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The World Is Screaming for Oil After 20 Yearsand Eroded Spare

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The World Is Screaming for Oil After 20 Yearsand Eroded Spare INDUSTRIAL CONTEXT FOR US ENDEAVOUR 2005-2020 FINAL REPORT 02.10.2020 Executive summary The need to go out – US GoM deepwater was the best initial choice Strong strategic reasons to seek international US GoM deepwater was the rational choice opportunities for a NCS player in 2005 • Macro environment called for non-OPEC production • Steep creaming curve, low political risk, attractive growth and improved oil price fiscal regime and no privileges to NOCs • IOCs were priced on growth outlooks • All significant deepwater operators entered GOM • NCS production appeared to have peaked with • Statoil was the largest deepwater operator globally NCS players' value penalized due to low R/P ratios and entered early with an attractive Encana deal • NCS players were leading in deepwater/subsea • Statoil was an aggressive explorer in US GoM, but technologies and had organizational capacity underestimated geological and business challenges Historical and projected oil production as seen from 2005 Top deepwater operators in 2005 US GoM investment* 2005-19 Million barrels per day Crude production deeper than 125m Billion USD real 2020 4 Statoil + Hydro NCS Petrobras 3.5 ExxonMobil BP 3 Shell Total 2.5 2006 Annual Chevron Energy Outlook Eni 2 Freeport CNRL 1.5 CNOOC Anadarko 1 TAQA US GoM Santos 0.5 deepwater Hess 2005 Resource Report CoP 0 Murphy Oil 1990 1995 2000 2005 2010 2015 2020 2025 Woodside *M&A, capex and expex Source: UCube; EIA; NPD; Rystad Energy research and analysis 2 Executive summary Shale – a true revolution early understood by Statoil Shale gas was the natural choice in 2008 Tight oil was the natural choice in 2010 • World still screaming for oil, “the easy oil is gone” – • US screaming for gas, attractive prices expected – tight oil break-through could take off globally as confirmed in Snøhvit and Shtokman studies • Statoil early in acquiring acreage and organization • Potential global revolution – important to master in Bakken - the most attractive basin in 2011 • Statoil picked the right play early, and cheap • Statoil missed the tight oil revolution in Permian • All relevant players entered at similar conditions as • All relevant players entered US tight oil, but Statoil’s Statoil or worse bet was high relative to company size • Statoil underestimated need to align contract • Statoil underestimated need for midstream access incentives and take-away capacity and complexity of land management Selected companies and the bet taken in shale gas and tight oil (Net M&A + Capex) BUSD real 2020 100 Majors 75 IOCs 67 Pure play shale companies 56 43 38 34 33 33 27 27 26 26 17 11 8.5 7.4 6.0 3.1 0.1 Source: UCube; Rystad Energy research and analysis 3 Executive summary The unforeseen market collapse and NCS success made US entry look bad in hindsight Shale a victim of its own success • Shale became a success beyond everybody’s expectations resulting in oversupply and market collapse • Gas prices under double attack: Shale gas abundance and associated gas from tight oil revolution • Oil price under triple attack: Tight oil productivity, new super play (Permian) and OPEC volume war • Almost all players destroyed value except from landowners and early exits, Brigham deal would have created marginal value if market conditions prevailed. • Unforeseen successes at NCS made US expansion, seen in hindsight, less pressing. US commodity prices and major acquisitions by Statoil Value creation from US onshore activity 2005-2019 (excl. finance costs) WTI (USD/bbbl) Henry Hub (USD/mmBTU) Present value 2020 (BUSD)* Tax payed Opex incurred 250 140 Brigham/ 20 Capex incurred US Bakken 18 200 Remaining value of portfolio 120 Revenue received GoM 16 150 Net M&A 100 14 Value creation 100 80 12 10 50 60 Eagle 8 0 Ford 40 6 -50 4 20 -100 2 Marcellus 0 0 -150 -200 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -250 *WACC 10% nominal, 2% future inflation Source: UCube; EIA; Rystad Energy research and analysis 4 Index Industry outlook in 2005 as seen from the NCS Activity in the US GoM deepwater from 2005-2020 Developments in the US unconventional industry from 2005 to 2020 External analyst coverage of Equinor’s M&A activity on US onshore 5 2005: The world is screaming for oil after 20 years of low prices low spare capacity OPEC spare Liquids demand history and IEA projections (WEO 2006) Brent oil price capacity Million barrels per day Dollar per barrel (Real Dec. 2005) Percent* 120 100 100% 90 90% WEO2006 projections 100 with 1.7% annual growth 80 80% Brent oil High GDP growth 70 70% 80 price expectations for: - China 60 60% Liquids - India 60 demand Oil - Brazil 50 50% prices rising 40 40% 40 “The easy oil is gone” 30 30% OPEC spare 20 20% 20 capacity eroded 10 10% OPEC spare capacity 0 0 0% 1980 1985 1990 1995 2000 2005 2010 2015 • Following the oil price collapse in 1986, where OPEC decided to increase their market shares by utilizing their large spare capacity (25% of the worlds production in 1985), the industry saw 20 years of low oil prices. • Over the same period oil demand grew at 1.7% per year. Over these years the OPEC spare capacity gradually eroded to serve the increase in demand. • 20 years of very low oil prices had led to underinvestment in the non-OPEC world. With steady demand growth expectations and very limited OPEC capacity to deliver these volumes, it was up to the non-OPEC world and largely offshore oil to deliver these volumes. The stage was set for production growth outside OPEC and higher oil prices. *Measured as percentage of global production in every year Sources: IEA WEO 2006, EIA, Cube; Rystad Energy research and anlysis 6 2005: Production growth was seen as the key challenge in the upstream industry 2005: • “All” industry players, at this page illustrated by CERA, Shell and OPEC, expected oil demand to far exceed 100 Mmboe by 2020, driven by Asia • A supply shortage was expected • Oil from the North Sea and other OECD regions expected to decline • Deepwater, oil sands and OPEC were seen as key growth areas • Oil companies focused on growth in their capital market communication Source: CERA; November 19, 2005: Oil Industry’s Growth Challenge, Shell annual report 2006; OPEC presentation March 2005 … 7 2005: Statoil had among the lowest RP ratio in the industry and recieved a price discount RP-ratio* as of 31.12.2004 by company RP-ratio as of 31.12.2004 by company** RP-ratio as of 31.12.2004 by region Oil and gas production divided by 1P reserves Oil production divided by 1P reserves Oil production divided by 1p reserves Petrobras 16.9 Petrobras 17.7 Brazil 17.7 Anadarko 16.9 Vintage 17.0 US 12.6 ConocoPhillips 16.8 Burlington 15.9 Africa 11.2 Vintage Petroleum 15.8 Spinnaker 15.3 XTO Energy 15.8 Asia 8.8 ConocoPhillips Spinnaker 15.3 14.5 Europe 5.9 Anadarko 13.2 Chevron 14.2 Norway 5.1 ExxonMobil 13.8 Chesapeake 13.0 - 5.0 10.0 15.0 20.0 Burlington 13.8 Chevron 12.1 Chesapeake 13.5 Devon Energy 12.0 BG 12.9 BP 11.8 EOG Resources 12.3 • In 2005, Norway was at peak ExxonMobil 10.9 Eni 12.1 production and Norwegian players Apache 10.7 Statoil and Hydro with high production Apache 11.8 and relatively low on proven reserves, Total 11.7 Total 9.1 thus low RP ratio Statoil 10.5 Eni 9.1 • Analysts looked for growth through BP 10.2 EOG Resources 8.3 higher RP ratio and Statoil shares Marathon Oil 9.9 Marathon Oil 6.8 were traded with discount due to low Hydro 9.8 RP ratio and limited production Hess 6.6 growth outlooks. Devon Energy 9.6 Hydro 5.7 Shell 8.8 • Seen as important to get “out of the Hess 8.7 Shell 5.6 Norwegian corner” and achieve growth internationally. Petro-Canada 7.8 Statoil 4.8 0 5 10 15 20 0 5 10 15 20 * Reserve to Production Ratio; **Only oil RP ratio in the six regions to the right included; *** Companies as shown to the left Source: SEC Edgar database; 10-K / 20-F reports; Annual reports 2004 8 2005: Liquids production on the NCS was expected to decline rapidly Liquids production on the NCS as seen from 2005 Million Sm3 liquids per year • The chart on the left shows the expected liquids production as published in the 2005 resource report by NPD. Resource report • On the NCS in 2005 peak oil from 2005 production was expected to be behind us – the Norwegian government was preparing for reduced oil production outputs in the future. • Even with sanctioning of contingent resources and expected exploration success, the result was still that the annual production towards 2010 would be reduced by 20%. Towards 2020, the same production levels compared to 2005 was expected to be halved. Legend: “Uoppdagede ressurser”=Undiscovered resources, “Betingede ressurser i funn”=Contingent resources in discoveries, “Betingede ressurser i felt”= Contingent resources in producing fields, “Reserver”=Reserves Source: Rystad Energy research and analysis, NPD resource report 2005 9 2020: Actual liquids production has outperformed the 2005 forecast since 2013 Liquids production on the NCS as seen from 2020 Million Sm3 liquids per year 250 • The chart on the left shows the 200 expected liquids production as published in the 2005 resource report by NPD compared to what really happened (black line). 150 Actual • Between 2005 and 2013, liquids production production underperformed compared to the expectations in 2005.
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