OIL SEARCH LIMITED Strategic Review: The Way Forward March 2008 1
Agenda 9:00 Welcome Brian Horwood 9:05 Strategy Overview Peter Botten 9:30 PNG LNG Bob Marcellus 9:50 Financing Nigel Hartley 10:00 PNG Oil Field Optimisation Phil Bainbridge 10:15 Break 10:30 Growth Austin Miller - PNG…
Welcome Brian Horwood: Chairman 3
Strategy Overview Peter Botten: Managing Director 4
2002/03 Review Oil Search last conducted a major strategic review in 2002/03. At the time: Oil Searchs market capitalisation was A800m Primary oil assets in decline, due to lack of investment by Operator Despite high equities, Oil…
Share price out-performance Aug 2006 : APC withdraws from April 07: Signs Cost Sharing 700 Australian leg of PNGGP Pipeline Agreement for LNG project 600 July 2005: Announcement of AGL 500 GSA and PNGGP equity sale 400 Oct…
CAGR 10% 20% 30% 40% 50% 60% 70% 0% Fortescue Metals Paladin Energy Source: IRESS 7 Source: Merrill Lynch WorleyParsons Caltex Australia Oil Search 53% United Group Oxiana Leighton Holdings ASX…
2007/08 Review Environment The 2007/08 strategic review has taken place in a significantly better environment, but with equal, though different, challenges: High oil and gas price regime with oil price US100/bbl, Australian East…
Strategic Review Process Priority given to ensuring strategic analysis and planning based on best available data Review of external operating environment Independent Technical Review undertaken by a range of experts: PNG production…
Strategic Review Process Cost Review In depth historical field, drilling and corporate operating cost reviews undertaken Organisation PNG field organisational / operational structure review Organisational effectiveness review…
Key Conclusions of Review Existing portfolio can Delivering PNG LNG is the deliver superior TSR Highest Priority Substantial unrealised value exists within Oil Searchs current asset portfolio, capable of generating superior…
Key Conclusions of Review Gas Commercialisation the Key to Growth PNG LNG will dominate A robust economic project ranking well relative to other possible developments ExxonMobil led, with strong alignment and commitment OSH can…
Key Conclusions of Review Management of Cash to Fund LNG Financial position is strong (net cash of 415 million in March 08) However, funding of PNG LNG capex (OSH share US3bn) will consume a large proportion of operating cash flow…
Key Conclusions of Review Gas Commercialisation the Key to Growth Other gas developments a priority Comprehensive strategy to drive growth Reserve aggregation through acquisition Exploration emphasis Infrastructure and development…
Key Conclusions of Review Optimise Cash Generation from Oil Fields PNG oil is essential part of Oil Searchs business - provides cash flow required to fund LNG development Easy wins from PNG oil fields have largely been captured,…
Key Conclusions of Review Re-focus MENA Oil Search has successfully built up diversified, value accretive portfolio in MENA Exploration activity to date has been disappointing and materiality of some of the licences in context of…
Key Conclusions of Review Exploration an Important Contributor to Growth Independent review of portfolio highlights potential for material oil and gas contribution in review period PNG Highlands potential will be tested. Offshore…
Key Conclusions of Review Achieve superior value growth performance versus peer group, over the next 5 year period by: Objectives: Ensuring PNG LNG project approves FID Optimising PNG operating performances to sustain production and…
Key Conclusions of Review Other Stakeholder Management OSH can add value and mitigate risk by active stakeholder management in PNG Government and bureaucracy Partnership with Government instrumentalities Landowner and community…
Focus Areas for Growth Gas will dominate PNG LNG first phase growth Other gas strategy to develop expansion opportunities and other projects Exploration Material prospectivity remains in PNG portfolio for oil and gas MENA…
PNG LNG Project Bob Marcellus : Executive General Manager Gas 21
Primary driver is to deliver PNG LNG PNG LNG Project is Oil Searchs primary focus This development will represent PNGs cornerstone gas development and will underpin Oil Searchs production and profits for 30+ years PNG LNG will…
Gas Evolution in PNG For 10 years, PNG to Queensland gas pipeline dominated When APC faltered in 2006, OSH re-assessed its options Asian LNG markets had strengthened considerably Both ExxonMobil and BG seriously interested in PNG…
PNG LNG Project 24
PNG LNG Project Status PNG LNG Project is poised to enter FEED Milestones already reached: 9 Commercial alignment (JOA) amongst the Project Owners 9 Initial funding interests pre-Government back-in (Oil Search 34%) 9 Unitisation…
PNG LNG Capex Estimate ExxonMobil historically has delivered projects on time & on budget First phase capex (2008 2014) expected to be between US10 11bn (real 2007) Subsequent capex is several years out (additional Hides…
Schedule Milestones: JOA signed - March 08 Gas Agreement target signing - end March 08 FEED entry following Gas Agreement Financing Information Memorandum 4Q 08 Buyer support (HOAs / SPAs) 2008/09 EPC bids 2Q 09 FID - 4Q 09…
PNG LNG A Robust Project PNG LNG Project LNG demand & prices remain strong Certified reserves are in place (2P - 9.5 TCF) Well-placed geographically to capture Asian markets Acceptable Project Economics Alignment amongst the…
Oil Searchs Unique Contribution Oil Search is well positioned to play its part in PNG LNG delivery: Supportive Joint Venture participant In-country expertise, well connected, well respected Supporting ExxonMobil on: Landowner…
Economic Importance to PNG ACIL Tasman Report 6 February 2008 Affects economy of PNG and its balance of trade situation profoundly GDP will more than double Oil & gas exports increase 4 fold Up to 7,500 jobs in initial phase, 20%…
Capturing PNG LNG FEED entry in the near term is highest priority 1Q 2008 Thereafter focus shifts to achieving Sanction in late 2009 by: Securing market off-take Securing debt and state equity funding Achieving agreements on…
Road to Sanction Project fundamentals are positive: ExxonMobil has publicly stated PNG LNG is one of 2 regionally important projects JV is aligned on delivery Project is economically attractive Host country is supportive Well…
Financing Objectives Ensure LNG debt funding is maximised and achieves: Competitive terms Minimal recourse to Oil Search Alignment with State financing objectives Offtake leveraged No delay to financial close Ensure LNG equity…
PNG LNG Debt Financing Plan Project has settled on joint financing approach, led by a Finance Committee, co-ordinated by ExxonMobil, with key input from Oil Search and other parties based on respective skill sets and experience…
PNG LNG Debt Financing Approach Joint debt requirement likely to be around US9.9 billion nominal (OSH share around US2.9 billion) Potential funding sources will include classic ECA loans; untied ECA loans; bank debt, both covered by…
PNG LNG Debt Financing Timeline Joint Finance Plan now approved by LNG Operating Committee Plan will be actioned with effect from 1 April, 2008 Approximately 18 months required to execute, including development of standard terms,…
PNG LNG Equity Plan Current debt strategy aims to maximise debt, leaving US1.0-US1.3 billion to be injected as OSH equity contribution Based upon current modelling, OSH is targeting to meet equity requirements from existing cash…
Oil Refinance Current oil facility of US42m following expiry of 4 year US100m revolver on 31/12/07 Target approximately US400m facility to be negotiated on club basis around mid April, with closing around mid year Market soundings…
PNG Oil Operations Phil Bainbridge Executive General Manager - Operations 41
Providing Cash for Growth Primary objective for oil operations: To optimise PNG oil cash generation over the next 5 years to support PNG LNG Project funding requirements, by balancing work programmes, production outcomes and…
Oil Operations - Context Excellent safety record Good relationships with stakeholders (Landowners, Government, NGOs) Existing oilfields are mature (decline rate of 20%) Track record of adding reserves and value 2008 programme…
PNG Oil Field Reserves (OSH Net) Remaining Reserves Netherland Sewell & Associates Oil Search (Risked) from 31/12/07 (mmstb) 1P 2P Life of Field Kutubu 18.0 24.9 29.9 Moran 17.5 29.9 32.2 SE Mananda 0.8 1.3 0.8 SE Gobe 1.2…
PNG Gross Oil Production 80,000 Oil Search Added over P50 Hides P50 2008 P50 takeover 45mmstb Base GTE Programme Contingent 70,000 operatorship compared Resources- to Chevron LOF 60,000 Oil Rate (bopd) 50,000 40,000…
Production Forecasting Incremental production Incremental production based on a firm new from a hopper of capital. Assumes opportunities (contingent uncertainties in resources) high graded Contribution on commercial and Schedule…
PNG Net Production (LOF) 10,000 9,000 8,000 7,000 NET Production 6,000 (Mstb) 5,000 4,000 Hides GTE 3,000 SEM SE Gobe 2,000 Gobe Main 1,000 Moran Kutubu 0 2008 2009 2010 2011 2012 Activities 9 wells 6…
PNG Oil Capex Context: Majority of oil business capex is drilling and workovers Need to reduce capex through drilling performance improvements, drilling cost reductions, new technologies and optimised rig strategy Transition…
PNG Oil - Opex Focus areas for cost reduction: PNG Controllable Costs / Barrel Organisational Review: 8 Remove duplication and minimise support costs 7 Improve accountability and 6 speed of decision making Promote ongoing…
Oil and Gas Interface Context: Oil Search remains operator of the oil fields and for the oil field component of the PNG LNG Project will manage: oil field FEED and construction on-going oil and gas operations Oil Search will…
Oil and Gas Interface Value enhancing opportunities: Operating cost sharing Potential for reduced tax on oil production Incremental and revised pipeline tariffs Incremental condensate Abandonment deferrals Risks to manage:…
Other Issues/Events Extend Hides Gas To Electricity Contracts: Porgera Joint Venture (PJV) keen to extend power supply contract beyond 2011 Likely to maintain Hides Joint Venture and continue to sell gas to PJV power generation…
Summary Oil fields continue to generate strong cash flows, to be utilised for PNG LNG Project Based on Life of Field studies, gross production expected to remain between 40,000 50,000 bopd through 2011, through both acceleration of…
Additional Growth Austin Miller Executive General Manager Commercial 54
Additional Growth Opportunities PNG LNG Project delivery is Oil Searchs core growth driver A material, world class and organic source of growth for a number of years The PNG LNG Project also sets the stage for additional growth…
Additional Growth Opportunities Incremental PNG gas aggregation and second phase gas commercialisation adds significant value The highest value, lower risk opportunities for OSH Builds on PNG LNG Project infrastructure Builds on…
New Business New Business activities tailored to complement core corporate strategy of growth through PNG LNG Project delivery Equity is Gold approach means Oil Search more a buyer than seller Have reviewed opportunities to add…
Oil Search Vision 1st Phase Growth from Gas is secured by PNG LNG Project delivery 2nd Phase Growth from Gas adds material value From subsequent LNG trains/plants From gas diversification Concurrent with pipeline completion…
Phase 2 Gas Growth: Strategic Review Activities Strategic Review examined in detail the economic potential for secondary gas developments: Review of PNG gas prospectivity Economics across a range of field development and supply…
Growth Through Gas Bob Marcellus Executive General Manager Gas 58
Phase 2 Gas Growth: Strategic Review Activities Results highlighted: Growth could come from subsequent Project LNG trains, new LNG, petrochemicals supply, fertilisers and domestic gas opportunities in PNG Most valuable is an…
Phase 2 Gas Growth: Strategic Review Activities Strategic Review also highlighted: Need for additional contractible gas Desirability of control (operatorship, preferred partners) Opportunity to add value by driving gas…
Oil Search will be the catalyst for Phase 2 Material value additions are available for Oil Search Strong licence position across PNG Gas resources outside PNG LNG dedications are significant (400 mmboe net) Opportunity to lead…
PNG has a significant discovered gas resource base (Deutsche Bank Energy Seminars March 2008) PNG discovered gas reserves by field Gobe A rea Kuru Iehi Bw ata Koko SE Mananda Technical Reserves 0.1% Technical 2% 1% 1% 0.3%…
Wood Mackenzie estimates of gas ownership in PNG (Deutsche Bank Energy Seminars March 2008) PNG discovered gas reserves by company 7000 35.8 Technical Technical Gas Gas 17,000 17,000 bcf bcf 6000 6352 4844 Total Remaining…
Phase 2 Gas Growth: Resource Overview PNG has substantial Juha Hides discovered gas resources Pnyang Angore Gas for PNG LNG Project Elevala Hides, Juha, Angore, Kutubu, Moran, Gobe Presently 9.5 tcf certified 2P Approx 3 tcf…
Western Forelands Hub Western Corridor & Juha Hides Forelands gas hub provide Pnyang opportunities for cluster developments (smaller Angore fields) & long-distance Elevala connection of more remote resources Kimu (0.8 tcf) OSH…
Eastern Forelands Hub Established gas that Juha Hides could be material in Pnyang LNG planning or domestic gas use Elevala Angore Could use PNG LNG infrastructure, if SE Gobe available Douglas Elk Iehi Barikewa (800 Bcf)…
Offshore Hub Offshore fields could Juha Hides tie into PNG LNG Pnyang pipeline, if available or have standalone Elevala Angore facilities Established gas at Uramu (0.4 tcf) Douglas OSH 49.5% Iehi Elk Kimu Pandora (1 tcf)…
Value of Non-Project Gas Targeted exploration & appraisal programme 2009 plus to augment existing resource base Project Return (%) PNG LNG 3rd Train Other LNG Non-LNG Highest value from PNG LNG 3P upside scenario:…
Developing Domestic Industry Smaller, non-LNG developments create interim value and diversity for PNG and Oil Search Fundamentals are similar Bring the reserves together Acquire/consolidate interests in key fields on commercial…
Phase 2 Gas Growth: Resource Overview Hides Gas To Electricity for Porgera Needed for Porgera mine life extension Petrochemicals-methanol/DME US300-500m NPV likely depending on gas source Daru gas development & infrastructure Port…
The Next Steps LNG will dominate value and longer term Oil Search will develop a coordinated business plan with other key stakeholders for delivery of successive projects Review reserves opportunities Review early infrastructure…
Exploration and Organic New Business Keiran Wulff Executive General Manager Business Development 74
Summary Portfolio optimisation across all exploration assets Divestment of less material MENA assets as packages of production/exploration to attract maximum interest Focus on assets that have material potential impact on OSH…
Context PNG LNG will command capital above exploration and new business OSHs last 2 years exploration results have been disappointing 5 small discoveries in MENA but lacking materiality for OSH size and direction remaining…
Strategy - Exploration PNG MENA & INTERNATIONAL 1. Gas build 1. Existing acreage optimisation Build on existing gas portfolio for Material opportunities adjacent to fields additional major growth controlled by e.g. Yemen Blocks 3 &…
PNG Gas Growth Pursue multiple play types with seismic control (typical prospect size) 0.3 - 2+TCF 0.2 -0.6+TCF 0.5 - 1+TCF Strong licence position along the infrastructure 1+TCF corridor in each of the: NW Highlands Hub…
MENA Permits 2003 2008 Likely evolution Le Kef Le Kef Tajerouine Bina Bawi Bina Bawi Tajerouine Kurdistan Area 18 East Ras Qattara Cairo Office Area 18 Dubai Office Area A Dubai Office Dubai Office Mesaha Block 35 Block 43…
MENA - Divestment Consideration was given to full exit versus high grading approach Following extensive external review, decision made to proceed with high grading based on: Quality and potential of parts of the portfolio to…
MENA Divestment Process Composition of divestment portfolio (still to be finalised) will likely include: Exploration/Production - Yemen Exploration (near field and frontier)/development/production Egypt Farm down frontier acreage…
Strategy New Business Dedicated team identifies candidates that meet key investment criteria Utilise strong relationships & operating credibility to acquire positions Proven world class petroleum systems but with challenges that can…
OSH 3 Year Forecast Drilling Programme Oil Search 3 Year Forward Drilling programme forecast - Exploration 2008 2009 2010 Country Area m j j a s o n d j f m a m j j a s o n d j f m a m j j a s o n d PNG NW Paua Wasuma Barikewa Wage…
Retained Exploration Portfolio Potential US60/bbl US80/bbl Key criteria in determining retained areas include: Possibility of material discoveries with nearby analogues Potential to substantially increase POS in immature but…
Conclusions Reduced yet focused spend on more material opportunities Greater focus on portfolio management & trading PNG & MENA Increased internal competition for funding Allocation on value and strategic basis US80-100m total…
Strategy Summary Peter Botten: Managing Director 86
Oil Search The Next 5 Years The Company at a cross roads Potential to multiply value by delivering PNG LNG and Other Gas Opportunities Three distinct phases over the next 5 years Phase I PNG LNG to FID 2008-09 Cash conservation ,…
The Immediate Focus Phase I PNG LNG to FID 2008-2009 Support for Operator Oil Search Specific value delivery Oil operations synergies, oil fields gas FEED Government and landowner management Financing Reorganisation to deliver…
The Medium Term Phase II PNG LNG Construction 2010-2013 Massive impact on PNG Oil Search specific value delivery Oil fields gas construction Manage stakeholders/landowners Mitigate impacts on oil business Further growth Mature…
The Long Term Phase III First Gas and Beyond 2013 Further growth opportunities Debottlenecking New train development Other gas developments off new infrastructure Major cash generation Legacy Asset Delivery A New Oil Search…
The Focus in 2008-2009 Reorganising Management and Teams for Specific Value Delivery PNG LNG Delivery Group JV support Oil operations synergies and interface In-country landowner management PNG LNG Financing Group Debt and equity…
Overall Conclusions Latent value in existing portfolio of assets is sufficient to deliver superior value delivery to shareholders over the next 5 years Opportunities are well defined Challenges can be managed Company is well…
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