Asian oil field services; riding a multiyear
investment boom
We believe the E&P investment cycle, globally and particularly in Asia, is on
the verge of a multi-year boom. This report looks at Asian oil services
companies that should benefit from this trend.
Trying to identify long-term, structural themes in the current volatile macro-economic
environment is a dangerous game, but one which could prove extremely rewarding if
done right. This report is an attempt at exploring one such investment theme – rising
oil prices and Asia’s thirst for oil leading to a multi-year boom in E&P investments,
and potential plays on this trend.
First, we draw on the work of our European oil services analyst Thomas Deitz to
understand why the global E&P investment cycle is at an inflection point. Very simply,
cheap oil in the 1990s led to structural underinvestment in E&P, which left the
industry with ageing oil-fields and declining production profiles, as well as falling
reserve-replacement ratios. With demand, particularly from emerging economies,
rising steadily, large scale investments are needed to improve production from
existing fields, as well as to find new reserves to meet current consumption. While oil
prices over US$90/bbl help, most investment projects should be viable even at a
long-term oil price below US$40-45/bbl. Overall, we foresee a multi-year inflection
point in the global E&P investment cycle, similar to that seen back in the mid-1980s.
In the Asian context, the case for a quantum jump in E&P investment in India/ China
is even clearer. Both are heavy net importers of crude oil and are seeing rapid
consumption growth. China’s leadership clearly views the dependence on imported
crude as a potential bottleneck to China’s national energy security and a possible
roadblock to maintaining its rapid economic growth. In India, rising crude oil prices,
combined with imported crude forming over 70% of the consumption mix, have led to
a substantial jump in its oil import bill, which now forms over 25% of its total
imports. India is stepping-up private sector participation through its New Exploration
Licensing Policy (NELP) and expects to see a sizeable jump in E&P activity in the 11th
five year plan (2007-12).
In terms of companies, Anish Desai has updated his target prices and forecasts for
the two largest companies in the Indian offshore rig space, namely Aban Offshore
(Hold, CMP Rs3,878, target price Rs3,955) and Great Offshore (Buy, CMP Rs874.60,
target price Rs1,010). Aaron Ge, our China specialist has also updated his forecasts
for China’s leading oil services company, China Oilfield Services Ltd (Buy, CMP HK13,
target price HK$19).
In addition, we initiate coverage on Shiv-Vani Oil & Gas Exploration Ltd. (Buy, CMP
Rs570, target price Rs800), India’s leading onshore services provider with a diverse
range of service offerings including seismic surveys, well maintenance, work-over,
directional drilling as well as projects in coal bed methane, etc. In order to provide
some context, we have also included brief profiles on six companies not under our
coverage that are related directly or indirectly to the Indian E&P space.

E&P investment cycle on a multi-year
inflection point
Structural under-investment in global E&P over the past decade has resulted
in ageing oil-fields and declining reserve-replacement ratios. IEA forecasts
over US$5.3trn in investment in oil & gas E&P activities over 2005-30.
The structural investment theme in E&P capex is a global phenomenon. Our
discussion of the global trends in this section draws heavily on the work of ABN
AMRO’s European oil equipment & services specialists, particularly Thomas Deitz.
Their coverage of the European/Nordic oil services companies like Technip, Acergy,
CGG Veritas, Saipem, TGS Nopec, PGS, Subsea 7 and, more recently, Aker Kvaerner
should make an interesting read for investors looking for global plays on this theme
as well as a reference point on what the business models of fledgling Asian oil
services companies could evolve into.
Global E&P capex; a very large uptick envisaged in the investment cycle
We believe the global E&P investment cycle is at a multi-year inflection point driven
by the following structural trends:
1) Global demand has been steadily rising with increasing population and more
recently a surge in emerging economies.
2) Structural under-investment in E&P in the 1990s has led to ageing oil-fields with
declining production profiles and shrinking reserve-replacement ratios.
3) Massive investments are needed to improve production from existing fields and
add new reserves if future consumption needs are to be met.
4) With oil prices touching nearly US$100/bbl and higher long-term price forecasts,
the economics of E&P projects have improved significantly.
5) Emerging economies, particularly India/China are seeing rapid consumption
growth in oil products. Both countries are net importers of oil and have
inadequate reserves to meet their future energy requirements. We expect both
countries to step-up their domestic as well overseas E&P capex to acquire
reserves and increase production.
The last investment peaks in the E&P capex cycle were seen in the early 1970s and
1980s and, in our view, 2005-06 would mark the inflection point of a new multi-year
boom in E&P investments.
Oil demand growth
The International Energy Agency’s (IEA) Medium-Term Oil Market Report expects oil
demand to grow from 86mbd in 2007 to 95.8mbd by 2012, which implies a CAGR of
2.2%. Oil demand growth was only 0.9% yoy in 2006 and 1.7% yoy in 2007. In our
view, the IEA estimate is aggressive.
Having said that, assuming oil demand grows by 1.5-2% pa into 2012, the demand
for oil will increase by 7.2-9.0mbd, which is more than double OPEC’s (Organisation
of Petroleum Exporting Countries) current spare production capacity of 2.78mbd.

Contents
O I L & G A S E Q U I P M E N T & S E R V I C E S 3 0 J A N U A R Y 2 0 0 8 2
E X E C U T I V E S U M M A R Y
Asian oil field services; riding a multi-year investment boom 3
We believe the E&P investment cycle, globally and particularly in Asia, is on the
verge of a multi-year boom. This report looks at Asian oil services companies that
should benefit from this trend.
I N D U S T R Y D Y N A M I C S
E&P investment cycle on a multi-year inflection point 4
Structural under-investment in global E&P over the past decade has resulted in
ageing oil-fields and declining reserve-replacement ratios. IEA forecasts over
US$5.3trn in investment in oil & gas E&P activities over 2005-30.
R E G I O N A L / G L O B A L P E R S P E C T I V E
China: The dragon needs fuel to dance 11
With buoyant oil & gas demand in China and tight offshore oil service capacities,
we expect utilisation rates to remain robust and the pricing gap to narrow over
2008-09.
Buoyed by China’s thirst for oil & gas 11
India: The elephant needs to drink too 17
India’s dependence on imported oil has increased from 30% in the mid-80s to
70% in 2006. At 5% oil consumption growth per annum, we estimate this
dependence could rise to 77% by 2012.
Energy underinvestment – India not very different 17
Oil import bill balloons on rising imports and oil prices 17
A P P E N D I X
Alphageo - seismic survey specialist 20
Alphageo specialises in providing 2D/3D seismic surveys to E&P companies in
India and it estimates the value of seismic exploration to be undertaken for just
the NELP V and VI blocks is worth over US$2bn over three years.
Deep Industries Limited - developing Coal Bed Methane (CBM) 22
Deep Industries was established in 1991 and derived about 90% of its FY07
revenues from gas compression services. Deep has been awarded two blocks for
commercial exploitation of CBM.
Dolphin Offshore – diving and marine EPC support 24
Dolphin Offshore has over 25 years’ experience in marine construction and EPC
projects, with a strong niche in diving support services. It is looking to expand its
assets and become a prime contractor for marine EPC projects.
Garware Offshore – offshore logistics support 26
Garware Offshore, incorporated as Garware Shipping in 1976, is part of the
Garware group of companies. Garware Offshore is focused on offshore logistics
and currently has a fleet of four AHTS and three PSVs.
Global Vectra Helicorp – air logistics support to offshore platforms 29
Global Vectra Helicorp is the largest air logistics service provider to the Indian
offshore oil gas industry in terms of fleet size. It has a fleet of over 20 helicopters,
which it uses to ferry crew and spares to offshore platforms.
Jindal Drilling – adding offshore rig capacity 31
Jindal Drilling has an operating alliance with Noble, the second largest drilling
contractor globally. In addition to its two existing jack-ups, Jindal will take
delivery of two new jack-ups by end-2008.
C O M P A N Y P R O F I L E S
Company profiles
Aban Offshore 33
China Oilfield Services 41
Great Offshore 50
Shiv-Vani Oil&Gas Exploration Services 57