational Excellence defined: Outstanding performance across all aspects of the business

Operational excellence

Top Quartile Asset

Performance

Best in class Processes &

Systems

World-class HSSE

High Performance

Culture

Distinctive Capabilities

Immaculate Reputation

• Standardized, consistent OE system adopted across Group

• World-class processes& systems

• Seamless structure for integration of acquisitions

• Best in class results on HSSE metrics and superior HSE culture

• OE mindset in all activities and cultureacross all assets and functions

• Continuous improvement mindset & behaviors

• Highly talented and skilled workforce and management

• Institutionalized capabilities across technical and supporting functions

• Large Pool of talent

• Envied reputation in the industry and the region for best-in-class operations and sustainable business practices

• Top quartile performance on key value drivers and return on capital across all assets

For more information, please contact Bain and Company

Bain & Company is the management consulting firm that the world’s business leaders come to when they want results. Bain advises clients on strategy, operations, technology, organization, private equity and mergers and acquisition, developing practical insights that clients act on and transferring skills that make change stick. The firm aligns its incentives with clients by linking its fees to their results. Founded in 1973, Bain has 48 offices in 31 countries, and its deep expertise and client roster cross every

industry and economic sector. For more information, visit www.bain.com. Follow us on Twitter@BainAlerts.

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