INTERNATIONAL OIL AND GAS CONFERENCE IN CHINA OPENING PLENARY SESSION OPPORTUNITIES AND CHALLENGES IN A VOLATILE ENVIRONMENT, BEIJING, JUNE 2010

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1 Thank you very much for that kind introduction Mr. Chairman it s an honour to be here today at this International Oil & Gas Conference and Exhibition in China. My fellow panel members have described the challenges that we all face in helping meet the world s energy needs. From my perspective, I would like to discuss how the development and delivery of technology must change in response to the demand for future supply of oil and gas that will have to come from more difficult, more complex and therefore potentially more costly resources. I m going to cover three topics. First, a few words on the growing diversity and complexity in future supplies of oil and natural gas that will echo some of the thoughts already expressed, second some thoughts on how the engineering and manufacturing of oilfield technology must change, and finally the need to focus on the people that will help us bring that technology to bear on future exploration and production activity. 1

2 The International Energy Agency tells us that world energy demand will grow by some 40% by 2030 and that hydrocarbon fuels will continue to dominate the global energy mix with coal, oil and natural gas supplying almost 80% of primary energy needs. To enable growth in oil and natural gas supply, investment of some 550 billion dollars in exploration, production and processing is estimated to be needed every year for the next twenty years. With the age of easy oil over, and the consequent higher costs of new supply from more difficult areas and more complex reservoirs, the challenges of matching supply and demand in changing times are not likely to decrease. 2

3 Fortunately the world is not short of oil and gas and I for one remain sceptical of any theory that predicts that we will no longer be able to increase the amount of oil and gas we recover within a decade or two. While geology, economics, and politics may not sit well in arguments, the most frightening thing is that any belief in geoscience and oilfield technology always seems to disappear when fears of shortage arise. But even though we have ample resources, we still face the task of transforming them into reserves, and it is here that the true role of technology must lie. At $70 per barrel, most oil resources, except ultra deepwater, oil shales, some arctic areas, and various liquid conversions, remain economic to develop but huge unknowns lie in the effects that technology can have on reserves and on recovery. In the long term, natural gas resources show similar trends. In fact the vast majority of the world s natural gas resources are considered unconventional trapped in low-permeability reservoirs, shales and coalbed methane formations. And although these represent only 10% of today s total production, that proportion will increase as consumption accelerates and conventional reservoirs deplete. And not only will we be producing from unconventional reservoirs, we will also be adding more diverse types of gas including wet gas, sour gas and carbon dioxide all of which further expand the challenges to which new technology must respond. 3

4 Given this context, I believe there to be three directions for new technology. First is the need for technology to help recover unconventional oils and natural gases. Here, we need new technologies and processes for better extraction, lower cost and smaller carbon footprint. Second is the recovery of conventional hydrocarbons from the remaining under-explored and undeveloped areas such as deepwater, deeply buried reservoirs, the arctic and certain parts of the Eastern Hemisphere. Technology that lowers technical risk and increases operational performance will be a necessity. Third are the reserves already in production and it is perhaps here that new technology is likely to make the biggest difference in the short to medium term. In other words, the days of one particular oilfield technology meeting many potential applications are over. We need to change the way in which technology is developed and deployed and we need to encourage closer cooperation and collaboration between technology provider and technology user. This of course is one of the reasons why research locations are moving closer to operating oil company locations and to academia. It s also the reason why technology centers are focusing on specific industry challenges such as gas condensates, unconventional gas, heavy oil, carbonate reservoirs and deepwater operations. Both changes reflect the need for closer cooperation. But new technology also demands many different inputs. Fundamental research, intrinsic development, adaptation of solutions from other industries, protection of intellectual property, and commercial timing all combine to lengthen the cycle and potentially retard the benefit. None of these of course are specific to the exploration and production industry. 4

5 For example, one highly integrated product sold to hundreds of millions of consumers around the world is the modern automobile. To meet cost pressures as well as safety, reliability, environmental and fuel-efficiency requirements, auto-makers are forced to be aggressive adopters of new technologies. The automotive industry has also been a leader of LEAN engineering and manufacturing methods dedicated to improving reliability and ensuring repeatability. With the exploration and production industry moving towards more difficult geologies, complex fluids, new geographies, deeper waters, extended logistics and greater extremes of temperature and pressure, similar changes in the way we develop oilfield technology will be needed. In these higher-cost operating environments, one important consideration will be the elimination of waste. After all, average non-productive time in drilling operations is around 20% today with perhaps one-third of that attributable to service industry performance. 5

6 So let me now describe some of the ways in which Schlumberger is integrating a series of initiatives to improve performance through improving technology development, deployment and delivery. We call this Excellence in Execution. The first of these initiatives was the creation in 2007 of an engineering, manufacturing and sustaining organization to establish systems, processes and standards across our product development and manufacturing centers worldwide. This enables a stronger focus on design for reliability, manufacturability and maintenance, while manufacturing for zero defect. The method is centered on a system of concurrent lifecycle management that represents a major evolution in the way we work. The objectives of the method include faster commercialization of more reliable products, more efficient industrialization of innovative ideas, better coordinated development of enabling technologies, and stronger operational support. Although we still have some way to go, significant progress has been made toward improved product reliability. For operations, the most visible improvements have been achieved through the sustaining organization which holds the primary role of improving existing commercial product quality and reliability while reducing cost and managing product obsolescence. Last year, the sustaining teams made a strong early impact at the field level with a 17% improvement in reliability for 39 key projects selected across our Technology portfolio. What we have learned in sustaining many generations of products is applied early in new product developments at the conceptual and detailed design phases. We then strive to physically test the limits of those designs and build greater design margins into our products so that all new commercial offerings are more robust and reliable. 6

7 One example of this is the PowerDrive X5 rotary steerable system. In November 2009, this version of the PowerDrive designed for six-inch hole sections attained a record mean time between failures of 3,060 hours and a 2009 year-to-date average of 1,411 hours. This represents an increase of 707 hours over the 2008 average of 704 hours a 100% improvement. This step-change in reliability was achieved through a combined effort involving field locations, technology center sustaining and manufacturing, supply chain management, and cooperation with various customers. The tool underwent four major changes. Today, 30% of the worldwide fleet has been upgraded and the tool represents a technology that we believe cannot yet be matched. 7

8 A second part of Excellence in Execution focuses on the support organization in the field for it is here that operational tools receive the required maintenance in service. Over the last five years, we have invested more than 300 million dollars in the building of 13 new large oilfield services bases in China, Canada, the United States, Libya, Australia, Saudi Arabia, Abu Dhabi, Mexico, Congo and Brazil. This investment has been complemented by projects in other bases around the world to upgrade their facilities to matching higher standards. Compared to small bases, larger facilities enable standardization and more robust maintenance practices that have enabled the introduction of tool maintenance processes based on LEAN principles focused on standardization, quality improvement, cost reduction and efficiency. This has led to consistent maintenance time reduction and a positive trend in non-productive time improvement. An example of this is in the Emirates where we have achieved reduced volatility in key quality performance indicators, reduced staff overtime by 60%, increased productivity by 25% without the need to increase headcount in spite of rising activity. Of course it s not only a question of infrastructure, it s also a question of personnel training and here we have directed considerable investment in developing training centers around the world that not only train new operating engineers but also provide the facilities to instill consistency of process within the maintenance organization. To give you an idea of the scope of our overall training effort, we have hired nearly 24,000 technical staff with university degrees or diplomas for positions in field engineering, field support, data services, research, engineering, manufacturing and sustaining since Almost 10,000 of these employees are dedicated to the maintenance of our field technical equipment at various levels. Their training is just as important as that of the operating field engineers particularly as the consistency in which they perform their work has a direct bearing on the performance of the equipment in their charge. To manage such training, we have opened a series of new-generation learning centers that bring consistency and efficiency to the training effort. These new facilities are not only equipped with test wells, service pads and classrooms, they also have a series of laboratories in which maintenance staff 8

9 can be developed. The centers are also designed to train staff from many product lines in the same location to offer scalability and critical mass. The size of the training effort is measured by training days. Since 2006, our new learning centers have conducted nearly 900,000 total training days with just over 40% of these dedicated to maintenance staff training. The last initiative that I would like to mention concerns the role of the operations support centers in Excellence in Execution. From initial experiments in 2004 in the North Sea and the Gulf of Mexico, our OSC network has evolved to an industrialized and global deployment of over 30 centers that provide 24-by-7 performance assurance for drilling operations worldwide. Remote support and interventions from the experts in our OSCs have allowed us to deliver sustained reduction of non-productive time in drilling operations. This expert support has also helped mentor less-experienced crews on the job and the centers have provided improved operational visibility that in turn has helped accelerate organizational learning and process improvements. As a result, recurring patterns of issues have been quickly identified and addressed at various levels of the organization such as local spot training, updates to regional guidelines or improvements to global standards and systems. This tightening of the improvement cycle is allowing us to reduce the variability in service quality locally, regionally and globally. I should also add that the OSC platform provides the optimal usage of our expertise to perform higher value real-time workflows such as real-time geo-mechanics, well placement, and drilling optimization. As we get into increasingly challenging drilling from a reservoir and operations perspective, the OSC will provide an effective operational platform to manage performance. 9

10 Mr Chairman, ladies and gentlemen. Oil and natural gas will still be supplying the major part of the world s energy supply for some decades to come. New and innovative technologies will solve most of the problems of producing unconventional hydrocarbons in the long term, but more importantly will extend the size and recovery of existing conventional oil reserves in the shorter term. New technology will consequently provide the means to assure the supply of sufficient oil and natural gas to meet world needs while alternative energies are developed. But while the technological challenges we face are formidable, we also need to focus on eliminating wasted effort from oilfield operations. After all, 20% non-productive time translates to significant financial loss on a 100-million dollar well and on smaller fields such a level of inefficiency can represent the difference between economic success and failure. We therefore see a clear need to improve operational performance through initiatives designed to encourage reliability and consistency. This begins with product design and development, continues through training of both field crews and maintenance staff and employs a range of facilities that include state-of-the-art operational bases, training centers and operational support locations. At Schlumberger we want to evolve our strong can-do culture to a we can do it right the first time every time approach. Thank you very much. 10