The Postmodern Oil Company. Presentation to IAEE Houston - Oct 13, 2005

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Roland Carson
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1 The Postmodern Oil Company Presentation to IAEE Houston - Oct 13, 2005

2 Spot Price ($/B) Private and Confidential Production (MMBD) 2005 Here We Go Again? Spot Dubai OPEC Non-OPEC Saudi Arabia

3 Refining is profitable for the first time in 20 years! US $/Bbl 10 Figure 6: Refining Margins: Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 USGC West Texas Sour Coking NWE Brent Cracking Singapore Dubai Hydrocracking 2 Private and Confidential

4 The world needs growing oil supplies, but will OPEC deliver? MMBD Source: EIA, International Energy Outlook 2004 Non-OPEC OPEC (Capped) Gap 3 Private and Confidential

5 IOCs are finding that remaining resources are increasingly unconventional or inaccessible Proven Reserves (Bn BOE) 3.5 Stranded Gas Qatar Bolivia Iraq Fungible Oil & Gas Europe Libya Saudi Heavy Oil Canada Vzla M. East Open Difficult Closed Labeled countries are examples of group 4 Private and Confidential

6 The eventual correction will be driven by end use efficiencies and a recycle through the resource pool The Traditional Decarbonization View Pre Post-2010 Firewood Industrial Revolution Anthracite Internal Combustion Light Environment 3D Seismic Local Resource Scarcity Nuclear and Renewables Renewables COAL OIL GAS Climate Change GHG Limits Biomass Genetics Materials Lignite Gasification Sequestration Tar, Shale Extraction Processing Stranded LNG GTL Technology Advance An Alternative Back to the Future View 5 Private and Confidential

7 Relative returns don t explain enterprise value; growth prospects are becoming important Multiples vs. Returns 10 EOG 9 BRG 8 EV / EBITDA AHC MRO COP DVN BP APC PCZ BR MUR PBR TOT APA REP CVX RD XOM Source: Yahoo! Finance, 9/28/05 6 Private and Confidential ROA

8 Companies must post-modernise for disciplined growth Refocus on Growth Metrics Emphasise ROCE and Reserve Bookings Structure a Diversified Growth Portfolio Balance Efficiency Improvement with Expected Value of Future Cash Flow Rights Focus on Upstream Oil in Established Basins Fill the Funnel with Diverse Opportunities; Understand Optionality; Explain Portfolio Value and Risks Manage Project Risk Down/ Value Up Negotiate a tough contract with supplier Enhance Local Stakeholder Benefits; Take a Systemic View Rebuild the Capacity for Growth Capture Synergies through Functional Business Units and Technology Withdrawal Rebuild Growth Capacity with Integrated Gas/ Heavy Oil Supply Chains and Revitalised Technology Networks 7 Private and Confidential

9 A Clean Sheet Postmodern Organization proposal CEO Straw-model Portfolio Strategy Supply and Trading Traditional Mature Deepwater Emerging Country Development Unconventional Resources Risk Management Basin Ops Exploration Traditional Resource Development Supply Chain Integration Trading - OECD Basins - Other mature operations Refinery Ops - Non-integrated refineries (Europe/NA) Established Market Retail - Retail in OECD, other established markets M&A - Acquisitions and Divestitures Development/ Offshore Project Offshore Production - Nigeria - Algeria Expanding NOC s - Norway - China Self Sufficient - Saudi Arabia Russia -Heavy Oil -Coal -Shale -Stranded Gas Renewables -Solar -Wind -Biomass Integrated Chains -Integrated Refineries -Storage, Transport, Processing, etc -LNG 8 Private and Confidential

10 in which design follows function focusing on differential sources of value Distinctive Postmodern Sources of Value Traditional Mature Deep Water Emerging Country Development Unconventional Resources Supply & Trading Value Capture Portfolio Strategy Cost control Supply chain management Acquisition and consolidation Exploration success Production platform project management Infrastructure leverage NOC and government relations Innovative deal making National content development Extraction and Process Technologies Project management Integrated hydrocarbon supply chain development Risk management Creative product development Information systems Clear view of business context Business/Project risk assessment Portfolio modeling 9 Private and Confidential

11 including nodes of functional excellence networks where they are most needed Tailored Functional Excellence CEO Exploration I.T. Technology Functional Networks Supply Chain Human Resource Supply And Trading Value Capture Network Functional Stewards Traditional Mature Deepwater Business Lines Emerging Country Development Unconventional Resources 10 Private and Confidential

12 Rethinking what a refinery should look like. The Postmodern Refinery Extends its Product Markets into Chemicals and Power Ethylene/Propylene Ethylene Cracker Complex BTX Aromatics Complex Aromatics C2-C5+ C2-C5+ naphtha H2 raffinate Natural Gas Bitumen/ Heavy Crude FCC Coking Refinery intermediates Hydrotreating/ cracking Complex Gasoline Diesel C1 Coke Gasification Complex H2 syngas wax Fischer Tropsch Lubes Power CO2 EOR/ Sequestration 11 Private and Confidential Source: CRA International

13 Addressing the Capability Shortfall The Business Challenge Filling the funnel with opportunities Getting the deals done and satisfying host country needs Financing huge projects in a Sarbanes Oxley world Managing external risks (FCPA, HSE/GHG, social responsibility) Executing the projects on time, on budget Creating effective joint venture organizations Building integrated supply chains Not Enough Projects to Meet Demand The ROCE Legacy Only a few capable IOCs left Downsized organizations Aging work force Unfavorable industry reputation Weakened oilfield service sector Underinvestment in technology Shortage of special steels and other key materials 12 Private and Confidential

14 retaining the greying experience base while adding a new, diverse work force Knowledge ADAPTATION Capability Retention And Transfer Knowledge codification (by systematizing) Knowledge REPLICATION EXPLICIT KNOWLEDGE Knowledge transfer (by teaching) 3. Knowledge sharing (by coaching) TACIT KNOWLEDGE Knowledge internalization (by training) Knowledge REPLICATION Source: The Accelerating Organization, Arun Maira & Peter Scott-Morgan, p Knowledge ADAPTATION Capability Challenges Experienced employees enriched by high stock values heading for the golf course? Best of the Best new recruits only available in developing countries China graduating 500,000 engineers per year = 10x US total National content targets oblige companies to nurture local talent Flat organizations and performance models predicated on experienced staff Homeland security causing intense visa problems 13 Private and Confidential

15 Measuring and communicating post-modern progress beyond traditional near-term metrics Performance (Modern Oil Company) Growth (e.g. General Electric) Option Creation (Pharma Industry) Terra Firma Synergy capture Costs ROCE Capital discipline Reserve replacement Terra Nova Mid-to-long term Earnings Growth expectations Strategic positioning vs. mega-trends Portfolio optimization Building new growth platforms to scale Technology leadership Human capital>physical capital growth incentives Higher returns earned by adding value (customers, services, technology, processes, global scale) Terra Incognita Defined R&D Platforms Number of new products, and number in late stage trials Clear pipeline milestones with cycle time Value transparency established (via collaborations) at each stage of pipeline Year-over-year pipeline strength comparisons Revenues from new strategic alliances 14 Private and Confidential

16 Chris Ross CRA International 1600 Smith, Suite 4900 Houston, TX (713) Private and Confidential

Short-Term and Long-Term Outlook for Energy Markets

Short-Term and Long-Term Outlook for Energy Markets Guy Caruso Administrator, Energy Information Administration guy.caruso@eia.doe.gov Fueling the Future: Energy Policy in New England December 2, 25 Boston,