MTS Outlook Conference Equipment Manufacturers and Supplies March 26, 2015
Oil and Gas Industry Trends
Increased Globalization- Top 400 Oil & Gas Projects Deepwater, Unconventional Resource Plays, Canadian Oil Sands & LNG 3
Many Challenges Exist Oil driven projects becoming more complex and expensive Technology will continue to be exported from the U.S. and developed in foreign markets Production growth exceeds infrastructure in many markets Massive supply chain expansions will be required Energy transportation and storage systems (i.e. rails, ports, pipelines, etc.) nearing capacity; future expansions will be costly and may be difficult to get approved Local country content requirements in foreign markets are escalating Skilled labor is increasingly tight in international locations Environmental and regulatory impacts are playing increasingly larger roles Political risks 4
Deepwater Trends Sections of West Africa and the US Gulf of Mexico have moved to an exploitation phase, but new basins are still being opened (sub-salt Angola, more GOM) Brazil has been the greatest exploration find in the industry over the past decade o Frontier areas around Africa and Latin America now receiving attention Common themes are present: o o o o o Increasingly deeper water Harsher environments More complex fields Increasing capital intensity Project delays are ongoing Source: Goldman Sachs, Top 400 Projects 5
Unconventional Trends 6
Supply/Demand Imbalance 7
U.S. Land Rig Activity Precipitous drop in crude oil prices impacting onshore activity levels o U.S. land rig count is down over 45% since its peak in November 2014 o Oil directed rigs are down over 49% since its peak in October 2014 o Horizontal and vertically directed rigs impacted Negative impact on suppliers Source: Baker Hughes rig count, Wells Fargo research 8
Medium-Term Market Supply & Demand
Global Deepwater Growth The industry s focus on exploration in frontier offshore areas over the last ten years has provided notable exploration successes Most of the discoveries over the last five years have been in deepwater, with Brazil emerging as a dominant player followed by the US Gulf of Mexico As the industry becomes more successful at frontier exploration, appetite for risk is likely to increase, making it more important for companies to gain access to prospective new basins 10
Increased Capital Investments Needed Global deepwater capex expected to exceed $100 billion in 2018 Latin America and Africa driving growth in deepwater developments o o High exploration risk minimized through technological advances, especially in seismic, subsea and production technologies First movers gain exploration advantages in new basins Current focus on project costs Goal toward greater equipment standardization Industry is converging and moving to JV s to address challenges 11
Deepwater Capital Equipment Spending Capital equipment spending for subsea products forecasted to increase an average of 9% between 2015-2019 Subsea tree demand driven by Africa/ME and South America, accounting for over 50% of incremental trees Tree installations growing in frontier markets and at greater water depths 12
Floating Production System Spending Floating Production System (FPS) spending for 2015 to 2018 forecasted to total $56 billion, which is up 55% from 2011 to 2014, but down 13% compared to prior June 2014 forecast, as project economics being reassessed due to weaker crude price environment Latin America (Brazil) and West Africa expected to account for over 50% of global spending followed by Southeast Asia and Australasia Regional FPS Capex 2015-2018 West Africa 18% Australasia 14% 45 40 Global FPS Installations 2015-2018 35 South East Asia 14% NWECS 10% North America 4% Latin America 33% Source: Infield, as of December 2014 Floating Production Systems include: FPS, FPSO, FSU and other floaters 30 25 20 42 36 32 28 2015 2016 2017 2018 13
Land & Offshore Rigs Oversupplied U.S. land rig count is down over 45% since its peak in November 2014 Ultra deepwater rigs being stacked/scrapped o Transocean has scrapped 16 rigs so far o 300 floating rigs being marketed compared to total supply of 352 rigs (includes stacked rigs) o 87 newbuild ultra deepwater floaters still under construction o Industry needs to scrap 100-150 rigs over the next 1-3 years Excess equipment supply creates negative environment for rig equipment in the nearterm Source: UBS Investment Research, Wells Fargo research, IHS 14
Regulatory & Environmental Challenges
U.S. Government Imposed Investment & Development Limitations Crude exports are currently banned in the U.S. Keystone Pipeline has been held up in the U.S. Government approval process for several years Recent fracking regulations implemented on U.S. public lands Offshore drilling banned for: o Atlantic coast o Pacific coast o Eastern Gulf of Mexico Arctic limitations 16
Environmental Impacts Greenhouse gas emissions Impacts of fracturing ( fracking ) technology Water usage Major environmental incidents have occurred o Alaska (Exxon Valdez)- prompted the enactment of the Oil Pollution Act (OPA) in 1990 o Deepwater GOM (Macondo)- BP s liabilities: $28 billion paid in cleanup costs and damage claims Up to $18 billion potential for gross negligence $3.5 billion provided for Clean Water Act fines Greenpeace movement routinely challenges the industry 17
Other Industry Factors/Perception Other industry challenges: o Restricted access o Lengthy permitting / approval process o Local country content requirements o High taxes on the industry o Developing economies budgets are challenged o Safety and security concerns are prevalent o Political will/fiscal stability is a concern Big Oil o Economic power o Perceived influence in politics o Impact crude oil exerts over first-world industrial society 18
Financial & Industry Threats
Oil-Driven Projects Becoming More Complex and Expensive 20
Deepwater Project Costs Lower commodity price environment leading to reduced oilfield service costs Project economics under reassessment 21
Developing Economies are on an Uncertain Trajectory Brazilian national oil company, Petrobras, involved in a corruption scandal o New executive leadership and board has been put in place o New CEO, Aldemir Bendine, formerly the President and CEO of Banco do Brasil, but has no experience in oil/gas industry o Scandal has led to significant slowdown in activity Petrobras has ambitious growth targets, management needs to address the issue of a funding gap o 2015 capital spending lowered by 27% to $31 - $33 billion, while asset sale targets raised to $13.7 billion o Activity this year is likely to focus on high return pre-salt developments and improving output of existing fields Source: Cowen and Company research, Petrobras/Brazil Offshore: Any Light at the End of the Tunnel? 22
Personnel Needs Research and development o Technology development is the key to our future Safety, research, and technology advancements come at a cost Industry needs more talent o Skills gained are transferable between commodities and geographies Engineers Metallurgists Supply chain personnel Trained service personnel Will be difficult to attract specialized skills in the current low price commodity environment 23
Concluding Thoughts Current Supply/Demand Imbalance Largely Caused by Success in U.S. Land Unconventional Wells U.S. Land Rig Count is Declining at a Rapid Pace in Response to Low Commodity Prices Deepwater Projects Have Seen Success but Delays Continue Deepwater and Offshore Opportunities Exist but are Unlikely to Absorb Expanded Rig and Vessel Capacity in the Short-term Subsea Production Infrastructure Investments Appear More Defensive in the Current Low Price Commodity Environment Production will Adjust in this Environment But When is the Question? 24
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