Technology and theValue Paradox

GCAGSAustin

November 1, 2002

LIME ROCKPARTNERS

Technology and the Value Paradox:Where do we go from here?

Tom BatesManaging Director, Lime Rock Partners

Oil & Gas Markets Can Support Significant R&D Spending

Comfort Zone

Oil Prices in the 20th Century

$10

$15

$20

$25

$30

$35

$40

1985 1990 1995

High Inventories, Iraq, Warm Winter &

Asia

Fahd Gets Angry, Opens Taps

Schwarzkopf Visits Saddam

Iran-IraqTanker Wars

Bush Visits Fahd

Saddam Gets Greedy; Visits Kuwait

MG Liquidation

Low Inventories, Iraq & Cold Winter

OPEC cutsproduction

Source: Baker Hughes

0

50

100

150

200

250

300

350

$10 $15 $20 $25 $30 $35 $40

Num

ber

of O

ccur

ranc

esOil Prices in the 20th CenturySame data – different perspective

90’s average = $19.61

91-93 avg. = $20.1994-96 avg. = $19.2197-99 avg. = 18.00

Source: Baker Hughes, Bloomberg

Oil Prices: 2000-2001

0

50

100

150

200

250

300

350

10 15 20 25 30 35 40

1990-99

2000-01

Source: Simmons & Company International

Note: Data set stops prior to 9/11/01

Gas prices will remain high!!

Exploration Wells

Production Wells

Total

Summer Daily

Dry Gas Production

(Bcf/Day)

1997 634 10,010 10,645 51.7

1998 601 11,954 12,555 51.3

1999 479 9,572 10,051 51.1

2000 714 12,904 13,618 50.8

2001 979 20,245 21,224 52.3

Record 1981 2,514 17,652 20,166 52.5

Production is down even though drilling activity has doubled

Preliminary indications are that 2002 production will be down 5-7% for most operators

Source: Simmons Co.

Oil Company R&D tanks

0

100

200

300

400

500

600

700

800

'91 '92 '93 '94 '95 '96 '97 '98 '99

Source: Simmons & Co.

$, m

i lli o

ns

The Value Paradox

Key Technologies of the 90’s

3D Seismic,Computer Assisted Exploration

Deep-water,

Sub-sea,FPSO

Horizontal Drilling,Geosteering, &

Rotary Steering Systems

Source: Baker Hughes

3D Seismic Imaging

Source: Baker Hughes

Subsalt application to Gulf of Mexico

Global Exploration Success

Source: EIA

0%

10%

20%

30%

40%

50%

60%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Contribution to Falling E&P Costs

Source: Salomon Smith Barney

1995 to 1997

Drilling Technology

Horizontal Drilling

Subsea

CompletionsFracturing

Seismic46%

8%

26%

5%

11%

4%

Economic Value Added

Source: Simmons & Company, Baker Hughes

Revenue - $17.6 BNet Income - $ .4 B

2.2%

Top 8 Seismic Companies - 1995 to 1999

Capital Charge - $ 2.0 BValue Destroyed $ 1.6

Too many seismic boatsToo much spec seismic

ROCE – Oil Service

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

'94 '95 '96 '97 '98 '99

WACC = 12.2% Source: Simmons & Co.

Who will fund E&P technology?

Product Development Spectrum

Seed Stage Growth Stage Mature Business

• Angel investors• Managers

• Very high involvement• High risk• Modest dollar profits

• Industry-focused private equity groups

• High/moderate investor involvement

• High to moderate IRR• High dollar profits

• Public market• Strategic buyers• Large LBO players

• Limited outside involvement

• Lower IRRs/Lowest Risk• Low volume of deal flow

Optimum Ownership Group

Investment

Characteristics

LIME ROCKFocus Area

Time

Co

rpo

rate

Va

lue

Energy Private Equity Funds

• Invest $$$ on behalf of institutional partners into (primarily) privately held businesses in the upstream energy sector

• Target companies in oil service, technology, E&P and pipeline/processing segments

• Take $1-$100 million positions with substantial influence or control in portfolio companies

• Add value to through active board involvement and strategic and financial decision making

• Lime Rock, Natural Gas Partners, SCF, First Reserve, ARC, Altira, etc. are some of the funds

• Newfield, Magic Earth, Sensa, Roxar, Weatherford, Chroma, are some of the companies

Private Equity Growth

Source: PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree™, Thompson Financial

Source: DRI-WEFA Final Report, 6/2002, Thompson Financial

Private Equity Backed Firms Invest in R&D

$44

$15

$0$5

$10$15$20$25$30$35$40$45

Private Equity All Public Cos

Investment per $1000 in assets

Energy private equity is too lowU.S. venture capital and private equity disbursements 1997- 2000

Source: Venture Economics

Internet: 40%

Communication: 17% Computer Software & Hardware: 17%

Other Products: 7%

Medical / Health& Biotech: 9%

Semiconductor & Electronics: 5%

Consumer: 3%

Energy / Chemicals: 2%

Portfolio Company

IPEC Ltd.

Roxar ASA

Noble Rochford

Deer Creek

Venture Production

Sensa

Torch Offshore

CGG

Torex Resources

ADB Systemer

SmartSynch

Downstream Energy

Sourced By

Lime Rock

Lime Rock

Lime Rock

Lime Rock

3i

Lime Rock

Lime Rock

Lime Rock

Lime Rock

Lime Rock

Lime Rock

Lime Rock

Summary• E&P technology is under funded

– Volatility is “predictable”

– Upward bias in commodity prices

– Oil company spending is way down

• Service company returns on technology are low

– Seismic industry is the ultimate paradox

– Destroying value every year

• New dynamic in technology

– Majors/governments fund seed stage

– Large service companies increasingly buyers

– Private equity needs to play a bigger role!

– Sensible “Silicon Valley” model is possible

LIME ROCKPARTNERS

Growth Capital for the Energy Industry

www.lrpartners.com

Global Energy Demand

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Co

nsu

mp

tio

n,

MT

OE

1965 1969 1973 1977 1981 1985 1989 1993 1997 2001

COAL NUCLEAR HYDROELECTRIC GAS OIL

Source: BP

Primary Energy Consumption

0

1

2

3

4

5

6

North America Europe FSU Rest of World World

78 83 88 93 9873

To

nn

es o

il eq

uiv

alen

t

78 83 88 93 9873 78 83 88 93 9873 78 83 88 93 9873 78 83 88 93 9873

Source: BP

0

10

20

30

40

50

60

Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98

14%

60

50

40

30

20

10

0

1998

1997

1996

1995

1994

1993

1992

1991

1990

Pre-1990

Drilling Year:

Bcf

/d

Jan-99

Source: EOG, Baker Hughes

Depletion

Bcf

/d

Reserve Additions Decline

0

1

2

3

4

1947 1957 1967 1977 1987 1997

Source: Purvin & Gertz, Oil & Gas Journal

Gulf of Mexico – shallow waterB

illi

on

s o

f b

arr

els

dis

cove

red

Oil & Gas Outlook

• Crude Oil supply is tighter than perceived

– OPEC discipline is holding

– Hubbert’s Peak analysis says global production peaks 2005-2008

– New oil price band is $25-30???

• North American gas supply is limited

– Depletion, reserve base limits gains in US

– Canadian gas has same constraints as US

– Rig count is down in both US and Canada

– LNG and Arctic gas are 10 years away