Presentation to MIT LMPSeptember 2007

Energy at a Crossroads

McKinsey and Co.

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Today’s discussion

• Where are we headed in the world’s energy supply anddemand balance (focusing on petroleum)?– Demand growth led by emerging economies– Supply concentration in a few resource holders– Increased volatility– Future geopolitical and technical challenges

• Why will this matter to engineers and manufacturers?

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2

0

10

20

30

40

50

60

70

The petroleum industry has evolved through several eras

Source: EIA

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 20042002 2006

U.S. refiners crude oil acquisition costUSD/bbl

4. Recent pricesurge(1999-now)

3. Oil price bust (1983-98)2. Oil crisis andprice boom(1973-82)

1. Pre oilcrisis(Pre1973)

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0

10

20

30

40

50

60

70

The petroleum industry has evolved through several eras

Source: EIA

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 20042002 2006

U.S. refiners crude oil acquisition costUSD/bbl

4. Recent pricesurge(1999-now)

3. Oil price bust (1983-98)2. Oil crisis andprice boom(1973-82)

1. Pre oilcrisis(Pre1973)

• High demand growth in US and Europe driven bytransportation and generation markets

• Easy access to Middle East reserves• Slow growth in indigenous production in US/EU• Industry dominated by the ‘seven sisters’ (Exxon,

BP, Shell, Mobil, Texaco, Gulf and Chevron)

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0

10

20

30

40

50

60

70

The petroleum industry has evolved through several eras

Source: EIA

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 20042002 2006

U.S. refiners crude oil acquisition costUSD/bbl

4. Recent pricesurge(1999-now)

3. Oil price bust (1983-98)2. Oil crisis andprice boom(1973-82)

1. Pre oilcrisis(Pre1973)

• OPEC countries established tight control• Majors stimulated non-OPEC production by

developing North Sea and Alaska (1970s)• OPEC cartel formed as resource holders

nationalized oil assets and becomes industry pricesetter

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0

10

20

30

40

50

60

70

The petroleum industry has evolved through several eras

Source: EIA

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 20042002 2006

U.S. refiners crude oil acquisition costUSD/bbl

4. Recent pricesurge(1999-now)

3. Oil price bust (1983-98)2. Oil crisis andprice boom(1973-82)

1. Pre oilcrisis(Pre1973)

• Oil consumption per unit of GDP decreased50% from 1970s-80s due to switching from oil togas and increasing vehicle fuel efficiency

• Majors started gaining access to reserves informer Soviet Union (1990s)

• New technologies for deepwater, and 3-Dseismic introduced (1980s)

• Competition between OPEC nations resulted inover-supply and reduction of investment inhigh cost countries

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0

10

20

30

40

50

60

70

The petroleum industry has evolved through several eras

Source: EIA

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 20042002 2006

U.S. refiners crude oil acquisition costUSD/bbl

4. Recent pricesurge(1999-now)

3. Oil price bust (1983-98)2. Oil crisis andprice boom(1973-82)

1. Pre oilcrisis(Pre1973)

• Rapid growth in Asia energy demand – China and India• Regions such as North Sea and North America passed peak oil• Growth of global LNG – making gas supplies more accessible

to global markets• Mega-mergers*’ to enhance access to high quality unexploited

fields and create value through lower cost structures and/orbetter capital discipline, creating the Super-Majors of today

• Emergence of ‘national champions’ – NOCs with internationalambitions

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Since 2003, the industry has been in a ‘fly-up’ period characterized bylow spare capacity

Oil demand and production capacity

4.64.44.13.93.73.53.02.7

2003 2004 2005 2006 2007 2008 2009 2010

Spare production capacity

Source: EIA; McKinsey analysis

Production capacity

Demand

75

80

85

90

95

2005 2006 2007 2008 2009 2010

10.8

2003 2004

1.9%CAGR

Million bopd

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As a result, oil prices rose dramatically to a new range…

Source: CRA, Bloomberg, NYMEX, EIA, Platts, McKinsey analysis

WTI crude oil price and NYMEX forward curves, nominal pricesDollars per barrel

Historically. . .

• Forward prices havehad the tendency to“revert to the mean” of~20 USD/B

. . . but today

• The overall price of oilhas risen to, and heldat, historically highlevels

• For now, the slopeof the forward curvesreflect a belief that oilprices have moved to anew price band

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10

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…with a small but vocal group raising the possibility that it could go muchhigher

0

50

100

150

200

250

300

350

400

Jan-00 Sep-00 May-01 Dec-01 Aug-02 Apr-03 Dec-03 Aug-04 Apr-05 Dec-05 Aug-06 Apr-07

Ixis CIB investmentbank

Osama Bin Laden

Matthew Simmons

Goldman Sachs

T. Boone Pickens

WTI Crude Oil Price, nominal pricesUSD/B

NYMEX futures

US oil majorsconsensus

If one takes into account the level of previous oil shockssuch as in the 1970's, we don't think a price level of

$380 per barrel is out of the question."

“Osama bin Laden has argued that the price of petroleum — even at $40 barrel —is so low as to constitute extortion. It is kept at this artificially deflated price throughU.S. coercion and Saudi complicity. Osama argues that the fair price of oil issomewhere above $200/barrel.” --National Review

"Oil is far too cheap at the moment," says Mr Simmons."The figure I'd use is around $182 a barrel. We need to price oil realistically tocontrol its demand. That is because global production is peaking."BBC News

'We believe oil prices have entered the early stages of a super-spike period,'said analyst Arjun Murti, who raised his price range to $50-105 a barrel from$50-80.

"I think people are scratching their heads as to whether the world will accept $60like it did $50...You could go to $70, but at some point it's going to cost on thedemand side. Sixty may slow everything down."

Source: CRA, Bloomberg, NYMEX, EIA, Platts, McKinsey analysis

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Key trends

Going forward, we foresee a challenging period for the industry

Availability andaccessibility ofresource

Industry coststructure

Significance ofOECD marketsrelative to Asia

Demand growth

Dem

an

dS

up

ply

Key driving forces

Technology &capabilities

Impact on industry dynamics

• Demand growth relative to supply will increase pricevolatility as spare capacity diminishes

• Growth of LNG and pipeline gas will eventuallymake gas a commodity

• Non-MRH entities will need to increasingly accessmarginal cost opportunities and increase price riskexposure

• A significant portion of trade flows may be regulatedby G-G relationship instead of open contract

• Discipline with OPEC countries will influence theircollective control over supply

• Lowered spare capacity, coupled with demandfluctuation, may result in higher price volatility

• Technology breakthrough will bring possibility of thenew supply and improved cost efficiency

• Access to reserves will depend on meeting socialand political objectives of resource holdingcountries

• Oil demand growth will accelerate inthe next 15 years and gas demand willgrow faster than oil

• Increasing need to compete intechnically challenging environmentwill likely drive up industry cost

• Reserves will increasingly concentrateto OPEC and few other countries

• Low industry CAPEX investment in the80s and 90s resulted in low sparecapacity

• High oil price will encourage theemergence of alternative energies

• Aging talent pool may be a limit tosupply growth

• Many resource-holding countries havesignificant geo-political risks

• Growth of Asia market will likely give NOCs ofChina and India bargaining chips in theirinternational expansion

• Continued significance of OECD countries willenable super majors to remain the key intermediarybetween markets and resource holding countries

• Such strong demand growth is mainlydriven by China, India, and otherdeveloping countries

• OECD countries will sustain asignificant portion in global demand

Geopolitics

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We are not running out of hydrocarbon resources soon…

* Based on 2005 production of 29 billion barrels

Source: BP Statistical review; USGS, S.A. Holditch; Rand corporation

2,200

1,400

1,000

500

300

400

140

110

90

60

40

Cumula-tive pro-duction

Proven reserves

IOR/EOR

Yet to find oil

Tar Sands

Oil Shale

Non-OPEC

OPEC and Non-OPEC ResourcesBillions of barrels

900 1,300 1,600 1,900

600 OPEC

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2005 proven reserves

…but today’s global reserves are concentrated within a few resourceholders with political risks

* Including tar sands and heavy oil** 2003 data

*** EIU Business environment risk below 6 or Viewswire risk rating C or below

Source: Oil and Gas Journal; EIU; Viewswire; team analysis

264,310

178,790

132,460

115,000

101,500

97,800

79,729

60,000

39,126

35,876

21,371

18,250

15,270

12,882

11,350

108,835

185

160

151

112

98

75

71

62

990

1,680

971

910

241

214

192

Country

Saudi Arabia

Proven oil reservesMMbbl

Russian Federation

Mexico

Qatar

Iraq

Iran

U.S.

Nigeria

United Arab Emirates**

Venezuela

Libya

China

Algeria

Other total

Top 15 = 92%of oil reserves

70% ofreserves in

OPECmembers

Canada*

Russian Federation

Iran

Saudi Arabia

United Arab Emirates**

U.S.

Nigeria

Algeria

Iraq

Turkmenistan

Malaysia

All others

Indonesia

Kazakhstan

Venezuela

Qatar

Proven gas reservesTCF

Top 14 = 84%of gas reserves

52% ofreserves in

OPECmembers

Kuwait

OPEC members

Risky country***

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0

5

10

15

20

25

0 20,000 40,000 60,000 80,000 100,000 120,000

Producers outside of OPEC will need to access more marginalsources of supply to compete

Depleting conventionalresource base pushes nonOPEC players into alternativeresource ventures with highercosts

OPECDollars per barrel; WTI price basis

Venezuela

UAE Algeria

Kuwait China

USA

Mexico

Iran

Angola

Malaysia

Iraq

GOM

FSU

Brazil

CanadaHeavy

MBD

US stripper wells

Ira

q

SaudiArabia

Kuwait

Algeria

Iran

VenezuelaHeavy

Russia

NigeriaAngola

Brazil

TarSands

GTL

SaudiArabia

Capital recovery

Variable costs

2007 demand

Canada-Conventional

UKNorway

Source: McKinsey analysis

Existing capacity(variable cost)

New capacity(full cost)

2002 demand

Maturing asset basecontinues to shiftplayers to the right handside of industry costcurve

Marginal costs

2002 ESTIMATE

Changes since 2002:• High cost inflation,

particularly in OECDand technologicallycomplexenvironments

• Unit cost increasedue to smaller fieldson line

Contrast between lowcost and high costplayers haveincreased

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Future challenges will increase the cost of supply…

Size of exploration discovery isdecreasing

1

4044

21

1215

1999 2000 20032001

Global exploration discoveriesBillion boe

Source: Infield; IHS; team analysis

2002

Projects are more commercially and technically complex

3

24 22

7056

622

1990–03 2003–13

Distribution of project complexity%

High

Moderate

Low

Source: Goldman Sachs; team analysis

100% = 22 27

Tax rates are increasing2

53 58

2004 2013

Average tax rate

Source: Wood MacKenzie; team analysis

Growth is likely to come fromunconventional breakthroughs

5

Unconventional Resource basebillion boe

Heavy crude

Arctic gas

Deep gas

UDW

Hydrates

GTL

2,000

250

10-20

20-50

50

10-30

Source: Press research

Fewer Openings4

Source: Wood MacKenzie; team analysis

8

1747

71

45

12Open

Controlled access

Not Open10

33

15

12

25

6

UAE

Saudi

Mexico

Iraq

Iran

Kuwait1993 2003

Distribution of reservesBillion boe

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…but long-term pricing may be constrained by the price ofalternatives

• Most alternative fuels are economical at less than $50/bbl• Initial capital investments can be >$1 billion and high oil prices must be

sustained for 10-20 years to earn reasonable return on investment

ESTIMATES

Sources: Press releases; team analysis

With currentcost inflation

Withoutsubsidies

Ultra deep-water

20 25 30 35 40 45 50

Gas to liquids

Biodiesel

Oil shale

Coal-to-liquids

EthanolBrazil (sugar cane) U.S. (Corn)

?

$80 (EU)

Today

In 10years

China U.S.

Cellulosic biomass ?

Tar sands

New EOR

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Chinese GDP, 1960-2005USD trillions*

* Calculated using 2003 prices and exchange rates

Source: World Bank

CAGR 1978-2005

9.4%

Top economies by GDP, 2005USD Billion*

CAGR 1960-1977

5.2%

China’s economy is the fourth largest in the world

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1960 1970 1980 1990 2005

2,110

Italy

China

1,723

2,193

France

UK

2,782

US 12,455

Japan 4,506

Germany

2,229

Start of economicreforms

1. Security of energy supply

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* 2003

** 2000

Source: China Statistical Yearbook 2004; Euromonitor (May 2005); GfK Basiszahlen 2005; U.S. Census Bureau (2004)

• Shower

• Air conditioner

• Color TV

• Computer

• Automobile

1990 1995 2005

Per capita floor space in m

• Urban

• Rural

13.7

17.8

16.3

21.0

26.1

29.763.0**

ChinaU.S.2004

Per 100 Urban households

China has a rapidly improving standard of living, but still has a ways to go toreach Western standards

35.8

0.1

20.0

0.0

1.7

38.3

8.1

89.8

5.1

2.3

72.7

80.7

134.8

41.5

3.4

99.7

77.5

99.6

72.8

93.2

Over 440MM peopleare expected toachieve middleclass status (over$13,500 USD inincome) by 2010

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18 Sources: The Observer: "China Syndrome" (May 2004); The Asian Wall Street Journal: "State Control" (April 2004)

• Lack of infrastructure for refining oil

• Long-term underinvestment in the coaland electricity industries

• 22 regions have suffered from frequentpower cuts in 2004 (16 in 2003)

• Institutions (e.g., hospitals, hotels,schools) have to buy backup generators

• Chinese factories face energy rationing

• Ports, refineries, and pipelines are unableto cope with the rising demand for oilproducts

• China now importing 50% of oil consumed

• Energy demand soared up to2.11 trillion kilowatt hours in2004 (12% increase from 2003)

• 75% increase in car ownershipover the past 10 years

• Consumers fail to constraintheir energy consumption

High energy demand Low energy supply

Energy supply is becoming a constraint to growth

Other infrastructure (e.g., rail, ports) also partially

unsatisfactory, but energy currently the most important

problem

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The Chinese National Oil Companies have embarked on anaggressive international search for oil

Source: Literature search, Wood Mackenzie

Existing contracts

CNOOC

Petrochina

Sinopec

Possible contracts

CNOOC

Petrochina

Sinopec

Ecuador• Exploration

of Block 11

USA• Unocal

acquisitionby CNOOCstopped

Canada

Cananda• MEG Energy

Australia• North West shelf

Algeria• Zarzaitine

Chad

Kazakhstan• Aktobe• North Buzachi

Turkmenistan• Gumda

Myanmar

Uzbekistan• Bukhara-Khiva

Russia• Orenburg

Niger• Risk exploration

Nigeria• Stubb creek

Russia• Possible Yugansk

acquisition by CNPC

Saudi Arabia• Ar-Rub‘ Al-Khali

Iran• Yada-

varan

Azerbaijan• K&K• Gobustan

Syria• Gbeibe

Algeria• Adrar• Block 350 and

Block 102a/112

Morocco• Vanco

Cananda• Synenco

Gabon

Angola

Congo

Sudan• Unity

Sudan• Block 1/2/4• Block 3/7• Block 6

Iraq• Ahdeb

Oman• Block 5

Indonesia• 6 blocks

Indonesia

Thailand• Banya

Venezuela• Caracoles• Intercampo• Orimulsion

oil project

Peru• Block 1-AB/8• Block 6 and 7

Brazil• Offshore

exploration

Chad• Block H risk

exploration

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The Majors dominate market capitalization, butNational Oil Companies hold the reserves

*Market cap as of start-Sept 2007; Statoil-Hydro = Statoil + Hydro estimate

Source: Bloomberg; PIW Ranking; J.S. Herold; Reuters

29

30

32

33

36

37

38

40

42

44

50

68

78

92

100

109

128

128

154

163

203

250

258

260

420

Marathon

ExxonMobilPetroChinaGazpromShellBP

Devon

TotalChevronPetrobrasENI

ConocoPhillipsSinopecRosneft

Statoil-HydroLukoilSurgutneftegasONGC

BGRepsol YPFCNOOC OccidentalEncanaSuncorImperial Oil

7,600EniEGPC

306,200Saudi Aramco300,241NIOC

136,175Gazprom134,293INOC

128,178QP111,078KPC105,959PDV

78,293Adnoc40,944Libya NOC40,637NNPC38,476Sonatrach

25,852Petronas22,380Exxon Mobil20,476Lukoil20,277PetroChina17,616BP16,181Pemex11,985Shell11,906Chevron11,813

6,705

9,617Surgutneftegas 9,900

PetrobrasTotal

11,74310,717

Rosneft

ConocoPhillips

Oil & Gas Proved Reserves, 2005Billion boe

Market Capitalization*USD billions

Major

NOC

Mid-size integrated

Independent

2. Resource nationalism

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European gas market is becoming increasingly morevulnerable

Source: McKinsey Global Gas Model; Wood Mackenzie

Full Cost$/mmbtu

CapacityBcm

3 countries (Norway, Russia and Algeria) represent the bulk ofimports into Europe and maintaining the contractual link between gasand oil prices is the simplest way to ensure continued market conduct

Indigenous & Norway

Piped: Other

0 100 150 250 300 350 400 45050 500 550 600 650 700 750 800

0

1,0

1,5

4,02

200

4,5

3,5

3,0

2,5

2,0

0,5

5,0

5,5

3

Piped: Russia & FSU

LNG

Europe contract price at30USD/bbl oil

Russia

Russia’s position on the supply curve enables it to manage capacityadds and manage pricing into Europe

Additional ME LNG @cost / US parity?

Europe contract gasprice at 40USD/bbl oil

Algeria Norway Algeria

Supply cost curve, Europe Example

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GCC nations see the conditions for regional development

• The expected oil ‘windfall’ of USD1.2–2.0 trillion over the next 5 yearsrepresents an opportunity for the region to make the necessarychanges to fill the growth gap

• Origins of boom are different this time – Both 1973–74 and 1979–81were supply shocks while this is a demand shock. Higher prices maylast longer

• Early signs suggest governments are more wisely spending surplus.Modest domestic spending increases have been accompanied by debtreduction and targeted investment

• Stronger financial institutions (banks/stock markets) more efficientlydistribute money

• Intraregional investment is growing rather than pure overseas portfolioinvestment as in past

• Furthermore, a new group of leaders with more progressive visions areentering power

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0

2

4

6

8

10

12

14

16

US(HenryHub)

UK(NBP)

2002 2003 2004 2005 2006

MiddleEast

Many industries are becoming attractive for GCC

Natural gas pricesUSD/MMBtu

GCC

Source: Platts; Bloomberg; Tecnon; IFDC; Broker reports; SRI; CMAI; WM; J.F. King; Factiva; team analysis

Increased spread in natural gas pricesbetween the GCC and the Western world…

GCC

Rest of World

…is fuelling the GCC region’s share of natural gas and energyintensive industries

6.9 93.1 34Aluminium

8.2 91.8 117Ethylene

8.8 91.2 71Polyethylene

2.3 97.7

99.4 1,130Steel

100% =

Propylene

4.0 96.0 28Styrene

0.6

76

36.9 63.1 9

32.3 67.7 29

29.8 70.2 21

25.1 74.9 16

22.2 77.8 6

2.9 97.1 420

100% =

Current capacity, 2006 Announced capacity

AverageGCC share

24.9mtpa mtpa

5.1

…is fuelling the GCC region’s share of natural gas and energyintensive industries

Percent

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453525155Styrene (E)

Benzene (E)

7

>10

4

3

6

5

2

1

9080706050403020 130120110100100PE (N)Steel (N)

1251151059585

Aluminum (N)

6555

Ammonia/urea (N)Chlorine (N)Ammonia/urea (E)

PE (E)

Ethylene (N)Chlorine (E)PG, commercial, small ind. (E/N)Ethylene (E)Propylene (N)Aluminum (E)Steel (E)

Benzene (N)Styrene (N)

Propylene (E)

75

Many energy intensive industries will be competitive in the GCC…even atsignificantly higher gas prices

ESTIMATES

Gas demandsegments

Note: Based on global (US) gas price of USD 5.0 /MMBtu. (E) indicates existing facility, (N) indicates new, planned capacity* For ethylene, a weighted-average price by process economics used was calculated; for other industries, the price is based

on the most likely process for new capacity** Divide by 10 to get a rough approximation of the Bcf/day equivalent

Source: Tecnon; IFDC; broker reports; interviews; SRI; CMAI; BP Energy Statistics; Pelig; WM; J.F. King; team analysis

Current gas price 0.75 USD/MMBtu

GasvolumeBcm/yr**

Maximum gas price for different end users, Real 2005*USD/MMBtu

SAUDI EXAMPLE

Price ceiling set byQatar LNG exportparity prices of USD~2.8 /MMBtu

Gas price 1.5–2.0 USD/MMBtu

Demand/supply in Saudi Arabia, 2015

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0

10

20

30

40

50

60

70

80

2008 2012 2016 2020 2024 2028

0

10

20

30

40

50

60

70

80

2008 2012 2016 2020 2024 2028

0

10

20

30

40

50

60

70

80

2008 2012 2016 2020 2024 2028

Carbon price will need to fit within a “funnel”

CO2 price$/t

Year

Floor driven by• Need for

investmentincentives

• Marketviabilityconcerns

Ceiling driven by• International

competitiveness• Consumer

acceptability• Marginal social

cost of carbon

Wind

Explicit carbon price

Solar

Ceiling

Floor

Longer term CO2price driven byeconomics ofsupply anddemand, andfiscal regime

*Solar costs reflect combination of rooftop PV and CSP costs, weighted average across regions. Windcost is onshore weighted average across regions

Where cost of abatement technology isgreater than the carbon price, there is a needfor transition incentives to drive investment

3. The carbon agenda

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Marginal cost of abatement may be ~ 40/t in 2030

0 1 10 11 12 13 22 23 2415 16 17 18 192 20 21

10

20

30

40

26 273 4 5 146 7 258 9

0

-10

-100

-110

-120

-130

-140

-150

-160

-20

-30

-40

-50

-70

-80

-90

-60

Cost of abatement/tCO2e*

Insulation improvements

Fuel efficientcommercialvehicles

Lighting systems

Air Conditioning

Water heatingFuel efficient vehicles

Sugarcanebiofuel

Nuclear

Livestock/soils

Forestation

Industrialnon-CO2

CCS EOR;New coal

Industrial feedstock substitution

Wind;lowpen.

Forestation

Celluloseethanol CCS;

new coal

Soil

Avoided deforestation

America

Industrial motorsystems

Coal-to-gas shiftCCS;

coalretrofit

Waste

Industrial CCS

AbatementGtCO2e/year

Avoid de-forestationAsia

Stand-by losses

Co-firingbiomass

Smart transitSmall hydro

Industrial non-CO2

Airplane efficiency

Solar

2030

* Exchange rate taken as 0.80 /USD

Source: McKinsey/Vattenfall

Abatement needed to hit

550ppm by 2100

Abatementneeded tohit 500ppm

by 2100

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Oilfield technologies have driven massive economic improvements forthe industry…

Finding and development cost, 1996 dollars per barrel,

offshore United States*

* Similar results were reported for the onshore U.S.

Note: F&D costs are calculated as exploration and development expenditures over 3 years, divided by additions to oil reserves over the same time

Source: Cambridge Energy Research Associates

0

5

10

15

20

25

30

35

40

1981 1984 1987 1990 1993 1996

Lower cyclical costs: 20%

Cost position 1981

Technology based: 80%

Technology improvements:

• Horizontal drilling

• Coiled tubing

• 3D seismic

• Improved reservoirsimulation

4. Technology development in the petroleum industry

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…as well as unlocked key growth ‘mega trends’ accounting for80% of global production growth since 1985

Global oil and gas production, million BOE daily

0

20

40

60

80

100

120

140

'85

'87

'89

'91

'93

'95

'97

'99

'01

'03

Source: BP Statistical Review of World Energy; team analysis

MegatrendTotal

‘1985 conventional oil & gasproduction’

x CAGR ‘85-’04 percent

2.0

3.124.2

4.8

xAbsolute increase ‘85-’04M BOE / day

2New basins(mainly Norway)

4.6

4Deep water(US GoM, West Africa)

3.6

1Middle East (+ EOR)(mainly Saudi Arabia)

17.0

5LNG(APAC, North Africa)

2.9

3Piped gas to Europe(Russia, UK, Norway)

3.96.7

10.0

ESTIMATE

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The pace of innovation in Petroleum has been slow relativeto that in other industries

0 5 10 15 20 25 30 35

E&P industry(15 tech. Cases)

ADSL (broadbandtelecom)

Medicine (Merck-average)

Consumerproducts(US average)

Time (years)

Average duration of the four phases in different industries

• Idea toprototype

• Prototype tofield test

• Field test tocommercial

• Commercial to50% penetration

Source: Industry journals, interviews

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An industry-wide shortage of talent may bottleneck growth

* AAPG membership

Source: AAPG, SEG, SPE

. . . and the industry is aging

Average age of technical professionals

The number of geoscientists is falling. . .

39

49

37

46

0

10

20

30

40

50

60

1990 2000

AAPG SPE

AAPG SPE

0

5,000

10,000

15,000

20,000

1975

1979

1985

1988

1991

1994

1997

2000

2003

under 30

31-55

56 plus

. . . but few since then

Active petroleum geoscientists*

Many people entered during the boom in the 1980s. . .

US petroleum engineer degrees Oil Price, 2000$/bbl

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Yet the need for world-class engineering have never been greater

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-25% 0% 25% 50% 75% 100% 125%

Agbami

Escravos GTL

Shah Deniz

Tengiz

Dalia

Girassol

BTC pipelineKizomba B

Kizomba AXikomba

Clair

Mad Dog

Cost deviance

Schedule deviance

Na Kika

Bonga Main

Goldeneye

Sakhalin

Kashagan

Source: Media clippings; Market intelligence

Many of the world’s largest oil projects exhibit cost and schedule overruns

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Key questions

For developing nations For resource holders

For engineersFor developed nations

• Where are the next set of breakthroughs?– Arctic oil and gas– Unconventional gas– Seismic imaging– Ultra-deep water

• How can the industry accelerate technologydevelopment and deployment?

• How can Western companies use theirtechnology edge for competitive advantage?

• Will China’s (and India’s) quest for oil lead tointernational competition with American andEuropean nations?

• What geo-political alliance are likely to form?

• What may be China’s response to CO2 given itsneed to sustain manufacturing growth?

• What will be the impact on US companies relianton a Chinese manufacturing base?

• What economic incentives (or carbon tax) areneeded to drive a ‘step change’ in energyefficiency across sectors?

• How willing are consumers to pay a carbontax?

• Which alternative energy sources are scalablewithin the 2030 timeframe?

• How will resource rich nations exert their new-found power in consuming markets? Will theyseek greater presence in markets in exchangefor energy supply?

• How will the GCC invest their multi trillion-dollar oil surplus in the coming decade? Willthey seek to develop the Middle East as amajor manufacturing base?

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What are the key learnings?

• We are entering a challenging period for energy, where we will faceincreasing competition to access limited suppliers

• There are no easy answers to this dilemma, as we will need to pursueboth new hydrocarbon sources and alternative sources of energy

• Emerging markets have explicit GDP growth agendas tied to security ofhydrocarbon supplies – likely to continue regardless of developed worldpolicies

• Energy efficiency and demand management matters – in the past and inthe future, but the trick is how to incentivise real changes in consumerdemand

• Engineering and technology will be a key lever to maintaining ourcompetitiveness in the future, but we start from a talent deficit today