Falling Oil Prices and The Offshore Oil and Gas Industry

Falling oil prices and the offshore oil and gas
industry: assessing the state of the market

Speakers:
Chris Rachwal, Senior Strategic Advisor, Gaffney, Cline & Associates
Robin Mann, Partner, Deloitte, Resource Evaluation & Advisory
Jim Honefenger, Regional Manager for Americas, Gaffney, Cline & Associates
Moderator:
Bruce Beaubouef,
Managing Editor, Offshore
Sponsor:
April 2015
Resource Evaluation & Advisory
Falling oil prices and the offshore oil

and gas industry: assessing the state of
the market
Oil Prices in the Past 12 Months
120
16
110
14
100
12
90
10
80
70
60
50
40
30
-2
20
Apr 2014
-4
May 2014
WTI
US$/bbl
US$/bbl
Benchmark oil prices over the last 12 months
Jun 2014
Jul 2014
Brent
Aug 2014
Sep 2014
Oct 2014
Nov 2014
Dec 2014
Jan 2015
Feb 2015 Mar 2015
Brent-WTI Differential
Crude oil prices have dropped by 55% since October 2014

Differential widened in the last 2 months due to growing North American oversupply
Source: EIA
Global Supply Increasing
4,500
4,500
4,000
4,000
3,500
3,500
3,000
3,000
2,500
2,500
2,000
2,000
1,500
1,500
1,000
1,000
500
500
0
2009
2010
Iran
Incremental US Production (Mbbl/d)
Estimated production outage (Mbbl/d)
Estimated production outages vs. increasing US production
2011
Iraq
2012
Nigeria
2013
Libya
2014
US
Shale oil production in US has largely made up for losses due to conflict in Middle East
Prices began to fall in Q3 2014 as Libya increased exports and US production continued to climb
There may be further downward pressure on oil prices if Iranian sanctions are lifted
Source: Deloitte, EIA
Effects of Supply and Demand

World petroleum supply and demand balance
7
EIA forecast
(MMbbl/d)
96
94
92
90
88
86
84
82
-1
80
2010
(MMbbl/d)
98
-2
2011
Net supply
2012
2013
World production
2014
2015
2016
Current depressed prices are expected to

increase demand
EIA forecasts world production to recede in
Q4 2015 and stabilize with consumption, with
prices expected to rise thereafter
Some have concerns that EIA forecast
consumption growth may be optimistic with
the threat of potential recessions in some
world economies
World consumption
Year-over-year changes in consumption
Worldwide consumption has been slowing

year-over-year, most prominently in Asia
Little growth is expected in North America or
Europe
Year-over-year change (MMbbl/d)
3
EIA forecast
2
-1
-2
2010
North America
2011
2012
Central and South America
2013
Europe
2014
Middle East
2015
2016
Asia and Oceania
Source: EIA Short-Term Energy Outlook April 2015
Global Offshore
Oil and Gas Industry
Areas of Growth in Offshore Activity

Number of Rigs Contracted
Arctic
3 rigs contracted
GOM (U.S.)
E. Mediterranean
76 rigs contracted
12 rigs contracted
GOM (Mexico)
E. Africa
60 rigs contracted
W. Africa
3 rigs contracted
58 rigs contracted
Brazil
53 rigs contracted
NW Australia
12 rigs contracted
Source: Deloitte REA, adapted from Rigzone, April 2015
Offshore Utilization by Area

April 2015
Region
Number of Rigs
Contracted
Africa - Other
Number of
Rigs
Available
6
Africa - West
58
Asia - Far East
April 2014
Utilization
Number of Rigs Number of

Utilization Change
Rigs Available
Contracted
50.0%
62.5%
-12.5%
92
63.0%
63
98
64.3%
-1.3%
25
30
83.3%
20
23
87.0%
-3.7%
Asia - South
34
41
82.9%
39
43
90.7%
-7.8%
Asia - SouthEast
72
121
59.5%
89
125
71.2%
-11.7%
Australia
12
16
75.0%
12
14
85.7%
-10.7%
Black Sea
60.0%
66.7%
-6.7%
Europe - East
50.0%
100.0%
-50.0%
Europe - North Sea
87
100
87.0%
82
96
85.4%
1.6%
Mediterranean
12
21
57.1%
13
19
68.4%
-11.3%
MidEast - Persian Gulf
77
106
72.6%
80
105
76.2%
-3.6%
MidEast - Red Sea
10
14
71.4%
13
16
81.3%
-9.9%
N. America - Canadian Atlantic
60.0%
100.0%
-40.0%
N. America - Mexico
60
88
68.2%
67
84
79.8%
-11.6%
N. America - US Alaska
75.0%
33.3%
41.7%
N. America - US GOM
76
197
38.6%
104
194
53.6%
-15.0%
S. America - Brazil
53
58
91.4%
63
67
94.0%
-2.6%
S. America - Other & Carib.
11
20
55.0%
13
38.5%
16.5%
S. America - Venezuela
66.7%
100.0%
-33.3%
Total / Average
602
929
66.7%
663
916
75.72%
-9.1%
Source: Adapted from Rigzone, April 2015
Areas of Growth in Offshore Activity

Number of Rigs Contracted at each Water Depth Interval
Arctic
GOM (U.S.)
E. Mediterranean
Brazil
E. Africa
GOM (Mexico)
W. Africa
NW Australia
Shallow Water (< 500 ft)

Deep Water (500 - 5,000 ft)
Ultra-deep Water (> 5,000 ft)
Offshore Rigs Contracted versus Stacked
Rigs
Contracted
(~600)
Rigs
Stacked
(~330)
UltraDeep
Deep Water
Water
UltraDeep
Water
Deep
Water
Shallow
Water
Shallow Water (< 500 ft)
Shallow
Water
Deep Water (500 - 5,000 ft)

Ultra-deep Water (> 5,000 ft)
Offshore verses Onshore activity

Worldwide Offshore
April 2015
April 2014
Change
Available
929
916
+1.4%
Contracted
602
663
-9.2%
Utilization
66.7%
75.7%
-9.0%
917
1,765
-48.0%
U.S. Onshore Rigs

Contracted
Reduced utilization
More competition between suppliers
Reduced daily rig rates
Source: Adapted from Baker Hughes Data & Rigzone, April 2015
Typical Impact Time of Reduced Product Prices

Typical impact time
Immediate 3 Months
6 Months
9 Months
1 Year
2 Years
3 Years
4 Years
5 Years
Onshore
Lease permitting activity
New Geophysical surveys
Rig contracting
Drilling
Completions
Production
Offshore
Lease permitting activity
New Geophysical surveys
Rig contracting
Drilling
Facility Manufacture
Completions
Production
Source: Deloitte REA, April 2015
Impact of Low Price and

Recent Announcements
Low Product Price Environment
Weed out under-performing projects
Reduce exploration activity
Focus on operational efficiency
Favor low cost investments completing uphole zones, re-fracturing etc.
Encourage innovation
Force service providers to reduce prices
Cause deferral of some house-keeping projects well abandonments, decommission of

pipelines and equipment reduced to the minimum regulatory requirements
Contractual obligations may cause a company to continue spending even if a project is

currently unattractive
Financially strong companies are generally less affected
Provides opportunities for contrarians and those with cash
Short life projects with a short timeframe from first expenditure to first production may be
deferred pending stronger product prices
Long term or long life projects are typically unaffected unless low product price persists for
a number of years
Off-shore projects generally slower to slow down and slower to ramp up in a recovery
Recent Events
April 14, 2015 Exploration drilling in two offshore blocks in India and Vietnam
April 9, 2015 Two exploration programs offshore east coast Canada - drilling off Nova Scotia
and a seismic program in the Jeanne dArc Basin off Newfoundland
April 9, 2015 Major discovery in the subsalt 220 miles south of New Orleans, GOM
April 8, 2015 Major acquisition in the upstream Oil and gas industry for $70 billion based on
the global LNG market and future deep water drilling
April 6, 2014 Five deepwater rigs shut down off the coast of Brazil due to the drilling
contractor filing for bankruptcy
March 31, 2015 Two rig contracts terminated in the GOM for $160MM termination fee
March 30, 2015 Super Major cuts capital spending by $15 billion US from 2015 to 2017, but is
sticking to plans to drill offshore in the Arctic
March 30, 2015 Production Sharing Contract signed to explore for oil and gas in the Rakhine
Basin, located offshore Yangon, Myanmar.
Recent Events Continued
March 30, 2015 Production began at the Hadrian South Field, located about 250 miles off the
coast of Louisiana in water depths of approximately 2,332 meters
March 30, 2015 Additional offshore discoveries in Block 2, Tanzania
March 30, 2015 Rig contract terminations with various service companies in the GOM
March 18, 2015 Cyprus has signed an agreement to extend a search for natural gas off the
east Mediterranean Islands southern coast after disappointing results from an initial exploration
round
March 16, 2015 Drilling to start in the Stabroek Block offshore Guyana
March 13, 2015 Major Eastern European explorer terminates five-year contract with large
offshore drilling operator
February 24, 2015 A number of major offshore explores have terminated drilling contracts for
a total of 6 rigs with Drilling companies in Brazil, the GOM and the UK North Sea
Resource Evaluation & Advisory
17
Offshore Gulf of Mexico

Gaffney, Cline & Associates
April 23, 2015
2015 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of
Gaffney, Cline & Associates and includes valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the
United States of America and other countries. The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior
written consent of Gaffney, Cline & Associates, and may not be used directly or indirectly in any way detrimental to Gaffney, Cline & Associates interest.
Major Themes
Low oil prices resulted in dramatic decline in worldwide and US drilling

Offshore GOM rig counts
Until now, remained within normal seasonal levels
Since March, dropped dramatically
Currently, offshore day rates under pressure because of NOC and IOC renegotiations
Despite short-term pain, long-term GOM outlook strong because of deep water (shallow
water declining)
New projects
Growing production
New discoveries
Interest in new leases
Mexico
Lots of interest in southern shallow water
Northern deepwater likely delayed by low oil prices
Offshore Gulf of Mexico

State Waters
Shallow/Shelf
Deepwater
N. DW
S. DW
S. SW
Pain Likely in 2015 but Deepwater should be Better
Rig activity in the Gulf of Mexico has historically not been driven by price.
Since March, rig activity in the Gulf of Mexico has fallen.
US GOM Percent Rig Utilization

90
80
70
Percet Utilization
60
50
40
30
20
10
0
Apr-14
Source: Rigzone, April 10, 2015
Nov-14
Mar-15
Apr-15
Production from Gulf of Mexico is Deepwater
Source: BSEE
Deepwater, greater than 1,000 ft, represents the majority of the production.
Deepwater is the focus of future activity.
Forecasted Production
2014: Eight new fields

-
Production 2015/16
2015/16: Thirteen new fields

-
Exceeds start-ups since 2007
Projected Production
- New projects + redevelopment
+ expansion of older fields
- Forecast
2015: 1.52 MMBbl/d

2016: 1.61 MMBbl/d
Rate of Return & Cashflow Illustrations
Full cycle break even prices for selected

worldwide deep water projects range from
$30/bbl to $100/bbl to achieve a 10% rate of
return
Significant difference in the cash flow

between onshore unconventional projects
and deep water GOM projects.
Much higher rates of return for deep water

GOM projects than onshore unconventional
projects at crude prices under $90/bbl
Source: Global Data

Source: Global Data
2011 Gaffney, Cline & Associates. All Rights Reserved.
Trends in the Gulf of Mexico

Costs
Reduction in rig day rates
- Renegotiation of contracts
- Cancellation of contracts
Use of subsea tieback to

reduce the high cost of surface
structures
Collaborative efforts
Lower lease sales
Risks
Use of partners:
- 2014 lease sale 1/10 partners
- 2015 lease sale 7/10 partners
Mexico Reform Offshore

Low oil prices threaten near-term activity; mitigate investor enthusiasm
immediately following opening
Shallow water exploration
39 companies purchased data packages
Shallow water extraction

9 have purchased and 14 more have applied
North Deepwater
Lots of interest close to US
Target data availability July/August
South Deepwater
Little interest now
Looking Ahead
Long-term
Trends
Strong commitment in deepwater
Deepwater producers are staying the

course
Dominance of Majors
Diversity of investments
Continued lease sale interest
Short-term vulnerability
Risk mitigation
Recent drop in drilling
Increase use of partnerships
Impact on near-term activity
Cost reduction
Time frame of future projects
Use of subsea tiebacks

Changes in drilling contracts
Cost-effective use of capital through
calibration
Mexico has a lot of interest, but
Offshore Africa
Gaffney, Cline & Associates

April 23, 2015
29
2014 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of
Gaffney, Cline & Associates and includes valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the
United States of America and other countries. The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior
written consent of Gaffney, Cline & Associates, and may not be used directly or indirectly in any way detrimental to Gaffney, Clines & Associates interest.
Major Themes
Offshore Africa rig counts in decline but drop is not uniform
60 of 94 rigs active (Rigzone) = 63.8% utilization
Offshore day rates under pressure,

ENI negotiated a day rate for a jack-up in Nigeria that is directly
linked to oil price, varies from $75K to $125K/day
Deep Water exploration and appraisal drilling declining,

Cairns Senegal finds SNE-1 and Fan-1 a beacon of hope
Existing mega-projects in Ghana and Angola proceeding

Support 4-6 multi-year high spec Drillship contracts
Pressure on satellite tie-back projects, as subsea tie-back costs

slower to respond to oil price decline
SW Bonga rejected bids received, re-tender underway
Shallow water development drilling holding up well in Angola,

Congo, Gabon, Cote dIvoire, Cameroon, Nigeria
30
Bullish Africa exploration view from 2013
31
Rest of Africa
Pre-Salt West Africa
Focus countries
Tunisia
Aptian Salt Basin
Morocco
The Big Upside?

But where is it working?
Algeria
Libya
Egypt
Mauritania
Mali
Niger
Sudan
Chad
Eritrea
Senegal
Burkina
Faso
Guinea-Bissau
Benin
Togo
Guinea
Cote
dIvoire
Sierra Leone
Nigeria
Ethiopia
Liberia
South
Sudan
Central African
Republic
Ghana
Cameroon
Somalia
EG
Gabon
Uganda
Congo
DR
Congo
Aptian Salt Basin marked in Blue,

spans offshore Gabon, Republic of
Congo, DRC and Angola.
Tanzania
Angola
Zambia
Zimbabwe
Namibia
Botswana
South
Africa
32
Kenya
Tectonic setting
The opening of the South Atlantic
During the late Jurassic and throughout the Cretaceous a large scale
rifting event led to the break-up of the Gondwana supercontinent and the
development of the South Atlantic ocean.
33
Heine et al. (2013)
How similar is W. Africa to Santos/Campos Basin?
34
The Santos and Campos basins of Brazil were formed adjacent to those
in Angola during the rifting event and therefore stratigraphy and structure
will be analogous despite the fact that the South Atlantic now separates
the two.
Plate reconstruction by GeTech, published in GEO ExPro (2013).
The West African pre-salt

Shift towards pre-salt exploration
Proportion of Pre/Post salt exploration wells in the Aptian salt basins of Gabon,
Republic of Congo, DRC & Angola, from 1954-2014.
100%
90%
80%
Tupi (Lula)
discovered in 2006
70%
% of wells
60%
50%
Post-Salt Wels
Pre-Salt Wells
40%
30%
20%
10%
0%
Year
35
Data from Deloitte Petroview Sub Saharan Africa October 2014 dataset
West African margin

Rio Muni Basin
Pre-Salt largely untested
Rio Muni
basin
Pre-salt clastic
reservoir targets
Basin borders (Fracture zones,

structural arches and highs)
West African Coastal basins
Gulf of Guinea basins
Niger Delta
West African Aptian salt basins
36
Orange River coastal basins

Adapted from: Brownfield & Charpentier (2006)
West African margin

Gabon Basin Pre-Salt
Mature oil play under shelf but
Diaman-1B (Total), Leopard-1
(Shell) tested thick gas pays in
Water depths 5,500-6,500
W
Pre-salt clastic
reservoir targets

Niger Delta
37

Gabon
basin
West African margin

Congo Basin Pre-salt
Deep Water under evaluated
Shelf plays very successful
NE
SW
Congo
basin
Pre-salt clastic
reservoir targets
Patchy carbonate
reservoir targets

Niger Delta
38

Gabon
Republic of
the Congo
DRC
Pre-salt clastics Republic of Congo

Vandji Marine
Angola
Zambia
Kilometres
0
Nene Marine
250
500
Namibia
MBoundi
Minsala Marine
Tilapia
Kouakouala
Pointe Indienne
Mengo
Loufika
Litchendjili
Viodo
Lidongo X Marine
Bindi
Loussima
Kundji
Tchiniambi
Emeraude
Manzi
39
Move
Deloitte Petroview October 2014 Sub Saharan Africa Dataset
Pre-salt clastic fields

discovered before 2006
Pre-salt clastic fields
discovered after 2006
The first pre-salt clastic field

discovered was Pointe
Indienne in the Republic of
the Congo in 1957.
Multiple discoveries in the
pre-salt clastic play through
to present.
Hydrocarbons encountered
are a combination of oil and
gas.
All in <200m water depth.
West African margin

Kwanza Basin
Pre-salt clastic
reservoir targets
Pre-salt carbonate
reservoir targets
Potential basement
reservoir targets

Neocomian-lower Aptian clastic
reservoir targets
Neocomian- Barremian carbonate
reservoir targets
40
Niger Delta
Kwanza
basin
Gabon
Republic of
the Congo
DRC
Kwanza Pre-salt carbonate play

OMBOVO-1
Map of
Southern
Kwanza
Basin
BALEIA-1
ORCA-1
KAMOXI-1
MAVINGA-1
Kilometres
0
CAMEIA-1
CAMEIA-2
JACARE-1
BICUAR-1
MUPA-1
LOCOSSO-1
DILOLO-1
AZUL-1
Statoil
cancelled
rig contract
Only dry holes and

CO2 gas outboard
of this area so far
PUMA-1
DISCOVERY
P&A
OGONGA-1
41
Deloitte Petroview October 2014 Sub Saharan Africa Dataset
Zambia
LONTRA-1
Angola
DRILLING
250
500
Namibia
First well to test the pre-salt

carbonate was Baleia-1 in 1996.
No further wells drilled until 2011
Several significant discoveries
Hydrocarbons encountered
are gas-rich.
Six+ recently announced failures
at greater water depth may shift
focus to an inboard pre-salt
carbonate sweet-spot.
The Brazilian analogue

Is this an appropriate analogue?
Cameia
Tupi (Lula)
Santos
Kwanza
Fault
Shale and Siltstone
Sandstone
Break-up Unconformity
Basement rocks
Carbonate
Salt
The stratigraphic sequence is comparable, with pre-salt clastic and

carbonate lithologies encountered on both margins.
There are however a number of differences between the two margins,
most notably of which is the ubiquitous thickness of salt of the Santos
basin which is often thin or even absent in parts of the Kwanza.
42
Adapted from Brownfield & Charpentier (2006) & Feijo (2013).
Gas Developments
Many of the Deep Water West African pre-salt discoveries are gas rich,
in contrast to the predominance of oil found in the pre-salt of Brazil
Under current Angolan contract terms, operators are not entitled to
any gas discovered.
Gabon, Republic of the Congo and DRC have more favourable gas
development terms, but lack of infrastructure or clustered resources
will delay gas developments
African Gas Demand
Ghana, Cote dIvoire, Cameroon, Gabon, Mauritania & Nigeria all have
local gas market developments that are not linked to oil prices
Thus developments can proceed as long as funding for gas
utilization projects based on Power Generation or Petrochemicals
proceed as planned
Backed by International Agencies with gas payment guarantees
43
Thank you
44
Image source: Wikipedia
Falling oil prices and the offshore oil and gas

industry: assessing the state of the market
Questions ?
Thanks to our speakers:
Robin Mann
Jim Honefenger
Chris Rachwal
Thanks to our sponsor:
April 2015

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Falling oil prices and the offshore oil and gas

industry: assessing the state of the market

Resource Evaluation & Advisory

Falling oil prices and the offshore oil

Oil Prices in the Past 12 Months

Benchmark oil prices over the last 12 months

Feb 2015 Mar 2015

Crude oil prices have dropped by 55% since October 2014

Global Supply Increasing

Incremental US Production (Mbbl/d)

Estimated production outage (Mbbl/d)

Estimated production outages vs. increasing US production

Effects of Supply and Demand

Current depressed prices are expected to

Year-over-year changes in consumption

Worldwide consumption has been slowing

Year-over-year change (MMbbl/d)

Central and South America

Asia and Oceania

Source: EIA Short-Term Energy Outlook April 2015

Areas of Growth in Offshore Activity

Source: Deloitte REA, adapted from Rigzone, April 2015

Offshore Utilization by Area

Asia - Far East

Number of Rigs Number of

Europe - North Sea

MidEast - Persian Gulf

MidEast - Red Sea

N. America - Canadian Atlantic

S. America - Other & Carib.

Source: Adapted from Rigzone, April 2015

Areas of Growth in Offshore Activity

Shallow Water (< 500 ft)

Source: Deloitte REA, adapted from Rigzone, April 2015

Offshore Rigs Contracted versus Stacked

Deep Water (500 - 5,000 ft)

Source: Deloitte REA, adapted from Rigzone, April 2015

Offshore verses Onshore activity

U.S. Onshore Rigs

Typical Impact Time of Reduced Product Prices

Source: Deloitte REA, April 2015

Impact of Low Price and

Low Product Price Environment

Weed out under-performing projects

Reduce exploration activity

Focus on operational efficiency

Favor low cost investments completing uphole zones, re-fracturing etc.

Force service providers to reduce prices

Cause deferral of some house-keeping projects well abandonments, decommission of

Contractual obligations may cause a company to continue spending even if a project is

Financially strong companies are generally less affected

Provides opportunities for contrarians and those with cash

Recent Events Continued

March 30, 2015 Additional offshore discoveries in Block 2, Tanzania

Resource Evaluation & Advisory

Offshore Gulf of Mexico

Low oil prices resulted in dramatic decline in worldwide and US drilling

Offshore Gulf of Mexico

Pain Likely in 2015 but Deepwater should be Better

US GOM Percent Rig Utilization

Source: Rigzone, April 10, 2015

Production from Gulf of Mexico is Deepwater

2014: Eight new fields