Floating Production & Storage Systems Europe 2008 IQPC FPSO Conf London 1Apr08 R1... ·...

Floating Production & Storage Systems Europe 2008

An IQPC Conference London, March 31 – April 2, 2008

NYSE: DVN www.devonenergy.com 2 of46

An operator’s outlook for FPSOs in the ultra deep waters of the U.S. Gulf of Mexico

Peter LovieDevon Energy CorporationHouston, Texas

NYSE: DVN www.devonenergy.com page 3 of 46

Key Messages

Good reasons no FPSOs in GoM hitherto

Players have been changing, particularly Devon

GoM Ultra Deep Water (UDW) stretches drillers likenever before

Increasing lag, UDW discovery to development

Hubs & spokes continue

FPSOs different for today’s GoM

Flexibility critical


Good Reasons No FPSOs in GOM

a. Wells often needed intervention, non-FPSO field development solutions available, known quantities in GOM, fast and cost effective;

b. FPSOs might are theoretically workable in some instances but not the optimum solution so far;

c. Extensive efficient network of export infrastructure (pipelines), been effective solution for tie in of new deepwater developments hitherto;

d. Export by shuttle tankers expensive in US GOM: Jones Act calls for US built/owned tankers, means CAPEX about 3x intl, OPEX about 2 x intl, long uncertain delivery hitherto;

e. But most of all: “Economics, Economics, Economics”; [Rick Meyer of Shell, at SPE’s FPSO Global Workshop Houston, 2002]


History in GoM

Pipelines have been highly profitable for many years for many oilcompanies and independent pipeline owners – why change thatbusiness model?

MMS/USCG approval in principle achieved in Record of Decision in December 2001 for FPSOs and shuttle tankers in US waters;

For service in US waters FPSOs can be built anywhere. In contrastshuttle tankers must be owned, built and crewed in US;

For the record, the first two FPSOs in GoM were in Mexican waters:1st FPSO 1989 Owned by Pemex1st FSO 1998 Charter from Modec2nd FPSO 2007 Charter from BW Offshore


The Early Production System (EPS) at Cascade / Chinook is firstFPSO in US waters in GOM, with first use of Jones Act shuttletankers in GOM, contracted 2007, first oil 2010;

Cascade is 50:50Petrobras: Devon

Chinook is 2/3:1/3 Petrobras: Total

Petrobras operator of both;

8,200 ft. water depth;

Full field developmentsolution not yet decided, not necessarily an FPSO;

5 year lease with BW Offshore600,000 bbl capacityMax. 80,000 bopd

It All Changed in 2007FPSO Contracted for EPS service


2004 Ivan: storage vessels discussed for mitigating pipeline damage effects;

2005 Katrina and Rita. Storage vessel chartered at one location to enable gas production via collection of liquids;

2006 Two DP storage vessels chartered as “insurance policy” during hurricane season;

2007 Changes in design codes: announcements and debate of API RP2 at OTC;

2008 Underwriters start to ease up a little;2008 More lawsuits settled on the explosion at BP Texas City.

Industry realizes how hurricane damage may not be the only risk of interruption of revenues for offshore producers!

Mother Nature has spoken: Disconnectability, optionality and storage are all good!

Corporate Memory“2005 All Over Again”, Designs for the Future


Players Have Been ChangingParticularly Devon

1997 – 2007 saw the birth of Supermajors:BP Amoco, Arco, BPChevron Chevron, Texaco, UnocalConocoPhillips Burlington, Conoco, PhillipsExxonMobil Exxon, MobilTotal Elf, Fina, Total

The coalescing of the bigger puddles of oil continued:ENI ENI, DominionStatoil Hydro, Saga, Statoil

And then there is: “The Rise of New Bodacious Independents”

[SPE’s Journal of Petroleum Technology, guest editorial, pp. 22, 24, March 2008]

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Note: Enterprise value calculated as sum of market value of outstanding common stock plus book value of long-term debt, preferred stock, certain other long-term liabilities less net working capital.

U.S. Independents in 1997Enterprise Value, US$ Billions

Often not realized, U.S. Independents changed radically since 1997.

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Growth over 1997 base

Acquired / merged

U.S. Independents in 2008Enterprise Value, US$ Billions

Source: Enterprise Value as stated on Yahoo! Key statistics on February 2008.

The bodacious few still standing in 2008!


Devon - Exploration InventoryNet Unrisked Resource Potential

GULF OF MEXICO CHINA

4 – 7 BBOE36 Prospects


BRAZIL



Devon - Largest IOC in BrazilIn Terms of Net Exploration Acreage*

98179

323325

1,751

1,328

1,159

879

637581

374 354

Chevron Repsol Anadarko Shell SK Total Statoil N. Hydro Esso EnCana ENI

Net

Acr

eage

(Km

2)

1,752 Km2 = 70 OSC Blocks

*Excludes Petrobras which has 10,100 sq km under license


Devon - Largest IOC in ChinaIn Terms of Offshore Net Exploration Acreage*

25,818

10,626

9,729

3,919

10,88211,982

20,09818,194

6,277 6,504 5,255

20,750

BG Husky SINOPEC TARC Anadarko ConocoPhillips Primeline Chevron

Net

Acr

eage

(Km

2)

Total 31,632 Km2

(Includes 53/30 & 64/18)

Shelf Deepwater

*Excludes CNOOC 278,617 km2


Devon Floating Systems - History Most types, different parts of the world

Field Location Water depth, feet Type First oil Capacity,

boepd Devon role Partners

Cascade GOM 8,200 F P S O 2010 80,000 Non op Petrobras

Polvo Brazil 344 F P S O 2007 90,000 Operator SK

Independence Hub

GOM 8,000 Semisubmersible 2007 166,000 Non op Anadarko, Dominion, StatoilHydro

Red Hawk GOM 5,300 Cell Spar 2006 20,000 Non op Anadarko

Magnolia GOM 4,700 T L P 2006 75,000 Non op ConocoPhillips

Serpentiina Eq. Guinea 1,558 F P S O 2003 110,000 Non op ExxonMobil, Govt. of Equatorial Guinea

Panyu S. China Sea 320 F P S O 2003 60,000 Non op CNOOC, ConocoPhillips

D e v o n F l o a t i ng P r o d u c t i o n S y s t e m s

Mostly non operated projects hitherto - that is changing now


Panyu FPSO in South China Sea

Operator: DevonCNOOC 51.0%Devon: 24.5%ConocoPhillips: 24.5%

Oil development at Panyu Block 4-260,000 bopd max320 ft. water depthFirst oil 4Q031,000,000 bbl storage


SerpentinaFPSO in Equatorial Guinea

Oil and gas development in Block B:Initial development started in 1993 with the Zafiro Producer FPSO, expanded with the Jade platform then the Serpentina FPSODiscovery March 1995

First oil August 1996

Serpentina first oil July 2003, 110,000 bopd, 1,900,000 bbl storage(ExxonMobil generic EPS FPSO), waterdepth 1,558 ft.

Operator: ExxonMobil71.25% ExxonMobil23.75% Devon5% Govt. of Equatorial Guinea


Red HawkCell Spar in GOM

Gas development in GB 877: Operator: AnadarkoPeak 120 mmscfd 50:50 Anadarko: Devon5,300 ft. w.d.Contracted: 2002First gas: 2004


MagnoliaTLP in GoM

Oil development in GB 783 Operator: ConocoPhillips50,000 bopd capacity + 150 mmscfd 75: 25: ConocoPhillips: Devon4,700 ft. w.d. Discovery: May 1999First oil: November 2004


PolvoFPSO, shown en route, now producing in Brazil

Oil development in BM-C-8: Operator: Devon90,000 bopd 60:40 Devon:SK344 ft. w.d. Leased FPSO from Prosafe1,500,000 bbl storage (7 years + options)Discovery: June 2004, first oil: July 2007


Texas

Louisiana

Deepwater GoMExploration Trends

Lower Tertiary Trend194 Blocks

Miocene Trend156 Blocks

Block Ownership:• 3rd largest in trend• 2nd among independents

Block Ownership:• 5th largest in trend• 3rd among independents

Looking ahead: Devon in a leading position in the frontier areas for Gulf of Mexico ultra deepwater exploration


TertiaryLower Trend

Tertiary

Lower

Trend

TertiaryLower Trend

Tertiary

Lower

Trend

• 4 announced discoveries out of 6 exploration wells drilled

• 67% success rate

Devon Significant Discovery

Devon Non-Commercial

Cascade2002 Discovery

Jack2004 Discovery

St. Malo2003 Discovery

Kaskida2006 Discovery

Toledo2003

Sardinia2004

Lower Tertiary TrendDevon Results to Date


TertiaryLower Trend

Trend

Devon - Lower Tertiary Prospect Inventory

• 4 significant discoveries to date

• 21 additional prospects

Devon Discovery

Devon Prospect

Cascade

Jack

Kaskida

St. Malo

Trend

Merope

Cherry Bomb

Capella

Sardinia West

Propus

Bottle Rocket

Gorgona

Navi

Knik

M80

Jericho

Vinita

Cypress W

Bass Green Bay

Azha

Dart

Latigo

TertiaryLower Trend Ponza Deep

Fist

Chuck


Texas

Louisiana

Devon - Miocene Prospect Inventory

Devon Miocene Prospect

Recent Industry Miocene Discovery

Devon Miocene Discovery

Mission Deep

Sturgis

Bigfoot

Puma

Knotty Head

Tahiti

Tubular Bells

Rigel

ColoradoDestin

Tuscany W

Sabre

Winter Park

Wombat

Shogun

Shelby

Petard

Chaps

RaptorKoalaPortage

Sturgis North


4,685’50%DevonKeathley CanyonDart

5,820’50%DevonWalker RidgeFist

6,500’39.5%DevonWalker Ridge Chuck

6,059’25%ChevronKeathley CanyonGorgona

6,237’12.5%ChevronKeathley CanyonCypress West

6,324’33.3%ChevronKeathley CanyonCherry Bomb

5,511’75%DevonKeathley CanyonCapella

6,475’100%DevonKeathley CanyonBass

4,189’16.7%AnadarkoKeathley CanyonBottle Rocket

5,583’100%DevonKeathley CanyonAzha

Prospect Water DepthDVN Block

W.I.OperatorArea

Lower Tertiary Prospect Inventory

Operated By: Anadarko (2), Chevron (7), Devon (12)


6,28423%AnadarkoWalker RidgeGreen Bay

5,525’75%DevonKeathley CanyonVinita

6,062’35%ChevronKeathley CanyonSardinia West

4,200’100%DevonGarden BanksJericho

6,219’25%ChevronKeathley CanyonPonza Deep

6,364’50%DevonKeathley CanyonNavi

3,422’100%DevonGarden BanksMerope

5,645’50%ChevronKeathley CanyonM80

4,094’50%DevonKeathley CanyonLatigo

6,764’100%DevonWalker RidgeKnik

Propus

Prospect

6,482’50%ChevronKeathley Canyon

Water DepthDVN Block

W.I.OperatorArea

Lower Tertiary Prospect Inventory - Continued

Operated By: Anadarko (2), Chevron (7), Devon (12)


Extreme depths: 30,000+ ft. RKB not unusual;

Extreme pressures in reservoirs, e.g. 18-22,000 psi;

Mountainous seabed;

Reservoir rocks without production history;

MODU availability limited, long deliveries;

Experienced people in operator, drillingcontractor and vendor organizations are morecritical than ever for wells like these.

But these people are in very short supply;

GoM Ultra Deep Water Stretches the Drillers

Combination of factors at work


Drilling Like Never Before: And Stretching Development Strategy

Drilling and completion for one well may take six to nine monthsin the Lower Tertiary;

Drilling investment can be in the region of $120-$160million per producing well;

Well costs dramatically high for the Lower Tertiary, in part from day rates and in part from well characteristics;

Facility choices more driven by drilling than 5-10 years ago: well CAPEX about 2/3 now of field development, instead of 1/3 before;

Developments may take several years to drill up, hence production ramp up may be slower;

Development solutions: choices changing, e.g. no TLPs,maximum size spars, FPSOs, semisubmersibles;


MMS Report 2007-021: Deepwater Gulf of Mexico, Interim Report of 2006 Highlights

Proven Reserves Add Value

Increasing Lag Discovery and Development in the Ultra Deep

Reproduced by Permission of RPSEA


DeepStar/BP (Nov04)

Great White

Walker Ridge

Keathley Canyon

Alaminos Canyon

Independence Hub


GoM Ultra-deepwater Activity(broad industry attention on challenges in region)

Walker Ridge / Keathley Canyon

– Sub-salt– Deeper wells– Tight formations

Alaminos Canyon– Viscous crude– Lacking infrastructure

Eastern Gulf – Gas Independence Hub

- Higher pressure- Higher Temperature- CO2 / H2S

Higher Drilling CostsChallenging Economics

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120+ Project Ideas$300 MM

70 Project Ideas $175 MM

26 Project Ideas$30 MM

RPSEA 2007 & 2008 Projects

April, 2007

June, 2007

July, 2007


Significant Demand for UDW Technology Funding


Decades of tradition of tie ins to deepwater hubs that process andfeed a transportation system often with major oil companyownership;

Same practical reasons hold today, looking ahead: shared facilities, profit motive for all;

Independence Hub = Independents’ Hub, first gas in July 2007;

FSOG: Devon developed concept for hub storage in remote ultradeep waters of Walker Ridge and Keathley Canyon, ability to collect and process gas on deck;

FPSO: Duty as a hub may be a priority features in FPSO capabilities,similar to FSOG;

Hubs and Spokes ContinueMore Ahead


Independence Hub = Independents’ HubIngenious teamwork in aligning contractor & independents’ interests

GOM Gas Hub:8,200 ft. w.d.Engineering began: July 2004 First gas: July 20071.0 Bcf/d5,000 bopd condensate

Owned: 80% Enterprise / 20% Helix Operator: Anadarko

3 Additional AnchorProducers:

Devon

Dominion

StatoilHydro


Out of sightindependents produce 14 locations, 10 fields

Pioneering in 8,200 ft. of water: Huge subsea spread created engineering and construction challenges

If you know Houston, it’s like an area from Galveston to The Woodlands


Field 1Operator 1

Field 2Operator 2

Field 3Operator 3

FSOG

FSOG Concept: Regional StorageDeveloped by Devon in 2004

Separate fields using Devon operated FSOG with shuttle tankers to Gulf Coast refineries: typically use a standard VLCC with 2,000,000 bbl storage capacity US patent pending, inventors:

Dave Bozeman & Steve Seat

300,000 – 500,000 BOPD


Features of the FSOG

a. Common infrastructure for storage and transportation of crude;

b. Provides for collection, processing & compression of commercialgas volumes in low GOR region;

c. Provides marketing hub for tie in of future fields;

d. Devon has a patent pending for the FSOG: “Method and System forGathering, Transporting and Marketing of Offshore Oil and Gas”;

e. Practically: FSOG is an assembly of proven components: doublehull VLCC, low pressure risers, disconnectable turret mooring;

f. Could work with any non disconnectable option (e.g. spar etc.);

g. Would mean an extra tariff to add to the shuttle tanker tariff.

New business opportunity in regional marketing of oil and gas


FPSOs for Today’s GoMThe New Requirements

a. Disconnectable. Run before storms like in Far East. Becomes easier to modify, expand or maintain;

b. Long field life, e.g. Lower Tertiary fields may produce for as long as 40-50 years, i.e. about double past field lives. Important effect on facility design and on exposure to extreme storm events;

c. New more remote areas of Lower Tertiary turning out to be veryprospective (potential for high rates);

d. Long way out, over mountainous seabeds, pipeline routes much longer, more circuitous and more expensive than hitherto (exporteconomics may favor FPSOs);

e. Pressure to cut the cycle time to improve economics is counteredby risks of reservoirs performing differently from expectations (timing on a firm FPSO contract less clear than before);


Is There Really a Case for an FPSO for Full Field Development?

Simultaneous with all that is deeper, higher pressured, more remote,bigger CAPEX, the corporate need in these mega projects intensifies to maintain capital discipline and project management discipline;

So we could study it to death to mitigate risks - or take some risks withfuture flexibility at a premium;

How to forge ahead? How to apply Devon’s mantra “accelerate through the value chain”?

More GOM acceptance of FPSOs: the rise of the independents, plus arrival of non GoM experience (Petrobras, StatoilHydro);

Conclusion: Circumstances now more favorable today for FPSOs in GoMthan before, if they can be more flexible in capability & business basis;


Early Well Testing (EWT) ? And/or Early Production Systems (EPS) ?

Gas cannot be flared in GoM – makes shorter term operations moredifficult than in countries where there is some regulatory latitude fortrials in new areas;

Desirable to test wells for longer durations but assembling the spreadis difficult and costly ;

Smaller shorter term EPS, possibly on DP, has been debated in GoMbut true added value to a field development often not there - or not conclusive;

Dilemma of equipment being built if several multi-month (or one ortwo year) long commitments were available. The trick is gatheringenough of these to enable vessel construction;

In spite of much discussion, no definitive GoM solution yet selected!


Putting It Together(Cautiously)

Corporate goals of large independents may favor FPSOs: proving as they go along, e.g. EPS morphing into FFD;

Commitments on export pipelines are huge, tanker export easier tostart quickly for remote areas and economics competitive – hence export system selection may favor FPSOs);

Drilling, well access, available technologies affect facility choice(e.g. dry trees and/or DVA, no FPSO);

Not conclusive that there must be a future for FPSOs for FFD in ultradeep in GoM;

Projecting the future fleet size of FPSOs for US GoM would requiretruly remarkable use of crystal balls plus perfection of SWAGs on abiblical scale!!!


Logic of Real Option Value decision process expedites steering ourcourse in uncharted waters (pun intended);

Rigorous internal debate, little/no bias pro/con FPSOs;

No legacy of pipeline operation, shuttle tanker v. pipeline (relatively open competition;

Sanctioning an FPSO by end 2009? A P50 event?

Concept selection process slow and deliberate with Devon and itspartners;

Would not expect a flood of FPSO orders for GoM;

Devon’s Perspective(1 of 2)


Devon’s Perspective(2 of 2)

For Devon’s 2008 portfolio of Lower Tertiary prospects in the UDW GoM, we can confirm considering FPSOs along the lines of:

Technically: + EPS expandable to FFD+ Suezmax newbuild;+ Disconnectable;

Commercially: + Studies on FPSOs for GoM soon;+ Early talks with contractors;+ Firm commitment dependent on well results;+ Premium on flexibility and speed;+ Bid process could proceed – or negotiation on hull

under construction – depending on progress;+ Linked to availability of shuttle tankers.

We do encourage exchange of ideas with contractors, expect them to make a reasonable profit,

and understand paying for successful performance!


Flexibility CriticalWrapping up

a. Delays in the traditional Definition project stage for Lower Tertiary prospects in GoM call for something new in the industry. Old desire to “git ‘er done” being stymied for good technical reasons and for traditional economic choices;

b. FPSOs being re-locatable are well suited to “try it and learn” –mitigating development risks and improving project economics;

c. GoM needs FPSOs with maximum technical and commercial flexibility to deal with future reality, knowing that initial ideas on production requirements will probably be wrong!

d. Can we create even more flexibility than “generic” FPSOs of recent years? Expandability?

e. Fertile waters for operator initiatives and fresh thinking in FPSO contractors – critical for FPSOs to happen in GoM UDW.


Integrity

A few good people;

Old fashioned values & good business sense today;

Long term working relationships;

Values and value.


Acknowledgements

My thanks is due to Devon management for permissionto freely discuss the issues here.

Recognition is also due to colleagues for their ideasand assistance in reviewing and assembling theinformation in this presentation:

Dave BozemanScott CoodyMelany Boughman

NYSE: DVN www.devonenergy.com 45 of46

Questions?

[email protected]

001 713 265 6489 office

001 713 419 9164 cell

Thank You

Floating Production & Storage Systems Europe 2008 IQPC FPSO Conf London 1Apr08 R1... ·...

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