1. Its all in the Economics! Presented by Roger Burrows La Garde Associates LLP

2. What is a marginal field? l Some statistics – 1 to 1000 mmbbls can all be marginal – Discoveries in UK 1996-1999 averaged 29 mmbbls – 315 Undeveloped Discoveries in UK as at beginning 2000 l Economically – There are good fields – no serious questions about development decision – There are bad fields – forget it for a few years – And there are marginal fields Sources, UKOOA, PILOT and Wood Mackenzie

3. What drives the economics of a project? l Technology – Can give productivity – Can provide new and low cost engineering solutions – Covered elsewhere today – and tomorrow! l Oil Price l Reservoir

4. Oil Prices and Marginal Fields l Rule 1 – Do not believe today’s oil price l Rule 2 – Do not believe your company’s economic assumptions l Rule 3 – Believe the market l Rule 4 – Be patient

5. Rule 1 - Do not believe today’s oil prices Sources Platts, UKOOA and the BBC Worries over economic slowdown and oversupply Opec cuts production coupled with cold snap in US Iraq stops exports raising under supply worries Fear of oversupply coupled with economic slowdown Supply fears following the events of September 11 Fears of the demand impact of recession coupled with oversupply

6. Rule 2 - Do not believe your assumptions Source Wood Mackenzie

7. Rule 2 - Do not believe your assumptions l Remember what they are for – Budgets – Medium to Long Term Planning – Ensuring comparability for decisions – For projects that have an economic life “through the cycle” – e.g. exploration, larger fields – typical “economic” lives of 5-15 years l Not appropriate for the small “marginal” field – oil price cycle is not relevant to most Marginal Projects – economic life is too short

8. Rule 3 - Believe the market l Offer management the ability to lock in the oil price – you can “guarantee” them a return if they are willing to lock in – (if they do not wish to lock in – implies they believe the market will go higher!) l So they should still be willing to sanction

9. Rule 4 - Be Patient l If the available price is not good enough – be patient – put the project on the shelf and wait….

10. A Small but Marginal 10 mmbbl Field l Project is ready to go – “happy” with technology and reserves – development plan written – first oil 18 months from sanction l Project Manager – Wants his project sanctioned! l Project needs $18+ to deliver required return – Economic Life only 2 years from first oil

11. Forward Oil Price Trends

12. Timing is everything Early 1999 Our project is not economic We can only lock in ca $15/bbl Spot Prices 2004 prices

13. Timing is everything 2005 prices $20 $30 Spot Prices Late 2000 Our project generates a high return We can lock in $20 to $25/bbl

14. Timing is everything 2005 prices $20 $30Spot Prices Late 2001 Delay has lost us the super returns but.. Our project can still give a good return We can still lock-in ca $20bbl

15. Reservoir l Economists worry about Reservoir Engineers – especially what they tell us about the reservoir! l Reality is – like price, reserves are not guaranteed – we can lock in the price – but we cannot lock in the reserves

16. Our Marginal 10 mmbbl Field l Not actually a 10 mmbbl field l It has a range of Reserves – Say 3 to 15 mmbbls – Risk of losing money significant if we end up at lower end of reserve range – even after locking in high prices!

17. Coping with Reserves Uncertainty l Some thoughts – Each project has a project manager – His/Her objective for field development decisions – give management a return – reduce risk – studies, reprocessing seismic, more studies – costs time, effort and money – all value destructive – but point forward economics still look good!!! l For developments we tend to become risk averse l Not appropriate for small discoveries

18. Exploration Mindset l Drill a portfolio of opportunities – Some work – Most don’t! l Accept the possibility of loss – because it is balanced by value derived from successes

19. Development Mindset l Develop a portfolio of opportunities – Most work – Some don’t l Accept the possibility of loss – because it is balanced by value derived from successes

20. Think Portfolio l Most companies have several marginal discoveries l Should consider small discoveries more like exploration – Treat them like an exploration portfolio – Accept uncertainty – Don’t work them to death and destroy value – Each project sanctioned is just part of your portfolio – If it fails it is NOT a disaster – Some will work better then expected l Spreading Risk – improves chance of obtaining required return overall

21. In Summary l Do not be ruled by oil price uncertainty – Be patient – and overrule it by locking in when advantageous l Think Portfolio – Do not overwork the problem – Spread the risk and improve the certainty of return

22. Tel +44 1732 352591