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Release Notes

QUE$TOR

2016 Q3 Release

November 2016

QUE$TOR is a registered trademark of IHS.

Windows is a registered trademark of Microsoft


Corporation.
QUE$TOR 2016 Q3 Release Notes

Contents

Introduction 2

Version compatibility 3

Whats on the CD-ROM 3

System requirements 4

Application execution 5

General upgrades in QUE$TOR 2016 Q3 6

Carbon steel X52 material option for onshore pipelines and


flowlines 6

Tanker and Topsides leasing 6

Commingling manifold subsea distribution unit 8

Equipment in Subsea component 8

Addition of comments on locked values 9

Selected other technical revisions 11

Cost database update 12

General 12

Oil Price Trend and Currency Market 13

Steel 17

Equipment 18

Bulks 19

Offshore rigs 21

Offshore vessels 24

Subsea 26

Labour 28

Land rigs 30

Contacting customer support 32

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QUE$TOR 2016 Q3 Release Notes

Introduction
We are pleased to provide the 2016 Q3 release of the QUE$TOR cost
estimating software.

All cost databases have been reviewed and updated to incorporate


current unit rates, exchange rates and man hour costs for all regions to
reflect third quarter 2016 prices.

The main technical enhancements made to QUE$TOR 2016 Q3 are:

l Carbon steel X52 material option for onshore pipeline and


flowlines.
l A leasing option on the OPEX cost sheet for tankers and topsides.
l Subsea distribution unit on commingling manifolds.
l User definable subsea equipment.
l Addition of comments on locked values.

The above changes as well as numerous other improvements and


minor bug fixes have been made at the request of users and through
internal review. We actively encourage feedback from users as a
means of improving the accuracy and ease of use of the program.

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QUE$TOR 2016 Q3 Release Notes

Version compatibility
Projects created in QUE$TOR v8.0 and later are compatible with
QUE$TOR 2016 Q3. However, projects created or saved in QUE$TOR
2016 Q3 cannot be opened in earlier versions.

Opening a project created in an earlier version of QUE$TOR will result in


the costs and technical calculations automatically being updated, except
where unit rates or results have been locked when creating the original
project. Changes will be made permanent when the project is saved
and the case will no longer open in the earlier version. It is therefore
advisable to make a copy of your project file before opening it in the
new version.

QUE$TOR allows multiple versions of the program to be installed side by


side in order to view projects created using earlier databases.

Whats on the CD-ROM


The QUE$TOR 2016 Q3 CD-ROM contains the following:

l QUE$TOR (2016 Q3) installation files.


l An Application directory containing QUE$TOR (2016 Q3) program
files.
l A Documents directory containing a copy of the full help file, the
quick start guide and a copy of the full and short release notes in
portable document format (.pdf).
l A dotNET Framework directory containing the executable to
install the required .NET Framework on your machine if it is not
already installed.
l A FlexNet directory containing the executables and installation
instructions necessary to set- up and manage a network licence
server.
l A Sentinel SuperPro Driver directory containing the executable to
install the licence security key (dongle) driver (for single user
licence dongles) on your machine if it is not already installed .
l A Utils directory containing a set of utilities to assist IHS support
staff with troubleshooting should any problems arise whilst
installing or running the application.

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QUE$TOR 2016 Q3 Release Notes

System requirements

QUE$TOR 2016 Q3

Windows 7 SP1 / Windows 8 /


Operating system
Windows 8.1 / Windows 10 [1]
Application disk space 275 MB
Disk space / project ~1 MB
Disk space / procurement strategy ~3 MB
Minimum monitor resolution 1024 x 768
Licensing Network or USB port

[1] The 32- bit (x86) and 64- bit (x64) versions of these operating
systems are supported.

Installing the software from the QUE$TOR installation CD-ROM

l The software on the QUE$TOR CD-ROM can only be run if you have
a valid security key (dongle) or access to a network licence but
these are not required when installing the software.

l Load the CD-ROM into your CD drive.

l The setup program will automatically detect if you dont have the
required Microsoft .NET Framework version already installed and
provide a warning. It can be downloaded from Microsofts website
by clicking on the Yes option. Alternatively, run the file located in
the dotNET Framework sub-folder of the QUE$TOR CD-ROM.

l To install the Sentinel SuperPro dongle driver (if not already


installed) run the Sentinel System Driver Installer 7.5.7.msi
located in the Sentinel SuperPro Driver sub- folder of the
QUE$TOR CD- ROM. Reboot your machine to complete the
installation of the Sentinel driver. Note, this step is only required
for single user / standalone licensing.

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QUE$TOR 2016 Q3 Release Notes

l To install QUE$TOR 2016 Q3 run the file setup.exe in the root


folder of the QUE$TOR 2016 Q3 CD-ROM.

l Once installed, an icon for QUE$TOR 2016 Q3 will appear on your


desktop. A group will also appear on the start menu under All
Programs\IHS\QUE$TOR 2016 Q3 containing shortcuts for the
Database editor, the Project editor, the Project viewer, the main
QUE$TOR application and the Unit editor.

l If you get any warnings during the installation then please contact
the QUE$TOR support desk, support_questor@ihs.com.

l You are now ready to run QUE$TOR providing your dongle or


network licence has been updated to run QUE$TOR Offshore or
Onshore 2016 Q1.

Note:QUE$TOR 2016 Q3 supersedes previous versions but can be


installed alongside them. You should install the Sentinel security key
software before the dongle is plugged in. If your dongle has not been
updated to run QUE$TOR 2016 Q1/Q3, contact the QUE$TOR licensing
desk (questor_ licensing@ihs.com) to get an email update for your
dongle licence. If you use a network licence please ask your licence
administrator to contact the QUE$TOR licensing desk.

Application execution
l To run the software click Start and follow All Programs > IHS >
QUE$TOR 2016 Q3 > QUE$TOR 2016 Q3 or double-click the
icon created on your desktop.

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QUE$TOR 2016 Q3 Release Notes

General upgrades in QUE$TOR 2016 Q3


In response to feedback the following features have been implemented
in QUE$TOR 2016 Q3.

l Carbon steel X52 material option for onshore pipeline and


flowlines.
l A leasing option on the OPEX cost sheet for tankers and topsides.
l Subsea distribution unit on commingling manifolds.
l User definable subsea equipment.
l Addition of comments on locked values.

Carbon steel X52 material option for onshore


pipelines and flowlines
Carbon steel X52 has been added as a material option for onshore
pipelines and flowlines. This is in addition to the current Carbon steel
X60, Clad 316 stainless, Duplex, CRA and GRP options.

The new Carbon steel X52 material is in many ways similar to Carbon
steel X60 although is a cheaper alternative when yield stress is not a
determining factor in pipeline sizing. In lower pressure scenarios
QUE$TOR will often default to a minimum wall thickness for a given line
size based on industry standards. In some of these scenarios a cheaper
material with a lower yield strength can be selected with no increase in
the pipeline wall thickness resulting in a cheaper overall pipeline. The
new Carbon steel X52 has no other changes in installation durations or
ancillary costs as compared with the default Carbon steel X60. The new
Carbon steel X52 is never selected by default but can be chosen by the
user.

Tanker and Topsides leasing


The option to evaluate a lease cost for the tanker and topsides has been
included. When a tanker or topsides is added to the main schematic the
option to lease is available on the component Lease tab. When the
option is active a lease calculation is added to the OPEX/Leases sheet.
The leasing calculation will convert the CAPEX amount into an annual
leased amount.

The calculated CAPEX cost can be split between the lease company and
the operating company with the lease company CAPEX being converted
into an annual operating cost. The leasing option can be configured

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QUE$TOR 2016 Q3 Release Notes

depending upon the amount of capital being leased and the economic
environment of the leasing company by adjusting the amount of
corporation tax and expected discount rate for the lease company.

Figure 1 - Tanker and Topsides leases

The lease calculation can be modified depending upon the terms of the
lease.

The model assumes that the asset will be leased for its entire useful life
which is the same as the project field life.

The calculation for the lease cost is performed on a quarterly basis


solving to give a Net Present Value (NPV) of zero for the leasing
company.

The following formula is used:


T
Ct
NPV = t
C0 + CT
t =1 (1 + r)

Where
t = Time interval (with T equal to the field life)

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QUE$TOR 2016 Q3 Release Notes

Ct = Net Cash Flow at time t. ($)

Income OPEX Tax Rate(Income OPEX


Depreciation amount in year t)
r = Real discount rate. (%)
C0 = Initial CAPEX amount.($)

(1- Tax rate) * Upfront costs CAPEX outlay


CT = Residual CAPEX amount.($)

The leasing rates are editable on the leases sheet in OPEX and
modifications can be made to allow for:

l Projects where the asset life is greater than the field life
l Using an asset that has been previously deployed
l Lease purchase (fixed percentage or remaining book value)
l Joint asset ownership

Commingling manifold subsea distribution unit


The option to add a subsea distribution unit to commingling manifolds
has been included. This can enable individual wells or templates and
clusters to be controlled from a distribution unit connected to the
commingling manifold. The size of the distribution unit is dependent
upon the number of umbilical connections that are being made to the
unit. It is assumed that the distribution unit will not be automatically
enabled but can be selected if the design requires it.

Equipment in Subsea component


The option to add bespoke equipment in the subsea schematic is now
available which will create an equipment line on the subsea cost sheet
where the unit rate can be entered.

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QUE$TOR 2016 Q3 Release Notes

Figure 2 - Subsea equipment input form

The equipment form shown in figure 2 allows for the DSV installation,
design and project management durations to be configured. The DSV
installation duration for each subsea equipment item is determined
based on the water depth and type of equipment the custom equipment
item is treated as. The design and project management manhours are
based on the treat as equipment type only.

Addition of comments on locked values


The option to add comments to locked values has been extended over
the last release to allow users to attach comments to all locked cost
sheet and sub cost sheet values both quantities and unit rates plus
editable values on the OPEX and Investment and Production Profile
(IPP) sheets.

Editing a comment is done by right clicking on the value to reveal the


context menu with the menu options "Locked", "Insert comment", "Edit
comment" and "Delete comment" if a comment is present. Comments
on a locked value can be identified through a red triangle above the lock
symbol. The comments on locked values are reported in the locked
values report and the text can also be seen on the tooltip when hovering
over the locked value. In addition the tooltip shows the login identifier of
the commenter, the date and time comment was modified. For input
values the precision of the number is also displayed.

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QUE$TOR 2016 Q3 Release Notes

Figure 3 - Comments on locked cost sheet values

Note: Unlocking a value removes any user comment that is


associated with it.

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QUE$TOR 2016 Q3 Release Notes

Selected other technical revisions


A number of other technical revisions have been made to the
application.

l When there are living quarters on topsides unit, the input report
now has a manning breakdown list by type and shift rotation, along
with the total number of beds required.
l The ghosted status of a component (CAPEX & OPEX) now appears
in the locked values report when the component is ghosted to
make the ghosted status of the component clearer.
l Onshore construction civils costs (General, Foundations, Roads
and Buildings) unit rates are now reproduced from the civils sub
cost sheet onto the main cost sheet. This change applies to wellpad
groups, production facilities, terminals, pipeline booster stations
and LNG regasification components.
l Oil export now includes an export rate input box; this allows for
explicit specification of the export rate used in sizing the export
pumps. By default, this equals the pipeline oil flowrate when
export is via pipeline or ten times the Topsides oil capacity when
export is via offshore loading/ship to ship.

Note:A previously locked Civils or Civils construction unit rate or


quantity on the main cost sheet will be lost when upgrading to the latest
release.

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QUE$TOR 2016 Q3 Release Notes

Cost database update


Substantial effort has gone into reviewing all cost databases to bring
them in line with third quarter 2016 costs.

Note: On saving the project, the QUE$TOR 2016 Q3 cost estimate will
overwrite earlier costs except where those costs were locked on the
cost sheet or in the database. Therefore if you wish to retain a copy of
your original estimate you should first create a duplicate of the project
before opening and saving it in QUE$TOR 2016 Q3.

The following sections outline where the most significant changes to the
regional cost databases have been made.

General
Global upstream activity has been slowing uninterruptedly since the
crude oil price crashed at the end of 2014. Despite oil prices recovering
from a twelve- year low in January 2016 of below $30/bbl and now
stabilising at about $50/bbl, spending and activity levels in the industry
remain suppressed. The number of visible Front End Engineering
Design (FEED) awards has increased compared with 2015, although it
remains below 2014 levels.

Suppliers and contractors have continued to respond to the challenging


market situation by cutting costs, reducing supply capacity, workforce,
and capital commitments. Costs have seen massive declines,
significantly lowering breakeven prices of new project developments.
Operators have continued to cut internal costs, renegotiate prices with
contractors, rethink projects and in general to place a high focus on cost
reduction, which has yielded huge results. Breakeven project prices
have fallen dramatically as the downturn has progressed, creating
some optimism despite oil prices having remained relatively low.

Workforce reductions among the largest service contractors have been


massive in all regions and further layoffs are expected as the downturn
continues and activity levels remain weak. In addition, responding to
the current oversupply, contractors have cancelled or postponed new
build programmes in order to reduce future capital commitments and
not flood the market with additional capacity.

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QUE$TOR 2016 Q3 Release Notes

With this current downturn being lower for longer, service companies
are encountering further financial challenges, most likely resulting in a
major restructuring of the service industry. As a result, the operators
should be prepared to face a completely different service sector once
the downturn ends.

After two years of deflation, upstream costs have started to trend


upwards in the second quarter of 2016, essentially on higher material
prices, most notably higher steel prices. Although the rise in material
prices is likely to fluctuate in the short-term, with adjustments expected
in the remaining part of this year, some project costs have started to
increase. Annual cost escalations are expected from 2017 onwards, on
both industry recovery and stronger fundamentals in the global
economy, likely pushing material and labour costs up.

Oil Price Trend and Currency Market


Crude oil has shown a slow rebound in prices after reaching the bottom
in Q1 2016 when oil prices went below the $30/bbl mark, as shown in
the graph below (Figure 4).

Figure 4 - WTI and Brent crude oil prices

In Q3 2016 oil prices almost reached the $50/bbl level (exceeded in


October), showing some volatility and similar variations for both the
West Texas intermediate (WTI) and Brent price. Table 1 shows how the
minimum and maximum oil prices have varied in the last two years.

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QUE$TOR 2016 Q3 Release Notes

WTI (USD/bbl) Brent (USD/bbl)


Time period
Min Max Min Max
Q1 2015 43.4 53.6 45.1 61.9
Q3 2015 38.2 56.9 41.6 61.7
Q1 2016 26.2 41.5 26.0 40.5
Q3 2016 39.5 49.0 40.0 49.7

Table 1 - Crude oil price spread

At the end of September 2016, at an informal meeting in Algeria, the


Organization of the Petroleum Exporting Countries (OPEC) reached a
preliminary agreement to cut oil production, the first time since the
financial crisis hit the global economy in 2009. The decision caused
global oil prices to jump only six percent, not as much as expected, due
to the fact that there are still a few obstacles to overcome. Among
these, the lack of guidelines on how the output reduction will be split
among members and procedures to ensure that all parties respect the
deal seem to put at risk the accomplishment of the final agreement,
scheduled for end of November 2016. Other factors, which will likely
play an important role in the negotiations, include whether or not Russia
takes part in the accord; the expected increase in oil production in Libya
and Nigeria following severe supply disruptions; and the ongoing rivalry
between two major producers - Saudi Arabia and Iran.

OPECs attempt to curtail oil production, if it materialises at the


November meeting, could boost crude prices and bolster oil revenues.
However, Irans intention to keep pumping oil to reach pre- sanction
levels threatens to pose a serious barrier to reaching a final agreement.
At the moment industry experts have no other option than adopting a
wait-and-see approach as the positive impact of the preliminary oil deal
in September has been overshadowed by doubts about its effective
implementation.

The currency market has shown a mix of depreciation and appreciation


of foreign currencies versus the US dollar (USD), with the Euro (EUR)
holding strongly whilst the British pound (GBP) lost almost 10%
compared to Q1 2016, as result of the Brexit decision. The USD is
ending the third quarter of 2016 on a strong note, despite the
uncertainty related to the imminent presidential elections. On the other
side, the strength of the Euro seems destined to fade given the
forthcoming election cycle involving several of the major EU players.

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The Norwegian kroner (NOK) exchange rate has remained highly


dependent on oil, and gained around 3% of its strength against USD
since the first quarter of 2016.

The GBP is extremely vulnerable as uncertainty stemming from the


Brexit vote will continue to deter investment. The initial Brexit shock on
business and consumer confidence was slowly fading at the end of the
summer, after a weak pound helped to boost British exports; but the
recent declaration by the UK Prime Minister that the UK will trigger
Article 50 in March 2017 has generated further instability. However,
chances are high that negotiations will not start any time soon since the
UK government has ruled out the initiation of the formal negotiations
this year and progress will likely be limited at least until after general
elections in France in 2017. At the moment of writing, the GBP has lost a
further 5% compared to the rate used as representative of Q3 2016 in
Table 2; however the financial market seems to be considering the
possibility of a further depreciation in sterling in the short-term.

Emerging-market currencies enjoyed a steady rally since late February,


with the exception of the Chinese yuan renminbi (CNY) which weakened
broadly. The Russian rouble (RUB), primarily influenced by energy price
dynamics and European growth prospects, seems to have found a
period of stabilization after a steady six-month rally. The Brazilian real
(BRL), influenced by more stable industrial production as a result of the
new governments fiscal austerity, has recovered well, up by 11%
between Q1 and Q3 2016.

Latin Americas economy remained weak, with the Argentinian peso


(ARS), Venezuelan bolivar (VEF) and Mexican peso (MXN) all weakening
against the USD since Q1 2016. The outlook for Mexico has an added
degree of uncertainty, due to its important ties to the USA and the
latter's impending presidential election.

Table 2 gives the exchange rates, averaged over the last two weeks
before the end of each quarter, of the major local currencies expressed
as local currency equivalent to 1 USD, and the percentage change
between Q3 2016 and Q1 2016.

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QUE$TOR 2016 Q3 Release Notes

Local Percentage
Region Country Q1 2016 Q3 2016
Currency Change
North America Canada CAD 1.32 1.32 0.0%
Argentina ARS 14.6 15.2 4.0%
Brazil BRL 3.66 3.24 -11.4%
Chile CLP 669 662 -1.0%
South and Cen-
Colombia COP 3,058 2,898 -5.2%
tral America
Mexico MXN 17.5 19.6 12.1%
Peru PEN 3.32 3.32 -0.1%
Venezuela VEF 6.29 9.98 58.7%
Eurozone EUR 0.892 0.893 0.1%
West Europe Norway NOK 8.44 8.17 -3.2%
UK GBP 0.701 0.769 9.7%
Czech Republic CZK 24.1 24.1 0.0%
Kazakhstan KZT 343 336 -2.0%
Poland PLN 3.81 3.84 0.7%
East Europe
Russia RUB 68.5 64.1 -6.4%
Turkey TRY 2.87 2.97 3.6%
Ukraine UAH 26.2 25.6 -2.0%
Australia AUD 1.32 1.32 -0.7%
China CNY 6.50 6.67 2.7%
India INR 66.7 66.7 0.0%
Indonesia IDR 13,142 13,066 -0.6%
Japan JPY 112 101 -9.8%
Asia South Korea KRW 1,167 1,106 -5.2%
Malaysia MYR 4.04 4.13 2.0%
Singapore SGD 1.37 1.36 -0.4%
Taiwan TWD 32.5 31.4 -3.4%
Thailand THB 35.0 34.6 -1.0%
Vietnam VND 22,096 22,073 -0.1%
Algeria DZD 109.5 108.9 -0.6%
Nigeria NGN 197.4 313.3 58.7%
Africa
Angola AOA 158.7 165.1 4.0%
South Africa ZAR 15.4 13.8 -10.6%
Saudi Arabia SAR 3.75 3.75 0.1%
Middle East
UAE AED 3.67 3.67 0.0%

Table 2 - Exchange rate fluctuations of major local currencies

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Steel
After bottoming- out in the first quarter of 2016, steel prices for all
products recovered sharply. Prices rallied for months before faltering
and falling slightly, undermined by the unchanged fundamentals of the
market. The reality remains that the steel industry grew to its current
proportions in order to supply the Chinese construction sector. Until
mid-2014 China was producing and consuming 50% of the worlds steel.
Since its policies shifted towards generating growth through a
consumer economy, China has tried to hold on to as much steel
production as possible (mainly to stave off mass- unemployment),
exporting vigorously to replace its internal consumption. This has
flooded global steel markets, leading to the closure of mills around the
world and the recent enactment of anti-dumping measures to prop up
local producers.

When iron ore prices spiked early in the second quarter of the year,
mills in China raised their prices and passed on their higher costs since
they were producing at-cost and had no other option; some are only
breaking even, thanks to government subsidies. Mills around the world
also took advantage of this rare reprieve to raise their own prices.
Products covered by new anti-dumping legislation managed to hold on
to their increases and surged even further as mills no longer saw
themselves in competition with cheap Chinese steel. Even though their
prices fell after the rally ended, overall they still increased greatly,
some by double-digit percentages.

In order to best understand how steel costs have changed in the past 6
months, it is helpful to break the market down by its dominant end-
users. As far as upstream development is concerned, the two main
categories are steel products that are impacted greatly by upstream
spending (i.e. Oil Country Tubular Goods [OCTG] and linepipe), and
those that are dominated by construction and automotive spending (i.e.
structural steel and reinforcing bars for construction, hot rolled sheets
and coils for automotive). The former has not recovered very much at
all over the past 6 months. While linepipe prices in some regions are
modestly higher (especially in Europe), OCTG prices have continued to
fall unimpeded as the industry oversupply has been largely left
untouched due to another year of low upstream spending.

Steel consumption by the construction and automotive industries has


not been especially strong, but that did not stop prices from
experiencing a great deal of volatility. The relentless exporting of
Chinese steel products for construction has led to protectionist
measures being taken in North America and Europe, resulting in the

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QUE$TOR 2016 Q3 Release Notes

first price hikes in around two years. While construction spending is yet
to recover meaningfully, it has been far more stable than upstream
spending and as a result products consumed by its activities have fared
better and their markets do not suffer from oversupply. This has helped
structural steel and reinforcing bar maintain more of the rise in their
prices from the second quarter compared to other products, especially
those in oversupply.

The rally in the second quarter of 2016 was unexpected both in timing
and severity. Its collapse later that quarter (and more recently) lends
credence to the idea that market fundamentals have been left
unchanged. While some products will see further declines in their
prices, the bottom hit early this year is unlikely to rematerialize.

Equipment
Global equipment costs have not changed much over the last six
months. While prices for most product categories were flat, decreases
were observed in some, especially highly- engineered equipment.
Overall this continues the trend of falling equipment prices for upstream
development.

When the downturn began equipment prices were under much less
downwards pressure than other categories. This was because lower oil
prices encouraged downstream investment, and equipment suppliers
could adjust their output thanks to the modular nature of equipment
manufacturing. This protected suppliers for around a year, and since
then they have been competing to capture business as projects get
cancelled and delayed worldwide. Lead times for a wide variety of
equipment have fallen over the past six months due to anaemic
demand.

Rotating equipment is the category most impacted by the downturn


since the first quarter of 2016. This category had the lowest
combination of demand and backlog activity, leading to a reduction of
over 20% in lead times. Complex pumps and centrifugal compressors
were down the most, while turbine costs increased modestly. Heat
exchanger costs fell slightly, again due to competition over limited
demand. Vessel prices for both atmospheric and pressurised storage
were down slightly despite strengthening material costs. Metering,
control, and communications equipment costs seem to have not
experienced any change.

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Drilling equipment costs fell over the past six months as well. Demand
for wellheads and trees can only come from upstream investment, and
so suppliers lowered prices once more to attract enough business to
weather the downturn. Equipment costs usually track globally, with
regional aberrations usually being caused by volatile exchange rates.
The only regions to experience significant deviations from the changes
described in this section are Russia and Latin America. Both saw
currencies strengthen versus the USD, leading to higher equivalent
costs for items manufactured locally.

While higher metal prices have been recorded recently (especially


carbon steel), equipment prices are being driven by supply and
demand. Equipment manufacturers avoided reacting to the lower oil
price environment by maintaining prices and so today they still have a
little further before they bottom out. It is unclear if this will be the case
however, as stabilizing oil prices are beginning to generate more
optimism in the industry about the return of investment confidence. If
more projects start going through, competition over existing demand
may ebb, halting the fall in equipment prices. Higher material and
labour costs will also contribute to this, though only after supply and
demand balance more closely and suppliers return to the backlogs they
are most comfortable with maintaining.

Bulks
The upstream bulk market is strongly correlated with construction
spending as activities in both markets share their items of largest
expenditures (i.e. concrete and cement, insulation, wiring, electrical
components, simple valves). This has meant that costs in this market
have declined globally once again, with some significant regional
differences. As bulks are relatively straightforward to produce, they are
available for purchase from many different regions, each with a supply
chain dominated by its local currency, thus increasing the divergence in
regional costs.

The North American construction sector is the healthiest of all regions,


with the US housing sector leading the resurgence in spending,
especially after a long summer season. This has kept most bulk costs
steady, even as metal prices fell slightly in the past 6 months. Suppliers
have been reluctant to pass on their savings as they anticipate a quick

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QUE$TOR 2016 Q3 Release Notes

recovery. This is especially true of wires and cables; on the other hand,
valves, switchgears, and transformers all benefited from the fall in
metal prices, leading to slightly higher demand.

Latin American bulk markets are suffering from a number of different


factors. The end of the Olympics in Brazil has also brought an end to the
countrys rampant construction spending. Budget constraints now
prohibit governmental spending on public works, and a resurgent local
currency has made exporting more expensive. Colombia and Argentina
have also had a tough time clearing financial hurdles to regain access to
credit at rates that can sustainably fuel construction activity through
government spending. The fall in metal prices is global and so was
apparent in this region as well, with lower costs for wires and simple
electrical components.

European construction has been very mixed, and will be quite unclear
going forward. Before the Brexit vote, construction had been strong in
the UK, but the countrys sudden change in direction has added a dose
of uncertainty to many parts of its economy. As a result of the fall in
value of the GBP, all bulk prices have declined. Other parts of Western
Europe have not seen very much construction activity, leading to lower
local bulk prices. However, increasing amounts of bulks consumed in
Europe are now being bought from Russia. Construction spending in
Russia has declined by over 20% in USD terms so far this year, and with
the massive devaluation of the local currency as a result of sanctions,
Russia bulks are by far the cheapest on the continent. It should be
noted that Eurocement Russias biggest producer has not been
subject to sanctions. While Russian suppliers are exporting as much as
possible, overall consumption of their products is still down.

Nigeria and Angola have both suffered from lower oil prices. Both
countries have seen their local currencies lose much of their value over
the course of this downturn. This has led both countries to experience
inflationary increases in costs for a variety of bulks. The situation has
become so bad in Angola, that industry officials report that the country
may not have enough foreign exchange cash to import clinker, one of
the raw materials used for manufacturing cement.

While public spending in the Middle East is still falling, signs of


stabilization are emerging. The fall in oil prices has led to some of the
first budget deficits in years for oil- rich countries in the region,
prompting most of them to review and rationalize their expenses. The
governments of oil-rich states tend to play an outsized role in their own
economies, and so these changes have had wide- ranging
consequences on labour, materials, and bulks. For example, the export

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QUE$TOR 2016 Q3 Release Notes

ban on cement might be lifted in Saudi Arabia for the first time since it
has been placed as demand dwindles due to project cancellations. Most
metal bulks are imported in this region, and so their prices have tracked
with their global counterparts.

In global terms, bulk prices will not rise appreciably until construction
demand pulls back up. Regional markets may buck these trends as
bulks are easy to manufacture and are usually though not always
locally available. Rising metal or oil prices can contribute significantly to
costs in these markets as they are competitive (i.e. they will pass on
savings from lower input costs quickly and efficiently) due to the large
number of suppliers.

Offshore rigs
Global offshore rig demand has remained very low since the last market
update, in the first quarter of 2016, as oil and gas companies have
continued to reduce their spending in the current challenging oil price
environment. As a consequence only a few new fixtures have been
signed in the last six months, while a significant number of drilling
contracts have been terminated early or suspended and some have
been allowed to expire without the exercise of options or renewals.
Some rig operators have chosen to accept dayrate discounts instead of
cancelling contracts as this was the only option to keep their units
employed in a market environment with a worryingly high idle rig count.

In this environment of low commodity prices and spending cutbacks


across the whole upstream industry, there is not much to report for the
offshore rig market segment worldwide due to the limited numbers of
new contracts. Table 3 shows the worldwide average changes for the
different classes of offshore rigs used in QUE$TOR, again all negative,
although the reduction is more moderate than what was experienced in
the first quarter of 2016.

IHS November 2016 Page 21


QUE$TOR 2016 Q3 Release Notes

Worldwide Average
QUE$TOR Rig Classification
Change
Floater > 7500 ft -11%
Floater 5001-7500 ft -10%
Floater 3001-5000 ft -10%
Floater 1501-3000 ft -6%
Floater <1500 ft -5%
Jackup -12%

Table 3 - Floater and jackup dayrates average variations since


Q1 2016

The most significant fact is that the Middle East has shown to be one of
the few remaining hotspots in the world where offshore activity has not
fallen as much as in other regions. The number of contracted jackup
drilling rigs today is very similar to that recorded two years ago, before
the oil price crashed in the second half of 2014. The Middle East has
proven to be more resilient than most other regions largely because of
the high level of state participation in its petroleum industry, particularly
in Saudi Arabia, Iran, UAE, and Qatar. These countries are heavily
reliant on oil and gas revenues and oilfield developments are facilitated
by typically lower project costs compared to places such as offshore
Northwest Europe and West Africa. However these remain challenging
times for rig contractors even in this region as they are under cost
reduction pressure and have to accept operators terms and conditions.

In the US Gulf of Mexico, the makeup of the rigs by type has changed
dramatically over the last ten years. This market has changed so much,
passing from a net predominance of jackup and barges to having
drillships as the largest and more important segment in the sector. The
maturity of the shelf has played a big role in the reduced demand for
jackups and inland barges, but rig contractors have also been forced
over the years to face a new reality of tighter budgets and reduced
demand, and to adapt to new contracting terms in the region. Semi-
submersible rigs are struggling to maintain their place in the US Gulf
market. The increased preference for drillships is mostly attributable to
the effect of hurricanes on moored units in recent years, pushing the
market to select dynamically positioned rigs, which can move out of a
storms path very quickly. Deepwater is expected to continue to play a
big role in the future of the US Gulf, so drillships and semis are expected
to remain key units in this region, with their capabilities likely to undergo
a step change as technology improves and more challenging well
conditions call for higher-specification rigs.

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QUE$TOR 2016 Q3 Release Notes

In the North Sea offshore rig market, day rates have remained low
although there have been a steady amount of new tenders and
requirements being released with work planned for 2017 and 2018
from various operators. In the past months, the Norwegian market has
seen a number of rig contract suspensions and rigs becoming idle while
operators have no current work to keep them busy. West of Shetland
has seen a slight upswing in overall activity with arrivals and departures.
Meanwhile, the UK standard semi market has seen a relatively quiet
time.

The West African floater sector has been relatively busy in terms of
enquiries and requirements compared with past months; however, only
a few fixtures have been made. The situation in the jackup sector is
more dramatic as it continues to stagnate with only deferrals and
further rigs becoming available in the already oversaturated market.

In Latin America several contracts on semis were terminated in Brazil


and rigs have continued to leave the region, although at a slower rate
than previously recorded. Only recently there was some news of
tendering plans for work in the Falkland Islands and Mexico.

Lack of fixtures has made this update quite challenging. The spider
diagram in Figure 5 shows the percent changes implemented in
QUE$TOR to the offshore rig dayrates depending on rig class and
region. Only Australian deepwater rigs and South American jackups
had a small positive variation in their rates which should not be seen as
a real market trend but rather more as an adjustment of the dayrate
value in those regions to be closer to the most recent marketed contract
value.

IHS November 2016 Page 23


QUE$TOR 2016 Q3 Release Notes

Figure 5 - Worldwide offshore rig rate changes

Offshore vessels
Trading conditions for owners and operators of offshore supply vessels
remain extremely challenging worldwide. Demand for offshore vessels,
both Platform Supply Vessels (PSVs) and Anchor Handling Tug Supply
(AHTS) Vessels, has weakened significantly in all regions, pushing
vessel owners into some very hard decisions. In all regions vessels
owners were forced to continue stacking vessels in the hope of reaching
a point when they can charge decent day rates again. Nobody though
can predict how soon that will be and many vessel owners have started
to be more realistic about the fact that it may still be a long time before
the market will fully recover. Regionally, the largest number of lay-ups
were in the US Gulf of Mexico, followed by Southeast Asia and then by
Northwest Europe.

As in the case of the offshore rigs, the offshore vessel market did not
register a significant number of fixtures to allow a reliable statement of
what the market trend is. Therefore the implemented variations should
be intended more as adjustments rather than well-defined market
movements.

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QUE$TOR 2016 Q3 Release Notes

The market across Asia-Pacific was characterised by weaker offshore


activity, lower utilization and falling day rates. Long-term charters were
few and far between, and vessel owners have been competing for
occasional spot jobs in the oversupplied offshore vessel market.

In Latin America, the limited demand for offshore vessels created by


sporadic activity has increased competition. Similar to other worldwide
markets, day rates have remained depressed as vessel owners are
fighting to keep tonnage operating under contract. Due to the gradual
decline of the number of contracted rigs in Brazil, vessel owners have
been laying up idle tonnage as the current stagnation persists. Without
a significant improvement in global oil prices for a sustained period of
time, the Brazilian market will continue to weaken, with lower utilisation
for both rigs and vessels.

In the Mediterranean, the prospects of new term contracts for offshore


vessels within the drilling support activity remain limited across the
region. Production support requirements throughout the Mediterranean
and Black Sea region are predominantly covered by existing term
contracts and the spot market. In recent weeks, new term fixtures have
largely centred around a number of long-distance towage contracts for
rig mobilizations and vessels destined for the recycling and scrap yards.

Term demand for the Middle East PSV segment fell to historical lows in
August. The weakness across the offshore sector continues to result in
tonnage being stacked, and low demand for PSVs in the region
indicates that this will continue over the short to middle term. While new
build PSVs continue to enter the market, many committed new build
orders from Middle Eastern owners are known to have been deferred or
cancelled. Most of these orders are for medium to large sized PSV
classes that were initially planned for fleet expansions some years ago.

The situation in the North Sea for owners and operators of PSVs and
AHTS vessels remains unchanged. Most still have vessels laid-up, and
several have vessels idle and available for immediate charter. The
downturn shows little sign of easing up in the short term, with many
vessel owners now embarking on strategic and long- term plans to
ensure that they can remain competitive throughout the rest of the
downturn. Some are looking at employing their vessels for work outside
of the traditional supply vessel sector, some are merging, and others
are going through major debt restructuring to ensure their financial
future. The summer proved to be a disappointing time for owners of
medium AHTS vessels on the spot market, with day rates down from

IHS November 2016 Page 25


QUE$TOR 2016 Q3 Release Notes

the first quarter. On the PSV side of the market, meanwhile, there was
plenty of activity with dayrates remaining low but slightly picking up
quarter to quarter.

In West Africa, there was a small number of term fixtures awarded


during the summer. Looking ahead into the next twelve months,
demand for offshore vessels in support of drilling operations is unlikely
to see significant net change in demand.

Offshore vessels utilization in the US Gulf has been more severely


affected than the other major offshore markets of the world. While the
fall in rig activity has flattened out, deepwater day rates have
decreased over the last few months. Demand for large deepwater PSVs
had seen a slower fall than the collapse experienced by the shallow-
water sector of the market.

In the construction vessel sector, utilization decreased almost across all


vessel segments. While some vessels, like accommodation, heavy lift
vessels and multiservice, experienced a more drastic decrease, other
segments, like diving support, pipelay and ROV support, went down
more moderately. In some regions and specific sectors, it is believed
that day rates have bottomed out. However, competition in the market
for any jobs is at a very high level and operators continue to negotiate
any new and existing contracts much like how they are re-budgeting
their project portfolios. The list of confirmed cold- stacked vessels
continues to grow and vessel owners are being forced to change their
business methods to survive the low oil price environment. Among
these strategies are company mergers, seeking wind farm or
government work, entering the decommissioning market, and financial
restructuring.

Subsea
Upstream developments that require subsea components tend to be
quite expensive and as a result have high break- even costs. These
projects were some of the first to be cancelled or postponed when oil
prices crashed in late 2014. While this did have an effect on suppliers,
their long backlogs protected them for over a year, after which spare
capacity had begun to grow to alarming rates. With no end to the
downturn in sight, suppliers began pursuing a number of different
strategies to survive.

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QUE$TOR 2016 Q3 Release Notes

It is difficult to describe the extent of shrinkage the subsea market has


experienced so far this downturn. While subsea trees are only one of
the components this market includes, order levels for trees can serve as
a useful bellwether of overall subsea activity. Compared against 2015,
new orders for this year and total number of trees to be installed are
down by over 65% and 45% respectively. It should be noted that 2015
was already a bad year for subsea suppliers, down over 25% from the
year before. The total annual value of the subsea equipment market
today is down to $2.1 billion.

In reaction to the shrinking market spend, subsea companies have


offered lowered prices, downsized, and in some cases merged with
other service companies. While lower prices do send the right signals to
potential customers and make the market more competitive, they do
not appreciably impact break-even prices and therefore are ineffective
at generating demand. Therefore while subsea companies did not
officially lower their prices, buyers can negotiate rates lower than they
would have been able to before the downturn.

However, without more demand to fill order books subsea suppliers


cannot justify maintaining the capacities they built up to before oil
prices fell. As a result, most companies have downsized significantly,
with most recent job losses appearing in Norway where Aker Solutions
and FMC Technologies both have a large presence. With low capacity
utilization across the market and pessimism surrounding an oil price
recovery, downsizing is one of the only ways of balancing supply and
demand in order to regain some pricing power. Finally, two big mergers
took place in the subsea market that show how dire things have gotten
for its players. FMC Technologies merged with Technip, and Cameron
was acquired by Schlumberger. While in the long term these
consolidations will lower costs through standardization, for right now
they promote further downsizing and the rationalising of capabilities.

After almost two years of contraction, it is unclear that the subsea


market can get any smaller. Now that oil prices have stabilized
somewhat, subsea suppliers need to be able to operate profitably at the
current levels of demand, which are much lower than what the industry
had grown used to since 2010. If oil prices do not fall further over the
next year, demand is expected to grow as projects that were postponed
for fear over lower prices begin to become safe investments again.
Having excess capacity when that happens will exert considerable
downwards pressure on prices, so suppliers are already addressing the
fundamentals that are holding their market back from recovery.

IHS November 2016 Page 27


QUE$TOR 2016 Q3 Release Notes

Labour
As a result of the current global downturn in the oil and gas industry,
2016 has proved to be another difficult year for the labour sector. The
number of workers laid off or made redundant has continued to
increase globally although recently there have been some positive
signals that maybe the bottom has been reached and the market will
start to strengthen. How quickly the market will recover though is still
uncertain; some analysts believe that the crude oil price is likely to stay
low for an extended period whilst some others expect to see a quicker
recovery. Whatever will happen, it is fair to say that the industry will
definitely face some tough challenges in the coming years. Even when
the oil crude price does recover, it is likely that a constant pressure to
reduce costs and increase efficiency will persist. Up to now, the cost
reduction activity implemented by employers has resulted in a large
number of redundancies and layoffs worldwide. These changes in the
workforce, together with early retirements, will leave employers with a
large knowledge gap in their workforce once the industry activity starts
to recover.

The drilling market in North America has been hit particularly hard and
the trend of the labour market in this region has been unpredictable
over the last two years. Layoffs were announced in both multinational
and small independent companies. In the United States, drilling activity
has seen a considerable slowdown and only in the second half of the
year the rig count has started to go up, recovering marginally from its
historical lows. It has also been a rough ride for the Canadian oil and
gas industry, with several key projects having delays or being cancelled.
As in the United States, job cuts have been severe and have resulted in
an exodus of talent that will be hard to attract back.

In the UK, the economy was recovering well after the oil price crash at
the end of 2014, but deteriorated due to the political instability following
the result of the EU referendum. During the summer a rebound in the
UK economic data was suggesting that the Brexit shock on business and
consumer confidence was slowly fading out, helped by a weaker pound
able to boost local manufactured products. However, pressure from
pro-Leave campaigners have forced the Prime Minister, Theresa May,
to declare the date when the UK will trigger Article 50 of the Lisbon
Treaty. This has generated further instability with rumours that major
international companies and banks will move their headquarters to
continental Europe to maintain their access to the European single
market once the UK leaves the European Union.

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QUE$TOR 2016 Q3 Release Notes

The Eurozone has shown to be more resilient than expected to the


Brexit earthquake, with the Euro keeping its value against the US dollar,
but this may soon change as it is about to enter a very busy election
cycle. Political deadlock has continued in Spain and the country could
face a third round of general elections in one year. Italy will face a
critical referendum on Senate reform on 4 December, which has the
potential to shake up political stability. Looking into 2017, a number of
countries face key elections, including major players France and
Germany. Support for the status quo is fading across the Eurozone and
this could lead to deep instability in many countries governments.

In Norway, unemployment hit the highest rate since the middle 1990s
as major oil and gas companies were forced to downsize and
announced significant layoffs. As global prices for crude are still low,
Norwegian oil companies cannot afford to meet the requests from
workers for higher wages, which prompted a strike in September.

In the Middle East and North Africa (MENA) regions, economic activity
seems to have bottomed out in the second quarter of 2016. Growth in
the region continues to be constrained by subdued commodity prices,
weakness in global financial markets, and security threats. The poor
policy response from governments of the regions oil- producing
countries has escalated uncertainty and deterred investment. The
Nigerian naira (NGN) depreciated drastically in Q3 and a ceasefire
between the government and the militant group, whose attacks on
infrastructure caused Q2s drop in oil output, failed to hold in late
September, renewing concerns about production. Angola is currently
facing a foreign currency crunch which has hampered banking activity,
investment, and output in the non- oil sector. The preliminary
agreement reached by OPEC members in late September to cut output
comes as good news for the oil- rich country; nevertheless, doubts
remain as to whether the agreement will provide enough support to
improve the countrys battered finances.

In Latin America, economies remained depressed in the first half of


2016 and became even weaker in the third quarter. Weakness
persisted with Argentina and Venezuelas currencies showing instability
at the end of Q3. Brazils deep recession showed some signs of recovery
at the end of September although austerity measures, tight credit
conditions and high unemployment still put pressure on consumption.
The only countries in which economic growth has gained momentum
are Mexico, Paraguay, and Uruguay.

IHS November 2016 Page 29


QUE$TOR 2016 Q3 Release Notes

In the Commonwealth of Independent States (CIS), lower export and


fiscal revenues, following the drop in oil and gas prices, constrained
economic activity in the regions main energy exporters Azerbaijan,
Kazakhstan, Russia, Turkmenistan, and Uzbekistan. Russia has
undergone a painful economic adjustment and the contraction appears
to have softened out in Q2 2016. Russian economic activity is seen as
strengthening gradually, although downward risks to the outlook
remain in the form of intensified geopolitical tensions between Russia
and Ukraine and prospects that the US dollar will strengthen toward the
end of the year, if the Federal Reserve increases interest rates in
December.

Worldwide major Engineering and Project Management (EPM)


companies have continued to implement cost-cutting measures such as
staff reductions and office consolidations whilst some reported an
increase in profitability, although backlogs were down and new orders
decreased. Due to the high uncertainty in the oil price, most Final
Investment Decisions (FIDs) were postponed and several projects
cancelled or scaled back. Engineering contractors are not optimistic that
backlogs will recover in the near term and are very focused on
headcount reductions to match current backlogs. Few new project
sanctions are expected in the near term, as the number of projects
entering the FEED stage remains very low.

Land rigs
The global land drilling rig market has shown no signs of substantial
recovery as oil prices remain low and drilling activity continues to be
depressed. The rig count, which reflects the strength and stability of the
energy price markets, showed a small increase towards the end of the
third quarter due to the recent rise in oil price just above the $50/bbl
level. However, the rig count would have to rise significantly before
rates are increased, as contractors are very aware what happened one
year ago when oil prices were rising after the price crash at the end of
2014 and land rig contractors believed that the worst was over. But
after summer 2015, oil price, rig count, and day rates all fell, with oil
prices reaching the $30/bbl mark by the end of 2015. The fear of
repeating the same cycle is clear and contractors are very cautious of
returning rigs to active status; therefore, even with oil prices on the
rise, a large increase in rig count has not yet occurred eliminating any
possibility of dayrate increases in 2016. This was the exacerbated by
further declines in drilling activity due to the announcements of

Page 30 November 2016 IHS


QUE$TOR 2016 Q3 Release Notes

additional reductions to capital expenditures as operators continued


trying to minimise costs and maximise drilling efficiency in this sustained
low oil price environment.

Dayrates declined in most international markets across all rig classes


since first quarter 2016. The greatest reductions were in China, SE Asia,
Asia, Africa, and South America, with rates down between 2% and 5%;
in the remaining regions dayrates decreased marginally or remained
flat. The oversupplied market and the low utilization rates have
provided operators with greater bargaining power in negotiating
contracts for onshore drilling rigs, forcing drilling contractors to either
reduce dayrates or stack rigs. In some regions, units were removed
from the active fleet and placed on standby, at a significantly lower
rate, so that they can become active when demand materialises.

Despite differences in rig specification, both high- spec and low- spec
dayrates declined overall. The declines for low- spec rigs occurred
mainly in those markets where a significant number of rigs were drilling
shallow vertical wells. The tight margins of low-spec rig dayrates means
that they have reached their minimum level when compared to the
high- spec rigs. As the downturn continues, most contractors have
removed low-spec rigs from service because they are not efficient and
provide only minimal production gains. High-spec rigs, on the other
hand, have remained active for a longer period because they are more
cost effective to operate. Drilling contractors have attempted to keep
high- spec rigs working for as long as possible, even under reduced
dayrates. When the drilling market recovers, high-spec rigs will be the
first rigs back to work, while a majority of low-spec rigs will likely never
return to service.

Looking into the future, contractors have started to accept the reality of
a reduced labour force. In order to reduce costs, experienced rig crews
have been dismissed, and this is likely to create a shortage of
experienced workers when the market recovers. Efficiency gains that
have occurred through high- grading rigs will potentially end up
disappearing due to less experienced crews entering the workforce.

IHS November 2016 Page 31


QUE$TOR 2016 Q3 Release Notes

Contacting customer support


As part of the continuing licensing agreement for QUE$TOR, IHS offers
a full technical support service via its regional offices. Both computing
and engineering support relating to the operation and understanding of
the program are available.

The QUE$TOR support group has a dedicated support email address:


support_questor@ihs.com

Note: There is an 's', not a '$' in questor in the email address.

The IHS software support team key contacts are as follows:

Page 32 November 2016 IHS


QUE$TOR 2016 Q3 Release Notes

North & Central Jonathan Stephens - Product Manager,


America jonathan.stephens@ihs.com
Abhishek Verma - Senior Field Development Engineer,
abhishek.verma@ihs.com
Zayd Wahab - Cost Analyst, zayd.wahab@ihs.com

5333 Westheimer
Houston
Texas 77056
USA

Tel: (+1) 713 840 8282


Fax: (+1)713 995 8593

South America Thais Hamilko - Product Specialist, E&I Prod Line-LATAM,


thais.hamilko@ihs.com

Rua So Bento, 29 - 7o andar


Centro
Rio de Janeiro
RJ, CEP 20090-010
Brazil

Tel: (+55) 21 3299 0440

Europe, Africa & Rita Antonelli - Cost Manager, rita.antonelli@ihs.com


Middle East Matthew Butcher - Field Development Engineer,
matthew.butcher@ihs.com
John Helliwell - Engineering Advisor,
john.helliwell@ihs.com
Greville Williams - Engineering Manager,
greville.williams@ihs.com

133 Houndsditch
London
EC3A 7BX
UK

Tel: (+44) 20 3159 3300


Fax: (+44) 20 3159 3299

IHS November 2016 Page 33


QUE$TOR 2016 Q3 Release Notes

S.E. Asia & Australia Sanjay Sinha - APAC Field Development SME,
sanjay.sinha@ihs.com

First Floor, Tower A


Vatika Business Park
Sohan Road, Sec 49
Gurgaon 122018 - Haryana
India

Tel: (+91) 124 454 2699

China Yaxing Wang - Sr. Customer Solution Advisor,


yaxing.wang@ihs.com

Room 3001
China World Office 1
No.1, JianGuoMenWai Avenue
Beijing
100004
China

Tel: (+86) 10 5633 4567


Fax: (+86) 10 5633 4500

Page 34 November 2016 IHS