Western Canada Oil & Gas benchmarking report Juniors and intermediates

Western Canada Oil & Gas benchmarking report Juniors and intermediates www.pwc.com/ca/energy

Bigger has often meant better in the energy industry in Western Canada, but challenging times are affecting every size of producer these days, as depressed commodity prices, slow infrastructure growth and reduced share values hamper progress. So how are the smaller E&P companies coping? In certain instances, the existence of prevailing business conditions has delayed the planned exit strategies of several junior oil companies from the Western Canadian Sedimentary Basin. Where these companies were once the driving forces of the Canadian industry, they are now the ones being driven. Inside 2 Operations 6 Supply Chain Management ii 8 Finance 12 Risk and Controls 14 Human Resources 18 Information Technology

You can t manage what you don t measure. The quote, incorrectly attributed to William Edwards Deming, the founder of Continuous Improvement, is most likely from Peter Drucker, the father of Management Theory and Practice. No matter who said it, the maxim is still highly relevant in today s current oil and gas business. Correctly measuring and tracking your company s performance is imperative. Understanding where you stand in the market and how you measure up against your competitors allows companies to make the necessary changes and improvements to succeed. So, how do companies do this? It has long been recognized that by comparing company measurements to operational benchmarks, a company s progress can be evaluated by monitoring key performance indicators (KPIs) important to successfully achieving an organization s goals. Gone are the days of relying solely on the daily price of oil or gas as a leading KPI of industry health, although the quarterly corporate results will often be used today as a barometer for decisions on capital spending and corporate commitments. Most benchmarking studies undertaken in the oil and gas industry focus on the larger, global or complex companies the independents, major and supermajors. Smaller juniors and intermediates here in Western Canada are not well served by these studies to assist them to efficiently manage their businesses and operations on an ongoing basis. PwC has attempted to address this imbalance in benchmarking for junior and intermediate companies by presenting our benchmarking survey, which looks at performance for this particular sector among public companies in the industry. The effective positioning and management of a junior or intermediate E & P company is especially true in light of recent volatile market conditions, whether investment, merger, pricing, operational, political, environmental or regulatory driven. The public and private E & P companies operating in the Western Canadian Sedimentary Basin account for a $100 billion industry, $60 billion of which is conventional oil and gas. They span several distinct segments of the industry from gas weighted companies, to liquids weighted organizations, through to oil sands developers, either pure play or with these assets as an integral part of their portfolio. Our survey is broad-based and covers subsectors and a variety of business areas from Operations and Supply Chain Management through to Information Technology, Human Resources, Risk and Controls, and Financial Effectiveness. In all, nearly 80 public junior and intermediate E & P operators received the benchmark questions relating to their 2011 performance. The split was roughly equal between juniors, with daily production in excess of 2,000 BOE/d, and intermediates that went from 10,000 to 90,000 BOE/d. Emerging juniors were not included. In the survey mean, median and range are shown for each benchmark; the mean being the numerical average, the median the middle value for the responses and the range the highest and lowest response figures. 1

Operations The primary purpose of an E & P company is to locate, acquire and produce hydrocarbons for sale to the market. Always recognized as a capital intensive business, most of the operations and processes used have stood the test of time, especially with conventional oil and gas production, and are well-known to the industry practitioners. While there is a always room for improvement in operating practices and the metrics associated with it, many of the measurements have become second nature to industry professionals. The size and positioning of a junior or intermediate carries with it a certain range of possibilities for economies of scale, but in general the intermediates will mostly be the highest leveraged and the emerging juniors the highest cost operators. The geological prospectivity of the Western Canadian Sedimentary Basin has been well established, with copious amounts of data available for evaluation and control. Exploration risk is small for oil sands developers. The variables for success are often the price of steel and labour. Increases in both can adversely affect operating costs. Several of the more common metrics are benchmarked here to provide an indication of the health of the juniors and intermediates in 2011. What was the % of capital projects designed and engineered in-house? 92.5 80 100 95.0 It is not surprising that the junior and intermediate companies chose to carry out their design and engineering of capital projects in-house. Many of the projects, either drilling, tie-ins or facilities oriented, have become second nature to these companies and have become somewhat standardized. Keeping them in-house is more cost effective. However, outsourcing to an engineering firm becomes a viable option if the projects under consideration are not part of the company s core business activities, knowledge and experience. The decision to outsource design and engineering or carry out inhouse is based on several factors such as capital investment, ability to develop new technical skills, availability of these skills, risk management, budget restrictions, etc. Several of the larger companies in the Canadian industry have begun to own their own fabrication facilities as well, occasioned by their inability to access these services during major project construction periods. It would appear from the responses that almost all the projects undertaken by the juniors and intermediates are accomplished in-house, with the possible exception of facilities for SAGD operators. 2

What was the % of actual CAPEX to AFE? 104.5 95 116 105.0 With capital investments growing at a compound annual rate of over 36%, it is evident that the high levels of activity, pricing, and cost uncertainty now experienced will be with us for the foreseeable future. But much of this investment will be on large projects involving complex technology and difficult locations, which is not the domain of junior or intermediate companies. So, how are respondents coping with these high cost project environments? More than 80% of respondents indicated that actual CAPEX is higher than AFE. But the overruns are not nearly as drastic as those associated with the larger capital projects that we hear so much about in Calgary. Only exceeding authorization for expenditure by an average of 5% is probably a particularly a good statistic in today s project environment. Our experience suggests that almost all capital projects have some project and schedule overruns. Usually companies fail to categorize projects based on the level of complexity and size and thus treat all projects alike. While most of the junior and intermediate projects are repetitive and similar, the fundamentals should still be examined on a regular basis. Strong project management and controls always need to be in place to cope with any size and level of complexity. Also, identifying controllable costs and managing them is critical to projects success. Inadequate project preparation leading to scope changes during implementation, choice of technology, resource unavailability, and general lack of detailed planning are several factors that contribute to project costs and schedule overrun. What was the average time to tie in new wells, from rig release date to commercial production? 38.9 10 90 45.6 Due to the nature of the activity in question, only the juniors and intermediates are represented and not the oil sands developers. It is safe to say that the old adage time is money is certainly true here. For example, at a WTI price of $80 per barrel and a production of 35 bopd for a junior company, $2,800 would be on the line daily. With the average time to tie in new wells at 45.6 days, that would mean that the junior could forfeit over $125,000 per well not tied-in. For the intermediate company with the highest figure of 90 days on average, that would mean that two wells not tied-in would be a maximum of over half a million dollars of lost revenues. What was the number of wells shut in? 8.4 0 31 1.0 Another source of lost revenue is shut-in wells down for mechanical reasons. However, if the reason is economic, for example because of the depressed price of natural gas, then it is appropriate to shut-in the well to avoid losses. Again, the figures only represent the junior and intermediate companies and suggest that, among the respondents, there were either a fair number of wells shut-in, in any given company, or very few. This accounts for the spread between the mean and median figures. Several companies reported having no wells shut-in. 3

Operations What was the target operating cost per BOE? 11.8 8 17 11.2 What was the actual cost per BOE? 14.9 8 25 16.8 Comparing the charts, respondents indicated that the vast majority of them failed to reach their target operating costs, but not by an adverse amount. Few beat their targets. We expected the target operating costs to be highest with the oil sands developers, but in fact the highest quoted figures came from the intermediates. Perhaps this is a consequence of them moving into unconventional plays. Historically, intermediates have been well below the majors and juniors in operating costs, both target and actual. Only one company, a junior, reported target and actual as the same and that was at the extreme low end of the range. The highest actual cost per BOE was an oil sands start-up, which pulled the mean and median values upward. Without the figure of $25 per BOE, the mean would have been $13.32 and the median $13.40, which is closer to the target means and medians. From historic costs we would expect the 2011 actual operating costs for juniors to be around $13 per BOE and about $10 per BOE for intermediates. We have seen an increase in the adoption of non traditional oil and gas tools to help drive improved operational performance. Tools such as Lean and other continuous improvement techniques are now being rapidly implemented across the industry. What was the corporate G&A, in $ per BOE? 2.9 1.12 5.74 2.6 What was the operating G&A, in $ per BOE? 4.6 1.79 11.20 2.8 Few companies track or allocate their operating G&A costs with respect to overheads for finding and development costs, and production. Our experience indicates that G&A costs can have significant impact on the profitability of a company. Usually, top performing companies have a $1 to $3 per BOE advantage over their counterparts, which means a probable difference of millions of dollars on the bottom line for any intermediate and for some junior companies. Responses suggest that most companies have corporate G&A around $3 per BOE and operating G&A around the same figure. With both sets of G&A costs higher than $3 per BOE, the numbers suggest some inefficiency at the corporate or operating level. Responding companies should review their numbers and look at opportunities for improvement. What was the reserves replacement ratio? 260.0 115 500 212.5 Companies use reserve replacement ratios as an indicator of their ability to replenish annual production volumes and grow reserves. The market places great emphasis on a company s ability to replace reserves every year, and investors use the number as a key metric to evaluate performance. Annual targets for proven reserve replacement vary in the oil and gas industry. Currently, majors and supermajors consider themselves fortunate if both oil and gas reserve replacement is in excess of 100%. This means that they have covered annual production and added to their proven reserves base. It is entirely possible that these companies can make the target for gas, but not always for liquids. If combined, they do give a figure in excess of 100%. One of the common practices is to quote reserve replacement over a period of three, five or ten years. Acceptable annual figures for majors and supermajors would be 120 140%. In the oil and gas industry here in Calgary, a target for our Canadian majors may be around 150 180%. One sure way of adding reserves is to participate in oil sands projects, thus adding large volumes of proven reserves. It can be seen from our respondents that the juniors and intermediates are doing very well in terms of reserve replacement and hopefully turning them into projects that throw off cash flow. Over the past decade reserve replacement figures in general have been declining. 4

What was the % of net developed acres to total acres? 21.5 1 52 20.5 The amount of spend in any one year on land is a small percentage of capital expenditures for juniors and intermediates. The number of net acres a company leases tells investors something about the company s size, market position and ambitions. How it uses those acres is intrinsic to the success of the company. The larger the company the more net acres it will have. The lower the ratio of net developed acres to total acres, the more opportunities the company possesses to drill and produce. The land values are also an important measure in the expected profitability of drilling. For oil sands developers land sales have peaked and economically viable areas are fully leased, with the sector now in development mode. Oil sands respondents to the question above were at the very lowest end of the percentage range, in single figures, indicating that they had a lot more land to develop. Juniors and intermediates seem to working with a ratio of about one fifth of their total net acres under development. 5

Supply Chain Management Pressures such as declining natural gas prices, faltering reserves numbers, flat production, major cost overruns on construction projects, and shareholders looking for consistent returns have oil and gas companies looking at every opportunity to reduce costs and increase efficiency. Many juniors and intermediates have already re-evaluated their supply chain operations as a source of possible cost reductions. But how are they doing? Much has been written about supply chain management in the oil and gas industry, but very little has been benchmarked. Around 80% of operational budgets at upstream oil and gas companies are allocated for external supply chains. It is mostly for materials and services provided by third-party suppliers. It is not surprising that this percentage has caused companies to focus on their supply chains for cost cutting and efficiency improvements. These efforts have led to short-term successes in many instances, but most oil and gas companies are unable to radically alter their supply chain management approach or to sustain the short term benefits created. We have seen that human resources, information technology, and contract support can probably be shared across the organization. But other supply chain activities must be managed individually, in a way that empowers the front line to be agile. Companies should ask themselves: have we identified if the procurement and supply chain management strategy aligns with our overall business objectives? Are the activities involved in procurement and supply chain cost effective and in line with leading practices? And have we identified if the proper metrics are in place to measure the success of procurement and supply chain? What was the % of your suppliers that account for 80% of your third party spends? 7.4 5 25 7.0 Half of the respondents indicated that on average 7.5% of suppliers account for 80% of their 3rd party spend; so, there is a big tail of suppliers who account for just 20% of the spend. This supplier portfolio pattern is a common problem most companies face. Our experience suggests that such large tails of suppliers require a disproportionate amount of time and effort to manage them. On the other hand, a higher dependency on fewer suppliers could cause potential risk to the companies by increasing the supplier power to influence cost and schedule. The number of suppliers a company manages can be optimized if category management is in place. Category management relies on the strategic segmentation of a company s third party spend into business critical and high complex categories of spend and less critical or strategic categories. Once complete the supply chain function works collaboratively with the business to develop and then execute against the category strategies. An important initial step to drive benefits is the rigor put into the upfront spend analysis to identify the major areas for opportunity; this can often be supported by external parties who have the skills and experience to accelerate the execution of this work. What was the field level or business unit managed spend to total corporate spend? 93.2 90 98.5 91.0 Responses suggest that most of the junior and intermediate companies spend a very large portion of their corporate spend through business units or at field level. Our experience suggests that centralizing procurement may not be the best approach here. In certain categories centralized buying cannot outperform the local procurement staff who have extensive knowledge of local supply markets and consumption patterns. Further, some goods are not suited for centralized buying. However, such localized buying habits might pose challenges such as accountability and standardization which could lead to inefficiencies and high costs. A hybrid model such as Centre Led Procurement where the centralized team is responsible for the strategic categories may work perfectly in such situations by supporting local procurement where it makes most sense without compromising on the purchasing methodologies in terms of structure, expertise and measurement. 6

What was the % of managed spend processed through blanket agreements or long-term contracts? 24.4 12 50 17.5 Most of the respondents do spend through blanket agreements but not more than 25% of the total spend. Blankets agreements are usually designed to cater for repetitive procurement needs thus reducing administrative efforts and paperwork by eliminating the need for issuing individual purchase orders and payments. By establishing charge accounts with approved sources of supply at a predetermined rate, blanket agreements eliminate the need for solicitations, allow for quicker turnarounds on orders, and minimize terms and condition variations. Overall through the use of frame agreements, companies should expect to obtain better value by leveraging a procuring office s buying power through volume purchasing. What was the average number of business days from user request to issuing a PO? None of the respondents answered this question. This strongly indicates that not many junior and intermediate companies actually measure the efficiency of their end-to-end process or they do not have one in place. There are many end-to-end processes including Source-to-Contract (S2C), Procureto-Pay (P2P), Order-to-Cash (O2C), Recordto-Report (R2R), and Hire-to-Retire (H2R) to manage performance of these business processes. Cycle time measurement is a critical business measure of internal efficiency and can be enabled and measured through effective technology or strong process performance management. Considering the scale of spend and size of operations in junior and intermediate companies, a P2P process should stand high in priority for optimization. Compared to other end-to-end processes, P2P activities are typically more common across the enterprise, making them easier to standardize. Secondly, the business cases for P2P are frequently the most compelling given the size of operations, volume of suppliers and spend in these types of companies. Through process standardization, companies have been able to achieve significant savings in spend and operating cost, increases in efficiency and better risk management, all of which are key priorities for the organizations within the survey. What % savings have you achieved, if any? Almost all survey respondents chose not to, or were unable to respond to this question. This suggests a lack of mutually beneficial analysis between the supply chain, finance and business groups, maybe combined with unclear KPI s and annuals targets. A figure of 5% was quoted as a saving by one intermediate company. We typically see an industry benchmark between 2 5% in sustainable savings at minimum with some high performing organizations achieving between 10 20% savings through focused improvement projects. 7

Finance The objective of this set of questions was to assist in determining finance function effectiveness. Increasingly, organizations are turning to their finance function to drive strategic analysis and thinking to help effectively run the business. From the responses received, several avenues and lines of inquiry could be followed: 1. Evaluation of existing finance function in terms of both cost and value created and assessment of the enablers including organization, people, process and technology compared with peer group organizations, and best practice 2. Understanding the key gaps and initiatives required to deliver the finance vision in alignment with business strategy 3. Performing a high level cost-benefit analysis in order to validate top-down hypothesis and prioritize improvement opportunities. How many business days did it take to close and report to executive management? 11.7 4 25 12.5 Most companies performed around the mean time period, but there is still ample room for improvement. Many companies spend a majority of the time gathering data and very little time analyzing the data. There was no correlation between the length of time taken and the number of metrics gathered for the report. In other words, companies were not suggesting that it took longer because there was more to collect and collate. A faster period-end close allows more time to analyze key financial information, its implication and for the preparation of market communications. The intermediates seemed to be faster in report close and circulation, giving them more time to review and analyze their larger business operation. As a thumb rule if it takes more than 10 business days to close and report to executive management, a closer look at the process is recommended. This demands a thorough look at the reporting process to identify any bottlenecks. Bottlenecks might exist in the manual process or in the technology a company uses. Almost 50% of the respondents of this survey have significant area for improvement to reduce the time spent on closing and reporting. How many people in the organization received the monthly management report? 15.0 0.55 58.0 7.7 Based on the number of people in each respondent s organization, we calculated the mean and median percentage number of people in the organization who received the monthly management report. From these computations it would appear that the junior companies have done a better job in more widely circulating their monthly management report than their intermediate cousins. The intermediates had more layers of management and consequently less people at a very senior level to receive the report, according to the responses, and therefore did it faster. It would appear that the juniors circulated the report to a greater number of people in their respective organizations, but slower. 8

How many metrics were included in the monthly management report? 16.7 7 30 15.0 As expected the more mature companies had the greater number of metrics in their reports, reflecting the larger number of tracked risks and KPIs. Companies with a higher number of metrics probably spend a lot more time and effort in collecting the data. The faster a finance team can prepare key information, the more time they have to analyze the implications and prepare market communications. The better performing finance teams should build their reporting solutions around relevant key metrics, rather than metrics controlled by the technology in use. Of course, not every metric that is measurable makes them key to the organization s success. In selecting key metrics, it is critical to limit them to those factors that are essential to the organization reaching its goals, ideally aligned through a balanced scorecard. It is also important to keep the number of key metrics as small as practicable, to keep everyone s attention focused on achieving the same KPIs. With over half of the companies having more than 15 metrics as key in their monthly management reports, there is a huge scope to identify the priority metrics and save unnecessary efforts. As expected, it is very important to an organization s success to have recipients fully understand the significance of each key metric and how to interpret it. How many business days of work effort did it take to prepare your annual budget? 49.0 14 112 39.0 Although the time it takes to finalize a budget varies from company to company based on its lines of business, operations and presence in different geographies, most of our respondents agreed that their companies are spending a great deal of time and effort on consolidating, summarizing, communicating, explaining, and reviewing information for financial planning. One unfortunate consequence of these lengthy planning cycles is that final budgets often fall out of step with quickly evolving business conditions, leading to decisions being left open until the budget is prepared and ratified. More than half of all respondents reported that budgeting takes up to two months and longer to complete. Interestingly, there was no correlation between the size of company and the length of time to address the budgets. Intuition might have suggested that the smaller companies could have completed the task quicker. How many business days of work effort did it take to prepare your annual forecast? 30.3 1.5 52 36.0 The top performing finance teams take around 10 days to prepare their forecasts. Fifty percent of respondents in this study take up to 30 days to prepare annual forecast, which indicates overburdening of the financial planning process with excessive details. This could potentially reduce flexibility, increase planning cycle times, and ultimately impact the ability to make timely business decisions. The more agile businesses are concentrating on the key top-down business drivers rather than spending time building budgets from the bottom up approach. Most organizations also fall into the trap of forecasting to beat budget, thus ending up with unrealistic forecasts. In many industries a direct indication of this will reflect in the disjointed efforts and results of sales, marketing and operations teams. Most organizations are comfortable forecasting in a stable environment, but the new petroleum business realities are anything but stable, leading to a split between projected and actual performance and reducing confidence in the planning outputs. 9

Finance The most effective solution to these issues is continuous forecasting based on changing business conditions. This provides an up-todate view of whether goals will be met and the impact on targets and bonuses. It would also encourage business teams to look at risks and opportunities further into the future. This may be too much to adopt quickly for many junior and intermediate companies. A reasonable first step would be to adopt a lean budget process, combined with an appropriate forecast horizon. Five-quarter rolling forecasts are frequently used. A zero-based budgeting approach would make this kind of thorough re-evaluation even more valuable. This process should ideally be supported by variance analysis and the ability to explain why forecasts have changed from period to period. What % of your finance team s time was spent preparing and communicating business insight? 20.1 0 80 7.5 Despite devoting more than 20% of resource time to prepare and communicate business insights, both strategic and commercial, most business teams are still not getting the level of meaningful analysis they need. Data and systems can contribute to the failure up to a certain extent but the quality of the people carrying out the analysis is also crucial to providing effective decision support. According to PwC s recent global CEO survey, business leaders believe that the people who are the hardest to recruit and retain are the high potential middle managers that are crucial to taking the business forward. Finance is one of the areas where hiring the right talent is challenging. Although hard to find and develop, this combination of business and analytical capabilities can provide valuable competitive insight and perspective. This includes bringing together financial and non-financial data. The underlying attribute is the ability to translate endless streams of figures into compelling commentary and insight. What are your priorities over the next 12 months? 1. Cost reduction 2. Cash flow 3. Drilling programs 4. Raising capital 5. People/labour issues More than 50% of respondents indicated that cost reduction was their primary target in the coming months. This came mostly from the juniors and intermediates and not the oil sands developers. The next topic was cash flow, and was given equal weighting by all three segments. Drilling programs figured third in the list of priorities, with oil sands respondents most prominent. Raising capital was fourth and people/labour issues last in the list of priorities. It might have been expected that the oil sands developers would have ranked people and labour issues higher, but we attribute the low prioritization to the fact that they are all SAGD producers, already up and running, and therefore not exposed to the challenges of larger oil sands capital projects under construction or awaiting construction. 10

Is access to capital markets a challenge for your business? Is your company involved in commodity hedging (i.e. production forward contracts) In support of the priorities listed in the question above and their corresponding answers, 75% of respondents replied that there was no issue for them in raising capital. Those that replied that it was were mostly juniors. A majority of the juniors and intermediates responded positively. All the oil sands developers responded negatively. 11

Risk and Controls Spurred by Sarbanes-Oxley and other reform measures, organizations have taken steps to strengthen controls and expand their controls related monitoring activities. However, the focus is now changing to a risk-centric mindset. Companies now view risk management and internal controls as fundamental to their business operations. As a result, risk and controls are no longer seen as the technical domains of only internal audit and other staff functions. Management has begun to take ownership of risk to their business and ensuring effective controls to mitigate exposure. The rising expectations of senior management and audit committees vary according to the size and maturity of the organization. For more mature intermediates, the introduction of an internal audit function was likely part of the growth of the company. For a junior company, expectations are not as high, given the usual absence of such a function. Junior companies will typically grow into the implementation and use of risk and control metrics, collection, analysis and management. It is the junior segment that has the largest number of bankruptcies in the oil and gas industry, but it is also the junior segment that has defined exit strategies that likely preclude them from growing to a size that warrants an internal audit function. What were the numbers of key controls over financial reporting? 131.5 4 300 97.0 The number of key controls over financial reporting varies considerably and depends on the size and complexity of an organization. Survey results show a median number of 97 key controls over financial reporting, which is in line with what we would expect for midsize oil and gas companies. Intermediate companies at the higher end of the scale with significantly higher number of key controls have an opportunity to perform, or have a third party perform a controls rationalization and design review. The purpose would be to identify potential duplicative controls and ensure that the right controls have been identified as key. Junior companies with a significantly lower number of key controls may also want to perform a design review to ensure appropriate controls are in place to address the risk of material misstatement in the financial statements. How many staff worked in your internal audit function? 1.7 0 8 0.1 Survey results show that many junior and mid-size oil and gas companies do not have Internal Audit (IA) functions. The survey also indicated that the oil sands developers, with perhaps only one large thermal project did not resort to an IA function. However, as companies grow and risks continue to change through acquisitions or larger capital projects that drive increased production, the need for IA also increases. IA can play a significant role in ensuring processes are put in place to manage risks faced by organizations. The initial set up and execution of an internal audit plan can be outsourced until the right experience and skill sets are developed internally. A rule of thumb would be to assign 1% of the organization s workforce to staffing an IA department. 12

What was the number of enterprise-wide risks identified and monitored? 48.0 10 82 60.0 With global trade and pricing, supply chains and financial markets are all intricately linked. Risks become apparent quickly, unexpectedly, and with significant impacts on company operations, reputation and even survival. The depressed price of natural gas for juniors and intermediates is recent evidence of this. This has led companies to become engaged more than ever before in improving their ability to define, communicate, and manage their risk profile. The survey results did not indicate any differentiation between juniors, intermediates or oil sands developers. The number of enterprise wide risks managed by a company will vary, but we tend to see that companies have 10 15 key risks that are communicated to their audit committee and board and monitored at this level. However, underneath the high level key risks there may be a number of more granular risks that have been identified and are managed at a detailed level. There may be an opportunity for companies on the high end (60 80) to group the risks into key themes or areas and report the risks at a higher level. As companies grow and risks continue to escalate in number and magnitude, the need for a strong control environment becomes imperative. It is becoming increasingly clear that companies are leaning more on their IA groups to help manage these risks. Internal Audit can play a significant role in ensuring processes and controls are put in place and operating effectively. We are seeing some of the once smaller oil and gas companies become larger players looking at developing an internal audit function. We believe this is the right step to take and that a strategic plan for internal audit should be developed that moves the function from inception and implementation to an expected steady state, which typically takes 24 36 months. 13

Human Resources The constant turnover of junior oil and gas companies is one of the hallmarks of the Canadian energy industry. According to a recent report from the University of Calgary s School of Public Policy, junior companies do create significant amounts of new employment, but adversely the survival rate is low among emerging juniors, pegged at only 50 75% and substantially contributing to the number of job losses in the sector, either through bankruptcy or acquisition. It is the intermediates and majors, with more than 100 employees, that account for around 70% of the job vacancies in Alberta. Other surveys have shown correlations between E & P firm size and average weekly employee earnings. In companies with less than 4 people, the average weekly earnings for employees are about 20% less than in companies with 5 20 employees. In turn they are about 20% less than in firms with 500+ employees. This could be attributed to the fact that remuneration in the smaller firms often comes by way of stock, as well as salary and wages as a method of retention. It is also important to remember that juniors still only account for 6% of daily Canadian production in barrels of oil equivalent. As a point of reference, many of the comparative metrics and benchmarks quoted are derived from the PwC Saratoga Human Capital Effectiveness Survey 2012 for the oil and gas industry. What was the % of field employees to corporate employees? 31.3 2 70 30.0 Responses varied widely between respondents, from a low of 2% field employees to a high of 70% field employees. There does not seem to be a correlation between the size of company or segment, but rather the maturity of the company and the stage that it had reached in its business cycle. In general, companies in start-up mode were more heavily weighted toward corporate employees, and those in a project development stage had a higher percentage of field employees. Companies in steady state operations trended to the mean and median of about one third field to corporate staff. If extrapolated, this trend suggests that the distribution between field and corporate locations varies widely as companies mature in their life cycle, a consequence of constant changes in the levels of employment in industry corporate centres such as Calgary and field operations near more remote locations. 14

What was the % of contractors to employees? 22.8 15 41 19.0 The use of contractors, both in the field and also at head office, is an ongoing and substantial part of the workforce and a long-time industry trend that was once more substantiated in the results of the survey. All respondents reported a significant use of contractors regardless of their industry segment or stage of development. This likely reflects the value of contractors as a highly flexible labour force that is able to provide specialized skills not needed full time. It also provides flexibility in labour costs, allowing for a closer correlation between revenue and, or capital expenditure. Companies that had a high number and value of capital projects underway tended to report the use of a lot of contractors, reflecting the project nature of the work. The norm appeared to be around one fifth of the organization as a contract work force. What was the % of open/vacant positions to full time employees? 7.6 0 30 3.0 Vacant positions were reported by all respondents except one, with a median vacancy rate of 3% of all positions. This finding suggests either ongoing voluntary turnover or employment growth, or likely a combination of both factors. Regular turnover of employees is a constant trend among major oil and gas companies as well as the junior and intermediate sectors. In 2011 the median voluntary turnover rate among larger oil and gas companies was 9%, or one in 11 employees. With a typical recruiting cycle time of 3 months, this implies an ongoing vacancy rate of approximately 2.5% based on turnover alone. If workforce growth rates of 3 to 5% per annum are added to turnover, vacancy rates exceed 3% and approach our mean figure, a number not uncommon in the industry. Constant recruitment is a feature of most companies in the oil and gas industry, including juniors and intermediates, especially those developing projects. What was the % of employees 5 years from retirement to full time employees? 8.2 2 25 6.0 Respondents reported a median of 6% of employees within 5 years of retirement, with a low of 3% and a high of 25%. This compares favourably with an industry median rate of 28% among larger oil and gas companies. In the junior and intermediate sector, impending retirements seems to be less of an issue than with the larger operators. Among major oil and gas companies, the proportion of baby boomers in the workforce aged 52 and older is 27%. This is a significant contributor to the relatively high level of impending retirements in the industry. The figures presented indicate that the proportion of baby boomers in the junior and intermediate sector is likely substantially lower than in the large company sector. Regardless of company size, investing in proactive knowledge transfer and formal succession planning is important. 15

Human Resources What was the % of full time employees with stock options? 56.2 0 100 60.0 All survey respondents with the ability to issue options did so, with 50% of that group making options available to every employee. Companies that made options available to 100% of employees were typically companies in the start-up or development stages of their life cycle. This finding is consistent with how stock options are commonly used in other industries as substitutes for cash compensation in the early stages of a company s life when cash flow is a priority and the upside potential of stock options is substantial if the company succeeds. Stock options are also commonly used among major oil and gas companies, however they tend to form a substantial portion of executive compensation packages, with broad based (i.e. all employee) option plans used by only a minority of companies. As a general rule of thumb for junior and intermediate E & P companies, a 100% growth in revenues manifest itself as a 50% growth in salaries, once efficiencies are captured. In 2011 did your business add full-time and/or contract employees? A common theme found among respondents was that recruitment and staff additions were caused by growth. Every company surveyed reported they had added full time employees, contractors, or both to their workforce during 2011. This finding is consistent with the vacancy rates reported. A second theme found was the relatively low priority assigned by all respondents to people and labour issues. Business concerns such as cash flow or cost reduction were reported as higher priorities than people and labour issues. This finding is consistent with an industry wide trend of fewer talent shortages than was the case during the last oil boom, notwithstanding the normal scarcity of reservoir engineering skills, some geoscience disciplines and production accountants. Exceptions to this trend were companies with substantial oil sands operations in the Wood Buffalo region around Fort McMurray. These companies tended to report people and labour issues as higher priority than companies with operations in other parts of Alberta and Saskatchewan. This reflects the ongoing difficulties with attracting and retaining talent to this region. 16

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Information Technology Oil and gas companies are presently focused on short-term justifications of IT spending, with investments demonstrating a quick payback over those that do not. At the same time, previous investments in major systems are being scrutinized to ensure that the return on past IT investments have been as expected and have helped to maximize value of the company s hydrocarbon and physical assets. In general, there appears to be a high level of dissatisfaction within the industry on certain aspects of IT, most frequently with increasing costs associated with installation and upkeep of systems. More than 50% of respondents highlighted these increasing costs as an IT issue they faced, probably as a result of continuing IT investments to enable these organizations to execute their business strategies, both commercial and operational. Among the juniors and intermediates, QByte overwhelmingly continues to be the platform of choice. We have increasingly seen that larger intermediate companies are exploring wall to wall ERP solutions much sooner in their development process. What was the percentage of IT spend to the company operating budget? 5.1 1 13 4.5 The highest ratio was reported by the oil sands developers, the lowest by the intermediates, who have had more time to establish and stabilize their IT platforms and applications as they have grown. This left the juniors around the mean and median numbers. As a benchmark, upstream IT spending is about 25 cents per flowing barrel of oil across the global industry, which includes the entire size range of E & P companies. What was the ratio of IT users to IT staff? 25.1 9 70 21.5 The highest level of IT users to IT staff was reported by the intermediates, who have a greater staff complement, but not necessarily an increased number of IT professionals to assist them. Coincidentally, this group also reported the greatest level of dissatisfaction with IT, perhaps as a result of this ratio. Interestingly, oil sands developers were below the median and mean as a group, having earlier reported the highest level of spend on IT. Juniors once again were around the midpoint. 18

What was the % of your IT spend on outsourced or cloud services? 3.0 11.3 0 50 The use of outsourcing and cloud services varies greatly, ranging from no spend to companies for whom 50% of their spend is on such services. It seems the spend is directly influenced by a company s own individual IT strategy to maintain systems and support in house as opposed to seeking external assistance. Interestingly there was no discernible difference between the juniors and intermediates, or the oil sands developers. When relevant, the IT help desk is the most common IT service that is outsourced, followed by application maintenance and support. Infrastructure maintenance and support, application hosting and end-user support all tie for the third most popular outsourced service. Infrastructure provisioning is the least outsourced. We believe that alternative service delivery models may provide solutions to many of the IT specific challenges, and more broadly the cost reduction mandate within the business. How many unplanned outages for mission critical applications took place? 1.5 0 6 1.0 Based on responses, it seems that the IT operational environments are generally stable. The number of unplanned outages for mission critical applications is low to nonexistent, with only one respondent reporting several incidents. The most frequently reported number of outages was one, indicating almost everyone experienced an interruption at some point in 2011. How many security incidents took place? 0.2 0 1 0 The continuance of strong security at the operating system and application level remains important to maintaining a robust core of IT infrastructure. Investments in security appear to have paid off, as a very low number of security incidents were reported. On the other hand, it could suggest that the junior and intermediate oil and gas sector is not of interest to those who wish to access and obtain computer-based information or that there are limited detection mechanisms in place. 19

Information Technology Which of the following IT issues did you experience? Increasing IT costs Problems implementing new systems Lack of business confidence or trust in IT IT security or privacy incidents Problems with IT suppliers or service providers Insufficient number of IT resources Insufficient IT skills Lack of agility Serious IT operational incidents IT disaster recovery or business continuity issues Return on IT investments not as expected As mentioned, the most stated issue was increasing IT costs. While a majority of juniors and intermediates are almost hitting their target operating cost per BOE, they also stated that overall cost reduction was of primary importance. So, if it is not to be gained in the operating environment, it only leaves the corporate G&A as an area of concentration, which IT is an integral part. The second most mentioned issue was challenges implementing new systems and lack of business confidence or trust in IT. It would be interesting to ascertain whether the lack of confidence arose as a result of the functionality of the systems implemented or the integrity of the data within them. Few spoke of insufficient IT skills, per se, but rather insufficient numbers of IT resources. This particular dissatisfaction correlation was most prevalent in those respondents, the intermediates, with high IT user to staff ratios, as shown earlier. No respondents reported lack of agility or serious IT operational incidents, and there were only a small number of problems with IT suppliers and service providers. Of course, this latter issue is not of concern to juniors and intermediates that do not outsource. These numbers were perhaps higher than anticipated. None of the respondents reported an issue with return on IT investments, which may be indicative of the rigor around vendor and project selection and the investment business cases that we are seeing. Although IT costs are increasing, to the ongoing concern of many operators, organizations are feeling that in general, benefits of these investments are being realized. 20

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Contacts Reynold Tetzlaff National Energy Leader +1 403 509 7520 reynold.a.tetzlaff@ca.pwc.com James McLean Partner, Consulting & Deals +1 403 509 7535 james.mclean@ca.pwc.com Crystal Chong National Marketing Specialist, Energy +1 403 509 7555 ext 3019 crystal.chong@ca.pwc.com Join the conversation pwc.com/ca/energy-linkedin www.pwc.com/ca/energy 2012 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 2345-12 1212