Drillers and Dealers - April 2010

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Ian H. Fay, Founding Partner of Odin Advisors, is quoted in the Oil Council\'s April issue of Drillers and Dealers.

Ian H. Fay, Founding Partner of Odin Advisors, is quoted in the Oil Council\'s April issue of Drillers and Dealers.

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  • 1. D IES RL R L AD N D AE S E LR IU 4 S E S P bi e b u lh d y s w wocu c. m w .l ni o io lc
  • 2. ‘Drillers and Dealers’ Published by: The Oil Council “Engaging Upstream Oil & Gas Communities World-wide” 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. Yours, Ross Stewart Campbell Iain Pitt Chief Executive Officer, Chief Operating Officer, The Oil Council The Oil Council T: +44 (0) 20 8673 3327 T: +27 (0) 21 700 3551 ross.campbell@oilcouncil.com iain.pitt@oilcouncil.com Contact The Oil Council For general enquiries and information on how to work with The Oil Council contact: Ross Stewart Campbell, Chief Executive Officer T: +44 (0) 20 8673 3327, ross.campbell@oilcouncil.com For enquiries about Corporate Partnerships, attending one of our Assemblies and advertising in a future edition of ‘Drillers and Dealers’ contact: Laurent Lafont, VP, Business Development, laurent.lafont@oilcouncil.com Michael Knowles, VP, Business Development, michael.knowles@oilcouncil.com To receive free monthly editions of ‘Drillers and Dealers’ , as well as, discounts to all our upcoming Assemblies please visit our website now (www.oilcouncil.com) to sign up as a Member of The Oil Council. Membership is FREE to oil and gas executives. Copyright and IP Disclaimer ***Any content within this publication cannot be reproduced without the express permission of The Oil Council and the respective contributing authors. Permission can be sought by contacting the authors directly or by contacting Iain Pitt at the above details***
  • 3. „Drillers and Dealers‟ – April 2010 Edition  About The Oil Council and „Drillers and Dealers‟ o Contact Details  Executive Q&A o An interview with Attila Holoda, Managing Director, Eurasian E&P, MOL Plc. Exploration and Production  Giving Birth to Shareholder Value o By Alistair Stobie, Chief Financial Officer, Pan-Petroleum  Our Partners  2010 Global Oil & Gas Survey Results  „On the Spot‟ with our Question of the Month o “What defining qualities and characteristics do oil and gas executives (CEOs, CFOs and COOs) need to possess to lead their company to new growth in today's marketplace?"  The Oil Council‟s Assemblies in New York City and London  Crude Enterprise in Iraq o By Elaine Reynolds, Oil Analyst, Edison Investment Research  “Diary of a Commodity Trader” (Column) – Ahead of the Curve: Getting in Front of the Coming Energy Crisis! o By Kevin Kerr, President and CEO, Kerr Trading International  “The Oil Outlook” (Column) – Crude's Irrational Exuberance o By Gianna Bern, President, Brookshire Advisory and Research  “Golden Barrels” (Column) – Lifestyle Companies o By Simon Hawkins, Managing Director, Omni Investment Research www.oilcouncil.com
  • 4. Executive Q&A With Attila Holoda, Managing Director, Eurasian E&P, MOL Plc. Exploration and Production Talking with Ross Stewart Campbell, CEO, The Oil Council th Date: 11 April 2010 Ross Stewart Campbell (RSC) from which have a production history of more than 30 The Oil Council: Attila thanks for years and are now in a ‟mature age‟. joining us. There are a number of topics that I wanted to discuss with As these fields still hide significant potential reserves you today but if I may I’d like to start that can to be produced, the industry gives plenty of with exploration. As we move into a room for the implementation of new techniques and world where all the ‘easy oil’ has technologies, in order to intensify the fields and to been found, E&P companies are facing a raft of new improve the efficiency of production from them challenges when looking to find and extract oil and (Brownfield developments). gas in increasingly far flung locations and complex environments. MOL‟s upstream portfolio (including INA‟s US portfolio which has been fully controlled by MOL In your opinion what are the biggest exploration since mid-2009) has a solid basis for future growth, challenges facing oil and gas companies and how with sizeable production in seven countries, and are MOL planning on overcoming these? further exploration potential in 15 countries. All these operations leverage off our 70+ year-old E&P Attila Holoda (AH) from MOL: experiences gained in the Central-European region. Ross, the oil industry in the first decade of the 21st century faces a As one of the largest operators in the region we have range of new challenges in the introduced and successfully implemented a wide replacement of hydrocarbon range of enhanced and improved techniques for reserves. In competing for maturing oil fields in the last 40 years. exploration areas, companies have witnessed that the sizes of conventional field For the MOL Group, our main task in the coming few discoveries tend to be smaller and smaller, while years is to maximise the value of our existing they are forced to execute work programs and to upstream portfolio. Our key focuses are; perform operations in harder and tougher environments.  To progress high-return, early-cash generation development projects in CEE, Syria, Pakistan, Kurdistan and Russia; “For the MOL Group, our  To increase our production levels; main task in the coming  To contribute significantly to Group-level EBITDA; and few years is to maximise  All while extending MOL‟s outstanding efficiency the value of our existing to our whole upstream portfolio. upstream portfolio.” To help do this we‟ll carry out extensive conventional and unconventional exploration to further increase our reserve base. Two good examples of this phenomenon are the activities carried out in deep or ultra-deep off-shore RSC: We’ve recently witnessed a record amount of and arctic conditions. But apart from the climatic and M&A and A&D activity in the oil and gas sector as geographical hardships, safety risks are also now companies ‘fight’ to acquire new assets needed to increasingly high on the agenda to a certain degree. fulfil their growth potential. Despite intense conventional and unconventional With this activity burns the age old question of exploratory activities these days, currently 65% of whether companies should focus on organic or the global crude oil production still comes from fields inorganic growth to build their reserves base. www.oilcouncil.com
  • 5. Is exploration still the ultimate key to growth, or, has the past 75 years in E&P activities, or, by applying M&A overtaken it as the leading factor in building creative financing and structuring alternatives. one’s reserves? Let me draw you (and your readers) a few examples AH: In my opinion Ross exploration provides a Ross on our most recent exploration activities: hugely important organic method of value generation for all industry players. But today‟s best and quickest 1. In Hungary, we implemented a new concept in opportunities for growth may come from the M&A our exploration activities in 2006, which resulted marketplace. in an above 70% exploration success ratio [since the initiation of this concept], proving that Companies who aligned themselves to ride out the a mature area can also be important part of an cyclicality of the oil and gas industry are much better exploration strategy positioned to significantly benefit from arising M&A opportunities. 2. In Russia we had 100% success rate in our exploration activities in 2008, where we utilized For those who can apply rigorous strategies in the experiences we gained in Hungary “contango” years and preserve significant financial resources, there are currently multiple inorganic 3. We had one of the world‟s top 10 discoveries in growth opportunities available at very attractive and 2009 (according to Wood Mackenzie) in the hugely discounted prices. Kurdistan region of Iraq, which is one of the most promising regions for growth “...we are continuously RSC: What are your main exploration objectives in the Eurasia region in the short, medium and long- analyzing further term, and what news flow should the industry look opportunities within our out for later this year and moving into 2011/2012? other core regions to AH: We would like to continue our domestic replace reserves at an conventional exploration in our most successful areas but we are becoming more and more focused appropriate risk level.” on several existing unconventional targets (i.e. the Pannonian Basin). If we analyze the last “oil price crisis” at the end of Beside our Hungarian exploration activity we would the 1990‟s, a significant consolidation process took like to enter other Central-European areas, like the place based on accumulated and preserved Romanian, Polish and Croatian exploration arenas. resources, which have been mainly spent right after the bottom of the cycle, providing significant  In the short-term we want to use our [similar] inorganic value generation for those who could geographic, geological and infrastructural survive the crisis. experiences in Central-Europe here. RSC: Looking at your global exploration strategy  In the medium-term we would like to strengthen Attila where geographically is MOL focusing on to our presence in these countries by building up a find new reserves? What particular country new asset portfolio. (countries) do you view as most opportunistic for future growth? And how large ‘a play’ and part of this  Considering long-term objectives we would like strategy is the Eurasia region? to enter in to exploration of the offshore Black Sea, either on the Romanian part, or, on other AH: MOL pursues exploration opportunities in the offshore sections of the sea. We believe that CEE region, in the Middle East, in Central Asia and this region of Eurasia is one of the most in the Northern and Western parts of Africa – promising areas to discover considerable altogether in 15 countries. hydrocarbon reserves. As our domicile region, Eastern Europe, is relatively explored compared to [e.g.] Western Africa and as “Forming partnerships and such it therefore provides little room to further increase our reserve base. strategic alliances have We are continuously analyzing further opportunities had a clearly visible effect within our other core regions (e.g. Western Africa, on the performance of the Middle East, and Central Asia) to replace reserves at an appropriate risk level. oil and gas industry.” We enter certain projects on a case-by-case basis, RSC: On a similar note what production milestones where we see real potential for significant value within the region have you set yourself this year? Are creation, either by utilizing our knowledge gained in you on track to reach these milestones? www.oilcouncil.com
  • 6. AH: This year we would like to stabilize our domestic focuses on shareholder return – of course production (in essence stop falling production rates). typical to IOCs However our medium-term objective is to slightly We utilize this dual role in our partnerships and increase domestic production by developing current, alliances as well. For example as an NOC, MOL has and near-future, discoveries and start work on some taken an active role to unlock the potential in very promising IOR/EOR projects in our more unconventional hydrocarbon resources in Hungary “mature” fields. with the active participation of ExxonMobil. As is widely known [and recognized] about MOL we While as an IOC, MOL is utilizing our ability to have a strong background in field rejuvenation develop certain [technically difficult] assets in methodologies; horizontal wells, infill drilling, 3D Pakistan, where the NOC here didn‟t have the seismic programs, state of the art geological necessary expertise to develop their assets – our modeling, methane and CO2 injection, and improved partnership provided both parties significant results. water flooding. In order to exploit the opportunities arising in the Considering the region I do hope that we can reach currently challenging market environment, we have the pre-mentioned exploration objectives and in built up several strategic alliances recently – with addition that we can start production from each of OOC, INA, CEZ and other MENA partners. the new discoveries we have made. I believe that we are on track to reach these milestones. RSC: I’d like to ask your opinion on four key issues that are currently influencing the mindsets of E&P executives: (i) partnerships, (ii) costs, (iii) technology RSC: What qualities do MOL look for in a potential and (iv) people. partner? And for those companies perhaps looking for new industry partners, what can MOL bring to the Starting with partnerships, how is MOL positioning table that the industry should be more aware of? itself to work with other oil and gas companies? Are you looking to work as JV Partners with other IOCs, AH: MOL has been creating partnerships in the past NOCs and perhaps even independents? What are few years along two different models. the opportunities of partnering MOL on new ventures? And are you always looking to retain In unconventional plays, we seek experienced and operatorship and ownership of any new venture? financially robust partners, while in our conventional plays, where exploration was extended to smaller prospects close to known accumulations, we teamed “If the NOC – IOC – up with other industry players contributing a different approach with special regional know-how. Service Sector is working well together, the case- This approach has helped us decrease industry- specific risks in our unconventional plays. Our by-case supply-demand exceptional success rate in the CCE region in the gaps in oil and gas past couple of years is a clear sign that this was the right approach to take. output can be filled in.” As a Group we have a legacy of over 70 years in oil and gas E&P and in developing partnerships since AH: Forming partnerships and strategic alliances the end of the 1990s. Our experts have proven their have had a clearly visible effect on the performance skills in many projects around the globe. of the oil and gas industry. If the NOC–IOC–Service Sector is working well together, the case-by-case oil The key to their success was the combination of high and gas supply-demand output gaps can be filled in. quality performance with the understanding for our partners‟ culture and needs. It is important to note that in terms of NOC–IOC relationships and partnerships, in MOL‟s operations RSC: For many companies last year was about a dual role can be recognized: streamlining their businesses and reducing costs wherever possible. How can E&P companies look to  On one hand, MOL is the custodian of the reduce their costs without losing their competitive Hungarian E&P sector; owning more than 50% of acreages in Hungary, and contributing approx. 99% of the country‟s production – “...money and energy which is typical to NOCs need to be (re)invested to  On the other hand MOL is building an renew our most important international asset portfolio, has a diversified human resources” shareholder structure, and as a listed company www.oilcouncil.com
  • 7. edge and effectiveness? Are their some examples from within MOL you could share with us? Registration is now open for AH: At times of crisis major oil companies used to our New York City and London regard the closure of weaker fields almost as the only solution. Assemblies. Special discounts In reality, writing off and liquidating human resources for oil & gas companies. Book are such steps whose reinstatement costs cannot, or now at www.oilcouncil.com can fully, be assessed accurately (fundamentally for the time required for reinstatement). involve to the highest possible degree the operators‟ In our endeavour not only to sustain but to develop staff into the continuous process optimisation. the machines and devices that we use, we fight against their depreciation and their replacement RSC: Moving the discussion onto technology Attila, through accurately planned accounting rules, in the past few years a wave of innovative planned refurbishment and renewal. technology has emerged that is now allowing E&P companies to operate successfully in previously Likewise, money and energy need to be (re)invested uneconomical and/or inaccessible oil and gas plays. to renew our most important human resources, since How large a factor will technology be for tomorrow’s such technical and technological challenges, such as E&P companies? developing and adopting EOR/IOR techniques, or, exploring and exploiting the reserves in operation, AH: Generally technology can create a massive are impossible to resolve without them! competitive advantage over those companies that are behind the cutting edge of technology. Technically responsible and financially accountable Nevertheless this competitive advantage can be managers; experts who often possess specialised perceived from at least two perspectives. knowledge; background workers; and technicians; all play a similarly important role in (i) the efficient operation of technological systems and (ii) helping to breed the talents of a new generation who “Competition makes it themselves bring new, fresh ideas, as well as, new compulsory for every paradigms. economic performer to enhance efficiency. Change and innovation Together with the maintenance personnel dedicated are essential in improving to the given technological area, operators have a competitiveness.” joint responsibility to run the process systems, the existing technical devices, machines and equipment at a constant optimum. Firstly that companies who use less sophisticated technology in areas that are accessible to most of One staff member complements the other. They their competition are in a less favourable position must not only intend to fulfil the responsibility they than companies who can apply state of the art of have taken, or the joint necessity they have to technologies. operate the field, but strive to sustain [and even develop] their personal existential status. Here the competitive advantage seems to be very straightforward, like the Olympic motto „Citius, Altius, Personnel, unified in this sense, who breathe Fortius‟, which in this case means that a certain together with the technological systems they run, are exploration project can be accomplished faster, profoundly knowledgeable about each element of the cheaper and more efficiently than those that are run process. Practice from daily operations, gaining on has-been kind of technologies. experiences and developing skills will allow them to filter out the inevitably inherent but superfluous Secondly that companies who work in areas that are elements in our systems, and to discover the only accessible to high-level technology. optimisation potentials, to the smallest details, of all technological processes. In this case new technology is instrumental in achieving any success. If a company does not have Thus, a manager‟s responsibility is not only to track such technologies their efforts will be in vain, and it the realisation of a business plan – prepared with the can be concluded that technology is an essential help of a well-established planning method called part of the game and its lack forms a barrier to Zero Based Budgeting (or ZBB), i.e. an operation success. Suffice to think about the success ratio of case-map designed to the minute detail at asset and exploration ops focusing on unconventional plays. service level, with a constant and continuous State of the art technologies, especially a series of engineering and cost-centre control – but also to technologies logically built along the line of www.oilcouncil.com
  • 8. information acquisition and interpretation can provide a considerable amount of competitive advantage in Join Matt Simmons, Ken Hersh, decision making and profit realization with companies that are in a position to apply them. Ed Morse, Tom Petrie and John Professionals who have the privilege to be Schiller in NYC and join Andy responsible for developing or implementing state of Bartlett, Francisco Blanch and the art technologies also bear the responsibility for making their company‟s decision makers aware of Jeffrey Currie in London. Book the advantages and the risks of the technology. now at www.oilcouncil.com This includes the risks that might come from the inappropriate application of the technology and losing control over its budget. Well-trained experts All companies should be aware at all times of the and state of the art technology go hand in hand. If corporate capabilities and expert skills they need to any of these two prerequisites for success are meet their own strategic goals. missing then failure becomes inherent in the system. For this aim we worked out and implemented a Competition makes it compulsory for every economic transparent and controllable performance evaluation performer to enhance efficiency. Change and system based around a continuous capability matrix innovation are essential in improving which incorporated a career management system for competitiveness. each member of our staff. It is highly important to harmonize the personal “Nowadays the war for futures of your staff (including benefits, packages, talent has become trainings, professionals or managerial careers) with your company‟s own fortune making them aligned to really very aggressive.” common success as much as possible. RSC: If I may Attila I’ll wrap up by asking your one- RSC: Moving finally onto people – many large oil word opinion (bullish, bearish or uncertain) on the and gas companies are struggling to secure skilled future of the following. Bullish, Bearish or Uncertain? talent and we’re already seeing a [growing] shortfall of skilled personal within the industry (particularly RSC: China? engineers and geologists). AH: Bullish Are we, as an industry, heading towards a ‘skills/talent crunch’? How is MOL looking to capture RSC: Russia? and retain skilled E&P staff (both in management and in operations)? AH: Uncertain AH: As I touched on earlier trained managers, skilled RSC: Oil at $100 before the end of 2010? experts and technicians all play an important role in the efficient operation of technological systems and AH: Bearish continuous improvement. To retain them is crucial and a critical factor of the future success of any E&P RSC: Attila, thank you very much for your time and company. your thoughts. We wish you and the team all the very best in reaching your goals. Nowadays the war for talent has become really very aggressive. In this situation our managerial responsibility is to offer our staff a long-term professional career opportunity with personal and professional development. About Attila Holoda: Attila graduated (M.Sc.) from Gubkin University of Moscow, Russia in petroleum engineering in 1989. He has MBA (finance) graduation from Budapest University of Economic Sciences as well. He joined MOL as a production engineer in 1989. He worked in different leading positions in production, operational maintenance and investment until 1999. He headed a Hungarian-Kazakh joint venture, and represented at the same time MOL in Atyrau, Kazakhstan between 1994 and 1995. Since 1999 he held different mid and top level managerial positions in the domestic production and exploration. He is responsible for Hungarian and Russian E&P activities of MOL, as managing director of Eurasian E&P. About MOL: MOL Group is an integrated oil and gas group in Hungary. In addition to Hungary, the company is present in the Europe, the Middle East and Africa region, as also in the CIS countries, with interests in exploration, production, refining, marketing and petrochemicals. MOL Group’s upstream operations expands in Central Europe, the CIS countries, Middle East and North Africa. www.molgroup.hu www.oilcouncil.com
  • 9. BDO – NATURAL RESOURCES BDO’s specialist Natural Resources team provide a wide range of services to clients across the globe. Let us tell you more. A TRULY INTERNATIONAL NETWORK The BDO network is a living network and our oil and gas team work together and meet regularly at BDO’s BDO is the fifth largest accountancy network in the world international Oil and Gas conferences where there are real with over 1,000 offices in over 100 countries world-wide relationships and real personalities – the network is not a (including exclusive alliances of BDO Member Firms). We loose umbrella of firms where every firm is different. The believe passionately in our client’s businesses and the BDO network is one where the partners know each other people behind them. We therefore seek to provide a personally and work with each other on a regular basis to distinctly different professional service to our clients. service their client’s needs. These strong relationships ensure the quality of our work internationally is also OUR INTERNATIONAL OIL AND GAS TEAMS consistent – you can be sure that the advice you receive from our African team will be the same standard as that Our international oil and gas teams are based on five you receive from our Australian team. continents in Australia, Russia, Africa, the United Kingdom and the United States. These five centres of excellence allow us to service our international clients wherever their Our local oil and gas experts have the network of contacts operations take them. Each centre of excellence include to provide you with the range of services you require. partner who are local experts in their jurisdictions and Whatever service you need, wherever your oil and gas provide points of reference for neighbouring countries operations are in the world they will know the person to when working in the sector. help you. 115 1,138 Present in over More than 1,000 115 countries offices 46,035 Fifth 44,035 partners and BDO is the world’s fifth largest staff world-wide* accountancy network
  • 10. OUR INTERNATIONAL OIL AND GAS SERVICE CORPORATE FINANCE STREAMS Our international Corporate Finance teams provide a wide BDO can provide you with the wide range of services range of specialist services ranging from flotations (LSE, you would expect from a major international firm TSX, NYSE, ASX, AIM), due diligence and professional including: advice in relation to mergers and acquisitions. We are also able to provide assistance to companies looking to raise • Assurance private equity finance and fund private finance initiatives. • Taxation • Corporate finance, and FORENSIC SERVICES • Forensic services. BDO has a dedicated and highly experiences international All our services are tailored to the specific needs forensic accounting team who have the insight to help you and circumstances of our clients. to solve the most challenging disputes and litigation. We have a wealth of knowledge and technological expertise to provide you with the right advice to meet your forensic ASSURANCE accounting needs. Our international assurance practice provides our clients We have a strong track record of working with clients in with a robust external audit reporting service which the sector. Our teams forensic accounting services include utilises a consistent audit methodology throughout the expert witness services, alternate dispute resolution, world. Our audit teams spend the majority of their time fraud and financial crime, asset investigation and working with clients in the sector therefore they recovery, anti-money laundering provisions, technology understand your business and the issues you face. forensics and valuations. If it is more than a statutory audit you require we also provide specialist audit services covering PSC contracts, JV requirements or governmental fiscal regimes, on top of WHO TO CONTACT International Financial Reporting Standard conversions, If you are interested in discussing any of our services technology risk reporting and internal audit services. further, require more information on BDO or you require assistance in an overseas jurisdiction please contact: TAXATION Companies operating in the oil and gas sector often have complex cross-border structures and employees who spend long periods of time overseas. It is also becoming increasingly important for companies to ensure they minimise their exposure to costly tax regimes through effective tax planning and for them to also look to incentivise key employees in a tax efficient way. Our tax teams provide a wide range of specialist services covering international tax planning, compliance services through to advising on the structure of share schemes, remuneration and reward planning. This publication has been carefully prepared, but should be seen as general guidance only. You should not act upon the information contained in this publication without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO accepts no responsibility for any loss incurred as a result of acting on information in this publication. BDO LLP operates across the UK with some 3,000 partners and staff. BDO LLP is a UK limited liability partnership and a UK Member Firm of BDO International. BDO Northern Ireland is a separate partnership operating under a licence agreement. BDO International is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity world-wide and no BDO Member Firm is responsible for the acts and omissions of another member. The network is coordinated by BDO Global Coordination B.V., incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located. BDO LLP and BDO Northern Ireland are both separately authorised and regulated by the Financial Services Authority to conduct investment business. BDO is the brand name for the BDO International network and for each of the BDO Member Firms. BDO LLP and BDO Northern Ireland are the Data Controllers for any personal data that they hold about you. We may disclose your information, under a confidentiality agreement, to a Data Processor (Shamrock Marketing Ltd). To correct your personal details or if you do not wish us to provide you with information that we believe may be of interest to you, please telephone (Great Britain - 0870 567 5678 or Belfast - 028 9043 9009). Copyright © January 2010 BDO LLP. All rights reserved. Website: www.bdo.co.uk
  • 11. Giving Birth to Shareholder Value Written by Alistair Stobie, Chief Financial Officer, Pan-Petroleum As I subjected my wife to the provides the capital that allows the wells to be drilled vicissitudes of the latest transaction in and the fields developed. the Stobie household she remarked that transactions seem not entirely The ex-private equity man inside me thinks that a dissimilar to the latter stages of lifetime of investment banking is hardly ideal either. pregnancy; you feel bloated, And this is long before we get into the discussion of immobile, exhausted and can’t wait for the whole who has the right to apply the portfolio approach to thing to be over. Which is exactly the point at which managing risk; the investor or the oil and gas the problems really start. I wasn’t quite sure though company. how ice cream fitted into the analogy. Pan-Petroleum’s recent announced merger with the “I can think of a number Brazilian arm of Norse Energy Corp and subsequent listing to create a cross-Atlantic independent with of companies who have assets in Brazil, Nigeria, Gabon and the Republic of fed frequently at the Congo will, if I may continue to borrow from the analogy above, mark the end of the pains of capital trough before childbirth and the beginning of a new corporate life. creating much by the way Whilst some would suggest that the time to think of shareholder value.” about how others created value was perhaps prior to the transaction, it is of course the nature of life that the process has caused a rethink on what made Access to capital, at more or less the right price others successful in the past. And success in this which is also aligned in its timing and expectations, case is breaking out of the crowded small-cap space is the lifeblood of our sector. It was fashionable for a into the headier realms of the mid-cap space. brief moment in the dark days of early 2009 to talk about the length of the funding runway. The shorter In search of the minnow’s nirvana, shareholder the runway, the higher the cost of capital. returns (read personal enrichment), the small and mid-cap E&P sector is somewhat wedded to deals; Those companies able to source capital relatively farm-in’s, farm-out’s, farm-down’s, portfolio easily, and it’s never easy, are able to focus on rationalisation, the desire for scale and above all the adding value, growing their portfolio and taking out need for capital to feed the exploration and their less successful brethren. Those who struggle development beast. are reduced to farming down earlier than they would like in order to keep going. Deals in this case would seem to be a proxy for value creation. And yet if you were to read the I can think of a number of companies who have fed management bios of a random selection of AIM- frequently at the capital trough before creating much listed companies it wouldn’t be entirely clear where by the way of shareholder value. And I am not sure the art of creating shareholder returns was learnt. that is a criticism. Whilst, subsurface skill (and luck) and execution A day or so of mine was recently spent trying to excellence inevitably play a substantial role, there is merge decision making processes across two a theme that runs through successful companies that companies. Sitting on the table was a weighty capital would suggest that these are necessary but not values tome from an estimable multi-billion market- sufficient conditions. cap independent with an enviable record of executing complex North Sea developments on time and on budget. There was a lot of very good material on what has to be included in the decision gates and how to ensure Nor are they a great place to understand the investor that you are on track between them, but very little on mind-set, or put another way, the mind-set that how to apply risk to the value and whether, as a www.oilcouncil.com
  • 12. small company, the returns would still be than G&A, which keeps the institutional commensurate with our own cost of capital. shareholder-base happy, even when other events are following a more normal oil and gas But does it really matter? My personal list of small emerging market path. companies that became bigger, and in some case really quite big, over the past few years include  There is no correlation between their success Burren Energy, Tullow, Addax and Imperial Energy. and value created through exploration, with one notable and honourable exception I’ve selected these naturally through past personal involvement or because they operate in geographies  Similarly there is little evidence of a combined in which I am interested. You will note there are no focus on low-cost operations – probably North Sea, Asia, or North America focussed because growth was deemed to be more companies – I’m sure plenty of wealth has been important than counting the pennies. created in these places; I just haven’t followed it. One common strand was having a core shareholder base who believed in the vision management was “Strangely, these promoting. It maybe a little farfetched to refer to them as an ‘investor fan base’, but given the hurdles companies also share that can impede progress in our sector having a core one other common group of shareholders who continue to believe in the big picture is as important, if not more so than strand – their CEO did technical skill. not come from a big The investor base won’t stick around if faced with too oil background” many disappointments and it’s clear that they became fans because targets were set and met. I don’t have personal knowledge of all these Beyond that each of these companies is relatively companies; one I do and two others I have followed easy to understand. There was a relative geographic directly or indirectly quite closely. Those I am most focus – extreme in Imperial’s case – and an ability to familiar with shared a common theme of being control one’s own destiny [that is, if you believe that process light, and rapid executive-decision heavy. you can control your destiny in Nigeria and Russia]. These qualities maybe necessary for success but Value could be easily identified in relatively few definitely not sufficient. There are plenty of small assets and a story could be easily constructed which E&P companies which also had rapid executive- spoke to value catalysts. decision making as a key quality, which are no longer with us or reside in AIM’s living dead Cause and effect; but were they rewarded by the category. market for geographic and asset focus, or, was their geographic and asset focus the key to their wealth I have tried to identify a common theme between creation? Strangely, these companies also share companies that have either broken out into the sunlit one other common strand – their CEO did not come uplands of the FTSE250, or been acquired by a from a big oil background and serendipity has NOC or IOC. worked in their favour.  There is some, but imperfect, correlation Written by Alistair Stobie, between sufficient early production to fund more Chief Financial Officer, Pan-Petroleum About Alistair Stobie: Alistair is the EVP, New Ventures and Commercial-designate at the merged Pan-Petroleum - Norse do Brasil company and is CFO at Pan-Petroleum. Prior to Pan-Petroleum Alistair was CFO at Volga Gas, an AIM listed oil and gas producer with assets in the European part of Russia. At Volga Gas, Alistair was responsible for all aspects of the company’ IPO which raised $135 million in April 2007. Before Volga he worked for Baring Vostok Capital Partners, the manager of the First NIS Regional Fund, a leading FSU-focused private equity firm. Whilst at Baring Vostok, he was responsible for the fund’s investment in Burren Energy and represented the fund on the board of directors from 1994 – 1998. After Baring Vostok, Alistair worked for Urals Trading and a Burren Energy subsidiary establishing new business ventures in Russia. Contributing an Article Oil Council Partners have first option on writing articles and papers for inclusion in ‘Drillers and Dealers’. We do welcome other recognised executives, organisations and companies to contribute articles on topical oil and gas matters. Articles must be content-led rather than sales-led. If you would like to contribute an article for a future edition of ‘Drillers and Dealers’ please express your interest by contacting either: Ross Stewart Campbell, CEO, ross.campbell@oilcouncil.com, or Iain Pitt, COO, iain.pitt@oilcouncil.com www.oilcouncil.com
  • 13. *** Oil Council Partners ***
  • 14. 2010 Global Oil & Gas Survey Results 1. What type of company/organisation do you represent? Independent Oil & Gas Company Oil & Gas Consultancy Financial Service Provider (Bank/Advisor/Stockbroker/Investment Dealer) Major Oil & Gas Company Investor (SWF/Institutional/Asset Management/Private Equity/HNWI) Law/Accountancy Firm Oil &/or Gas Service Company National Oil & Gas Company Equipment or Technology Provider Government Official / Regulator Other Insurance Broker or Risk Management Firm 80 2. Are you bullish, bearish or uncertain, about the future of: 70 80 70 60 60 50 Bullish 50 Bearish 40 40 Uncertain 30 30 20 10 20 0 10 National Oil & Gas Companies Major Oil & Gas Companies The US Dollar US Natural Gas Markets Iraq as a major international oil province Mid-cap Oil & Gas Companies Small-cap Oil & Gas Companies Oil & Gas Service Companies Banks Oil Sands 60 35 50 30 25 40 20 30 15 20 10 10 5 www.oilcouncil.com info@oilcouncil.com Oil Council 0 0
  • 15. 20 10 3. What do you expect to see happen to the oil and gas markets in 2010? 60 35 50 30 25 40 20 30 15 20 10 10 5 0 0 A slow, steady and continued recovery A progressive weakening/ deterioration Other Increased volatility and uncertainty 4. Which of the following holds the greatest investment potential in 2010? 35 60 30 50 25 40 20 30 15 20 10 5 10 0 0 Major (blue-chip) Oil & Gas Companies Mid-cap Oil & Gas Companies Small-cap Oil & Gas Companies Oil & Gas Service Companies www.oilcouncil.com info@oilcouncil.com Oil Council
  • 16. 5. Are we likely to see another oil price spike in 2010? 60 50 40 30 20 10 0 Yes No Uncertain 6. What in your opinion will be the peak oil price in 2010? $80 $95 $110 $125 $140+ 7. What in your opinion will be the average oil price in 2010? <$50 $50-60 $60-70 $70-80 $80-90 $90+ www.oilcouncil.com info@oilcouncil.com Oil Council
  • 17. 8. What are the three biggest challenges facing oil and gas companies in 2010? Access to capital and finance for new investment Access to new reserves Manpower crunch / lack of leadership and talent 9. Which of the following will be most important in determining the success of an oil and gas company in 2010? Exploration / drill-bit success Strong cash flow and access to capital / investment Acquisition of new reserves A strong leadership / management team Industry partnerships with governments, advisors and other partners Investor relations and corporate communications Capital and cost management Asset quality and increasing the efficiency and development of existing producing assets 10. Who will be most influential in determining the landscape of the oil and gas industry in 2010? Governments and Regulators Investors 0 5 10 15 20 25 Traders and Speculators Banks and Financiers Major Oil & Gas Companies National Oil & Gas Companies China The USA The Middle East OPEC 0 5 10 15 20 25 30 www.oilcouncil.com info@oilcouncil.com Oil Council
  • 18. 11. Which geographic region now offers the best exploration opportunities to oil and gas companies? West Africa East Africa North Africa and the Middle East North America Central and South America Russia and the CIS Southern Asia South-eastern Asia The North Sea and Norwegian Continental Shelf Other (please specify) 12. In comparison to 2009 will the industry in 2010 see more, less, or the same volume, of: 0 80 70 60 More 50 Less 40 The same 30 20 10 0 IPOs Secondary capital raisings De-listings Asset-level M&A/A&D deals Corporate-level M&A/A&D deals Insolvencies Redundancies World-class exploration successes Oil price volatility Share price volatility www.oilcouncil.com info@oilcouncil.com Oil Council
  • 19. 13. Are banks providing enough capital to ensure the continued recovery of the oil and gas industry? 80 70 60 Yes 50 Yes but more is needed as are better terms and conditions No 40 30 20 10 0 14. What source of capital / finance will be most utilised in 2010 by oil & gas companies? Equity Capital Markets 50 Debt Markets Mezzanine Finance 0 5 10 40 15 20 2 M&A / A&D deals 30 Private Equity 20 IPOs 10 JVs, Farm-ins, Concessions. PSAs 0 Large Strategic Investors Other 0 5 10 15 20 25 30 35 15. Value for money in service provision? Are current service costs: 50 40 30 20 10 0 Significantly over-priced Correct Slightly overpriced for today’s marketplace Slightly underpriced Significantly underpriced 10 15 20 25 30 35 www.oilcouncil.com info@oilcouncil.com Oil Council
  • 20. ‘On the Spot’ with our Question of the Month ““What defining qualities and characteristics do oil and gas executives (CEOs, CFOs and COOs) need to possess to lead their company to new growth in today's marketplace?” “The defining characteristic for leaders in the energy business to have is the ability to manage effectively amidst heightened uncertainty. Simply put, there is a greater list of unknowns than ever before, so leaders must be those who are able to be decisive and provide organisational direction when not all the answers are readily apparent.” ... Ken Hersh, CEO, NGP Energy Capital Management and Managing Partner, Natural Gas Partners (Oil Council Committee Member) “The single most essential quality and characteristic is really mindset based and not complicated at all. The CEO that possesses, or acquires, the unwavering mindset to continuously and exclusively focus on establishing a sustainable competitive advantage in every action or initiative, no matter how large or how small, will unquestionably achieve performance superiority. Such a composite, sustainable competitive advantage will produce superior financial results as a natural by-product.” ... Franz Ehrhardt, CEO and Principle Consultant, CASCA Consulting LLC (Oil Council Committee Member) “In the oil and gas world „what‟ questions normally require an „it depends‟ answer. In the posed question the phrase „new growth‟ may need to be defined and then any likely answer will tend to „it depends‟! It may depend on the stage of the company (explorer, pre-production, producer, domestic, international, multi-location, etc), or on the size of the company (market capitalisation, number of employees, balance sheet, etc). However in very broad terms oil and gas executives need to have vim, vigour, dash and determination. It also helps to sport a Stetson, bootlace tie and cowboy boots!” ... Jonathan Morley-Kirk, Director, Petrokamchatka “Senior management at all oil and gas companies in today's environment needs to be both innovative and flexible in order to steer their organisations toward successful growth, whether it be organic or through strategic asset or corporate acquisition. The true test today for the CEO of a junior or independent E&P company, particularly one with a portfolio in need of geographic diversification, will be in his ability to convince the Board to maintain a nimble attitude towards capital allocation in order to position the company to take advantage of the increasingly active marketplace for assets in certain "hot" areas like the US shale plays, West Africa and several spots in Southeast Asia (Vietnam and Indonesia in particular). If that CEO can approach asset acquisition and/or partnership decisions efficiently and marshal the cash and managerial resources to execute and integrate, the current environment is ripe for deals which could provide for solid growth, enhanced corporate visibility and risk diversification – all potentially very good for the shareholders.” ... Ian Fay, Founding Partner, Odin Advisors (Oil Council Partner) www.oilcouncil.com
  • 21. “Growth is many faceted, from reserves growth, to production in BOE/day growth, to prime license acreage held, to profitability, or more accurately, lowering finding and development costs / bbl produced. Our perspective is identified by the following points below, all of which can be attributed back to the adoption of sound principles of eCommerce:  A CFO needs to have the vision to recognise the latent and un-tapped value in his supply chain, not (just) through driving down vendor costs using his Procurement department as a battering ram, but understanding his supply chain‟s pain points, collaborating with them to ease the pain (if not remove it entirely), and liberate value, which just like cream, will rise to the top when encouraged.  A CEO needs to recognise one of their roles is being the ultimate long-term executive sponsor of driving business process efficiency into their organisation. Challenging the way business is done today, not just electrifying paper business processes, but looking to streamline efficiencies through their supply chain, and even enforcing change management, against the natural human resistance.  All three, the CEO, COO and CFO have a responsibility for shareholder value growth. To do this they need to be able to demonstrate a very high level of transparency in all aspects of the organisation‟s business. This would start perhaps with full SOX compliance, and extend to contract compliance, tendering processes, and the accounting for all cash flow out of the company being simple and clearly identifiable. Having as high a proportion of the business run as eCommerce facilitates this significantly.” ... William Le Sage, CEO, OFS Portal, LLC (Oil Council Partner) "In a timeless way, today's successful oil and gas executives will either posses those characteristics attributed to a Renaissance person, or, have built a team that accomplishes this by sufficiently complimenting one another. They need to be diplomats by nature, whilst being highly calculating, with the ability to intimately integrate their skills by communicating effectively. They need to be both individually and collectively capable in a multidisciplinary sense, thereby bringing together specific industry expertise and experience, technical and otherwise, as well as, a thorough understanding of the financial and commodities markets – past, present and projected." ... Chris Valenti, Energy Investment Banker, Starlight Investments, LLC (Oil Council Member) “Integrity, drive and effective motivational skills are common among top executives, regardless of sector. Leading oil and gas executives, however, are characterized by additional qualities and skills:  Vision – to articulate (and stick to) clear strategies  Boldness – to identify and seize opportunities as yet unexploited by others, but tempered by…  Risk awareness – to take calculated risks, and know when to walk away from a deal  Network – to bring together the right team of experts, financers and advisers both inside and outside the company  Experience – the most successful executives have been in the industry for a long time, and understand the business from the ground up (in fact, from the sub- surface up)  Socio-political awareness – local, regional and global political, environmental and security issues impact oil and gas companies to a far greater degree than many other sectors. Understanding the wider context in which E&P companies operate can mean the difference between success and failure.” ... Afonso Reis e Sousa, Director, Taylor-DeJongh (Oil Council Partner) “Courage and honesty. With the exception of downstream sales, the oil and gas industry produces commodity products – oil and gas. The principal area of differentiation lies in a company‟s reputation for responsible excellence with resource holders. Yet it is often hard to see this differentiation in practice, and the industry as a www.oilcouncil.com
  • 22. whole has at best a tarnished reputation. If a „customer‟ is someone who allows you to make a profit, then, by definition, a „customer‟ is anyone who has the ability to stop you making a profit. I would argue that having the courage to truly engage with these „customers‟ is essential to earn and maintain the license-to-operate. To do so requires honesty, the willingness to listen and, once promises are made, the relentless drive to always live up to those promises. Amongst the myriad of challenges senior executives face, this is one that leverages the most skills – and experience has shown that earning the trust of the public at large is not through technical or commercial „logic‟, but by recognising that people form views based on emotions. If oil and gas executives are unable to engage constructively in this way, and ensure that all employees live up to promised actions and values, reputation can be destroyed overnight, severely compromising one‟s licence-to-operate. The only source of true future value is sustainable profits – sustainable companies are therefore sustainable businesses.” ... Lew Watts, Chairman, Regester Larkin North America (Oil Council Partner) “The defining qualities and characteristics that we look for and that we think executives need to posses starts with their ability to recruit and lead their team, potential joint venture partners and the service companies that will be a part of any project‟s success. An executive with that level of leadership and people skills stacks the odds in their favour. This needs to be followed up with self-discipline and attention to detail to mitigate risk; like pursuing low-cost production options and following through on accountability systems they set up for the teams they work with. The greatest results are delivered by an executive with a relentless tenacity to reach a well defined destination [that they themselves have chosen] and who has the friendly people skills that cause others to want to do business with them.” ... Jess Larsen, President and Senior Managing Director, Katana Oil & Gas Fund (Oil Council Partner) “So you want to start up an oil and gas company? Did you get your team altogether? Did you get a list of everything you needed? Great! Did you remember the soapbox, the slide ruler and the steak sandwich? Running a junior oil and gas company in today's marketplace is no different than it has been in the past. Yes the regulations have been increased, yes the costs are higher, and yes the basins are harder to find but one thing remains...it's about effectively working with different kinds of people towards a common goal. The three best tools an executive team can use for managing people in an oil and gas company are (i) the soapbox, (ii) the slide ruler and (iii) the steak sandwich. i. A soapbox is required to raise oneself up to make an impromptu speech. Every company needs an executive that has the passion to tell the corporate story to investors, analysts, board members, and staff. The vision of success is orated at every opportunity keeping corporate objectives in the forefront at all times. ii. A slide ruler is required to ensure that the facts are correct. This executive has a passion for the empirical facts and calculations. They are an irreplaceable addition to the finance department, the technical team and the board of directors. They keep the dreams in check with reality. iii. A steak sandwich is a Friday lunch tradition in the oil patch. It‟s about actively listening to, and observing, those you are with and those in the room around you. This executive is the one that is asked the hard questions first and is first approached with the new ideas to bring up at management meetings. The interesting thing about these three items is that they cannot be placed specifically into the CEO, CFO or COO roles. The qualities that each item brings to the effective leadership of an oil and gas company has been indispensible for growth in the past and remains so in the future. So my questions are, which one are you and what is your team missing?” ... Chris McLean, President, Stonechair Capital Corp. (Oil Council Member) www.oilcouncil.com
  • 23. “Leadership roles in oil and gas companies need multi-dimensional skills and experiences. Oil and gas is a long- term business. To ensure enduring success, leaders must develop longer term strategic perspectives, which will assist the organisation to navigate during short-term cyclical swings, typical of the industry. More importantly, leaders must have the ability to execute and deliver the strategy in an increasingly complex global business. Given that growth will come from emerging economies like China, India and Africa, leaders must have multi- cultural insights and global work experiences in these geographies – to build organisations aligned to local priorities while maximising shareholder/local government value. Given also the concentration of resources within national companies – who increasingly demand more “value” for their resources and have to serve domestic development agendas – leaders must also have the strategic priority to be aligned with host nations and NOCs. The majority of oil and gas businesses are developed in joint ventures and partnerships. Local partners often assist in developing the business on the ground. Leaders must have the experience and ability to forge win-win partnerships with unity of vision and mutually beneficial objectives, and have the diplomatic expertise to manage any conflicts and differences. Leaders should also be able to strongly articulate and implement standards of corporate governance, ethical values, business principles and HSE without compromise. Leaders must develop local talent to fill senior positions (rather than expatriates) and to also ensure appropriate social responsibility/community development efforts, which are often crucial for projects round the world. Leaders must lead their organisations to “globalise with localisation”, i.e., ensure multi-prong sharing of ideas, best practices and benchmarking. Emerging technologies will hold the key for many of today‟s strategic issues facing the industry, including climate and environmental impact. Leaders must lead their organisations to leverage on these developments and carry out business with minimum damage to environment. Other key areas of expertise required to be successful include: (i) commercial and market access (ii) robust project investment decisions based on sound judgement, economics, screening, risk management and financing, and (iii) execution capabilities, whether in-house or outsourced.” ... Soumo Bose, Former CEO, Gasol “As someone who raises capital for oil and gas management teams from private equity funds, my views mirror those of private equity. The track record of the management team is paramount to private equity investment decisions. Past achievements such as sizable discoveries, raising production and reducing costs are valued. Management teams that have previously built and sold companies for high ROIs and IRRs are also prized, as are ones that have demonstrated capital allocation acumen, making good choices where [and where not] to deploy similar scales of capital as they will steward in the new company. Management teams that have worked for many years together are preferable in order to avoid personality conflicts and allow them to really hit the ground running together. Equally, they should be highly experienced in the region or play type to avoid nasty surprises. A North Sea team now deciding to focus of shale does not fly, and vice versa. Management teams that have invested 30-50 % of their liquid net worth in the company are also more likely to attract private equity, as their interests are aligned with the funds when their financial futures are dependent on the success of the company. Equally, managers of successful private equity backed companies stand to build considerable personal wealth. Drive, vision and passion for building their company is vital, along with intelligence, expertise and interpersonal abilities. After the trials of the last couple of years, funds are definitely also looking for teams that will be adaptable and responsive, but also steady hands and pleasant to work with to overcome challenges together.” ... Emilie Sydney-Smith, Partner, MZ Finance “For publicly listed companies (any exchange), I would venture that an ability to communicate the company's message to the investor base is critical for the executive members. In addition, for all companies (public and private) two key attributes are: (i) a the ability to attract and motivate the right talent (very critical in today's oil and gas world), and (ii) negotiation skills (be it with host governments or partners on concessions).” ... Rafi Khouri, Oil & Gas Equity Analyst, Raymond James “I would add that an ability to adapt to change is vital. The oil and gas industry is sometimes criticised as traditional and unbending, and not open to using new methods of communication, in particular Web 2.0. In times of economic constraint it is a willingness to be open to new ideas that may give a competitive edge.” ... Tracey Dancy, Marketing Executive, RPS Energy www.oilcouncil.com
  • 24. Oil & Gas Company Executives, register now Oil Council online for only $1000 ENERGY CAPITAL ASSEMBLY AMERICAS Matthew Simmons Ken Hersh Tom Petrie Founder and Chairman, Simmons Founder and CEO, NGP Energy Vice Chairman, & Company International Capital Management Bank of America – Merrill Lynch Attendee registration information: Laurent Lafont laurent.lafont@oilcouncil.com +44 (0) 20 3287 3447 For sponsorship or exhibition information: Ross Campbell ross.campbell@oilcouncil.com +44 (0) 20 8673 3327 For media information: Iain Pitt iain.pitt@oilcouncil.com +27 (0) 71 858 1025 26 – 28 October 2010 New York, USA Oil & Gas Company Executives, register now online for only £995 Oil Council WORLD ENERGY CAPITAL ASSEMBLY Jonathan Waghorn Jeffrey Currie Pierre Sigonney Portfolio Manager and Sector Global Head, Commodities Chief Economist, Total Specialist (Energy), Investec Asset Research, Goldman Sachs Management Attendee registration information: Laurent Lafont laurent.lafont@oilcouncil.com +44 (0) 20 3287 3447 For sponsorship or exhibition information: Ross Campbell ross.campbell@oilcouncil.com +44 (0) 20 8673 3327 For media information: Iain Pitt iain.pitt@oilcouncil.com +27 (0) 71 858 1025 23 – 25 November 2010 London, UK
  • 25. Crude Enterprise in Iraq Written by Elaine Reynolds, Oil Analyst, Edison Investment Research With the Iraqi elections of March 7th now over, oil The effects of war and sanctions will quite probably companies will be watching the outcome with have also taken their toll on the oil and gas interest and hoping for a government that can reservoirs themselves. Years of Soviet-style provide stability and continuity. Since the secular engineering and poor reservoir management will party of Ayad Allawi has won by a margin of just two have resulted in damaged reservoirs and seats over incumbent Prime Minister Nuri al Maliki, it permanently lowered recovery factors. Hardware can seems likely that months of post-results wrangling lie be replaced, damaged reservoirs cannot. ahead in order to achieve a new coalition. This, as Donald Rumsfeld would say, is the ‘known unknown’ for the oil companies. “... as Donald Rumsfeld would say, is the Meanwhile, Mr Sharistani wants OPEC to accept 12 million bbl/day as Iraq’s quota, arguing that his „known unknown‟ for nation’s need for reconstruction, and loss of income the oil companies.” over years of sanctions should be taken into account when determining quotas. If accepted, this rate would seriously challenge For the oil companies, this will be just one more Saudi Arabia’s long-held position as swing producer issue to live within the world of oil and gas in Iraq. and force other OPEC members to cut back The lack of a national oil law to guarantee that production or face lower oil prices. However, OPEC contracts will be met by future governments is of Secretary General Abdalla El-Badri has suggested major concern, as are doubts regarding the ability to 4-5 million bbl/day as a more meaningful quota. work in the semi-autonomous region of Kurdistan. Expect trouble at future OPEC meetings. In addition, Iraq’s tough oil minister, Hussein al- But it’s Iraq’s old rival Iran that seems to be most put Sharistani, has driven a hard bargain with the oil out by this potential shifting of power in the Middle companies, insisting that they can take no more than East. How else to explain the brief incursion of $2/bbl. Iranian troops into Iraq last December to occupy the These brutal terms will ensure thin profit margins, al-Fakkah oil field? playing well with Iraqis who are touchy about giving away their oil wealth to foreign companies. Iran relies on high oil prices to prop up support at home, but has also historically received backing from China in the UN to avoid sanctions over its nuclear But he has also set an ambitious production target of programme. China’s motivation has been to secure 12 million bbl/day by 2015, up from current much-needed energy supplies from Iran, but with production rates of around 2.4 million bbl/day. It will new supplies becoming available from Iraq, this may be a huge task to upgrade and replace Iraq’s decrepit and decaying infrastructure, not to mention no longer seem so critical. And so, given the variety of issues at play here, it looks like interesting times resource the manpower required for such a job. ahead for the industry in Iraq. 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. About Edison Investment Research: 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 pr ivate client broker and international investor communities. Edison was founded in 2003 and is authorised and regulated by the Financial Services Authority. www.edisoninvestmentresearch.co.uk www.oilcouncil.com
  • 26. Diary of a Commodity Trader (April) Ahead of the Curve: Getting in Front of the Coming Energy Crisis! By Kevin Kerr, President and CEO, Kerr Trading International As the World begins to show signs of a wasted blaming speculators on running amok has slow awakening from the economic simply taken away from any time spent on meaningful implosion of 2007-2009, the window of conversations about real solutions, or why the price opportunities for getting a handle on spike happened in the first place. energy prices is rapidly slipping away. At $140 we began to hear earnest conversations When crude oil hit $147, most of us who have been about drilling offshore and in Alaska. We saw trading it for a number of years felt that the price was consumers begin to look seriously at hybrid vehicles, not sustainable. Clearly we were correct. and most importantly we saw significant investment in alternatives. There is an old saying that traders use and it was drilled into my head back when I was on the trading Everything from ethanol to solar and nuclear to shale floor at the ripe age of 19. The cure for high prices is was gaining momentum and investor interest. high prices. The same saying holds true for extremely Suddenly as oil prices fell, all of that progress low prices as well. evaporated. The consequences of this will be grave, especially for Western economies that are completely First Blame All the Speculators dependent on foreign oil. When we saw oil prices fall from $147, the unwinding Boom to Bust: Denial is not just a river in Egypt was dramatic and quick. Prices for crude actually got back down to $36 briefly and the hand wringing and Like any addiction, the oil addiction in much of the blaming of speculators commenced. World, especially America, is insidious and one key element that keeps that addiction going is denial. We saw government and regulatory investigations commenced immediately and the result was they Denial is powerful and unfortunately it is leading us uncovered little if anything, except maybe a free right back down the path for even higher oil prices this market doing what it does, trade free. time around. Pain has always been a great motivator and clearly oil at $147 caused pain to consumers and the government, now I think it will take oil at $200 “The consequences of this before we see real angst again. will be grave, especially The reality of Chinese demand is the fact that the for Western economies countries thirst for oil products is growing by at least that are completely 5% a year and likely much more. dependent on foreign oil.” As the populations of both India and China grow their middle classes and continue to purchase cars, better food, and other items, demand for energy will only Prices quickly ramped back up to the $80 level and grow. have been there ever since, regardless of the global economic condition and weak demand and Leadership and a true energy policy for the United oversupply. So what will happen as we start to see demand pick up? It’s a safe bet that oil prices will not go lower. Speculators and all of the new trading products certainly contributed to the volatility in the energy sector but quickly supply and demand brought the markets in line again – that is the entire purpose of price discovery and it worked perfectly. The problem with focusing solely on speculators is that it simply fostered the denial that got us to $147 in the first place. Crude at $90 was, and is, sustainable just with demand and pent up demand as well as growth, even in a slow economy. The reality is that the time we www.oilcouncil.com
  • 27. States is sorely lacking if not non-existent. Policy While more oil maybe in the region it won’t be easy or makers seem to simply be adrift in a sea of problems. cheap to get to. Major drillers like Exxon and BP can’t, and won’t, get involved in projects in Mexico because of government restrictions and costs. “Leadership and a true Other exploration projects from the Arctic to the Gulf energy policy for the United hold promise but also come with a big price tag and States is sorely lacking if even worse they will take years to develop. not non-existent.” The prognosis for consumers is not good for the next decade and if we don’t get serious about getting ahead of the curve on this issue it will surely be the As regulators try to appease the public and find the demise of the Western economy. smoking gun that caused high oil prices, precious little is being done to find real solutions. I recently spoke to CNBC and Larry Kudlow, as well as, Addison Armstrong of Tradition Energy; all are The only good news is [if you want to call it that] a deep in denial about the coming high prices for oil, in "price limit" of about $100 a barrel that likely will only my opinion. stall things temporarily. When crude reaches $100 again economies would likely rapidly switch to alternative fuel sources. “As regulators try to However that demand is unlikely to fall fast enough to appease the public and find match dwindling supplies and as a result, unrest could still occur as people are forced to rapidly reduce their the smoking gun that oil consumption. caused high oil prices, Getting Serious About Alternatives precious little is being done to find real solutions.” The truth is that oil supplies are dwindling and while new oil field discoveries are being made, the costs of extracting that oil will be significant, those costs will Two weeks after this interview, crude oil was $5 higher get passed on to consumers at the pump. and gasoline prices spike up 20 cents or more at the pump nationwide. On hand supplies cannot last forever and key suppliers such as the Cantarell field in Mexico are You can decide for yourself by watching the interview: facing peak oil and dying. Cantarell is down to around http://kerrtrade.com/blog/?p=1034 1 million BPD and dropping, for Mexico the impact will be devastating. The Mexican government gets around The days of cheap and easy to find energy are gone. 40% of its revenue from PEMEX and the oil exported Those of us traders who know that are already ahead from Cantarell. of the curve, and as traders, that’s always a good place to be. The first symptoms of a genuine oil crisis became more and more apparent in 2007 as PEMEX was *** Look out for Kevin’s regular column, which is forced to cut back on exports to the United States. released at the middle of every month. *** About Kevin Kerr: Kevin Kerr is a TV and radio investment advisor, his unparalleled expertise in futures and commodities has made him a regular contributor to news outlets like CNBC, CNN, FOX News, CBS Evening News, Nightly Business Report and many others. Recently, he was even featured on Jon Stewart's The Daily Show. What's more, Kevin has traded commodities professionally for the last 19+ years. Kevin began his career on Wall Street in 1989 acting as a currency arbitrage clerk on the former New York Cotton Exchange and has worked on and owned seats on several of the Commodities Exchanges in North America. About Kerr Trading International: Kerr Trading International is a diversified commodities firm providing education, trading and consulting services worldwide. In the fast paced commodities markets it can be difficult to find someone who wants to take the time to help you understand the potential profit opportunities as well as the risks involved in today's markets. KTI is a full service commodity research company and advisor that always puts its customers first. www.kerrtrade.com www.oilcouncil.com
  • 28. The Oil Outlook April 2010: Crude's Irrational Exuberance By Gianna Bern, President, Brookshire Advisory and Research While the oil industry value chain is generally quite Greek Drama happy with $86 per barrel crude prices, one must ask whether this recent rally is sustainable. On April The Euro has been somewhat volatile in recent 6th crude reached an 18-month intraday high of weeks as the market sorts out reaction to Greek debt $87.09 per barrel. In just the past 10 to 15 days, plans. As a result, the dollar has had some recent crude has increased $4 to $5 per barrel depending strength. On April 7th, the U.S. dollar was at $1.3327 on how you view the situation. to the Euro. I don't think the market is in the clear on the Greek situation. Place this within the context of relatively high U.S. crude oil inventories and it begs the question, is Finally, there has been some recent strong there the fundamental strength in the market? economic data that has been released regarding manufacturing and job creation that has buoyed the Crude Inventories market. The market is looking for any positive economic data even though the jury is still out on For those who follow U.S. crude oil inventories, sustainability. inventory levels have posted 10 weeks in-a-row of inventory growth. Crude Outlook The bright spot in the market has been a fairly I do think the crude market will experience a healthy RBOB / gasoline complex. Gasoline retrenchment in the very near-term. I define this time inventories have begun to come into line with the horizon as the next several weeks. Certainly, over seasonal draw downs as we approach northern the remainder of the year, crude oil prices will still hemisphere summer drive season. have a very good story. As a result, gasoline spot prices on both sides of the As long as economic recovery proceeds, I believe Atlantic have had healthy upticks in pricing. that we will see crude prices in the $90 to $95 dollar per barrel range. Therein remains the wild card. To date, I would characterize global economic recovery “The market is looking at fragile at best. for any positive Without a doubt, Asian economies are leading the economic data even way in terms of growth. The U.S. and European economies are slowly trailing behind. Most though the jury is still economists are placing average OECD GDP growth out on sustainability.” numbers in the 2% to 3% range. These conservative estimates are far below that of emerging market economies such as India, or China that are posting However, U.S. crude inventories are still above the GDP numbers in the 5% to 6% range. All told, crude five-year average of 337 mm barrels. The U.S. oil is enjoying a rally that will generally support the Energy Information Administration just reported yet market into the remainder of the year. another week of inventory builds of 1.98 mm barrels to bring the most recent report to 356.2 mm barrels. While we may experience some near-term retrenchment, l anticipate healthy crude oil prices All things considered, it may be fair to say the crude north of $90 per barrel into the third and fourth market is getting ahead of itself. quarter of 2010. 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 www.oilcouncil.com
  • 29. Golden Barrels April: Lifestyle Companies By Simon Hawkins, Managing Director, Omni Investment Research A cynical institutional investor once said to me that the the economics of exploration, how they balance E&P sector is full of lifestyle companies. That typically portfolio risk and, importantly, how a smaller management have come from Big Oil [and gas] independent can generate attractive farm-in companies because they were frustrated and wanted opportunities. to run their own operation. The lack of M&A over the last two years is a complex They pointed to the lack of M&A in the sector when story. I’d argue that an element of corporate resistance assets were cheap during the credit crunch as being to an unsolicited bid is good business in terms of the ultimate proof that management were too ‘baronial’ maximizing shareholder value. It’s true that assets to achieve the kind of consolidation that many were cheap during the credit crunch as oil plummeted commentators have been predicting for some time, from $147 to $30/bbl and those with low liquidity were limiting value opportunities for shareholders. particularly vulnerable. But in talking to companies throughout the crisis many “I’ve often said that for a were too focused on their own survival to want to take global industry we live in on additional financial, operational and exploration risks by acquiring another business. a very small village.” I’d therefore reject the idea that the credit crunch was an ideal time for consolidation. As an analyst it’s sometimes difficult to get inside the heads of management but I would say this has I think in any industry there are bound to be networks generally not been my experience at all. and alliances (as we have here in The Oil Council), which foster a level of cooperation and even At Omni we talk to a large number of companies in the friendships. I’ve often said that for a global industry we sector. Companies that we consider for corporate live in a very small village. And this is compounded by clients go through an invisible vetting process and as the technical nature of our sector. We have our own part of that we make our own assessment of how ‘Six Degrees of Kevin Bacon’. But it’s not six. Maybe shareholder friendly their management is. it’s the ‘Three Degrees of Aidan Heavey’? That’s how we know that our research adds genuine I can see how the demands of the industry invade value. After all, we help no one by putting lipstick on a personal lives and that has to be a lifestyle choice. But pig. I can honestly say that none of our corporate this does not mean the sector is full of lifestyle clients are lifestyle companies. companies. The charge that management come out of bigger oil Let me know your views at: companies is difficult to refute. But I would argue that goldenbarrels@omniir.co.uk in most cases experience in Big Oil is a good thing, providing a solid grounding in how these companies *** Look out for Simon’s regular column, which is approach the industry, the technology they employ, released at the middle of every month. *** 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. www.oilcouncil.com
  • 30. Regester Larkin Regester Larkin helps IOCs, NOCs, Independents Some of our clients include: and utilities – both upstream and downstream - to Air Products protect and capitalise on their reputation. BG Group For 15 years, we have been pioneering reputation management in the oil Conoco Phillips industry. Our expertise has been honed by helping energy companies maintain Dolphin Energy 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 Dubai Petroleum helped many of the world’s largest energy companies proactively to manage Eni both short and long-term threats to their hard-won global reputations. ExxonMobil Hess Our specialists work with energy companies on a local, national and international basis, providing in-depth analysis, independent advice and Karachaganak Petroleum tailored coaching and training. Operating, National Grid 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 Nexen your business goals, we have a comprehensive range of services to assist you, Oil & Gas UK including: Oman LNG OMV • Reputation risk audits Petro-Canada • Evaluating emerging issues Petroleum Development Oman • Industry benchmark studies Premier Oil • Special advisers to top management Qatargas • Deploying reputation for business growth Shell • Crisis leadership coaching TAQA • Crisis spokesperson training Total • 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. Contact us • Designing and facilitating crisis exercises at country, divisional and group level for worldscale energy companies. Regester Larkin Limited • Conducting a two-year programme to enhance crisis preparedness at one 21 College Hill, London, of the world’s largest gas companies. EC4R 2RP, United Kingdom T: +44 (0)20 7029 3980 Issues management: • Helping an IOC consider its external engagement and media strategy enquiries@regesterlarkin.com related to a major potential project in Iraq. • Advising an oil and gas transportation company on its position during Regester Larkin Middle East industry discussions on proposed new shipping emissions regulations PO Box 77768 • Helping an IOC develop and implement its issues management strategy twofour54, Al Salam Street around a product legacy land contamination issue. Abu Dhabi, United Arab Emirates T: +971 2 401 2585 mena_enquiries@regesterlarkin.com Reputation Strategy and Management www.regesterlarkin.com
  • 31. ‘Drillers and Dealers’ Published by the “Engaging Upstream Oil & Gas Communities World-wide” To receive free monthly editions of ‘Drillers and Dealers’, as well as, discounts to all our upcoming Assemblies please visit our website now to sign up as a Member of The Oil Council. Membership is FREE. www.oilcouncil.com The Oil Council (Head Office) The Oil Council (International) 3rd Floor, 86 Hatton Garden 31 Bell Crescent, Tokai London, EC1N 8QQ Steenberg, 7947 United Kingdom South Africa T: +44 (0) 20 8673 3327 T: +27 (0) 21 700 3551 F: +44 (0) 20 3163 0626 F: +27 (0) 21 700 3500 info@oilcouncil.com info@oilcouncil.com