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The Official Publication of The Oil Council :::   ::: February 2011 Issue
Shaping the future.
We need energy to power our future and         Wintershall is working hard to find and
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technology and strong partners at our          disposal as well as unrivalled regional and
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the Caspian Sea region. As the largest German-based producer of crude oil and natural
gas, we are helping to secure the energy supply, both now and in the future.

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Welcome to Drillers and Dealers




Drillers & Dealers                               Contents
Official Publication of The Oil Council          2011 Oil & Gas Survey Results                                                    5
3rd Floor
86 Hatton Gardens
London                                           EMERGING MARKETS SPECIAL FEATURE
EC1V 8QQ, UK
                                                 Q&A: Risk / Reward Matrix of Caspian                                             9
Editor                                           Exploration & Production: An M&A Energy
                                                 Advisor’s Perspective
Drake Lawhead
Vice President, Content and Member               Dana Novakovic, LB Capital
Relations
drake.lawhead@oilcouncil.com
T: +44 (0) 20 7067 1873                          Iraq – A Diamond in the Ash                                                      12
                                                 Greg Hammond, Akin Gump Strauss Hauer & Feld
Editor-at-Large and Media Enquires

Iain Pitt                                        Do NOC Leaders have the skills to deliver their                                  14
COO                                              National Mission?
iain.pitt@oilcouncil.com
T: +27 (0) 21 700 3551                           Johan Nell and Colin Sloman, Accenture

Publisher
                                                 The New Emerging Energy Future                                                   17
Ross Stewart Campbell                            Mehmet Ogutcu, BG Group
CEO
ross.campbell@oilcouncil.com
T: +44 (0) 20 7067 1877                          MENA Region’s Oilfield Services                                                  20
                                                 Nawaf Marafi, Ali Rampurwala and Rajiv Bishnoi,
Partnership Enquires                             Kuwait Financial Centre “Markaz”
Vikash Magdani
Executive Vice President, Corporate              Monetizing East African Gas                                                      25
Development                                      Wylie Clark, Taylor-DeJongh
vikash.magdani@oilcouncil.com
T: +44 (0) 20 7067 1872
                                                 Latin America’s Emergence as an Oil & Gas                                        26
Advertising Enquires
                                                 Stronghold
Guillaume Bouffard                               Evelyse Carvalho Ribas, CARVALHO RIBAS - Advocacia e
Vice President, Business Development             Consultoria
guillaume.bouffard@oilcouncil.com
T: +44 (0) 20 7067 1876
                                                 Best Practices in Engaging Stakeholders in Oil                                   31
Laurent Lafont
Vice President, Business Development
                                                 and Gas Projects – The African Experience
laurent.lafont@oilcouncil.com                    Ziwase Ndhlovu, Mukazi Consulting
T: +44 (0) 20 3287 3447

Ken Lovegrove                                    OC Columnists – What’s New Online?                                               35
Vice President, Business Development
ken.lovegrove@oilcouncil.com
T: +1 604 566 4949
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     Drillers and Dealers :::                                                                                   ::: February 2011 Edition
The Value of
                                                 Specialist
                                                  Knowledge




  Great Successes 2010: A Collection
                                 London                                 Edinburgh
                                  Joe Nally                               Jon Fitzpatrick
                           +44 (0) 207 397 8900                       +44 (0) 131 220 6939
                            jnally@cenkos.com                       jfitzpatrick@cenkos.com

                                                   www.cenkos.com

Cenkos Securities plc is authorised and regulated by the Financial Services Authority and is a Member of the London Stock Exchange.
Emerging Markets Focus




            Risk / Reward Matrix of Caspian Exploration & Production:
                      An M&A Energy Advisor’s Perspective
                           Drake Lawhead interviews Dana Novakovic, Managing Director of LB Capital




 DL: What does 2011 hold for Oil & Gas emerging markets M&A?

 DN: Whilst most of our mandated work since 2009, through 2010, has been in Canada and North and
 West Africa, at the start of 2011 we see renewed interest, and opportunity to grow shareholder value, in
 the Caspian – places such as Kazakhstan, where the deal count has been limited and where most deals have
 been of a local or a private nature over the past 3 years.

 Only in January we accepted two mandates in the Caspian, a cross-border buy-side, and a sell-side in
 Kazakhstan. From a Macroeconomic perspective, according to projections put together by the IEA, Caspian oil
 and gas output will approximately double by 2030. Whilst the quickest output growth will come from
 Turkmenistan, the quickest growth in export quantities will still come from Kazakhstan, requiring that the country
 expands its oil export capacity from 1.5m bbl/d to as much as 3.5 m bbl/d.

 On the microeconomic level companies are carefully scrutinising technical, “soft” and financial consideration, and
 the risk envelope of the Caspian is recovering relative to the alternatives, as well.

 DL: How is this affecting acquisition multiples and expected level of deal flow?

 DN: Kazakhstan acquisition multiples have fallen significantly between 2007 and 2009, from its highest level of
 over ca. $5 per boe of 2P reserves between 2005 and 2007. This reflected not only the lack of acquisition finance
 since 2007, but also the changes in the risk envelope of the country.

 Whilst the bulk of renegotiations of the largest contracts such as the case with Karachaganak, may well be
 isolated and not spread to other large projects, a level of uncertainty remains, in particular, with respect to the
 export-tax regime and the local factors’ ambitions to increase its levels of ownership in the largest of the projects.
 However, the risks associated with renegotiations of contracts have affected primarily the Majors involved in the
 largest projects, and small and medium size producers remain largely unaffected.

 DL: So, are we to expect more activity in 2011?

 DN: Following the decline in acquisition multiples, a number of sizable assets bearing low technical risk remain
 available at reasonable multiples. Some of these assets have effectively been on the market since 2009, and
 Kazakhstan is emerging from the credit crunch as an attractive place for small and medium size E&P acquirers
 seeking both value and growth.




Drillers and Dealers :::                                                                           ::: February 2011 Edition
Emerging Markets Focus




 In fact, in the 1Q 2011, the total value of mainly producing assets on the market in Kazakhstan, formally
 mandated by sell-side advisors for, on average, over a year now, amount to in access of $1 billion.

 Now, the supply / demand curve is reaching that point where we see renewed interest by investors to result in a
 couple of reasonably sized transaction expected to close in February / March, as the “air pocket” between the
 seller’s expectations (pre credit crunch) and the acquirers’ ability to spend (post credit crunch) has
 diminished. A couple of these larger deals have been drawn out and reflect the sellers’ dissatisfaction in case of
 protracted processes involving Chinese potential acquirers.

 On a separate note, we also see a number of small cap explorers obtaining funding for higher-risk pure
 exploration drilling strategies.

 DL: What seem to be the most opportunistic acquisition targets?

 DN: It is indeed a bold proposition, but Cogito Ergo Sum: there is a case for a “roll-up” of a number of,
 especially, undervalued onshore properties in Western Kazakhstan, a proven hydrocarbon basin with existing
 infrastructure. This is a particularly fitting proposition for smaller and medium size acquirers because of
 the under-developed nature of the country’s smaller onshore resources of well known geologies, relative
 to the big bets (the likes of Kashagan) that Majors have focused on. Western Kazakhstan was well explored
 during the Soviet era, the data has been stored and has been successfully used by foreign companies operating
 there to focus and reduce costs of their 3D campaigns.

 DL: Which on-shore prospects offer the highest upside?

 DN: A number of onshore assets with substantial resources offer significant financial upside that will come from
 the conversion of resources into reserves in the next couple of years. These are assets at a stage where a small
 investment in development and external valuations of discoveries to confirm reserves is required in order to
 satisfy creditors and raise future development capital.

 Whilst, such situations would usually be positioned in the upper right hand corner of the risk / reward
 matrix, the known character of the local geology and low technical risks, have already allowed for such
 strategies to obtain financing over the past two years.

 We are looking at a number of portfolios where 3D seismic has been applied to the proven hydrocarbon basin,
 actively de-risking portfolios of low-risk, low-upfront-expenditure prospects with substantial production upside.
 Rolling up a number of smaller assets of this description would allow a larger acquirer to participate in several
 licences and diversify exploration risks for investors, in order to obtain a premium over the typical one-asset risk
 situations of smaller exploration plays, which is the case with most Caspian plays that are publicly traded.

 DL: What about producing assets?

 DN: The universe of acquisition targets for larger acquirers is case-book, as well. All Kazakhstan-based E&P
 players fall, quite neatly, into 3 categories: exploration plays, growing early producers and mature producers.
 When it comes to production, companies operating in Kazakhstan sell approximately 20% of oil in the local
 market at ca.50% of Brent, and export about 80% of produced oil. Barrel sold in Kazakhstan is less profitable
 than exported barrel but still much more profitable than, for example, Russian barrel.

 This is also why oil prospects in Kazakhstan are safer bets relative to gas prospects; whilst gas producers face
 uncertainty related gas pricing, as well as gas transportation and processing, oil producers, on the other
 hand, enjoy clear and stable export price that equals Brent minus a predictable discount that depends on
 transportation cost from the point of sale to Europe and quality of crude. Also, most producing assets and
 companies in Kazakhstan have substantial resources that have not migrated to reserves yet offer substantial
 exploration and development upside.

 In conclusion, we do see value for investors in a few carefully selected oil assets higher up the development
 curve here, as well.



 LB Capital companies provide cutting edge strategic advisory service on merger and acquisition (“M&A”) and
 A&D transactions. We serve corporate clients and governments, as well as a range of institutional and
 private investors, including sovereign wealth funds in Energy and Natural Resources Sectors.

 Dana is Managing Director at LB Capital. Prior to LBC, she was Corporate Director M&A Energy at ABN
 Amro and Associate Director M&A Energy at UBS Investment Bank in London. She joined UBS Investment
 Bank in 2004 after working at Lehman Brothers M&A Energy and McKinsey & Company’s Petroleum
 Practice in London and New York. Dana holds an MBA with concentrations in Finance and Accounting from
 the William E. Simon Business School, University of Rochester, New York: http://lb-capital.com/




Drillers and Dealers :::                                                                                ::: February 2011 Edition
Cutting edge specialist Oil & Gas M&A boutique repeatedly engaged
                by sophisticated Sector clients seeking to attain specific results and grow value




http://www.lb-capital.com


WHAT MAKES US DIFFERENT

We were founded on the belief that a private and independent advisory firm that offers pure
advice, untainted by the conflicts inherent in multi-product investment banks offers superior
value to our sophisticated and results-oriented Sector clients. With no lending or trading
conflicts, LB Capital's fundamental focus, and our cutting edge, is in valuing our long-term
client relationships by delivering high-impact advisory services based on specialist experience,
uncompromising integrity and continuity of personnel.

Our model has evolved in response to the industry's increasing demand for a more thoughtful
and sophisticated approach to portfolio optimization, capital re-deployment, and careful
investing. As a result, our track record of delivering value for clients, and our unique
combination of skills, has quickly made us the firm of choice for sophisticated clients looking to
achieve superior results under challenging market conditions, including in the emerging and
frontier markets.

In addition to independence, our distinct advantage is our singular Sector specialisation; we
are primarily an Oil & Gas boutique that is better positioned to include and leverage the hands-
on expertise of our technical consultants, primarily petroleum engineers, combined with the
sophisticated corporate finance prowess of a leading investment bank.


LB Capital Limited
Berkley Square House
Berkley Square
London WIJ 6BD
United Kingdom
http://www.lb-capital.com




                                SELECTED RECENT MANDATES
                  Mandated      Diversified International Conglomerate
                                Advisor to a privately held diversified corporation in connection with reviewing strategic alternatives regarding its
                                oil & gas portfolio.

                  Mandated      Privately held E&P
                                Advisor to a privately held company in connection with a proposed sale of oil & gas exploration and production properties
                                in Kazakhstan.

                  Mandated      UK Independent
                                Advisor to a UK Independent on potential acquisitions of oil & gas producing properties in the Caspian.

              December 2009     Canadian corporation
                                Advisor to Canadian corporation supported by Carmignac Gestion on the next stage of its corporate development including
                                acquisition of oil & gas producing properties in West Africa.

              December 2008     NOC client
                                Advisor to an NOC on potential acquisitions of a privately held company producing oil in the CIS.

                 March 2008    Petronorse
                               Advisor to Petronorse in connection with its decision to explore strategic opportunities in pursuing next stage of development.

              December 2007    CEAC
                               Advisor to Central European Aluminium Company on potential acquisition(s) of power producing assets.
Emerging Markets Focus




                                         Iraq – A Diamond in the Ash
                           Written by Greg Hammond, Partner, Akin Gump Strauss Hauer & Feld




 Iraq is possibly unique among the major oil producing nations insofar as its oil production profile over the last 30 years shows a
 succession of truly spectacular collapses in production. Depicted on a graph, it resembles the jagged blade of a giant wood-
 saw.

 Since its all-time production peak in 1979, Iraq has of course been subjected to three devastating wars which brought the
 country to its knees and destroyed key elements of its hydrocarbons infrastructure.

 As if this wasn’t enough, the source of the world’s fourth largest oil reserves has experienced a number of other setbacks.
 Religious and cultural divisions (for example amongst the Shia and Sunni muslims, as well as the Kurds in the north and the
 Marsh Arabs in the south) continue to create barriers. These divisions are also sometimes reflected in the political landscape.
 Following the elections in 2010 (when no clear majority emerged), it took over nine months for a coalition government to be
 formed which delayed and further hindered Iraq’s rebuilding effort.

 In addition, Kurdistan continues to govern itself semi-autonomously through the Kurdistan Regional Government (“KRG”), with
 the result that there are differing oil and gas licensing regimes in Kurdistan and the rest of Iraq. These differences (which have
 arisen partly from a disagreement over the interpretation of the Iraqi Constitution adopted in 2005), resulted in the oil embargo
 imposed by Baghdad which has recently frozen exports out of Kurdistan. Another source of friction between Baghdad and Erbil
 has arisen from the KRG’s preference for a traditional PSC-style licensing arrangement in contrast to the south where a form of
 technical services contract (the “DPSC”) is more typically used (which rewards participants with a cash fee per barrel of oil
 recovered rather than with a pre-agreed percentage share of physical oil).

 One of the starkest logistical problems facing Iraq relates to the lack of transportation facilities and storage capacity for
 hydrocarbons – particularly in landlocked (and mountainous) Kurdistan. While a network of ageing pipelines does exist up and
 down the country, Iraq is still a long way short of the infrastructure which will be required if its current production targets are to
 be achieved.

 Of course security also remains an issue of concern – both as regards safety of employees, as well as security of assets and
 infrastructure. Hijackings and bombings continue – and there is concern in some quarters over the ability of the Iraqis to
 maintain reasonable standards of law and order in the future once foreign forces have left. On a more practical level,
 unexploded munitions and mines from the Iran-Iraq war and two Gulf wars often need to be removed before fields can be
 accessed and developed. Indeed the form of Iraqi DPSC makes specific reference (where appropriate) to the preparation of a
 “de-mining work program” which must then be performed as a recoverable cost of the contractor parties.

 Wars (and even previous production methods) have on occasions damaged the oil deposits themselves, leading to by-passed
 reservoirs and unpredictable operational difficulties. For example, a UN Report in 2000 highlighted such problems in the
 massive Kirkuk field.

 As one might expect, three wars in quick succession have also resulted in the loss or destruction of years of accumulated
 appraisal data. Oil reserves information is therefore often based on limited data, giving scope for interpretation or error. In
 addition, the once plentiful pool of world-class technical experts emanating from Iraq (including geologists and geophysicists)
 has been severely reduced by war and emigration. There are even claims from some circles that certain fields in the south of
 Iraq may be subject to the stringent environmental laws which govern the area of the Marsh Lands around Basrah – protecting
 its water supplies, flora and sensitive fishing stocks.

 Add to that the global financial crisis, the resulting fall in the oil price and the collapse of Dubai as the hub for Middle Eastern
 finance and (as one might expect) the list of problems, handicaps and restricting factors goes on and on.

 So why then in 2009 did BP and CNPC buck the general trend and alone enter into a DPSC under the First Licensing Round in
 Southern Iraq when all other bidders had declined? More intriguingly, why in 2010 did the market capitalization of one AIM-
 listed oil producer soar to £1.5bn when its oil production in Kurdistan is both limited and currently transported solely by road? In
 short, why (in spite of the catalogue of risk factors listed above) does the tide now appear to be turning in favour of investment
 in Iraqi oil and what are the prospects in the medium-to-long term for investors there?

 As we know, the oil industry is essentially an exercise in understanding and assessing risk – which can take many forms and is
 often present across the full length of the oil exploration, production and off-take chain.

 The big difference in Iraq is that one of the key customary risks – exploration risk – can often be almost eliminated due to the
 unusual degree of confidence that hydrocarbons are in place. In the south of Iraq, this is frequently because most of the oil
 fields which have been the subject of the latest three licensing rounds are known to have existed (and indeed have often been
 in full-scale production) at some point over the last thirty years. The existence of these huge fields has of course been the
 justification for the technical services arrangement embodied in the Iraqi DPSC – on the basis that there was never any
 exploration risk for a bidder. All that was required was a large balance sheet and the technical expertise and resources which a
 super-major IOC could provide to bring a particular field back on stream.

 In contrast to southern Iraq, the virtual elimination of exploration risk in Kurdistan arises in other ways. It was best illustrated to
 me many years ago by the look on the face of one of the industry’s leading geologists who, during the early scramble for




Drillers and Dealers :::                                                                                         ::: February 2011 Edition
Emerging Markets Focus




 Kurdish exploration acreage, memorably emerged open-mouthed from a London data room whispering that he had seen
 “mountains full of oil”.

 This prediction turned out to be pretty accurate, given that the success rate for exploration wells in Kurdistan currently stands at
 around 80% - an astonishing statistic.

 So, if one can be fairly confident in Iraq about exploration risk, how will one ever be able to get comfortable with the various
 political, security, transportation, educational, environmental and other risks catalogued above? In other words, what could be
 the justification for BP’s extraordinary move in 2009 against a clear tide of contrary opinion and responsible eighteen months
 later for the rocketing upwards of an AIM-listed company’s market capitalization to £1.5bn from almost nowhere ?

 The answer may recently have arrived in the form of Abdul Karim Al-Luaibi – the newly appointed Iraqi Oil Minister. Aged 51
 and standing over six feet tall, he is a petroleum engineer who has spent his whole career with the Iraqi Oil Ministry – where he
 started out as an engineer’s assistant. A shrewd and capable politician, he is reported to be close to Hussain Al-Shahristani
 (the former Oil Minister and now Deputy Prime Minister) and Nouri al-Maliki (the recently appointed Prime Minister – who also
 happens to be from the same tribe). The closeness of these relationships underscores the critical importance of Iraqi’s oil
 industry to its leaders and also explains the unified position which now appears to be emerging in energy-related matters,
 notwithstanding the unstable and unpredictable political scene elsewhere in Iraq.

 Within two weeks of his appointment, Mr. Al-Luaibi (who, as deputy minister of oil for upstream, managed the process for all
 three previous licensing rounds in southern Iraq) announced a fourth round of licensing – although importantly this will now be
 for exploration blocks rather than the development of existing fields. As a result, it is possible that southern Iraq will now move
 away from the current form of technical services agreement and more towards a traditional form of contract. Within that same
 two weeks, he announced a record increase in output from Iraqi oil fields (which included a ten per cent. increase in BP’s
 production over its budgeted targets at its Rumaila field). More recently, it has been announced that Iraq has agreed to build an
 oil pipeline to neighbouring Jordan and is now considering plans for a similar project into Syria. However, if one reads between
 the lines, the good news doesn’t seem to stop there.

 Recognising the critical importance of upgrading Iraq’s oil infrastructure, Mr. Al-Luaibi has confirmed that another immediate
 focus will be on export routes to the south. There are therefore plans for new pipelines (in conjunction with storage expansion
 at Faw, Nasiriyah and Zubair in the south) in a clear move to increase the flow of oil to the wider global market.

 As regards the thorny issue of relations with the KRG, there is now evidence that North Oil Company (the vehicle used by the
 KRG for oil investments in Kurdistan) is being offered participations in some key oil projects in southern Iraq – thereby further
 breaking down the barriers between Kurdistan and the south, and almost introducing an element of “cross-shareholding”.

 Furthermore, Mr. Al-Luaibi (who has led negotiations for southern Iraq for the last year and therefore knows the KRG oil
 officials extremely well) recently announced that “Talks with the brothers in the KRG will continue in order to reach solutions
 which meet the public interests”. This was the best indication yet that a thawing was occurring in relations between Erbil and
 Baghdad.

 Finally, at the end of January, officials from both sides confirmed that pipeline exports would recommence from two Kurdish
 fields with effect from 1 February – although other details about such a possible relaxation of the oil embargo were hazy at that
 stage. Then, on 2 February, news began to break that exports had recommenced from two fields in Kurdistan (including DNO’s
 Tawke oil field where offtake into the Turkish export pipeline is expected to increase to 50,000 bpd in the next few days). At that
 point, it became clear that the Iraqi Oil Ministry (under Mr. Al-Luaibi) not only has ambitious plans, but also appears to be able
 to deliver on them.

 Inevitably, there will also be a number of external factors which will incentivize the Iraqis and the broader oil industry to tackle
 and overcome the obstacles to Iraqi investment listed above. In the same way that a steadily increasing oil price, rising global
 demand, desire for security of supply and the recognition of the risks inherent in other areas of the industry have driven the
 development of new products such as shale gas, the same market forces can be expected to encourage IOCs, NOCs and
 other oil industry participants to now come to the table in Iraq.

 Combined with these external factors, it could be that the Iraqis have now found a magical mix of political will, industry
 expertise, personalities and global circumstances which can help to reduce or overcome some of the risk factors which have
 affected them in the past and herald a new “golden age” of investment in Iraq. If that proves to be true, one can expect the
 original wave of first movers into Iraq to now sit back and enjoy the parallel benefits of a rising oil price and reducing Iraqi risk.
 Likewise, those original prime-movers wishing to make further investments into Iraq (who by now will have experienced its oil
 industry at first hand over an adequate period of time) will be best placed to assess the new reduced risk levels and price them
 into their future investments.

 Greg Hammond is a Partner in the London office of Akin Gump Strauss Hauer & Feld, the leading international energy
 law firm and a Member of The Oil Council Committee.




 Note: The original version of this article appeared in the 31 January 2011 edition of The Lawyer, which The Lawyer entitled
 "Get Well Soon”




Drillers and Dealers :::                                                                                        ::: February 2011 Edition
Range Resources: A diversified                              n Georgia
international oil and gas exploration                       n Puntland
and production company
                                                            n Texas

                                                            n Trinidad


                                                            www.rangeresources.com.au



                                                                ASX:RRS           AIM:RRL




                         Australian Office                  London Office
                         Ground Floor, 1 Havelock Street,   5th Floor, St James House,
                         West Perth, Australia WA 6005      23 King Street, London SW1Y 6QY
                                                            Telephone +44 207 389 0588
                         PO Box 684, West Perth,
                         Australia WA 6872                  Email a.eastman@rangeresources.com.au
                         Telephone +61 8 9488 5220          Website www.rangeresources.com.au
Emerging Markets Focus




                             Do NOC Leaders have the skills to deliver their National Mission?
                                                     Written by Johan Nell and Colin Sloman, Accenture




              The growing ambition of National Oil Companies (NOCs) has transformed the energy landscape in recent years. But as NOCs
              increasingly expand beyond their domestic markets, it is now time to ask whether they themselves are ready for further
              transformation of their business. NOCs are expected to continue delivering on their „national mission‟, and as they expand
              abroad, and must compete with International Oil Companies (IOCs) where the battle for reserves, equipment and talent is
              intense. But another challenge is emerging.

              NOCs are now being asked to operate their business on a different scale which involves delivering large and complex projects
              (both at home and abroad) operating in new markets, working with multiple partners and ensuring operational excellence. This
              new way of operating means the spotlight is now being turned on the leadership qualities of NOCs as they face these new
              challenges.

              Over the next decade, OPEC will have an opportunity to reassert its dominance as its members‟ share of global production
              rises from 40% to as much as 46% by 2030i. International expansion is already a feature for many NOCs. Asian players in
              particular are very active in acquiring assets abroad.

              For example, the Chinese National Petroleum Company (CNPC) now operates 81 oil and gas projects in 29 countries, up from
              58 projects in 22 countries at the end of 2005ii. It recently stated that its average annual growth rate of overseas crude oil
              production reached 15.6% during the past five yearsiii.

              NOCs are also working together, forming consortia to bid on new projects together as they move into new markets. Saudi
              Aramco, for example, has become a major supplier to Asia and an important contributor to Asian economies through
              investment in refining and petrochemical sector activities. In China alone, it currently employs around 8,000 peopleiv.

                                                           The Importance of Leadership
              These trends will require very different skills and experience to those required of NOCs before. In a recent survey of NOC
              executives conducted by Accenture,* most respondents cited leadership skills and quality talent as essential to deliver their
              strategies, but acknowledged that these were also often the attributes they particularly lack.

              NOCs recognise the need to introduce leadership development programmes but these programmes often do not go far enough
              to drive wholesale business transformation. As they expand their horizons, a greater focus on leadership skills is needed.

              (*in 2010 Accenture undertook a study of NOC executive to understand what leadership capabilities would be required for NOC
              success in the energy industry. The study composed of surveys, workshops and interviews with NOC senior level executives,
              and a workshop with over 40 students (the majority are current employees of NOCs) completing Oil and Gas MBAs in
              Aberdeen, UK)

              There are many different types of NOCs, all with different strategies and ambitions; as a result they will all need a slightly
              different focus to delivery their particular leadership development agenda. In addition, NOC leadership skills face unique
              challenges with which IOCs do not have to contend. In place of the Western ideology of “maximising shareholder returns”,
              NOCs work to a more holistic concept of “value creation” along both commercial and social lines, which also requires an ability
              to manage their key stakeholder, the government.

              Expectations of “value creation” for many NOCs are codified in their „national mission‟ that means that NOC leaders are
              continuously balancing the priorities of the commercial business with that of the wider economy, against a backdrop of a
              constantly changing political situation.

                                                 What Leadership Capabilities do NOCs need?
              As NOCs embark on changing their business models (which often involves internationalization) they need to achieve a cultural
              fit with their new businesses and communicate well with governments in the host nation. Overlooked skills such as languages
              are fundamental, as are abilities to execute increasingly risky and complex projects on time and to budget.

              Over the past two decades, the gap in commercial and technical excellence has narrowed considerably between NOCs and
              international oil companies (IOCs) However over the past few years, IOCs have been forced to raise their levels of efficiency as
              they work on projects which have increased in size, complexity, and risk. Many NOCs are now seeing a similar challenge and
              need to also build on their business execution skills to be able to deliver projects, on time and on budget. Complex project
              management skills will be critical to long term success for NOCs.

              Underpinning the leadership attributes of vision, relationship and execution is a requirement of all leaders to have strong “soft”
              skills. Such skills include commercial acumen, communication skills and international experience which are all needed to scale
              companies at a global level. Such skills often come with experience rather than training and are thus, harder to develop.

              Visioning skills will also be important for NOC who will are required to maintain a focus on the „national mission‟ as well as
              inspire and engage staff throughout the significant transformation ahead. In the Accenture survey, NOCs identified that the
              ability of their executives to set a vision, see opportunities and inspire their workforce as fundamental to achieving their future
              objectives, but is often lacking as a core leadership attribute.




Drillers and Drillers and Dealers :::
             Dealers                                                                                                                     February 2011 Edition
                                                                                                                          ::: February 2011 Edition
Emerging Markets Focus




 Successful transformations require strong leadership capabilities but are complicated by the fact that the skills and experiences
 demanded of the NOC leaders for more a more complex project environment at home and international growth is very different.
 As they transform their companies, NOCs need to address all three levels of leadership at the individual, team and process
 level.

 Based on Accenture‟s extensive experience working with leading NOCs across the world, as well as the results of our recent
 NOC Leadership Survey, we propose five key ways that NOC leaders can build the skills to achieve high performance abroad
 and successfully deliver their „national mission‟.

        1.      Understand individual leadership style

                In addition to generic leadership training, it is critical to provide individuals leaders with an understanding of their
                personality and how it impacts their leadership and management style. This is key to the individual leader‟s success
                and that of the leadership team and wider organisation. Focusing on developing individual leadership styles is
                important as is the ability of their management to learn through experience

        2.      Learn through experience

                Leaders learn from planned and unplanned experiences varying from major events, such as leading a Joint Venture
                or recovering from a financial disaster, to the more conventional (e.g. job rotations, working abroad, etc.). NOCs need
                to develop a comprehensive leadership development program that uses “experience” and equips candidates to learn
                from both planned and unplanned experiences.

        3.      Build foundational soft skills

                NOC leaders will need to be highly effective communicators, know how to lead change, and have a keen
                understanding of the commercial and social policy of the company. NOC managers already have considerable
                relationship building and networking skills, but in order to improve success in international markets, they will need to
                balance technical skills training with „soft‟ skills development.

        4.      Develop team leadership capabilities

                The strength of leadership teams, as opposed to individual leaders, will dramatically increase in importance as NOCs
                optimise their businesses and extend their scale in multiple markets. NOC executive teams often operate as
                homogeneous groups. But according to our survey, 100% believe that a team discipline will be paramount for future
                success, and 50% believe that diversity in management will act as a strategic asset. Developing good teams of
                leaders helps leverage the different capabilities, knowledge, experience and styles of individual leaders and obtain
                the right balance to execute their specific strategy. Attention should be paid to key areas such as diversity and using
                social networking tools to encourage teaming. Peer reviews and peer coaching can also help by challenging the
                traditional hierarchical model of most NOCs.

        5.      Establish strong leadership processes / systems

                Cultivating the next generation of leaders will not happen without intervention. NOC leaders not only need to identify
                their immediate successors but those two generations beyond. This will only occur with a robust performance
                management system, as well as a comprehensive succession planning and strategy-aligned programmes for high
                potentials, which develop and rewards high achievers.

             Steps                   Description

   1.        Understand              Apply tried and tested tools to give NOC leaders an understanding of their individual
             individual leadership   leadership styles and how they work with others – enabling them to reflect and set out
             style                   practical improvement actions


   2.        Learn through           Embed experiential based learning at the heart of a comprehensive leadership development
             experience              program – plan experiences and equip candidates to reflect and learn from both planned and
                                     unplanned experiences


   3.        Build foundational      Take immediate steps to put in place targeted soft skills training that incorporates experiences
             soft skills             and role play, while at the same time embed soft skill development in career paths, expected
                                     competencies and training curriculum for the long term


   4.        Develop collective /    Develop a global mindset through focussing on increased diversity of the executive leadership
             team leadership         team, and using peer group coaching and the latest technologies to build stronger teaming,
             capabilities            knowledge sharing and collaboration skills


   5.        Set the tone and        Establish a performance based culture and actively cultivate the next generation leaders
             establish strong        through the rigorous application of performance management and succession planning, as
             leadership              well as putting in place a comprehensive, strategy aligned, High Potentials program
             processes / systems




Drillers and Dealers :::                                                                                         ::: February 2011 Edition
Emerging Markets Focus




 As NOCs transform their business models and extend their international footprint, they will not only need to address leadership
 skills at all levels of the organisation but make sure they have the processes in place to embed the leadership capability in their
 company. The Accenture survey showed however that while most NOCs recognise the need for improved leadership skills,
 they have yet to develop programs to nurture them.

 For example, the importance of leadership teams, as opposed to individual leaders, will dramatically increase in importance as
 NOCs optimise their businesses, and have to “get things done on a global scale”. “Today, NOC executive teams operate as
 homogeneous groups.

 In the future, 100% believe that a team discipline will be paramount for success, and 50% believe that diversity in management
 will act as a strategic asset” (Accenture NOC Leadership Survey). Some of the changes will be difficult to adopt, as they may
 go against both the existing practices and culture of the company.

 As NOCs change, they will need to offer a more structured career path and create a more dynamic working environment as a
 value proposition to future leaders. NOC executives will also need not only the skill but the “will” to be able to steer the
 company and the next generation of its leaders into the next phase of its development.

 To fulfil their ambitions at home and abroad, many NOCs are already making incredible business transformations. Our survey
 found that generally, NOCs felt they were better prepared to handle today‟s challenges than those of tomorrow. If successful
 change is dependent on talent, then the journey starts here.



 About the Authors

 Johan Nell leads Accentures’s Upstream Oil and Gas Segment. He has worked in the resources environment for the past 20
 years in operational and consulting roles and has delivered business improvement initiatives in the chemicals and petroleum,
 utilities, mining and heavy engineering industries. In his current role Johan is challenged with the task of directing Accenture’s
 global industry expertise to the challenges of upstream energy companies, creating and delivering capability in the strategy,
 operations and operational support domains.

           johannes.nell@accenture.com

 Colin Sloman is a Senior Executive in Accenture’s London Office and part of Accenture’s Global Talent & Organisational
 Performance (T&OP) Leadership Team. Colin is responsible for leading the Energy Industry T&OP Service Line and the Global
 Culture practice. His industry experience spans Oil & Gas, Chemicals and Mining Industries. Colin is primarily focused on large-
 scale business change projects spanning Europe, Russia, Middle East, Africa, North America and Asia Pacific.

           colin.sloman@accenture.com




 This article was produced with the assistance of Julie Adams (Accenture Research, and Matthew McGuiness, Accenture
 Media).

 i
    “Demand for oil will keep rising, warns BP”, 20th January 2011, The Daily Telegraph, © 2011 Telegraph Group Limited, via Factiva
 ii
     “China's CNPC cuts 2011-2015 overseas investment plan”, 23 November 2010, Reuters News, (c) 2010 Reuters Limited, via Factiva
 iii
      “CNPC ups overseas oil production”, 24th December 2010, China Daily Information Company, copyright 2010 China Daily Information
 Company via Factiva
 iv
      “Oil giant invests in social responsibility” 28 September 200, South China Morning Post, (c) 2009 South China Morning Post Publishers
 Limited, Hong Kong. All rights reserved, via Factiva




Drillers and Dealers :::                                                                                           ::: February 2011 Edition
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Emerging Markets Focus




                              The New Emerging Energy Future:
                           Towards Cleaner, Safer and Smarter Energy
                                  Written by Mehmet Öğütçü, Chairman, The Bosphorus Summit




    “When a Brazilian brews her morning coffee today, she is likely to use electricity from a power plant
     in Uruguay that runs on natural gas from Argentina provided by a Chilean company. She drives to
      work in a Ford fuelled with Venezuelan gasoline, and her Canadian-owned factory may soon be
                          powered by a 3,000 km natural gas pipeline from Bolivia.”
 Tectonic ch anges ar e occ urring not only in the wo rld finan cial system, tradi ng and investment,
 geopolitic s, and te chno logy. A fundamental transfor mation is also under way i n the glob al en ergy
 system. Myriad trend s ind icate tha t the curren t system is far from being sustainab le. It will be
 shaped by rising demand over th e long term, dominance of fossi l fuels, inaccessible suppli es,
 price volati lity, inadequ ate investmen t, geopoliti cal tensions, resou rce natio nalism, and climate
 change. The mos t pre ssin g decision facing th e next generation may be how b est to accelerate th e
 transi tion from a fossi l -fu el -bas ed energy system to a system based on cli mate - friend ly energy
 alterna tive s. No one coun try c an a lone add ress thi s mammoth challeng e. T he US, the EU and
 BRICs must a ll embrac e th is transition — or we all su ffer th e consequ ences.

 As globalization lifts millions out of poverty, the demand for energy worldwide will continue to grow, and we risk ending up with
 a volatile, “beggar thy neighbor” style of competition between countries to control sources of supply, especially in the
 developing world. Mankind has had access to electricity for only 130 years. In just over a century, we have extended
 transmission lines, providing refrigeration and lighting to 5 billion people around the world. NASA's "Earth at Night" map
 highlights this world of prosperity, yet 24 percent of humanity still lives in the dark.

 We are forced to embark on a journey to create a new energy system. However, describing this cleaner energy system is a lot
 easier than creating it. The transition will take time. History shows that once a new energy technology is proven, it takes about
 30 years for it to achieve 1 per cent of the overall market. There is no easy solution, no technological fix and no single answer.
 Weaning ourselves off fossil fuels will require a combination of greater efficiency, changes in habits and lifestyle, and deploying
 major renewable energy projects that some people will not like.

                                          Changing Dynamics In World Energy
 By dint of their sheer size and population -- and their collective decision to embrace their own particular brand of capitalism --
 BRICs are the economic future of the world. They today already account for a combined GDP of $15.435 trillion on a
 purchasing power basis. These rising economic dynamos will have to compete with the mature economic powers for access to
 remaining untapped reserves of exportable energy - in many cases, bought up long ago by the private energy firms of the
 mature powers like Exxon Mobil, Chevron, BP, Total of France and Royal Dutch Shell.

 Of necessity, the new contenders have developed a potent strategy for competing with the Western "majors": they have created
 state-owned companies of their own and fashioned strategic alliances with the national oil companies that now control oil and
 gas reserves in many of the major energy-producing nations. The changing nature of the international petroleum market thus
 requires new rebalanced mechanisms, and new forms of partnerships among players. The profound changes in world energy,
 still underway, could be summed up as follows:

 First, the increased international petroleum prices have, together with many other factors, shifted power significantly to oil
 producing countries, especially a few large ones, where the majority of remaining reserves are located, such as the Gulf,
 Russia, and Central Asia. This power, coupled with the huge financial assets accumulated by those producers in a high price
 environment, has fuelled the international ambitions of these countries to seek changing or reshaping the traditional rules of the
 game for the benefit of their national interests.

 Aware of their increasing power, many of the resource-rich countries have either re-nationalised their oil industries or
 established strategic control through further transfer of power into the hands of governments.

 Second, there is an increasing concern of security of energy supply at the consumer’s side. Due to increased demand and
 depletion of domestic reserves, major oil consumers will have to rely more on imported oil and gas, from a few politically-
 instable regions such as the Middle East, Africa, Russia and Central Asia, through long-distance pipelines and vulnerable sea
 routes. This, combined with the fact that international oil market, is less stable and more prone to the disruption of natural
 disaster, terrorist attack and isolated geopolitical acts increased the vulnerability of these consumer countries.

 Third, the capacity of the global energy industry to satisfy demand is shrinking. By all accounts, the global supply of oil will
 expand for perhaps another half decade before reaching a peak and beginning to decline, while supplies of natural gas, coal
 and uranium will probably grow for another decade or two before peaking.

 Yet, there are still huge unexpored areas in the world. For example, the Arctic is estimated to hold reserves of 51bn tons of oil
 and 87 trillion cu m of gas, of which 9 bn tons of oil and 10 trillion cu m of gas fall in Russia's territory. Energy investment
 worldwide has plunged over the past few years in the face of a tougher financing environment, weakening final demand for




Drillers and Dealers :::                                                                                     ::: February 2011 Edition
Emerging Markets Focus




 energy and lowering cash flow. It is estimated by IEA that global upstream oil and gas investment budgets for 2009 were cut by
 around 19 percent compared with 2008 — a reduction of over $90 bn. The 2010 figures were not encouraging, either.

 Fourth, Although the OECD countries are still the largest oil consumers, the current increase in demand for oil and gas is
 mainly driven by fast economic development in developing countries such as India and China, which account for one-third of
 the world population but only consume 17 percent of world energy.

 Each Chinese, however, consumes only two barrels a year, so even a small increase in Chinese consumption could have a
 massive impact on the market. Global energy demand is expected to nearly double in the first half of this century. That is partly
 due to population growth, going to about nine billion people in 2050 from 6.8 billion today. Different from OECD countries, these
 newly emerging major oil consumers are less supportive of free market principles and are guarded by national oil companies
 that are controlled and supported by their governments.

 Fifth, a rising security of demand concern of major oil producer countries may prevent large scale of investment from
 happening. To meet the rising energy demand, huge amount of investment is needed. Due to environmental pressure,
 consumer governments around the world are seeking to reduce consumption and reliance on traditional fossil fuels given that
 the energy sector is the main contributor of emissions of greenhouse gases.

 This rising uncertainty of future consumption level for conventional energy, increases the security-of-demand concern of major
 export countries, and impedes much needed investment.

 As a result of these developments, the global energy scene is going through a fundamental transformation that will not only
 change the rules of the game; it will also change the game itself and its players.

                                   The “Green Economy” and Energy Alternatives
 New sources of energy are desperately needed to compensate for the eventual disappearance of existing fuels as well as to
 slow the buildup of climate-changing "greenhouse gases" in the atmosphere. In 2030, fossil fuels will still account for exactly the
 same share of world energy as in 2004 while the expected increase in renewables and biofuels is so slight - a mere 8.1 percent
 - as to be virtually meaningless. In global warming terms, the implications are nothing short of catastrophic:

 Rising reliance on coal (especially in China, India and the Us) means that global emissions of carbon dioxide are projected to
 rise by 59 percent over the next quarter-century, from 26.9 billion metric tons to 42.9 billion tons. The meaning of this is simple.
 If these figures hold, there is no hope of averting the worst effects of climate change.

 The winds of economic destruction are flattening not just retirement accounts but also naive visions for a green economy.
 Public support for costly new green mandates is weakening, and government budgets to fund them are bleeding red ink. The
 market, it is now clear, is not a reliable force for driving the adoption of green technologies.

 Just as the role of government is rising across banking and other sectors of the economy, new green will be much more wary of
 market forces as the route to profit. Supporters of renewable energy have been much more effective in affecting regulation: in
 most of the US it is now nearly impossible to get approval to build new coal plants (even when they replace older, less efficient
 units) and half the states force power companies to buy rising amounts of renewable electricity almost regardless of cost.

                                                           Final Word
 What makes the world energy somehow unstable are "above-ground factors." Ironically, the choices we made to achieve our
 unprecedented prosperity may bring about our downfall. In 1950, there were 2.5 billion people and a global economy of $7
 trillion. Today, the consequences of energy use are felt in every wallet, on each continent, coastline and in our shared
 atmosphere. The new energy future will likely be a world powered by cleaner fossil fuels, more renewable energy and nuclear.

 It will be a world where cars, appliances and buildings are much more energy-efficient. Biofuels, wind and solar will grow rapidly
 from their small base. Renewables could make up 30 per cent of the world’s energy by 2050, if we include hydroelectricity.
 Fossil fuels and nuclear will make up the rest. In the transport sector, consumers will enjoy a wider array of fuel choices.
 Vehicles will be powered by everything from advanced petrol and diesel to biofuels, electricity and, eventually, hydrogen.

 The global business community is the crucial link that will enable the world to get to grips with the energy challenge of the
 coming decades. Governments will set the framework, scientists will invent the technologies and consumers will adapt to a less
 energy-intensive world, but it is business that will develop, deliver and apply the technologies at every level. How successful it
 is will determine how successfully the world copes.




 About the Author: A former Turkish diplomat, IEA Principal Administrator, Head of OECD Global Forum, Mehmet Öğütçü is
 Director of a major multinational energy corporation (UK); Chairman, The Bosphorus Summit; a teaching fellow with London
 School of Economics, Reading University; and a regular columnist in international and Turkish publications.

 The views expressed in this paper are the author’s and do not necessarily reflect those of any organisation he is associated
 with. He can be contacted at ogutcudunya@yahoo.co.uk




Drillers and Dealers :::                                                                                      ::: February 2011 Edition
Emerging Markets Focus




                                        MENA Region’s Oilfield Services
                 Written by Nawaf Marafi, Ali Rampurwala and Rajiv Bishnoi from Kuwait Financial Centre “Markaz”




 In our view, 2011 and the near-future, represent exciting times for the oilfield services (OFS) segment, both globally as well as
 in the Middle East & North Africa (MENA) region. As a result of the changing stance of National Oil Companies (NOCs),
 increasingly favorable policies of local governments, reopening of the financial markets, and growth in regional entrepreneurial
 talent, opportunistic regional OFS companies stand to benefit significantly in the near-future. We also believe that the
 opportunity to build indigenous regional OFS companies is fundamentally underexploited.

                                                    The Global Quotient
 According to GBI Research, the global OFS market is expected grow at a compound annual growth rate (CAGR) of 7.3% from
 $131 billion in 2009 to $200bn by 2015. Similarly, Barclay’s estimates that the global E&P capital expenditure will reach $490bn
 in 2011 highlighting the strong business potential for OFS companies.

 This is further underscored by the estimates of the International Energy Agency (IEA) that more than 80% of producing assets
 globally, are in rapid decline and the resulting need for supporting OFS companies to provide the necessary technology and
 know-how to maximize recovery and improve efficiency.

                                                   The Regional Quotient
 The MENA region’s OFS expenditure is expected to grow from approximately $11 billion in 2010 to approximately $13 billion by
 2012, as per Douglas-Westwood. Whereas, the region’s onshore and offshore drilling and work over expenditure on OFS was
 approximately $7.7bn in 2007, and is expected to increase by 61% to reach $12.4 billion by 2012, and $27.9bn by 2014.




 The number of rigs working the market is normally a good leading indicator for assessing the OFS segments growth or
 shrinkage trends. Growth in rig count is usually associated with higher demand, both due to an increasing scale as well as
 enhanced service intensity.

 The rig count across the MENA region has been in an upward trend over last few years, despite a minor dip in 2008-09 due to
 the global financial crisis, and is expected to continue upwards in the near-term indicating that the OFS sector in the region can
 witness sustainable steady growth.

                                                        The Landscape
 From a demand perspective, OFS in the MENA present a clear and obvious opportunity. Notwithstanding, the supply side of
 the equations paints an erratic picture, whereby many of the regional firms are poorly positioned to exploit the same.

 In particular, the MENA region OFS industry structure is highly fragments, with approximately 19,478 companies operating in
 the Oil & Gas sector in the MENA region, as per recent estimates. Most of these are concentrated in the UAE and are largely
 operating under agency type agreements with foreign entities.




Drillers and Dealers :::                                                                                     ::: February 2011 Edition
Emerging Markets Focus




                 600        Land
                            Offshore
                 500

                 400

                 300

                 200

                 100

                    0



                                   MENA: Quarterly Average Rig Count 2005 - 2010
                                           Source: Schlumberger, Markaz Analysis


 A select few of these regional/local OFS companies are in a position to compete effectively in niche areas with the international
 OFS companies. Such companies have been able to capitalize on the opportunities presented in the OFS segment as a result
 of being converted from family-owned to corporate structures, growing inorganically through well-timed acquisitions, and/or
 establishment of joint ventures (JV) with reputed international companies.



            14000          13242
            12000

            10000

              8000

              6000

              4000
                                   1799
              2000                            826         608        586        577        426        323          91
                   0
                            UAE    Qatar     Saudi Bahrain Egypt               Oman Kuwait            Iraq      Yemen
                                             Arabia
                                             MENA: Number of Oil & Gas Companies
                                                    Source: Markaz Analysis


                                                      The Opportunity
 We believe there continues to be an opportunity for regional OFS companies to jump on the bandwagon. World oil demand is
 expected to continue to grow unabated, leading to a call on the region to further increase production.

 It is widely accepted that in the long-term, most increases in the production and reserves in the MENA countries, are not
 expected to result from existing giant fields or from any major new discoveries, but from marginal fields and as a result of
 applying enhanced production and recovery techniques in existing fields.

 This is where the OFS companies come into the picture. Both, development of smaller fields and production enhancement, are
 highly service intensive. To sweeten the deal, NOCs are promoting regional companies through favorable policies and
 initiatives. We believe that in the near-future, as a result of the increasing emphasis on local content, regional OFS companies
 will potentially have access to a larger portion of the total OFS spend.




Drillers and Dealers :::                                                                                     ::: February 2011 Edition
Emerging Markets Focus




 This is being complemented by the favorable policies and initiatives of the MENA governments to source increasingly larger
 volumes of services locally, in order to promote local employment, prevent wealth outflow, develop local talent, and help
 diversify the economy.

 Additionally, the region does not lack talented entrepreneurs. Many of them emanate from well-established family businesses
 that have decades of experience in the oil and gas industry, and are now expanding to provide higher end OFS.

 Some of the eminent regional names worthy of mention are the UAE based Al-Mansoori Group and the NPS Group which was
 the result of a merger between the National Oil Well Maintenance Company (NOWMCO) of Qatar, National Petroleum
 Technology Company (NPT) of Saudi and National Drilling Company (NDC) of Saudi.

 Another variety of entrepreneurs are those that are leaving large NOCs, IOCs, and global OFS companies alike, to establish
 start-up businesses to provide niche energy services. For example, companies like Target and Falcon oil field services (both
 from Oman) and the Kuwait based Gas & Oilfield Services Company (GOFSCO) were started and/or strengthened by such
 entrepreneurs.

 There are also a small but growing number of regional OFS companies that are moving from being agents of global OFS
 majors to establishing their own services, and forming a niche in their own countries as well as throughout the region.

 Any discussion on opportunities in the MENA regions OFS segment cannot exclude the potential presented by Iraq. Various
 estimates suggest that the Iraqi OFS market is expected to rise from $1.3bn in 2010 to $8bn by 2014. It is further estimated that
 over 2010-2016, with a base case target production of 5 million barrels per day, there is a need to drill approximately 5,000
 wells; making the Iraqi OFS market-size around $20bn, with local companies accounting for 35% market share.

 On the bullish side, with a target production of 11 million barrels per day, the market size is estimated to be around $60bn with
 local companies accounting for a $20bn market share. These statistics alone might be enough reason for the regional OFS
 companies to capitalize on the aforementioned opportunity.

                                                 Exploiting the Opportunity
 In our view, the approach to exploit the regional OFS opportunity is multipronged. The low hanging fruit is for regional OFS
 companies to form JVs with international companies. There are numerous examples of such engagements being successful in
 the past, and there is potential for more. Another approach is for regional OFS companies to acquire companies that provide a
 specific service or possess a specific technology.

 Lately, this approach has been the path of choice for regional companies, providing an avenue to rapidly grow their portfolio
 and allowing them to effectively compete with international OFS companies. Last, and possibly the least explored approach, is
 to build indigenous OFS companies, ground-up.

 In summary, the MENA OFS sector represents a large opportunity for regional companies. It is likely that the MENA’s OFS
 sector is at an inflection point; there is potentially space for several regional OFS players to capture a reasonable portion of the
 MENA OFS market.




 About Kuwait Financial Centre “Markaz”:

 Kuwait Financial Centre S.A.K. 'Markaz', with total assets under management of over KD1,03 billion (USD 3,64 billion) as of
 September 30, 2010, was established in 1974 has become one of the leading asset management and investment banking
 institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997.

 Authors:

           Nawaf Marafi, Vice President – Oil and Gas, Markaz
           Ali Rampurwala, Senior Analyst – Oil and Gas, Markaz
           Rajiv Bishnoi, Assistant Vice President – Oil and Gas, Markaz

 For more information please contact:

 Mariam A. Al Suwailem
 Assistant Manager, Media & Communications
 Kuwait Financial Centre S.A.K. "Markaz"

 Tel: +965 2224 8000 ext 1817
 Direct: +965 2224 8078
 Fax: +965 2249 8740
 msuwailem@markaz.com




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Emerging Markets Focus




                                        Monetizing East African Gas
                                      By Wylie Clark, Vice President, Taylor-DeJongh




 Once virtually ignored by the global oil & gas industry, East     resources holders with reserves over 3 tcf, LNG is likely to be
 Africa now faces the prospect of becoming a global natural        the monetization option of choice, given higher potential
 gas hub following a string of recent natural gas discoveries.     margins per molecule.

 The star of this past year’s exploration campaign was             Despite weak demand in the Atlantic Basin LNG market,
 doubtless Anadarko Petroleum Corporation, which made four         strong demand (and high prices for LNG), together with still
 discoveries off the coast of Mozambique, together estimated       prevalent long-term firm offtake contracts in the Asian
 by some analysts to hold 6+ trillion cubic feet (tcf) of gas.     markets will support LNG monetization for larger scale
 Farther north, in Tanzania, oil & gas companies continue to       reserves.
 add to the country’s natural gas resource base, which
 presently stands at 7.5 tcf. With additional reservoirs being     At the country level, both Tanzania and Mozambique possess
 discovered throughout the region, the big question is how this    sufficient reserves for LNG. However, governments must
 resource will be monetized.                                       ensure that they do not overcommit gas resources to export
                                                                   projects well into the future lest they find themselves short of
                   Limited Local Markets                           domestic supply, as Egypt has found to its cost.

 The size of local markets for natural gas varies significantly    When assessed at the resource holder level, for now only
 across East Africa. In Tanzania, natural gas was introduced       Anadarko’s Mozambique assets appear to pass the LNG
 into the economy in 2004 and since then demand from               reserve threshold. Given the relative proximity of gas
 industrial and power customers has grown. According to the        resources in Tanzania and Mozambique, one could argue
 Tanzanian government, demand for natural gas outstrips            that resource holders in both countries could pool resources
 current supply by12 mmcf/d.                                       in developing a single larger scale LNG project. History has
                                                                   shown, however, that cross-border gas monetization has
 Demand for power is expected to grow by 10% to 15% per            proven to be a difficult commercial model to develop and
 annum, which will further contribute to gas demand growth.        finance (see the West African Gas Pipeline for an object
 These figures have inspired a rash of projects, including 340     lesson).
 MW of gas-fired generation expected to come online by 2013
 and a USD460 million electricity distribution expansion           East African gas could be used to feed ammonia/urea and/or
 scheduled for completion in 2015.                                 methanol production in order to tap the global fertilizer and
                                                                   petrochemical industries. Although not usually as profitable
 Orca Exploration and Production, which through its subsidiary     as pipeline or LNG exports, urea/ammonia and methanol
 PanAfrican Energy operates Songo Songo, Tanzania’s only           projects can be usefully employed where gas resources are
 significantly producing gas field, has announced plans to         too small to justify an LNG project (or when sponsor capital is
 raise production by 60% to 144 mmcf/d, requiring expansion        constrained).
 of existing pipeline infrastructure and processing capacity.
 But domestic demand for gas, despite projected growth, will       The major global fertilizer-consuming regions include South
 only ever absorb a fraction of Tanzania’s 7.5 tcf of proven       Asia, North Africa and East Asia. Reports vary on supply and
 reserves. Producers must surely look further afield in order to   demand forecasts for urea, with some analysts viewing the
 monetize existing and new finds.                                  market as over-supplied in the medium term.

 The domestic market in Mozambique offers even fewer               Methanol, which serves as a feedstock in the production of
 options for gas producers. In the power market, Mozal, the        petrochemicals, could be pursued in tandem with
 BHP Billiton-operated aluminium smelter, is by far the largest    urea/ammonia or separately. While traditional petrochemical
 single consumer with a peak-demand of over 900 MW. This           markets in North America and Western Europe are presently
 is met largely through a long-term supply agreement with          stagnant, robust demand in China and other Asian markets
 South Africa’s ESKOM.                                             offers opportunities for methanol exporters.

 Outside Mozal, power demand is limited, as only ~13% of the                  What To Expect Going Forward
 population has access to electricity. Though the government
 plans to increase this access in the future, the focus appears    With a growing portfolio of commercial discoveries, oil & gas
 to be on hydroelectric generation.                                companies will look to export markets for higher returns. This
                                                                   will require significant investment as well as technical and
 Energy hungry South Africa offers an opportunity for              project expertise, which likely means that many of the junior
 Mozambique gas stakeholders. At close to 230 bcf/year,            oil & gas companies active in the region will make way for
 South African gas consumption is nearly twice domestic            larger independents and IOCs with the balance sheets and
 production, with imports from Mozambique already filling          experience to undertake these projects. Assets, and
 much of the gap through a 534 mmcf/d pipeline in operation        potentially companies, will no doubt swap hands as the
 since 2004, feeding a Sasol run petrochemical plant in            resource holders in the region look to consolidate portfolios in
 Secunda. To put this in context, exports through this pipeline    an effort to build a sizable resource base.
 represent 96% of Mozambique’s natural gas production.
                                                                   Though full-scale natural gas production is still some years
 Additional exports to South Africa would require an expansion     away, it is clear that East Africa’s position in the global
 of the existing pipeline or construction of a new pipeline,       natural gas market is moving quickly from a sleepy backwater
 together with a likely extension beyond Secunda to access         towards a new gas hub.
 other gas buyers. Once reserves reach “critical mass”, many
 resource holders in East Africa will look to monetization         Special thanks to TDJ analysts Alexander Maass and John
 options that capture higher margins in the global market. For     Probyn for contributing to this article




Drillers and Dealers :::                                                                                    ::: February 2011 Edition
Emerging Markets Focus




                           Latin America’s Emergence as an Oil & Gas Stronghold
                Written by Evelyse Carvalho Ribas, Managing Partner, CARVALHO RIBAS - Advocacia e Consultoria




 Latin America has enjoyed robust economic growth in recent years, in part driven by rising global prices for commodities such
 as oil & gas. The discovery of new gas & oil reserves in Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru and
 Venezuela is causing changes in the relative importance of countries and in the relationships among them. Given the active
 role played by Brazil on relations among Latin American countries, we will deal with it from the perspective of Brazilian policy.
 Most of the studies on prospective energy markets, including the World Energy Outlook (WEO), tell us that oil & gas will remain
 dominant in world energy supply well throughout the first half of this century.

 Their predictions assume that, without new energy and environmental policies, demand for oil will continue to grow at 1.6% per
 year. Natural gas demand will grow even faster, at 2.3% per year. Other experts say that new frontiers in oil & gas will spark
 innovations in E&P technology: Latin American countries are seeking to diversify energy matrices with a majority having biofuel
 policies. But, some reports appoint market restraints as the decline in oil reserves, the decrease in growth of industry sector
 and the new regulations against carbon emissions.

 The oil & gas industry is being transformed by the technological developments needed to explore and develop reserve sites
 and refine liquid fuel. However, Latin America is a rich under-explored hydrocarbon region whose economic future is dependent
 on the development of secure energy supplies.

 But the intensifying need to obtain supplies from more challenging conventional and non-conventional resources will impose
 very considerable demands on the sector's human, financial and intellectual capabilities.

 Foreign investors are faced with E&P opportunities in some Latin America countries, enhanced oil recovery field rehabilitation
 projects, pipeline distribution and transmission projects, the construction of refineries and transport infrastructure for oil, gas,
 and derivatives, vessels, liquefaction and regasification terminals, as well as widespread local, regional and international
 electrification projects.

 The current energy landscape and consequences of current policies

 The energy situation is very different in the various regions of Latin America. In Central America and the Caribbean, there are
 greater opportunities for ‘oil diplomacy’. The reason for this is that in those regions several big energy producers cohabit with
 more than 20 countries that are net importers of crude oil and gas, also, there are its population, its market, its voting power in
 the Inter-American System, and its geopolitically significant proximity to the United States. Only Guatemala and Cuba produce
 small amounts of oil, but not enough to satisfy domestic demand.

 In the Andean region, Venezuela and Ecuador export significant amounts of oil and gas.

           Venezuela ranks among the top ten oil producers in the world and boasts a robust 80 billion barrels in proven
            reserves. Exploiting this abundance should be the main focus of the country’s energy policy. This means improving
            both the quantity and quality of its refineries and, at the same time, establishing joint ventures to extract, refine and
            market these crudes through agreements with companies or countries that own or that can build or finance plants
            with technology capable of processing low-API crudes.

           Ecuador has 0.4% of the world’s crude reserves. Oil has an enormous significance in its economy. Peru has major
            natural gas fields in its southeastern Amazon basin.

           Colombia, has huge reserves of high quality coal and abundant hydro resources which, together with gas, will enable
            it to be an important player in energy integration programmes, especially in Central America and Mexico. However,
            the Colombian oil industry is showing worrying signs of decline in oil production in recent years. Some analysts
            believe that the country will no longer be a net oil exporter by around 2011.

 In South America...

           Bolivia holds the second-largest accumulation of natural gas reserves in South America, behind Venezuela. Due to
            the composition of its reserve base, Bolivia is primarily a natural gas-producing nation. Argentina has 0.3% of the
            world’s crude oil reserves.

           Argentina is still a net gas exporter, but the rapid growth of its internal demand, the failure to discover significant new
            reserves and the lack of investment in exploration and production, will sooner or later make it an importer of natural
            gas.

           Paraguay does not produce oil. However, if we consider hydroelectric production, Paraguay is energy independent,
            since it consumes much less energy than the available hydroelectric capacity of Itaipú (Brazil-Paraguay agreement)
            and Yacyretá (Argentina-Paraguay agreement).

           Uruguay does not produce oil. In terms of energy, Uruguay is the most vulnerable country in South America.

           Chile suffers from an energy deficit, as it produces no more than 5% of the oil it consumes and covers no more than
            20% of its natural gas needs. Reacting to its oil & gas deficit, Chile is developing an interesting energy diversification




Drillers and Dealers :::                                                                                        ::: February 2011 Edition
Emerging Markets Focus




            policy. This translates into new funds for hydroelectric plants in the south, boosting coal-powered thermoelectric
            plants, especially in the north, and combined-cycle plants.

 Brazil has been self-sufficient since 2006 and became a net oil exporter in 2009. In the January 2011 Short-Term Energy
 Outlook, EIA projects that Brazil will continue to be a net exporter through the end of 2012. According to the Oil and Gas
 Journal (OGJ), Brazil has 12.9 billion barrels of proven oil reserves and it has South America’s largest proved reserves of coal.
 It is also the world leader in production and a pioneer in the use biofuels such as biodiesel, which is an oil derived from plants
 such as sunflower, macaúba, soy beans, colza, and as alcohol extracted from sugar cane. Together with the United States, the
 two countries produce 70% of the world supply of ethanol. However, the main factors for the development of this fuel are the
 diversification of the energy matrix and the reduction of the country’s dependence on oil by-products. Brazil has the ideal
 conditions for the development of biofuels projects such as available manpower, abundant land to cultivate and favorable
 climate conditions.

 Experts present different scenarios for the future energy landscape in Latin America. Many suggest that the notion of regional
 integration will be superseded by global integration. The countries that have adopted the most prudent policies are those that
 have liberalized their oil and gas industries, those that have started to look outside the region to secure additional supplies or
 both. Brazil, Colombia, Peru, and Chile are all included in this group.

 Other experts believe aspirations toward regional energy integration have to some degree fallen by the wayside due the current
 wave of nationalizations and populist energy policies. Some countries are striking bilateral agreements but working toward self-
 sufficiency - motivated by a mixture of politics and economics - as Ecuador, Bolivia, Argentina and Venezuela that have
 adopted policies that are impractical and unsustainable. Venezuela and Bolivia ‘oil diplomacy’, for example, decided to
 nationalize some portion of its hydrocarbon industry that entailed heavy-handed expropriation of assets from private
 companies. While Argentina heavily subsidized domestic energy prices and Ecuador’s that has been following an aggressive
 policy against foreign investment.

 These divergent paths have produced incompatibility in the domestic political economies of the major exporters and the major
 importers as consequence it have limited the potential for developing regional infrastructure. The needs of the populace will
 drive governments to moderate or find middle ground. Latin America still has launched regional entities with the objective of
 improving energy integration and collaboration, as the Initiative for Regional Infrastructure South American Integration (2000)
 and South American Energy Council (2007). However, the overwhelming consensus is that energy coordination among Latin
 American nations remains limited and that these institutions have been ineffective, largely because they could not overcome
 the challenges associated with asymmetrical regulatory frameworks, policy coordination and implementation of rules and
 procedures.

 Some experts say that public policy can play a key role in numerous ways, notably by focusing on the following: providing a
 framework favourable to investment in new resources; providing a policy climate that ensures continued active co-operation
 between technology developers and hydrocarbon resources holders; actively participating in developing and facilitating the
 implementation of technologies that improve the safety of installations; vigilantly supporting industry's efforts to reduce its
 environmental footprint and thus to access resources in new areas.




                                                 Brazil’s Energy Overview
 According to EIA, International Energy Statistics, the largest share of Brazil’s total energy consumption comes from oil (50
 percent, including ethanol), followed by hydroelectricity (34 percent), natural gas (8 percent), coal (5 percent), other renewable
 (2 percent) and nuclear (1 percent). Natural gas is currently a small share of total energy consumption, but attempts to diversify
 electricity generation from hydropower to gas-fired power plants could cause natural gas consumption to grow in the coming
 years. The aggressive policy it has followed to develop Petrobras is changing energy geopolitics in the region. Brazil is the
 ninth largest energy consumer in the world and recent discoveries of large offshore, pre-salt oil deposits could transform Brazil
 into one of the largest oil producers in the world.




Drillers and Dealers :::                                                                                     ::: February 2011 Edition
Emerging Markets Focus




 A consortium of Petrobras, BG Group, and Petrogal discovered the Tupi field in 2007, which contains substantial reserves that
 occur in a pre-salt zone 18,000 feet below the ocean surface under a thick layer of salt. Following Tupi, numerous additional
 pre-salt finds were announced in the Santos Basin, such as Iracema, Carioca, Iara, Libra, Franco and Guara. Estimates for the
 total pre-salt resources vary. Some analysts place total extent of pre-salt recoverable oil and natural gas reserves at more than
 50 billion barrels of oil equivalent.

  Petrobras plans to invest $33 billion in pre-salt exploration and production activities to achieve an oil production target of close
 to 4 million bbl/d by 2020.More than a quarter of this target is to come from pre-salt oil. Brazil’s pre-salt announcements
 immediately transformed the nature and focus of Brazil’s oil sector, and the potential impact of the discoveries upon world oil
 markets is vast. Shortly, the Brazilian government released the proposed regulatory framework for the pre-salt reserves in
 August 2009. Brazil’s new regulatory meets a need in the gas industry by providing legal stability in the sector. Also, the law is
 to encourage more investment as well as competition in the natural gas sector, especially in the midstream.

                                                       External Alliances
 Russia, China, India and Iran recognize the strategic importance of Latin America and are building broad relationships in very
 systematic, aggressive ways.

           Russia is widely recognized as using its vast natural resources as a political weapon and holding countries hostage
            by manipulating access, control and distribution of the energy resources. Russia has also been quite active in
            building strategic relationships with several resource-wealthy countries to enhance its own long term energy security.
            In September 2009, Russia and Venezuela announced several cooperative agreements on energy, defense and
            trade, including a commitment to supply Venezuela with almost $4 billion in weapons. PDVSA, Venezuela’s oil
            company, signed two agreements with a consortium of energy giants in Russia.

           China’s grand strategy has been shaped by its desire to secure surety of energy supplies to fuel its continued
            industrialization. In April 2010, China announced a $900 million heavy crude production project with Venezuela. Just
            prior to that, in Brazil, China’s Sinopec and the China Development Bank signed a strategic development pact with
            Petrobras, Brazil’s state-owned oil company, whereby China agreed to provide financing to the tune of $10 billion in
            Petrobras over the next five years. China also has operations in Ecuador. In 2006, Andres Petroleum, a consortium
            of Chinese oil companies, purchased the Ecuadorian assets of the Canadian firm, EnCana for $1.42 billion.

           India also recognizes the strategic importance of Latin America. India’s state-owned Oil and Natural Gas Corporation
            (ONGC) has exploration and production stakes in projects in Brazil and Colombia and is exploring opportunities in
            Venezuela. In 2006, ONGC Videsh Ltd. (the overseas investment arm of ONGC) joined with the Chinese firm
            Sinopec to acquire a 50 percent stake (for a combined $850 million) in the Colombian oil firm Omimex de Colombia.

           Iran has also been cozying up to Venezuela and Brazil, as well as a number of Andean countries. In 2007,
            Venezuela and Iran signed three petroleum cooperation agreements which involved bilateral investment in Iranian
            gas and Venezuelan oil fields and Venezuelan gasoline exports to Iran. Brazilian energy firms - including Petrobras -
            are exploring possible deals to provide training and technology to modernize the Iranian energy sector. To support its
            strategic positioning in the region, Tehran has set up branches of its Export Development Bank in Brasilia as well as
            Caracas. Bolivia and Ecuador also enjoy cozy relations with Iran.

                                                             Findings
 This short article is just a part of a much more complete report on Latin America’s energy. Anyway, it can be said that global
 demand for energy is expected to increase. Most of this demand will come from developing economies in the long term and will
 be fulfilled by the oil & gas industry. New analysis estimates that the Latin America region will produce around 11.17 million
 barrels daily in 2014.

 Due to energy-efficiency trends, environmental regulation, and energy matrices reconfiguration, new technologies such as
 gasification (application IGCC), gas to liquid (GTL) or lignocellulosic ethanol will experience a high demand in Latin America in
 the years to come.

 However, low internal savings’ rates have limited local capital markets. Because of this, most of that funding must come from
 direct foreign investment such as emerging strategic partnerships and joint ventures in innovative technologies which are
 expected on demanding areas that include upstream and downstream segments such as: pre-salt discoveries in Brazil; heavy
 oil upgrading; and the construction of refineries and transport infrastructure for oil, gas, and derivatives, vessels, liquefaction
 and regasification terminals.

 Policy approaches drawing on these observations can help build the partnerships between industry and government that are
 needed to protect the interests of all stakeholders. Along with continued international collaboration on advancing technological
 development in the upstream oil & gas industry, such approaches will be needed if the hydrocarbon markets of tomorrow are to
 deliver on their promises.


 CARVALHO RIBAS ADVOCACIA E CONSULTORIA is an independent law firm situated in Mafra city that is actively involved in
 international matters and transactions working in close collaboration with correspondents and law firms located in key cities in
 Brazil, USA, Canada, Europe and Asia, which ensures competent assistance in the handling of local matters. Our work focuses
 on legal advice on all areas of business law, and stands out for its commitment to helping companies develop their activities,
 defending their rights and negotiating their interests. To obtain more detailed information with respect to the assistance that our
 professionals are able to provide, our overseas Clients should contact CARVALHO RIBAS ADVOCACIA E CONSULTORIA at
 info@carvalhoribas.com.brn or online at www.carvalhoribas.com.br




Drillers and Dealers :::                                                                                       ::: February 2011 Edition
Richmond Energy Partners
Highly experienced oil and gas professionals who provide independent
expert research and insights into smaller oil and gas companies


n REP provide investors with
analysis of smaller companies,
sectors, themes and trends
for corporate and professional
investors and advisers

n Research is based on deep
industry knowledge and an
understanding of how oil
companies are successful

n Our research is built on ‘from
the rocks up’ technical evaluations
of assets and realistic commercial
assessments of value and risk

n Our global network of industry
experts provides independent,
objective and conflict free insights
into both assets and people




For further information,
please contact Keith Myers
T: +44 (0) 208 742 8203
Email: kmyers@richmondep.com
www.richmondep.com
Drillers and Dealers Feb 2011
Drillers and Dealers Feb 2011
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Drillers and Dealers Feb 2011

  • 1. The Official Publication of The Oil Council ::: ::: February 2011 Issue
  • 2. Shaping the future. We need energy to power our future and Wintershall is working hard to find and develop new oil and gas deposits all over the world. We have both state-of-the-art technology and strong partners at our disposal as well as unrivalled regional and technical expertise particularly in Europe, North Africa, South America, Russia and the Caspian Sea region. As the largest German-based producer of crude oil and natural gas, we are helping to secure the energy supply, both now and in the future. www.wintershall.com
  • 3. Welcome to Drillers and Dealers Drillers & Dealers Contents Official Publication of The Oil Council 2011 Oil & Gas Survey Results 5 3rd Floor 86 Hatton Gardens London EMERGING MARKETS SPECIAL FEATURE EC1V 8QQ, UK Q&A: Risk / Reward Matrix of Caspian 9 Editor Exploration & Production: An M&A Energy Advisor’s Perspective Drake Lawhead Vice President, Content and Member Dana Novakovic, LB Capital Relations drake.lawhead@oilcouncil.com T: +44 (0) 20 7067 1873 Iraq – A Diamond in the Ash 12 Greg Hammond, Akin Gump Strauss Hauer & Feld Editor-at-Large and Media Enquires Iain Pitt Do NOC Leaders have the skills to deliver their 14 COO National Mission? iain.pitt@oilcouncil.com T: +27 (0) 21 700 3551 Johan Nell and Colin Sloman, Accenture Publisher The New Emerging Energy Future 17 Ross Stewart Campbell Mehmet Ogutcu, BG Group CEO ross.campbell@oilcouncil.com T: +44 (0) 20 7067 1877 MENA Region’s Oilfield Services 20 Nawaf Marafi, Ali Rampurwala and Rajiv Bishnoi, Partnership Enquires Kuwait Financial Centre “Markaz” Vikash Magdani Executive Vice President, Corporate Monetizing East African Gas 25 Development Wylie Clark, Taylor-DeJongh vikash.magdani@oilcouncil.com T: +44 (0) 20 7067 1872 Latin America’s Emergence as an Oil & Gas 26 Advertising Enquires Stronghold Guillaume Bouffard Evelyse Carvalho Ribas, CARVALHO RIBAS - Advocacia e Vice President, Business Development Consultoria guillaume.bouffard@oilcouncil.com T: +44 (0) 20 7067 1876 Best Practices in Engaging Stakeholders in Oil 31 Laurent Lafont Vice President, Business Development and Gas Projects – The African Experience laurent.lafont@oilcouncil.com Ziwase Ndhlovu, Mukazi Consulting T: +44 (0) 20 3287 3447 Ken Lovegrove OC Columnists – What’s New Online? 35 Vice President, Business Development ken.lovegrove@oilcouncil.com T: +1 604 566 4949 Copyright, Commentary and IP Disclaimer North American Media Enquiries ***Any content within this publication cannot be reproduced without the express permission of The Oil Council and the respective contributing Jay Morakis authors. Permission can be sought by contacting the authors directly or by Partner contacting Iain Pitt at the above contact details. All comments within this JMR Worldwide magazine are the views of the authors themselves unless otherwise attributed jmorakis@jmrworldwide.com to their company / organisation. They are not associated with, or reflective T: +1 212 786 6037 of, any official capacity, or any other person in their company / organisation unless so attributed *** To Be Added to Distribution List Email: info@oilcouncil.com More Information At www.oilcouncil.com Drillers and Dealers ::: ::: February 2011 Edition
  • 4. The Value of Specialist Knowledge Great Successes 2010: A Collection London Edinburgh Joe Nally Jon Fitzpatrick +44 (0) 207 397 8900 +44 (0) 131 220 6939 jnally@cenkos.com jfitzpatrick@cenkos.com www.cenkos.com Cenkos Securities plc is authorised and regulated by the Financial Services Authority and is a Member of the London Stock Exchange.
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  • 9. Emerging Markets Focus Risk / Reward Matrix of Caspian Exploration & Production: An M&A Energy Advisor’s Perspective Drake Lawhead interviews Dana Novakovic, Managing Director of LB Capital DL: What does 2011 hold for Oil & Gas emerging markets M&A? DN: Whilst most of our mandated work since 2009, through 2010, has been in Canada and North and West Africa, at the start of 2011 we see renewed interest, and opportunity to grow shareholder value, in the Caspian – places such as Kazakhstan, where the deal count has been limited and where most deals have been of a local or a private nature over the past 3 years. Only in January we accepted two mandates in the Caspian, a cross-border buy-side, and a sell-side in Kazakhstan. From a Macroeconomic perspective, according to projections put together by the IEA, Caspian oil and gas output will approximately double by 2030. Whilst the quickest output growth will come from Turkmenistan, the quickest growth in export quantities will still come from Kazakhstan, requiring that the country expands its oil export capacity from 1.5m bbl/d to as much as 3.5 m bbl/d. On the microeconomic level companies are carefully scrutinising technical, “soft” and financial consideration, and the risk envelope of the Caspian is recovering relative to the alternatives, as well. DL: How is this affecting acquisition multiples and expected level of deal flow? DN: Kazakhstan acquisition multiples have fallen significantly between 2007 and 2009, from its highest level of over ca. $5 per boe of 2P reserves between 2005 and 2007. This reflected not only the lack of acquisition finance since 2007, but also the changes in the risk envelope of the country. Whilst the bulk of renegotiations of the largest contracts such as the case with Karachaganak, may well be isolated and not spread to other large projects, a level of uncertainty remains, in particular, with respect to the export-tax regime and the local factors’ ambitions to increase its levels of ownership in the largest of the projects. However, the risks associated with renegotiations of contracts have affected primarily the Majors involved in the largest projects, and small and medium size producers remain largely unaffected. DL: So, are we to expect more activity in 2011? DN: Following the decline in acquisition multiples, a number of sizable assets bearing low technical risk remain available at reasonable multiples. Some of these assets have effectively been on the market since 2009, and Kazakhstan is emerging from the credit crunch as an attractive place for small and medium size E&P acquirers seeking both value and growth. Drillers and Dealers ::: ::: February 2011 Edition
  • 10. Emerging Markets Focus In fact, in the 1Q 2011, the total value of mainly producing assets on the market in Kazakhstan, formally mandated by sell-side advisors for, on average, over a year now, amount to in access of $1 billion. Now, the supply / demand curve is reaching that point where we see renewed interest by investors to result in a couple of reasonably sized transaction expected to close in February / March, as the “air pocket” between the seller’s expectations (pre credit crunch) and the acquirers’ ability to spend (post credit crunch) has diminished. A couple of these larger deals have been drawn out and reflect the sellers’ dissatisfaction in case of protracted processes involving Chinese potential acquirers. On a separate note, we also see a number of small cap explorers obtaining funding for higher-risk pure exploration drilling strategies. DL: What seem to be the most opportunistic acquisition targets? DN: It is indeed a bold proposition, but Cogito Ergo Sum: there is a case for a “roll-up” of a number of, especially, undervalued onshore properties in Western Kazakhstan, a proven hydrocarbon basin with existing infrastructure. This is a particularly fitting proposition for smaller and medium size acquirers because of the under-developed nature of the country’s smaller onshore resources of well known geologies, relative to the big bets (the likes of Kashagan) that Majors have focused on. Western Kazakhstan was well explored during the Soviet era, the data has been stored and has been successfully used by foreign companies operating there to focus and reduce costs of their 3D campaigns. DL: Which on-shore prospects offer the highest upside? DN: A number of onshore assets with substantial resources offer significant financial upside that will come from the conversion of resources into reserves in the next couple of years. These are assets at a stage where a small investment in development and external valuations of discoveries to confirm reserves is required in order to satisfy creditors and raise future development capital. Whilst, such situations would usually be positioned in the upper right hand corner of the risk / reward matrix, the known character of the local geology and low technical risks, have already allowed for such strategies to obtain financing over the past two years. We are looking at a number of portfolios where 3D seismic has been applied to the proven hydrocarbon basin, actively de-risking portfolios of low-risk, low-upfront-expenditure prospects with substantial production upside. Rolling up a number of smaller assets of this description would allow a larger acquirer to participate in several licences and diversify exploration risks for investors, in order to obtain a premium over the typical one-asset risk situations of smaller exploration plays, which is the case with most Caspian plays that are publicly traded. DL: What about producing assets? DN: The universe of acquisition targets for larger acquirers is case-book, as well. All Kazakhstan-based E&P players fall, quite neatly, into 3 categories: exploration plays, growing early producers and mature producers. When it comes to production, companies operating in Kazakhstan sell approximately 20% of oil in the local market at ca.50% of Brent, and export about 80% of produced oil. Barrel sold in Kazakhstan is less profitable than exported barrel but still much more profitable than, for example, Russian barrel. This is also why oil prospects in Kazakhstan are safer bets relative to gas prospects; whilst gas producers face uncertainty related gas pricing, as well as gas transportation and processing, oil producers, on the other hand, enjoy clear and stable export price that equals Brent minus a predictable discount that depends on transportation cost from the point of sale to Europe and quality of crude. Also, most producing assets and companies in Kazakhstan have substantial resources that have not migrated to reserves yet offer substantial exploration and development upside. In conclusion, we do see value for investors in a few carefully selected oil assets higher up the development curve here, as well. LB Capital companies provide cutting edge strategic advisory service on merger and acquisition (“M&A”) and A&D transactions. We serve corporate clients and governments, as well as a range of institutional and private investors, including sovereign wealth funds in Energy and Natural Resources Sectors. Dana is Managing Director at LB Capital. Prior to LBC, she was Corporate Director M&A Energy at ABN Amro and Associate Director M&A Energy at UBS Investment Bank in London. She joined UBS Investment Bank in 2004 after working at Lehman Brothers M&A Energy and McKinsey & Company’s Petroleum Practice in London and New York. Dana holds an MBA with concentrations in Finance and Accounting from the William E. Simon Business School, University of Rochester, New York: http://lb-capital.com/ Drillers and Dealers ::: ::: February 2011 Edition
  • 11. Cutting edge specialist Oil & Gas M&A boutique repeatedly engaged by sophisticated Sector clients seeking to attain specific results and grow value http://www.lb-capital.com WHAT MAKES US DIFFERENT We were founded on the belief that a private and independent advisory firm that offers pure advice, untainted by the conflicts inherent in multi-product investment banks offers superior value to our sophisticated and results-oriented Sector clients. With no lending or trading conflicts, LB Capital's fundamental focus, and our cutting edge, is in valuing our long-term client relationships by delivering high-impact advisory services based on specialist experience, uncompromising integrity and continuity of personnel. Our model has evolved in response to the industry's increasing demand for a more thoughtful and sophisticated approach to portfolio optimization, capital re-deployment, and careful investing. As a result, our track record of delivering value for clients, and our unique combination of skills, has quickly made us the firm of choice for sophisticated clients looking to achieve superior results under challenging market conditions, including in the emerging and frontier markets. In addition to independence, our distinct advantage is our singular Sector specialisation; we are primarily an Oil & Gas boutique that is better positioned to include and leverage the hands- on expertise of our technical consultants, primarily petroleum engineers, combined with the sophisticated corporate finance prowess of a leading investment bank. LB Capital Limited Berkley Square House Berkley Square London WIJ 6BD United Kingdom http://www.lb-capital.com SELECTED RECENT MANDATES Mandated Diversified International Conglomerate Advisor to a privately held diversified corporation in connection with reviewing strategic alternatives regarding its oil & gas portfolio. Mandated Privately held E&P Advisor to a privately held company in connection with a proposed sale of oil & gas exploration and production properties in Kazakhstan. Mandated UK Independent Advisor to a UK Independent on potential acquisitions of oil & gas producing properties in the Caspian. December 2009 Canadian corporation Advisor to Canadian corporation supported by Carmignac Gestion on the next stage of its corporate development including acquisition of oil & gas producing properties in West Africa. December 2008 NOC client Advisor to an NOC on potential acquisitions of a privately held company producing oil in the CIS. March 2008 Petronorse Advisor to Petronorse in connection with its decision to explore strategic opportunities in pursuing next stage of development. December 2007 CEAC Advisor to Central European Aluminium Company on potential acquisition(s) of power producing assets.
  • 12. Emerging Markets Focus Iraq – A Diamond in the Ash Written by Greg Hammond, Partner, Akin Gump Strauss Hauer & Feld Iraq is possibly unique among the major oil producing nations insofar as its oil production profile over the last 30 years shows a succession of truly spectacular collapses in production. Depicted on a graph, it resembles the jagged blade of a giant wood- saw. Since its all-time production peak in 1979, Iraq has of course been subjected to three devastating wars which brought the country to its knees and destroyed key elements of its hydrocarbons infrastructure. As if this wasn’t enough, the source of the world’s fourth largest oil reserves has experienced a number of other setbacks. Religious and cultural divisions (for example amongst the Shia and Sunni muslims, as well as the Kurds in the north and the Marsh Arabs in the south) continue to create barriers. These divisions are also sometimes reflected in the political landscape. Following the elections in 2010 (when no clear majority emerged), it took over nine months for a coalition government to be formed which delayed and further hindered Iraq’s rebuilding effort. In addition, Kurdistan continues to govern itself semi-autonomously through the Kurdistan Regional Government (“KRG”), with the result that there are differing oil and gas licensing regimes in Kurdistan and the rest of Iraq. These differences (which have arisen partly from a disagreement over the interpretation of the Iraqi Constitution adopted in 2005), resulted in the oil embargo imposed by Baghdad which has recently frozen exports out of Kurdistan. Another source of friction between Baghdad and Erbil has arisen from the KRG’s preference for a traditional PSC-style licensing arrangement in contrast to the south where a form of technical services contract (the “DPSC”) is more typically used (which rewards participants with a cash fee per barrel of oil recovered rather than with a pre-agreed percentage share of physical oil). One of the starkest logistical problems facing Iraq relates to the lack of transportation facilities and storage capacity for hydrocarbons – particularly in landlocked (and mountainous) Kurdistan. While a network of ageing pipelines does exist up and down the country, Iraq is still a long way short of the infrastructure which will be required if its current production targets are to be achieved. Of course security also remains an issue of concern – both as regards safety of employees, as well as security of assets and infrastructure. Hijackings and bombings continue – and there is concern in some quarters over the ability of the Iraqis to maintain reasonable standards of law and order in the future once foreign forces have left. On a more practical level, unexploded munitions and mines from the Iran-Iraq war and two Gulf wars often need to be removed before fields can be accessed and developed. Indeed the form of Iraqi DPSC makes specific reference (where appropriate) to the preparation of a “de-mining work program” which must then be performed as a recoverable cost of the contractor parties. Wars (and even previous production methods) have on occasions damaged the oil deposits themselves, leading to by-passed reservoirs and unpredictable operational difficulties. For example, a UN Report in 2000 highlighted such problems in the massive Kirkuk field. As one might expect, three wars in quick succession have also resulted in the loss or destruction of years of accumulated appraisal data. Oil reserves information is therefore often based on limited data, giving scope for interpretation or error. In addition, the once plentiful pool of world-class technical experts emanating from Iraq (including geologists and geophysicists) has been severely reduced by war and emigration. There are even claims from some circles that certain fields in the south of Iraq may be subject to the stringent environmental laws which govern the area of the Marsh Lands around Basrah – protecting its water supplies, flora and sensitive fishing stocks. Add to that the global financial crisis, the resulting fall in the oil price and the collapse of Dubai as the hub for Middle Eastern finance and (as one might expect) the list of problems, handicaps and restricting factors goes on and on. So why then in 2009 did BP and CNPC buck the general trend and alone enter into a DPSC under the First Licensing Round in Southern Iraq when all other bidders had declined? More intriguingly, why in 2010 did the market capitalization of one AIM- listed oil producer soar to £1.5bn when its oil production in Kurdistan is both limited and currently transported solely by road? In short, why (in spite of the catalogue of risk factors listed above) does the tide now appear to be turning in favour of investment in Iraqi oil and what are the prospects in the medium-to-long term for investors there? As we know, the oil industry is essentially an exercise in understanding and assessing risk – which can take many forms and is often present across the full length of the oil exploration, production and off-take chain. The big difference in Iraq is that one of the key customary risks – exploration risk – can often be almost eliminated due to the unusual degree of confidence that hydrocarbons are in place. In the south of Iraq, this is frequently because most of the oil fields which have been the subject of the latest three licensing rounds are known to have existed (and indeed have often been in full-scale production) at some point over the last thirty years. The existence of these huge fields has of course been the justification for the technical services arrangement embodied in the Iraqi DPSC – on the basis that there was never any exploration risk for a bidder. All that was required was a large balance sheet and the technical expertise and resources which a super-major IOC could provide to bring a particular field back on stream. In contrast to southern Iraq, the virtual elimination of exploration risk in Kurdistan arises in other ways. It was best illustrated to me many years ago by the look on the face of one of the industry’s leading geologists who, during the early scramble for Drillers and Dealers ::: ::: February 2011 Edition
  • 13. Emerging Markets Focus Kurdish exploration acreage, memorably emerged open-mouthed from a London data room whispering that he had seen “mountains full of oil”. This prediction turned out to be pretty accurate, given that the success rate for exploration wells in Kurdistan currently stands at around 80% - an astonishing statistic. So, if one can be fairly confident in Iraq about exploration risk, how will one ever be able to get comfortable with the various political, security, transportation, educational, environmental and other risks catalogued above? In other words, what could be the justification for BP’s extraordinary move in 2009 against a clear tide of contrary opinion and responsible eighteen months later for the rocketing upwards of an AIM-listed company’s market capitalization to £1.5bn from almost nowhere ? The answer may recently have arrived in the form of Abdul Karim Al-Luaibi – the newly appointed Iraqi Oil Minister. Aged 51 and standing over six feet tall, he is a petroleum engineer who has spent his whole career with the Iraqi Oil Ministry – where he started out as an engineer’s assistant. A shrewd and capable politician, he is reported to be close to Hussain Al-Shahristani (the former Oil Minister and now Deputy Prime Minister) and Nouri al-Maliki (the recently appointed Prime Minister – who also happens to be from the same tribe). The closeness of these relationships underscores the critical importance of Iraqi’s oil industry to its leaders and also explains the unified position which now appears to be emerging in energy-related matters, notwithstanding the unstable and unpredictable political scene elsewhere in Iraq. Within two weeks of his appointment, Mr. Al-Luaibi (who, as deputy minister of oil for upstream, managed the process for all three previous licensing rounds in southern Iraq) announced a fourth round of licensing – although importantly this will now be for exploration blocks rather than the development of existing fields. As a result, it is possible that southern Iraq will now move away from the current form of technical services agreement and more towards a traditional form of contract. Within that same two weeks, he announced a record increase in output from Iraqi oil fields (which included a ten per cent. increase in BP’s production over its budgeted targets at its Rumaila field). More recently, it has been announced that Iraq has agreed to build an oil pipeline to neighbouring Jordan and is now considering plans for a similar project into Syria. However, if one reads between the lines, the good news doesn’t seem to stop there. Recognising the critical importance of upgrading Iraq’s oil infrastructure, Mr. Al-Luaibi has confirmed that another immediate focus will be on export routes to the south. There are therefore plans for new pipelines (in conjunction with storage expansion at Faw, Nasiriyah and Zubair in the south) in a clear move to increase the flow of oil to the wider global market. As regards the thorny issue of relations with the KRG, there is now evidence that North Oil Company (the vehicle used by the KRG for oil investments in Kurdistan) is being offered participations in some key oil projects in southern Iraq – thereby further breaking down the barriers between Kurdistan and the south, and almost introducing an element of “cross-shareholding”. Furthermore, Mr. Al-Luaibi (who has led negotiations for southern Iraq for the last year and therefore knows the KRG oil officials extremely well) recently announced that “Talks with the brothers in the KRG will continue in order to reach solutions which meet the public interests”. This was the best indication yet that a thawing was occurring in relations between Erbil and Baghdad. Finally, at the end of January, officials from both sides confirmed that pipeline exports would recommence from two Kurdish fields with effect from 1 February – although other details about such a possible relaxation of the oil embargo were hazy at that stage. Then, on 2 February, news began to break that exports had recommenced from two fields in Kurdistan (including DNO’s Tawke oil field where offtake into the Turkish export pipeline is expected to increase to 50,000 bpd in the next few days). At that point, it became clear that the Iraqi Oil Ministry (under Mr. Al-Luaibi) not only has ambitious plans, but also appears to be able to deliver on them. Inevitably, there will also be a number of external factors which will incentivize the Iraqis and the broader oil industry to tackle and overcome the obstacles to Iraqi investment listed above. In the same way that a steadily increasing oil price, rising global demand, desire for security of supply and the recognition of the risks inherent in other areas of the industry have driven the development of new products such as shale gas, the same market forces can be expected to encourage IOCs, NOCs and other oil industry participants to now come to the table in Iraq. Combined with these external factors, it could be that the Iraqis have now found a magical mix of political will, industry expertise, personalities and global circumstances which can help to reduce or overcome some of the risk factors which have affected them in the past and herald a new “golden age” of investment in Iraq. If that proves to be true, one can expect the original wave of first movers into Iraq to now sit back and enjoy the parallel benefits of a rising oil price and reducing Iraqi risk. Likewise, those original prime-movers wishing to make further investments into Iraq (who by now will have experienced its oil industry at first hand over an adequate period of time) will be best placed to assess the new reduced risk levels and price them into their future investments. Greg Hammond is a Partner in the London office of Akin Gump Strauss Hauer & Feld, the leading international energy law firm and a Member of The Oil Council Committee. Note: The original version of this article appeared in the 31 January 2011 edition of The Lawyer, which The Lawyer entitled "Get Well Soon” Drillers and Dealers ::: ::: February 2011 Edition
  • 14. Range Resources: A diversified n Georgia international oil and gas exploration n Puntland and production company n Texas n Trinidad www.rangeresources.com.au ASX:RRS AIM:RRL Australian Office London Office Ground Floor, 1 Havelock Street, 5th Floor, St James House, West Perth, Australia WA 6005 23 King Street, London SW1Y 6QY Telephone +44 207 389 0588 PO Box 684, West Perth, Australia WA 6872 Email a.eastman@rangeresources.com.au Telephone +61 8 9488 5220 Website www.rangeresources.com.au
  • 15. Emerging Markets Focus Do NOC Leaders have the skills to deliver their National Mission? Written by Johan Nell and Colin Sloman, Accenture The growing ambition of National Oil Companies (NOCs) has transformed the energy landscape in recent years. But as NOCs increasingly expand beyond their domestic markets, it is now time to ask whether they themselves are ready for further transformation of their business. NOCs are expected to continue delivering on their „national mission‟, and as they expand abroad, and must compete with International Oil Companies (IOCs) where the battle for reserves, equipment and talent is intense. But another challenge is emerging. NOCs are now being asked to operate their business on a different scale which involves delivering large and complex projects (both at home and abroad) operating in new markets, working with multiple partners and ensuring operational excellence. This new way of operating means the spotlight is now being turned on the leadership qualities of NOCs as they face these new challenges. Over the next decade, OPEC will have an opportunity to reassert its dominance as its members‟ share of global production rises from 40% to as much as 46% by 2030i. International expansion is already a feature for many NOCs. Asian players in particular are very active in acquiring assets abroad. For example, the Chinese National Petroleum Company (CNPC) now operates 81 oil and gas projects in 29 countries, up from 58 projects in 22 countries at the end of 2005ii. It recently stated that its average annual growth rate of overseas crude oil production reached 15.6% during the past five yearsiii. NOCs are also working together, forming consortia to bid on new projects together as they move into new markets. Saudi Aramco, for example, has become a major supplier to Asia and an important contributor to Asian economies through investment in refining and petrochemical sector activities. In China alone, it currently employs around 8,000 peopleiv. The Importance of Leadership These trends will require very different skills and experience to those required of NOCs before. In a recent survey of NOC executives conducted by Accenture,* most respondents cited leadership skills and quality talent as essential to deliver their strategies, but acknowledged that these were also often the attributes they particularly lack. NOCs recognise the need to introduce leadership development programmes but these programmes often do not go far enough to drive wholesale business transformation. As they expand their horizons, a greater focus on leadership skills is needed. (*in 2010 Accenture undertook a study of NOC executive to understand what leadership capabilities would be required for NOC success in the energy industry. The study composed of surveys, workshops and interviews with NOC senior level executives, and a workshop with over 40 students (the majority are current employees of NOCs) completing Oil and Gas MBAs in Aberdeen, UK) There are many different types of NOCs, all with different strategies and ambitions; as a result they will all need a slightly different focus to delivery their particular leadership development agenda. In addition, NOC leadership skills face unique challenges with which IOCs do not have to contend. In place of the Western ideology of “maximising shareholder returns”, NOCs work to a more holistic concept of “value creation” along both commercial and social lines, which also requires an ability to manage their key stakeholder, the government. Expectations of “value creation” for many NOCs are codified in their „national mission‟ that means that NOC leaders are continuously balancing the priorities of the commercial business with that of the wider economy, against a backdrop of a constantly changing political situation. What Leadership Capabilities do NOCs need? As NOCs embark on changing their business models (which often involves internationalization) they need to achieve a cultural fit with their new businesses and communicate well with governments in the host nation. Overlooked skills such as languages are fundamental, as are abilities to execute increasingly risky and complex projects on time and to budget. Over the past two decades, the gap in commercial and technical excellence has narrowed considerably between NOCs and international oil companies (IOCs) However over the past few years, IOCs have been forced to raise their levels of efficiency as they work on projects which have increased in size, complexity, and risk. Many NOCs are now seeing a similar challenge and need to also build on their business execution skills to be able to deliver projects, on time and on budget. Complex project management skills will be critical to long term success for NOCs. Underpinning the leadership attributes of vision, relationship and execution is a requirement of all leaders to have strong “soft” skills. Such skills include commercial acumen, communication skills and international experience which are all needed to scale companies at a global level. Such skills often come with experience rather than training and are thus, harder to develop. Visioning skills will also be important for NOC who will are required to maintain a focus on the „national mission‟ as well as inspire and engage staff throughout the significant transformation ahead. In the Accenture survey, NOCs identified that the ability of their executives to set a vision, see opportunities and inspire their workforce as fundamental to achieving their future objectives, but is often lacking as a core leadership attribute. Drillers and Drillers and Dealers ::: Dealers February 2011 Edition ::: February 2011 Edition
  • 16. Emerging Markets Focus Successful transformations require strong leadership capabilities but are complicated by the fact that the skills and experiences demanded of the NOC leaders for more a more complex project environment at home and international growth is very different. As they transform their companies, NOCs need to address all three levels of leadership at the individual, team and process level. Based on Accenture‟s extensive experience working with leading NOCs across the world, as well as the results of our recent NOC Leadership Survey, we propose five key ways that NOC leaders can build the skills to achieve high performance abroad and successfully deliver their „national mission‟. 1. Understand individual leadership style In addition to generic leadership training, it is critical to provide individuals leaders with an understanding of their personality and how it impacts their leadership and management style. This is key to the individual leader‟s success and that of the leadership team and wider organisation. Focusing on developing individual leadership styles is important as is the ability of their management to learn through experience 2. Learn through experience Leaders learn from planned and unplanned experiences varying from major events, such as leading a Joint Venture or recovering from a financial disaster, to the more conventional (e.g. job rotations, working abroad, etc.). NOCs need to develop a comprehensive leadership development program that uses “experience” and equips candidates to learn from both planned and unplanned experiences. 3. Build foundational soft skills NOC leaders will need to be highly effective communicators, know how to lead change, and have a keen understanding of the commercial and social policy of the company. NOC managers already have considerable relationship building and networking skills, but in order to improve success in international markets, they will need to balance technical skills training with „soft‟ skills development. 4. Develop team leadership capabilities The strength of leadership teams, as opposed to individual leaders, will dramatically increase in importance as NOCs optimise their businesses and extend their scale in multiple markets. NOC executive teams often operate as homogeneous groups. But according to our survey, 100% believe that a team discipline will be paramount for future success, and 50% believe that diversity in management will act as a strategic asset. Developing good teams of leaders helps leverage the different capabilities, knowledge, experience and styles of individual leaders and obtain the right balance to execute their specific strategy. Attention should be paid to key areas such as diversity and using social networking tools to encourage teaming. Peer reviews and peer coaching can also help by challenging the traditional hierarchical model of most NOCs. 5. Establish strong leadership processes / systems Cultivating the next generation of leaders will not happen without intervention. NOC leaders not only need to identify their immediate successors but those two generations beyond. This will only occur with a robust performance management system, as well as a comprehensive succession planning and strategy-aligned programmes for high potentials, which develop and rewards high achievers. Steps Description 1. Understand Apply tried and tested tools to give NOC leaders an understanding of their individual individual leadership leadership styles and how they work with others – enabling them to reflect and set out style practical improvement actions 2. Learn through Embed experiential based learning at the heart of a comprehensive leadership development experience program – plan experiences and equip candidates to reflect and learn from both planned and unplanned experiences 3. Build foundational Take immediate steps to put in place targeted soft skills training that incorporates experiences soft skills and role play, while at the same time embed soft skill development in career paths, expected competencies and training curriculum for the long term 4. Develop collective / Develop a global mindset through focussing on increased diversity of the executive leadership team leadership team, and using peer group coaching and the latest technologies to build stronger teaming, capabilities knowledge sharing and collaboration skills 5. Set the tone and Establish a performance based culture and actively cultivate the next generation leaders establish strong through the rigorous application of performance management and succession planning, as leadership well as putting in place a comprehensive, strategy aligned, High Potentials program processes / systems Drillers and Dealers ::: ::: February 2011 Edition
  • 17. Emerging Markets Focus As NOCs transform their business models and extend their international footprint, they will not only need to address leadership skills at all levels of the organisation but make sure they have the processes in place to embed the leadership capability in their company. The Accenture survey showed however that while most NOCs recognise the need for improved leadership skills, they have yet to develop programs to nurture them. For example, the importance of leadership teams, as opposed to individual leaders, will dramatically increase in importance as NOCs optimise their businesses, and have to “get things done on a global scale”. “Today, NOC executive teams operate as homogeneous groups. In the future, 100% believe that a team discipline will be paramount for success, and 50% believe that diversity in management will act as a strategic asset” (Accenture NOC Leadership Survey). Some of the changes will be difficult to adopt, as they may go against both the existing practices and culture of the company. As NOCs change, they will need to offer a more structured career path and create a more dynamic working environment as a value proposition to future leaders. NOC executives will also need not only the skill but the “will” to be able to steer the company and the next generation of its leaders into the next phase of its development. To fulfil their ambitions at home and abroad, many NOCs are already making incredible business transformations. Our survey found that generally, NOCs felt they were better prepared to handle today‟s challenges than those of tomorrow. If successful change is dependent on talent, then the journey starts here. About the Authors Johan Nell leads Accentures’s Upstream Oil and Gas Segment. He has worked in the resources environment for the past 20 years in operational and consulting roles and has delivered business improvement initiatives in the chemicals and petroleum, utilities, mining and heavy engineering industries. In his current role Johan is challenged with the task of directing Accenture’s global industry expertise to the challenges of upstream energy companies, creating and delivering capability in the strategy, operations and operational support domains.  johannes.nell@accenture.com Colin Sloman is a Senior Executive in Accenture’s London Office and part of Accenture’s Global Talent & Organisational Performance (T&OP) Leadership Team. Colin is responsible for leading the Energy Industry T&OP Service Line and the Global Culture practice. His industry experience spans Oil & Gas, Chemicals and Mining Industries. Colin is primarily focused on large- scale business change projects spanning Europe, Russia, Middle East, Africa, North America and Asia Pacific.  colin.sloman@accenture.com This article was produced with the assistance of Julie Adams (Accenture Research, and Matthew McGuiness, Accenture Media). i “Demand for oil will keep rising, warns BP”, 20th January 2011, The Daily Telegraph, © 2011 Telegraph Group Limited, via Factiva ii “China's CNPC cuts 2011-2015 overseas investment plan”, 23 November 2010, Reuters News, (c) 2010 Reuters Limited, via Factiva iii “CNPC ups overseas oil production”, 24th December 2010, China Daily Information Company, copyright 2010 China Daily Information Company via Factiva iv “Oil giant invests in social responsibility” 28 September 200, South China Morning Post, (c) 2009 South China Morning Post Publishers Limited, Hong Kong. All rights reserved, via Factiva Drillers and Dealers ::: ::: February 2011 Edition
  • 18. Discover TMX: WORLD LEADING Exchanges for Oil & Gas Toronto Stock Exchange and TSX Venture Exchange are home to nearly 400 junior and senior Canadian and international oil and gas companies, having a total market capitalization of more than $425 Billion. As of December 31, 2010: 394 Oil & Gas $11.3B Oil & Gas Issuers Equity Raised 55 New $258B Oil & Gas Listings Value Traded Global Investments Global Properties Explore your Capital Global Visibility Opportunity Today. For more information about listing on Toronto Stock Exchange or TSX Venture Exchange, contact Cindy Gray at cindy.gray@tsx.com or +1 403-218-2822 www.tmx.com/energy This is not an invitation to purchase securities listed on Toronto Stock Exchange or TSX Venture Exchange. TMX Group and its affiliates do not endorse or recommend any of the referenced securities. Please seek professional advice to evaluate specific securities. TMX, Toronto Stock Exchange and TSX Venture Exchange are trade-marks of TSX Inc.
  • 19. Emerging Markets Focus The New Emerging Energy Future: Towards Cleaner, Safer and Smarter Energy Written by Mehmet Öğütçü, Chairman, The Bosphorus Summit “When a Brazilian brews her morning coffee today, she is likely to use electricity from a power plant in Uruguay that runs on natural gas from Argentina provided by a Chilean company. She drives to work in a Ford fuelled with Venezuelan gasoline, and her Canadian-owned factory may soon be powered by a 3,000 km natural gas pipeline from Bolivia.” Tectonic ch anges ar e occ urring not only in the wo rld finan cial system, tradi ng and investment, geopolitic s, and te chno logy. A fundamental transfor mation is also under way i n the glob al en ergy system. Myriad trend s ind icate tha t the curren t system is far from being sustainab le. It will be shaped by rising demand over th e long term, dominance of fossi l fuels, inaccessible suppli es, price volati lity, inadequ ate investmen t, geopoliti cal tensions, resou rce natio nalism, and climate change. The mos t pre ssin g decision facing th e next generation may be how b est to accelerate th e transi tion from a fossi l -fu el -bas ed energy system to a system based on cli mate - friend ly energy alterna tive s. No one coun try c an a lone add ress thi s mammoth challeng e. T he US, the EU and BRICs must a ll embrac e th is transition — or we all su ffer th e consequ ences. As globalization lifts millions out of poverty, the demand for energy worldwide will continue to grow, and we risk ending up with a volatile, “beggar thy neighbor” style of competition between countries to control sources of supply, especially in the developing world. Mankind has had access to electricity for only 130 years. In just over a century, we have extended transmission lines, providing refrigeration and lighting to 5 billion people around the world. NASA's "Earth at Night" map highlights this world of prosperity, yet 24 percent of humanity still lives in the dark. We are forced to embark on a journey to create a new energy system. However, describing this cleaner energy system is a lot easier than creating it. The transition will take time. History shows that once a new energy technology is proven, it takes about 30 years for it to achieve 1 per cent of the overall market. There is no easy solution, no technological fix and no single answer. Weaning ourselves off fossil fuels will require a combination of greater efficiency, changes in habits and lifestyle, and deploying major renewable energy projects that some people will not like. Changing Dynamics In World Energy By dint of their sheer size and population -- and their collective decision to embrace their own particular brand of capitalism -- BRICs are the economic future of the world. They today already account for a combined GDP of $15.435 trillion on a purchasing power basis. These rising economic dynamos will have to compete with the mature economic powers for access to remaining untapped reserves of exportable energy - in many cases, bought up long ago by the private energy firms of the mature powers like Exxon Mobil, Chevron, BP, Total of France and Royal Dutch Shell. Of necessity, the new contenders have developed a potent strategy for competing with the Western "majors": they have created state-owned companies of their own and fashioned strategic alliances with the national oil companies that now control oil and gas reserves in many of the major energy-producing nations. The changing nature of the international petroleum market thus requires new rebalanced mechanisms, and new forms of partnerships among players. The profound changes in world energy, still underway, could be summed up as follows: First, the increased international petroleum prices have, together with many other factors, shifted power significantly to oil producing countries, especially a few large ones, where the majority of remaining reserves are located, such as the Gulf, Russia, and Central Asia. This power, coupled with the huge financial assets accumulated by those producers in a high price environment, has fuelled the international ambitions of these countries to seek changing or reshaping the traditional rules of the game for the benefit of their national interests. Aware of their increasing power, many of the resource-rich countries have either re-nationalised their oil industries or established strategic control through further transfer of power into the hands of governments. Second, there is an increasing concern of security of energy supply at the consumer’s side. Due to increased demand and depletion of domestic reserves, major oil consumers will have to rely more on imported oil and gas, from a few politically- instable regions such as the Middle East, Africa, Russia and Central Asia, through long-distance pipelines and vulnerable sea routes. This, combined with the fact that international oil market, is less stable and more prone to the disruption of natural disaster, terrorist attack and isolated geopolitical acts increased the vulnerability of these consumer countries. Third, the capacity of the global energy industry to satisfy demand is shrinking. By all accounts, the global supply of oil will expand for perhaps another half decade before reaching a peak and beginning to decline, while supplies of natural gas, coal and uranium will probably grow for another decade or two before peaking. Yet, there are still huge unexpored areas in the world. For example, the Arctic is estimated to hold reserves of 51bn tons of oil and 87 trillion cu m of gas, of which 9 bn tons of oil and 10 trillion cu m of gas fall in Russia's territory. Energy investment worldwide has plunged over the past few years in the face of a tougher financing environment, weakening final demand for Drillers and Dealers ::: ::: February 2011 Edition
  • 20. Emerging Markets Focus energy and lowering cash flow. It is estimated by IEA that global upstream oil and gas investment budgets for 2009 were cut by around 19 percent compared with 2008 — a reduction of over $90 bn. The 2010 figures were not encouraging, either. Fourth, Although the OECD countries are still the largest oil consumers, the current increase in demand for oil and gas is mainly driven by fast economic development in developing countries such as India and China, which account for one-third of the world population but only consume 17 percent of world energy. Each Chinese, however, consumes only two barrels a year, so even a small increase in Chinese consumption could have a massive impact on the market. Global energy demand is expected to nearly double in the first half of this century. That is partly due to population growth, going to about nine billion people in 2050 from 6.8 billion today. Different from OECD countries, these newly emerging major oil consumers are less supportive of free market principles and are guarded by national oil companies that are controlled and supported by their governments. Fifth, a rising security of demand concern of major oil producer countries may prevent large scale of investment from happening. To meet the rising energy demand, huge amount of investment is needed. Due to environmental pressure, consumer governments around the world are seeking to reduce consumption and reliance on traditional fossil fuels given that the energy sector is the main contributor of emissions of greenhouse gases. This rising uncertainty of future consumption level for conventional energy, increases the security-of-demand concern of major export countries, and impedes much needed investment. As a result of these developments, the global energy scene is going through a fundamental transformation that will not only change the rules of the game; it will also change the game itself and its players. The “Green Economy” and Energy Alternatives New sources of energy are desperately needed to compensate for the eventual disappearance of existing fuels as well as to slow the buildup of climate-changing "greenhouse gases" in the atmosphere. In 2030, fossil fuels will still account for exactly the same share of world energy as in 2004 while the expected increase in renewables and biofuels is so slight - a mere 8.1 percent - as to be virtually meaningless. In global warming terms, the implications are nothing short of catastrophic: Rising reliance on coal (especially in China, India and the Us) means that global emissions of carbon dioxide are projected to rise by 59 percent over the next quarter-century, from 26.9 billion metric tons to 42.9 billion tons. The meaning of this is simple. If these figures hold, there is no hope of averting the worst effects of climate change. The winds of economic destruction are flattening not just retirement accounts but also naive visions for a green economy. Public support for costly new green mandates is weakening, and government budgets to fund them are bleeding red ink. The market, it is now clear, is not a reliable force for driving the adoption of green technologies. Just as the role of government is rising across banking and other sectors of the economy, new green will be much more wary of market forces as the route to profit. Supporters of renewable energy have been much more effective in affecting regulation: in most of the US it is now nearly impossible to get approval to build new coal plants (even when they replace older, less efficient units) and half the states force power companies to buy rising amounts of renewable electricity almost regardless of cost. Final Word What makes the world energy somehow unstable are "above-ground factors." Ironically, the choices we made to achieve our unprecedented prosperity may bring about our downfall. In 1950, there were 2.5 billion people and a global economy of $7 trillion. Today, the consequences of energy use are felt in every wallet, on each continent, coastline and in our shared atmosphere. The new energy future will likely be a world powered by cleaner fossil fuels, more renewable energy and nuclear. It will be a world where cars, appliances and buildings are much more energy-efficient. Biofuels, wind and solar will grow rapidly from their small base. Renewables could make up 30 per cent of the world’s energy by 2050, if we include hydroelectricity. Fossil fuels and nuclear will make up the rest. In the transport sector, consumers will enjoy a wider array of fuel choices. Vehicles will be powered by everything from advanced petrol and diesel to biofuels, electricity and, eventually, hydrogen. The global business community is the crucial link that will enable the world to get to grips with the energy challenge of the coming decades. Governments will set the framework, scientists will invent the technologies and consumers will adapt to a less energy-intensive world, but it is business that will develop, deliver and apply the technologies at every level. How successful it is will determine how successfully the world copes. About the Author: A former Turkish diplomat, IEA Principal Administrator, Head of OECD Global Forum, Mehmet Öğütçü is Director of a major multinational energy corporation (UK); Chairman, The Bosphorus Summit; a teaching fellow with London School of Economics, Reading University; and a regular columnist in international and Turkish publications. The views expressed in this paper are the author’s and do not necessarily reflect those of any organisation he is associated with. He can be contacted at ogutcudunya@yahoo.co.uk Drillers and Dealers ::: ::: February 2011 Edition
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  • 22. Emerging Markets Focus MENA Region’s Oilfield Services Written by Nawaf Marafi, Ali Rampurwala and Rajiv Bishnoi from Kuwait Financial Centre “Markaz” In our view, 2011 and the near-future, represent exciting times for the oilfield services (OFS) segment, both globally as well as in the Middle East & North Africa (MENA) region. As a result of the changing stance of National Oil Companies (NOCs), increasingly favorable policies of local governments, reopening of the financial markets, and growth in regional entrepreneurial talent, opportunistic regional OFS companies stand to benefit significantly in the near-future. We also believe that the opportunity to build indigenous regional OFS companies is fundamentally underexploited. The Global Quotient According to GBI Research, the global OFS market is expected grow at a compound annual growth rate (CAGR) of 7.3% from $131 billion in 2009 to $200bn by 2015. Similarly, Barclay’s estimates that the global E&P capital expenditure will reach $490bn in 2011 highlighting the strong business potential for OFS companies. This is further underscored by the estimates of the International Energy Agency (IEA) that more than 80% of producing assets globally, are in rapid decline and the resulting need for supporting OFS companies to provide the necessary technology and know-how to maximize recovery and improve efficiency. The Regional Quotient The MENA region’s OFS expenditure is expected to grow from approximately $11 billion in 2010 to approximately $13 billion by 2012, as per Douglas-Westwood. Whereas, the region’s onshore and offshore drilling and work over expenditure on OFS was approximately $7.7bn in 2007, and is expected to increase by 61% to reach $12.4 billion by 2012, and $27.9bn by 2014. The number of rigs working the market is normally a good leading indicator for assessing the OFS segments growth or shrinkage trends. Growth in rig count is usually associated with higher demand, both due to an increasing scale as well as enhanced service intensity. The rig count across the MENA region has been in an upward trend over last few years, despite a minor dip in 2008-09 due to the global financial crisis, and is expected to continue upwards in the near-term indicating that the OFS sector in the region can witness sustainable steady growth. The Landscape From a demand perspective, OFS in the MENA present a clear and obvious opportunity. Notwithstanding, the supply side of the equations paints an erratic picture, whereby many of the regional firms are poorly positioned to exploit the same. In particular, the MENA region OFS industry structure is highly fragments, with approximately 19,478 companies operating in the Oil & Gas sector in the MENA region, as per recent estimates. Most of these are concentrated in the UAE and are largely operating under agency type agreements with foreign entities. Drillers and Dealers ::: ::: February 2011 Edition
  • 23. Emerging Markets Focus 600 Land Offshore 500 400 300 200 100 0 MENA: Quarterly Average Rig Count 2005 - 2010 Source: Schlumberger, Markaz Analysis A select few of these regional/local OFS companies are in a position to compete effectively in niche areas with the international OFS companies. Such companies have been able to capitalize on the opportunities presented in the OFS segment as a result of being converted from family-owned to corporate structures, growing inorganically through well-timed acquisitions, and/or establishment of joint ventures (JV) with reputed international companies. 14000 13242 12000 10000 8000 6000 4000 1799 2000 826 608 586 577 426 323 91 0 UAE Qatar Saudi Bahrain Egypt Oman Kuwait Iraq Yemen Arabia MENA: Number of Oil & Gas Companies Source: Markaz Analysis The Opportunity We believe there continues to be an opportunity for regional OFS companies to jump on the bandwagon. World oil demand is expected to continue to grow unabated, leading to a call on the region to further increase production. It is widely accepted that in the long-term, most increases in the production and reserves in the MENA countries, are not expected to result from existing giant fields or from any major new discoveries, but from marginal fields and as a result of applying enhanced production and recovery techniques in existing fields. This is where the OFS companies come into the picture. Both, development of smaller fields and production enhancement, are highly service intensive. To sweeten the deal, NOCs are promoting regional companies through favorable policies and initiatives. We believe that in the near-future, as a result of the increasing emphasis on local content, regional OFS companies will potentially have access to a larger portion of the total OFS spend. Drillers and Dealers ::: ::: February 2011 Edition
  • 24. Emerging Markets Focus This is being complemented by the favorable policies and initiatives of the MENA governments to source increasingly larger volumes of services locally, in order to promote local employment, prevent wealth outflow, develop local talent, and help diversify the economy. Additionally, the region does not lack talented entrepreneurs. Many of them emanate from well-established family businesses that have decades of experience in the oil and gas industry, and are now expanding to provide higher end OFS. Some of the eminent regional names worthy of mention are the UAE based Al-Mansoori Group and the NPS Group which was the result of a merger between the National Oil Well Maintenance Company (NOWMCO) of Qatar, National Petroleum Technology Company (NPT) of Saudi and National Drilling Company (NDC) of Saudi. Another variety of entrepreneurs are those that are leaving large NOCs, IOCs, and global OFS companies alike, to establish start-up businesses to provide niche energy services. For example, companies like Target and Falcon oil field services (both from Oman) and the Kuwait based Gas & Oilfield Services Company (GOFSCO) were started and/or strengthened by such entrepreneurs. There are also a small but growing number of regional OFS companies that are moving from being agents of global OFS majors to establishing their own services, and forming a niche in their own countries as well as throughout the region. Any discussion on opportunities in the MENA regions OFS segment cannot exclude the potential presented by Iraq. Various estimates suggest that the Iraqi OFS market is expected to rise from $1.3bn in 2010 to $8bn by 2014. It is further estimated that over 2010-2016, with a base case target production of 5 million barrels per day, there is a need to drill approximately 5,000 wells; making the Iraqi OFS market-size around $20bn, with local companies accounting for 35% market share. On the bullish side, with a target production of 11 million barrels per day, the market size is estimated to be around $60bn with local companies accounting for a $20bn market share. These statistics alone might be enough reason for the regional OFS companies to capitalize on the aforementioned opportunity. Exploiting the Opportunity In our view, the approach to exploit the regional OFS opportunity is multipronged. The low hanging fruit is for regional OFS companies to form JVs with international companies. There are numerous examples of such engagements being successful in the past, and there is potential for more. Another approach is for regional OFS companies to acquire companies that provide a specific service or possess a specific technology. Lately, this approach has been the path of choice for regional companies, providing an avenue to rapidly grow their portfolio and allowing them to effectively compete with international OFS companies. Last, and possibly the least explored approach, is to build indigenous OFS companies, ground-up. In summary, the MENA OFS sector represents a large opportunity for regional companies. It is likely that the MENA’s OFS sector is at an inflection point; there is potentially space for several regional OFS players to capture a reasonable portion of the MENA OFS market. About Kuwait Financial Centre “Markaz”: Kuwait Financial Centre S.A.K. 'Markaz', with total assets under management of over KD1,03 billion (USD 3,64 billion) as of September 30, 2010, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997. Authors:  Nawaf Marafi, Vice President – Oil and Gas, Markaz  Ali Rampurwala, Senior Analyst – Oil and Gas, Markaz  Rajiv Bishnoi, Assistant Vice President – Oil and Gas, Markaz For more information please contact: Mariam A. Al Suwailem Assistant Manager, Media & Communications Kuwait Financial Centre S.A.K. "Markaz" Tel: +965 2224 8000 ext 1817 Direct: +965 2224 8078 Fax: +965 2249 8740 msuwailem@markaz.com Drillers and Dealers ::: ::: February 2011 Edition
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  • 26. oil and gas Taylor-DeJongh’s 2010 League Table Rankings upstream Rank midstream Oil & Gas 1 oilfield services Metals & Mining 1* power Global 3 Asia-Pacific 1 corporate finance Middle East & Africa 3* project finance Americas 6* mergers & acquisitions divestitures Ranked by value of Financial Advisory Mandates Won in 2010. (* denotes by number) Metals & Mining tied. IJ and PFI League Tables published January 2011. w w w. t ay l o r- d e j o n g h . c o m contactTDJ@taylor-dejongh.com +1 202 775 0899 WA S H I N G TO N • L O N D O N • PA R I S • D U B A I
  • 27. Emerging Markets Focus Monetizing East African Gas By Wylie Clark, Vice President, Taylor-DeJongh Once virtually ignored by the global oil & gas industry, East resources holders with reserves over 3 tcf, LNG is likely to be Africa now faces the prospect of becoming a global natural the monetization option of choice, given higher potential gas hub following a string of recent natural gas discoveries. margins per molecule. The star of this past year’s exploration campaign was Despite weak demand in the Atlantic Basin LNG market, doubtless Anadarko Petroleum Corporation, which made four strong demand (and high prices for LNG), together with still discoveries off the coast of Mozambique, together estimated prevalent long-term firm offtake contracts in the Asian by some analysts to hold 6+ trillion cubic feet (tcf) of gas. markets will support LNG monetization for larger scale Farther north, in Tanzania, oil & gas companies continue to reserves. add to the country’s natural gas resource base, which presently stands at 7.5 tcf. With additional reservoirs being At the country level, both Tanzania and Mozambique possess discovered throughout the region, the big question is how this sufficient reserves for LNG. However, governments must resource will be monetized. ensure that they do not overcommit gas resources to export projects well into the future lest they find themselves short of Limited Local Markets domestic supply, as Egypt has found to its cost. The size of local markets for natural gas varies significantly When assessed at the resource holder level, for now only across East Africa. In Tanzania, natural gas was introduced Anadarko’s Mozambique assets appear to pass the LNG into the economy in 2004 and since then demand from reserve threshold. Given the relative proximity of gas industrial and power customers has grown. According to the resources in Tanzania and Mozambique, one could argue Tanzanian government, demand for natural gas outstrips that resource holders in both countries could pool resources current supply by12 mmcf/d. in developing a single larger scale LNG project. History has shown, however, that cross-border gas monetization has Demand for power is expected to grow by 10% to 15% per proven to be a difficult commercial model to develop and annum, which will further contribute to gas demand growth. finance (see the West African Gas Pipeline for an object These figures have inspired a rash of projects, including 340 lesson). MW of gas-fired generation expected to come online by 2013 and a USD460 million electricity distribution expansion East African gas could be used to feed ammonia/urea and/or scheduled for completion in 2015. methanol production in order to tap the global fertilizer and petrochemical industries. Although not usually as profitable Orca Exploration and Production, which through its subsidiary as pipeline or LNG exports, urea/ammonia and methanol PanAfrican Energy operates Songo Songo, Tanzania’s only projects can be usefully employed where gas resources are significantly producing gas field, has announced plans to too small to justify an LNG project (or when sponsor capital is raise production by 60% to 144 mmcf/d, requiring expansion constrained). of existing pipeline infrastructure and processing capacity. But domestic demand for gas, despite projected growth, will The major global fertilizer-consuming regions include South only ever absorb a fraction of Tanzania’s 7.5 tcf of proven Asia, North Africa and East Asia. Reports vary on supply and reserves. Producers must surely look further afield in order to demand forecasts for urea, with some analysts viewing the monetize existing and new finds. market as over-supplied in the medium term. The domestic market in Mozambique offers even fewer Methanol, which serves as a feedstock in the production of options for gas producers. In the power market, Mozal, the petrochemicals, could be pursued in tandem with BHP Billiton-operated aluminium smelter, is by far the largest urea/ammonia or separately. While traditional petrochemical single consumer with a peak-demand of over 900 MW. This markets in North America and Western Europe are presently is met largely through a long-term supply agreement with stagnant, robust demand in China and other Asian markets South Africa’s ESKOM. offers opportunities for methanol exporters. Outside Mozal, power demand is limited, as only ~13% of the What To Expect Going Forward population has access to electricity. Though the government plans to increase this access in the future, the focus appears With a growing portfolio of commercial discoveries, oil & gas to be on hydroelectric generation. companies will look to export markets for higher returns. This will require significant investment as well as technical and Energy hungry South Africa offers an opportunity for project expertise, which likely means that many of the junior Mozambique gas stakeholders. At close to 230 bcf/year, oil & gas companies active in the region will make way for South African gas consumption is nearly twice domestic larger independents and IOCs with the balance sheets and production, with imports from Mozambique already filling experience to undertake these projects. Assets, and much of the gap through a 534 mmcf/d pipeline in operation potentially companies, will no doubt swap hands as the since 2004, feeding a Sasol run petrochemical plant in resource holders in the region look to consolidate portfolios in Secunda. To put this in context, exports through this pipeline an effort to build a sizable resource base. represent 96% of Mozambique’s natural gas production. Though full-scale natural gas production is still some years Additional exports to South Africa would require an expansion away, it is clear that East Africa’s position in the global of the existing pipeline or construction of a new pipeline, natural gas market is moving quickly from a sleepy backwater together with a likely extension beyond Secunda to access towards a new gas hub. other gas buyers. Once reserves reach “critical mass”, many resource holders in East Africa will look to monetization Special thanks to TDJ analysts Alexander Maass and John options that capture higher margins in the global market. For Probyn for contributing to this article Drillers and Dealers ::: ::: February 2011 Edition
  • 28. Emerging Markets Focus Latin America’s Emergence as an Oil & Gas Stronghold Written by Evelyse Carvalho Ribas, Managing Partner, CARVALHO RIBAS - Advocacia e Consultoria Latin America has enjoyed robust economic growth in recent years, in part driven by rising global prices for commodities such as oil & gas. The discovery of new gas & oil reserves in Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru and Venezuela is causing changes in the relative importance of countries and in the relationships among them. Given the active role played by Brazil on relations among Latin American countries, we will deal with it from the perspective of Brazilian policy. Most of the studies on prospective energy markets, including the World Energy Outlook (WEO), tell us that oil & gas will remain dominant in world energy supply well throughout the first half of this century. Their predictions assume that, without new energy and environmental policies, demand for oil will continue to grow at 1.6% per year. Natural gas demand will grow even faster, at 2.3% per year. Other experts say that new frontiers in oil & gas will spark innovations in E&P technology: Latin American countries are seeking to diversify energy matrices with a majority having biofuel policies. But, some reports appoint market restraints as the decline in oil reserves, the decrease in growth of industry sector and the new regulations against carbon emissions. The oil & gas industry is being transformed by the technological developments needed to explore and develop reserve sites and refine liquid fuel. However, Latin America is a rich under-explored hydrocarbon region whose economic future is dependent on the development of secure energy supplies. But the intensifying need to obtain supplies from more challenging conventional and non-conventional resources will impose very considerable demands on the sector's human, financial and intellectual capabilities. Foreign investors are faced with E&P opportunities in some Latin America countries, enhanced oil recovery field rehabilitation projects, pipeline distribution and transmission projects, the construction of refineries and transport infrastructure for oil, gas, and derivatives, vessels, liquefaction and regasification terminals, as well as widespread local, regional and international electrification projects. The current energy landscape and consequences of current policies The energy situation is very different in the various regions of Latin America. In Central America and the Caribbean, there are greater opportunities for ‘oil diplomacy’. The reason for this is that in those regions several big energy producers cohabit with more than 20 countries that are net importers of crude oil and gas, also, there are its population, its market, its voting power in the Inter-American System, and its geopolitically significant proximity to the United States. Only Guatemala and Cuba produce small amounts of oil, but not enough to satisfy domestic demand. In the Andean region, Venezuela and Ecuador export significant amounts of oil and gas.  Venezuela ranks among the top ten oil producers in the world and boasts a robust 80 billion barrels in proven reserves. Exploiting this abundance should be the main focus of the country’s energy policy. This means improving both the quantity and quality of its refineries and, at the same time, establishing joint ventures to extract, refine and market these crudes through agreements with companies or countries that own or that can build or finance plants with technology capable of processing low-API crudes.  Ecuador has 0.4% of the world’s crude reserves. Oil has an enormous significance in its economy. Peru has major natural gas fields in its southeastern Amazon basin.  Colombia, has huge reserves of high quality coal and abundant hydro resources which, together with gas, will enable it to be an important player in energy integration programmes, especially in Central America and Mexico. However, the Colombian oil industry is showing worrying signs of decline in oil production in recent years. Some analysts believe that the country will no longer be a net oil exporter by around 2011. In South America...  Bolivia holds the second-largest accumulation of natural gas reserves in South America, behind Venezuela. Due to the composition of its reserve base, Bolivia is primarily a natural gas-producing nation. Argentina has 0.3% of the world’s crude oil reserves.  Argentina is still a net gas exporter, but the rapid growth of its internal demand, the failure to discover significant new reserves and the lack of investment in exploration and production, will sooner or later make it an importer of natural gas.  Paraguay does not produce oil. However, if we consider hydroelectric production, Paraguay is energy independent, since it consumes much less energy than the available hydroelectric capacity of Itaipú (Brazil-Paraguay agreement) and Yacyretá (Argentina-Paraguay agreement).  Uruguay does not produce oil. In terms of energy, Uruguay is the most vulnerable country in South America.  Chile suffers from an energy deficit, as it produces no more than 5% of the oil it consumes and covers no more than 20% of its natural gas needs. Reacting to its oil & gas deficit, Chile is developing an interesting energy diversification Drillers and Dealers ::: ::: February 2011 Edition
  • 29. Emerging Markets Focus policy. This translates into new funds for hydroelectric plants in the south, boosting coal-powered thermoelectric plants, especially in the north, and combined-cycle plants. Brazil has been self-sufficient since 2006 and became a net oil exporter in 2009. In the January 2011 Short-Term Energy Outlook, EIA projects that Brazil will continue to be a net exporter through the end of 2012. According to the Oil and Gas Journal (OGJ), Brazil has 12.9 billion barrels of proven oil reserves and it has South America’s largest proved reserves of coal. It is also the world leader in production and a pioneer in the use biofuels such as biodiesel, which is an oil derived from plants such as sunflower, macaúba, soy beans, colza, and as alcohol extracted from sugar cane. Together with the United States, the two countries produce 70% of the world supply of ethanol. However, the main factors for the development of this fuel are the diversification of the energy matrix and the reduction of the country’s dependence on oil by-products. Brazil has the ideal conditions for the development of biofuels projects such as available manpower, abundant land to cultivate and favorable climate conditions. Experts present different scenarios for the future energy landscape in Latin America. Many suggest that the notion of regional integration will be superseded by global integration. The countries that have adopted the most prudent policies are those that have liberalized their oil and gas industries, those that have started to look outside the region to secure additional supplies or both. Brazil, Colombia, Peru, and Chile are all included in this group. Other experts believe aspirations toward regional energy integration have to some degree fallen by the wayside due the current wave of nationalizations and populist energy policies. Some countries are striking bilateral agreements but working toward self- sufficiency - motivated by a mixture of politics and economics - as Ecuador, Bolivia, Argentina and Venezuela that have adopted policies that are impractical and unsustainable. Venezuela and Bolivia ‘oil diplomacy’, for example, decided to nationalize some portion of its hydrocarbon industry that entailed heavy-handed expropriation of assets from private companies. While Argentina heavily subsidized domestic energy prices and Ecuador’s that has been following an aggressive policy against foreign investment. These divergent paths have produced incompatibility in the domestic political economies of the major exporters and the major importers as consequence it have limited the potential for developing regional infrastructure. The needs of the populace will drive governments to moderate or find middle ground. Latin America still has launched regional entities with the objective of improving energy integration and collaboration, as the Initiative for Regional Infrastructure South American Integration (2000) and South American Energy Council (2007). However, the overwhelming consensus is that energy coordination among Latin American nations remains limited and that these institutions have been ineffective, largely because they could not overcome the challenges associated with asymmetrical regulatory frameworks, policy coordination and implementation of rules and procedures. Some experts say that public policy can play a key role in numerous ways, notably by focusing on the following: providing a framework favourable to investment in new resources; providing a policy climate that ensures continued active co-operation between technology developers and hydrocarbon resources holders; actively participating in developing and facilitating the implementation of technologies that improve the safety of installations; vigilantly supporting industry's efforts to reduce its environmental footprint and thus to access resources in new areas. Brazil’s Energy Overview According to EIA, International Energy Statistics, the largest share of Brazil’s total energy consumption comes from oil (50 percent, including ethanol), followed by hydroelectricity (34 percent), natural gas (8 percent), coal (5 percent), other renewable (2 percent) and nuclear (1 percent). Natural gas is currently a small share of total energy consumption, but attempts to diversify electricity generation from hydropower to gas-fired power plants could cause natural gas consumption to grow in the coming years. The aggressive policy it has followed to develop Petrobras is changing energy geopolitics in the region. Brazil is the ninth largest energy consumer in the world and recent discoveries of large offshore, pre-salt oil deposits could transform Brazil into one of the largest oil producers in the world. Drillers and Dealers ::: ::: February 2011 Edition
  • 30. Emerging Markets Focus A consortium of Petrobras, BG Group, and Petrogal discovered the Tupi field in 2007, which contains substantial reserves that occur in a pre-salt zone 18,000 feet below the ocean surface under a thick layer of salt. Following Tupi, numerous additional pre-salt finds were announced in the Santos Basin, such as Iracema, Carioca, Iara, Libra, Franco and Guara. Estimates for the total pre-salt resources vary. Some analysts place total extent of pre-salt recoverable oil and natural gas reserves at more than 50 billion barrels of oil equivalent. Petrobras plans to invest $33 billion in pre-salt exploration and production activities to achieve an oil production target of close to 4 million bbl/d by 2020.More than a quarter of this target is to come from pre-salt oil. Brazil’s pre-salt announcements immediately transformed the nature and focus of Brazil’s oil sector, and the potential impact of the discoveries upon world oil markets is vast. Shortly, the Brazilian government released the proposed regulatory framework for the pre-salt reserves in August 2009. Brazil’s new regulatory meets a need in the gas industry by providing legal stability in the sector. Also, the law is to encourage more investment as well as competition in the natural gas sector, especially in the midstream. External Alliances Russia, China, India and Iran recognize the strategic importance of Latin America and are building broad relationships in very systematic, aggressive ways.  Russia is widely recognized as using its vast natural resources as a political weapon and holding countries hostage by manipulating access, control and distribution of the energy resources. Russia has also been quite active in building strategic relationships with several resource-wealthy countries to enhance its own long term energy security. In September 2009, Russia and Venezuela announced several cooperative agreements on energy, defense and trade, including a commitment to supply Venezuela with almost $4 billion in weapons. PDVSA, Venezuela’s oil company, signed two agreements with a consortium of energy giants in Russia.  China’s grand strategy has been shaped by its desire to secure surety of energy supplies to fuel its continued industrialization. In April 2010, China announced a $900 million heavy crude production project with Venezuela. Just prior to that, in Brazil, China’s Sinopec and the China Development Bank signed a strategic development pact with Petrobras, Brazil’s state-owned oil company, whereby China agreed to provide financing to the tune of $10 billion in Petrobras over the next five years. China also has operations in Ecuador. In 2006, Andres Petroleum, a consortium of Chinese oil companies, purchased the Ecuadorian assets of the Canadian firm, EnCana for $1.42 billion.  India also recognizes the strategic importance of Latin America. India’s state-owned Oil and Natural Gas Corporation (ONGC) has exploration and production stakes in projects in Brazil and Colombia and is exploring opportunities in Venezuela. In 2006, ONGC Videsh Ltd. (the overseas investment arm of ONGC) joined with the Chinese firm Sinopec to acquire a 50 percent stake (for a combined $850 million) in the Colombian oil firm Omimex de Colombia.  Iran has also been cozying up to Venezuela and Brazil, as well as a number of Andean countries. In 2007, Venezuela and Iran signed three petroleum cooperation agreements which involved bilateral investment in Iranian gas and Venezuelan oil fields and Venezuelan gasoline exports to Iran. Brazilian energy firms - including Petrobras - are exploring possible deals to provide training and technology to modernize the Iranian energy sector. To support its strategic positioning in the region, Tehran has set up branches of its Export Development Bank in Brasilia as well as Caracas. Bolivia and Ecuador also enjoy cozy relations with Iran. Findings This short article is just a part of a much more complete report on Latin America’s energy. Anyway, it can be said that global demand for energy is expected to increase. Most of this demand will come from developing economies in the long term and will be fulfilled by the oil & gas industry. New analysis estimates that the Latin America region will produce around 11.17 million barrels daily in 2014. Due to energy-efficiency trends, environmental regulation, and energy matrices reconfiguration, new technologies such as gasification (application IGCC), gas to liquid (GTL) or lignocellulosic ethanol will experience a high demand in Latin America in the years to come. However, low internal savings’ rates have limited local capital markets. Because of this, most of that funding must come from direct foreign investment such as emerging strategic partnerships and joint ventures in innovative technologies which are expected on demanding areas that include upstream and downstream segments such as: pre-salt discoveries in Brazil; heavy oil upgrading; and the construction of refineries and transport infrastructure for oil, gas, and derivatives, vessels, liquefaction and regasification terminals. Policy approaches drawing on these observations can help build the partnerships between industry and government that are needed to protect the interests of all stakeholders. Along with continued international collaboration on advancing technological development in the upstream oil & gas industry, such approaches will be needed if the hydrocarbon markets of tomorrow are to deliver on their promises. CARVALHO RIBAS ADVOCACIA E CONSULTORIA is an independent law firm situated in Mafra city that is actively involved in international matters and transactions working in close collaboration with correspondents and law firms located in key cities in Brazil, USA, Canada, Europe and Asia, which ensures competent assistance in the handling of local matters. Our work focuses on legal advice on all areas of business law, and stands out for its commitment to helping companies develop their activities, defending their rights and negotiating their interests. To obtain more detailed information with respect to the assistance that our professionals are able to provide, our overseas Clients should contact CARVALHO RIBAS ADVOCACIA E CONSULTORIA at info@carvalhoribas.com.brn or online at www.carvalhoribas.com.br Drillers and Dealers ::: ::: February 2011 Edition
  • 31. Richmond Energy Partners Highly experienced oil and gas professionals who provide independent expert research and insights into smaller oil and gas companies n REP provide investors with analysis of smaller companies, sectors, themes and trends for corporate and professional investors and advisers n Research is based on deep industry knowledge and an understanding of how oil companies are successful n Our research is built on ‘from the rocks up’ technical evaluations of assets and realistic commercial assessments of value and risk n Our global network of industry experts provides independent, objective and conflict free insights into both assets and people For further information, please contact Keith Myers T: +44 (0) 208 742 8203 Email: kmyers@richmondep.com www.richmondep.com