John Westwood Thom Payne

London Business School Energy Club

8 Feb 2010

About us
Established 1990 Aberdeen, Canterbury & New York

Activities & service lines

offshore

Market research & analysis Commercial due-diligence Business strategy & advisory Published market studies
power

Industry sector coverage

Oil & Gas Power Renewable Energy
LNG LNG

onshore

400 clients in 60 countries

>600 projects completed for: government agencies energy majors and their suppliers investment banks & PE firms the leading independent provider of commercial DD to OFS investors

downstream

renewables

22

Published reports include

Brazil huge blackout. Half the country left without electricity g y y South Africa fear of return of power cuts UK peak d k demand could exceed capacity b 2017 d ld d it by Australia Victoriaelectricitydemandnearedarecordpeak China cold weather electricity rationing continues UK gas supplies for businesses turned off gas off Venezuela key industries halted by hydroelectric crisis
Press reports since November 2009

Energy Market Drivers Sustainable Energy UK Power Generation The Future 5

Energy sources & issues

Hydro 2% Environmental concerns E i t l over large dams CRW 10% Combustible renewables & waste Important in some countries p Growth potential

Nuclear 6% NIMBY concerns Long plant build time 5x gas powergen Capex

Coal 27% Abundant supplies Highly polluting CCS very expensive i

Gas 21% Abundant but local shortages Expensive to transport Off-the-shelf powergen plant Emits half CO2 of coal
World Energy Consumption
Source: Douglas-Westwood /IEA 2009

Oil 34% Preferred transportation fuel Supply concerns Emissions concerns

Energy two linked concerns; one driver

Population growth Energy supplies Global warming

Energy demand outpaces population growth

193%
sources: DWL,UN, BP

95% 55%

oil demand growth

energy demand growth Global Growth 1965-2008

population growth

Consider oil, the fuel of transportation:

1 billion cars worldwide. Production capacity 86 million p.a. (2008) Electric cars will help efficiency (eventually) But how long to change the world car fleet (>20 years?) Meantime China and Indias growing populations will motorise And cause a huge growth in oil demand and prices Can the global economy handle this?
8

Energy demand and climate change

Security of energy supplies is a

more i immediate problem th di t bl than global warming (and some
governments are now realising this!)

US Russia Germany p Japan UK France China India

3.0 30 1.4 0.8 1.3 13 0.6 0.6 1.5 15 1.1 0.4 4.9 3.8 4.0 3.5 4.0 4.3 6

7.6 11.1 10 9.5 8.9 CO2 (t.p.a.)

19

The big political driver is climate

change

US consumes 5x more energy

p per capita than China and p produces 4.4x CO2 per capita

energy (toe p.a.) population (hundred million) 13.3 11.5

But China has 5x the population What might happen as such

developing economies grow?

Douglas-Westwood analysis using multiple data sources

Chinas oil demand could double in a decade

Chinadoubles China doubles USin2025

Chinareaches USin2018

Were China to follow Koreas path of development - as it largely has to date its oil demand would more than double in the next decade. By 2030, Chinese consumption could exceed 50 mbpd
source: Douglas-Westwood analysis using EIA, IMF, and US Census Bureau data

China is the key driver of global oil demand growth China oil consumption up 4.9% y on y , 7.3% in December p p year year, Vehicles sold: China 13.6 m vs. US 10 m in 2009
10

China leads a return to growth

Exports +17.7% YOY, (4.0% forecast) Imports +55.9% ( p (31% expected) p ) Industrial output +25% YOY (Dec) GDP growth in Q4 exceeded 11% The world's biggest car market in 2009. 13.6 million
sold compared with 10 million in the US Car sales forecast to rise 15% in 2010 Imports from Asia soar. S Korea +94%, Taiwan +91%, Malaysia +53% (Nov) China to move from 5th to 2nd largest economy overtaking Japan Oil imports +14% i D i t 14% in December, up 4 9% YOY b 4.9%

DWL expect oil consumption to run1-2% ahead of GDP

Other Asia oil consumption +12% Dec Other Asia Dec.

And Other Asia has more consumption than China

11

China invests in future energy supplies

Canada: $1.7bn Oil sands USA: $2.2 bn Windpower

Russia: $300 bn. 300kbd UK: windpower bid

Venezuela: $8 bn

Nigeria: 1/6th O&G reserves

Brazil: $10 bn. 160kbd

Australia: 20 year LNG Australia: $5 2 bn Coal $5.2

January 2010: S Korea to buy 10 oil companies

energy security a priority

Data: Major investments in 2009. Douglas-Westwood

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They got it wrong before will they again?

March 1999

April 2009

13

Europe oil production in decline, gas to follow

7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 35 3.0 2.5 2.0 1.5 15 1.0 0.5 0.0

Offshore Oil
Southern Europe Other NW Europe Norway United Kingdom

Source: Energyfiles

Offshore gas
Southern Europe Other NW Europe Norway United Kingdom

UK

300 275 250 225 200 175 150 125 100 75 50 25 0

Mil lions of bbls oil per day s

Bcm per yea ar

UK

1985 1990 1995 2000 2005 2010 2015 2020 2025

1985 1990 1995 2000 2005 2010 2015 2020 2025

Offshore Europe has lost 50% of its oil production in a decade Massive dependency on Norwegian gas
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Global oil supplies cannot continue to grow

120 100
millio barrels pe day on er
<2002 52 countries past peak by2008 66 countries past peak
Source: Energyfiles

BIOFUELS CTL

80 60 40 20 0 1995 1999 2003 2007 2011 2015 2019 2023

GTL OIL SHALES OIL SANDS REFINERY GAIN OFFSHORE DEEP OFFSHORE SHALLOW ONSHORE

Global fields reserves declining at 6.7% p.a. (2007 estimate was 3.7%!) IEA Global peak revised down by 4 Mbpd to 89 Mbpd Total CEO 16 Feb 09 CEO,16 09 Need to find and get into production one NEW Saudi Arabia every THREE years!
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The Movement Offshore Oil Growing Importance of Offshore Production

120 100
millio barrels of oil per day on f y

Of f shore Deep Of f shore Onshore (inc. Unconventional Reserves)

80 60 40 20 0 1950 1965 1980 1995 2010 2025

Global Oil Production 1950-2025

Offshore oil currently accounts for 33% of global output: 35% by 2020 2020. Deepwater share of offshore production to grow rapidly over the next decade. Deepwater 3% of production in 2002, 6% in 2007, 10% by 2012. After 2012, deepwater is the only sector to continue to grow.
16

Cyclical & cynical: a brief history of the offshore market

25 20 Numb of Rigs ber 15 $60 10 $40 5 0 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 $20 $0 $120 $100 $/bbl ($2008) $80

Semi-Submersible Drilling Rig Deliveries

Source: Riglogix

The offshore market has seen a number of activity cycles since 1969 1969. Oil price volatility has been a major driver for this behaviour.

The 2005-2008 cycle was also particularly driven by the move to deepwater (W.Africa, B il & G M) (W Af i Brazil GoM)

The 2009 recession will not be the end of the offshore oil & gas market. But
reserves are getting harder to find and more challenging to produce. What will be the key themes for the Offshore market?
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NOCs rule OK?

Source: Barclays: Outlook 1 Feb 2010

NOCs to control 55% of 2010 non-US spend And 80% of the worlds remaining reserves world s Note PetroChina market cap now larger than Exxon! Gazprom boe reserves equals the rest of the top-10 players by mar cap p q p p y y p So what is the long-term role of the major international oil companies?
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Have 8 out of 10 oil majors have passed peak production?

2002 2496 2018 2109 2359 1533 1897 1589 891 921 1112 2003 2516 2121 2119 2379 1701 1823 1661 1237 981 1132 2004 2571 2531 2233 2253 1661 1737 1695 1242 1034 1135 2005 2523 2562 2270 2093 1847 1701 1621 1447 1111 1102 2006 2681 2475 2276 2030 1908 1759 1506 1698 1079 1058 2007 2616 2414 2312 1899 1920 1783 1509 1644 1020 1054 2008 2404 2410 2379 1771 1996 1676 1456 1367 1026 1056

ExxonMobil BP PetroChina Shell Petrobras Chevron Total ConocoPhillips ENI StatoilHydro

Data: Petroleum Review, May 2009 Review

Peak Year

Peak oil is a reality, not just for the majority of the producing countries
but b t perhaps f the majority of th t producers. h for th j it f the top d Offshore is one of the few remaining places where the oil majors can increase production

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Global offshore oil & gas production & spend to grow

Source: EnergyFiles

400 350
C Capex & Opex ($billions) x

300 250 200 150 100 50 0

Africa Asia Australasia Eastern Europe & FSU E t E Latin America Middle East North America Western Europe

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Global Capex falls in 09/10 but Opex sees long term growth Most regions to see overall growth But W Europe to decline Particularly UK needs incentives Norway has longer term prospects
20

But what about all the big new deepwater discoveries?

It can take 5-10 years to get a major deepwater field to full production
21

Deepwater Capex to reach new highs

$35 $30
Africa Asia Australasia Latin America Others North America Western Europe

Expenditure ($billions) )

$25 $20 $15 $10 $5 $0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Deepwater production: to grow 99%

(shallow water 20%)

Future deepwater investment:

Source: The World Deepwater Market Report 2008-2013 Douglas-Westwood

$137 billion over th next five years billi the t fi

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Big oil to get best IRR in deepwater?

23

Floating production market has turned the corner

14 12 10
Africa Australasia Latin America North America Order Year Asia E. Europe & FSU Middle East Western Europe

$ billion

8 6 4 2 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Global Floating Production Expenditure 2004-2013
Source: Douglas-Westwood

Material decrease in orders in 2009; but market has bottomed Impact of project delays $14 billion of projects slipped Gl b l FPS market to be worth $50 billion over 2009 2013 period Global k tt b th billi 2009-2013 i d Increasing share of market to leased FPSOs. Consolidation likely Market still well below pre recession levels pre-recession Long term >200 prospects exist and growth will recover
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Subsea recovers from a tough 2009

3,500 3,000
Order Val lue $ millions

2,500 2,000 1,500 1,000 500 0

Aker Solutions Cameron Dril-Quip FMC GE Oil & Gas

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

Subsea Production and Processing Orders

Source: S bsea So rce Subsea Market Share Assessment December 2009 Do glas West ood Assessment, Douglas-Westwood

Subsea processing orders were hard hit in with the recession Pl Players revenues reasonably stable due to backlog bl t bl d t b kl Orders bottomed in Q4 2008 Trend suggests 2010 will recover to normal levels normal FMC is subsea market leader 2009 Q1-3 by order value
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Offshore ops & maint spend to see good growth

$80 $70 $60
$billions

$50 $40 $30 $20 $10 $0

Africa Asia-Pacific Eastern Europe & FSU Latin America Middle East North America Norway UK Rest of Europe

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: The World Offshore Operations & Maintenance Market Report 2010-14 Douglas-Westwood

>7,000 fixed & >200 floating platforms 7 000 fi d 200 fl ti l tf Spend to exceed $330 billion over the next five years Plus demand for major modifications Subsea IRM 10% CAGR as subsea installations increase
26

Natural gas production to soar

million barrels of o il equivalent per day n p

100 90 80 70 60 50 40 30 20 10 0

Africa Asia Australasia Eastern Europe & FSU Latin America Middle East North America Western Europe

Middle East

1930 1937 1944 1951 1958 1965 1972 1979 1986 1993 2000 2007 2014 2021
Source: Energyfiles

Natural gas production currently dominated by E Europe & Russia Middle East, Latin America, Africa & Asia to see significant growth But local supply issues e.g. in Europe Deepwater gas and LNG to be of growing importance And unconventional gas US shale gas, coal bed methane, etc

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Continuing growth in global LNG capacity

400 350
Liquefaction Capacity (mmtp pa)

300 250 200 150 100 50 0

Africa Asia-Pacific FSU Middle East South America North America Western Europe

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Large expansions to Qatargas and Rasgas plants to come onstream in

2009/2010. 2009/2010 Will add 46.8 million tpa of new capacity to the market 46 8

33 additional installations forecast, incuding19 new facilities 53 new LNG import terminals and a number of expansions to expected p p p
to be completed in the next five years
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Escalating costs are a major concern for future developments

200 190 180 Oil Price Actuals (Brent) $100

Offshore Cost Inflation Index (CERA)

$120

Offhsore Cost Index C

170 160 150 140 130 120 110 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

$80

Brent Oil Price (Forecast) Brent Oil Price (Actuals)

$60

$40

$20 $

$0

Cost Inflation has tracked oil prices closely over the past 10 years. Costs cooled somewhat in 2009 but remain high. BUT Oil prices are on the move again. BUT i th i Another flurry of offshore activity may well trigger a similar cost inflation
scenario. Major challenge for the industry to manage costs in the supply chain over the next five years.
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$/bb bl

Oil & Gas The Post-Recession World

Technology-driven

IOCs will be under increasing pressure for new discoveries and expanded production mostly from deepwater OECD countries are unlikely to sustain oil prices much above $80 Threat of recurring recession, sluggish growth, possibly stagflation China and other emerging economies will tend to absorb incremental oil production p If we find the oil, can we afford to lift it? Natural gas has to take up some of the load

But recession has ended price is no object environment

Cost will be an important driver Oil supply will be insufficient to meet future needs Both innovation and cost will be critical drivers in the years ahead Challenging times ahead, but the global economy will absorb all oil
volumes that can be produced at affordable prices

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Energy Market Drivers Sustainable Energy UK Power Generation The Future 31

Alternative energy challenges & opportunities

onshorewindoffshorewindbiomasssolarhydrowavetidal

There is no magic bullet. None are ideal: many are very high cost &/or technically immature / impractical / location specific / unproven /conflicting interests, etc

nuclearCCScarboncap&tradeconservation

But.they are a major part of the way ahead

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Alternatives the problem is cost

Con nventional Oil Unconventio onal Oil

Middle East Oil Other Conventional Oil Deepwater Venezuela's Orinoco Belt Candadian Oil Sands (new dev.) Coal to Liquid Oil Shale European Biodiesel US Corn Ethanol Brazilian Sugar Cane Ethanol Coal with CCS Traditional Coal Nuclear

Tidal energy costs 0.15 kWh, wave energy 0.25, coal-fired electricity costs 0.05. 0 05 The Carbon Trust Feb 2010

R Renewables

Coal

Biofuels

Offshore Wind Onshore Wind 0 20 40 60 80 100 $/bblequivalent 120 140 160

Source:FT12/08

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Windpower: a $36 bn world market

Portugal 2% Denmark 2% France 3% Italy 3% ROW 14%

UK 3%

US 22%

158GW
India 7% China 16% Spain 12% Germany 16%

Installed Global Windpower Capacity (end 2009)

Source:GWEC

2009: world installed capacity grows by 31% China +100% to 25GW; US by 39% to 35GW Europe +54% of which UK added1MW +36% Wind is a green solution and an important part of the energy mix But best locations are remote & major NIMBY issues in some countries Offshore has major attractions: out of sight & a better wind regime
34

Offshore wind: 5.3 GW to come online 2009-13

Forecasts 2009-13 UK 2.3 GW Germany 1.4 GW Denmark 0.9 GW Belgium 0.4 GW Others 0.3 GW

1400 Belgium 1200

Annual Installed Capacity MW M

China Denmark Germany Netherlands Sweden UK Others

1000 800 600 400 200 0 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Douglas-Westwood

UK is the worlds leading market Germany to follow China emerging (and exporting monopiles)
35

Tackling the installation problem

Source: Keppel FELS

By applying offshore oil & gas techniques

Source: RESTATS,July2009

36

Offshore renewable energy global Capex in context

200 180 160
Source: Douglas-Westwood

200 152 1 2

Capex ($ billion)

140 120 100 80 60 40 20 0 0.2 0.6 Marine Renewables 2 5.2 Of f shore Wind All Wind Of f shore O&G 47 2009 2012

Offshore renewables small but with strong g g growth Wind power is EU supply chain dominated Marine renewables is new with great future potential But will UK invest or will see a repeat of the windpower situation
37

Coal huge growth in world demand. Can CCS be financed?

3.0

Rest of world ld
2.5

Coal (billion tonnes s)

2.0

China consumes 45% of world coal

1.5

1.0

0.5

0.0
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Dirty coal UK 1952

Dirty coal China 2009

Carbon capture & storage has not yet been achieved on a large scale

38

38

Is nuclear the answer?

>426 new reactors planned or proposed planned proposed

worldwide (125 in China) Source: World Nuclear Assn.

28 under construction in China Nuclear suited to centralised grids The cheapest large scale, low carbon
electricity source EDF

Newbuild takes 8-10 years & 5 bn euros French EPR design safety issues raised f Finland reactor 3 years late and several
billion euros over budget New [UK] sites at risk from lack of subsidies (CEO EDF) Level playing field with wind needed
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The Negawatt

Picture: www.eagleshieldinc.com/

The need to invest in less Average UK home emits 5.5 t CO2 p.a. twice as much as a car Reducing thermostat by 1 degree saves 10% of heating costs I a typicall B iti h h In t i British home 1/3 of th h t i l t th f the heat is lost through roof & walls h f ll
40

Energy Market Drivers Sustainable Energy UK Power Generation The Future 41

4 February 2010

British h B iti h households h ld risk unaffordable energy bills Ofgem bills, warns
Households and businesses face the risk of unaffordable energy bills unless radical action is taken to safeguard Britain s supply Britain's supply, the regulator Ofgem warned today.

42

Demand could exceed capacity by 2017

If existing station closure programme is implemented How will new capacity impact ? p y p
Source:TheUKPowerGenerationExpenditureReport20102030.DouglasWestwood

43

Coal, Nuclear & Gas (CCGT) dominate UK powergen

Hydro and pumped storage, 5% Others, 0% Interconnector, 3%

Wind, Wind 2% Gas turbines and oil engines, 6% Coal & Coal Others, 35%

CCGT & CHP, 31% Oil, Oil 5% Nuclear, 12%

Source:TheUKPowerGenerationExpenditureReport20102030.DouglasWestwood

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79 GW of additions needed by 2030*

8 Solar PV 7
C Capacity Ad ditions GW W
*Base case. Online dates

Biomass Hydro Wave & Tidal

6 5 4 3 2 1 0

Onshore Wind Offshore Wind Nuclear Coal Gas

Total annual new plant additions of 1-7 GW per annum 2010-17 additions: >50% gas, 44% wind (mainly offshore) A new UK dash for gas with security of supply implications
Source:TheUKPowerGenerationExpenditureReport20102030.DouglasWestwood

45

149 billion spend forecast*

10 9 8
Capex (bil lion)
*Scenarios range 119-162 bn

Solar PV Biomass Hydro Wave & Tidal Onshore Wind Offshore Wind Nuclear Coal Gas
NUCLEAR OFFSHORE WIND

7 6 5 4 3 2 1 0

COAL +CCS

Total period gas spend 8% (CCCT is the cheapest option) Clean coal spend begins 2021? (online 2024 earliest) Nuclear spend begins 2012 (online 2018 earliest) total >42 billion Annual Capex rises from 1.7bn in 2008 to >9 billion in 2020
Source:TheUKPowerGenerationExpenditureReport20102030.DouglasWestwood

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Energy supply security

Europe lacks a free

market in electricity k t i l t i it

Massive investment in a
European super-grid is essential

UK needs more links to

Norway and Europe

And a national smart

grid and smart appliances

47

The smart grid

Figure 27: An Interconnected Electricity System Source: Parliamentary Office of Science and Technology

The smart grid can also enable smart appliances to be used Appliances can switch on at cheapest power times 200,000 x 40 kW cars can quickly provide 8 GW of power to the grid S th Korea plan $24b smart grid with nearly 30 000 electric vehicle South K l $24bn t id ith l 30,000 l t i hi l
charging stations by 2030
48

UK powergen final thoughts

Taking into account the potential for increasing demand, and

intermittency of renewable sources , powergen capacity will may need to grow to 112 GW by 2030 (base case)

The equivalent of 95% of existing UK capacity will need to be built over

the next 20 years

Required capital investment 149 billion (range 124bn Plus major grid investment! Could total 264 bn in the next decade!

to 167 bn)

Lord Davies, Trade & Investment Minister FT 26Jan 10

49

Energy Market Drivers Sustainable Energy UK Power Generation The Future 50

The 1,000 billion EU power bill

33% 2007 2030 25% 19% 26% 19% 24% 34%

35% 30% 25% 20% 15% 10% 5% 0%

4% 1%

5% 3%

7%

hydro

Biggest five European countries need to spend: 300bn to meet environmental targets 470bn on replacement & renewal A massive growth in renewable energy is required
Source: DWL & FT 3 Feb 2010

ren newables

nuclear

coal

oil

gas

51

Towards change

Source: The End of Energy Obesity Peter Tertzakian

We must decouple GDP growth

from energy demand growth

Some successes:
Japan Top Runner Programme Denmark carrots & sticks (taxes (taxes,
wind power, cogeneration, etc.)

Switzerland Swiss Energy Swiss

Programme

But we must not export our

energy demand

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Thank you
This presentation can be downloaded from www.douglas-westwood.com www.douglas53