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Lunch Hosted by McKinsey & Company
The document discusses the challenges faced by the North Sea oil and gas industry amidst declining market capitalizations, emphasizing a significant drop in valuations over time. It highlights the rising operational costs in the UK Continental Shelf (UKCS) and suggests that increased inefficiencies, rather than heightened activity, have contributed to this. The report indicates that transformative approaches and incremental improvements in operations are necessary for the sector to recover and enhance productivity.
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- 1. #OM2015 Responding to thedownturn – lessons from the North Sea Oil & Money 6 October 2015, London
- 2. 1 #OM2015 These areclearly tough times for the industry Source: Fairfield Energy; Courtney Sacco, MBR -42% June 2014 October 2015 2.2 1.3 1 Majors and largest 20 independents Industry market capitalisation1 USD trillion,
- 3. 2 #OM2015 But valuationshave been in decline for much longer Source: McKinsey analysis, company filings; BP Statistical Review 1 Includes BP, ExxonMobil, Chevron, Eni, Shell, Statoil, Total. Enterprise value = market value of equity + debt – cash; invested capital = fixed assets + current assets - current liabilities – cash Indexed: 2005 = 100 Majors’ valuation1 (enterprise value/ invested capital) Brent oil price 50 150 100 1311 12102009 2014
- 4. 3 #OM2015 Oil &Gas’s ‘economic power’ for last 20 years Source: McKinsey Strategy Practice and McKinsey Corporate Performance Analysis Tool 1 For companies with revenue > 2.8 bn (2005 real) in any year from 1995–2014; On an average N = 2,559. Weighted average for companies in the sector, average for the time period 1995–2014 average ROIC-WACC spread1, Percent (width of the bar represents average invested capital) 10 5 -5 0 Trans- portation Utilities Media Materials Capital Goods Consumer discretionary Commercial & professional services Retail & wholesale Telecom Oil & gas Consumer staples High tech Healthcare and pharma- ceuticals
- 5. 4 #OM2015 Trend overtime Source: McKinsey Strategy Practice and McKinsey Corporate Performance Analysis Tool 1 For companies with revenue > 2.8 bn (2005 real) in any year from 1995–2014; On an average N = 2,559. Weighted average for companies in the sector, average for the time period Average ROIC-WACC spread1, Percent (width of the bar represents average invested capital) x Average oil price ($b, Brent) 23 1995–2004 15 10 5 0 -5 Oil & gas
- 6. 5 #OM2015 Trend overtime Source: McKinsey Strategy Practice and McKinsey Corporate Performance Analysis Tool 1 For companies with revenue > 2.8 bn (2005 real) in any year from 1995–2014; On an average N = 2,559. Weighted average for companies in the sector, average for the time period Average ROIC-WACC spread1, Percent (width of the bar represents average invested capital) x Average oil price ($b, Brent) 23 71 1995–2004 2005–2009 15 10 5 0 -5 Oil & gas 15 10 5 0 -5 Oil & gas
- 7. 6 #OM2015 23 71 102 Trend overtime Source: McKinsey Strategy Practice and McKinsey Corporate Performance Analysis Tool 1 For companies with revenue > 2.8 bn (2005 real) in any year from 1995–2014; On an average N = 2,559. Weighted average for companies in the sector, average for the time period Average ROIC-WACC spread1, Percent (width of the bar represents average invested capital) 1995–2004 2005–2009 2010–2014 15 10 5 0 -5 Oil & gas 15 10 5 0 -5 Oil & gas 15 10 5 0 -5 Oil & gas x Average oil price ($b, Brent)
- 8. 7 #OM2015 1995–2014 Average ROIC-WACCspread1, Percent (width of the bar represents average invested capital) Wide range within the oil & gas sector Source: McKinsey Strategy Practice and McKinsey Corporate Performance Analysis Tool 1 For companies with revenue > 2.8 bn (2005 real) in any year from 1995–2014; On an average N = 2,559. Weighted average for companies in the sector, average for the time period Majors 15 5 -5 10 0 NOC OFSE International independents Downstream and midstream North American Indepen- dents
- 9. 8 #OM2015 North Seaprovides a unique window into this effect Broad range of players Hundreds of developments (50+ giant fields) 40 years technology development
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- 11. 10 #OM2015 The costchallenge in the UKCS Source: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys 1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average Big Mac 2.5 Annual inflation rates, 2000–14, Percent
- 12. 11 #OM2015 The costchallenge in the UKCS Source: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys 1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average Annual inflation rates, 2000–14, Percent Big Mac 2.5 North Sea platform lifting costs1 12
- 13. 12 #OM2015 The costchallenge in the UKCS Source: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys 1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average Annual inflation rates, 2000–14, Percent Big Mac 2.5 North Sea platform lifting costs1 12 UK lifting cost per barrel of oil equivalent, (2004–14)2 18
- 14. 13 #OM2015 The costchallenge in the UKCS Source: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys 1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average Annual inflation rates, 2000–14, Percent Big Mac 2.5 North Sea platform lifting costs1 12 UK lifting cost per barrel of oil equivalent, (2004–14)2 18 UK development cost per barrel of oil equivalent, (2004–13)2 21
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- 16. 15 #OM2015 The increasewas largely unforeseen Growth in operating cost forecast from UKCS operators, GBP billions Source: Oil & Gas UK 2012 Economic Reports and 2015 Activity Survey 2002/3 2003/4 2004/5 2008/9 2009/10 2011/12 2013 actual (8.9) 2014 actual (9.6) 01 2003 2005 2007 2009 2011 2013 2015 2017 2019 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2010/11 2007/8 2005/6 2006/7
- 17. 16 #OM2015 Cost increasenot due to increased activity … Source: McKinsey Energy Insights Deck cargo shipped Tonnes +1.5%
- 18. 17 #OM2015 Cost increasenot due to increased activity … Source: McKinsey Energy Insights Deck cargo shipped Tonnes +1.5% Helicopter hours Hours +2.0% Wells drilled Number -4.0%
- 19. 18 #OM2015 … orhigher supplier margins Source: McKinsey Energy Insights 1 Margin as announced – adjusted for different accounting/disclosure policy. Sample includes 18 equipment, 13 EPC, 38 assets and 9 services companies EBITDA margin1 of OFSE companies, Percent 2012–14 2009–11 Assets EPCServices Equipment 10 19 23 39 8 18 22 36
- 20. 19 #OM2015 So whathas been behind the large cost increase? Source: McKinsey Energy Insights; “Meeting the challenge of increasing North Sea costs” McKinsey article 20%Increased activity
- 21. 20 #OM2015 So whathas been behind the large cost increase? Source: McKinsey Energy Insights; “Meeting the challenge of increasing North Sea costs” McKinsey article 40–50% 20% Increased unit cost Increased activity
- 22. 21 #OM2015 So whathas been behind the large cost increase? Source: McKinsey Energy Insights; “Meeting the challenge of increasing North Sea costs” McKinsey article 40–50% 20% 30–40%Greater inefficiency Increased unit cost Increased activity
- 23. 22 #OM2015 Opex example:integrity inspections cost Source: Sanitised client example Comparison of topsides integrity inspection costs per asset, GBP thousands per installation, gross 30% 20% 50% Year 1 Greater inefficiency Rate increase Increased activity Year 4 x 2.9
- 24. 23 #OM2015 Capex example:new greenfield developments Development cost, Index; 100 equal to full cost in year 2000 30% 20% 70% Actual costs 2000 Actual costs 2014 replica Source: Sanitised client example x 2.5 Greater inefficiency Rate increase Increased activity
- 25. 24 #OM2015 Something otherhighly technical industries appear to have avoided Nominal price inflation for a new commercial airliner Source: A2Mac1; manufacturer’s public data; Airline Monitor: McKinsey analysis +0.2–1.5% Nominal price inflation for a new car +1.0%
- 26. 25 #OM2015 Inspiration cancome from many sources Source: McDonalds, McKinsey Operations Practices Standards Training Auditing Workplace organisation
- 27. 26 #OM2015 Including theexisting organisation Source: McKinsey Upstream Operations Service Line Production, Indexed 110 90 10 0 70 80 100 120 8 100 2 12 14 16 242218 204 6 +12% Time hours 8 100 2 12 14 16 242218 204 6 -3%
- 28. 27 #OM2015 Some approachesare transformational Source: McKinsey Oil & Gas and RTS practices 5-year cumulative FCF impact, USD billions 4.5Total Reorganise around assets and talent De-risk and optimize major capital project Targeted production improvement External spend cost reduction Change in asset strategies
- 29. 28 #OM2015 Others relyon incremental gains 7/10 golds -50%
- 30. 29 #OM2015 The impactcan be enormous… SWN in the Fayetteville Shale Source: Southwestern Energy Investor Presentation 2015 Days to drill Lateral length 08 092007 11 201410 12 13 767 8 1112 14 18 1209 11 20141310082007 4,8194,836 4,528 4,100 3,619 2,657 5,4405,356
- 31. 30 #OM2015 …and rapid Source:Recent offshore example Offshore productivity, Earned hours per POB 13 1515 11 16 7 6 9 10 2014 ave. Week 5 Week 1 April Week 4 Mar Week 3 Feb Week 2 Start of program end April
- 32. 31 #OM2015 Initiatives likethis are starting to have an effect Source: Oil & Gas UK UKCS Opex, GBP billions, fields onstream 7.5 8.8 9.6 8.9 2013 2014 2015F 2016F -22%
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