MODEL CONTRACTUAL SOLUTIONS for the UKs Offshore Oil and Gas Industry

THE COMPELLING CASE FOR CHANGE - Introduction and Background

David Odling, Oil & Gas UK, past Chairman of the Standard Contracts Committee Supply Chain Solutions Workshops Autumn 2010

Agenda

1. 2. 3. 4. 5. 6. 7.

Background the Starting Point Todays UKCS Business Climate Some outputs from CRINE in the 1990s Suite of Ten Model Contracts Other model solutions Benefits for Operators, Contractors and Suppliers Where might we be in 2020?

Background the Starting Point

$40 oil in 1980 and $10 in 1987 (in money of the day) CRINE report in February 1994 (Cost Reduction in the New Era) need to cut UKCS costs (capex and opex) by 30% standardisation (technical and commercial) formation of contracts committee at beginning of 1996
(the CRINE initiative comprised a mixture of operators, contractors and suppliers)

Cost remains a major concern for UKCS today

(ref Activity Survey results published each February)

New developments costs have been rising rapidly

35 $perboeDeveloped/Produced 30 25 13 20 15 10 5 0 7 16 8 2005 2008 2009 201012 15 15 12 13 Opex/boe Capex/boe UKCS Unit Technical Cost 2005 - 2012

Technical costs drive the economics of new developments Unit technical costs ($/boe) have risen by 80+% since 2005 equals difficulties when oil & gas prices decline which they did! oil prices have recovered to $80-85 per barrel BUT gas is 30-40 p/th, equivalent to ~$30-40 per barrel for oil Northern North Sea the most expensive area
NB: technical costs exclude finding and various other costs

Unit Operating Costs by Region

(assuming sustained investment case)
30.0
UKCS NNS SNS CNS WofS

25.0

20.0

UOC $/boe

15.0

10.0

5.0

0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Time will not wait - there is Window of Opportunity

Around 45% of infrastructure could be decommissioned by 2020 unless current activity is sustained If investors confidence is maintained, decommissioning could be delayed by 10-15 years in many of the existing production systems
120 100

Existing Production

Example of major hub life extension

Production

80 60 40 20 0 2006

Brownfield E&A + New Devt s

Economic cut -off point

2010

2015

2020

2025

2030

Some outputs from CRINE initiative

Pre-Qualify in advance, not again and again for each project First Point Assessment (FPAL) Functional Specifications standards for major, high value plant and materials procured by the industry what ever happened to these? re-captured by in-house engineering preferences?? Create a set of standard contracts for major activities at the time, big doubts whether this was achievable (which didnt say much for our industrys behaviour!) Model Invitations to Tender (ITTs) separate and more recent initiative by Supply Chain Forum (previously Network)
7

Standard Contracts the Suite

Suite of 10 models covering most of high value, high risk activities associated with offshore oil & gas Originally published in late 1990s, updated in 2000s available on-line at www.logic-oil.com
- Design

- Construction - On- and Off-shore Services - Marine Construction - Mobile Drilling Rig - Well Services - Procurement of Major Plant & Equipment - Purchase Order (short form) - SME Services (+ sub-contract)
8

Model Contractual Solutions what else?

Industry Mutual Hold Harmless (IMHH) regime began operating in mid-2002; 400+ participants now knock-for-knock indemnities between fellow contractors working offshore, covering own people, property and consequential / indirect losses; pollution excluded expires at end of 2011; follow-on IMHH from 1st January 2012 now agreed, allowing more participants Parent Company Guarantees and Performance Bonds recommended model forms: see www.logic-oil.com
9

Benefits for Clients, Contractors and Suppliers

Easier selection of bidders through FPAL Quicker tendering (ITTs) and contract awards Fewer qualifications: less negotiation Increasing familiarity in the supply chain Greater consistency in contracting practice, especially in risk allocation An ability to feed back performance via FPAL More winners than losers OR so we all hoped, but sadly in recent years there has been a tendency to drift back towards the bad, old ways So, is it not time to re-invigorate the whole process? if not
10

What should we look like in 2020 ?

3.5

DTI Energy Review, July 06

3.0

Oil & Gas Demand in UK

BERRs (DECCs) Renewable Energy Consultation, June 08

2.5 million boepd

2.0

The Better Future

~40% of demand in 2020

1.5

1.0

UKCS Oil & Gas Production

0.5

Existing Production Base

0.0

12% of nations demand in 2020

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: DECC / National Grid / Oil & Gas UK

11