The E&P industry is technologically one of the most advanced

010227-boost value creation2-ZXI039OL.ppt
A new regime for innovation and technology management in the E&P industry McKinsey Research Project July 2001

The E&P industry is technologically one of the most advanced
010731Technology in E&P-main pack.ppt.ppt The E&P industry is technologically one of the most advanced boost value creation2-ZXI039OL.ppt The E&P industry has been, and still is at the leading edge of many technologies. It was the key driver behind the explosive growth in computing power during the 70’s and 80’s… … and many high-impact new technologies (e.g. 3D seismic, horizontal wells, FPSOs) fully penetrated the market in the ’90s. Today it continues to integrate advanced software, material science and robotics.

010731Technology in E&P-main pack.ppt.ppt
Independent studies conclude that new technologies have created significant value in the industry boost value creation2-ZXI039OL.ppt EU study: Reserves gains Shell study: Total pre-tax benefit in 5 Shell units Billion boe oil and gas reserves in UK, Norway and Denmark US$ billions ( ) Sub- surface Seismic Floaters 4,1 Well Drilling 3,8 Facilities Other 8.3 ~45 X 0,5 X-3,3 Reser-ves 1990 (minus prod 90-97) Due to better tech-nology Other factors Reser-ves 1997 Oper-ating cost 1991 Total benefit from new tech-nolo-gies Total cost of R&D and impl. Op. cost 1994 Source: EU Energie publication, OGJ, EIA

However, too many potentially high-impact technologies have failed to materialise boost value creation2-ZXI039OL.ppt Text February 28, 2000 October 2, 1999 January 15, 2001 The volume of transactions conducted on-line is growing rapidly, but some sectors are likely to outstrip others. The volume of transactions conducted on-line Financial institutions will spend more on electronic commerce Financial institutions will spend more on electronic commerce technology than on branch technology in the Year 2001. Financial institutions will spend more on electronic commerce Now it’s the turn of the small companies e-commerce promised a level playing field. Now it’s the turn of the small companies e-commerce promised a level playing field. Now it’s the turn of the small companies e-commerce promised a level playing field. The volume of transactions conducted on-line is growing rapidly, but some sectors are likely to outstrip others. The volume of transactions conducted on-line Financial institutions will Financial institutions will spend more on electronic commerce technology than on branch technology in the Year 2001. Financial institutions will spend more on electronic commerce Now it’s the turn of the small companies e-commerce promised a level playing field. Now it’s the turn of the small Financial institutions will spend more on electronic commerce The volume of transactions conducted on-line is growing rapidly, but some sectors are likely to outstrip others. The volume of transactions conducted on-line Financial institutions will spend more on electronic commerce Financial institutions will spend more on electronic commerce technology than on branch technology in the Year 2001. Financial institutions will spend more on electronic commerce Financial institutions will spend more on electronic commerce technology than on branch technology in the Year 2001. Financial institutions will spend more on electronic commerce Direct Hydrocarbon Indication and slimhole drilling cuts exploration cost by 70% First platform free deep-water development in operation – cost down by 50% Downhole separation….…multiphase pumping…smart wells… Gas-to-liquid plant to be built with total cost of USD 15/boe

Leaders in the E&P industry are struggling to capture the full potential from technology boost value creation2-ZXI039OL.ppt Technology related concerns Strategy: How could we build a distinct strategy based on our technological capabilities? Investments in new technology: Should we fund technology development, if so – how ? Organization: How should we organize/work to maximize value creation from new technologies? Sourcing: How could we work with our suppliers to maximize value creation from new technology? Why of current interest: Many companies have failed to leverage their technological strength in a holistic strategy Investments have been very cyclical – good projects stopped despite huge long-term potential Recent organizational trend has resulted in less willingness and capacity for new technologies Currently there are limited incentives for suppliers to push forward new technologies

McKinsey conducted a knowledge building initiative to gain understanding of the issues and to identify solutions boost value creation2-ZXI039OL.ppt Phase 1 Phase 2 Phase 3 Develop perspective on innovation and technology in E&P Share with E&P Co and Technology Co. and adjust Present and support teams and projects 2001: January-March April-June July-Dec Technology case studies: 5 mature technologies: 3D, MWD, Horizontal wells and FPSOs, subsea trees 12 promising new technologies: E.g. smart wells, 4C sesimic, downhole separation Survey on E&P companies by OFSEs Interviews 20 with E&P Companies, e.g. : Shell, Norsk Hydro, Exxon, Statoil, Enterprise, Unocal, ENI, Amerada Hess, Conoco, Adnoc 15 with OFSEs/ technology companies, e.g: Halliburton, Schlumberger, Baker Hughes, Roxar, Read Well Service, PGS, ABB, Stolt 10 with banks, governments. and R&D Institutions, e.g.: Imperial College, First securities, Simmons, DDB, CERA, Chr. Michelsen 15 questions Ranking of 8 E&P companies Participants: leading OFSEs/technology companies in Houston, London, Oslo, Stavanger

We conducted many case studies within the main categories of technologies boost value creation2-ZXI039OL.ppt Yellow: Technology case studies performed Communication and visualisation Broadband and remote operations Visualisation Subsurface Seismic (2D, 3D, 4C,4D) Reservoir simulation and management software Monitoring Downhole Smart wells Downhole metering Downhole separation Drilling and logging MWD Horizontal drilling Slag cement Expandable casing Dual gradiant drilling Offshore slimhole drilling Subsea and pipeline Subsea trees Multiphase metering Risers and pipelines Subsea separation Topside and platform Generators Separators Valves and pumps FPSO Processing GTL LNG

A new regime for innovation and technology management in the E&P industry boost value creation2-ZXI039OL.ppt New technologies are required to meet the opportunities and challenges in the E&P industry Innovation and introduction of new technologies in E&P is inefficient The conduct of E&P companies and OFSEs is the prime cause of this inefficiency This technology gap is an opportunity for value creation provided that a new regime for technology management is successfully introduced

Oil and gas supply are predicted to grow faster than other energy sources boost value creation2-ZXI039OL.ppt Average annual growth rate (%) World energy supply (Mtoe) 6000 Oil supply 2000- 2.0 2020 5000 Oil 1980- 0.6 2000 4000 Gas supply Gas 2000- 2.9 2020 3000 Coal 1980- 2.1 2000 2000 Total energy consumption Nuclear 2000- 1000 1.8 2020 Hydro 1980- Other renewable 1.3 2000 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: International Energy Agency

The E&P industry faces a dramatic growth challenge
010731Technology in E&P-main pack.ppt.ppt The E&P industry faces a dramatic growth challenge boost value creation2-ZXI039OL.ppt Region Latin America Europe FSU M.East Asia Pacific Change mmb/d +9 -3 +10 +15 +6 140 120 100 80 60 40 20 Global oil* production medium scenario Million b/day Technology challenge: +80 mmb/d Region North Sea South America Other Change (mmb/d) +5 +2 New fields outside M.East Region Middle East FSU / China Other Change (mmb/d) +20 +12 Increased recovery Existing fields and Middle East fields * Including HC liquids and NGL Source: IEA, EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000), McKinsey

The Middle East, FSU and deep water regions will be the main growth areas boost value creation2-ZXI039OL.ppt Exploration/ Deep water / rough water Mature area offshore - IOR Mature area onshore - IOR Middle East Source: EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000).

Deep water exploration is high on the agenda for leading international petroleum companies boost value creation2-ZXI039OL.ppt Exploration/ Deep water/ rough water “Our highly focused exploration program is concentrated in deepwater Gulf of Mexico, Latin America and West Africa, while our core production areas also include the US, UK, North Sea, Middle East and the Pacific” Focus areas: Deepwater Gulf of Mexico, West Africa (Angola, Nigeria), South America, Caspian Region, Eastern Canada, Middle East Texaco-Chevron June 2001 ExxonMobil Annual report 2000 Source: EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000).

But successful deep water exploration and development requires technological breakthroughs boost value creation2-ZXI039OL.ppt Exploration/ Deep water/ rough water Reduce exploration drilling costs Reduce development costs Resolve environmental issues regarding gas processing Direct Hydro Carbon Indication (DHI) (using seismic attributes) Dual-gradient drilling Deepwater slimhole drilling Subsea processing Downhole separation … Source: EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000).

Mature offshore areas could be further exploited through new technologies boost value creation2-ZXI039OL.ppt Mature area offshore - IOR Smart wells Downhole separation 4C/4D seismic Reservoir optimisation and management Increased oil recovery Improved economics of marginal fields Source: EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000).

The “shift to gas” poses additional technological challenges
010731Technology in E&P-main pack.ppt.ppt The “shift to gas” poses additional technological challenges boost value creation2-ZXI039OL.ppt 180 Million boe/day 160 140 Gas “ExxonMobil is exploring the opportunity to apply its proprietary GTL technology by developing a world-scale GTL plant in Qatar” 120 100 80 60 ExxonMobil web - annual report 2001 40 Oil and HC liquids 20 Source: OGJ

Stranded gas reserves* need new technology to be monetised
010731Technology in E&P-main pack.ppt.ppt Stranded gas reserves* need new technology to be monetised ESTIMATE boost value creation2-ZXI039OL.ppt Trillion cubic feet FSU 1,340 Norway 49 U.S. 53 Qatar 226 Malaysia 38 Algeria 67 Indonesia 47 Nigeria 86 LNG technologies Gas-to-liquid technologies (GTL) Sour gas processing technologies Reduce processing costs Reduce transportation costs and connect gas fields to markets Venezuela 52 Iran 505 Abu Dhabi 154 Australia 47 * Gas reserves exceeding current or anticipated commitments in large quantity and sufficiently accessible location to support potential international gas trades Source: Janson Association; McKinsey analysis

Growing environmental concerns add to the need for new technologies
010731Technology in E&P-main pack.ppt.ppt Growing environmental concerns add to the need for new technologies boost value creation2-ZXI039OL.ppt Continuing technology advances are essential for meeting expanding energy needs and reducing its environmental impact Phil Watts, Managing Director of Shell Innovation is making it possible to produce and to use energy products in ways which don’t damage the environment Sir John Brown, Chief Executive BP Gas re-injection technologies Decarbonisation technologies GTL Reduce CO2 emission, including gas flaring Reduces oil to water

New technology is required to enable companies to successfully achieve the forecast increases in labour productivity boost value creation2-ZXI039OL.ppt Boe/day per E&P employee for selected E&P companies Higher productivity More onshore work Group work Streamlined work processes Broadband communication and remote real-time operations Visualisation and “groupware” 1990 2000 2010 1980 2020

New technologies are required to meet the opportunities and challenges in the E&P industry boost value creation2-ZXI039OL.ppt Business challenges Possible new technologies Increase oil recovery rate Improve economics of marginal fields Reduce operating costs Reduce exploration drilling costs Reduce development costs Reduce processing costs Reduce transportation costs and connect gas fields to markets Reduce CO2 emission, incl. gas flaring Smart wells Downhole separation 4C/4D seismic Reservoir optimisation and management Direct Hydro Carbon Indication (DHI) Dual-gradient drilling Deepwater slimhole drilling Subsea processing LNG technologies Gas-to-liquid technologies (GTL) Sour gas processing technologies Gas re-injection technologies Decarbonization technologies GTL Mature Area/ Brownfield Deepwater Gas e.g. in Middle East Environmental Productivity Higher productivity Demanning offshore Streamlined work processes Broadband communication and remote real-time operations Visualization and “groupware”

The role of smaller players has been crucial in the innovation and technology development process boost value creation2-ZXI039OL.ppt Role* of various players through the development process (based on 15 technology case studies) [%] 2 15 14 14 Non E&P 18 1 8 Academic 25 17 38 SME 40 9 21 2 Big 3 OFSE 22 2 17 12 Other E&P 43 29 32 Majors 23 Idea Prototype 1st field test Commercially available 50% Penetration * The role is defined as the financial value of resources devoted to the effort (i.e. direct funding, expertise, laboratory time etc.), for phase 2-4. For the first phase “intellect contribution” is also assessed and included Source: Industry journals, interviews

Development timelines of key E&P technologies
010731Technology in E&P-main pack.ppt.ppt Development timelines of key E&P technologies boost value creation2-ZXI039OL.ppt Sub-sea trees Idea to prototype Prototype to field test Field test to commercial Commercial to 50% penetration …? GTL MWD Horizontal drilling 3D seismic FPSO …? Multiphase metering Successful cases …? Subsea processing …? Downhole separation 4C seismic …? …? Slag cement …? Expandable casing …? Dual gradient drilling …? Seismic while drilling …? Smart wells …? Deepw.slimhole drilling Visualisation 1960 1965 1970 1975 1980 1985 1990 1995 2000 Source: Industry journals, interviews

Visualisation technologies have been developed efficiently
010731Technology in E&P-main pack.ppt.ppt Visualisation technologies have been developed efficiently boost value creation2-ZXI039OL.ppt 1995 2000 More than 100 large screen visualisation centers are expected by the end of 2001 Pioneers Norsk Hydro, Arco and Texaco initiate visualisation development centers. Experience is drawn from space, medicine and construction Phillips, Statoil and others install visualisation centers BP tests successfully, plans to build 15 centers worldwide Norsk Hydro installs virtual reality center Value impact: Better detailed design of well paths in reservoir has significantly improved well production - e.g . in Hydro an online decision on well extension improved recovery by 750’ barrels Better general understanding of reservoir has improved development solutions, reduced cost of overall well program and increased recovery Simulation models have improved significantly Drivers: Pull from E&P: Low risk, limited capital involved Immediate value impact – fine-tune well Appealing technology - excitement Push from technology companies: Basic technologies from other sectors Non-E&P players have nothing to lose Source: Industry journals, interviews

The success of 3D seismic required both pull from E&P companies and push from technology companies boost value creation2-ZXI039OL.ppt 2 streamers 5 streamers 12 streamers 1970 1980 1990 2000 Better positioning made 3D possible –(Norwegian shipping tradition met E&P) Delay in development Elephant fields (Statfjord) fully covered by 3D New entrant (PGS) pushed development; Increased computing power multi-streamer, onboard processing Multiclient seismic acquisition Value impact: Savings USD ~200 billion , or ~50 cent/b Enhances value through detection of small pools Revitalised mature basins (e.g. Gulf of Mexico) Doubled exploration success rate (1985–1994) Improved risk evaluates from volume data Acquisition and processing speed up from 25 sq.km/month in 1990 to 2000 sq.km/month in 1998 Drivers: Pull from E&P: Huge value potential acknowledge Funding available from elephant fields Organization eager to implement Best people in R&D in the 80ies Push from technology companies: New entrant with nothing to loose Business model that allows value to technology supplier Source: Industry journals, interviews

There have been significant delays for most technologies
010731Technology in E&P-main pack.ppt.ppt There have been significant delays for most technologies boost value creation2-ZXI039OL.ppt Sub-sea trees …? Periods with low activity Not yet successful commer-cialized GTL MWD Horizontal drilling …? 3D seismic FPSO …? Multiphase metering Cases examples …? Subsea processing …? Downhole separation 4C seismic …? …? Slag cement …? Expandable casing …? Dual gradient drilling …? Seismic while drilling …? Smart wells …? Deepwater slimhole drilling Visualisation 1960 1965 1970 1975 1980 1985 1990 1995 2000 Source: Industry journals, interviews

Measurement While Drilling (MWD) was very slow to develop
010731Technology in E&P-main pack.ppt.ppt Measurement While Drilling (MWD) was very slow to develop boost value creation2-ZXI039OL.ppt 1970 1980 1990 1995 Elf and Raymond incorporate Teleco to push development of MWD EWR MWD developed Price shock. Amoco, Exxon, Shell... begin using MWD Elf research initiated Full penetration Teleco demonstrates MWD Industry outsider Raymond Engineering develops mud pulse telemetry Revenue: US $m Teleco Schlumb Other Schlumberger research initiated Schlumberger acquires Analysts to develop MWD (but do not launch MWD) Value impact: Reduced drilling time – no stop to log and cost reduced by ~USD 400k per well EWR MWD made formation evaluation better – discoveries of e.g. turbidites MWD essential tool in horizontal drilling Drivers: Pull from E&P: When cost became an issue in 1986 Push from technology companies: Primarily from industry outsiders Barriers: Major OFSEs held back the technology for a long period to protect existing service lines Industry leaders slow to adapt Focus on log quality and not cost / value benefit GeoLink’s Orienteer MWD system Source: Industry journals, interviews

Deepwater Slimhole Drilling has been slow to take off
010731Technology in E&P-main pack.ppt.ppt Deepwater Slimhole Drilling has been slow to take off boost value creation2-ZXI039OL.ppt Value Impact Smaller rigs and less equipment needed Reduced investment by ~50%+ Reducing expl. drilling cost Casing: 65% Mud Cost: 70% Cement: 80% Personnel: % Reduced cost: 40-45% in shallow water, 50% deep water Description Use of thinner pipes with stronger materials and narrower well diameters for drilling Hive com-pensation Barriers : Development stopped No support from major OFSEs or existing rig owners (to protect existing service lines?) No E&P company wants to be first mover (risk aversion) Conventional Slimhole Source: Industry journals, interviews

The key drivers of innovation and technology
010731Technology in E&P-main pack.ppt.ppt The key drivers of innovation and technology boost value creation2-ZXI039OL.ppt Drivers E&P players with strong strategic interest (few portfolio alternatives) in the new technology are involved Decision makers that will commit money are in charge Developments are asset-light Organizational culture, systems and incentives to foster and test ideas Technology companies exist which have strong incentives to push new technologies E&P companies create demand for new technology Examples Need for horizontal drilling in Austin chalk + Troll field (Hydro) Statfjord “funded” 3D in 1980 Visualisation is asset-light Shell deepwater-team Norsk Hydro culture open to try “wild idea” of horizontal drilling (Troll) Separate JV with open culture PGS pushed 3D seismic Teleco pushed MWD Demand in E&P companies induced OFSEs to provide MWD Strategy Funding Organisation Sourcing

Barriers to technology development
010731Technology in E&P-main pack.ppt.ppt Barriers to technology development boost value creation2-ZXI039OL.ppt Idea Prototype 1st field test Commercially available 50% penetration Barriers Weak understanding of strategic rationale for being technology leader Lack of stability in funding Lack of Patent protection Organisational conservatism and risk averse approach to technology decisions “Not invented here” syndrome Insufficient cooperation with technology suppliers

With a few exceptions the main classes of new technology are still moving slowly boost value creation2-ZXI039OL.ppt Current status Classes of technologies Communication and visualisation Reservoir Downhole Drilling and logging Subsea and pipeline Processing Topside and platform Comment Rapid introduction of broadband, remote operations and visualisation Fast introduction of new software, but slower on next generation seismic Many ideas introduced, but slow pilot testing phase due to high risk Radical ideas developed, but limited push for testing Currently some push from deep-water, but conservative attitude from E&P Much focus around gas conversion, but few breakthrough results Currently very little innovation around separators, generators, pumps, etc.

The pace of innovation in E&P has been slow relative to that in other industries boost value creation2-ZXI039OL.ppt Average duration of the four phases in different industries Consumer products (US average) Idea to prototype Prototype to field test Field test to commercial Commercial to 50% penetration Medicine (Merck- average) ADSL (broadband telecom) E&P industry (15 tech. Cases) 5 10 15 20 25 30 35 Time (years) Source: Industry journals, interviews

The conduct of E&P companies and OFSEs directly influences innovation and technology development boost value creation2-ZXI039OL.ppt Level of influence Factors influencing innovation and technology Geological realities Oil price Macro economy None Low High Patenting Government policies Field investments Cyclical mindset Talent attention Techn. R&D investments E&P Co. Organization Innovation and technology development E&P Co. strategy Sourcing

Player conduct has varied significantly and today leads to a poor environment for technology and innovation boost value creation2-ZXI039OL.ppt Oil Price Very positive Positive Neutral Negative Very negative ++ + o - -- Environment for technology and innovation Macro trend Actual price ++ + - + ++ + - + - -- -- Influ-enced by macro trend

Macro trend downward is partly a result of the cyclical behaviour following the industry cycles boost value creation2-ZXI039OL.ppt Oil Price Very positive Positive Neutral Negative Very negative ++ + o - -- Environment for technology and innovation Industry cycles Actual price ++ + - + ++ + - + - -- -- Follow industry cycle

Distinct technology based strategy
010731Technology in E&P-main pack.ppt.ppt Few companies have been able to identify and execute on a technology based strategy boost value creation2-ZXI039OL.ppt Distinct technology based strategy - (V) - (V) V No apparent technology-based strategy Elements of a technology based strategy Fully implemented technology based strategy Companies: ExxonMobil Shell/ Royal Dutch BP Amoco TotalFina Elf ChevronTexaco Conoco Phillips Unocal Norsk Hydro Statoil Petrobras ENI Saudi Aramco Adnoc Anadarko BHP Enterprise Amerada Hess Our growth strategy is based on privileged relations within specific countries. Technology plays a minor role E&P company We have been in the technology forefront many times, but it has been “bits and pieces”. We never developed any distinct strategy E&P company

Some companies cite the lack of correlation between performance and innovation as a reason for not taking a stronger role in technology and innovation boost value creation2-ZXI039OL.ppt ENI BP TotalFinaElf Shell ExxonMobil “Free rider” mentaity ChevronTexaco Total return to shareholders Norsk Hydro Unocal Innovation index

The “free rider” mentality is a significant strategic weakness in the industry boost value creation2-ZXI039OL.ppt What is apparently a rational decision for an individual company…. …has negative consequences for all when aggregated up to the industry level If someone launches a new, good technology, our suppliers will give us access to it within less than 6 months Why invest, it is safer to “wait and see” Hey, why do we need to wait so long for new technologies Our investments has not paid off, now it is our turn to wait for others to carry the R&D burden E&P company Industry spokesman E&P company Technology company

Number of patents as a fraction of number in 1976-80
010731Technology in E&P-main pack.ppt.ppt Slow growth in E&P patents is symptomatic of poor patent protection for the industry boost value creation2-ZXI039OL.ppt Number of patents as a fraction of number in 8 Pharmaceutical Industrial 7 automation We have many patents, but we nevertheless see similar products showing up rather fast. 6 5 4 Automobile 3 Construction 2 E&P 1 Technology company Source: US Patent and Trademark Office

R&D is increasingly “outsourced”, and central funding has been reduced drastically boost value creation2-ZXI039OL.ppt R&D funding in the E&P industry Year 2000 US$ (billions) 3,0 1,1 1,9 1,7 OFSEs R&D Business units/ Licenses Central 1990 2000 E 4,1 3,6 Oil and gas com-panies

R&D in E&P is also low compared to other industries
010731Technology in E&P-main pack.ppt.ppt R&D in E&P is also low compared to other industries boost value creation2-ZXI039OL.ppt R&D Investment (%) Software & IT Pharma Health Chemicals Electronics Aerospace/Defence Media Automobiles Telecoms Construction Metals Oil & Gas Beverage Tobacco

R&D expenditure has dropped by 50% in the last decade with sharpest decline in the US boost value creation2-ZXI039OL.ppt 1999 US$/boe (adjusted by E&P share of total revenues) Average R&D spend cent/boe Norsk Hydro 35 Statoil 28 Shell 9,3 ENI-Agip 9,0 Chevron 8,5 BP Chevron Conoco Shell Phillips BP 7,6 Texaco 6,5 Exxon Texaco Exxon 5,8 Philips 5,7 1991 1995 2000 Conoco 5,1 Note: All R&D figures are adjusted according to average E&P share of total revenue, BP figures include Amoco in 1997 and after; Exxon figures include Mobil in 1997 and after Source: Herold’s; PetroCompanies; BP;10Ks, annual reports

There is no master plan behind academic and government driven R&D
010731Technology in E&P-main pack.ppt.ppt There is no master plan behind academic and government driven R&D boost value creation2-ZXI039OL.ppt Neither governments nor companies have focused on R&D, and the result is fragmented activity in many different academic institutions There is a hopeless duplication of Academic R&D efforts and no master plan R&D manager, E&P company Director, E&P company

The consequence is that nobody takes responsibility for long-term R&D
010731Technology in E&P-main pack.ppt.ppt The consequence is that nobody takes responsibility for long-term R&D boost value creation2-ZXI039OL.ppt Long term R&D E&P companies Technology is not core Technology will become available – we will then be fast followers Service companies We are not paid for that It could even hurt our business And do we know what they need? Institutes / academia Duplication Lack resources Lack of practical exposure and business judgment

Different opinions persist regarding the shift in approach to R&D
010731Technology in E&P-main pack.ppt.ppt Different opinions persist regarding the shift in approach to R&D boost value creation2-ZXI039OL.ppt OFSEs can do long term R&D OFSEs cannot do long term R&D We used to have an R&D department but shut it down – we trust in the service sector (or other E&P companies) to do the breakthrough R&D Don’t expect anything real new from the big OFSEs Small technology company We tried to get an OFSE engaged in our long term project, but they thought it was too far a way to go -- we had to do it ourselves US E&P company E&P company First and record-setting perfor-mance… We are more “hungry” and efficient than E&P companies’ internal departments, and thus create higher impact R&D. But E&P must finance it, OFSEs do not want to finance long term R&D Schlumberger web-site Independent R&D institution

Investments have been very cyclic in the E&P industry
010731Technology in E&P-main pack.ppt.ppt Investments have been very cyclic in the E&P industry boost value creation2-ZXI039OL.ppt Investments US$ (billions) Oil price US$/bbl Development cost Nominal oil price Exploration cost Correlation between exploration cost and oil price = 0,89 Correlation between development cost and oil price = 0,53 Note: Domestic and foreign investments by US oil companies registered in EIA database Oil price is US average domestic first purchase price

Capital intensive technologies are often stranded in a funding “Death Valley” for years boost value creation2-ZXI039OL.ppt E&P industry Field test to commercial 4C seismic Offshore slimhole drilling Slag cement + Downhole separation Multiphase metering Subsea separation Cash flow Time No more R&D funding available Small companies do not have balance sheet to carry risk Big 3 do not push due to existing cash cows E&P companies wait for others to test, or expect free test equipment Limited VC available, regarded as too risky “digital risk” R&D funds available - The Death Valley

The average field size has decreased, and fields are no longer “sponsors” of new technologies boost value creation2-ZXI039OL.ppt Average field size at the UK sector Million toe after year of discovery Average field size at Norwegian sector Million toe after year of discovery Without Ormen Lange gas field 17 68-75 76-80 81-85 86-90 91-95 96-00 68-75 76-80 81-85 86-90 91-95 96-00

A Venture Capital partner
010731Technology in E&P-main pack.ppt.ppt There is a shortage of funding available for the remaining smaller players boost value creation2-ZXI039OL.ppt Absolute size USD millions in equity funds in Europe 1999 Relative size Equity funds/market cap Communication IT Chemicals/ material Pharma Transport Construction Electronics Financial services Energy VC in Oil and gas is too risky – too dependent on a very few customers and it is difficult to really understand the very complicated technology A Venture Capital partner

All vital functions within assets
010731Technology in E&P-main pack.ppt.ppt The move from functional to asset-based organisations has weakened the ability of some companies to innovate and develop new technology boost value creation2-ZXI039OL.ppt E&P Expl orati on Field deve lopm ent Oper ation Cons tructi on E&P Sup port Asset 1 Asset 2 Asset 3 All vital functions within assets Functional organisation Asset-based organisation Strengths: High attention on R&D and strategic technology development Easy to enforce consistent technology and methodology approaches across fields Issues: Weak business coordination within asset (e.g. how to proactively optimise infrastructure through satellite tie-ins) Focus towards disciplines generates “academic interests” that might not pay off Too complex when many fields Strengths: Strong business focus, good coor-dination across phases at asset level Non-bureaucratic and empowered organisation Lean and mean Issues: Weaker processes for optimising and sharing of technology-related results Incentives might be too short-sighted Less capacity for strategic technology development

Safety concerns also limit the willingness of E&P organisations to test new technologies boost value creation2-ZXI039OL.ppt With the government’s current focus on safety, it is very difficult to get support for using any technology that does not have a proven track record We are dealing with people in high risk environments, we cannot risk life and property by playing around with fancy new technologies Technology company E&P manager

Survey results from suppliers indicate that E&P companies need to improve in most areas boost value creation2-ZXI039OL.ppt Survey question Key Success Factors Range of survey results In relation to technology to what degree does the E&P company... Poor Excellent Moderate Generate ideas internally Understand the value Use external ideas / products Share ideas / products externally Communicate new tech. internally Fund during early phase development Provide field testing opportunities Effectively manage JIPs Collaborate with small tech. companies Commercial skills Internal processes / procedures Company structure Internal incentives External contractor incentives Implement new technology effectively Best in class Worst in class Companies in survey BP ChevronTexaco ENI Exxon Norsk Hydro Shell Statoil TotalFinaElf Unocal Companies surveyed Brit Bit FMC Halliburton Inside Reality PGS Read Schlumberger SPS-AFOS Stolt To what degree does the E&P company have appropriate... Source: McKinsey surveys

OFSEs and technology companies do not rate oil companies highly in technology development and innovation boost value creation2-ZXI039OL.ppt There is a tendency to stick to tried and tested technologies Joint Industry Projects are not well managed Not enough funding or testing opportunities are provided Ideas from technology companies are not well adopted The problem lies with the oil companies’ internal structure, processes and procedures Incentives to promote new technology are poor

Suppliers rank Norsk Hydro and BP as technology leaders
010731Technology in E&P-main pack.ppt.ppt Suppliers rank Norsk Hydro and BP as technology leaders boost value creation2-ZXI039OL.ppt Average of all questions Norsk Hydro BP Shell Statoil TotalFinaElf ChevronTexaco Unocal ENI Exxon Poor Moderate Excellent Source: McKinsey surveys of 9 technology suppliers: Brit Bit, FMC, Halliburton, Inside Reality, PGS, Read, Schlumberger, SPS-AFOS, Stolt

E&P companies can be classified in four distinct groups when evaluated for their technology leadership and external cooperation boost value creation2-ZXI039OL.ppt R&D investments Norsk Hydro “Internal oriented leaders” Statoil Shell “External oriented Leaders” BP High ENI Technology and innovation orientation (Average R&D spend level* ( ) + total survey score) TotalFina Elf ChevronTexaco “Internal oriented followers” “External oriented followers” ExxonMobil Enterprise Low Conoco Amerada Hess Low High External cooperation orientation (Score on survey - external orientation + qualitative assessment ) Source: 10 Ks/annual reports, Survey, Interviews; Team analysis,

Each group has some typical ways to approach technology and innovation
010731Technology in E&P-main pack.ppt.ppt Each group has some typical ways to approach technology and innovation boost value creation2-ZXI039OL.ppt Leading in some technologies Large central technology departments Often want to own technologies themselves Leading in many technologies Asset based organizations, but strong competence networks Use of incentives in contracts Open to let technology companies own the technology Norsk Hydro Shell Statoil BP Leader ENI TotalFina Elf ChevronTexaco Enterprise Follower ExxonMobil Focus to standardize and reuse technology internally Central departments approve all important technology decisions Wait for others to pioneer new technology – prefer field tested technologies Low budgets, and explicit policy of being fast followers Asset based - no own R&D department Open to use turnkey solutions from suppliers Conoco Amerada Hess Internal External Source: 10 Ks/annual reports, Survey, Interviews; Team analysis,

A talent shortage in the E&P industry is cited as a key barrier to technological innovation boost value creation2-ZXI039OL.ppt Number of E&P professional job applications to a major oil company (% of 1990 applications) Top tier recruits in a major oil company (% of total recruitment) Disguised Client Example 100 98 6 4 59 40 1 1990 1992 1995 2000 1992 1995 2000 Recruitment of staff with potential to become senior management, in a major oil company (% of 1980 intake) Headcount in 25 largest E&P companies (millions) 1,6 100 1,4 1,12 80 0,8 60 0,6 Required level 0,5 40 20 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995

The best talent was attracted to petroleum studies in the 1980’s, but this is no longer the case boost value creation2-ZXI039OL.ppt Entrance score of Norwegian Institute of Technology (no. 1 Engineering School) (Changed formula) Petroleum Product Design Industrial Economics Top 2% of cohort Top 10% of cohort Top 30% of cohort Physics and Math. Architecture Electrical Engineering Marine Engineering Mech. Engineering Civil Engineering Petroleum Chemistry Engineering

The OFSE industry is highly concentrated
010731Technology in E&P-main pack.ppt.ppt boost value creation2-ZXI039OL.ppt Market share - selected segments Revenue 1999 $Million Wireline logging 14% 57% 20% 3D seismic 5% 10% 12% 6% Company Cement 38% 29% 5% 20% Halliburton 15,664 Schlumberger 9,568 50%* Baker Hughes 5,080 BJ Services 1,087 PGS 775 CGG 475 Veritas 265 * 50/50 joint venture of Western GECO Source: Spears and Associates, Inc.

And the “Big 3” OFSEs have primarily entered new technology markets through acquisitions boost value creation2-ZXI039OL.ppt In-house innovation* Acquired** Adaptor No role played No. of new technologies Halliburton Schlumberger Baker Hughes * ”In-house innovation” is any innovation by OFSE before 1990 or an innovation by a division after 1990 that was part of the OFSE before 1990 ** ”Acquired” innovation is any innovation that was acquired through an acquisition after or was developed by a division acquired after 1990

With a mindset of selling “products” rather than “value” some companies hold technologies back boost value creation2-ZXI039OL.ppt We were not engaged in wireline logging, and therefore pushed MWD aggressively at an early stage We would rather sell a large number of commodity wells than a few advanced ones We contacted one of the big service companies to get their support in developing our new technology. They were positive, but nothing materialised. They had all kinds of excuses, but after a while we realised that they were not really interested in success due to their existing service line Baker Hughes An OFSE An E&P company

Some companies have focused on “selling value” and have been innovative boost value creation2-ZXI039OL.ppt PGS has been a pioneer in developing a business model focused on selling value rather than just “sell products” They have (as a result?) been pioneers and technology pushers within the both the seismic business (3D acquisitions and processing, vertical cable acquisitions, 4C-seismic) and small field production (FPSOs). However, they have not (yet?) capitalised on many of their inventions, e.g 4C seismic Unlike other OFSEs, they have taken significant geological and reservoir risks

Smaller companies have major difficulty in accessing E&P companies
010731Technology in E&P-main pack.ppt.ppt Smaller companies have major difficulty in accessing E&P companies boost value creation2-ZXI039OL.ppt E&P companies are listening only to the three big OFSEs. Therefore we do not get access to E&P companies with our slimhole technology that will reduce drilling cost by 50% Our company is “built to flip” [sell company], we don’t get anywhere alone – marketing etc. will be far too expensive An OFSE Smaller technology company Offshore & Marine

In summary, several barriers impede the four key drivers of technology
010731Technology in E&P-main pack.ppt.ppt In summary, several barriers impede the four key drivers of technology boost value creation2-ZXI039OL.ppt Strategy Weak understanding of strategic rational for being a technology leader Lack of ability to identify and execute on a technology based strategy Ambiguity about whether technology is core business Notion that being a technology “free-rider” makes sense Easy to be fast follower - no efficient patent protection Lack of companies taking the “shaper” role Lack of stability in funding Lack of “elephants” to sponsor new technologies Each downturn has resulted in unreasonable cut in good projects Especially difficult to fund “field test phase” – none take the responsibility Lack of tools to do valuation of new technologies – insufficient funding Limit Venture Capital available Organisational conservatism and risk aversion in technology decisions Power moved from center to assets – less strategic/holistic perspective Increased focus on short term performance targets – uptime focus Safety, health and environmental issues driver for using “known technology” Homogenous demographics and strong professions – “wild ideas” stopped Lack of talents with time and incentives to engage in new technology Lack of openness for external ideas (the not-invented-here syndrome) Insufficient cooperation with technology suppliers Significant cannibalization issues stops suppliers from pushing technologies Contracts has wrong incentives - sell “products/hours” rather than “value” Independent players with great ideas/products have limited access Poor set-up of many joint industry projects – lack of”win-win” incentives Funding Organisation Sourcing

With the result that the industry dynamics for technology have become dysfunctional boost value creation2-ZXI039OL.ppt E&P companies Increasingly expecting others to do R&D Not changing contractual models accordingly Big 3 OFSEs Important cash-flow from existing products - no incentives for proactively introducing new technologies under current contractual regime Limited tradition for in-house breakthrough innovation Controlling distribution channels Other technology companies Often innovative, but difficult to get funding difficult to get access to E&P companies

The conduct of E&P companies and OFSEs directly influences innovation and technology development boost value creation2-ZXI039OL.ppt Level of influence Factors influencing innovation and technology Geological realities Oil price Macro economy None Low High Patenting Government policies Field investments Cyclical mindset Talent attention Techn. R&D investments E&P Co. Organization Innovation and technology development E&P Co. strategy Sourcing

Core elements in the new regime for innovation and technology management boost value creation2-ZXI039OL.ppt Strategic role Valuation methodology Funding Processes Technology as a business project Organisational structure Culture Supplier incentives Links with smaller players Successful alliances

Determining your role Observations that say “Lead”
010731Technology in E&P-main pack.ppt.ppt Determining your role boost value creation2-ZXI039OL.ppt Observations that say “Lead” Observations that say “Follow” The demand for new oil will be huge Lack of appropriate technology is still a show stopper for many fields New geographies are opening up Technology could be the ticket to entry Technology companies have not had the strengths or interests to be shapers of breakthrough technologies The capacity for innovation and technology development is currently low The macro trend in most industries is that value chains are split up into global niches dominated by technology specialists, i.e. it is difficult for “users” like E&P companies to keep ahead as leaders Intellectual property rights are not easily obtained/enforced Also in Oil and Gas we see that technology companies are taking over R&D and a larger part of the value chain It is not obvious that a single approach (leader or follower) to all E&P technologies is the best strategy

Some companies have taken the role of technology leaders
010731Technology in E&P-main pack.ppt.ppt Some companies have taken the role of technology leaders boost value creation2-ZXI039OL.ppt Examples The FPSO expert BHP Petroleum was a pioneer in FPSO developments in Australia, and has leveraged this in Vietnam The deepwater expert Shell recognised the potential early, tied up more than 600 deepwater blocks in GoM with a dedicated organisation Petrobras became a leading deepwater player in South America The sub-salt exploration expert Anadarko has developed superior skills within sub-salt imaging, deepwater exploration and option based risking Mature giant field expert Statoil has aggressively invested in IOR-technology for extending life of own giant fields in the North Sea Yet to be seen…? The arctic expert The environmental expert Yet to be seen…?

Shell recognised the potential of deepwater exploration in GOM before most other players boost value creation2-ZXI039OL.ppt SHELL IN DEEPWATER EXPLORATION Success rates in deepwater exploration Gulf of Mexico* Percentage of wells with finds >100 MMBOE** Shell was in the 80s and early 90s an early mover in deepwater exploration and production Tied up deepwater blocks Invested heavily in skilled personnel Led the development in technology to exploit deepwater fields Shell Exxon Conoco Onyx Land position Blocks Average field size MMBOE Number of finds 633 135 115 3 200 128 128 90 8 5 3 901 Water depths >1,500 feet ** to 1991

Unocal had a “Follower” role that has also been successful in drilling
010731Technology in E&P-main pack.ppt.ppt Unocal had a “Follower” role that has also been successful in drilling boost value creation2-ZXI039OL.ppt Well time, days Unocal approach to achieving drilling cost reductions Maintain a supportive culture Encourage and reward innovation, open communication, effective teamwork and fast decision making Instil the right philosophy Geoscientists, engineers, drillers, financial staff and contractors work as a team and share commitment to succeed Provide the right incentives Compensation of deepwater teams directly linked to 50% cost goal -55% Employed innovative, state-of-the-art technology Advanced interpretation Improved well design (slim holes, fewer sections) Premoored anchors BOPs on the rig floor Synthetic muds LWD evaluation Industry average comparable Garden Banks wells Spirit Energy Garden Banks 74 Source: Unocal PIRA conference presentation

Key success factors in a “Follower” role
010731Technology in E&P-main pack.ppt.ppt Key success factors in a “Follower” role boost value creation2-ZXI039OL.ppt Speed Develop a flexible organisation to respond to opportunities Networks Develop internal and external global networks with other companies Keep visible possible new technology clusters on the horizon Deal Making Gain access to new opportunities and add value by applying technology Contractor relationships Leverage relationship with contractors to track knowledge on new technology clusters and potential opportunities for application Superior operating and development performance Application of new technologies under a performance culture to extract the best in class performance Willingness to accept new technologies from outside as well as inside the company Cultivate a culture that willingly accepts and understands the introduction of new technologies

Select what role you want to play for each technology cluster
010731Technology in E&P-main pack.ppt.ppt Select what role you want to play for each technology cluster boost value creation2-ZXI039OL.ppt Examples Look at clusters of technologies For each cluster, take deliberate decisions on where to be leader and where to be follower based on: Value potential of the technology Overall and business area strategy Current and future assets Technological capabilities Organisational capacity Technology status by suppliers Competitors ambitions and actions Governments expectations etc. Leader After the leader/follower decision, decide on “cooperation strategy” – “internal” versus “external/collaborative” Follower Source: BBC; press clippings

Be sophisticated when choosing approach for each technology cluster
010731Technology in E&P-main pack.ppt.ppt Be sophisticated when choosing approach for each technology cluster boost value creation2-ZXI039OL.ppt ILLUSTRATIVE Leader Follower Internal External Overall approach of E&P companies E&P companies’ approach to each specific cluster of technologies Norsk Hydro Leader Shell Statoil BP ENI TotalFina Elf ChevronTexaco Follower Exxon Mobil Enterprise Conoco Amerada Hess Internal External

There are four main technology strategies for each technology cluster
010731Technology in E&P-main pack.ppt.ppt There are four main technology strategies for each technology cluster boost value creation2-ZXI039OL.ppt Description When to use Description When to use Be an innovator but keep cards close Actively use patents as protection Establish internal R&D projects Corporate initiatives BU or cross-BU When technology is of key strategic importance and could give unique competitive differentiation (none/little to gain from others), and risk is acceptable Be architect/facilitator Lead and drive through collaborative efforts JV / JIP Alliances/partnerships Corporate venture capital When technology is of key financial and strategic importance, but company believes that joint R&D is most efficient, lacks some skills and/or wants to share the risk Innovate and protect Lead and colla-borate Leader Follower Prepare and adapt Pick and play Internal External Description When to use Description When to use Let others drive development but actively monitor and test Experiment/prepare internal systems to allow fast roll-out When technology is of moderate importance and could give competitive advantage if rolled out rapidly, but others lead Keep watch over development Adopt fast when commercially available When technology is of moderate importance, but others are better positioned to drive it, and it is easily available in the market

Systematic valuation of your technology portfolio is vital for investment decisions boost value creation2-ZXI039OL.ppt Identify technologies Calculate value Categorise and prioritise What End products Map technologies to develop a gross list of promising technologies in each cluster Assess overall attractiveness of the mapped technologies Select key technologies to be further evaluated List of key technologies to be evaluated Identify value creation opportunities of the selected technologies Identify and understand key uncertainties Identify options Calculate the value Estimate value for individual technologies Evaluate value creation potential vs. ease of capture for individual technologies Evaluate connectivity between technologies Identify and prioritise groups/clusters of technologies Prioritisation of technology clusters and individual technologies

Use an appropriate valuation methodology
010731Technology in E&P-main pack.ppt.ppt Use an appropriate valuation methodology according to the development stage boost value creation2-ZXI039OL.ppt Life cycle stages Idea Development and early implementation Commer-cialisation Mature products Level of uncertainty • True ambiguity • High uncertainty • Continuous or discrete uncertainty • Useful prediction • Stable situation Low uncertainty Level of flexibility • Very high • High • Medium • Low Appropriate metrics • Preliminary analysis of option value • Detailed real option valuation (ROV*) • Discounted cash flow (DCF) • Economic Profit (IRR) * ROV methodology is discussed further in the Appendix

Secure stability, scale and value chain mindset
010731Technology in E&P-main pack.ppt.ppt Secure stability, scale and value chain mindset (idea to full use) in funding of technology projects boost value creation2-ZXI039OL.ppt Life cycle stages Idea Development and early implementation Commer-cialisation Mature products Funding need in each phase • Moderate • High • Very high • Low R&D cost in E&P is currently typically 5-10 cents per barrel, while cost improvement attributed to new technology was probably cents per year in the first half of 1990’s and cents in the last part – stability of funding is the key to keep momentum Total funding – see life cycle need

Most vital functions within assets
010731Technology in E&P-main pack.ppt.ppt The new regime means stronger technology processes internally and externally boost value creation2-ZXI039OL.ppt E&P Expl orati on Field deve lopm ent Oper ation Con stru ctio n E&P Su ppo rt Asset 1 Asset 2 Asset 3 Most vital functions within assets E&P Tech nolo gy units Asset 1 Asset 2 Asset 3 Technology architects Functional organisation Asset-based organisation New regime: Asset based with technology architects – “The best of both worlds” High attention on R&D and functional excellence Consistent technology approaches across fields But… Weak business coordination Risk of becoming too academic Too complex when there are many fields Strong business focus Empowered organisation Lean and mean But… Risk of weak technology optimisation across assets Short-sighted incentives Less capacity for strategic technology Keeps strong business focus within assets Achieves focus and scale in R&D and technology development Ensures coordination and proficiency towards suppliers Internal VC ensures secure, professional allocation of funds for technology projects

Key building blocks are a “VC unit” and technology architects that act as “businesses” boost value creation2-ZXI039OL.ppt Central units allocate funds and make policies E&P CTO/VC Assets follow policies and interact on commercial basis with technology architects Technology units control and execute technology standards, supplier relation and some operational tasks Techn ology units Asset 1 Asset 2 Asset 3 Technology architects Technology architects lead technology development and implementation projects as “businesses” to maximise value from new clusters of technologies Supplier 1 Supplier 2 Other E&P companies

The internal VC unit has some similarities, but also differences from external VC companies boost value creation2-ZXI039OL.ppt Tasks for the Venture Capital Unit: Value new technology and allocate funds to projects accordingly – Hold expertise in valuation of technology Yearly valuation and reassessment of all technology projects Member of “boards” for technology projects Selection of management Advisor and door-openers on alliance partners, commercial deals etc. Window towards the external would - Initiate projects and get partners in, or propose participation in external projects E&P Contract support “Venture capital unit” Central R&D Similarities to “real” Venture Capital companies: Allocate funding Select and coach management Support commercial processes Mindset and people skills Difference from “real” Venture Capital companies”: “Synthetic” NPV of venture based on calculated improvement in cash flow from new technology Accept higher risks (if upside is significant for company’s own assets)

Set up technology projects as “businesses”
010731Technology in E&P-main pack.ppt.ppt Set up technology projects as “businesses” boost value creation2-ZXI039OL.ppt E&P Use a business plan approach and create a (synthetic) cash-flow model to calculate option value / NPV, IRR, value of early testing etc. Su ppo rt Asset 1 Asset 2 Asset 3 Technology architects Create the “technology architect” as a real champion”. Ensure sufficient budget. Key task is to maximise life-cycle NPV of technology for the company Increase the future value through proactively positioning in strategic assets Get partners to share investments and ensure sufficient scale in testing phase Search for partners with competence and incentives to speed up development phase Apply “best practice” development projects, inspired by E&P field development projects Venture Capital methodologies Best practice from product development in other industries “Buy” testing time from assets/ licenses on a purely economical basis

The use of mini business plans creates discipline and eases the management task boost value creation2-ZXI039OL.ppt Organisation and resources required to carry out the project Description of technology platform Impact of the technology on the industry Objectives of project (+goals metrics for measuring performance) Business plan for a technology development project Value to the Oil Co. and other partner companies Funding requirement for the projects Market for the technology Roles of other players and competitors

Choose organisational solution based on synergy potential across assets vs. within assets boost value creation2-ZXI039OL.ppt Assessment for each technology type: Need to keep resources and operational control in assets. Align work processes, tools and decide R&D centrally, i.e. balanced Need negotiation power towards suppliers, and directive approach towards assets to develop & test new technology, i.e. strong center Need optimisation within assets on often unique installations, but big synergy potential in buying power, standards and R&D if coordinated, i.e. balanced If optimisation is important across assets is strong center natural Need to push concept thinking and challenge suppliers. Cyclical need, i.e. central unit is natural Degree of operational and technology control E&P Contract support High Moderate Low “Venture capital unit” Central R&D Asset 1 Asset 2 Asset 3 Subsurface (G&G+reservoir) Drilling Maintenance/ topside support Logistics and supply Engineering/ Construction Technology units Technology architects

Strong technology networks are crucial when key technology personnel are in assets boost value creation2-ZXI039OL.ppt Examples of technology/ competence networks (3 types) : Discipline focused: Geology Geophysics Reservoir engineering Etc. Technology focused 4C Seismic Downhole separation Etc. Business concept focused Tail-end production Sub-salt exploration Etc. Technology units Asset 1 Asset 2 Asset 3 Best practice technology networks Clear membership of each network Dedicated (full time) owners/leaders Committed (part time) leadership group Frequent local and global meetings/ seminars Personal incentives linked to success of network Fully harmonised processes and procedures across assets High quality common databases and systems to support work processes Strong informal networks and a culture to share experience and ask for advice Ad hoc and permanent project groups to follow up/ conduct research on specific tasks Flexible and non-bureaucratic approach to start and stop networks according to changing needs

Create a new culture through best practice support processes and systems boost value creation2-ZXI039OL.ppt E&P Knowledge management Su ppo rt Asset 1 Asset 2 Asset 3 Performance management Technology architects Technology projects “give and take” Technology market organisation Work processes and information flow are mapped, and systems are designed to support processes Common platform across geographies and field development phases are implemented that allow efficient cooperation between different competence groups and assets Information and experience sharing intra-net and extra-net systems are fully in use to support the different knowledge-, technology- and business focused groups KPIs in use focusing both on short and long term objectives. KPIs developed that allow valuation of technologies under development – these KPIs should be used to make it possible to value and trade off long term development versus shorter term objectives Talent management Continuous recruiting – avoid cyclical mindset and on-off recruiting Explicit career path descriptions with big upside for high performers Explicit programs for long term development of professionals, including training and rotation

Use incentives to stimulate suppliers to deliver value, not products – align interests, and open the way for SMEs boost value creation2-ZXI039OL.ppt E&P Use KPIs/incentives in a creative way to give suppliers incentives to create value for you as an E&P company, e.g. Pay per (marginal) barrel produced Pay linked to field value enhancement (reserve increase, revenue increase and/or cost improvement – use valuation methodology) Pay linked to HSE indicators Let technology companies own the technology – use contractual means (not ownership of technology) to regulate privileged access to technology Keep channels open for SMEs and industry outsiders with innovative technologies – experience shows the importance of those companies in innovation Techn ology units Asset 1 Asset 2 Asset 3 Technology architects Supplier 1 Supplier 2 Industry outsider Small Supplier 1 Small Supplier N

Set up cooperation agreements to match the specific project needs
010731Technology in E&P-main pack.ppt.ppt Set up cooperation agreements to match the specific project needs boost value creation2-ZXI039OL.ppt Category of relationship Rationale Form of cooperation Type of cooperation partner Industry expertise Gain access to skills the company can not provide Non-exclusive relationships with large number of individual companies and institutions Suppliers/customers Downstream industrial players Players with complementary business areas Ideas/ technology Boost idea flow Pre-empt competition Exclusive relationship with few strategic partners Large and non-exclusive network with industry and academy Industrial Partners Cooperation agreement with Universities/research centers Smart capital Gain smart capital Facilitate exit Close relationship with few selected partners Venture Capital companies within industry Venture Capital companies outside industry Business building Boost business building skills further Exclusive relationships with few strategic partners Non-exclusive, loose relationship with regional and international players Industrial Partners Local incubators for non-core business Reputation Signal strength and growth horizons to external stakeholders Capture ideas, talent and capital Loose relationships with top players nationally and globally Local research institutions International research institutions

Experience shows that JV and JIPs require careful consideration to achieve success boost value creation2-ZXI039OL.ppt Example Pros Cons Joint Venture Partnerships JV Well Dynamics JV merger of smart well and i-well groups (Shell and Halliburton) Clear objectives for JV Separate organisation and culture to parent companies Low commercial viability of venture due to high upfront funding Misalignment of shareholder objectives Lack of knowledge resources within venture Joint Industry Project HIP (US CAR) Deep star JIP Development of deepwater technology 24 members (both oil companies and OFSE) Broad assessment of technology gaps Helps companies to climb the learning curve Misalignment of objectives between participants Slow implementation speed Lack of direct funding Value impact not understood Lack of knowledge capability within JIP

‘To-do’s for E&P companies
010731Technology in E&P-main pack.ppt.ppt ‘To-do’s for E&P companies boost value creation2-ZXI039OL.ppt Use modern valuation methods as the basis for investment decisions Secure long term stability and scale in funding of technology innovation and development – avoid cyclical behavior Ensure that new, promising technologies are given testing opportunities, e.g. through explicit funds to technology manager to buy testing opportunities Ensure that technology and competence processes across assets are efficient – secure a “global” approach when appropriate. Use technology architects and internal VC to run technology projects as a business Be open to share and receive ideas with others, avoid “not invented here” syndrome Stimulate people to drive innovation and technology development Techn. R&D investments E&P Co. Organization Innovation and technology development E&P Co. strategy Sourcing Develop a technology based strategy Make deliberate decisions on where to be the technology leader and follower and when to collaborate for each cluster of technologies Protect your intellectual property Understand your suppliers’ economics, and give them incentives to work jointly with you to to maximise value from new technologies Actively explore alliances with small players

‘To-do’s for E&P companies at the industry level
010731Technology in E&P-main pack.ppt.ppt ‘To-do’s for E&P companies at the industry level boost value creation2-ZXI039OL.ppt Level of influence Level of influence Factors influencing innovation and technology Geological realities Oil price Macro economy None Low Patenting Government policies Field investments Cyclical mindset Talent attention E&P companies and technology companies should work at the industry level to… Make patent protection more efficient – give more to the inventors! Make license decision structures more efficient, especially when there are “multiple owners” (large partnerships) Stimulate Venture Capital into the industry - create independent VC bodies Make a better national and international master plan for academic E&P research Improve recruiting quality and quantity - promote petroleum education for youngsters and the petroleum sector for graduates

‘To-do’s for OFSEs boost value creation2-ZXI039OL.ppt Secure long term stability and scale in funding of technology innovation and development - get partners (and governments) to commit to fund you throughout the testing phase (to overcome “child diseases”) Build networks or “communities of practice” for business issues across org. units – dedicate sponsors to network Be open to share and receive ideas with external parties - avoid “not invented here” syndrome Make sure that employees understand value drivers in E&P and stimulate them to innovate and sell integrated concepts at high levels in E&P companies Techn. R&D investments OFSE Organisation Innovation and technology development OFSE strategy OFSE Sourcing Fundamentally rise ambitions towards delivering more value to E&P companies through offering integrated solutions, and capture more of the value through take some of the performance upside and geological/reservoir risk Be the architect of integrated solutions in areas where you can differentiate, and use sub-suppliers when appropriate Be creative and proactive in developing and using contractual models where you get a (larger) proportion of the upside Use JV etc. to secure commitment and long term relation with subsuppliers and customers – but focus on finding business model where value is captured E&P companies R&D drive

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The E&P industry is technologically one of the most advanced

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