Global & Regional Scene Dynamics

Peter ParryPartner – Bain & Company

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

UK ROLE IN A ‘LOWER FOR LONGER’ O&G WORLD

International Festival of Business (IFB2016)

20 June 2016

Peter J. ParryDirector: Head Global Oil & Gas ConsultingBain & Company, Inc. | 40 Strand | London | WC2N 5RW | United Kingdomtel: +44 20 7969 6300 fax: +44 870 731 8300 mobile: +44 7733 302 300 mailto:Peter.Parry@Bain.com | web:www.bain.com | www.linkedin.com/in/Peter-Parry-Bain-Co

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

WHERE IS OIL PRICE HEADING? SUPPLY DRIVEN SCENARIOS

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

MACRO ENERGY PICTURE AND THE ROLE OF GAS

• Global demand growing 1.8-2% pa over next 20 years, fastest growing fossil fuel

• Ample gas supply, reserve and resource potential; North American shale, offshore East Africa, Mediterranean, Australia, Russia, Qatar and Iran

• Growing regulatory support post COP 21

• Falling gas, LNG price; intense G to G, G to coal and G to renewables competition

• Disruptors; unconventional asset impairment, European LT gas contract arbitration, LNG oversupply

SHARE OF PRIMARY ENERGY GLOBAL GAS

Source: BP Energy Outlook January 2016

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

2020 Oil Price Outlook – The Supply Side Variables

WHERE IS OIL PRICE HEADING? SUPPLY DRIVEN SCENARIOS

• OPEC production growth 2014-2020 2 to 6 Mbpd• Deep water production growth from 8.8 Mbpd in

2014 to 10.4 or 11.6 Mbpd by 2020• Excess oil inventory clearing end 2016 to 2019• The marginal barrel U.S. tight oil or deepwater

• Oil demand shows signs of growth (1-1.5% pa)

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

“New Normal”

“Trouble then

Recovery”

“Return to the Old

Paradigm, but not

Old Price”

2020 Oil Price Outlook

WHERE IS OIL PRICE HEADING? SUPPLY DRIVEN SCENARIOS

< $50/bbl $60-70 $75-85

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

LOW OIL PRICE WEAKNESS NOW DRIVING PROFOUND CHANGE

• Capacity contraction, headcount reductions 10-40%, CAPEX 25% and Opex 12% YoY reductions 2014-16

• Challenged, below breakeven operational delivery, in places asset productivity up by as much as 15% (UK North Sea)

• ‘New Economics’ for field development and field production fragile, not yet resilient

• Gas prospects and gas markets very changed, M&A remains difficult and activity type shifting from long to short cycle

• For country's and regions its about being competitive

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

IMPLICATIONS: BEING COMPETITIVE

Note: * – Breakeven price assumes a 10% return, and NPV of 0 Source: IEA World Energy Outlook; EIA International Energy Outlook; EIA Annual Energy Outlook; Morgan Stanley

0

25

50

75

100

$125

Breakeven price*

(per Boe)

OPEC, Middle East,

and AfricaRussia

and CIS

4020 60 80

Euro

pe

Asia conv

S. Ame-rica

(Non-OPEC)

Asia DWGTL

CTL

NA c

onv

Aus and Pacific

EOR

Arc

tic

Global oil production supply curve

November 2014 Brent price

Can

adia

n O

il San

ds

VZ e

xtra

hea

vyN

A D

W

Eagl

e Fo

rd

Permian tight

Bakken

SA D

W

Production (MBD)

June 2016 Brent price

12

3

1. Price fall2. Drive to lower cost3. Reprioritize portfolio

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

US PRODUCTION CONTRACTING, VISIBLE 2016 DECLINE

WEEKLY U.S. FIELD PRODUCTION OF CRUDE OIL (THOUSAND BARRELS PER DAY)

Source: Baker Hughes, EIA

5,000

6,000

7,000

8,000

9,000

10,000

Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016

03 June2016: Production: 8,745

Kbbl/day

PEAK 03 July 2015: Production: 9,604

Kbbl/day

• Global O&G industry keenly watch US oil production level

• Oil Rig Count: 328units in mid May 2016

- 1,609 in Oct 2014 - highest figure since reports started

- Average number of oil rigs in 2015: 759

• Natural Gas rig count: 86 units in mid May 2016

- All-time high of 1,606, reached in late summer 2008

- Average 2015 natural gas rigs: 226

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

BEING COMPETITIVE: U.K. OIL & GAS SECTOR REQUIREMENTS

REDUCED COMPLEXITY

COST EFFECTIVE AND EFFICIENT

DIGITAL INNOVATION

STANDARDISE AND INTEGRATE

SHIFT TO SHORT CYCLE

Examples: Aerospace, Engineering, Power, Retail, Insurance and

Hospitality sector disruptors

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

INTEGRATION ALSO MEANS LINKING GAS WITH RENEWABLES

• Shell’s New Energies Division build from pre-existing hydrogen, biofuel and power R&D

• $1.7 billion capital employed, c$200M annual capital expenditure to be run within the Integrated Gas division

ENI focus on Solar, alongside upstream operating business in Africa

Total acquisitions SunPower, $1.4bn, Saft Groupe $1.1bn creating New Energies Division, $500m pa capital budget and further M&A

Statoil reshuffle to New Energy Solutions Division, $200m energy investments fund

BP move renewable assets (mainly wind and bio fuels) under new Alternative Energy and EVP regions

A New Green Energy Era

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

IMPERATIVES FOR OFSE INDUSTRY

Refocus customer value proposition

Reprioritize business

development

Transform cost structure

Redefinesub-segment participation

Shorter term Longer term

• Identify participation model for more/less attractive industry segments

• Strategically drive M&A

• Eliminate complexity• ‘Lean out’ the entire

organization• Lean supply chain• Simplify decision

making and increase responsiveness

• Become low-cost and agile

• Strengthen low-cost, standardized products & services

• Rethink R&D /NPD /technology strategies

• Lead in digitally-enabled technologies

• Reorient service delivery towards greater collaboration and speed

• Different OFSE industry segments are differently attractive

• Prioritize segments that are more resilient or have greater upside

31 2 4

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

IMPERATIVES FOR OPERATORS

Wave 3: Restructuring

Typical savings 5-15% 15%+

Substantial investment required; can be done in parallel with wave 2

25%+

‘Hardware’ simplification

•Strategy redirect•Future of exploration•M&A•Restructure businesses (super buckets)

•Divest diluting businesses

•Blueprint for radical change

•Energy mix alignment

“Necessary but not sufficient” “Complexity reduction and productivity gains”

@UKTIevents#IFB2016

Global & Regional Scene Dynamics