Technology and the Value Paradox GCAGS Austin November 1, 2002 LIME ROCK PARTNERS Technology and the Value Paradox: Where do we go from here? Tom Bates Managing Director, Lime Rock Partners

Oil & Gas Markets Can Support Significant R&D Spending

Comfort Zone Oil Prices in the 20 th Century High Inventories, Iraq, Warm Winter & Asia Fahd Gets Angry, Opens Taps Schwarzkopf Visits Saddam Iran-Iraq Tanker Wars Bush Visits Fahd Saddam Gets Greedy; Visits Kuwait MG Liquidation Low Inventories, Iraq & Cold Winter OPEC cuts production Source: Baker Hughes

Oil Prices in the 20 th Century Same data – different perspective 90’s average = $ avg. = $ avg. = $ avg. = Source: Baker Hughes, Bloomberg

Oil Prices: Source: Simmons & Company International Note: Data set stops prior to 9/11/01

Gas prices will remain high!! Production is down even though drilling activity has doubled Preliminary indications are that 2002 production will be down 5-7% for most operators Source: Simmons Co.

Oil Company R&D tanks Source: Simmons & Co. $, millions

The Value Paradox

Key Technologies of the 90’s 3D Seismic, Computer Assisted Exploration Deep- water, Sub-sea, FPSO Horizontal Drilling, Geosteering, & Rotary Steering Systems Source: Baker Hughes

3D Seismic Imaging Source: Baker Hughes Subsalt application to Gulf of Mexico

Global Exploration Success Source: EIA

Contribution to Falling E&P Costs Source: Salomon Smith Barney 1995 to 1997 Drilling Technology Horizontal Drilling Subsea Completions Fracturing Seismic 46% 8% 26% 5% 11% 4%

Economic Value Added Source: Simmons & Company, Baker Hughes Revenue - $17.6 B Net Income - $.4 B 2.2% Top 8 Seismic Companies to 1999 Capital Charge -$ 2.0 B Value Destroyed$ 1.6 Too many seismic boats Too much spec seismic

ROCE – Oil Service WACC = 12.2% Source: Simmons & Co.

Who will fund E&P technology?

Product Development Spectrum Seed StageGrowth StageMature Business Angel investors Managers Very high involvement High risk Modest dollar profits Industry-focused private equity groups High/moderate investor involvement High to moderate IRR High dollar profits Public market Strategic buyers Large LBO players Limited outside involvement Lower IRRs/Lowest Risk Low volume of deal flow Optimum Ownership Group Investment Characteristics LIME ROCK Focus Area Time Corporate Value

Energy Private Equity Funds Invest $$$ on behalf of institutional partners into (primarily) privately held businesses in the upstream energy sector Target companies in oil service, technology, E&P and pipeline/processing segments Take $1-$100 million positions with substantial influence or control in portfolio companies Add value to through active board involvement and strategic and financial decision making Lime Rock, Natural Gas Partners, SCF, First Reserve, ARC, Altira, etc. are some of the funds Newfield, Magic Earth, Sensa, Roxar, Weatherford, Chroma, are some of the companies

Private Equity Growth Source: PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree™, Thompson Financial

Source: DRI-WEFA Final Report, 6/2002, Thompson Financial Private Equity Backed Firms Invest in R&D Investment per $1000 in assets

Energy private equity is too low U.S. venture capital and private equity disbursements Source: Venture Economics Internet: 40% Communication: 17%Computer Software & Hardware: 17% Other Products: 7% Medical / Health & Biotech: 9% Semiconductor & Electronics: 5% Consumer: 3% Energy / Chemicals: 2% Portfolio Company IPEC Ltd. Roxar ASA Noble Rochford Deer Creek Venture Production Sensa Torch Offshore CGG Torex Resources ADB Systemer SmartSynch Downstream Energy Sourced By Lime Rock 3i Lime Rock

Summary E&P technology is under funded –Volatility is “predictable” –Upward bias in commodity prices –Oil company spending is way down Service company returns on technology are low –Seismic industry is the ultimate paradox –Destroying value every year New dynamic in technology –Majors/governments fund seed stage –Large service companies increasingly buyers –Private equity needs to play a bigger role! –Sensible “Silicon Valley” model is possible

LIME ROCK PARTNERS Growth Capital for the Energy Industry

Global Energy Demand Source: BP

Primary Energy Consumption North AmericaEuropeFSURest of WorldWorld Tonnes oil equivalent Source: BP

14% Pre-1990 Drilling Year: Bcf/d Jan-99 Source: EOG, Baker Hughes Depletion Bcf/d

Reserve Additions Decline Source: Purvin & Gertz, Oil & Gas Journal Gulf of Mexico – shallow water Billions of barrels discovered

Oil & Gas Outlook Crude Oil supply is tighter than perceived –OPEC discipline is holding –Hubbert’s Peak analysis says global production peaks –New oil price band is $25-30??? North American gas supply is limited –Depletion, reserve base limits gains in US –Canadian gas has same constraints as US –Rig count is down in both US and Canada –LNG and Arctic gas are 10 years away