the oil council's may magazine

DRILLERSAND

DEALERS

ISSUE 4

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‘Drillers and Dealers’

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Foreword

‘Drillers and Dealers’ is our pioneering free monthly e-magazine for the upstream industry. It is entirely focused on sharing insight, analysis, intelligence and thought leadership across the E&P sector. We hope you enjoy reading the articles our guest authors have so kindly contributed.

Ross Stewart Campbell Chief Executive Officer, The Oil Council T: +44 (0) 20 8673 3327 [email protected]

Iain Pitt Chief Operating Officer, The Oil Council T: +27 (0) 21 700 3551 [email protected]

Contact The Oil Council For general enquiries and information on how to work with The Oil Council contact:

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„Drillers and Dealers‟ – May 2010 Edition

About The Oil Council and „Drillers and Dealers‟ o Contact Details

Executive Q&A o An interview with Jess Larsen, President and Senior Managing Director,

Katana Energy Fund LP

The Oil Council‟s Assemblies in New York City and London

Executive Q&A o An interview with JW Vitalone, SVP, Investment Banking, Oberon Securities

The Finance Forum – Executive Q&A o An interview with Steve Mills, CEO, Abbotwood (Former Head, Oil & Gas, RBS)

Oil & Gas Hedging in 2010 and Beyond o By Mike Corley, Founder and President, EnRisk Partners

Accelerating Your Projects and Wealth with Private Equity o By Emilie Sydney-Smith, Partner, MZ Finance S.A

Our Partners

Executive Summary – Enhanced Oil Resources Inc.

„On the Spot‟ with our Question of the Month o “Which geographical region(s) holds the greatest (i) exploration potential and

(ii) new growth potential for O&G companies in 2010?”

“Golden Barrels” (Column) – Processing the Slick o By Simon Hawkins, Managing Director, Omni Investment Research

“The Oil Outlook” (Column) – Crude Falls on Sovereign Debt Fears o By Gianna Bern, President, Brookshire Advisory and Research

The Gulf Widens o By Elaine Reynolds, Oil Analyst, Edison Investment Research

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Executive Q&A

With Jess Larsen,

President and

Senior Managing Director,

Katana Energy Fund LP

Talking with Ross Stewart Campbell, CEO, The Oil Council

Date: 12th

May 2010

Ross Stewart Campbell (RSC) from The Oil Council: Jess, many thanks for joining us to share your thoughts on today’s markets. Some of our readers might not be familiar with Katana; can you quickly introduce your company and the investments in your portfolio?

Jess Larsen (JH) from Katana:

Thanks Ross, Katana is a Calgary based Private Equity Firm. We invest growth capital into junior oil and gas and renewable energy developers. We typically target what we believe are more reliable returns; limited-exploration risk for oil opportunities

and non-technology risk for renewables projects. Our other soap box is low-cost production like our high net-back Bakken play in Manitoba that provides our limited partners with ongoing disbursement checks. RSC: Looking first at the small-cap (junior) oil and gas sector Jess, what is the role of juniors in today’s oil and gas landscape? And how significant a role will they play in determining the future success of the industry as a whole? JL: Juniors will be responsible for enabling the

progression of our industry. Many young engineers at large firms seem too concerned about protecting their bonuses to be willing to really push the envelope or scrounge for every last drop of oil/gas in a property/field.

In contrast we often see the best talent leaving those firms to start junior companies, where going the extra mile can not only make them millions personally but also very strong rates of returns for their investors. This form of reward usually seems to win when compared to the modestly bigger bonus

and pat on the back approach large firms‟ offer for completing the same work.

- Juniors will always have a significant role to play because they are statistically so much better at finding and proving up new reserve additions than larger producers. For stock prices these larger producers need to replace the oil they pump each year and when they fall short of finding enough reserves the answer is simply to buy up some juniors and top up their [possible] growth reserves. RSC: Many believe in the potential and strong upside of the junior sector but conversely many also believe that the sector is too risky to be involved in. With this in mind would you say Katana has a greater appetite for risk in your investments, or, that in fact you’re geared up for greater growth potential and higher returns on investment? JL: Listen, there‟s no getting around the fact that

many CEOs in this end of the business are total gamblers who want to make their next big bet with your money. Without the right team to verify stories and top-shelf technical talent to confirm reservoir characteristics, it can be very hard to tell the difference between the gamblers and the really great and reliable management teams. That said, so many of the truly great management teams are just not willing to settle for a few hundred thousand a year, riding a desk, when their own track record has proven they can consistently create millions for themselves and others by simply running their own junior company. At Katana we spend a lot of time sorting through the chaff until we find these guys, and it works for us. RSC: What size of return(s) are Katana typically looking to make from an investment and do you have a standard investment period before executing an exit strategy? JL: It takes a lot of deal sourcing to find them but

between cash flow and sale price we typically want to see a project have a 4x–7x upside over maybe five years or so. With these kinds of goals you can see why we favour low-cost production, such as oil

“Juniors will be responsible for enabling the

progression of our industry”

www.oilcouncil.com

wells that only have $20/bbl in costs instead of some of the giant projects that only have $20/bbl of profit.

RSC: In today’s small-cap companies what qualities and characteristics are you looking for in a future investment? How do you separate the wheat from the chaff? Is management the defining key? And what attracts Katana more: an exploration focus, a development focus, a production focus, or a mixture of assets/plays? JL: We want experienced developers Ross. Teams

that know who is doing what in their area of operation(s) and how they can acquire and improve undervalued assets. Our favourites are management teams that can show they have done this before and that have created an entire new opportunity to do it again. We want to fund a team which has all the details worked out and the last thing they need is the money, those are stories that get our attention. RSC: Turning the tables somewhat now, with your niche in the marketplace Jess what are companies who approach Katana typically looking for? Is it merely a ‘capital pit-stop’, or, are they looking for management expertise, technical ability, increased operating capacity, or perhaps a new network of future investors?

JL: Mostly it‟s just the money until they find out what

kind of active partners we are. Once they realize that we‟re not “bleacher” type investors and that we‟re willing to get into it up to our elbows with them they start to view us more like a real business partner, not “just the investors”. This includes being willing to help source third party capital for JVs, or contribute our technical and legal teams at no cost to them in order to preserve capital for oil producing capex costs.

RSC: Due diligence is key in any transaction Jess. Do juniors make any typical (and therefore avoidable) mistakes when looking to attract and secure private equity partners? JL: Ross this is something that the industry could

use some work on. Many teams disqualify themselves early on by not being committed enough to risk their own dollars and pay for a solid third-party evaluation of their opportunity. Capital sources like Katana are typically looking for something that will be reliably profitable. The oil business has profit, the first breakdown comes in how reliably that management team can execute their plan and come up with the results they are promising.

Juniors should put their money where their mouth is and invest more personal capital; proving reliability with third-party reserves verification and recruiting more team members and advisors until they know they have a top 10 sector team. This type of reliability attracts investment. We want to see 100% commitment, unshakable confidence and third-party verification.

RSC: What role should a private equity company ideally play in a management and direction of a small-cap oil and gas company? JL: We think private equity should be the jet fuel in

the small-cap vehicle; more money, more connections, more senior-level strategy. RSC: When we spoke with Chris McLean [Stonechair Capital] earlier this year we discussed the need for some oil and gas companies to look more internationally for investment and partners as some were perhaps guilty of focussing their efforts too much on local and regional sources of capital/service. Are some companies in Western Canada – where a lot of your investments are based – doing enough to reach out to the international capital community and make themselves known? JL: Unfortunately not. We have recently started The

Energy Entrepreneur (TheEnergyEntrepreneur.com) to be used as a tool for making that connection, but it takes real effort if someone wants results. Many claim their dream is more important to them than anything else but then aren‟t willing to pay the price to secure international contacts/expertise and find those experts to ask how it all works. One way would be to go to your New York Assembly this fall where you can meet these kinds of international investors and financiers. These energy capital conferences are a great meeting point to hear real-life stories from veterans and meet advisors [like Managing Directors of large investment banks, consultants, brokers and law

“...many CEOs in this end of the business are total gamblers who want to make their next big bet

with your money.”

“Juniors should put their money where their mouth

is and invest more personal capital. We want to see

100% commitment, unshakable confidence and

third-party verification.”

www.oilcouncil.com

firms] who already know people at the capital sources that a junior would want to get introduced to. RSC: How underexploited is Western Canada is terms of small (but economically viable) oil and gas fields? Would you advise international E&P companies to look more seriously at the region for new E&P plays rather than more exotic E&P opportunities in Africa and Latin America?

JL: There are positives and negatives about

everywhere but the positives in Western Canada are quite enviable: access to skilled labour and service companies support, possibly the best public reservoir data of any country in the world, healthy Canadian banking system for sourcing debt and economic stability, a well developed regulatory a environment, and security are all favourites of ours. RSC: What’s your outlook for the future of oil and gas focussed private equity in 2010/2011? Are we going to see a new wave of investment and the resurgence of their involvement and influence in the industry? JL: With the prospects of higher prices coming,

many more players are already coming to the table. We have had unsolicited calls from large „household name‟ financial institutions looking to start new fund of funds to get into the profits of this business. A lot of people now realise that even though the recession has [we believe] been and gone, our world is out of cheap and easy oil. RSC: With the risk of perhaps revisiting previous ground I’d like to ask your opinion on one last topic: entrepreneurism in the oil and gas industry. Are we, as an industry, doing enough to foster – and even champion – entrepreneurs? Are there ways we can look to reward entrepreneurism more? JL: My personal opinion is that not enough is done

for entrepreneurs. They‟re the reason we have progress and adaptation and they deserve all the help they can get. On the community citizen side, we hope to inspire some of our peers to copy us by starting The Energy Entrepreneur.com, but there are many more things

the rest of us can do; such as run free seminars to give entrepreneurs access to known experts and successful mentors, and have lunch with local politicians to lobby on their behalf. On the business side these individuals are the „soon to be rich‟, they‟re worth investing in by key service providers (financial, legal, etc) so that they can learn to make the money needed to build new businesses and perhaps in turn hire you later in your career. RSC: I’ll wrap up Jess by asking your one-word opinion on the future of the following. Bullish, Bearish or Uncertain? RSC: The Canadian Economy JL: Bullish

RSC: Stephen Harper JL: Uncertain

RSC: Oil over $100 before the end of 2010 JL: Uncertain

RSC: The TSX-V JL: Bullish

RSC: Oilsands JL: Bullish RSC: Thanks for your time Jess.

About Katana and Jess Larsen: Katana provides growth and development capital to renewable and traditional energy producers and projects. His career in the energy industry began by building oil and gas pipelines and has progressed beyond the petroleum industry into the hydro electric and other clean energy production companies. His finance background stems from his time in Mergers & Acquisitions with Citigroup and subsequent services provided for Energy Private Equity Groups and Family Offices. For more information on Katana please visit: www.katanaoil.com

“...these individuals are the „soon to be rich‟, they‟re

worth investing in by key service providers”

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Executive Q&A

With JW Vitalone,

Senior Vice President,

Investment Banking,

Oberon Securities


Date: 11th

May 2010

Ross Stewart Campbell (RSC) from The Oil Council: JW, many thanks for joining us to share your thoughts on today’s markets. To cover off introductions first can you quickly introduce Oberon Securities and your position within it? JW Vitalone (JWV) from Oberon:

Oberon Securities is a New York-based investment bank that works with small and mid-sized companies across a broad range of industries by providing capital formation and M&A advisory services, and assists in obtaining financing through privately

placed equity and debt. The entrepreneurial spirit on which Oberon was founded nearly ten years ago also serves as the basis for our approach of working closely with each individual client to partner with them and create financial solutions that will best help achieve its unique financial or strategic objective. RSC: Looking first JW at the current state of play with oil and gas investment banking, we endured a torrid time in 2008-2009 followed by a record year for many banks and financial service providers in 2009-2010. What is the general sentiment of oil and gas bankers in the US today? It is one of optimism, cautiousness, or, dare we say it bullishness?

JWV: As you point out Ross, 2008 – 2009 was a

torrid time for both capital seekers and providers characterized by a rapid decline in market liquidity and the sharp drop in commodity prices. And as you know that led to a good deal of discussion concerning the possibility of a severe and prolonged contraction in global economic growth and the demand for oil and gas. Those markets subsequently began their recovery as those concerns became less immediate.

As to your question I think oil and gas bankers today are generally optimistic but even so I think it‟s an optimism that might best be considered as „guarded‟. The banker that sees the longer-term oil and gas supply-demand outlook influencing a positive operating environment for oil and gas companies is likely to regard itself as optimistic. However, that banker probably regards the post-recovery financial markets as unsettled and recognizes that the recovery in commodity prices has more or less been the result of improving oil prices with natural gas prices improving less so in the context of increased volatility. In the current environment the banker is likely to guard its longer-term optimism by taking a more selective approach on a near-term basis to its deal participation. RSC: Reflecting on the past twelve months JW do you think the role (and responsibility) of an energy investment banker has changed in any way following the crises? JWV: I‟m not sure the role of the energy banker has

necessarily changed over the past year. Like all investment bankers their role takes on a number of different roles with their client during the course of completing a transaction. However from our recent experience I‟d say some roles are being taken on more frequently. The role of advisor seems to have defaulted to the top of our list. This has resulted from a higher than usual level of constant communication with clients revisiting deal strategies and their likely outcomes, or involving the preparation of responses to an increasing number of additional questions posed by investors/lenders to requests for more detail concerning the information our client has provided. Broadly speaking I think the role of advisor will continue to dominate all others until the capital markets renew their previous comfort with risk. On the other hand I‟m not sure that an investment bank, especially one interested in being successful, will regard its responsibility as something to be

“I think it‟s an optimism that might best be

considered as „guarded‟.”

www.oilcouncil.com

dialled up or down although I suppose some may feel it appropriate to expand or shrink the list of those it regards as having a responsibility to based on the particular circumstances at the time. Let me add that here at Oberon there has been no change to rather high responsibility bar we set when we fist founded the company. RSC: Many analysts commented that the crises removed a number of oil and gas companies from the marketplace that were not built on viable business models and strong management teams. Does the same hold true for energy investment banking? Have the strongest banks/advisors survived; those with the greatest depth of expertise, most diverse business offerings and strongest client relationships? JWV: I think there‟s little doubt that to be a

successful company regardless of the industry requires a viable business model that a strong management team executes well. So yes both would also be characteristic of any successful investment bank. However just as important to the investment bank‟s success is its depth of expertise and strength of client relationships because they speak to the essence of the trust and confidence that its clients and the markets will repeatedly look to. Just as the inefficiencies of certain poorly run companies tend to be obscured by the veil that periods of consistently higher oil and gas prices will provide, periods of “irrational exuberance” can provide the same cover for those poorly run financial service companies. A subsequent crisis or sustained business downturn will have the effect of lifting that cover exposing each industry‟s poorly managed organizations and their inefficiencies. However for investment banks lifting the curtain is likely to also reveal a misplaced trust and confidence. RSC: What should an oil and gas company look for in their financing partners/advisors? JWV: That‟s a great question Ross but also one that

is hard to answer because when all is said and done it‟s the relationship that is established between the oil and gas company and its investment bank that will account for much of a successfully completed capital raise.

What I‟ve found particularly interesting is while it is easy to get management teams all nodding in agreement with that premise, there‟s a good chance there‟s no agreement on what criteria it should consider to determine whether the desired relationship with a particular bank is possible. But because the situation, objectives and financing goals will be unique to each company, rather than offering a list of things to look for in their banker, I can suggest that any company will find helpful clues by listening carefully to information the banker gives about itself and the things it considers important to being a valued partner.

And I can suggest with great certainty that it‟s virtually impossible for any oil and gas company to get an appreciation for the relationship it will have with its banker if the company‟s most important criteria are how that banker compares relative to others and the time the bank suggests it will take to complete the deal. RSC: Moving onto current market dynamics and trends JW, you work internationally but with a large focus on The Americas, what financing trends have you seen emerging in the past 6-12 months, particularly for (i) medium-large independents, and (ii) smaller independents? JWV: I think we‟ll need to see a few more data

points before we can be certain of any particular trend emerging. Our target market is focused on the smaller independents where more often than not when engaged to assist with a capital raise the strategy we present to our client will likely have been strongly influenced by its profitability, balance sheet and existing cap structure. However, considering the general nature of our more recent strategies we have tended to not include reserve-based loans as a possible source of funds because of lenders‟ present level of risk-aversion and the more conservative LTVs now being applied to reserves across all categories. RSC: With regards to demand for capital and supply of capital, is there enough money to go around currently? JWV: Our recent experience involving a couple of

capital raises for small independents would suggest there is. However it also suggested getting an investor [or lender] to part with their money is a

“I think the role of advisor will continue to dominate all others until the capital

markets renew their previous comfort with risk.”

“However for investment banks lifting the

curtain is likely to also reveal a misplaced trust and confidence.”

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different matter as many capital providers continue to approach new opportunities in the context of a relatively lower tolerance for risk. So even though sufficient liquidity exists to fund capital needs, an oil and gas company preparing to tap the capital markets will need iron-clad reserve reports and financials, a well-articulated business strategy backed by a management team capable of executing it, plus a fair amount of patience for the added time needed with more extensive due diligence. RSC: Looking at the companies who have successfully raised capital [and done so with favourable T&Cs] do they exert qualities and characteristics that have benefited them in raising funds and completing transactions more successfully than their competition? JWV: Regardless of their size, those companies that

come to the market with opportunities where the value-added benefit to the company is quickly recognized along with attractive risk-adjusted economics readily apparent to the investor or lender are best positioned for a successful completion of a financing or acquisition. Oil and gas companies approaching the market having a less visible value proposition or economics have ultimately enjoyed a similar success because of a constructive relationship with its banker that enabled the company to convincingly validate its pursuit of that opportunity. RSC: Are there any recent deals in the marketplace that in their own right are either market leading in their innovation / deal-structuring / value creation? JWV: Offhand none of recent vintage come to mind

which I think isn‟t surprising given the generally conservative nature of the industry. On the other hand I think it‟s possible to consider deals like ExxonMobil‟s acquisition of XTO or Chesapeake‟s reordering of it asset portfolio as market leading – either because of their timing or for what they reveal about a company‟s perspective of future commodity prices, its financial health, its current competitive position or its regulatory outlook. RSC: What can small-cap oil and gas companies do better to ensure they can (i) raise capital with more favourable T&Cs, and (ii) complete A&D and M&A transactions to receive optimal deal value?

JWV: We frequently remind the small independents

we work with of the importance a rock-solid pro forma cash flow and production growth projections and evidence suggesting management‟s ability to effectively execute its business strategy has leading up to a successful capital raise or asset transaction. However, more recently and despite the apparent ample liquidity available to fund both development drilling and A&D transactions, we tell those clients that because of an apparent increase in deal flow –

that investors and lenders tell us they‟re now seeing –, solid pro forma projections and the promise of a well-executed strategy are necessary for a proposed deal to make it onto the short list. So within this context capital raises and asset transactions are more likely to involve term sheets or deal valuations that are “competitive”.

RSC: We’ve seen a record amount of A&D and M&A in the marketplace in the past 6-12 months. Do you still believe there is value to be acquired from the range of current assets/companies for sale? Or are we now getting to the point where assets and plays are not only as ‘cheap’ as they were but perhaps ‘more expensive’ than they should be? How inline or skewed are current asset/company valuations?

JWV: Certainly relevant questions but because of the high degree of correlation, directly and indirectly, between valuations of oil and gas transactions (or oil and gas company shares) and oil and gas prices, current and future, I think they need context to be best considered. For example taken from a broader perspective I am less certain of whether it‟s still possible in today‟s market to acquire value, than I might be about whether that likelihood exists for the company that has engaged us to assist with the A&D transaction it intends to pursue. From our initial due diligence and before bringing the deal to market we will have identified where our client sees value resulting from that transaction, and with the synergies or operating efficiencies anticipated as well as the commodity price environment assumed, how and how much value it expects to realize. RSC: If I may JW I’ll wrap up by asking your one-word opinion (bullish, bearish or uncertain) on the future of the following. Bullish, Bearish or Uncertain? JWV: Sure. But because Oberon Securities is a

regulated broker/dealer under provisions established by the Financial Industry Regulatory Authority, or FINRA, I must first preface my one-word responses by mentioning that they are my opinions only and not necessarily those of Oberon Securities. In addition none of my opinions should not be regarded as investment advice nor as a recommendation to buy or sell. Also I may or may

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not maintain a position in an investment related directly or indirectly to the general topics. RSC: Understood JW. First up, Barack Obama JWV: Uncertain

RSC: The US Dollar JWV: Bearish

RSC: Oil Shale JWV: Bullish

RSC: Domestic Natural Gas Plays JWV: Bullish

RSC: Small-cap Domestic Focussed Independents JWV: Bullish

RSC: Small-cap International Focussed Independents JWV: Bullish

RSC: Large-cap Domestic Focussed Independents JWV: Bullish

RSC: Large-cap International Focussed Independents JWV: Bullish

RSC: Canadian Oilsands JWV: Uncertain

RSC: JW, thanks very much for your time and your sharing your thoughts.

About JW Vitalone: Prior to joining Oberon Securities, JW spent nearly 15 years as an Energy sector equity research analyst with Wells Fargo Bank, Wachovia Corporation and Palladian Research covering Oil and Natural Gas Exploration & Production, Oilfield Services & Equipment, and Power Generation companies. JW‟s extensive research experience includes macro analysis of oil and gas markets, fundamental equity analysis and institutional buy-side marketing. Soon after earning a law degree, JW interned with the European Economic Commission as a Charles A. Dana Fellow in International and Comparative Law, where he worked on developing alternative approaches to financing lesser developed countries.

About Oberon Securities: Oberon Securities a New York based financial advisor addressing the financial needs of small and midsize companies across a broad range of industries. Our company was founded by senior professionals who have extensive experience in corporate finance, venture capital, research and operations. Oberon provides creative financial solutions to innovative companies that are seeking a significant market presence in their respective industries. Oberon's professionals have an average of more than 10 years on Wall Street; that combined experience and our market focus allow us to bring a level of service and expertise normally available only to large companies. For more information please visit: www.oberonsecurities.com

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Executive Q&A

With Steve Mills,

CEO, Abbotwood Ltd, and

Former Head, Oil & Gas,

RBS


Date: 13th

May 2010

In the first of our interviews on the financing scene for independent oil & gas companies, Ross Stewart Campbell (RSC) talks to Steve Mills (SM), Head of Oil & Gas at RBS until 2007 and since then a trainer in project finance and the CEO of Abbotwood Limited. RSC: Steve, welcome and thanks for agreeing to talk to us. If my maths are right you had something like a 30-year career in banking before you left to establish Abbotwood.

SM: That’s right Ross. I worked first for

the HSBC Group, had a spell of a few years in a corporate finance advisory “boutique”, which I helped to establish and then went to Sumitomo Bank as it was then. I then had a brief period with Commerzbank before moving to RBS where I became, as you know, Head of

Oil & Gas Project Finance in London. The RBS job was definitely the most interesting and challenging role I have ever had.

RSC: So why leave the world of investment banking to pursue a career in business training? SM: A work-life balance issue I suppose. I had always

enjoyed training and mentoring and I wanted to see if I could make a second career out of it. I wanted to spend more time with my family too before the kids left home. RSC: Where is your work coming from Steve and how significantly did the financial crises and market downturn affect your business? SM: I suspect I’ll answer the first part of your question

as we go along but let me address the second part first because I think it is probably of more interest to your readers. There has definitely been an impact because the raising of debt finance has become

harder. As I’m sure many of your readers know the crisis caused a dramatic shrinkage in bank debt capacity. Some banks who were formerly big market players have been taken over by others so the number of sophisticated lenders has gone down. And there has been a degree of retrenchment on the part of some institutions to markets closer to home. Companies of course still need to raise finance but the banks are no longer beating on the doors of borrowers. We’ve witnessed bank credit processes slow down a bit and credit committees are more difficult to predict. For a couple of years now we’ve been out of the liquid debt market that borrowers enjoyed before the crunch and it’s now much more about getting the deal financed than about shaving the last few basis points off the margin. Borrowers want to know how to approach banks, how lenders do their risk assessment and what they can do to maximise their chances of raising the finance they need. RSC: Does that mean that borrowers – both oil and gas companies and oilfield service companies – dominate your universe of trainees at the moment?

SM: Definitely not. We training and advising a lot of

bankers too. I think there is a definitely a concern on the part of some lenders that there’s a need for a return to basics in terms of careful application of best practice in both loan origination and portfolio management. We’re getting quite a few front-office associates and managers coming in for the basic “toolkit” of risk evaluation, debt structuring and documentation skills. There’s a fair bit of focus too on making sure that the portfolio managers have the right level of training to be

“There is a definite trend towards club transactions with joint underwrites.”

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able to administer and actively manage limited-recourse oil and gas loan financing books. There’s also been a fair amount of interest among banks in the project documentation area – as opposed to finance documentation that is. While banks are reasonably good at arranging training for their staff on loan dox, I don’t think they are always so good on EPC contracts, sale and off-take agreements, insurance documentation and so on. We’ve developed some new products in that area. With some banks being less keen on emerging market risk we’ve also seen a resurgence of the export credit agencies. We’ve had a lot of ECA staff on our courses over the last year or so. RSC: Just how tough do you think the market is for borrowers at the moment? SM: Well you have to remember that I see the market

at one remove, now that I’m no longer a lender day-to-day. So my feel for what is going on comes from conversations with our trainees and with lenders who are still active. The sense that I get is that the market is definitely there for the well managed independent, but some things have changed. Spreads and fees have increased, perhaps not as sharply as in some other project financing areas, but they’re definitely up. Deals are being run more by the book too – in the sense that term-sheets are tightening up. Features that were relinquished by banks having to compete very hard pre-crunch are back in banks’ first-shot term sheets and actually I don’t get the sense that banks are particularly minded or required to negotiate them; for example 12 month debt service reserve accounts. You wouldn’t be surprised to see banks looking for pre-payment penalties either in a market where they will expect borrowers to refinance when margins and fees start to fall. For the moment though the impression that I get is that they are more talked about than used. I’d welcome other people’s comments on this. Some of the more leading-edge products we saw before the credit crunch have now disappeared, such

as loans against undeveloped assets. I think banks are concentrating on good solid borrowing bases for more established players and where they do single field financings they want the deal to be fairly classic in structure RSC: Classic in what sense Steve?

SM: Good quality sponsor, not too high a

concentration in terms of field ownership, credible field partners, debt based on P90 reserves, loan value driven by Loan Life NPV of cash flow over 1.5, that sort of structure. RSC: And on that basis you believe deals can get done?

SM: Absolutely. It means of course that there is more

of an equity requirement than perhaps there was before the crisis. Probably the biggest issue still though is syndication. Smaller deals – say up to €150 million – can be done on the basis of a club of banks. It’s the bigger deals that pose the problems. Arranging banks are still extremely reluctant to underwrite transactions for fear of ending up with large unsyndicated exposures on their own balance sheets. Any underwrite will probably come with market flexibility clauses which allow the underwriters to adjust the pricing and indeed the structure of the deal if this is necessary for them to be able to sell down to their agreed net-take. There is a definite trend towards club transactions with joint underwrites. RSC: Steve thanks for sharing your thoughts with us and we wish you continued success with Abbotwood. As this Finance Forum develops we plan to have input from other bankers, financial officers and advisors and look forward to this feature of The Oil Council becoming a very active forum for trading views and experiences.

SM: Well I would welcome that – particularly if we can

have the experiences and views of a broad spectrum of lenders, borrowers and equity providers who are actively arranging transactions in the market right now.

Abbotwood Limited provides project finance training in the oil and gas, power, mining, infrastructure and PPP/PFI sectors. Its clients include world-scale banks and project sponsor companies, market-leading law firms active in limited-recourse finance and multilateral and development agencies. Steve Mills can be contacted at: Abbotwood Limited T: +44 118 9472166 / M: + 44 7515 660943 E-Mail: [email protected]


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Oil & Gas Hedging in 2010 and Beyond

Written by Michael Corley, Founder and President, EnRisk Partners

Since the NYMEX crude oil futures were introduced in 1983, exploration and production companies have had the ability to hedge their exposure to volatile oil and gas prices. However, for many companies, hedging and risk management can create as many challenges as they are intended to solve. In the past few years we have seen crude oil prices rise from $50 to $147 only to quickly decline back to $35 and then rising back to $75 as this article is being written. A similar history can be shown for natural gas, with NYMEX futures declining from a peak of $13 in the summer of 2008 to under $3 in the fall of 2009 and back to $6 this past winter. In addition, we have witnessed a credit environment like none other in recent memory, which has created many additional challenges for E&P companies. As if price volatility and credit constraints aren’t challenging enough, the industry now faces potential regulatory challenges, disguised as financial reform, that will most likely create additional challenges as it relates to oil and gas hedging. As we all know, predicting future oil and gas prices is very difficult, if not impossible. No matter how sound your analysis it’s simply a very difficult undertaking as there are so many variables that come into play. So what’s an E&P company to do with respect to hedging? For starters, you need to begin by determining your tolerance for risk as well as your hedging goals and objectives. That is, what are you trying to accomplish by hedging? Smoothing out volatile cash flows? Guaranteeing a minimum revenue stream? How much upside price participation are you willing to “give up” in order mitigating your exposure to declining and/or low prices?

Only after you have answered these and many related questions should you begin to determine what hedging instruments, and the related tenor, you should consider employing in any given environment. Swaps, collars, put options and three-way options, among others, are all viable hedging instruments but without proper analysis and planning, an improper hedging program can create numerous challenges as well. In the current environment we can create a strong case for both $50/BBL and $100/BBL, the key to hedging success for E&P companies is implementing a hedging program that “works” in both high and low price environments. While price risk is the “energy risk” (the others being credit, basis, operational and regulatory) that receives the most attention in the E&P business, credit risk cannot be ignored, especially in the current environment. While credit risk is traditionally viewed, as it relates to hedging, as the risk related to a counterparty’s ability to perform, which is most definitely a risk that demands constant and consistent due diligence, there is also another aspect of credit risk that has become prevalent in the current environment. As an example, in recent months we’ve received numerous inquiries from O&G producers that are being forced to find new hedging counter-parties as their current/former counter-party(s) are no longer able to provide them the ability to hedge, most often due to credit related issues. The reasons are many, but among others, here are a few that we are witnessing first hand:

E&Ps’ credit facilities being reduced, which in turn reduces their credit available for hedging

http://www.enriskpartners.com/

www.oilcouncil.com

Banks energy companies reducing / eliminating their trading businesses

Counterparties, both banks and energy companies, reassessing their risk tolerance which has forced many counterparties to severe relationships with their all but their best/largest customers

So what should E&P companies be doing in order to avoid these potential scenarios? Number one, it’s ideal to have at least several potential counterparties. In addition to traditional lenders that offer hedging, there are many energy companies, ranging from boutique trading firms to major oil companies, which provide E&P companies the ability to hedge their exposure to oil and gas prices. Having said that, the process of establishing a relationship with an additional counterparty(s) can take weeks, if not months, so it’s best to begin the process well before you anticipate needing or wanting to execute a trade. On this note, if you need assistance locating potential counterparties please give us a call, we would be glad to make the proper introductions. In addition to price and credit risk, E&P companies may very well be subjected to hedging related regulatory risk in the months and years to come. As has been well publicized in the media, the “financial reform” package being proposed in the United States seeks to move the majority of over-the-counter trading onto exchanges, limits the

ability of “banks” to trade to trade OTC swaps and options, etc. While there are many flaws related to trading in the proposed legislation, the current version does include exemptions for “end-users”, which we believe would include most energy companies, including E&P companies. What is not clear is whether a trade between an E&P company and a bank would have to be cleared via an exchange or approved clearing organization. While we are optimistic that the end-user exemption will allow E&P companies, as well as all end-users, to hedge in the OTC markets as they do today, it’s simply too early to say whether this will actually be the case if/when the legislation is passed. Which begs the next question, if the majority of energy trading in the US moves to a cleared trading environment, will the other major energy trading hubs (London, Singapore and Calgary) follow suit with similar legislation and regulations? Again, it’s too early to tell, especially given the current political environment across the globe. In summary, the coming months and years are going to present many hedging and risk management challenges to the E&P industry. All companies will be well served to create and implement a proper hedging and risk management policy (or to review and reassess your current policy(s) if you already have one in place) which not only addresses price, credit and regulatory risk but operational and basis risk as well.

Michael Corley is the Founder and President of EnRisk Partners, a Houston based energy trading and risk management advisory firm. Prior to founding EnRisk Partners, Mr. Corley worked for several energy consulting firms where he served as an energy trading and risk management advisor to oil & gas producers, commercial and industrial energy consumers and energy marketers. Earlier in his career, Mr. Corley was an independent energy trader and a natural gas options broker at Cantor Fitzgerald. While at Cantor Fitzgerald he also served as a risk management consultant to a natural gas utility company. Mr. Corley began his career at El Paso Merchant Energy where he held various positions in trading, structuring, scheduling and quantitative analysis; covering crude oil, electricity, natural gas, natural gas liquids and refined products. As a subject matter expert, Mr. Corley regularly advises commercial banks, hedge funds, private equity firms and professional services firms on various aspects of energy trading and risk management. Mr. Corley is a graduate of The University of Oklahoma. Mr. Corley can be reached at +1 713 844 6384 or via the firm’s website: www.enriskpartners.com

http://www.enriskpartners.com/

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Accelerating Your Projects and Wealth with Private Equity

Written by Emilie Sydney-Smith, Partner, MZ Finance S.A. The year is 2016. 1,000 E&P executives around the world have just become seriously wealthy. They are also now revered for turning ambitious projects into legendary success stories. They did this by winning their share of the $40 billion worth of the private equity that was allocated to oil and gas companies in 2010 and 2011. Private equity accelerated their success.

Stable, Unconstrained Capital

Many E&P companies go public well before they have the scale to deliver quarter on quarter growth. They then limp along in an anemic, capital-constrained state, fearing dilution, and preoccupied with satisfying the whims of the market, rather than on actual operations or deal-making. What a waste of E&P talent. In contrast, private equity funds generally invest $75 to $300 million with each portfolio company and like to see projects prudently accelerated. No more fragmented capital raises. Private equity’s Limited Partners cannot ask for their money back early, unlike hedge funds and the like that were selling out of perfectly good investments in 2008, because of redemptions.

The Time is Nigh

The stars are now aligning again for this private equity alternative. Private equity is sitting on a $40 billion war chest, dedicated to oil and gas. Other than about $12 billion, the bulk was raised in 2007 and early 2008 – in fact in record amounts compared to previous years. Private equity literally stopped investing for the last

two years, except to prop up existing portfolio companies. For example, in the first half of 2009, around the bottom of the market, private equity invested an additional $2.3 billion into 200 of its existing oil and gas portfolio companies. Given that much of the $40 billion has been now burning a hole in their pockets for two of the seven – ten years that the capital has been available to the funds from their own Limited Partners, and it takes three – five years to build and sell a company for high rates of return, private equity needs to invest that capital soon. If you would like a share, it is time to start securing that capital now. Since last September, we are seeing private equity investing in new oil and gas companies again. Why? Well, their existing portfolio companies have stabilized, so they are no longer focused solely on providing executive support. Their confidence is returning and they are kicking themselves about missing the bottom of the market. The terms on offer are normalizing, as they remember that the best of the best management teams must be properly compensated. They are also being more realistic about risk and opening their minds to exploration and development projects again, after being wholly preoccupied with production last year. Plus, the newly minted deals are creating much needed market metrics, and a sense of urgency to keep up with their competitors.

Partners with Aligned Interests

Instead of thousands of public market investors, private-equity backed companies only need to manage the expectations of one main investor – one that really understands its business. Many private equity fund managers were previously very successful E&P executives, so they know how to identify like-minded leaders. They often have their own geologists or engineers on staff to provide extra back-up in determining who can best discover and produce oil and gas. Private equity managers do not only bring capital to the table. They are so ingrained in the industry that they can also bring exceptional new assets, projects, joint venture partners, personnel and

“The stars are now aligning again for this

private equity alternative. Private equity is sitting on

a $40 billion war chest, dedicated to oil and gas.”

www.oilcouncil.com

technical ideas. They are like a member of their portfolio company’s executive team and are fully invested in the success of the company, but do not require a salary, or part of the management profit. The most important thing is to view it as a partnership and to have a shared vision of how to develop the company and its assets, just as you would with your fellow executives.

Double Dip Wealth Creation

The biggest misunderstanding about private equity is usually about dilution. Given that all the equity needed by the company is committed upfront by private equity, subject to juicy new opportunities, there is no dilution along the way. This contrasts with public equity raisings where your equity ownership gets diluted many times (death by many cuts). In fact, for oil and gas executives, their equity ownership may even out in the end between the public and private cases. With private equity, the company equity is divided up pro rata between the technical valuation of the pre-finance company and the capital being invested, with no upfront promote. However, with public companies, your equity is all you have – unlike working with private equity, where

you get to double dip. It is a big double dip: often 20 – 25% of the profits, once the company is sold.

Cubic Double Dip

In fact, working with private equity delivers a cubic double dip for the management team. If you are working with the optimal amount of capital to accelerate your dream business plans, you are generating a return on a larger base. If you are an E&P executive looking to accelerate your projects and wealth, while partnering with investors who are talented peers, you should consider accessing your share of the $40 billion of private equity currently available.

MZ assists small to medium sized oil and gas exploration and production companies around the world to raise capital, particularly private equity, utilising time-tested, proven methods. Emilie can be reached at: [email protected]

“The most important thing is to view it as a

partnership and to have a shared vision of how

to develop the company and its assets, just as you

would with your fellow executives.”


Oil Council Partners

www.oilcouncil.com

Enhanced Oil Resources Inc. TSX-V – EOR www.enhancedoilres.com

Executive Summary Enhanced Oil Resources Inc. (TSX-V Exchange Symbol EOR.V) is a Houston based oil company that owns, operates and produces oil from 3 legacy oilfields in the Permian Basin of eastern New Mexico. The Company’s vision is to become a leading energy producer in the Permian Basin through development of its oil reserves by utilizing technology improvements such as well down-spacing, fracture stimulation methods and, longer term, through CO2-EOR enhanced oil recovery. The Company’s independent engineering consultants have estimated that these 3 legacy oilfields have produced only 55 Million barrels of oil from a total in-place resource of approximately 320 million barrels. By utilizing modern technology improvements including full field CO2-EOR these fields could produce an additional 60 Million barrels of oil and, once developed, could produce in excess of 10,000 barrels of oil per day. Enhanced Oil Resources is a profitable company, producing an average of 520 barrels of oil per day at the end of Q1 2010. The Company has assembled an asset base of legacy oilfields that have considerable potential for reserves and production growth through redevelopment of these assets by well down-spacing and enhanced oil recovery processes. The Company purchased the oil fields for less than 10 cents a barrel of potentially recoverable oil, initiated and completed a successful CO2 pilot flood, commissioned and received independent reserve reports on the EOR-CO2 oil potential and secured a near term supply of CO2 through a gas delivery contract with Kinder Morgan CO2 Company, L.P. With the CO2 contract now in hand Enhanced Oil Resources has put in motion the development of the full CO2 flood that is projected to increase production from current levels to over 4,500 barrels per day within 4 years. Enhanced Oil Resources Inc has initiated the re-development of the Milnesand field in preparation for CO2 injection that is scheduled to begin no later than August 2012. The re-development includes up to 64 producers and 89 injectors. The re-development plan begins by decreasing well spacing from 40 acre spacing to 20 acres spacing to increase reserves and production not previously accessed by the broader well density. The systematic program would consistently increase daily production up to the injection phase and then increase it once again once injection starts. Estimated production over the initial infill development program is:

Date New Wells /

Quarter BOPD

Q4 2010 5 800

Q1 2011 6 1000

Q2 2011 6 1200

Q3 2011 6 1400

Q4 2011 6 1600

Q1 2012 6 1800

Q2 2012 6 2000

Q3 2012 6 2200

Image of Permian Basin, Eastern New Mexico, USA

St. Johns He/CO2

Permian

Basin

Enhanced Oil Resources Inc. TSX-V – EOR www.enhancedoilres.com

CO2 Injection starts during the 4th Quarter of 2012 with peak CO2-EOR oil production increasing by an additional 3,500 BOPD in Year 4 (2016) of the CO2 flood.

Enhanced Oil Resources Inc. Asset Base Permian Basin – Oil – Eastern New Mexico 1. Milnesand- San Andres – Roosevelt County, NM – 6,000 Acres

Discovered in 1956. 93 mmbo in place. Recovered 11 mm bbl oil (mmbo) to date

Proved: 2.0 mmbo; Probable: 4 mmbo; Possible: 8 mmbo for 3,000 acre project

Total field potential under full field CO2 flood: 14 mmbo

2. Chaveroo- San Andres – Chavez County, NM – 28,000 Acres

Discovered in 1952. 180 mmbo in place. Recovered 23 mmbo to date

Total field potential under full field CO2 flood: 34 mmbo 3. Crossroads (Siluro-Devonian Unit)– Lea County, NM – 800 Acres

Discovered in 1942. 50 mmbo in place. Recovered 22 mmbo to date

Proved Developed Reserves 0.8 mmbo

Total EOR field potential under full field CO2 flood: 11 mmbo 4. St. Johns Field –Helium/CO2– New Mexico & Arizona

Discovered by the Company in 1994; 36 wells drilled to date

Potentially the largest undeveloped field of Helium in North America

In place resource of 62 Bcf Helium; 15 Tcf CO2

3rd party reserve estimates 26 Bcf Helium; 6 Tcf Co2 Current Focus: Increase oil production through infill drilling of San Andres Reservoirs Milnesand and Chaveroo

Potential for 250 20-Acre infill wells

Capex per well: $500,000

Initial Production: 40 bopd

Cumulative production: 38,000 barrels per well

IRR 60%

Peak Production under infill drilling:5,500 bopd Recent Operational and Corporate Highlights

Executed a 5 Year CO2 supply agreement with Kinder Morgan CO2 Company, L.P.

Increased YE 2009 Proven & Probable oil reserves by 1300% to 4.5 mmbo

Increased oil production in 2010 by over 300 %

Generated positive cash flow for 4th Q 2009 and 1st Q 2010 Contact Information:

Barry Lasker President, CEO and Director [email protected] Don Currie, Director, Investor Relations [email protected] +1 604 488 1514




www.oilcouncil.com

‘On the Spot’ with our Question of the Month

“Which geographical region(s) holds the greatest (i) exploration potential and (ii) new growth

potential for O&G companies in 2010?”

“Any significant exploration potential for IOCs is rapidly diminishing due to the continuing – and expanding – effort of key producing and highly prospective resource countries to keep full control over their resources, and/or, to extract previously given concessions back from IOCs. These “repatriations” are frequently acts of blatant blackmail, i.e.: Russia, Kazakhstan, Venezuela, Bolivia, etc. Consumer countries [like China] have now entered into the bidding for the few remaining prospects open to IOCs with offers that are strictly politically motivated (for a variety of reasons including creating markets for consumer goods and trade agreements, political

alliances and energy source protection) and have no resemblance of any minimum economic returns typically required by IOCs, have cleaned out most of the opportunities for the IOCs. State-controlled or state-owned companies are also willing to take much higher risks than reasonable IOCs can afford, i.e.: in Iraq or bypassing and ignoring sanctions in countries like Iran and Syria, etc. Then there is the challenge of NOCs that expand beyond their own borders and avail themselves of Government-to-Government deals that are outside the reach of IOCs, i.e. Malaysia, etc. There are certainly some prospects for the IOCs left, especially in areas that require unique expertise to extract the resources at acceptable risks and expenses – i.e.: Golf of Mexico, North Sea, West Africa, Alaska, etc. – as well as non-traditional resources like, sour gas, tight gas, oil sands, shale oil, super heavy and sour crude, all of which however have substantial economic and environmental challenges. Finally, those historic opportunities for IOCs requiring their unique expertise have been virtually eliminated by the respective expertise gained by the NOCs and by the considerable expansion of the services of the Oil Service Companies to whom much of the respective IOC‟s expertise has been outsourced during the recent 1-2 decades. The pie of opportunities has significantly shrunk. However, for the truly innovative operator and oriented niche companies there are still a few attractive pieces left that have to be targeted with a matching of unique skills with unique opportunities. I wish I could be more optimistic, especially since I am still holding plenty of IOCs stock, but the longer term outlook for the IOCs looks bleak in upstream.”

... Franz Ehrhardt, CEO and Principle Consultant, CASCA Consulting LLC (Oil Council Committee Member)

“Areas which were previously closed with proven hydrocarbon plays offer the greatest exploration potential. Developments in technology can unlock vast new resources that are not being targeted. Iraq/Kurdistan, Libya and the US Eastern Gulf of Mexico & East coast are the most prominent examples of areas which were closed for political reasons. Environmentally sensitive areas such as the disputed zone between Norway & Russia and the Norwegian Nordland 6&7 areas offshore Lofoten both offer great potential. New ideas and play concepts are always going to be important. The old maxim “oil is found in the minds of people” is key. Analogues are often important in identifying new play types. In Morocco, Canamens has accessed a complete play fairway based on an analogy where we are evaluating opportunities that have not been explored previously. In another part of North Africa we have identified a stratigraphic play with significant potential.

www.oilcouncil.com

Technology is also opening up new oil and gas resources. Over the last 15 years the use of sophisticated seismic undershooting of salt canopies in the deep water Gulf of Mexico, and development of new seismic processing algorithms for pre-stack depth migration to create high quality imaging of sub-salt structures have proved very important. Application of 3D seismic in proven hydrocarbon basins where it has not been previously applied will dramatically increase success rates, and enable imaging of plays not yet targeted. Canamens is applying this in western Kazakhstan, where seismic attributes will be used to evaluate Cretaceous and Jurassic channels.” ... Greg Coleman, CEO, Canamens Energy including the thoughts of colleagues John Pickard, Vice President of Exploration and Peter Manoogian, Vice President of Business Development (Oil Council Members)

“2009 was characterised by economic uncertainty and falling oil prices which actually saw global offshore expenditure decrease by 5.0% to just over $230bn. As the oil price and economies have begun to recover, we expect to see confidence creep back into the industry with slightly higher E&P budgets with offshore spending forecasted to reach just over $233bn. We see regions in the deep water arena continue to play a major part in the portfolios of the major IOCs (such as Total, Shell and BP) and some NOCs (Petrobras and Statoil). Regionally, the focus will remain on the deep water „golden triangle‟ (the African, Gulf of

Mexico and Brazilian areas) which will represent 79% of deep water spend in 2010. The emergence of Asia as a significant deep water region should not be overlooked. Asian deep water expenditure in 2010 is expected to reach $1.6bn – with the main developments to occur off Malaysia and Indonesia. Shell‟s Gumusut and Chevron‟s Gehem & Gendalo, for example, are scheduled to come on-stream in 2010. Whilst there is substantially more production from onshore areas than offshore, onshore areas have been relatively well explored and have been exploited for much longer with far more fields in production. Offshore production is now increasing and will continue to rise in the future especially as more deep water fields come on-stream. There are challenges however. The tragic incident at the Macondo well in the US Gulf of Mexico is illustrative of the danger and technical difficulties of operating in deep environments. While the fallout on offshore operations in general remains to be seen, there is no doubt that the industry and governments will react to the incident with increased legislation.”

... Andrew Reid, Managing Director, Douglas Westwood

“As a successful international oil finder with 30 years of experience on most but not all continents, I think my perspective will be found of some interest. The question is oddly phrased, as “exploration potential” is not something that can be realised in the seven months remaining in 2010. Growth, however, can be viewed as reflecting where attention is about to focus. Let‟s go through this at the continental scale:

North America: unconventional and then shale gas have revolutionised exploration activity there this last decade. What about fractured and dolomitised limestones? All this could be dwarfed by the opening up of the Atlantic and then Pacific shelves. Never forget the Cook Inlet.

Central America: will Mexico ever be open to the foreign risk capital it needs? Cuba could yet lead the way. In the rest of the Caribbean, evolving tectonic models nudge us towards countries and island territories, many with little by way of precedence for material discoveries.

South America: if we write-off Venezuela, the issue becomes almost one of defining space to swing the proverbial cat in investment-friendly countries such as Colombia and Peru. But no one shows any intention of drilling my pet prospects there, because they are further up the risk-reward profile than capital-constrained operators have been prepared to contemplate this last decade. Watch the large hydrodynamic play out in the sub-Andean basins. In slightly less attractive countries such as Brazil and Argentina, there is still a great deal to be done, provided regulations don‟t stifle innovative activity.

www.oilcouncil.com

Africa: the littoral and deep shelf off West Africa continues rightly to surprise, and with so many unexplored zones along that trend, will carry on doing so. As to East Africa, although I have been proven wrong several times already, I still feel uncomfortable with this as a major focus area; offshore makes more sense than onshore. The southern half of the continent is still so underexplored, one hardly knows where to start; this is for the longer term. North Africa will continue to bubble away, but it is hard to see any marked changes to the status quo there. Oh to have a free hand to explore in Libya again!

Europe: the geopolitical paradigm sets the pace here, demanding constant re-evaluation of the most studied basins on the planet. Both CBM and unconventional/shale gas could have great futures, if costs can be kept down and prices rise, almost irrespective of resource materiality. Still great conventional opportunities along the Atlantic margins of Iberia, Ireland and Norway.

FSU: such a shame that political and legal issues get between foreign capital and some of the greatest untapped reserves on the planet. This is no more likely to improve in the next decade than the last.

Middle East: the highlight here is Kurdistan. Those who entered early and built the relationships are going to see the rewards. But my “fantasy exploration playground #1” is still Iran.

South Asia: great things have been achieved in India this last decade; they could be continued if the game were raised in the fold belt of the north-eastern states, in and around Bangladesh.

East Asia: so competitive, but the Philippines has so many un- or under-explored basins.” ... Dr Martin Keeley, President, Cascadia Hydrocarbon Incubator Funds and CEO, Finavera Gas (Oil Council Member)

“In some ways, as in geology, the past holds the key to the future. The exploration hot spots of recent years have been Brazil, the US Gulf of Mexico, Angola/Congo, Ghana/Uganda, Iraq and Norway. Although these are places for larger volume success, they also bring their own challenges either in terms of fiscal regime/contracts, politics, water depth/cost and obviously competition. All of those areas will provide production growth in the short-term but some will also provide exciting discoveries in the future. Iraqi Kurdistan is one of those promising area: onshore with low geological risk and at the low point of the political cycle, ready for a bounce in asset prices and further discoveries.

New exploration hotspots may open up, subject to wildcat success, from ongoing programs in Greenland, the Falklands and East Africa. The latter in particular is also very promising, with the whole African rift valley and the Indian oceanic margin still at an early stage of exploration. Exploitation contracts to develop discovered fields in Iraq and Venezuela look commercially challenging, but the potential oil volumes are huge, hence will continue to attract the interest of the industry. Unconventional sources have obviously seen massive growth in the US, Canada and Australia. The significant unproven unconventional gas potential in Europe, China and India could provide a long-term source of clean energy, feeding growing economies in China and India, or diminishing European dependence on Russian gas. In that respect, the forthcoming exploration of the shale gas play in Poland is of particular interest.”

... Lionel Therond, Head, Oil & Gas Research, Fox-Davies Capital (Oil Council Member)

“From a new growth potential, Colombia has shown over the past five years that it can provide very interesting exploration potential. In addition to smaller size fields (double digit million boes), high-impact exploration potential exists both offshore as well as in the llanos basin. Albania has an interesting sub thrust belt play unfolding right now (Petromanas). Off-shore Indonesia is another area of interest (although Exxon might not agree after their last two wells there). While not exploration, Alberta's oil sands could prove to be a large area of growth going forward.” ... Rafi Khouri, Oil & Gas Equity Analyst, Raymond James (Oil Council Member)

www.oilcouncil.com

“I feel that the next “big” thing will lie in deep water offshore Brazil. Whilst most of the noise is concentrated around the Santos Basin the, not-so-widely-discussed, subsalt areas of the Campos Basin – which are still largely unexplored – have the potential to be a prolific and exciting area for explorers.”

... Rajat Kapoor, Deputy General Manager, Business Development, Essar Oil Limited

(Oil Council Member)

"North America and Africa may hold the greatest potential for oil and gas companies in 2010, albeit for different reasons. Technological advances will continue to enhance the prospects of shale gas in North America. The abundance of shale gas reserves mean significant growth potential for operators in the US and Canada. Eventually, this „gas rush‟ is expected to carry over to other continents, though that is unlikely to happen in 2010. The deep water potential of the Gulf of Mexico, indisputable just a few weeks ago, may be limited in 2010 given the BP oil spill, which has lead to a backlash against offshore drilling in general. Africa offers significant exploration potential. Ghana‟s new Jubilee field, expected to come on line late 2010, has estimated reserves of 1.2 billion barrels. Tullow and Heritage estimate that Uganda may have reserves of up to 2 billion barrels. A range of countries, including Sao Tome, Gabon and Mozambique, are in the process of licensing significant exploration properties. However, oil companies operating in Africa must be prepared to face challenges stemming from political uncertainty and limited infrastructure."

... Shamshek Asad, Head of Research, Taylor-DeJongh and ... Eugene Zamastsyanin, Associate, Taylor-DeJongh (Oil Council Partners)

“2010 is of particular interest from an exploration perspective due to operational activity in a number of regions that are largely unexplored. Early news from the South Atlantic has been somewhat mixed. Turning to Greenland, whose latitude is further north than the Falkland Island is south; Cairn Energy‟s summer programme of exploration drilling will be keenly watched. North Africa and the ME hold the largest growth potential for 2010. The brightest spot is Iraq which will be resurgent and command significant industry resource and expertise. Certain countries in South America, West Africa and Central Asia also offer significant upside.

Looking forward beyond the current year, alternatives, in particular tar sands, will look attractive if commodity prices increase further in 2010. Canada will once again boom. Countries such as Venezuela, Mexico, Russia, Nigeria and Iran have considerable potential to unlock should they offer more favourable business environments. Libya is a good example of the industry‟s ability to re-energise a market in response to a positive change in energy policy.”

... Colin David, International Business Development Manager, Senergy

(Oil Council Member)

“East Africa is becoming an obvious first choice for E&P companies looking for high potential projects. In fact, East Africa holds very large areas that have only been sparsely explored and largely underexploited and that are showing today the highest potential in the African continent. For example most recently with the Uganda Lake Albert basin (700 mmboe reserves estimates), the huge gas discoveries in Tanzania and Mozambique (i.e. Anadarko‟s Rovuma basin February 2010 discovery), as well as, the Morondava basin in Madagascar with the multi-billion heavy oil discoveries (Bemolonga and Tsimiroro onshore discoveries currently under feasibility assessment by Total and Madagascar Oil), and the recent light oil discovery from Sunpec (October 2009, South West Madagascar, reserves not communicated yet).

www.oilcouncil.com

As more and more mid-cap and major E&P companies invest here, MOCOH understands this huge potential and has decided to be part of the East African upstream development and success by exploring the very prospective onshore acreages of Madagascar. We‟re currently considering deploying more resources in this region for the future.” ... Michael Hacking, Managing Director, MOCOH SA (Oil Council Member)

Which geographical region(s) do you feel holds the greatest (i) exploration potential? “Demand for new fossil fuels has increased dramatically over the last few years, partly due to the need of the Chinese and Indian NOCs to secure energy supplies to support their GDP growth projections. This will likely result in a global search, including an increase in M&A activity, in parallel with exploration efforts continuing into deeper waters offshore West Africa, Brazil and India. In particular, SE Asia (where I have been working for the last two years) still holds tremendous potential despite the intense drilling activity over the last 20 years. The MOC‟s and NOC‟s can still focus on new deep water exploration (such as the Makassar Straits and Papuan Basins), mid-caps continue to discover new fields on the shelfal regions and onshore, where new entrants can focus on low-cost onshore exploration, near-term development opportunities and even reworking “old” plays with new concepts.”

Which geographical region(s) do you feel holds the greatest (ii) new growth potential for O&G companies in 2010?

“I work for a small company which has the ability to compete within a niche play in SE Asia. Despite the large number of active players, opportunities are abound for companies that are willing to take a technical risk of new play concepts, and willing to take a commercial risk regarding “delivery”. The latter includes regulatory delays in terms of permits and approvals, plus uncertainty about commodity prices especially when monetising gas discoveries. However, many SE Asian Basins are under-explored, especially in terms of deeper Tertiary plays. There are still frontier basins that have limited seismic and no well penetrations which are currently attracting renewed attention from new entrants (and even MOC‟s in the deeper waters). The region appears to have emerged from the global financial crisis relatively unscathed, and in recent months M&A activity has increased – including the acquisition of Black Gold by Niko, the purchase of Nations Petroleum assets and new entrants like KrisEnergy making an immediate impact, to name a few. This is of course within a backdrop of continued farm outs, licensing rounds and ongoing exploration activity.”

... Shaun Richardson, Director, Far East, Exploration, Harvest Far East Pte Ltd (Oil Council Member)

Rystad Energy – ‘Drillers and Dealers’, May 2010

May’s Question of the Month:

“Which geographical region(s) holds the greatest (i)

exploration potential and (ii) new growth potential for O&G

companies in 2010?”

Resources (Mmboe)

Which geographical region(s) holds the greatest

exploration potential:

Figure 1

Source: UCubeTM – a proprietary, global upstream database developed by Rystad Energy – a Norwegian upstream consultancy firm.

Which

geographical

region(s) holds

the greatest

exploration

potential:

According to

expected yet-to-

find resources in

licensed areas

and expected

expenditure in

exploration

activities by the

world wide O&G

community,

Rystad Energy

expects South

America (Brazil)

to hold biggest

exploration

potential in 2010

followed by

North America

(US) and the

Middle East

(Iraq).

Resources (Mmboe)

Which geographical region(s) holds the greatest

exploration potential:

Figure 2

Which

geographical

region(s) holds

the greatest

exploration

potential:

The

corresponding

exploration

expenditure is

revealing a

somewhat

different picture,

were exploration

expenditure in

the US is

markedly higher

than for example

Brazil and the

Middle East

In immature

basins like

offshore Brazil

the exploration

efficiency per

invested US$ is

higher than in

the more mature

provinces like

North America

and Europe


Resources (Mmboe)

Which geographical region(s) holds new growth

potential for O&G companies in 2010

Which

geographical

region(s) holds

new growth

potential for O&G

companies in 2010:

If asset interests

held by national oil

companies

(NOC/INOC) are

excluded from the

dataset and we only

focus on entitled

conventional

resources (i.e. exc.

unconventional and

government take in

production sharing

agreements) and

investigate resource

base (as per YE09)

for the individual

regions by a life

cycle palette, it is

evident that North

America and Russia

provides the overall

largest resource

base available for

non-government

controlled

companies.

However, if the

focus is on

undeveloped

resources rather

than production,

Australia and West

of Africa is more

attractive


UCube introduction

Advisory Firm

Global Databa

ses

Research

Products

Consulting

Services

• UCube is a database for complete information access, analyses and decision making for the global

upstream oil & gas industry

• Provides field by field bottom-up reserves, production, financial figures and a range of additional

decision parameters with a time span of 200 years

• Contains 70,000 oil and gas fields and licenses and more than 3,000 companies.

UCube Benefits

• One integrated and easy-to-use database with instant graphs, maps and tables

• Complete global coverage of oil and gas including unconventional, NGLs, US onshore and yet-to-find

resources

• Forecasting of production and economics on asset level, aggregated along all dimensions

• State-of-the-art OLAP cube* technology enabling extremely quick slice & dice of data

• Easy export to PowerPoint and Excel for producing presentations and reports

UCube – Multi-Purpose Tool

• Multi-use – one database with flexibility for a variety of purposes within strategy and business

• Macro overview; Explore global production and oil economics by geography, owner, life cycle or

facility

• Competitor intelligence: Get immediate overview on competitors portfolio and cash flow situation

• Deal screening; Find targets for acquisitions or farm-ins from a wide range of search criteria

• Benchmarking; Compare companies on dimensions like production, reserves, exploration or

economics

• Valuation; Get immediate valuation of assets and portfolios globally.

• Oil service market: Map future markets for oil service broken down by operator, facility type and

geography

• Exploration analysis: Understand exploration trends and see acreage

For more information contact:

Knud Nørve,

Senior Partner,

T: +47 67 11 83 85

[email protected]


www.oilcouncil.com

Golden Barrels

May: Processing the Slick

By Simon Hawkins, Managing Director, Omni Investment Research

BP's first quarter analyst conference call felt a little like visiting a sick relative in hospital – trying to process a mix of human emotion and the reality of a situation you really didn’t want to happen. It was a week after the explosion of the Deepwater Horizon and as Byron Grote, the company's CFO, came to the end of talking us through the numbers the call was opened up for questions. At that point we were all wondering if it really was 'ok' to ask about the things we were most worried about, like what exactly happened? How serious is the situation? How long until it gets better? And, the big one, despite being deeply concerned about the human tragedy we really did need some clarification on who's picking up the bill.

The questions were generally respectfully sombre and the answers confirmed and clarified that yes, BP is responsible for the cleanup and no, there was no third party insurance so the company is basically liable for everything. Inevitably, as questions got deeper, we got fewer answers as the company still had limited information. As I type, we are another couple of weeks into this, BP has had $30 billion wiped off its market value and there are still a lot of unanswered questions.

The growing slick threatening the Louisiana shores has become a metaphor for the dark shadow the incident has cast across the whole sector. We have a little more information about what caused the accident and, as companies appear before two US Senate panels, some initial finger pointing has started. But we still don't know just how bad this catastrophe is going to get and, critically, how BP is going to stop 5,000 b/d from further devastating the ecology and economy of a beautiful coastline, which I now feel lucky to have enjoyed on holiday just a few months ago. A number if things still don't add up and probably won't for some time. For me, the biggest question is this: if BP has all the right processes in place, how can a leading company in an industry that prides itself in the way it manages risk, fall down what today seems to be a bottomless chasm of exposure? Zooming out, is it possible this kind of exposure exists right across the sector? What if it were to happen to a smaller company? What is the 'right' size of company to engage in deep-water drilling? Should we be linking such exposure to market capitalisation? What are the implications for investors? The way BP responds to this tragedy will tell the world a lot about the corporate character of Western oil companies and this in turn will have an important influence on the global opportunities for the industry and investors. In many ways Tony Hayward is not just leading what used to be Europe's largest oil company but right now he is bearing a responsibility for the whole of the industry. As if containing oil gushing into the Gulf of Mexico and processing the slick wasn’t enough.

Let me know your views at:

[email protected]

About Simon: Simon is Managing Director of Omni Investment Research. Previously, Simon held senior positions at UBS and Dresdner Kleinwort, having been ranked number one by

Thomson Extel for his coverage of the European Gas sector, number two in European Oils and three in European Utilities. About Omni Investment Research: With over 70% of the UK E&P sector now under coverage Omni Investment Research is the only independent research house that focuses exclusively on the global oil and gas sector.

“...how can a leading company in an industry that prides itself in the way it manages risk fall

down what today seems to be a bottomless chasm

of exposure?”


www.oilcouncil.com

“…the risk and fear of a sovereign debt contagion is far worse than the fear

of an actual Greek sovereign default itself.”

“This is a shot across the bow to get your respective economic house in order sooner rather than later.”

The Oil Outlook

May 2010: Crude Falls on Sovereign Debt Fears

By Gianna Bern, President, Brookshire Advisory and Research

Over the course of several days, crude oil prices proceeded to fall almost $10 per barrel, as the markets continued to weigh the consequences of a spreading European sovereign crisis. Given that Greece is a relatively smaller economy, I am not overly concerned about a potential default. I tend to view the Greek drama situation as a wake-up call for the UK, US, and other major economies with considerable budget deficits. On April 27th, Spain, Portugal, and Greek were furthered downgraded by one of the major rating agencies and placed on Negative Outlook triggering the fall in both equity and commodity prices. So what does that mean for crude prices? It means that expectations of a global economic recovery may be postponed as markets now encounter and digest yet another crisis. If a global economic recovery stalls, looming sovereign downgrades have the potential to put downward pressure on crude oil prices. It is also important to note that Spain, Portugal, and Greece were all placed on Negative Outlook.

This signifies that further downgrades may be imminent, within the next year, if these countries don’t take considerable measures to improve their economies to the satisfaction of the rating agencies. This is a shot across the bow to get your respective economic house in order sooner rather than later.

At worst, sovereign defaults have the potential to drag down commodity markets along with them. Think Russian default or Asian economic crisis of the 1990’s. Prior to this correction, crude oil prices were getting ahead of themselves at $86 per barrel. At $75 per barrel, crude oil prices are still healthy and permit the industry to continue investing. Furthermore, the Contango spread has increased as Cushing and Oklahoma crude oil inventories increase. The result of this now has Brent crude trading at a premium (over $4 per barrel) to WTI. Storage becomes a strategic advantage in these situations where potential arbitrage opportunities may be present. Inventories levels on the US side of the Atlantic are currently 10 million barrels above the five-year average of 349.9 mm barrels. Given that there is ample inventory of crude and refined products, a market correction was expected. Over the near term, I anticipate continued market volatility until the European sovereign issues stabilize and a resolution implemented. What is becoming readily apparent is the risk and fear of a sovereign debt contagion is far worse than the fear of an actual Greek sovereign default itself.

About Gianna: Gianna Bern is a registered investment advisor and President of Brookshire Advisory and Research, Inc. About Brookshire: Brookshire is an investment advisory firm focused on energy investment research, risk management, and credit portfolio management with clients in Europe, Latin America & the U.S: www.brookshireadvisoryandresearch.com

http://www.brookshireadvisoryandresearch.com/

RegesterLarkin

Reputation Strategy and Management

Regester Larkin helps IOCs, NOCs, Independents and utilities – both upstream and downstream - to protect and capitalise on their reputation. For 15 years, we have been pioneering reputation management in the oil industry. Our expertise has been honed by helping energy companies maintain their license to operate in the aftermath of many of the UK’s most high-profile oil industry incidents (eg: Sea Empress, Braer, Buncefield). We have also helped many of the world’s largest energy companies proactively to manage both short and long-term threats to their hard-won global reputations. Our specialists work with energy companies on a local, national and international basis, providing in-depth analysis, independent advice and tailored coaching and training.

Whether you want to protect your reputation in the face of local concerns, global issues or full-blown crises, or capitalise on your reputation to achieve your business goals, we have a comprehensive range of services to assist you, including:

Reputation risk audits

Evaluating emerging issues

Industry benchmark studies

Special advisers to top management

Deploying reputation for business growth

Crisis leadership coaching

Crisis spokesperson training

Media and family response training

Crisis exercises and simulations

Examples of our recent work in the energy sector

Crisis management:Advising a supermajor on its external communications when an oil tanker ran aground in ecologically sensitive waters.

Designing and facilitating crisis exercises at country, divisional and group level for worldscale energy companies.

Conducting a two-year programme to enhance crisis preparedness at one of the world’s largest gas companies.

Issues management:Helping an IOC consider its external engagement and media strategy related to a major potential project in Iraq.

Advising an oil and gas transportation company on its position during industry discussions on proposed new shipping emissions regulations

Helping an IOC develop and implement its issues management strategy around a product legacy land contamination issue.

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

Some of our clients include:

Air Products BG Group

Conoco Phillips Dolphin Energy

Dubai Petroleum Eni

ExxonMobil Hess

Karachaganak Petroleum Operating,

National Grid Nexen

Oil & Gas UK Oman LNG

OMV Petro-Canada

Petroleum Development Oman Premier Oil Qatargas

Shell TAQA Total

Contact us Regester Larkin Limited

21 College Hill, London,

EC4R 2RP, United Kingdom

T: +44 (0)20 7029 3980

[email protected]

Regester Larkin Middle East

PO Box 77768

twofour54, Al Salam Street

Abu Dhabi, United Arab Emirates

T: +971 2 401 2585

[email protected]

www.regesterlarkin.com

www.oilcouncil.com

The Gulf Widens

Written by Elaine Reynolds, Oil Analyst, Edison Investment Research

In a world where National Oil Companies control access to much of the prolific petroleum regions of the world, and with returns squeezed until the pips squeak, where can an oil major go these days to replace reserves and grow production? The answer is the Gulf of Mexico, which continues to throw up surprises, with new plays and large discoveries featuring regularly on the news wires. In particular, the emerging Lower Tertiary play has generated interest, with Petrobras expected to bring its Cascade and Chinook projects on-stream later this year, Chevron moving ahead with its Jack discovery and BP announcing its three billion barrel Tiber prospect barely six months ago. So the commencement of production from the Shell operated Perdido hub in March is significant, as it is the first to do so from this new play in a technically challenging area. Floating in almost 8000ft of water and designed to produce 100,000 bopd and 200 mmscfd, the ultra deep water production technologies that have made Perdido possible were not available as recently as 10 years ago.

The performance of the hub will be watched closely by an industry determined to keep innovating its way to growth, and a string of projects will learn from Perdido’s successes and mistakes. For the majors, operating in a region where technology is king plays to their strengths, and this,

combined with the predictable fiscal regime of the US and easy access to markets, ensures continuing investment on a large scale. Indeed, Congress has bent over backwards to accommodate the oil companies, with a 1995 bill that gives royalty relief for deep water exploration estimated to add up to $53 billion in future royalties. And now prospects are opening up in the relatively underexplored eastern part of the Gulf of Mexico, with BPs Tiber and, most recently, Shell’s Appomatox discovery, underpinning the belief that there remains significant reserves to be discovered in what many thought was a mature province. Even President Barack Obama wants more of it, saying in March he wants Congress to lift a drilling ban in the eastern Gulf of Mexico in a move to unearth more home-grown oil and gas. With the US Minerals Management Service estimating up to 41.5 billion barrels of undiscovered, recoverable oil and 207 trillion cubic feet of undiscovered natural gas in the area, it’s little wonder that the majors love the Gulf of Mexico. Postscript: As this article went to press, it is likely that the aftermath of the explosion on the Deepwater Horizon rig will have lasting ramifications for the industry in the Gulf. In the first instance, the potential environmental impact on Louisiana’s coastline will put pressure on Obama to keep the drilling ban in place in the eastern Gulf of Mexico. In addition, once the cause of the explosion is understood, the industry will also need to review its operational procedures, and any resulting changes will most likely make drilling in the Gulf even more costly and challenging than before.

About Elaine Reynolds: Elaine is an oil analyst at Edison Investment Research. Prior to joining Edison she had fourteen years experience as a petroleum engineer with Texaco in the North Sea and Shell in Oman and The Netherlands. Edison is Europe’s leading independent investment research company. It has won industry recognition, with awards in both the UK and internationally. The team of more than 50 includes over 30 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 250 companies across every sector and works directly with corporates, investment banks, brokers and fund managers. Edison’s research is read by every major institutional investor in the UK, as well as by the private client broker and international investor communities: www.edisoninvestmentresearch.co.uk

“For the majors, operating in a region where

technology is king plays to their strengths”

http://www.edisoninvestmentresearch.co.uk/

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