This document provides an overview and outline for an energy recruiting forum presentation. It discusses myths around the oil and gas industry being a "sunset industry" and highlights the industry's ability to continually generate new resources. It notes fulfilling career opportunities in the energy industry and reasons the next 40 years will be interesting, including continued global oil demand growth. The document outlines an framework for value creation strategies and notes what challenges and opportunities may lie ahead for the industry.

1. Terra Incognita: a Continuity of
Energy Surprises
Energy Recruiting Forum
August 1,2012
1

2. Outline
• Myths and realities of the sunset industry narrative
• The energy industry offers fulfilling career opportunities
• Reasons to think the next forty years will be at least as
interesting
2

3. The legacy: 22 years of downsizing and 8 years of recovery
“Difficulties mastered are opportunities won” Winston S. Churchill
Total Employment in Oil and Gas Extraction
Source: Bureau of Labor Statistics
3

4. The myths of the sunset industry narrative
“Criticism is easy; achievement is difficult” Winston S. Churchill
We’re running out of oil
Oil and gas is low tech
Oil and gas is a dying industry
Oil and gas employs good ole boys from Texas
Oil and gas companies manipulate oil and gas prices
Oil and gas companies are indifferent to the environment
Oil and gas companies ride roughshod over indigenous peoples
Oil and gas companies are in denial over climate change
Oil and gas companies are hostile to energy efficiency
Oil and gas companies are unable to operate safely
It’s a bad idea to own oil and gas company shares
Renewables represent the future
Oil & Gas is not a viable career choice
4

5. The reality: 2001 proved reserves are double those in 1981
World Proved Oil Reserves (Billion Barrels)
1800
1600
1400
1200
1000
From 1980 through 2011, 820 Billion
800
barrels of oil were produced globally,
while proven reserves increased from 680
600
Billion to 1652 Billion Barrels
400
200
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Source: BP Statistical Review of the World Oil Industry
5

6. The industry’s ability to generate new resources is astounding!
• Deep water exploration
– Visualizing the subsurface 20,000’ below the sea bed under layers of salt
– Drilling, designing and installing platforms in 10,000’ of water
– Remote operated vehicles doing unimaginable tasks
– Moving towards subsea processing and power generation …
• LNG projects
– The Gorgon project, costing ~$40 billion, with reinjection of produced carbon dioxide
– The PNG LNG project with a pipeline through land owned by multiple tribes secured by a benefits sharing agreement
– The AP LNG project liquefying coal seam methane
• Shale oil and gas
– Horizontal wells with 10,000’ laterals and up to 40 fracturing stages
– Micro-seismic analysis to understand fracturing mechanics
• Oil sands
– Transition to SAGD
– Experimentation with solvent extraction to reduce energy intensity
6

7. But there is a legacy of neglecting communications
“Politics are almost as exciting as war, and quite as dangerous. In war you
can only be killed once, but in politics many times” Winston Churchill 1921
Arthur D. Little report to the NPC on Future Issues , 1995
• “Over the past 25 years, the petroleum industry has faced a series of difficult challenges of significant consequence
for its various stakeholders… From periodic supply disruptions and price volatility, to the rising tide of environmental
regulations, entrenched public distrust, shareholder disaffection and subsequent cost-cutting programs, the barrage
of dissatisfaction expressed from many quarters – customers, communities, shareholders and employees – has left
the industry reactive and defensive.
However, our research shows that the petroleum industry has a rare historic opportunity to reposition itself from
the largely defensive and reactive posture of the past quarter century, into a more positive, proactive and forward
looking force in national and international communities.”
Pat Yarrington, Chevron 2005 (interviewed for Terra Incognita)
• “The industry … abdicated a very important role of communicating to people the value proposition of energy: the
efficiency of the industry; the size of the industry; the reliability of the industry; the relative affordability of our
products over time; and the values of the industry. We’ve also not communicated sufficiently about the
enhancements in the industry, whether it be through technology, or whether it’s through the environmental
footprint. A lot of the progress that’s been made in the industry in the last 20 years we haven’t communicated in a
sustained, comprehensive, impactful way at all.”
Prophet, 2015-2016 Reputation Survey
• “Oil & Gas industry reputation improved substantially in the industry rankings with markedly higher scores for ethics
and openness”
7

8. Renewables have a role, but are not “the answer”
“This is one of those cases where the imagination is baffled by the facts”
Winston Churchill 1941, referring to Rudolf Hess parachuting into Scotland
• Biofuels suffer from serious challenges of “energy Biofuels as a % of total liquids
density” consumption
3.0%
– Land and water requirements
– Energy used in planting, harvesting, processing
2.5%
– Intermittency
• Consequently, they are generally expensive and
2.0%
unreliable sources of energy, requiring subsidies at
a time when government funding is under
pressure 1.5%
– Algae have the potential to address the biofuels
energy density challenge, but naturally occurring 1.0%
algae may need genetic modification
– Onshore wind is close to economic, but requires 0.5%
back-up generation capacity and extensive new
transmission
– Solar panel prices are distressed, but solar power is 0.0%
still not economic 2010 2015 2020 2025 2030 2035 2040
XOM WEO CP WEO NP EIA BP
8

9. All super-majors’ except BP created TSR above S&P and Brent oil
price increase
Company TSR (CAGR) Vs. Indices
14.00% • Over the period 2001-2011, all the super-
majors exceeded the returns provided by the
12.00% S&P 500 and all except BP significantly
exceeded the oil price increase.
10.00%
• Chevron provided highest total shareholder
8.00% returns among the Super-major oil and gas
TSR segment
6.00% S&P500 TSR
• ConocoPhillips also delivered relatively high
4.00% Brent
returns, and ExxonMobil exceeded the group
Rivals Average average.
2.00%
• Shell TSR exceeded Brent crude oil price
0.00% increase, Total TSR was just below the group
average, while BP lagged its rivals

10. Large independents showed more variability with oil/gas mix
Independents’ TSR June 2007-June 2012
OXY 49.0% High oil weighting; balanced portfolio
NBL 29.2% Levant Basin opener; balanced portfolio
West African Margin, Mozambique Basin
APC 14.0%
opener; balanced portfolio
N. America focus; successful shift from gas
EOG 13.1%
to oil
Redeveloper; balanced portfolio but
-2.2% APA
concern over Egypt unrest
-40.9% ECA Over-weighted to natural gas
-48.0% CHK Over-weighted to natural gas. Financial
and governance issues
-60.0% -40.0% -20.0% 0.0% 20.0% 40.0% 60.0%
10

11. For more excitement, there are the smaller independents
Dividend Adjusted Share Prices – Small Independents
400.00%
350.00%
300.00%
250.00%
200.00%
150.00%
100.00%
50.00%
0.00%
-50.00%
-100.00%
CIE PXD ROSE OAS
11

12. Outline
• Myths and realities of the sunset industry narrative
• The energy industry offers fulfilling career opportunities
• Reasons to think the next forty years will be at least as
interesting
12

13. Affordable energy is the foundation on which the economy is built
Crude Oil Prices over Three Eras (2011 $/B)
140.00
Standard Oil TRC/ Seven Sisters OPEC/ NOCs
Standard Oil
120.00
First OPEC Meeting
100.00
80.00
60.00 “State of Insurrection”
in Texas (Gov. Ross)
40.00
20.00
0.00
13

14. The past 40 years have seen astonishing change
OPEC
Nationalization
14

15. Oil industry issues addressed over one career
Real Oil Prices 1966-2011 ($2011/B) Renaissance,
120.00 New Frontiers v2
New Frontiers v1,
Demand Destruction,
100.00
80.00
OPEC Emerges,
Growth Agenda
Nationalization
Privatization Vs. Peak Oil Fears
60.00
Downsizing,
40.00 Suez Virtualization
Canal
Closed
20.00
Environmentalism
0.00
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
BP Management Consulting Bauer
SONATRACH Majors
PDVSA NPC Terra
Supply Chain
LP Modeling Crude oil, LNG International- YPF Argentina Future Issues Incognita
Major Projects
Industry negotiations ization Privatization PDVSA “White Space” Value
Decision Trees Reopening Maxus PMI
Issues Independents CIED Technology Creation
OPEC Market outlook Consolidation Independents Strategies
Diversification PDVSA
Quotas Upstream, & Portfolio growth for Oil &
Association Shell
Messaging downstream Exploration Gas
Pricing contracts Sustainable
strategy Oil sands Research
Carlos Development
Technology
15

16. Twilight of the Seven Sisters era
Majors' Comparative Crude Production, 1950-1970
1966-73: Burning Issues for BP
KBD
6000 • LP Modeling of BP’s global refining
system, then for SFBP in Paris –
Standard Oil adapting to Suez closure in 1967
Shell
5000
BP
and disruption of Nigerian oil
Gulf supplies during the Biafra war
Texaco
4000 Socal • Back in London
Mobil
 What should senior executives
3000 say about rising prices and
negotiations with OPEC
countries?
2000
 Should BP diversify beyond oil
and gas?
1000
 How should BP use decision
trees in capital project s
0
1950 1955 1960 1965 1970
analysis?
Source: British Petroleum and Global Oil 1950-75 by James Bamberg 16

17. Early days of OPEC and National Oil Companies
1974-78: Burning Issues for SONATRACH
• Holding on in 1975 to oil prices negotiated in 1974.
Setting quality and location differentials.
• Negotiating innovative, oil linked LNG and LNG
tanker contracts with U.S. and European utilities.
• Should OPEC index oil prices to recover value lost
due to inflation and dollar depreciation?
First OPEC Meeting in 1960
• Should Algeria reopen to foreign investment in the
oil and gas sector?
• How should OPEC coordinate oil pricing and set
production quotas?
• What would happen to ADL when our client was
kidnapped with various OPEC ministers by Carlos
the jackal?
OPEC Meeting March 1973
17

18. Maturing and evolving NOCs in Latin America
Burning Issues in Venezuela (1980-2000)
• How can we create security of demand for our
heavy crude oil while demand for residual fuel oil is
being destroyed?
– Which U.S. refineries should we buy and how much should
we pay (1990s)?
– How can we minimize market damage from fraternal rivalry
among PDVSA subsidiaries (Lagoven, Maraven, Corpoven,
CITGO)
– Should we IPO CITGO (2000)?
• How can we make the case to Congress to open the
Orinoco tar belt for foreign investment?
• Can we create a world class training function for
crafts, professional and management development
(CIED)?
• Should we consolidate the subsidiaries into a single
PDVSA operating company?
Burning issues in Argentina (1990-95)
• How should we transform and restructure YPF
Argentina so we can privatize it with an IPO?
• How do we integrate the Maxus acquisition?
18

19. Back to North America in the 2000s
Burning North American Issues (2000-Present)
• Should we continue to support our LNG regasification project?
• What are realistic scenarios for natural gas supply, demand and price?
• Should we integrate oil sands into refining through acquisitions or joint
ventures?
• Are our strategies “right” for the changing business environment?
– What are we missing in the “white space” between our functional businesses?
– What overall corporate portfolio will provide greatest shareholder value?
– What should be our Gulf of Mexico deep water strategy and how can we bid successfully at lease sales?
– How do we add most value through technology?
• Is our organization effective?
– How can we improve our supply chain function?
– Are we heading in the right direction to achieve world class project management?
19

20. Outline
• Myths and realities of the sunset industry narrative
• The energy industry provides fulfilling career opportunities
• Reasons to think the next forty years will be at least as
interesting
20

21. Our framework for thinking about value creation strategies
Superior
Shareholder
Superior Management Performance Superior Financial Performance Performance
Growth
Strategy Choices
(e.g. Portfolio Shape)
Leadership and Total
Intrinsic
Organizational Profitability Shareholder
Value
Effectiveness Returns
Operating Model and
Capabilities
Risk
Investor Value Proposition
21

22. So what’s next?
“I always avoid prophesying beforehand because it is much better to prophesy after the event has taken place.”
Winston Churchill, Cairo in 1943
Global Oil Consumption (Excluding Biofuels)
105000 • World oil demand will continue to grow
100000
•
Oil Consumption (KBDOE)
95000 Robust oil prices and technological
90000
advances will open new resource
opportunities world wide
85000
80000 • Natural gas demand will grow strongly
75000
• Secure electricity supplies depend on a
70000
2010 2015 2020 2025 2030 2035 2040
robust generation portfolio with intelligent
infrastructure
XOM WEO CP WEO NP EIA BP
• Oil companies will continue to add
“Dictators ride to and fro upon tigers which they dare not personnel, providing exciting opportunities
dismount. And the tigers are getting hungry.” Churchill, 1937 for international careers
• Social and environmental performance
management will be even more important
• We will understand more about climate
change
• Competition for access to resources will be
intense
• Geopolitics will continue to present more
difficult challenges than geology and this is
the basis for a “dark side” scenario
22

23. Shifting battlefields but continued high competitive intensity
Players Competitive Strengths
Locals (MLPs) Low Costs
Independents Basin Opening1
(e.g. Anadarko) Technology Deployment
Difficult Resources
Redevelopment2
IOCs
IOCs Finance, Technology, Project
(e.g. Chevron) Management Independents1
Stakeholder engagement
Diversified markets
Independents2 iNOCs
INOCs Low cost of capital
(e.g. CNPC) Government support NOCs
Growing local markets Locals
NOC Local political mandate Difficult Places
(e.g. Sonangol)
Note: IOC = Integrated Oil Company; INOC = Internationalizing National Oil Company; NOC = National Oil Company 23

24. Project portfolios are being built around the “new” frontiers
Project Portfolios by Asset Type ($M)
120,000 NA SHALE GAS  ExxonMobil has the most valuable future
100,000
NA SHALE OIL project portfolio, the execution of which will
HEAVY OIL increase the firm’s rate of reinvestment in
80,000 SG growth and thus TSR.
ARCTIC
60,000 – Relatively low weighting to GoM deep water
LNG
40,000 OIL SANDS – Includes Point Thompson requiring AGPL
DW - OECD
20,000
DW - NON OECD  Chevron is highly weighted to (Australian) LNG:
- CONV
XOM CVX RDS BP COP TOTAL – No new oil sands projects planned
Project Portfolio "Shape"
– Will become less “oily” over the next decade
100%
90% NA SHALE GAS  Shell reports a balanced but small portfolio
80% NA SHALE OIL
– Highest proportion of deep water projects
70% HEAVY OIL
60% SG  BP has a legacy of conventional oil projects
50% ARCTIC
LNG  ConocoPhillips has highest weighting to oil
40%
OIL SANDS
sands and to NA oil shales
30%
20% DW - OECD  Total has a high weighting to LNG and Stranded
10% DW - NON OECD (pipeline) gas
0% CONV
XOM CVX RDS BP COP TOTAL
1. Weighted by value 24

25. All the portfolios include substantial technical and location risk
Overall Project Portfolio Risk
8.00
SHELL • Shell is undertaking the highest technical risk
7.00 TOT project portfolio; ExxonMobil the least.
Technical Difficulty
BP
• Total has the highest location risk projects
6.00 (many in Africa); COP the least (US, Canada,
COP CVX
Australia). The same rankings apply for
XOM aggregate risk
5.00
• Shell, BP and CVX have similar aggregate risks
in their portfolios, with ExxonMobil slightly
4.00
2.00 3.00 4.00 5.00 6.00 lower.
Location Difficulty
• We constructed an aggregate risk index (low
Aggregate Risk risk > 1) by averaging location and technical
Risk Index risks for each portfolio. This was used to “risk”
COP 4.56 1.13 the project portfolios, amplifying for the low
XOM 4.86 1.06 risk, high index companies the value of their
CVX 5.18 0.99 portfolios and lowering the value of the higher
SHELL 5.28 0.97 risk portfolios.
BP 5.29 0.97
TOTAL 5.65 0.91
AVERAGE 5.14 1.00
25

26. Commitment to organic growth is an important driver of value
• Results of regressions undertaken to “explain”
TSR1 Value Driver Indices variations in TSR were surprisingly strong.
Past Performance Future
• Results for TSR suggest that over the period 2001-
CAGR Growth3 Returns4 Risked Project
Portfolio5 11, commitment to growth (in terms of organic
capital expenditures/ total assets) was the most
Chevron 12.80% 0.104 0.222 0.248
important driver of TSR: one point increase in the
Conoco-Phillips 12.53% 0.096 0.191 0.259 growth index produces a 2.1 point increase in TSR.
Exxon-Mobil 9.86% 0.077 0.249 0.331 • We assessed the technical and location risks of
each portfolio to derive a “risked” project
Total 8.10% 0.093 0.229 0.180
portfolio value. This variable as a manifestation of
Shell 4.62% 0.088 0.171 0.141 future growth potential was also statistically
significant: a one point increase in its value
BP 1.83% 0.065 0.139 0.138
relative to end 2011 total assets produces a 0.43
Adjusted point increase in TSR.
TSR Regression 2.09 -0.17 0.43
R2=0.94
• Average returns (in terms of EBITDA/Total Assets)
were less important drivers: Higher returns were
inversely related to higher TSR, but the variable
Notes; had low statistical significance.
1. Total Shareholder Return from stock appreciation and dividends paid
2. Alpha is the return adjusted for overall market moves, Brent crude oil price changes, size of the firm and market/book ratio
3. Organic capital spending/ total assets
4. EBITDA/ Total assets
5. (NPV of future project portfolio/ Total Assets at end 2011) * relative risk

27. Thank you
Christopher Ross
Executive Professor, Bauer School of Business
cross@bauer.uh.edu
27

28. Final thoughts
“I don’t know if there will still be five Super-majors in ten years
time, but I do think that if there are, the things they will be
doing will surprise us.”
Ian Howat, Head of Strategy for Total (2005)
“The winds and waves are always on the side of the ablest
navigators.”
Edward Gibbon, Decline and Fall of the Roman Empire (1776)
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