Oil Finders’ Meeting Aberdeen February 2010

1. Oil Finders’ MeetingAberdeenFebruary 2010 The Potential of the UKCS A race against time Based on HW data: fields, discoveries, prospects & related model metrics & software Jim Hannon Jim Brown Hannon Westwood LLP

2. Title: The North Sea – a race against time For the past six years, our firm has been building very comprehensive oil & gas resource data on field production, discoveries and un-drilled prospects; mainly to build our own detailed view of what reserves remain on the UKCS – albeit “in theory”. The answer always seems to be around 25 billion boe give or take a few billion and, more recently, we have played out theoretical drilling programmes to imagine the dynamics of this system, with the correspondent timescales, the cash flow and the investments needed; plus the subsequent tax takes and jobs created. But this dynamic isn’t everlasting, and the next step is to overlay the shutdown of pipeline and export routes and watch the upside potential being eroded, with the subsequent loss of national resource, loss of huge investment, loss of jobs and loss of tax take. In this talk, we will attempt this overlay; and we will model some simple shut-down sequences and start to quantify the scale of loss, and throw some light on the key areas (geographic or play or company size or sector). But much more work is needed to be done in our view, and in more detail, to develop a management tool or a continuous management reporting system to steer industry investment and cooperation and government fiscal stimuli - there are roles for both. The benefits to the nation are enormous. We in HW are now getting involved in this work and developing the thinking and the software to provide insightful steers to optimise what we can of the oil & gas take. Is there a looming crisis in terms of export routes ?? What areas or oil or gas plays are most affected ? Are there any measures to consider other than oil & gas price ??

3. THE UKCS TOTAL OIL & GAS RESOURCE: 25,600 mmboe 65350 mmboe 14000 12000 c. 13000 10000 8000 c. 2000 6000 5150 4000 5400 2580 3100 2000 1330 775 0 385 fields & satellites & Enhancements Risk 100% 46 Near Term Developments Risk 100% 227 Discoveries dpi > 0.3 Risked @ 60% From 5150 to 3100 178 Discoveries dpi < 0.3 Risked at 30% From 2580 to 775 1633 Prospects Risked @ 20% From 65350 to 13000

4. DISCOVERY WELLS: theoretical pace of investment Count: Potentially commercial: DPI > 0.3 300 mmboe 9000 8000 200 projects 7000 count 200 6000 5000 reserves 80 projects 4000 100 3000 15 projects 2000 1000 0 0 $30 oil 22p / therm gas $40 oil 37p / therm gas $50 oil 37p / therm gas $60 oil 44p / therm gas $70 oil 52p / therm gas

5. SCOUTED PROSPECTS: theoretical pace of investment 1000 Count: Potentially commercial: DPI > 0.3 mmboe 35000 700 prospects 800 count 30000 480 prospects 25000 600 reserves 20000 400 15000 85 prospects 10000 200 5000 0 0 $30 oil 22p / therm gas $40 oil 37p / therm gas $50 oil 37p / therm gas $60 oil 44p / therm gas $70 oil 52p / therm gas

6. MODEL: data & metrics Prospects: 1633 Discoveries: 451 Producing fields: 385 Main oil routes: 10 Main gas routes: 34 Prospects & Discoveries: oil & gas reserves based on scouted/public domain data and considered the P50 (sometimes reported as the P50) Current field production curves based on latest DECC submissions and decline forecast. Reserves are calculated from the profile. Oil & Gas model production profiles, based on average curves from fields since 1965 Capex look up tables based on recent developments / public domain information Opex based on Capex - formula Value allowance applied to small fields (< 25 mmboe), HPHT, Heavy oil

7. Prospects Condensate Discovery Oil discovery Gas discovery MODEL: some universal ground rules Prospects and Discoveries:- tagged to nearest field hub / main pipeline export route > 25km from field hub discarded Dpi < 0 discarded as non-viable Sort order for drilling both oil & gas determined by DPI (profitability) TAX / Value allowances automatically included Cost and price inflation: 2% Pipelines: Oil route stoppage at 2000 bopd Gas route stoppage at 20 mmscfd (-5) years stop on new business from end year stoppage No allowance for:- Targeted investment (e.g. areas or play types) Pipeline corrosion Ownership behaviours Individual pipeline running costs Global competition for $$

8. SCENARIOS Exp wells App wells Gas count count Oil $/bbl p/therm CAPEX OPEX Well $App/Exp LOW 10 30 55 27 80% 80% 18/14 MEDIUM 30 50 65 40 100% 100% 25/20 HIGH 60 60 75 60 110% 110% 35/30 Variable periods of 1,2 or 3 years are applied between exploration wells, appraisal wells, next appraisal well and development on any one prospect or discovery, depending on the application of LOW, MEDIUM or HIGH.

9. NEXT STEPS Overlay the shutdown of pipeline and export routes Start to quantify the scale of loss Key areas (geographic or play or company size or sector)

10. EXAMPLE: OIL - Brent pipeline estimates LOW $55 End year c. 2060 797 mmbbls HIGH $75 End year c. 2052 953 mmbbls

11. EXAMPLE: OIL - ALL UKCS oil pipeline estimates LOW Throughput: 8750 mmbbls +2060 onwards LOW activity suggests extended shutdown dates as long as the throughput is commercial HIGH Throughput: 12900 mmbbls HIGH activity does not necessarily mean extended shutdown dates

12. 10 MAIN OIL PIPELINE ROUTES: SHUTDOWN FORECASTS Pipeline shutdown rate LOW scenario $55 HIGH scenario $75 12 100% shutdown 10 Shutdown rate: overall “shutdown rate”appears little affected by oil price; with some local exceptions Throughput rate: sensitive to oil price LOW to HIGH gap: 4.2 billion bbls = c. $30 billion project NPV & tax take (@50% = c. $100+ billion investment Investment: subject to competition for global $$, so 8.7 billion is not secure 8 6 4 2 0 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 Pipeline throughput rate: 5 YEAR TRANCHES mmbbls 3500 3000 12.9 billion bbls 2500 2000 1500 4.2 b bbls 1000 8.7 billion bbls 500 0 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

13. EXAMPLE: GAS - CATS pipeline estimates LOW 27p End year C. 2040 3.2 TCF HIGH 60p End year C. 2060 8.6 TCF

14. EXAMPLE: GAS - CATS pipeline estimates (MARKET VARIATIONS & ZERO SCT) 40p / therm GAS ZERO SCT 80% capex 70% well costs End year C. 2060 Throughput: 8.7 TCF Exp wells App wells Gas count count Oil $/bbl p/therm CAPEX OPEX Well $App/Exp HIGH 60 60 75 60 120% 120% 35/30

15. EXAMPLE: GAS - ALL UKCS gas pipeline estimates LOW activity suggest less gas throughput and quicker overall shutdown by 2040 HIGH activity suggests more gas throughput and overall shutdown extended to 2060 = a strong correlation for gas with price and investment levels ALTERNATIVES TO HIGH GAS PRICES = 1. Tax allowances targeted at both gas plays (dry and condensate); or focussed down into specific areas / a collective set of pipelines Example:- the gas basin Or by large major pipeline routes for condensate 2. Softening of Capex & Opex costs and well costs / collaboration between service sector & oilcos LOW 15.4 TCF HIGH 28.3 TCF

16. 34 MAIN GAS PIPELINE ROUTES: SHUTDOWN FORECASTS 100% shutdown Shutdown rate: 3 to 5 pipelines LOW and HIGH. Overall extension out by c. 15 years to 2060. The “shutdown rate” is sensitive to activity level Throughput rate: sensitive to gas price LOW to HIGH gap: 13 TCF = c. $15 billion project NPV & tax take (@50% = c. $50+ billion investment Investment: subject to competition for global $$, so 15 TCF is not secure TCF 28 TCF 13 TCF 15 TCF

17. EXAMPLE: RANGE of GAS PRODUCTION – ST FERGUS TERMINAL As an example, an indicative range of pipeline closures was made for those pipelines landing at St Fergus 2050 • The indications are that • the LOW forecast shows 3 pipelines with throughput up until c. 2030, with 5 other line closures between now and 2022 • The HIGH forecast shows 3 pipelines with throughput between 2040 and 2050, with 5 other line closures between 2010 and c. 2031 2030 Suggestion is that Terminal operation may extend between 2030 to 2050 depending on the LOW-HIGH level of offshore investment

18. FURTHER MODEL DEVELOPMENT WORK Pipeline corrosion model Pipeline network model Pipeline tariffs Pipeline running costs Targeted investment by area (eg SNS) Targeted tax allowances / variances Brownfield throughput Prospects > 25km from hub / tanker v pipeline Drilling sequence: dpi plus materiality Well cost variations: by play Impact on terminals + ………………..

19. OBSERVATIONS & CONCLUSIONS: based on the model OIL – 10 MAIN EXPORT ROUTES E&A Throughput: 8.7 to 12.9 billion bbls ($55 to $75 per bbl) Project NPV range @ $7 per bbl: $60 billion to $90 billion Investment range: c. $220 billion to $325 billion Shutdown: Pipeline “shutdown rate” does not appear to be very sensitive LOW to HIGH activity levels. The overall “shutdown rate” may be increased with higher activity, as more oil is extracted sooner (example may be Brent) GAS – 34 MAIN EXPORT ROUTE E&A Throughput:15.4 to 28.3 TCF (27p to 60p per therm) Project NPV range @ $1.24 per mcf: $18 billion to $33 billion Investment range: c. $65 billion to $120 billion Throughput rate is very sensitive to gas price, with almost double throughput from LOW to HIGH scenarios. It may be equally sensitive to a combination of market and fiscal terms (example may be CATS) Shutdown: The overall pipeline “shutdown rate” may be sensitive to gas price (and activity level: eg St Fergus); although several lines (15 to 20) seem prone to shutdown even if price changes from 27p to 60p; but needs more detailed analysis. OIL V GAS Overall, oil and gas export shutdown rates respond differently to levels of activity, with oil fairly insensitive, but with gas strongly insensitive. Both benefit from large increases in throughput rate, given adequate capacity.

20. OBSERVATIONS & CONCLUSIONS: based on the model IS THERE A LOOMING CRISIS IN TERMS OF EXPORT ROUTES ?? Oil routes appear little affected by variations in oil price within the $55 to $75 price range. Gas is most affected in the 27p to 60 p per therm price range; and with 15 to 25 lines in the balance from 2010 to 2020. WHAT AREAS OR OIL OR GAS PLAYS ARE MOST AFFECTED ? So far determined that “gas” routes are the most vulnerable to low activity, but have not differentiated between dry gas and condensate gas, or by NNS v SNS v CNS etc; or by company strength or sector. ARE THERE ANY MEASURES TO CONSIDER OTHER THAN OIL & GAS PRICE ?? tax allowances There appears to be a case for intervention in GAS in particular, both to accelerate the throughput and extend the operating period of hub fields / pipelines and terminals industry & government collaboration A suggestion that targeted fiscal stimulus (eg selected gas activities) would need an equally robust response from industry in terms of a more elastic market with a softening of capex, opex and well costs to reflect the level of commerciality and compete in the global market.

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