Independent Explorers Create High Value Opening up New Countries*

Julie Wilson1 Search and Discovery Article #70144 (2013)**

Posted July 22, 2013 *Adapted from oral presentation at AAPG Annual Convention and Exhibition, Pittsburgh, Pennsylvania, May 19-22, 2013 **AAPG2013 Serial rights given by author. For all other rights contact author directly.
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Senior Analyst, Exploration Research, Wood Mackenzie, Houston, Texas (julie.wilson@woodmac.com)

Abstract Nine countries have seen country-opening finds since early 2006 - Uganda, Ghana, Sierra Leone, The Falklands, French Guiana, Sri Lanka, Cyprus, Liberia and Kenya. Deepwater plays have provided the first material hydrocarbon discoveries in seven of these nine frontier countries. All nine of these important wildcats were operated by Independents, led by Tullow, Anadarko, and Noble Energy. The Majors have been fastfollowers, farming-in to French Guiana ahead of the discovery well (Shell, Total) and moving quickly to establish positions in Uganda, Ghana, and Liberia. Further moves to enter these emerging hydrocarbon plays are likely. Total volumes discovered in these nine frontier countries already exceed 4.5 billion barrels of oil and 13 trillion cubic feet of gas. These represent little more than 5% of global new field volumes since 2006, but exploration in each country is still at an early stage. We estimate that the initial finds have de-risked a further 10 billion barrels of yet-to-find oil potential, plus substantial gas upside. Frontier country exploration has out-performed since 2006, achieving full-cycle returns of 17% versus an industry average of 14%. Full-cycle value creation was more than US$20 billion at our long term Brent price assumption of US$80/bbl. This recent success contrasts with the decade prior to 2006 when explorers completed wildcat wells in 22 frontier countries, but made commercial discoveries in just three - Sudan, Israel, and Mauritania. Two factors have been key to opening frontier countries. Firstly, explorers had to be comfortable drilling wells with low chances of success, reflecting the product of both play risk and prospect risk. Secondly, the remoteness from proven play fairways means that the application of regional-scale geoscience has been a core competence. Since 2002, the wildcat success rate in frontier countries is just 10% - less than one-third of the industry average. The increase in the number of frontier country discoveries since 2006 reflects an improvement in success rate as well as slightly higher activity in these plays.

We expect the trend of around 15 frontier country wildcats per year to continue, and overall, these wells should be rewarded with one or two new country play-openers annually, if one-in-ten success rates are maintained.

Independent explorers create high value opening up new countries

Julie Wilson Senior Analyst, Exploration Research

AAPG Pittsburgh, May 20th, 2013

Wood Mackenzie Disclaimer

This presentation has been prepared by Wood Mackenzie Limited for delivery at AAPG Pittsburgh on May 20th, 2013. It has not been prepared for the benefit of any particular attendee and may not be relied upon by any attendee or other third party. If, notwithstanding the foregoing, this presentation is relied upon by any person, Wood Mackenzie Limited does not accept, and disclaims, all liability for loss and damage suffered as a result. The information contained in these slides may be retained by attendees. However, these slides and the contents of this presentation may not be disclosed to any other person or published by any means without Wood Mackenzie Limited's prior written permission.

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Frontier conventional exploration continues to be led by the Independents Operated all nine new country-openers since 2006

Appetite for play risk and strong regional geoscience have been the keys
Source: Wood Mackenzie Exploration Service Wood Mackenzie 3

These new frontiers have yielded large volumes and value but still only a small fraction of global totals Value creation

Value creation

18 billion
Volumes discovered in new frontier countries since 2006 (bnboe)

$
7.3

354 billion
Volumes discovered since 2006 (bnboe)

2.9

Gas Liquids 4.4 242.4 New frontier countries Global

Source: Wood Mackenzie Exploration Service Wood Mackenzie 4

Frontier basins benefit from low discovery costs and attractive fiscal terms though other factors make developments challenging
Discovery costs and IRR
16%

Development value and government take

9.00 8.00
Low Base

68% 66% 64% 62% 60% 58% 56%

14%

Unit developemnt value (US$/boe)

12%
Full cycle IRR

High Government take %

7.00 6.00 5.00 4.00 3.00

10% 8% 6%

4%
2% 0% 0.00

2.00 1.00 0.00

Frontier Emerging Mature

54% 52% 50%

1.00

2.00

3.00

4.00

Resource discovery costs (US$/boe)

Frontier basins
Mature basins
Source: Wood Mackenzie Exploration Service

Emerging basins
All basins

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Government take %

(%) 100%

Proportion of conventional E&A spend

10%

20%

30%

40%

50%

60%

70%

80%

90%

0%

38%
Frontier Emerging

Investment by basin maturity (2002-2006)

62%
Mature Average

Top explorers are shifting spend towards frontier and emerging basins

Source: Wood Mackenzie Exploration Service Company Performance Report, October 2012
Kosmos Santos Inpex BG Petrobras Chevron Premier Oil ENI Total PETRONAS Apache Shell BP RWE Dea ConocoPhilips Tullow Oil ExxonMobil Nexen Statoil Cairn Energy BHP Hess Woodside Lundin Repsol Anadarko Occidental Marathon Noble Energy Talisman Wintershall Maersk Murphy

(%) 100%

10% 0%

Proportion of conventional E&A spend

20%

30%

40%

50%

60%

70%

80%

90%

Investment by basin maturity (2007-2011)

48%
Emerging

Frontier

52%

Mature

Average

Kosmos Cairn Energy Tullow Oil Santos Inpex Anadarko Hess Petrobras Noble Energy Chevron RWE Dea BP BG ExxonMobil BHP Premier Oil Repsol ConocoPhilips Shell Woodside Statoil ENI PETRONAS Apache Total Lundin Marathon Murphy Maersk Talisman Occidental Wintershall Nexen

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Exploration investment is rising with plenty of headroom to go further

Conventional spend exploration
100 125.00

Exploration spend intensity (re-investment rate)

25.00

Exploration & appraisal spend (US$ billion)

2011 Reported exploration spend (US$/boe)

Independent
20.00

80

100.00

Majors NOC

Brent (US$/bbl)

60

75.00

15.00

40

50.00

10.00

20

25.00

5.00

0 2004 2006 2008 2010 2012

0.00

0.00 0 500 1,000 1,500 2,000

E&A Spend (US$Bn)

Brent (US$/bbl)

2011 production (mmboe)

Source: Wood Mackenzie Exploration Service and Corporate Benchmarking Tool. Bubble size represents reported exploration spend. Wood Mackenzie 7

Vast new areas have been licensed over the past few years

Global blocks awarded 2003-2012

Block Awards
Blocks Awarded 2003 to 2007 Blocks Awarded 2008 to 2012

Source: Wood Mackenzie Wood Mackenzie 8

Net acreage signed since 2010 ('000 km2)

100 150 200 250 300 350

50

The Majors have been particularly aggressive in building up exploration positions and so have the minnows

Source: Wood Mackenzie

ExxonMobil Total Shell BP Eni Statoil

Majors net acreage capture since 2010

Chevron

Net acreage signed since 2010 ('000 km2)

100 200 250 300 350

150

50 0

Leading Small Caps by acreage capture since 2010

Silver Wave StatesmenRes Int Pet Ltd Upland O&G Pangaea Kosmos Amerisur Eco O&G Impact O&G Oranto NewAge Frontier Res CAMACEngy ERHC Niko Res Star Pet Tangiers Pet Instinct Simba Energy
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Majors will need to be comfortable with lower frontier success rates while small caps may struggle to drill, providing opportunities for M&A
Majors exploration well success rates 2002-2011
60% 50% 20

Leading Small Caps by acreage: wells since 2010

25

Success rate

40%

Number of wells
Statoil
Chevron Eni ExxonMobil BP Total

30%

15

20%
10% 0%

10

Shell

0
Silver Wave StatesmenRes Int Pet Ltd Upland O&G Pangaea Kosmos Amerisur Eco O&G Impact O&G Oranto NewAge Frontier Res CAMACEngy ERHC Niko Res Star Pet Tangiers Pet Instinct Simba Energy

Overall success rate Commercial success rate Average frontier overall success rate Average frontier commercial success rate

Exploration wells

Appraisal wells

Source: Wood Mackenzie Exploration Service, Pathfinder Wood Mackenzie 10

Huge swathes of frontier offshore acreage have been licensed, dominated by Africa and the Arctic
Offshore frontier acreage licensed since 2009 compared to deepwater Gulf of Mexico acreage

Latin America Europe

Pacific Africa
Latin America Europe
DW GoM

Asia-Pacific
FSU

Africa

DW GoM

FSU

Source: Wood Mackenzie Wood Mackenzie 11

Deepwater exploration expected to rise, facilitated by increasing rig fleet But it may still be constrained by rig capacity from 2016
Cumulative newbuild MODU days added since 2008
60

Deepwater rig supply and demand

100

500 450 400 350 300 250 200

Rig Capacity & Well Demand ('000 days)

90 80 70 60 50 40

Cumulative rig capacity ('000 days)

50

30

20

30
20 10 0

150
100 50 0 2010 2012 2014 2016 2018 2020

10

0 2010

2012

2014

2016

2018

2020

Semi

Drillship

Drilling Demand E&A Well Count

Rig Supply

Source: Wood Mackenzie Future of Global Deepwater Markets Wood Mackenzie 12

E&A Well Count

40

Summary
Independent explorers have led the way opening up new frontier countries since 2006, yielding large
volumes and value

Full-cycle economics of frontier exploration are helped by large discovery sizes and attractive fiscal terms Top explorers have shifted their exploration dollars towards frontier and emerging basins over the past
five years

Exploration spend has risen dramatically over the same period, with independents spending more on E&A
than Majors, relative to their production levels

Global spend is likely to continue to rise, given the vast amounts of acreage under license
Companies of all sizes have been aggressively growing their land positions, much of it in frontier areas,
presenting varying challenges but also opportunities for M&A deals

The huge amounts of recently leased frontier offshore acreage bring both increased complexity and greater
demands on the service sector

Deepwater drilling capacity is set to increase considerably over the next decade with 90 newbuilds to be
delivered; however, in spite of this, we still see a shortfall in supply by 2016 as demand outstrips supply

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