E & P Joint Ventures – Governing for Value

1. E & P Joint Ventures – Governing for Value Petron 2012 Presented by: GirishShirodkar, Global Partner and Managing Director December 11, 2012

2. Agenda Agenda • How Partnerships hinder value creation in E&P JVs • Governing for Full Value

3. Traditionally, JV partnerships are governed through a committee of owner representatives with voting rights. Request / receive funding approval Owner Representative Body (JOC / ManCom…) Operator’s Parent Company Non-operating Partners’ Parent Companies Receive / approve project team recommendations and funding requests Operator’s project team (may be supplemented with partner’s staff)

4. But, the environment of E&P has gone a complete transformation over the last decade. • Brent Offshore • Kashagan • 50% owned by Shell and Exxon Mobil • KazMunayGas, Eni, Shell, Exxon Mobil, and Total own 16.8% each; ONGC owns 8.4% and Inpex owns 7.6% Consortia • Operated by Shell UK • The consortium oversees all of the project’s activities, with EnI managing Phase 1 and Shell to manage Phase 2 Operator • Offshore reserve, at a depth of 140m. Exploited by 4 platforms, along with a 5th floating installation • Recovery factor is relatively low (15-25%). Artificial islands created for oil extraction due to the harsh weather Technical Complexity • Total capex of $25bn* • About $47bn invested so far, with production to begin only in 2013. Revised estimates indicate total cost of $187bn Investment • Recoverable reserves of about 3.2 billion barrels of oil • Ultimate recoverable reserves of 8 to 12 billion barrels of oil Reserves *In 2012 dollars

5. Lack of alignment between JV partners, led to a protracted legal battle in Pohokura Gas (NZ). • Pohokura Gas Project • Contracts with ‘swing’ are more valued • Largest gas producing filed in NZ • JV between Shell (48%, operator), OMV (26%) and Todd Energy (26%) • Rated production capacity at Pohokura is 86 PJ pa • Lack of capacity to store gas in NZ • Contracts with “swing” capacity are more valuable • Pohokura field has potential to store gas • Value loss due to sub-optimal decisions • Operator looked to maximise its value at the expense of minority partner • Led to lengthy legal battle • Option of joint marketing with full production was cancelled

6. JV partners with differing value measures and funds constraints, are eroding value in the Kashagan field. • Revision in plans • Kashagan field • Discovered in 2000 with 8 to 12 bn barrels of recoverable oil • The field is in the north Caspian sea, which faces harsh winters - artificial islands have to be created since the shallow sea freezes in winter • Initial estimate of $57bn has risen to $187bn • Production timeline shifted from 2005 to 2013 • Estimated production of 370,000 to 450,000 barrels per day • Reasons for Partner Conflicts • Value loss due to sub-optimal decisions • Increasing costs has killed trust and reduced faith in capabilities • JV partners like KazMunay gas are seeing funding constraints (other partners have put in $1bn on its behalf) • Value is no more the primary criteria • Phase 2 plan shelved for now by Kazakh government citing high costs • A 2 year delay would cut $8.5bn from the $79.8bn NPV of the project for the government, and $5.2bn from the $70.7bn NPV for the other partners

7. Both operators and non-operators agree on the impact of different perspectives and the need for more open dialogue. Conflict Increasing conflict Divergent views Different strategic objectives & drivers Different views of the opportunity Non-operating Partners Viewpoint Lack of open dialogue in the partnership Divergent views Partners’ technical competence Alignment Conflict Operators Viewpoint Source; SDG survey

8. Operator’s technical competence Alternatives not being investigated Lack of transparency in operator’s decision-making Non-operators have additional concerns about the way choices are made (and executed) by the operator Conflict Increasing conflict Divergent views Non-operating Partners Viewpoint Divergent views Alignment Conflict Operators Viewpoint Source; SDG survey

9. Slow corporate approvals Whilst the operator gets more frustrated by slow parent company approvals Conflict Increasing conflict Divergent views Non-operating Partners Viewpoint Divergent views Alignment Conflict Operators Viewpoint Source; SDG survey

10. All of the most critical concerns reflect the need for a strategic dialogue between partners and operator. Conflict Increasing conflict Divergent views Alternatives not being investigated Operator’s technical competence Different strategic objectives & drivers Different views of the opportunity Non-operating Partners Viewpoint Lack of open dialogue in the partnership Lack of transparency in operator’s decision-making Divergent views Slow corporate approvals Partners’ technical competence Alignment Conflict Operators Viewpoint

11. In summary, the following issues need to be addressed by any new governance model. • Address main areas of conflict within partnership • Different strategic objectives & drivers • Different views of the opportunity • Lack of open dialogue • Lack of decision transparency • Focus on investigating alternatives and identifying value maximising options. • Clarify roles and involvement of JOC/ManCom • Recognise strategic from execution activities

12. Agenda Agenda • How Partnerships hinder value creation in E&P JVs • Governing for Full Value

13. Capturing the value in major projects requires both “strategic” and “execution” decisions Strategic Decisions Execution Decisions • Examples • Development pace and sequence • Capacity & investment phasing • Export infrastructure • Contracting and risk sharing strategy • Govt. / stakeholder relationship strategy • Use of major new technologies • …etc • Examples • Project organization • Annual budgets and work plans • Design details (individual element capacity, layout) • Well locations and drilling program • Individual contract mechanisms • Selection of contractor(s) • …etc

14. The traditional ‘let the operator operate’ model falls down when used for strategic decision making. The ‘let the operator operate’ model works …. ….until partners want to make rather than endorse strategic decisions Entrench around base plan, incremental optimization Advocate solution Operator recommends Partners accept recommendations Partners challenge Operator works efficiently, and unimpeded Increasing time pressure-focus on schedule Time /resources spent defending solution Trust increases, project gains momentum Results in fast execution Results in stalemate

15. We’ve used “Strategic Governance’ to incrementally build alignment through evolving insight. ‘Strategic Governance’ means finding out what really gets in the way of agreement and tackling these as fits Partnership Alignment (JOC/ManCom) Incrementally build alignment through evolving insights Key strategic issues must be extracted and tackled separately from execution decisions Completeness of Analysis (Operator)

16. The first phase identifies what is critical from a partnership perspective. Decision Process Partnership Alignment At each interaction the partnership can build alignment • Phase 1: • Establish operator ‘rules of the game’ for decision making; process, roles, metrics • Surface decision critical issues • Identify alternatives partners want explored • Simplify to the core Completeness of Analysis

17. Phase Two spells out what’s possible. Decision Process Partnership Alignment At each interaction the partnership can build alignment • Phase 2: • Translate ideas into specific concepts • Verify do-ability, difference and completeness • Agree methodology and workplan • Re-enforce ‘rules of the game’ Completeness of Analysis

18. The third phase sets out commitment to action. Decision Process Partnership Alignment • Phase 3: • Insights narrow conflict to what is decision relevant • Debate is focused on such conflict • Genuine divergence in objectives stills leads to action At each interaction the partnership can build alignment Completeness of Analysis

19. Partner involvement must be appropriate for the type of decision that needs to be made. Likely stalemate ‘Strategic Governance’ Strategic Frame Desirable for efficient execution Inefficient. A symptom of strategic misalignment Execution Operator Advocacy Partnership Inclusion Process

20. We believe that Strategic Governance helps to address the critical issues. • Address main areas of conflict within partnership • Different strategic objectives & drivers • Different views of the opportunity • Lack of open dialogue • Lack of decision transparency • Focus on investigating alternatives and identifying value maximising options. • Clarify roles and involvement of JOC/ManCom • Recognise strategic from execution activities

21. Thank You