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Russian Oilfield Services “ a $23 billion market by 2011 ”

Russian Oilfield Services “ a $23 billion market by 2011 ”. London Home Counties Branch – 25 th June 2007. Steve Robertson Assistant Director, Manager Oil & Gas. Rod Westwood Analyst, Oil & Gas. Douglas-Westwood Overview Macro-economic trends Russian regional overview

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Russian Oilfield Services “ a $23 billion market by 2011 ”

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  1. Russian Oilfield Services “a $23 billion market by 2011” London Home Counties Branch – 25th June 2007 Steve Robertson Assistant Director, Manager Oil & Gas Rod Westwood Analyst, Oil & Gas

  2. Douglas-Westwood Overview Macro-economic trends Russian regional overview The Russian OFS Market Conclusions

  3. St Petersburg Oslo Aberdeen London New York Moscow China Houston Singapore Nigeria Rio de Janeiro Perth Douglas-Westwood Limited M&A due diligence Market forecasts Customer perception surveys Published market studies Market research, analysis & strategy Global customer perception surveys Investor presentations Business strategy work Recent/ongoing project locations include:

  4. Acquisition by SCF Partners $768 million IPO £319 million IPO Recapitalisation Songa Drilling £535m finance facility $280m acquisition of KBR Production Services Over $6 billion of transactions completed since 2006 £15 million MBO of Motherwell Bridge £50 million credit facility for Sovereign's acquisition of Forfab Inflexion Private Equity Backs £22m MBO of Viking Moorings Douglas-Westwood Limited £130m debt facility to finance the construction of two specialist vessels Acquisition by Cable Solutions Group Inc. UMAX Ltd Acquisition, Growth and Working Capital Facilities Serimer Holdings acquisition of the UMAX group £34.5 million Rovtech acquired by Fugro Perry Slingsby Systems capital acquired by Triton Group Holdings. Arcapita completes acquisition of Roxar £29 million Refinancing Expro Group $675m acquisition of Powerwell Services Investor syndicate $925m acquisition of ABB Oil & Gas Epcon Offshore AS acquisition by M-I SWACO.

  5. Douglas-Westwood Overview Macro-economic trends Russian regional overview The Russian OFS Market Conclusions

  6. Demand Growth 2000-2005 World Energy Consumption – Developing Countries Drive Demand China – An additional $180bn will need to be spent on new power generation by 2020FT, 12 April 2006 “Worldwide energy demand to grow by 71% by 2030” EIA, 20 June 2006 Data Source: - BP Statistical View of World Energy, June 2006

  7. 25.99 868 11.13 680 30.77 1.84 13 0.87 Oil – The Fuel of Transportation “oil demand to increase from 80 million b/d in 2003 to 98 million b/d in 2015 and to 118 million b/d in 2030” EIA, 20 June 2006 Barrels / person/ per annum. Cars per 1,000 people Source: ENI/BP

  8. The past ……in 1999 the view was very different

  9. 2007 – The Prospect of “Peak Oil” Looms And a further 12 could soon go over the edge Since then so have another 52 countries The USA’s oil production peaked in 1970 and has never recovered Source: BP Statistical View of World Energy, June 2006 Source: BP & “The World Oil Supply Report” – Douglas-Westwood

  10. Deepwater production Will Global Oil Production Peak? A major problem is that offshore shallow water production is in long-term decline Source: “The World Offshore Oil & Gas Forecast”,Douglas-Westwood Limited Source: Energyfiles

  11. Will Global Oil Production Peak? All oil sources Demand – EIA forecast 118 million barrels per day by 2030

  12. Peak Oil – The Establishment View “The peak oil theory is flawed…..production is more likely to trace an undulating plateau that will last for a decade or more beyond 2030” Review of CERA report,Oil & Gas Journal Nov 27th, 2006 “production will plateau at above 118 million b/d…..in 2031” Prof. H. R. Linden, Oil & Gas Journal Nov 27th, 2006 “CERA’s report contends that it is not reservoir constraints but aboveground factors such as geopolitics, conflict, economics, and technology that will dictate future oil supply.”Review of CERA report, Oil & Gas Journal Nov 27th, 2006 Global oil reserves are not the issue. The key issue is our ability to produce them.….. “the aboveground factors”.

  13. High Oil Prices Drive Industry Activity Source: Douglas-Westwood / Baker Hughes

  14. Production additions to meet incremental demand Energy Demand EOR in mature areas Attrition (Old Rigs Scrapped) Newbuild Rigs Labour ‘Easy ‘ drilling opportunities diminishing Oil & Gas Demand Local content requirements Product Prices Exploration, Appraisal & Development Drilling Available Rigs Available Crews Production decline from existing wells Rig Demand Rig Supply Key Drivers for Drilling Activity Energy demand Energy supply – easy oil has been found, greater activity required to extract each barrel, need to offset decline from existing wells Product prices – current high levels encouraging drilling activity Rig availability – utilisation rates are high, shortages of labour and local content requirements all putting upward pressure on dayrates

  15. The Future for oil prices? Near term…. Political influences could support prices • OPEC gains influence over another 1.4 mm bpd via Angola • Underpinning? The Saudi Arabian economy needs $45 oil • OPEC would like $60 target price? • Oil supplies look set to remain tight, supporting prices Longer term….limits of supply could come into play • An oil supply peak? • Massive increases in oil prices could result until alternatives are found • How long might that take? Some think 20 years!

  16. Finding Skilled People – An Industry-wide Challenge A global problem Large numbers nearing retirement A 20 year recruitment void to fill Can industry replace these people in time? Mobile offshore rigs on order need 10-20,000 people to man! Plus 50 more offshore construction vessels …… Cost implications for employers Source: Oil & Gas Journal

  17. The Easy Oil has been Found – the future?...Harsh Environments Arctic HPHT H2S Deepwater Politically unstable

  18. Oil & Gas Industry Cost Escalation

  19. Oil Producers’ Equipment Expenditure Worldwide expenditure increasing year on year, $267 billion expenditure in 2006 Survey excludes some big spending state NOCs (e.g. Saudi Aramco) Oil co. budgets based on oil price of $55.50 & gas $6.70 “Companies would only reduce spend if oil prices fell to $42” Investment decision threshold “in $20’s range” Source: Lehman Brothers survey of 325 oil & gas companies E&P spend, 2006

  20. The Rise of the NOCs A major power shift is underway 75% of oil reserves now held by NOCs Only 4% now controlled by the oil majors NOCs need technology & need the know-how (But do they need / trust the oil majors?) NOCs are cooperating with each other NOCs governments want local content “National oil companies will lead the 2007 increase in international spending with the largest spending growth among the Russian oil companies” Lehman Bros. Dec ’06 Survey

  21. The Russian NOCs Gazpromholds 16% of the world’s gas reserves 2/3rd of Gazprom revenues are from gas exports ($39 billion) Jan 1, 2006, supplies cut to Ukraine (and parts of Europe) Jan 1 2007, doubles gas price to Belarus & Georgia Wants to set up a “gas OPEC”? Jan 8 2007, Russia halts oil exports via Belarus (to Europe!) “A giant aware of its power” Sources: ISN Security Watch, 10 July 2006 Financial Times, 14 & 15 December 2006 Houston Chronicle, 8 Jan 2006

  22. Russian Expenditure Comparison Although not included in this analysis, Saudi Arabia ranks second in the world for total onshore expenditure. Russia ranks third overall in the world for onshore expenditure throughout 2001-2005 and will continue to hold this position until 2010. Onshore expenditure in Russia is increasing year on year compared with the US index. Strong growth can be expected in Kazakhstan as this country continues to develop. Source: Douglas-Westwood

  23. Douglas-Westwood Overview Macro-economic trends Russian regional overview The Russian OFS Market Conclusions

  24. Russian Oil Production Production recovered since post-Soviet trough Major drilling & workover efforts – recent gains in production forecast to continue through to 2035 Gas to play increasingly prominent role

  25. Western Siberia Russian Oil & Gas Production Mature region Accounts for 60% of production Samotlor (Russia’s largest oilfield) peaked at 3.5 mboe/day and is now in decline

  26. Volga Urals Russian Oil Production Most mature Russian region Major EOR efforts underway Romashkino oilfield now in decline

  27. Timan-Pechora Russian Oil Production Mainly a post-Soviet region Strong growth forecast Holds 8% of Russian reserves

  28. Eastern Siberia Russian Oil Production A region in its infancy Strong growth forecast Lack of infrastructure in place ‘Difficult’ geology – impact on cost A major future OFS opportunity

  29. Douglas-Westwood Overview Macro-economic trends Russian regional overview The Russian OFS Market Conclusions

  30. Methodology – Challenges relating to Data Access Very little public-domain data Small independent companies have very little public visibility Few requirements to record information, companies now moving to western business practices (but slowly!) Reluctance of operators to release data, particularly with regards pricing No rig count exists for Russia Inactive rig cannibalisation Challenges Face-to-face meetings with major operators and drilling contractors Evaluation and appraisal of Russian sources (e.g. Ministry information) Sense-checking on multiple levels Input and feedback from DWL’s due-diligence experience Workarounds

  31. Soviet Post-Soviet State Bodies Oil Major Service Teams In-House Service Company Specialist Subsidiary Specialist Subsidiary Specialist Subsidiary Independent Independent Independent Development of the Russian OFS Industry .

  32. Development of the Russian OFS Industry Development of the Russian OFS Industry Source: Douglas-Westwood

  33. Key Competitor Categories

  34. SSK Key Competitor Categories Quality, Technology Russian independent service providers Russian oil company in-house & affiliates International service providers Price

  35. Production Decrease Technology Push Directional Drilling 3D Seismic Hydraulic Fracturing Artificial Lift Water Control Sand Control Reservoir Engineering Intelligent Completions Production Increase Increasing Technology Requirements Maturing Regions Decrease in Downhole Pressure Increase in Water-Cut Russian technology is fit-for-purpose Westerners bring advanced tooling, downhole technology, EOR methods and project management Challenging frontier environments Increased technology needs Increase in Sand Production

  36. The Russian OFS Market $23 billion by 2011 – a doubling of the market The market will see 14% CAGR to 2011 Major growth in Eastern Siberia as a frontier region Source: Douglas-Westwood

  37. Douglas-Westwood Overview Macro-economic trends Russian regional overview The Russian OFS Market Conclusions

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