75th EAGE Conference & Exhibition incorporating SPE EUROPEC 'The Changing Frontier of Risk for E&P Companies'

Transcription

1 75th EAGE Conference & Exhibition incorporating SPE EUROPEC 2013 'The Changing Frontier of Risk for E&P Companies' 10 June 2013 Andrew Gould Chairman

2 Andrew Gould, Chairman, BG Group Appointed as a Non-Executive Director in 2011; Chairman from the 2012 Annual General Meeting (AGM). A chartered accountant, Andrew was chairman and chief executive officer of Schlumberger from 2003 to 2011, retiring as chief executive in 2011 and chairman in April Until May 2012, Andrew was senior independent director of Rio Tinto plc.

3 Good afternoon Ladies and Gentlemen, I would like to thank the organisers of the conference for their kind invitation to speak. When Mike Daly originally asked me to participate I had just stepped down at Schlumberger and just stepped up at BG. Mike s original idea was that I should contrast the risks working in a contractor with those encountered working in an operator. From this we morphed into the theme of the conference by having me address the changes that are occurring in the risks facing E&P companies. Some of the changes are only relevant to E&P companies but many of them are relevant to the whole industry. Let me begin by some remarks on the changing nature of risk and some of the major changes that have occurred in the last 15 years. Without any doubt, and in common with many other industries, the biggest change that has occurred is the new dimension that the internet and social media have given to our exposure to reputational risk. The capacity of a news story anywhere in the world to be available to a large audience instantaneously has completely changed the way we handle crisis management. For those of us who have been in the industry for a long time and who remember the Alexander Keilland, Piper Alpha, or the Exxon Valdez and can compare the coverage of those situations with what happened after Macondo the change is sobering. Today our reaction to any crisis situation must immediately take into account the reputational risk it implies and whether we agree with it, or not. Our initial response will have a huge effect on our reputation both as companies and as an industry. The second change which developed in the decade following the millennium has been the emergence of new structures within the industry that give government s greater choice of potential partnerships. A lot of this has been well documented before but substantial changes in the availability of technology and capital have led to new attitudes from governments towards partnership. At one extreme is the closure of the industry to private international capital. It is estimated that 75% of conventional oil reserves are off limits to public companies and have become the domain of National Oil Companies. National Oil companies have themselves become much greater forces in the industry undertaking some of the most complex technical challenges be it reservoir management for the recovery factor in Saudi Arabia or the development of the pre-salt in Brazil. As a result private capital has seen a massive move towards unconventional resource in stable free market jurisdictions as well as to more remote, harsh environment, difficult plays and generally smaller accumulations. It is worth noting that these moves have led to considerable exploration success. The availability of technology and capital has also vastly expanded the role of companies whose purpose is exploration. This has fundamentally changed government s options at the exploration phase. They can deal with small companies who do not require the long term future of potential finds to be fixed early in the game, thus leaving for both themselves and government opportunities to maximize value later on. The third change I would mention is the extreme volatility we have seen over the past twelve years in the fiscal risk. Countries and governments have seen BG Group Page 3 of 6

4 the oil price expand from around $20 to something in excess of $100. They have understandably believed that they can afford to take more of the rent. The facts are that today s developments whether they are in Light Tight Oil in the United States or deepwater in the remote newer provinces where exploration has been successful requires much higher prices. This, when coupled with increases in development costs has considerably reduced the margin per barrel of the industry. The cost of gas developments outside the shale developments in the United States suffer from similar issues. Fiscal uncertainty is a traditional risk that the industry faces but higher prices have exaggerated the desire of governments to capture more of the rent and increasingly this is complicating development decisions. Let me turn now to some of the more difficult changes in the risk profile that have occurred in recent years. The first is undoubtedly the risks that arise from the growing degree of political instability the world has experienced in the first decade of this century. Throughout the first years I spent in the industry risk due to security problems was largely confined to sporadic kidnapping in South America and occasional violence and political upheaval mainly in Africa. The loss of human life as a result of direct attacks on the industry was extremely rare. Contrast that with the situation today. In Amenas was the culmination of a change in the industry that has been occurring throughout the last decade. For me it began with the assassination of two Schlumberger engineers on an exploration rig in Algeria in At the time the incident attracted little press coverage outside Algeria demonstrating again how much communications have changed. It also leads me to express my understanding and sympathy for BP and Statoil and the other companies involved for the losses they have suffered. In Amenas was the culmination of a trend we have seen growing across the industry. The number of incidents that have led to increased exposure of personnel to security risk has multiplied exponentially. The number of operations that have been shut down for security reasons or which require heavy protection has multiplied and added huge cost to operations. One analysis estimated that global expenditure on security for oil and gas infrastructure reached $29.16 billion in 2012, an increase of 6.7% on Iraq has been the prime example of a province where the costs of operation are heavily affected by security but by no means the only one. The risk continues to grow with the need to place armed guards on LNG ships and oil tankers in the Indian Ocean being a recent escalation I would add that this is a risk that the service industry has to absorb to a much greater degree than the operators. It is a fact that in almost any upstream operation service contractors will have far more people on the ground than the operator. It is a domain where exemplary cooperation is necessary and the service contractors must be allowed to make their own decisions about what is safe and what is not. The service industry is largely dependent on the trust its personnel place in their management and if management fails to protect them they will not accept to be exposed. A similar situation exists with regard to the need for increased mutual respect between contractor and operator to minimize risk in the domain of operations. Post Macondo, the industry has a duty to maintain clear BG Group Page 4 of 6

5 accountability and traceability for its operating decisions. This implies that decisions around the conduct of operations be a joint decision between operator and service company and that service companies should be allowed to stop operations without fear of reprisal if they consider it too dangerous. As this is an EAGE conference an obvious example, which has frequently occurred, would be the opening of a DST string in darkness. Only if operators and service companies practice rigorous procedure in a climate of mutual respect will the industry attain a step change in safe operations. The move into unconventional resource on land in both the USA and elsewhere has raised the public profile of the industry dramatically. The period of the North Sea and elsewhere in the 1990 s was essentially a period of growth offshore. The industry was less visible to the public. The advent of shale and Coal Seam Gas has bought the industry back into the general public s back yard. The debate around fracking, the use and protection of fresh water, the risks of subsidence and earth tremors have caused genuine public concern. It has mobilised the NGO s and opponents of fossil fuels and made it incumbent on the industry to be much more proactive in countering the concerns and arguing the benefits of its case and managing the risks surrounding this activity. I would like now, before I finish to discuss changes in risk management that I see as being more positive. There are elements of the license to operate that are discussed today that are far more positive than in the past. All the traditional resentment of the foreign company that comes to exploit what is seen as a national resource remains but the attitude towards the foreign investor can be influenced positively. The focus many governments are putting on local content and the employment of their nationals in the industry gives an opportunity for companies to show they are willing to return more to the local economy than the government share of the rent. Social programs increasingly play a role in enhancing both the reputation and longevity of a company s presence but these must be undertaken with the full involvement of local communities. Active engagement can go a long way to mitigate many of the reputational risks that our industry implies. The second change I see as a positive development in the risk profile is the increased willingness of the industry to defend and even advocate its role in society. Fossil fuel energy has been and will remain for a long time a fundamental element in economic growth and will continue to lift of millions of people out of poverty. As concern over emissions continues to grow, defending our position against coal through the use of natural gas and limiting oil to its most efficient use will be essential tools in advocating our role. Finally, this industry is about people and the risk of not being able to attract the young to join it is to me the greatest risk we face and nowhere more so than in the OECD countries where the debate over climate change and renewable energy is the most advanced. The questions asked on campus about our business are exactly those I have been discussing. This meeting contains those in our industry who exercise imagination more than any other group in Oil and Gas and, who, by the nature of their profession have to be optimists. No technology can replace the Geologist in the development of a new theory or play. You have a duty to transmit that enthusiasm to the next generation and I BG Group Page 5 of 6

6 encourage you all to play a role in recruiting in schools and on campus. Obviously geology alone is not sufficient. I once listened to Marc Blaizot of Total develop a remarkable parallel between the imagination of the artist and the geologist, other parallels to your profession can be applied. I had the privilege of having on the Schlumberger board of directors one of France s leading film producers. Throughout a debate on how to value the multi-client seismic library he remained uncharacteristically silent. When I asked him why, he said, When I make a film, I can have the best script, the best actors, the best director, the best cameraman but until the public has seen it I have no idea if it will be a success. Ladies and Gentlemen with all your imagination, thank goodness for the drill bit. Thank you for your attention. BG Group Page 6 of 6