080319 strategy review total final - oil search · 2017. 1. 22. · 5 2002/03 review ¬oil search...

1

Strategic Review: The Way Forward

March 2008

O I L S E A R C H L I M I T E D

2

Agenda

9:00 Welcome Brian Horwood

9:05 Strategy Overview Peter Botten

9:30 PNG LNG Bob Marcellus

9:50 Financing Nigel Hartley

10:00 PNG Oil Field Optimisation Phil Bainbridge

10:15 Break

10:30 Growth Austin Miller

- PNG Gas growth Bob Marcellus

- PNG Exploration Keiran Wulff

- MENA Portfolio management & exploration Keiran Wulff

11:45 Summary & Questions Peter Botten

12:00 Close

3

Welcome

Brian Horwood: Chairman

4

Strategy Overview

Peter Botten: Managing Director

5

2002/03 Review

Oil Search last conducted a major strategic review in 2002/03. At the time:

− Oil Search’s market capitalisation was ~A$800m− Primary oil assets in decline, due to lack of investment by

Operator− Despite high equities, Oil Search did not control activities

− There were tight financial constraints− Gas commercialisation a focus in a lower price regime - oil

US$30/bbl, gas A$3.00/mcf domestic, US$3.30/mcf international

The implementation of the 2002/03 recommendations, which included taking over operatorship of the PNG assets, was instrumental in the Company's top quartile performance over the past five years

6

Share price out-performance

0

100

200

300

400

500

600

700

Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08

OSH ASX 200 ASX 200 Energy

July 2003: Acquisition of Chevron’s PNG Interests

Oct 2004 : PNGGP enters FEED

July 2005: Announcement of AGL GSA and PNGGP equity sale

April 07: Signs Cost Sharing Agreement for LNG project

Aug 2006 : APC withdraws from Australian leg of PNGGP Pipeline

7

TSR Performance

Source: Merrill LynchSource: IRESS

Ranked No.5 TSR Performer amongst current ASX 100 for 5 year period to Dec 2007

53%

0%

10%

20%

30%

40%

50%

60%

70%

Fort

escu

e M

etal

s

Pal

adin

Ener

gy

Worley

Pars

ons

Cal

tex

Aust

ralia

Oil

Sea

rch

United

Gro

up

Oxi

ana

Leig

hto

n H

old

ings

ASX L

imited

Dav

id J

ones

Com

pute

rshar

e

CSL

New

cres

t M

inin

g

Mac

quar

ie A

irport

s

QBE I

nsu

rance

Woodsi

de

Pet

role

um

Allc

oFi

nan

ce

Rio

Tin

to

BH

P B

illiton

OneS

teel

Sim

s G

roup

Blu

esco

pe

Ste

el

Mac

quar

ie G

roup

Orica

Mac

quar

ie C

om

munic

a.

CA

GR

8

2007/08 Review Environment

The 2007/08 strategic review has taken place in a significantly better environment, but with equal, though different, challenges:− High oil and gas price regime with oil price

>US$100/bbl, Australian East Coast domestic gas price A$4.50/mcf, international gas price US$11.00 mcf plus

− Much higher industry costs, with little evidence of diminishing inflation

− Oil Search controls investment in PNG oil assets− ExxonMobil driving PNG LNG but Oil Search can

influence and add value through oil/gas synergies and PNG landowner management

9

Priority given to ensuring strategic analysis and planning based on best available dataReview of external operating environment

Independent Technical Review undertaken by a range of experts:− PNG production & development programme − PNG exploration− MENA production, development and exploration

Followed up by in-house technical work− Prospect and lead inventory review− Long term oil fields sustaining capital review

Gas Commercialisation Review− Scoping economics completed for multiple development scenarios

based on probabilistic reserve assessments− Infrastructure capacities reviewed

Strategic Review Process

10

Strategic Review Process

Cost Review− In depth historical field, drilling and corporate

operating cost reviews undertaken

Organisation− PNG field organisational / operational structure

review − Organisational effectiveness review

Stakeholder Management− ExxonMobil influence and capacity to add value− PNG Government

11

Key Conclusions of Review

Existing portfolio can deliver superior TSR

Substantial unrealised value exists within Oil Search’s current asset portfolio, capable of generating superior shareholder returns over next five years and beyond

Delivery of PNG LNG alone can deliver 15% plus annual TSR growth with upside exposure to higher commodity prices. PNG LNG is the key future value driver

Further value growth can be delivered through commercialisation of other gas resources. Positioning for longer term growth above initial LNG Project through second phase gas developments is required

Value of PNG gas will increasingly dominate the portfolio over timeDec '07 Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13

“Delivering PNG LNG is the Highest Priority”

Oil & Other

PNG LNG

Valu

e

Other Gas

12

Gas Commercialisation the Key to Growth PNG LNG will dominate− A robust economic project ranking well

relative to other possible developments− ExxonMobil led, with strong alignment and

commitment− OSH can add value through:

− In-country contributions− Landowner and stakeholder management− Government and financing coordination−Oil fields gas delivery and synergy development

− Further growth definition


13

Management of Cash to Fund LNGFinancial position is strong (net cash of ~$415 million in March ’08)

However, funding of PNG LNG capex (OSH share ~US$3bn) will consume a large proportion of operating cash flow over next 5 years, impacting availability of funds for other activities

Major focus effort to secure project financing. Latest market soundings have confirmed that despite current credit crunch, project financing for PNG LNG is available. Equity funding for PNG LNG will be sourced from a combination of:

− Existing cash balances

− Future operating cash-flows

− Oil financing facilities

Discretionary expenditure will require close management

Hedging and other levers available

Active capital prioritisation across portfolio of opportunities


14

Gas Commercialisation the Key to GrowthOther gas developments a priority− Comprehensive strategy to drive growth

− Reserve aggregation through acquisition− Exploration emphasis− Infrastructure and development− Partnering with PNG stakeholders− Range of development opportunities

Significant value can be derived from discovered gas resource in 2008-2012 time frame


15

Optimise Cash Generation from Oil FieldsPNG oil is essential part of Oil Search’s business - provides cash flow required to fund LNG development

Easy wins from PNG oil fields have largely been captured, butLife of Field studies have shown that substantial upside potential still remains

− Underpins development programme 2009 & 2010

− Target – to maintain gross PNG production at between 40,000 –50,000 bopd until 2011

A number of initiatives have been identified to enhance cash flow generation progressively from 2008 and beyond with focus on:− Drilling performance and capital costs

− Appropriate cost base (fit for purpose)


16

Re-focus MENAOil Search has successfully built up diversified, value accretive portfolio in MENAExploration activity to date has been disappointing and materiality of some of the licences in context of growing gas portfolio is an issue

Some MENA assets offer the potential to provide a material diversified revenue stream outside core PNG operations

Rationalisation of MENA portfolio is required to release cash and reduce future capital and exploration expenditure commitments, refocus on assets with required level of materiality

MENA portfolio and equity levels to be pro-actively managed on an on-going basis with potential to deliver high materiality regularly assessed


17

Exploration an Important Contributor to GrowthIndependent review of portfolio highlights potential for material oil and gas contribution in review period

PNG Highlands potential will be tested. Offshore areas have material gas potential

MENA portfolio management concentrating on material prospects

Strong competition for capital with comprehensive ranking process

Programme of active equity management to optimise equity, risk and capital expenses. A trading mentality


19

Achieve superior value growth performance versus peer group, over the next 5 year period by:

• Ensuring PNG LNG project approves FID

• Optimising PNG operating performances to sustain production and cash-flows to first gas

• Managing the MENA portfolio to divest non-material interests & improve short term cash flows

• Positioning OSH with material growth opportunities post LNG Project FID

Maximise operating

performance

Objectives:

Value Drivers:

1. Production optimisation

2. Opex reduction

3. Drilling costs, Rig fleet management

12.PNG Government (support for risk, growth strategies)

13.IPBC Relationship- financing- support for risk, growth strategies

14.DPE Relationships-operations

4.Deliver LNG Project Sanction

5.Incremental PNG Gas Commercialisation accumulation

6.Pursue selective material new ventures

7.Pursue measured exploration programme

9.LNG Project debt strategy and associated initiatives

10.Sell down non material MENA positions

11.Optimise equity levels in exploration licences

15.Structure management accountabilities around priorities


Growth deliveryOptimise

Financing and Capital Structure

Maximise influence on key

decisions

Align Organisation to

deliver

18

OtherStakeholder Management− OSH can add value and mitigate risk by

active stakeholder management in PNG− Government and bureaucracy− Partnership with Government instrumentalities− Landowner and community management

Organisation to Optimise Strategy Delivery− Organisation being modified to align to

specific strategy initiatives− Reorganisation impact “Fit for Purpose”


20

Focus Areas for Growth

Gas will dominate− PNG LNG first phase growth− Other gas – strategy to develop expansion

opportunities and other projects

Exploration− Material prospectivity remains in PNG portfolio for oil

and gas− MENA portfolio management, with remaining

potential− Active licence trading to optimise equity, risk and

capital exposure

New Business− Continued measured new business activities

concentrating on medium term material contribution

21

PNG LNG Project

Bob Marcellus : Executive General Manager

– Gas

22

Primary driver is to deliver PNG LNG

PNG LNG Project is Oil Search’s primary focus

This development will represent PNG’s cornerstone gas development and will underpin Oil Search’s production and profits for 30+ years

PNG LNG will commercialise over 500 mmboe of Oil Search’s 2P gas resources

Initial development will add ~ 18 mmboe to annual net production

23

Gas Evolution in PNG

For 10 years, PNG to Queensland gas pipeline dominated

When APC faltered in 2006, OSH re-assessed its options

Asian LNG markets had strengthened considerably− Both ExxonMobil and BG seriously interested in PNG LNG− Strong interest from other parties (as participant or buyer)

In January 2007, work ceased on pipeline project, focus turned to LNG

In April, Oil Search joined ExxonMobil to study Hides LNG

In July, Oil Search led Kutubu oil projects into the study

12 months later, ExxonMobil-led PNG LNG Project is FEED-ready− Validates the move to LNG− Paves the way for material growth for Oil Search − Promises a cornerstone gas development for PNG, underpinning GDP

growth

24

PNG LNG Project

25

PNG LNG Project Status

PNG LNG Project is poised to enter FEEDMilestones already reached:

Commercial alignment (JOA) amongst the Project OwnersInitial funding interests pre-Government back-in (Oil Search 34%) Unitisation and agreed redetermination proceduresMarket Representation Agreement & joint marketing of 6.3 mmtpaEndorsed Marketing Plan, Project rolled-out to buyers at GasTechPre-FEED work and updated capital costs; competing technologiesExxonMobil’s and Oil Search’s validation of FEED readinessAgreement on effective oil field interface with LNG

Closure on Gas Agreement issues still outstanding

26

Project Interest Determination

1.2%

1.8%

3.6%

17.7%

34.1%

41.6%

Share of FEED costs

MRDC / State

Nippon

AGL

Santos

Oil Search

ExxonMobil

JV Partners

Methodology agreed for Project Interest determination

Initial Project Interests will be established at FID, taking into account FEED work and actual LNG revenue streams

Periodic re-determination and equalisation processes established

Government has the right to back-in (22.5%) to Hides, Angore and Juha licences

Resulting State participation in PNG LNG Project post back-in, approximately 19%

26%

28%

30%

32%

34%

36%

FEED Interest

PN

G L

NG

Inte

rest

OSH expected post Government back-in final project interest

Oil Search PNG LNG Interest

27

PNG LNG Capex Estimate

ExxonMobil historically has delivered projects on time & on budget First phase capex (2008 – 2014) expected to be between US$10 –11bn (real 2007)Subsequent capex is several years out (additional Hides drilling, Juha development and potential LPG extraction if required) Juha timing depends on Hides and Angore outcomes & performance Further updates to capex estimates from EPC bidsFurther optimisation will occur during dual FEED

Source: ExxonMobil Analyst Briefing 5th March, 2008.

28

Schedule

Milestones: − JOA signed - March 08 − Gas Agreement target signing - end March 08 − FEED entry following Gas Agreement− Financing Information Memorandum – 4Q 08− Buyer support (HOA’s / SPA’s) – 2008/09− EPC bids – 2Q 09− FID - 4Q 09− Financial Close - end 09− Target first LNG cargo - end 2013

29

PNG LNGA Robust Project

PNG LNG Project

− LNG demand & prices remain strong

− Certified reserves are in place (2P - 9.5 TCF)

− Well-placed geographically to capture Asian markets

− Acceptable Project Economics

− Alignment amongst the participants

− Project compares well with regional competition

− Competing projects face their own hurdles and alignment issues

− Additional Oil Search value arises from our positioning

− Leveraging oil fields

− Future gas growth potential

30

Oil Search’s Unique Contribution

Oil Search is well positioned to play its part in PNG LNG delivery:

− Supportive Joint Venture participant

− In-country expertise, well connected, well respected

− Supporting ExxonMobil on:− Landowner Benefits Sharing Agreement− Business Development opportunities− Training and localisation− Providing in country project management skills

− Financing:− Coordinating key parts of the project debt finance process with

ExxonMobil − Co-ordination with Government for equity funding options

− FEED on gas-related Oil Field facilities− Optimise oil and gas synergy value within the gas delivery obligation

31

Economic Importanceto PNG

ACIL Tasman Report 6 February 2008− “Affects economy of PNG and its balance of trade situation

profoundly”− GDP will more than double − Oil & gas exports increase 4 fold− Up to 7,500 jobs in initial phase, 20% by nationals; 850 full

time positions, developing national workforce over time− Huge cash flows to Government – national and provincial -

and landowners through tax, royalties, levies and equity participation

Builds initial infrastructure for national gas developmentCreates an industrial precinct near Port Moresby Step change for PNG’s credibility internationally

32

Capturing PNG LNG

FEED entry in the near term is highest priority

− 1Q 2008

Thereafter focus shifts to achieving Sanction in late 2009 by:

− Securing market off-take

− Securing debt and state equity funding

− Achieving agreements on benefit sharing

Operator’s efforts will be complemented by Oil Search experience and skills

− Delivering Oil Search’s component of the upstream FEED

− Optimising value between the oil fields and gas fields as the oil fields operator within the parameters of the gas supply arrangement

33

Road to Sanction

Project fundamentals are positive:− ExxonMobil has publicly stated PNG LNG is one of 2

regionally important projects− JV is aligned on delivery − Project is economically attractive − Host country is supportive− Well positioned against competing projects− Strong LNG market

Challenges can be managed and include:− Cost control/optimisation− Benefits Sharing Agreement across a range of

community interests − Financing likely to be critical path

34

PNG LNG ProjectFinancing

Nigel Hartley : Chief Financial Officer

35

Financing Objectives

Ensure LNG debt funding is maximised and achieves:− Competitive terms− Minimal recourse to Oil Search− Alignment with State financing objectives− Offtake leveraged− No delay to financial close

Ensure LNG equity funding is met “optimally”− Preserve cash flow via focussed cash management and

allocation of funds− Leverage balance sheet via oil refinancing− Utilise hedging if required to protect cash flow and

optimise borrowings

Avoid recourse to the market

36

PNG LNG Debt Financing Plan

Project has settled on joint financing approach, led by a Finance Committee, co-ordinated by ExxonMobil, with key input from Oil Search and other parties based on respective skill sets and experience

Joint financing provides strong security package for lenders as ties up whole project under one borrowing entity, as well as fully co-ordinated approach to debt markets

Credit quality of rated sponsors improves blended project risk and should translate into lower borrowing costs, better covenants, reduced sponsor recourse and maximised borrowing

Extremely strong alignment across all JV partners will also present united front to lenders and optimise result

37

PNG LNG Debt Financing Approach

Joint debt requirement likely to be around US$9.9 billion nominal (OSH share around US$2.9 billion)

Potential funding sources will include classic ECA loans; untied ECA loans; bank debt, both covered by political risk insurance and uncovered; partner co-lending; and potentially debt capital markets

Updated view on capacity from advisors and sponsors, notwithstanding current credit crunch, indicates more than sufficient capacity to meet debt requirement

Majority of funding likely to come from “sovereign sources” not impacted by sub-prime; and transaction being in right region and funding the right commodity, supported by old fashioned repayment mechanisms - eg reserves and committed long term LNG contracts -further validates advisors’ view of capacity

38

PNG LNG Debt Financing Timeline

Joint Finance Plan now approved by LNG Operating Committee

Plan will be actioned with effect from 1 April, 2008

Approximately 18 months required to execute, including development of standard terms, presentations, and negotiation of documents with banks, PRI providers, and ECAs

In parallel will initiate rating agency discussions with a view to obtaining a rating in the event a debt capital market issue is pursued

Finance plan completion not strictly on critical path but interdependencies with marketing, contract and procurement strategy and environmental plan will drive to a 4th quarter 2009 final investment decision, with financial close to follow early in 2010

39

PNG LNG Equity Plan

Current debt strategy aims to maximise debt, leaving US$1.0-US$1.3 billion to be injected as OSH equity contribution

Based upon current modelling, OSH is targeting to meet equity requirements from existing cash (US$415m), oil cash flows, and “corporate” borrowing from oil base refinancing

Key levers include judicious cash management and oil price hedging, supported by cost optimisation and other levers

Modelling based upon reasonable oil price estimates (well below current forward curve). If necessary, cash flows may be secured by appropriate oil price hedging, which may also be utilised to enhance oil base borrowing

40

Oil Refinance

Current oil facility of US$42m following expiry of 4 year US$100m revolver on 31/12/07Target approximately US$400m facility to be negotiated on club basis around mid April, with closing around mid yearMarket soundings indicate adequate capacity despite current liquidity issues – Project is in the right region and the right industry with excellent long term bank relationshipsWhilst margins have increased, Oil Search’s reference point is a 2003 financing. When combined with lower US$ LIBOR base rates, expect improvements compared to existing termsIntent will be to optimise (“refinance”) facility after two years, if necessary with use of hedging to improve bankers’ oil reference price

41

PNG Oil Operations

Phil BainbridgeExecutive General Manager

- Operations

42

Providing Cash for Growth

Primary objective for oil operations:

To optimise PNG oil cash generation over the next 5 years to support PNG LNG Project funding requirements, by balancing work programmes, production outcomes and efficiency measures while maintaining our safety performance and reputation as a competent Operator

43

Oil Operations - Context

Excellent safety record

Good relationships with stakeholders (Landowners, Government, NGO’s)

Existing oilfields are mature (decline rate of ~20%)

− Track record of adding reserves and value− 2008 programme delivers 2P resource base “plus” and

is commercially robust− 2009+ programme to target incremental reserves in

excess of 2P

Significant cost pressures

− Need to reduce drilling costs and operating costs

The oil / gas interface creates value. Risks need to be managed

44

PNG Oil Field Reserves(OSH Net)

Oil Search’s own 1P and 2P estimates are similar to those independently estimated by NSA, although Oil Search believes there may be some additional upside from the 2008 well programme in Kutubu

During Strategic Review, undertook Life of Field (LOF) studies. LOF reserves are based on high graded contingent resource estimates which have not been included in the NSA 1P/2P reserves figures

65.757.937.7TOTAL

0.30.20.2Gobe Main

2.51.71.2SE Gobe

0.81.30.8SE Mananda

32.229.917.5Moran

29.924.918.0Kutubu

Life of Field2P1P

Oil Search (Risked)Netherland Sewell & AssociatesRemaining Reservesfrom 31/12/07

(mmstb)

PNG Gross Oil Production

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Oil

Rat

e (b

opd)

PNG Oil Actuals Base Hides GTE Fcst 2008 Program Life of Field Hides GTE Actuals Decline Before OSL

Oil Searchtakeover

operatorship

Added over45mmstbcompared

to Chevron

P50ContingentResources-

LOF

P50 2008Programme

HidesGTE

P50Base

46

Production Forecasting

Base forecast from existing wells & facilities. Assumes uncertainty in :•Reservoir behaviour•Well performance•Facilities efficiency

Incremental production from a “hopper” of opportunities (contingent resources) high graded on commercial and technical input

Forecasting tool statistically samples options taking into account dependencies

Incremental production based on a firm new capital. Assumes uncertainties in •Contribution•Schedule

P90P50P10

P90P50P10

P90P50P10

47

PNG Net Production (LOF)

20206090140Approximate Net Capex (US$M)

1 sidetrack

1 well

1 sidetrack

4 wells6 wells

2 sidetracks

9 wells

14 workovers

Activities

Kutubu

Moran

Gobe Main

SE Gobe

SEM

Hides GTE

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2008 2009 2010 2011 2012

NET P

rod

uct

ion

(M

stb

)

48

PNG Oil – Capex

Context:− Majority of oil business capex is drilling and workovers

− Need to reduce capex through drilling performance improvements, drilling cost reductions, new technologies and optimised rig strategy

− Transition continues through first half 2008

Initiatives:− Rigorous cost control of contracts, materials and logistics

− Improvements in contractor performance culture

− New technology:− Rig 103 and 104 with leapfrog capability− Hydraulic workover unit to provide lower cost workover and

“incremental” drilling capability− Rig strategy:

− Requirement for 2 rigs per year− Actively working with other Operators in PNG− Rig 103 and 104 preferred option:

− Efficiency gains − Standardisation benefits− Flexibility

49

PNG Oil - Opex

Focus areas for cost reduction:

Organisational Review:

− Remove duplication and minimise support costs

− Improve accountability and speed of decision making

− Promote ongoing localisation

Contractor Management:

− Continue to rationalise our contractor base to fewer longer term contracts

Work Programme:

− Continue rigorous discipline to ensure work is limited to that which is essential for production, reliability and reputation

PNG Controllable Costs / Barrel

0

1

2

3

4

5

6

7

8

US

$/

bb

l

Other

Marine

Telecommunications

Catering Services

Services & Fees

Fuels, Chemicals,Materials & Supplies

Transportation

Labour

50

Oil and Gas Interface

Context:

Oil Search remains operator of the oil fields and for the oil field component of the PNG LNG Project will manage:

− oil field FEED and construction

− on-going oil and gas operations

Oil Search will support ExxonMobil in certain areas:

− Community and Government interface

− Support for the Project Benefits Sharing Agreement (BSA)

− Secondees with relevant PNG planning and project execution expertise

51

Oil and Gas Interface

Value enhancing opportunities:

− Operating cost sharing

− Potential for reduced tax on oil production

− Incremental and revised pipeline tariffs

− Incremental condensate

− Abandonment deferrals

Risks to manage:

− Access to skilled staff (requires training plan)

− Landowner issues for the integrated project

− Simultaneous operations

52

Other Issues/Events

Extend Hides Gas To Electricity Contracts:− Porgera Joint Venture (PJV) keen to extend power supply contract beyond

2011

− Likely to maintain Hides Joint Venture and continue to sell gas to PJV power generation facilities

− Value upside and maintains stability of production operations during LNG construction phase

Abandonment Planning:− Gobe, SE Gobe and SE Mananda may require provisioning for abandonment

within next 5 years. Timing depends on:− Oil price, costs, LNG project, commercial terms

Facilities Life Extension:− Surveys have confirmed asset integrity of the pipeline, storage tanks and

production facilities

− 2007 programmes upgraded selected infrastructure (accommodation, supply base and mess facilities)

− Key focus for 2008/2009 is export loading system life extension project

53

Summary

Oil fields continue to generate strong cash flows, to be utilised for PNG LNG Project

Based on Life of Field studies, gross production expected to remain between 40,000 – 50,000 bopd through 2011, through both acceleration of production and new reserves

Capex required by oil fields expected to decline over next five years

54

Additional Growth

Austin MillerExecutive General Manager –

Commercial

55

Additional Growth Opportunities

PNG LNG Project delivery is Oil Search’s core growth driver

− A material, world class and organic source of growth for a number of years

The PNG LNG Project also sets the stage for additional growth opportunities and our approach to new investment

− Provides a base for second and third phase gas opportunities

− New opportunities need to be considered in a framework of being material for a US$5bn+ company

− Capital management approach dictates a disciplined approach on prioritising opportunities and optimising higher risk/high reward exposures

56

Additional Growth Opportunities

Incremental PNG gas aggregation and second phase gas commercialisation adds significant value− The highest value, lower risk opportunities for OSH− Builds on PNG LNG Project infrastructure − Builds on our existing strengths of licence positions, technical

understanding, capabilities and relationships− Prioritisation of opportunities to optimise long term gas position − Appraisal, exploration activity as well as acquisitions of static gas

Material and select exploration opportunities− Potentially high value, but higher risk exposure in PNG and

internationally − 2 main drivers

− Source of material incremental longer term growth − Financial discipline to deliver PNG LNG Project

− PNG LNG Project allows a different approach than most competitors

− Secure and then mature opportunities. Actively manage the portfolio through capex heavy PNG LNG Project development phase. Maintain material exposures

57

New Business

New Business activities tailored to complement core corporate strategy of growth through PNG LNG Project delivery

− “Equity is Gold” approach means Oil Search more a buyer than seller

Have reviewed opportunities to add pre-First Gas production

− There has been an active, but disciplined M&A search process

− Current environment challenging in face of strong competition for assets, high corporate share prices, value proposition against OSH value and prospects

− AGL sale process pre-emptive

Longer term potential to deliver growth through international expansion as PNG LNG Project progresses

59

Oil Search Vision

1st Phase Growth from Gas is secured by PNG LNG Project delivery

2nd Phase Growth from Gas adds material value

− From subsequent LNG trains/plants

− From gas diversification− Concurrent with pipeline completion− Capture smaller value projects− Other industries− Regionally − Including Domestic Gas projects

Oil Search will lead Phase 2 Growth from Gas and additional waves of gas development in PNG

60

Phase 2 Gas Growth:Strategic Review Activities

Strategic Review examined in detail the economic potential for secondary gas developments:

− Review of PNG gas prospectivity

− Economics across a range of field development and supply scenarios

− Configurations based on existing resources and identified prospects/leads

− Consideration of infrastructure synergies

− Need for alignment

58

Growth Through Gas

Bob MarcellusExecutive General Manager –

Gas

61


Results highlighted:− Growth could come from subsequent Project LNG trains,

new LNG, petrochemicals supply, fertilisers and domestic gas opportunities in PNG

− Most valuable is an expansion train for PNG LNG project

− Gas resources outside the PNG LNG fields provide a platform for growth from gas for Oil Search

− Future growth requires a combination of gas aggregation and consolidation, exploration & appraisal, marketing, and development initiatives

62


Strategic Review also highlighted:−Need for additional contractible gas

−Desirability of control (operatorship, preferred partners)

−Opportunity to add value by driving gas aggregation and consolidation

− Importance of government in infrastructure and broad gas development plan

−Need to deliver domestic gas development programmes

63

Oil Search will be the catalyst for Phase 2

Material value additions are available for Oil Search

Strong licence position across PNG

Gas resources outside PNG LNG dedications are significant (~400 mmboe net)

Opportunity to lead consolidation, alignment and E&A

Strong commercial and social drivers to deliver a range of industries

LNG infrastructure establishes accessibility

Experienced operator

Focused on aggregating gas and delivering multiple projects over time

Strong alignment with Government

Portfolio of partners and potential projects for PNG

64

PNG has a significant discovered gas resource base…

(Deutsche Bank Energy Seminars – March 2008)

Almost a third of the gas reserves are held in the Hides field (which has been producing a very small amount of gas since 1991)When the other fields that are earmarked to supply it are added in, the PNG LNG project accounts for approximately half of PNG’s discovered gas resource

Stanley0.1%

Barikew a4%

Pasca1%

Angore7%Juha

6%

P`nyang10%

Pandora A7%

Kutubu Area8.3%

Hides (Technical Reserve)

30%

Kimu4.8%

Elevala3%

Douglas3%

Elk3%

Ketu2.3%

Uramu2%

Gobe Area2%

Moran1%

Kuru1%

Koko0.1%

Bw ata0.3%

SE Mananda0.1%

Iehi1%

Pandora B2%

Hides (Technical Reserve) Kutubu Area AngoreJuha P`nyang Pandora AKimu Barikew a ElkDouglas Elevala KetuPandora B Uramu Gobe AreaMoran Kuru PascaIehi Bw ata KokoSE Mananda Stanley

Technical Reserves

0

1000

2000

3000

4000

5000

6000

Hid

es (T

echn

ical

Res

erve

)

P`ny

ang

Kutu

bu A

rea

Pand

ora

A

Ango

re

Juha

Kim

u

Barik

ewa Elk

Dou

glas

Elev

ala

Ketu

Pand

ora

B

Ura

mu

Gob

e Ar

ea

Mor

an

Kuru

Pasc

a

Iehi

Bwat

a

Tota

l Gas

Res

erve

s (b

cf)

PNG LNG Project (key fields)

PNG LNG Project

Technical Gas ~ 17,000 bcfTechnical Gas ~ 17,000 bcf

PNG LNG Project

Source: Wood Mackenzie Path Finder

PNG discovered gas reserves by field

65

150204225

771583829

1858

4844

390 269 325 274 229 243 227

35.8

0

1000

2000

3000

4000

5000

6000

7000

Oil

Sea

rch

Exx

onM

obil

San

tos

Inte

rOil

Cor

pora

tion

AG

L E

nerg

y

Talis

man

Min

istry

of E

con

Trad

e&In

dust

.

PN

G G

ovt (

MR

DC

)

Rift

Oil

PLC

Aus

tral P

acifi

c E

nerg

y

Nip

pon

Oil

Cor

pora

tion

Mos

aic

Oil

Cue

Ene

rgy

Res

ourc

es

Che

etah

Oil

and

Gas

Cai

rn E

nerg

y

Mer

rill L

ynch

Com

mod

ities

Tota

l Rem

aini

ng G

as (b

cf)

Technical Gas (bcf) Commercial Gas (bcf)

Source: Wood Mackenzie Path Finder (format amended by Oil Search)

Technical Gas ~ 17,000 bcfTechnical Gas ~ 17,000 bcf

PNG discovered gas reserves by company

Wood Mackenzie estimates of gas ownership in PNG

(Deutsche Bank Energy Seminars – March 2008)

6352

66

Angore

Barikewa

Uramu

Pandora

Juha

P’nyang

Kimu

Iehi Elk

Hides

Flinders

PPL234

Elevala

Douglas

Phase 2 Gas Growth:Resource Overview

PNG has substantial discovered gas resourcesGas for PNG LNG Project−Hides, Juha, Angore, Kutubu,

Moran, Gobe−Presently 9.5 tcf certified 2P−Approx 3 tcf Oil Search share−about 60% of OSH’s

discovered gas resources

The Company has ~2 tcf of discovered gas outside PNG LNGPNG has a further est. 3-4 tcf of discovered gas resources spread across many fields & ownersGeographic & company ownership spreads leads to many consolidation opportunities & challenges

67

Western Forelands Hub

Western Corridor & Forelands gas hub provide opportunities for cluster developments (smaller fields) & long-distance connection of more remote resources

Kimu (0.8 tcf)− OSH @ 60.7%

Farm-in & consolidation opportunities in nearby licenses

Gas aggregation from other fields & producers − Douglas− Elevala

Western Corridor may stretch up to P’nyang

Potential for pipeline to Daru

Angore

Uramu

Pandora

Juha

P’nyang

Iehi Elk

Hides

Flinders

PPL234

Elevala

BarikewaKimu

Douglas

68

Eastern Forelands Hub

Established gas that could be material in LNG planning or domestic gas use

Could use PNG LNG infrastructure, if available

Barikewa (~800 Bcf)− OSH @ 42.6%

SE Gobe (small)− Not part of PNG LNG

at present

Opportunities with other producers − Elk (?)− Antelope (?)

Angore

Pandora

Juha

P’nyang

Hides

Flinders

PPL234

Elevala

Kimu

Douglas

Uramu

Iehi Elk

Barikewa

SE Gobe

69

Offshore Hub

Offshore fields could tie into PNG LNG pipeline, if available or have standalone facilities

Established gas at Uramu (0.4 tcf)− OSH @ 49.5%

Pandora (~1 tcf)− 3D seismic

scheduled to firm up resource size

Near Field Exploration opportunities to be tested− Flinders− PPL 234− APPL 293

Angore

Juha

P’nyang

Iehi Elk

Hides

Elevala

Barikewa

Kimu

Douglas

Flinders

PPL234

Pandora

APPL293

Uramu

70

Value of Non-Project Gas

PNG LNG 3rd Train Other LNG Non-LNG

Pro

ject

Re

turn

(%

)

Highest value from PNG LNG 3P upside scenario:− Significant field, pipeline & plant synergies obtained

Returns from Non-Project LNG fields highly variable depending on combination of assumed gas resources and infrastructure access outcomes

Subsequent LNG offers highest net-back values, however, other gas commercialisation opportunities can offer attractive returns and potentially earlier delivery (enhances NPV)

Targeted exploration & appraisal programme 2009 plus to augment existing resource base

71

Developing Domestic Industry

Smaller, non-LNG developments create interim value and diversity for PNG and Oil Search

Fundamentals are similar−Bring the reserves together

− Acquire/consolidate interests in key fields on commercial terms to align interests

− Common operator in Oil Search− Gas aggregation through gas purchases

−Prove more Reserves− Further exploration & appraisal

− Barikewa, other Eastern Corridor fields− 3D seismic and drilling – Offshore Corridor− Kimu, Elevala, Douglas, other Western Corridor fields

−Align with Government & others on infrastructure and domestic gas development needs

−Progress domestic opportunities, in parallel with high value export opportunities

72

Phase 2 Gas Growth:Resource Overview

Hides Gas To Electricity for Porgera

−Needed for Porgera mine life extension

Petrochemicals-methanol/DME

− US$300-500m NPV likely depending on gas source

Daru gas development & infrastructure

− Port and infrastructure may include gas pipeline & developments

Power generation in POM and elsewhere

− Smaller projects catering to the needs of communities & industry

73

The Next Steps

LNG will dominate value and longer term

Oil Search will develop a coordinated business plan with other key stakeholders for delivery of successive projects

− Review reserves opportunities

− Review early infrastructure investment

− Mature development options for a range of projects

Finalise investment strategy for next 4 years leading to multi “in country” developments from PNG LNG infrastructure spine

Frame Joint Venture Agreement(s) with aligned parties

74

Exploration and Organic New

Business

Keiran WulffExecutive General Manager –

Business Development

75

Summary

Portfolio optimisation across all exploration assets− Divestment of less material MENA assets as packages of

production/exploration to attract maximum interest− Focus on assets that have material potential impact on OSH

− Prudent farm down of exploration over-exposures in PNG− Likely packaged to attracted aligned partner

− Acquisition of new areas linked to regional strategy and materiality− PNG - increasing focus on gas build complemented with near facility oil

exploration & occasional “paradigm changers”− New Business - fewer but more material positions in proven petroleum

systems−Stronger “entrepreneurial trading” approach to manage costs

Single exploration budget pool allocated on basis of value and strategic impact on OSH− Centralised control − Competition for capital

76

Context

PNG LNG will command capital above exploration and new businessOSH’s last 2 years’ exploration results have been disappointing−5 small discoveries in MENA but lacking materiality for OSH size and

direction −remaining potential in some areas small while other areas highly

attractive−PNG well costs very high, drilling challenging with limited success

Despite large gas reserves already discovered, PNG has considerable remaining gas potential −OSH has identified 3 hubs plus additional frontier exploration areas

Strong international demand for assets in MENA region−OSH has a solid 1st generation portfolio built in highly competitive

environment−Some OSH assets valued more highly by regional players

OSH has strong international operational credibility & regional knowledge from which to selectively pursue material opportunities

77

Strategy - Exploration

PNG

1. Gas build− Build on existing gas portfolio for

additional major growth controlled by OSH

− 3 hubs identified along development corridor

−Central Fold belt, Eastern Forelands, Offshore Gulf of Papua)

− Seismic & studies 2008− Active drilling 2009+

2. Oil Exploration− High grade remaining prospects in close

proximity to infrastructure− Consider deeper Jurassic plays− Farm down high equity oil exploration

3. Frontier “paradigm changer”− Generally PNG exploration focused few

plays− Potential to open up new areas with

selective, albeit high risk, drilling− Large hinterland structures reliant on younger

reservoirs− Offshore fans and toe thrusts− Foreland extensional fault blocks

MENA & INTERNATIONAL

1. Existing acreage optimisation− Material opportunities adjacent to fields

e.g. Yemen Blocks 3 & 7− Pre-drill POS can be realistically >20%

through technology or quality of acreage, e.g. Yemen 3, 7. Libya Area 18, Kurdistan

2. World class petroleum systems − manageable above ground risk with very

large potential, e.g.. Kurdistan − New plays with large, albeit higher risk

upside & ability to farm down exposure e.g.. Tunisia deep gas plays

3. Actively maintain and build on core regional relationships− Key strategic advantage of OSH is ability

to operate at a local level

78

PNG Gas Growth

Strong licence position along the infrastructure corridor in each of the:

• NW Highlands Hub

• Forelands Hub

• Offshore Hub

1+TCF

0.5 - 1+TCF

0.3 - 2+TCF 0.2 -0.6+TCF

Pursue multiple play types with seismic control (typical prospect size)

79

MENA Permits 2003 – 2008Likely evolution

Sana’a Office

Dubai Office

Block 35

Block 15

2003

Concept to provide revenue through organic success to support production pre original gas project−LNG world different in materiality & capital requirements

−Mixed 1st generation exploration

−Time right for portfolio refocus

Solid portfolio of 15 licences built from scratch in ~5 years against hyper-competition−Portfolio is value accretive based on assessed value & peer comparison but

− Discoveries in Egypt and production in Yemen not material enough

− Some licenses considered immaterial for OSH going forward but require ongoing capital investment

− Some areas still have significant upside that can be evaluated & derisked

OSH is well respected in MENA as competent operator with strong local relationships

East Ras Qattara

Mesaha

Sana’a Office

Cairo Office

Dubai Office

Tajerouine

Le Kef

Area 18

Area A

Bina Bawi

2007Block 3

Block 7

Block 35Block 43

Block 49Block 74 Block 15

Sana’a Office

Dubai Office

2008Block 3

Block 7

Tajerouine

Le Kef

Area 18

Bina Bawi

Kurdistan

80

MENA - Divestment

Consideration was given to full exit versus high grading approach

Following extensive external review, decision made to proceed with high grading based on:

−Quality and potential of parts of the portfolio to deliver a material diversified revenue stream vs. PNG

−Need for growth opportunities post the delivery of PNG LNG alongside other PNG gas opportunities and PNG oil exploration

−Acknowledgement of the value of relationships developed

−Long lead times inherent in new business activities

−Preference to grow by exploration vs. large scale acquisition

81

MENA Divestment Process

Composition of divestment portfolio (still to be finalised) will likely include:− Exploration/Production - Yemen− Exploration (near field and frontier)/development/production – Egypt− Farm down frontier acreage – Tunisia− Possibly Libya

Extensive interest in portfolio since “divestment announcement”

− >40 companies expressed interest− Companies will be high-graded with 20-24 selected for data room access

Advisor appointed – Harrison Lovegrove & Associates− Invitation letters to interested companies out end March − Information Memorandum being finalised

− data rooms planned in Dubai during April to early May

− Anticipated transaction effective date: Mid 2008

Operatorship transition through Q3 2008Estimated completion date: early 4Q 2008

82

Strategy – New Business

Dedicated team identifies candidates that meet key investment criteria

Utilise strong relationships & operating credibility to acquire positions− Proven world class petroleum systems but with challenges that can be managed by OSH

expertise (i.e. operating credibility/developing country expertise/politically challenging)

− Risks need to be manageable

Develop strong entrepreneurial approach with rapid turnover of assets− A more ruthless approach to trading built on solid technical & commercial evaluations

Delineation of core areas with following attributes:− Proven petroleum system with material hydrocarbon potential

− Gas close to infrastructure or regionally strategic locations

− Manageable above ground risks

− Opportunity to de-risk technically ahead of drilling through 3D or other technology

Whole portfolio ranking of opportunities− No urgent requirement with strong 2008 – 2010 programme

− Coordinated approach to fund highest quality opportunities

83

OSH 3 Year Forecast Drilling Programme

More balanced drilling programme – less lumpyGreater lead-up time for deriskingManageable budget yet material opportunities

m j j a s o n d j f m a m j j a s o n d j f m a m j j a s o n dPNG

NW Paua

offshore

YemenBlock 3Block 7

LibyaArea 18

TunisiaTajerouineLe Kef

KurdistanBina Bawiprovisional

Man AtticBarikewa

PPL239onshore

Cobra

Wasuma Wage?

Iwa?

PPL244

3

FlindersPPL234

2

1 optional

1 2

1

2008 2009 2010

Oil Search 3 Year Forward Drilling programme forecast - Exploration

Country Area

84

Retained Exploration Portfolio Potential

US$80/bblUS$60/bbl

Key criteria in determining retained areas include:− Possibility of material discoveries with nearby analogues− Potential to substantially increase POS in immature but high

potential acreage− Untested but realistic plays− Proven petroleum systems− Able to utilise and build on OSH core operational expertise− Maintains core relationships

85

Conclusions

Reduced yet focused spend on more material opportunities

Greater focus on portfolio management & trading

− PNG & MENA

Increased internal competition for funding

− Allocation on value and strategic basis

− US$80-100m total exploration budget/yr for next 3-4 years

Increasing focus on:

− PNG gas exploration

− Material new plays in proven hydrocarbon systems

MENA divestment process targeting end 2Q 08

86

Strategy Summary


87

Oil SearchThe Next 5 Years

The Company at a cross roads –− Potential to multiply value by delivering PNG LNG and

Other Gas Opportunities

Three distinct phases over the next 5 years− Phase I – PNG LNG to FID 2008-09

Cash conservation , positioning− Phase II – PNG LNG construction 2010-13

Cash consumption, progressive delivery− Phase III – First Gas and Beyond 2013-

The legacy asset arrives

Shifting focus of priorities over period

88

The Immediate Focus

Phase I – PNG LNG to FID 2008-2009− Support for Operator

− Oil Search Specific value delivery

− Oil operations synergies, oil fields gas FEED

− Government and landowner management

− Financing

− Reorganisation to deliver

− Positioning for further growth

− Other gas developments, lay the foundations

− Measured exploration, with active trading

− Cash conservation – Strong competition for capital

89

The Medium Term

Phase II – PNG LNG Construction 2010-2013− Massive impact on PNG− Oil Search specific value delivery

− Oil fields gas construction− Manage stakeholders/landowners− Mitigate impacts on oil business

− Further growth− Mature other gas options for 2013 delivery− Measured exploration – some value delivery− Prepare for legacy asset contribution – A New

Direction?− Major Cash Consumption

90

The Long Term

Phase III – First Gas and Beyond 2013 –− Further growth opportunities

− Debottlenecking

− New train development

− Other gas developments off new infrastructure

− Major cash generation – Legacy Asset Delivery – A New Oil Search

91

The Focus in 2008-2009

Reorganising Management and Teams for Specific Value Delivery− PNG LNG Delivery Group

− JV support

− Oil operations synergies and interface

− In-country landowner management

− PNG LNG Financing Group

− Debt and equity financing co-ordination

− Gas New Business Group

− Concentrate on new gas developments

− Corporate reorganisation to “Fit for Purpose” Group based on new priorities

92

Overall Conclusions

Latent value in existing portfolio of assets is sufficient to deliver superior value delivery to shareholders over the next 5 years− Opportunities are well defined

− Challenges can be managed

− Company is well positioned to deliver

“It is Time”

93

Questions


080319 strategy review total final - oil search · 2017. 1. 22. · 5 2002/03 review ¬oil search...

Documents