A Rebirth in the North Sea or simply a False Dawn

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1 The North Sea has seen record levels of investment in 2012 and 2013 Drilling activity is forecast to increase in the coming years Utilization in the Region is the highest it has ever been and there are no spare Rigs As a result Day Rates are experiencing upward pressure and forecast to increase further As already busy Rig start program will be placed under even greater pressure The implications of project and rig start delays have increased the risks of failure A Rebirth in the North Sea or simply a False Dawn

2 Introduction Do the coming years represent a renaissance for the region? 2012 saw an increase in investment in the UK North Sea to $18.2 billion, an increase of 34% from 2011, and 2013 is set to increase further to an estimated $20.8 billion. If so, can the region successfully deliver on the investment and capital projects that will follow? Looking at the 3 years from 2011 to 2013 (forecast) and some key metrics it is easy to see why people are excited by the trends (fcast) Total Investment $26.7 billion $34.1 billion $40.5 billion CAPEX $13.6 billion $18.2 billion $21.6 billion OPEX $11.2 billion $12.3 billion $13.6 billion E & A $1.9 billion $2.7 billion $2.4 billion Oil Price Average $111 per bbl $112 per bbl $103 per bbl Gas Price Average 56p/th 60p/th 67.5p/th New Field Approvals New Field Starts 30 million boe 146 million boe Wells Drilled Exploration Appraisal Development Production 1.8 million boepd 1.55 million boepd 1.4 million boepd Oil 1.1 million boepd 0.94 million boepd 0.86 million boepd Gas 0.71 million boepd 0.61 million boepd 0.6 million boepd Source: Epeus Analysis, DECC Reports, Oil and Gas UK Activity Survey With the exception of the production levels, all the indicators point to a more buoyant UK Sector and North Sea and, without doubt, the changes announced in the UK budget rounds in 2012 have led to an increase in investment in particular in brownfield developments and decommissioning. But there are some other trends that are worth looking at specifically from a drilling rig perspective. This paper looks at those trends including Utilization in the North Sea The ageing North Sea fleet Day Rates and future trends Rig Start activity in the Region 2 A Rebirth in the North Sea or simply a False Dawn

3 Utilization Rates in the North Sea have been consistently in the 90% range for the last 8 years and at the time of writing are at 91.1%. 169 Rigs currently work in the North Sea from an available fleet of 176 including platforms. Just looking at MODUs, however, the numbers show 81 rigs from a fleet of 90 at a utilization of 90% and the real area of pressure is on jackups with levels at 94.4%. So it s fair to say that the North Sea market has no spare rigs at the moment. Of the current rigs under construction only 10 are currently bound for the North Sea and with those having firm contracts to move to this is unlikely to help utilization and so Operators will be relying on bringing in rigs from other parts of the world. The North Sea not only has the largest fleet size but also the highest levels of utilization, both in 2012 and forecast for A Rebirth in the North Sea or simply a False Dawn

4 Ageing Fleet With the average age of the MODUs in the North Sea at 27 years old (25 for jackups and 28 for semisubmersibles) the costs of modifications and upgrades will increase (if they can be done at any cost) as will the cost of Special Periodic Surveys. Our research shows that the useful economic life of a rig ends at between 30 and 35 years and with a recent reduction in build activity for semisubmersibles the fleet in the North Sea is approaching that point. By 2020 more than half of the MODUs will be over 35 years old, a total of 48 rigs and this is a worldwide trend not just an issue in the North Sea with more than 65% of the MODUs in the world being over 35 years old in that same time period And so as the Fleet gets older then the cost of upgrades, modifications and maintenance increases as does the complexity of operation. With new discoveries being increasingly deeper and more remote and needing higher specification rigs this will place even more pressure on the rigs already in operation. 4 A Rebirth in the North Sea or simply a False Dawn

5 Day Rates With utilization the highest of any region in the world this places inflationary pressures on Day Rates Utilisation at the highest of any region in the world places significant upward pressures on day rates that are already increasing Historical data combined with firm contracts clearly indicate that jackup rates should rise in the coming years, even before factoring in demand and supply impacts. So, the increases could be more severe and with drilling contractors reporting increases in Opex for MODUs in the North Sea, the cost push impact will also see a greater chance of day rates increasing further. Day Rates in the North Sea are still above the worldwide average for all MODUs however this is driven by a significant difference in Jackup rates in the North Sea Worldwide North Sea Difference Jackup $131,613 $228,524 $96,911 (173.6%) Semisub $357,166 $410,692 $53,526 (115%) Drillship $518,542 $537,500 $18,958 (103.7%) Source: Epeus Analysis, RigLogix Database, Drilling Contractor Presentations 5 A Rebirth in the North Sea or simply a False Dawn

6 May 2013 Rig Starts In the next 18 months, 148 rig starts are planned in the North Sea (including options), the most of any region in the world and representing more than $38 million a day of revenue in total. A large portion of the start up activity has already been implemented in the first months of 2013 however there have also been additional contract awards and the months in 2013 and 2014 are likely to increase in volume. Another trend apparent in the recent wave of contracts awarded in the North Sea is a change in Field Operator, of the 24 new contracts awarded so far in 2013 half of them represent a change versus an average in the rest of the world of less than 50%. 6 A Rebirth in the North Sea or simply a False Dawn

7 Conclusions So what does all this mean from a Drilling Rig point of view and what are the potential areas of risk? 1. A lack of available rigs in the North Sea may lead to bringing in rigs from other regions, or even additional new build rigs that don t have contracts which could mean more complex modification and upgrade activity and start up projects. 2. When rigs are brought into the North Sea from other regions there are comprehensive requirements that need to be met and this creates additional start up and project complexities. 3. Although we don t see decommissioning taking off in the North Sea for the next few years, P&A activity will place additional pressure on the supply of MODUs 4. Rig start activity is already very high in the next 18 months, which will put a strain on both operators and drilling contractor teams and available resources 5. Large investments in platform construction (Clair Ridge and Mariner to name just two) will further stretch expert resources 6. Day rates are already increasing and further cost push and demand pull price factors increase the negative financial implications of delays and failing projects 7. The UK Government s tax allowances on brownfield developments means that a number of reactivation projects are in the early stages of development. We know from our experience that reactivation projects, in particular Platforms, can be complex and have unique risk profiles that need attention. 7 A Rebirth in the North Sea or simply a False Dawn

8 The Epeus Group We are an international Project Risk Management Consulting Firm providing Advisory, Assurance, Technical Support and Project Rescue services to our clients in the Upstream Oil and Gas Industry. We work extensively on Drilling Rig and Specialty Vessel projects and help our clients to feel more secure about their prospects and to manage their financial and reputational risks. Our clients include those organizations that own, operate, invest in and hire Drilling Rigs and Specialty Vessels. Offshore rigs are dirty great beasts that demand respect. We understand exactly what s needed to get one drill ready We ve earned our spurs over many major engineering projects, gaining specific expertise in drilling rigs and specialty marine vessels. Couple this hard-won industry knowledge with our solid grounding in project risk management and you have an advisor who can see what s coming, long before it affects you. We also have considerable experience in the specialty marine sector, from support vessels to fullscale floating hotels for crews and FPSOs For more details visit our website at Contacts Mark Thompson mthompson@epeusconsulting.com Richard Walker rwalker@epeusconsulting.com Information, opinions, and analysis contained herein are based on sources believed to be reliable, but no representation, expressed or implied, is made as to their accuracy, completeness or correctness. The opinions contained herein reflect our current judgment and are subject to change without notice. We accept no liability for any losses arising from an investor's, lender s or any other person s reliance on or use of this publication. This publication is for information purposes only, and is neither a solicitation to buy nor an offer to sell securities. Certain information included herein may be forward-looking, including, but not limited to, statements concerning construction, utilisation rates, cost and rate increases, and the like. Such forward-looking information and associated comments involve important risks and uncertainties that could affect actual results and cause them to differ materially from expectations expressed herein. We do not have a financial relationship with any company whose stock is mentioned in this release, unless otherwise disclosed. We are not a registered investment advisor, and nothing in this publication is intended as a solicitation in connection with the making of any investment or lending decision, including without limitation buying or selling any security. 8 A Rebirth in the North Sea or simply a False Dawn