drillers and dealers march 2011

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Drillers and Dealers ::: ::: March 2011 Edition

The Forces That Move Nations

By Drake Lawhead, Editor, ‘Drillers and Dealers’

Ask five economists a question and you get six different answers, so the joke goes – of which there are many variants. They all turn upon the frustration those who solicit economic

advice are apt to feel about its inability to make useful predictions. Of course, the economist might protest that it isn’t his job to tell the future, merely to explain possible scenarios: ‘if XYZ then PQR’. And yet, our industry is not short of pundits who do try to tell the future in our industry. It is, strictly speaking, impossible for anyone to predict the price of oil in anything longer than the very near-term with any degree of accuracy. More stable factors, like global energy demand and demographics only tell part of the story. A significant part of the price of oil is based on variables knowable only to the truly omniscient analyst: whether rebel fighters in Libya have enough ammunition and resolve to topple their dictator; whether a blowout preventer in one of the Gulf’s 4,000 oil rigs is working properly. It is fascinating to reflect that the fire in the Middle East that has toppled two dictators (combined 52 years of rule), started a civil war, incited popular uprisings in the majority of the region’s states, and forced nearly every Government in the region to scramble to make concessions – was started by a market stall fruit seller in Tunisia who set fire to himself after his wares were confiscated by the police. On the wall behind my desk is a map of political and security risk for 2011 (i.e., likelihood of commercial interests being adversely affected by internal events). It puts Libya, Egypt, Tunisia, and Bahrain in the lowest security risk category along with the likes of Canada, Belgium, and Austria. As for political risk, Libya and Egypt are both ‘Medium’, or, on a par with Latvia and Brazil. It is by no means a criticism of economists or analysts, of course, that their predictive power is limited. After all, they are not predicting the motions of gasses and pistons, which are subject to regular laws, but rather, the actions of millions of people exercising their individual free wills. The point, rather, is that while we can make probabilistic predictions about where the planet and civilisation is headed based on a few glacial trends, the most important features of this change – the timing, the nature, the scale etc. – are always determined by the small things.

We can confidently assert that China and India’s growing appetites are putting a strain on the planet’s limited resources and will continue to do so. We know that one day, even Saudi Arabia will run out of oil. And yet in the immediate term in which we live our day to day lives – the forces that move nations – are often idiosyncratic, hard to perceive, and as wildly unpredictable as the single bullet that killed Archduke Franz Ferdinand, which sucked Europe into the vortex of war. If the Great War was inevitable for more fundamental structural reasons, its timing and character were not. Perhaps the most significant geopolitical shift in my lifetime – the end of the Cold War – was something whose sheer spontaneity and surprising peacefulness was not predicted by a single person amongst the armies of academics on either side who had dedicated their lives to studying it. Small things cause big things, then. And it is the work of the analyst to try to know about these small things. The quest for alpha is the quest for asymmetrical information – knowing something no one else yet knows – is the lifeblood of the stock-picker and the consultant. Upon asymmetrical information, fortunes and reputations are founded and destroyed. Oil exploration, like other enterprises, can seem like playing Roulette with asymmetrical information - calculated risks based on no more than probabilistic predictions. All of which provides a dubious segue into the theme for this month’s edition, which focuses on the independent oil companies – this multiplicity of (relatively) small players are nevertheless important players in the global E&P sector. In our ‘On the Spot’ we ask our members to quantify their importance. In ‘Analyst Notes’, we ask whether Junior O&G stocks could deliver superior shareholder value. You’ll notice that Drillers and Dealers has undergone a bit of a change in the last two issues, we hope for the better, we would welcome your comments, ideas, and suggestions.

p.s. I hope you can join us in London between the 29-30

th

of June as we host the world’s leading thought leadership forum for oilfield services and engineering companies.

Welcome to Drillers and Dealers – March 2011


Contents Exploration in 2010 – The Return of Big Volumes Exploration Service Team, Wood Mackenzie

6

Post-Macondo – Offshore EHS Regulation Energy Team, SNR Denton

11

Executive Q&A 15 Alan Booth, CEO, EnCore Oil The Independent E&P Universe, Deal Or No Deal, Who Will Take The Banker’s Offer?

17

Andrew Monk, CEO, VSA Capital Can The Oil And Gas Industry Live Up To Today’s Dynamics?

20

Dr. Abdul-Jaleel Al-Khalifa, CEO, Dragon Oil THE LEGAL CORNER – “What Issues Are Your Independent O&G Clients Most Concerned With In 2011 And How Can They Overcome The Challenges These Issues Present?”

24

Legal Perspectives from Across the Globe ANALYSTS NOTES – “How Do You See Independent E&P Stocks Performing In 2011 Relative To Blue-Chip O&G Stocks And Oilfield Services Stocks?”

26

Analyst Perspectives from Across the Globe ON THE SPOT – “In 2011 which O&G companies will be most influential in shaping the future O&G landscape - NOCs? IOCs? Independents?”

29

Partner/Member Perspectives from Across the Globe OC Columnists – What’s New Online? 32 Meet The Member

34

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Drillers & Dealers Official Publication of The Oil Council 3rd Floor 86 Hatton Gardens London EC1V 8QQ, UK Editor Drake Lawhead Vice President, Content and Member Relations [email protected] T: +44 (0) 20 7067 1873 Editor-at-Large and Media Enquires Iain Pitt COO [email protected] T: +27 (0) 21 700 3551 Publisher Ross Stewart Campbell CEO [email protected] T: +44 (0) 20 7067 1877 Partnership Enquires Vikash Magdani Executive Vice President, Corporate Development [email protected] T: +44 (0) 20 7067 1872 Advertising Enquires Guillaume Bouffard Vice President, Business Development [email protected] T: +44 (0) 20 7067 1876 Laurent Lafont Vice President, Business Development [email protected] T: +44 (0) 20 3287 3447 Ken Lovegrove Vice President, Business Development [email protected] T: +1 604 566 4949 North American Media Enquiries Jay Morakis Partner JMR Worldwide [email protected] T: +1 212 786 6037 To Be Added to Distribution List Email: [email protected] More Information At www.oilcouncil.com

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Special Feature Article


Drillers and Dealers February 2011 Edition


Exploration in 2010 – The Return of Big Volumes

Written by the Exploration Service Team, Wood Mackenzie

Wood Mackenzie has estimated that 39 billion barrels of new conventional volumes were added in 2010, with oil accounting for 54% of this total. Driven by eleven giant discoveries, volumes have returned to levels not seen since 2000, when the supergiant Kashagan find raised the annual total above 40 billion barrels. This report draws on the Wood Mackenzie Exploration Service Tool – which includes data on conventional exploration activity from 2000 to date across 446 basins worldwide. The well count and spend data for 2010 are based on currently available data, and are expected to increase as more information is disclosed. The resources discovered in 2010 continues the upward trend in annual conventional volumes which has been gathering momentum since 2006. This has been driven by deepwater exploration and, in particular, the emergence of Brazil’s Santos Basin pre-salt play. Mid-range reserve estimates for the 2010 Libra and Franco discoveries are a combined 14 billion barrels of oil and gas, underlining the global significance of this play. In the same basin, disclosure of the results of Shell’s 1SHEL-0023-RJS (Gato de Mat) well are still eagerly awaited. However, the Santos Basin is not the only deepwater story. Giant gas discoveries were made in Australia’s North Carnarvon Basin and Israel’s Sinai-Levant Basin. Overall, the global deepwater average discovery size for 2010 was 470 mmboe.

During the last ten years, onshore volumes have been mainly from discoveries in China and the Middle East. In 2010, onshore volumes discovered were also up significantly on previous years, led by giant gas discoveries in Iran and in Central Asia, where the Uzbek and Turkmen sectors of the Amudarya Basin provided over 7 tcf of gas. These large gas finds pushed the global average onshore discovery size up sharply to around 50 mmboe – almost double that for the period from 2000 to 2009. The giant discoveries of the deepwater and onshore areas were not matched in the shelf setting. Here, the increase in average discovery size in 2010 is underpinned by a series of large oil discoveries in Brazil’s Campos Basin. Currently available data suggest that success rates averaged 37% in 2010, which is in line with the average over the previous five years. A fall off in drilling – particularly in the Gulf of Mexico – has meant that there have been fewer discoveries in 2010, but the number of giant finds has ensured that discovered volumes are much larger than in 2009.

February 2011



It can be difficult to estimate the full commercial potential of new fields soon after their discovery. So far, Wood Mackenzie estimates that development of 2010's currently known discoveries could be worth in the region of US$41 billion, compared to an estimated US$48 billion for discoveries made in 2009. It is expected there will be large value upside in 2010 volumes as well results are confirmed and the commercial status of discoveries is confirmed through appraisal drilling. The total development value estimate for 2010 is higher than the exploration spend estimate. This implies that full cycle returns for new discoveries could be higher than 10% at the Base price (US$75/bbl) for the first time since 2007.

Significant Discoveries in 2010

Much of the new oil volumes have been found in the pre-salt play of Brazil’s Santos Basin. Two giants, Libra and Franco, constitute more than a third of the total resource in 2010. The neighbouring Campos Basin has contributed a further billion barrels of oil. Australia’s North Carnarvon and Browse basins have once again provided material gas volumes, while Israel’s Sinai-Levant Basin continues to emerge as a major gas province. The year was also notable for a number of giant onshore conventional gas discoveries in Iran and the North Ustyurt and Amudarya basins to the east of the Caspian Sea.



Emerging Exploration Areas Deepwater exploration in recent years has been characterised by a move to more deeply-buried, and otherwise more challenging target reservoirs. A parallel theme has been an increasing appetite for deepwater exploration in frontier areas on the part of a number of large international oil companies. A key example is Mozambique's Rovuma Basin, which emerged as a major new deepwater gas province in 2010 and has energised exploration in the Tanzanian sector of the basin. Interest has also risen in the West African Transform Margin, where the Mercury oil discovery offshore Sierra Leone in 2010 followed the Venus find of the previous year.

Hopes are high that these discoveries confirm a continuation of the play fairway which delivered recent success in Ghana. High profile drilling programmes have also been undertaken in the Philippines, where the scale of the discoveries made in 2010 has not yet been disclosed. The successes achieved in sparsely drilled areas of emerging plays during 2010, bode well for new discoveries in the years ahead. The industry has confirmed that functioning petroleum systems exist in several basins and, as drilling density is still very low, we expect that further discoveries will follow in these provinces.

Extracted from Wood Mackenzie Exploration Service Insight published February 2010. For more information or to request a copy of the report visit www.woodmac.com/oilcouncil0311

Wood Mackenzie is the most comprehensive source of knowledge about the world's energy and metals industries. We analyse and advise on every stage along the value chain - from discovery to delivery, and beyond - to provide clients with the commercial insight that makes them stronger. With more than 600 professionals in over 20 offices worldwide, we analyse the assets, markets and companies operating upstream and downstream; in oil, gas, coal, carbon, metals and power generation. We have been a respected adviser to the energy industry for over 30 years. We combine experience with industry knowledge to provide clients with valuable analysis and unique insights.

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Wood Mackenzie provides unique content, analytics and consulting advice to the energy industry. Wood Mackenzie’s analysts and consultants work with the company’s unique propriety information to provide forward-looking commercial insight to our international client base including every major company in the energy industry along with leading financial services organisations, governments and government agencies. Wood Mackenzie helps these clients to develop growth strategies, identify opportunities, value assets, assess competitors and reduce business risk.

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SNR Denton is a client-focused internationallegal practice delivering quality and value.

We serve clients in key business and financial centers from 60 locations and 43 countries, through offices, associate firms and special alliances across the US, UK, Europe, the Middle East, Russia and the CIS, South-East Asia, and Africa, making us a top 25 legal services provider by lawyers and professionals worldwide.

Our energy team comprises more than 100 lawyers covering all types of energy related work, ranking it among the largest dedicated energy legal practices in the world. The team has extensive experience advising energy businesses on all types of oil & gas projects and facilities.

Areas of Focus:• Upstreamanddownstream• Pipelinetransportationandstorage• LNG• Petrochemicals• Oilandgastrading• Derivatives• Regulation• Privatizationofoilandgasindustriesandenterprises

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Vince MurchisonPartner,DallasD +1 214 259 [email protected]

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Special Article


Post-Macondo – Offshore EHS Regulation Briefing Note 1: Financial Provision and OPOL

Written by the Energy Team, SNR Denton

When it comes to Environmental, Health and Safety (EHS) regulation, the UK oil & gas sector is experiencing a perfect storm. The Deepwater Horizon incident on 20 April 2010 has triggered regulatory reviews in the US, the EU and the UK. It has also prompted a massive industry response. Not since Piper Alpha has the EHS regime in the North Sea come under such close scrutiny at so many levels. But Deepwater Horizon is not the only factor causing the storm. The world of environmental and safety liability has been changing profoundly over recent years. The changes have significant implications for oil & gas companies. Significant because, taken as a whole, they alter the liability exposure of these companies. There are growing liability exposures (criminal liability, group actions); there are changing liability exposures (spilled oil as waste, criminal liability for non ship owners); there are new liability exposures (Environmental Liability Directive and Civil Sanctions); and there are important offshore regulatory reforms in the pipeline following Deepwater Horizon. The Energy team at SNR Denton has been in the eye of this storm. We have advised or delivered training in this area to over 15 major oil & gas companies with interests in the North Sea in recent months. On the other side of the Atlantic we have been monitoring regulatory developments in the USA in the aftermath of the Gulf of Mexico incident. As a result of this work we have developed an understanding of the key issues of concern to the industry, and the legal and policy areas where we are likely to see developments in the coming months and years. Key areas of interest include

• Financial provision and Offshore Pollution Liability Agreement (OPOL) • Incoherence of the UK offshore environmental regime – possible reforms following Deepwater Horizon • Environmental Liability Directive: offshore liability exposure • Lessons from recent case law: adequacy of existing contractual indemnities to cover EHS liability • Regulatory developments in the USA following Macondo • Civil sanctions and criminal penalties for companies and individuals: the changing landscape • Possible "goldplating" of offshore licensing regime (including decommissioning) by the EU • Growing significance of the "group action" under the UK legal system • Spilled oil as waste and the "polluter pays" principle • Emergency preparedness – review of crisis management plans

In this series of briefing notes, we will focus on these areas – taking one at a time.

Financial Provision and OPOL Financial provision for EHS liabilities arising from an equivalent incident to Macondo on the UKCS was an area of focus for the House of Commons Energy and Climate Change Committee inquiry into UK Deepwater Drilling chaired by Tim Yeo MP. The Committee's Report, published today, confirms that the current arrangements are an area of significant concern.

Are current arrangements for financial provision fit for purpose? Some people in the oil and gas sector consider that current arrangements for financial provision for oil pollution from offshore installations are perfectly adequate. After all, operators are required to sign up to OPOL under their JOAs, and through membership of OPOL those operators are bound, by contract to other parties, to be liable for the costs of pollution from their own facilities. They are also required to maintain insurance or other financial provision to cover these liabilities. At the same time, DECC has powers under the Petroleum Licensing regime to give licence holders reasonable instructions with a view to ensuring that funds are in place to discharge any liability for damage attributable to discharges or escapes. DECC can also carry out financial viability assessments and financial capability assessments before granting petroleum licences. In some cases, in addition to financial provision which companies are required to maintain under OPOL and / or the licensing regime, companies will arrange their own additional financial provision as they deem appropriate according to their own assessment of risk. And ultimately, environmental risks posed to the onshore environment by spillages in the North Sea - with its rough open waters - are seen as lower than in calmer more enclosed environments such as the Gulf of Mexico. However, there are others who are not so sure. Others regard current arrangements for financial provision as out of date. First, financial provision is not a direct statutory requirement for offshore oil industry operators. OPOL is a voluntary industry agreement which is enforced indirectly through contractual arrangements and through the petroleum licensing regime (in practice DECC will ensure that operators are signed up to OPOL as a condition of granting a petroleum licence or approving an assignment).

Special Article


Second, it is arguably insufficient in terms of the types of liability which it covers. For example "Remedial Measures" as defined under OPOL is restricted to "traditional" remediation only - containment and clean up. It does not extend to new areas of liability such as complementary or compensatory remediation under the Environmental Liability Directive. And third, there does not appear to be a great deal of scientific rigour to the way the liability limits under OPOL are arrived at. That OPOL is inadequate is a view shared by the House of Commons Energy and Climate Change Committee. The Committee issued its Second Report on 6 January ("Yeo Report") concluding, in respect of financial provision: ........ "Given the high costs of the incident in the Gulf of Mexico, we believe that the OPOL limit of $250 million is insufficient. We are concerned that the OPOL provisions only cover direct damage and also that the precise definition of "direct damage" is unclear. While membership of OPOL remains voluntary - despite it being a prerequisite for a licence - its voluntary nature weakens its legality and the control and deployment of its funds. We believe this lack of legal control will allow polluters to claim that damages to biodiversity and ecosystems are indirect, and therefore do not qualify for compensation. We conclude there needs to be clarity on the identity and hierarchy of liable parties to ensure that the Government, and hence the taxpayer, do not have to pay for the consequences of offshore incidents. We conclude that any lack of clarity on liability will inhibit the payment of compensation to those affected by an offshore incident. We recommend that it should be a requirement of the licensing process that the licensee prove their ability to pay for the consequences of any incident that could occur. We recognise that these measures could add to the cost of investing in new UK oil and gas production and urge the Treasury to reflect this when considering incentives to such investments." (Paragraphs 90 and 91) ........

How does OPOL compare to other types of financial provision required under environmental law? If we compare the OPOL regime to other environmental regimes under which financial provision is required, it is clear that the OPOL regime is something of a misfit. Consider the following regimes:

Decommissioning of offshore facilities – the Petroleum Act regime establishes a statutory regime for joint and several liability for all licence holders specifically for decommissioning costs. DECC's powers to ensure that adequate financial provision is in place to meet those liabilities has recently been strengthened by the Energy Act 2008. By contrast the OPOL regime is non-statutory. And DECC's powers under the petroleum licence in terms of ensuring and protecting financial provision for oil spillages are much less extensive than those relating to decommissioning under the Petroleum Act.

Oil pollution from ships – under the International Convention on Civil Liability for Oil Pollution Damage (CLC), ship owners are as a matter of international law liable for and are required to maintain insurance in respect of pollution caused by spillages from their ships. To the extent that the limits set under the CLC are insufficient, there is a Civil Liability Fund in place to cover additional liabilities. By contrast, OPOL is a voluntary arrangement – not imposed by international law – and there is no "back up" fund sitting behind the OPOL financial provision arrangements.

Onshore landfill and mining operations – it has for many years been a requirement under environmental law in the UK that certain waste and mining operators demonstrate financial provision to the regulator. Landfill operators and certain mine operators are required to have in place financial provision to address the environmental management costs of their sites. This is enforced through the environmental permitting regime. In such cases, the maintenance of funds is a licence condition, and the licence will not be granted unless the operator can show adequate financial provision. In terms of the scope of financial provision, the concept is linked to operator competence, and the amount of financial provision that is required is linked to the operational requirements of the site in question. By contrast the level of financial provision set under OPOL appears arbitrary, and not based on any methodical assessment of specific or generic risks.

Nuclear liability – the UK is party to the Paris Convention and the Brussels Supplementary Convention under the auspices of the OECD. These conventions require signatory states to ensure that an operator of a nuclear installation is the sole point of third party liability for nuclear incidents and put in place financial security equivalent to this liability which covers, on a strict liability basis, injury, loss of life and damage to or loss of property (excluding the installation itself and property on the site of the installation). This mandatory financial provision in connection with the liabilities flowing from the operation of nuclear installations is therefore enshrined in international law and enforced through the nuclear site licensing regime. Not so for liability flowing from the operation of offshore oil & gas platforms in the UK Continental Shelf.

So how likely is it that we will see changes in this area? The current regime for financial provision in the UKCS is under intense scrutiny at Government level following Deepwater Horizon. Given the various ways in which the current regime differs from other financial provision regimes under environmental law, it is not at all unlikely that changes will be introduced in the years to come. This is particularly so given the recommendations of the Yeo Report, and as the EU Commission has made it clear that it has financial provision in its sights. This is from the EU Commission's Communication on Offshore O&G activities in October 2010:

Special Article


........ "[The offshore licensing regime] needs to be backed up by an unequivocal liability regime which must include adequate financial security instruments to cover major incidents. The existing financial security instruments need to be assessed with regard to financial ceilings and may be usefully complemented by other risk coverage instruments, such as funds, insurance, guarantees etc." ........ Consider further that mandatory financial provision has already been specifically considered and was almost imposed in respect of the new Environmental Liability Directive. In light of the Deepwater Horizon incident the EU Commission has now stated that it will "reconsider the option of introducing a requirement for mandatory financial security and will in this regard examine the sufficiency of actual financial ceilings for established financial security instruments". Note also that that the EU Commission's attitude to such matters will have been hardened by the aluminium sludge incident in Ajka, Hungary in October 2010. This was a known high risk activity in relation to which the level of financial provision in place was woefully inadequate to cover the scale of losses incurred. If the regime for financial provision is to be changed – what will change? There are a range of changes that could be forthcoming, and areas where clarification could be required, including:

the financial liability limits;

the way financial provision is calculated;

the way financial provision is imposed on operators;

the range of liabilities covered.

What's next? There are a number of drivers for change in this area. On 3 December 2010 the Council of the European Union invited the Commission to present concrete initiatives, including proposals to amend EU legislation on environmental liability issues, "as early as possible in 2011". We can therefore expect to see actual legislative proposals at EU level by Easter 2011. Meanwhile, the UK Government will now need to respond to the Yeo Report. In parallel, DECC has indicated that, in addition to the work it has done already, it will be reviewing offshore environmental regimes during 2011. In so doing, it will be keeping an eye on – and taking account of – the industry's own initiatives in this area (in particular the work of the Oil Spill Prevention and Response Advisory Group (OSPRAG)) and regulatory developments in the USA following the US Government's own review. Developments can therefore be anticipated at UK level over the coming months.

Contact

Danielle Beggs - Partner London

+44 (0)20 7246 7442 [email protected]

Stephen Shergold – Partner

London +44 (0)20 7320 6770

[email protected]

Sam Boileau - Senior Associate

London +44 (0)20 7320 6803

[email protected]

SNR Denton UK LLP, One Fleet Place, London EC4M 7WS, United Kingdom, T +44 (0)20 7242 1212




www. heritageoilplc.com

Heritage Oil Plc is an independent oil and gas exploration and production company with a Premium Listing on the London Stock Exchange (“LSE”) (symbol HOIL). The Company is a member of the FTSE 250 Index. The Company has Exchangeable Shares listed on the Toronto Stock Exchange (symbol HOC) and the LSE (symbol HOX). The Company has core activity areas focused on Africa, the Middle East and Russia. Heritage was one of the first companies to be awarded a Production Sharing Contract in Kurdistan in October 2007 and was appointed operator of the Miran Block, which covers approximately 1,015 square kilometres, in the southern part of Kurdistan. In January 2011, Heritage announced the discovery of the largest gas field to be discovered in Iraq for the last 30 years. Management estimates that the Miran field could have up to 12.3 trillion cubic feet of gas in-place. Heritage has now accelerated the work programme on this field and is considering various development options including a tie-in to planned infrastructure that will achieve first production for both oil and gas in 2015. This discovery has the potential to generate substantial further value for Heritage shareholders and benefit the people of Kurdistan and Iraq.

Independent Oil & Gas Focus


Executive Q&A with Alan Booth, CEO, EnCore Oil

Drake Lawhead (DL) interviews Alan Booth (AB)

DL: In our 2011 global oil and gas survey, management strength was cited as the number one determinant of a company’s success. What leadership qualities do you think are most important? AB: A clear and simple strategy that everyone understands and the part they need to play in helping deliver it. DL: In the independent sector there are recognised thought leaders, held in high regard because of their reputation, track record, innovation, and leadership skills. Whom of your fellow peers do you admire most? AB: Tullow and Agora. DL: The number of independents operating in the North Sea has dropped dramatically in recent times, although 2010 saw something of a renaissance. Why is EnCore sticking around when others have left? And how much life is left in the North Sea, in your opinion? AB: Exploring with Equity Capital is not always easy, being listed is less so. You really only get one, perhaps two chances to deliver, hence many smaller companies have not made it. EnCore continue to believe that there are significant discoveries still to be made in the UKCS if you stick to a strategy, be honest and upfront about the risks and drill enough wells. The only danger to continued investment by small and mid caps in the UKCS is infrastructure access and, post Macondo, a regulatory environment that discourages or prejudices smaller players from participation in exploration and appraisal in the non deep water, non HPHT areas. DL: The Catcher field was two to three times larger than you were expecting. How important, if at all, is Lady Luck in any company’s current exploration strategy? AB: Luck plays a part. However if you don’t drill enough wells you just won’t get lucky. DL: Can you tell us more about your play in Western Sahara, and what are you planning there currently? What about the greater potential of offshore oil in Western Sahara? AB: This is a long term investment and until we can see that there may be political change on the horizon we don’t really speak about it. We do our best to try and support the Sahrawi’s in their plight. DL: You describe EnCore as an opportunistic company. Would you consider venturing into any other regions if the opportunity struck? Which regions would attract you? AB: We are opportunistic within the UK North Sea and are happy staying the UK North Sea as that is an area in which the EnCore team has the most experience. DL: In one sentence, how would you describe the investment potential of EnCore to an investor? AB: What you see is what you get.



DL: In your opinion what is an independent’s advantage over a blue-chip oil and gas company in terms of delivering value to shareholders? AB: The ability to move quickly, lack of historical “baggage” and entrenched attitudes or behaviours driven by annual bonuses/targets, or a desire to climb the corporate ladder. DL: What was the wisest advice you ever received from a mentor? AB: Don’t let the staff sandbag the budgets and then claim they delivered excellent performance by coming in way under budget. That is tantamount to stealing the shareholders money. DL: How do you prefer to spend your spare time? AB: I like to buy gadgets, network the house, and I collect cameras from the 1960’s and 1970’s. DL: What three things would you take to a desert island? AB: I don’t need three, just one: A ticket on the next ferry off the island.

About EnCore Oil: EnCore Oil plc (LSE:EO.) is a UK based oil and gas exploration and production (E&P) company quoted on AIM. We hold a balanced portfolio of licences, primarily focused on offshore UKCS. We also own just under 30 per cent equity in AIM listed Egdon Resources plc (LSE: EDR), a focused onshore UK E&P company

About Alan Booth, Chief Executive Officer: Prior to co-founding EnCore, Alan Booth was Chairman and Managing Director of EnCana (U.K.) Limited (now Nexen Petroleum U.K. Limited), and a member of EnCana Corporation's executive management team. He was instrumental in building EnCana UK from a new UK entrant in late 1996 with a $55 million exploration funding obligation into a significant UK production operator and the discoverer and development operator for the Buzzard field. In late 2004 Alan lead the UK team which sold EnCana (U.K.) Limited to Nexen Corporation for $2.1 billion. Prior to EnCana, Alan worked in a number of positions of increasing seniority for Amerada Hess and Oryx Energy both in the UK and overseas. He has particular experience in new ventures acquisitions and exploration in the UK, Scandinavia, Australasia as well as the Middle East and Africa. For more information on EnCore Oil please visit: http://www.encoreoil.co.uk Or Contact: EnCore Oil, 4 Baker Street, London, W1U 7BU, United Kingdom, T: +44 (0) 20 7224 4546, E: [email protected]

http://www.encoreoil.co.uk/


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Drillers and Dealers February 2011 Edition


The Independent E&P Universe, Deal Or No Deal, Who Will Take The Banker’s Offer?

Written by Andrew Monk, Chief Executive Officer, VSA Capital

Everywhere you look there seems to be a new E&P company floating on the market or looking for Private Equity. I don’t think we ever have had so many Junior E&P companies before, certainly not quoted ones! And they are exploring everywhere from Africa to the FSU, Asia to North and South America and Europe and even Greenland. There is nowhere in the world that isn’t being explored and no stone unturned (almost literally now with all the oil shale plays). Now, we know why of course. The oil price is so high that it is now probably commercially viable to look everywhere and, of course, investors are currently throwing money at people in the hope of that “big strike”. Some E&P companies have had such amazing performance and been “10 baggers” that your average investor wants a bit of that action too, but when everyone piles in, should the astute investor be piling out? Are we in a bubble or is it just frothy? When a software salesman is telling you that you must buy an oil company in the Falklands, isn’t it time to sell? If we look back through history, the normal pattern was that there were a few E&P’s and they would grow over time and then get gobbled up by a major and that kept the Oil sector reasonably small and also fairly predictable as they nearly always did get taken over, as with the great names like Enterprise, Ultramar, Lasmo, Tricentrol, GOAL and Clyde. In fact the only one which seems to have just kept going is Premier Oil. So, have things changed or will we revert back to the old ways? The answer is probably half and half. We will always have more Junior E&P’S now (so all those highly paid analysts are safe!) because it is more commercially viable, the majors are not going to look in the smaller areas and stock markets globally are now able to list these companies more easily. Also, the Geographic spread provides investors with more options. But at the same time there probably are too many companies and ultimately they won’t all be successful; and when you get to a certain size how do you keep rewarding shareholders? The eventual takeover in the old days was actually very well received. Now it may be that new majors are created -or mini majors, particularly with the changing geo-political situation with the BRIC countries coming onto the scene - and these will be the swallowers. Or it may be that we see combinations of the giant Miners or Trading operations building up their E&P portfolio. We have seen BHP acquiring part of Chesapeake Energy for $5bn to expand their oil and gas division so perhaps they will go further (they seem to have more success with oil and gas acquisitions than mining ones!) and acquire our largest E&P, Tullow Oil, because that would be a serious move or they could even buy BG. So what about the slightly smaller players? Well, really, to be in the takeover range you need to be a decent size, so the mid cap players probably need to merge or acquire some smaller players, maybe Premier Oil, who are on the cusp of being FTSE100 size should acquire a few smaller players like Salamander or maybe the Catcher Development where EnCore, Nautical and Agora own 45% between them and that might make more sense especially for tax reasons. This would make them pretty exciting. And then there are all the small and micro cap plays, just hoping for that lucky strike. The trouble is the majority won’t be successful (and to be honest, most are overvalued). Should they merge and try and create and diversify the risk? Well whilst the punters are happy funding them they don’t need to but it won’t carry on forever. Now this will feel fairly unpalatable to most Chief Executives as they all believe they have the best well and the best prospects, but actually if they do a deal that makes shareholders money, the investors will remember you and will back you again in the future. There’s always another horse round the corner. We all know that egos tend to get in the way here but sometimes we have to leave them behind at the Golf Club. So my advice would be to think long term and don’t think you are rich until you have taken the profit and always best to leave a bit for someone else. So what makes it happen? Actually, this is the difficult bit. There’s always a lot of talk, but talk is cheap. One of the first things to know is what your shareholders really want you to do. How many Chief Executives really have a close relationship with their shareholders? Then, if the company has a very clear and well defined strategic plan of how it is going to acquire and grow, it can get the backing of its shareholders and that way it can raise additional funding as it goes along. So companies should decide if they want to be African focused, FSU focused or some other region, mandate its advisers and find who it wants to acquire and then have a strategy where everyone is a winner. It is always best to be amicable and make everyone comfortable. Of course sometimes an event happens that supersedes all this but still shows the dangers. Nautical Petroleum last year had significant commitments in Q2 2010, and the market simply dried up. They had spent too much time farming out, did not pay much attention to their key shareholder (until their key shareholder got squeezed) and they looked very stretched, luckily for them it was pretty much the Catcher discovery that saved them…at the last minute Being quoted has it’s downsides but it does give you access to finance. Oil companies have become masters at Farm-ins to raise finance, but ultimately you need to be your own master so you can never have too much cash.



However, at the moment, any deal really has to be for paper because all E&P stocks look pretty expensive so you need expensive paper to make acquisitions. Maybe finally we should remember that stock market appetite and rallies don’t last forever. Who knows when this current one will fall over, but one day it will and so if you want to deal remember to feed the ducks when they are quacking.

About VSA Capital: VSA Capital, based in the City of London and regulated by the FSA, provides a Corporate Finance and Broking service to companies involved in the global Natural Resources and Environmental sectors. Specialising in Mining, Oil & Gas, Timber, Agricultural, Environmental and Clean Technology sectors, they have extensive experience in capital raising, flotations, M&A activity, and the provision of corporate advice on a wide range of business problems. Their experienced Research analysts provide in-depth reports on the business prospects of Corporate clients based on a detailed due diligence process, allowing them to provide a fully informed opinion to Institutional Investors globally.

About Andrew Monk, Chief Executive Officer, VSA Capital: Andrew has had a successful stock broking career spanning over 25 years and during that time has built up strong relationships with many major UK institutions and Companies in the Natural Resources sector. He was employed by Hoare Govett for 11 years before founding Oriel Securities with the backing of Vitol. As Joint CEO he grew the business to over 100 employees from scratch and built a highly profitable and reputable firm. Later he became CEO of Blue Oar Plc, where he successfully turned around its UK securities operations and its private client division as well as starting an asset management division. During his period as CEO, Blue Oar Plc made three successful acquisitions. Since August 2010 Andrew has been the CEO of VSA capital Group Plc and is building a focussed natural resources broker and corporate finance firm

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Can The Oil And Gas Industry Live Up To Today’s Dynamics?

Written by Dr. Abdul-Jaleel Al-Khalifa, CEO, Dragon Oil

The continual change in Middle Eastern dynamics will have a profound impact on the Oil and Gas industry. Brent crude traded just below $120/bbl last week when events escalated in Libya. The panic is about security of supply rather than spare capacity, considering its abundance in the current oil markets. In other words, the market doubts that the current pro-customer oil policy in terms of pricing and production can be maintained going forward. Changes in the 1960s brought OPEC into existence and changes in the 1970s delivered a higher level of oil pricing. Most importantly, these changes shifted leadership from International Oil Companies (IOCs) to National Oil Companies (NOCs). So, how does the Oil and Gas Industry quickly adjust and reshape under today’s dynamics? Historically, the oil and gas industry has had a narrow focus on the bottom line of creating value for shareholders. The shareholder is the government for NOCs while it is public investors for IOC’s. Almost all strive to maximize financial earnings while delivering cost effective performance applying state-of-the art technologies. While considering governments responsible to meet community needs such as job creation and sustainable growth, companies had focused on corporate social responsibility aiming at improving their public image. This ‘profit-only’ business model, however, started to fail – especially in the Middle East. One can argue that one of the catalysts of recent Middle Eastern changes is the poor standard of living of large local communities, while billions of dollars accumulated in the hands of business dealers. This small business group was supplying materials and services to industry and securing more corporate agencies over time. There was the false belief that such business pockets could ensure stability and secure supply of energy even at the expense of the community at large. It was further exacerbated by companies focusing on core business while outsourcing utilities, food catering, medical, IT services and others. As such, companies laid off or retired thousand of national employees, leaving room for big business to employ non-local employees at cheaper rates. This had severely shrunk the value of the oil and gas industry in the eyes of local communities. The industry had also failed, most of the time, to build a complete chain of industrial and services support which provide job opportunities and circulate liquidity into the local economy. It is very devastating in some cases when operations have to be halted to wait for a service hand to fly overseas to service tools and facilities. Billions of dollars worth of EPC contracts to build new oil and gas facilities are also awarded to international contractors. Both detailed engineering and procurement are sourced abroad. Furthermore, at the construction stage, the EPC contractors normally fly in thousands of cheap non-local labour. While Houston is the oil capital in the Western Hemisphere, the Middle East, home to two-thirds of Global reserves, does not have an energy capital yet. This only speaks for industry’s narrow focus and failure to stimulate local industrial support. In order to secure supply of energy and live up to today’s dynamics in the Middle East, the oil & gas industry has to adopt a ‘People First’ business model. Communities are no longer external, inferior or a burden to the business. It is indeed central to the shared value model proposed by Michael E. Porter and Mark R. Kramer in the January-February, 2011 issue of Harvard Business Review. Industry has to abandon outsourcing and start hiring from local communities on their permanent payroll. The region deserves a full and efficient cluster of industrial services to support its local operations, while generating jobs and circulating cash into the local economy. The industry has to invent new means of developing local economy through an integrated development package that include power generation, technology transfers and industry creation. An offset program could be customized for the oil and gas industry. This offset program requests the contractor to invest 10 % of the value of EPC projects back in the community to yield a stand-alone profitable business within five years. Community expectations are high, and the oil and gas industry is scrambling to catch up. It is time that communities work hand-in-hand with the industry to ensure local growth and global prosperity. This can only happen if industry leaders adapt ‘people first’ policies and abandon the current failing ‘profit only’ business model.

Dr. Abdul-Jaleel Al-Khalifa is currently Chief Executive Officer of Dragon Oil. He served as the 2007 President of the International Society of Petroleum Engineers. He served for twelve years as Manager of Reservoir and Exploration Departments in Saudi Aramco. He is a PhD graduate at Stanford University in Petroleum Engineering. Dragon Oil is an independent international oil and gas exploration, development and production company. Our principal asset is the Cheleken Contract Area, in the eastern section of the Caspian Sea, offshore Turkmenistan. The Group’s headquarters are located in Dubai, UAE. Dragon Oil had proved and probable oil reserves as at 31 December 2010 of 639 million barrels of oil and condensate, 1.6 trillion cubic feet of gas reserves (corresponding to 260 million barrels of oil

equivalent) and 1.4 trillion cubic feet of gas resources.

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The Legal Corner


*** The Legal Corner ***

“What Issues Are Your Independent O&G Clients Most Concerned With In 2011 And How Can They Overcome The Challenges These Issues Present?”

―As we know, Governments everywhere are looking to increase revenue and one popular place to access revenue is increased regulation over extractive industries. Our independent clients are focused on the spectre of increased regulation and potential new government involvement in their activities. Each additional layer of regulation increases their cost structure which in turn affects their ability to compete, especially against the IOCs and NOCs. Increased regulation could come in the guise of additional safety regulations, further environmental concerns, or in the worst case, increased taxes, support for which could be spurred by the higher product prices that we are seeing—we all remember the US ‗windfall profits tax‘.‖

- Doug Glass, Partner, Akin Gump Strauss Hauer & Feld

―Canadian Domestic Independent O&G Companies: With higher oil prices producers are concerned with increased input costs and scarcity of manpower and services. Canada and Global Independents: Valuations for producing oil properties are trending too high to make economic acquisitions. One way to help minimize the challenges of increased costs and higher valuations is to acquire properties at an earlier stage with exploration and development potential and to acquire properties suitable to exploit with new technology. Juniors and Independents should consider accessing capital while there is a strong market and high corporate valuations.‖

- Richard Grant, Partner, Gowling Lafleur Henderson

―Core concerns for independent oil and gas clients in 2011 include bitumen differentials, regulatory approvals, M&A activity, steam to oil ratio and royalties. Heavy oil differentials are likely to be tight in the near-term as bitumen production catches up with the current build-out of new heavy oil refinery capacity. In the Canadian market, regulatory approval is a potential bottleneck because time to approval will take longer as application backlog grows. Clients are optimistic about a healthy M&A market with an increasing number of deals currently on the table, and JVs being a source of funding. Further, in 2011 steam-oil ratio (SOR) will be a critical metric when evaluating a project. For royalties, we expect companies that have projects that haven‘t yet reached payout (payout when cumulative after-tax cash flow = capital invested) will try to ring fence the phases of their projects in order to defer higher royalties under the current sliding scale regime. As always, in 2011 financing will be the core contingency and top priority for clients.‖‖

- Alan Ross, Partner, Borden Ladner Gervais

-

―For our independents still trying to make it to market, it is maintaining sufficient cash to keep them in business while the equity market windows open and close. For many, emerging market risk has heightened investor nervousness about venturing new monies (but equally the instability in the Middle East means the rewards are higher [as the oil price escalates]). A number of our larger independent clients also have concerns with the new Bribery Act and how that will affect their operations in developing countries. In terms of solutions, the answer is actually the same – sit tight - but for different reasons. On the ECM side, there is little option but to await calmer waters (though be ready when they arrive) and on the legislative side, the government may be having a rethink so it's a case of watching this space.‖

- David Lewis, Partner, Clifford Chance

"In the Middle East, Government relationships. These have always been important in the region, both in facilitating existing activity and in terms of identifying new E&P opportunities. However, as 2011 dawns and several Middle East regimes face their twilight, oil and gas companies operating across the region must be nimble if they are to stay ahead of the fast-changing political and legal environment. Those with obligations under current concessions / PSAs should be evaluating their rights in the event of force majeure or change in law, and can expect a tightening of provisions relating to the employment of nationals and the use of local content. They'll need strategies to protect their income and assets. Those looking to make investment decisions will be faced with uncertainty, as regional upheavals threaten to affect personnel within oil and gas ministries, national energy legislation and sources of finance. They'll need extra caution in conducting due diligence and negotiating terms and conditions, with an eye to securing their investments."

- Charles Wilson, Partner, and

Edward Rose, Partner, Trowers & Hamelin

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Analyst Notes


***Analyst Notes ***

“How Do You See Independent E&P Stocks Performing In 2011 Relative

To Blue-Chip O&G Stocks And Oilfield Services Stocks?”

“We see positive E&P sector sentiment, supported by high oil prices (>US$100/bbl), continuing to encourage the acceleration of investment decisions both within the industry and by the investment community. On a company-specific basis, we see small cap E&Ps continuing to outperform relative to their larger peers through 2011. One of the main reasons is the almost binary outcome of oil and gas exploration drilling, which will continue to have a more significant impact on the shares prices of the smaller independents, and it is the reward profile this produces, that we believe will continue to attract risk-seeking investors. There is, of course, a broad spectrum of quality within the sector, and so to help us differentiate we take a pragmatic approach to stock selection and it is this fact-based approach that helps us generate positive risk-adjusted returns for our clients.”

- Werner Riding, Analyst, Ambrian Partners

“We would expect that the share price performance of smaller independent E&P companies should outperform their larger brethren. The frequency of catalysts and the magnitude necessary for them to materially propel a company’s share price higher is much more prevalent in the independents then in their larger peers. Moreover we would say this is more likely the case with those independents that have sufficient capital to execute on their respective work programs. A good example of this can be seen when a work program becomes fully funded or gets expanded following a large capital raise as in the case of Gulf Keystone or San Leon. In the current environment with fairly stable and high oil prices, more often we find that larger O&G companies tend to be production related plays or other single-catalyst stories like a large disposal or leak. This is a similar dynamic experienced by service companies in that there are fewer price catalysts when oil prices are fairly consistent. The only difference is capacity constraints are typically long lead time, say for example in certain rig classes which can experience periods of heightened pricing. In essence we prefer the independents over the larger oil and gas companies and both of those to the service companies in general.”

- Richard Nolan, Analyst, Daniel Stewart & Co “2010 was a generally a good year for the E&P sector buoyed by stable (and rising) oil prices, active drilling programmes, stronger balance sheets and improving investor sentiment towards exploration. Drilling success was rewarded (Nautical, Rockhopper, Cove, EnCore etc.) and increasing risk appetite helped other stocks perform (Chariot, Bahamas Petroleum). In 2011, one of the key ingredients, an active drilling programme across the sector, remains. Exploration drilling will be at similar levels to last year with high profile campaigns planned across the globe stretching from Greenland to the Falklands and encompassing the industry's latest hot province, East Africa.

Analyst Notes


However, a few recent disappointing wells results (Heritage with Miran West and Rockhopper with Sea Lion appraisal) has hit sentiment and resulted in a general pullback in AIM exploration stocks. We believe this reflects a view that a number of shares had run ahead of events and risk tolerance had deteriorated, an overdue acknowledgement by the market that exploration is not a one-way bet. We generally have a neutral view on the larger more established E&P companies reflecting full valuations (based on lower oil prices than spot), and see more leverage to the upside amongst the smaller names, especially those drilling on proven plays opened up by drilling success last year with the recent pullback seen as a buying opportunity. The wildcard remains oil prices. If they remain at current levels, possible given that the simmering tensions in the Middle East are unlikely to disappear overnight, then the Large/Mid-Cap E&P producers may be due a re-rating outperforming other sub-sectors such as the Majors and Oil Services"

- Richard Rose, Analyst, Oriel Securities “The European E&P sector has risen by 13% in constant currency terms YTD 2011, slightly outperforming the integrateds (12%) with the oil services lagging with a 5% gain. However, given the stellar performance of the oil services in 2010 (+41%), the lag YTD in 2011 is perhaps understandable. We would expect a year-on-year increase in oil prices (which is currently the case) to normally be a reason for E&Ps to outperform, given their greater exposure, although this can be a double edged sword due to a potentially negative impact on the market. If longer-term expectations of oil prices begin to rise, this would probably be a reason for the E&Ps to underperform the services sector.”

- Phil Corbett, Analyst, RBS

“The E&P stocks had an excellent 12 month performance during 2010 with our coverage list up on average 126%. However, the sector currently trades at an average premium of over 200% to our core net asset values which encapsulates only producing reserves (versus c.70% this time last year) and an average Price/Risked NAV of 0.9x. This reflects exploration being back in focus with sustained higher oil prices. In our view, whilst the E&Ps should continue to outperform the larger integrated O&G producers in 2011, stock selection is key and likely to revolve around success with the drill bit, trading around drilling programmes. Successful small & mid cap E&Ps will always have the potential to generate significantly more alpha than IOCs, therefore there is strong motivation to identify a sensible range of smaller E&P’s from which the future winners are likely to emerge. Oilfield Services also had a strong year in 2010, with average (unweighted) prices improving c.60%, however share prices have largely failed to gain further ground to date in 2011. We expect that the high oil price will lead to increasing activity levels and therefore tightening capacities and widening margins, which should support earnings growth. With the cycle expected to continue into the midterm, we expect earnings surprises will be largely on the upside and share prices should naturally appreciate as valuations roll onto 2012 forecasts. However the market is already pricing in a strong sectoral performance and therefore Oilfield Services again will likely display less alpha than successful small and mid-cap E&Ps.”

- Tracy MacKenzie, Analyst, Brewin Dolphin

About Chariot:

Four licences covering eight offshore blocks in NamibiaÎÎ

Significant acreage position – one of largest holdings in Namibia – ÎÎ

30,504 km2

Over 13 billion barrels of gross unrisked mean prospective ÎÎ

resources – 10.4 bbbls net to Chariot

Mega Structure identified worth 3.1 billion barrelsÎÎ

3 geologically distinctive basins – well-positioned across ÎÎ

Namibian South Atlantic margin

Frontier exploration with a proven working petroleum systemÎÎ

Highly experienced management, complete skill set in-house: ÎÎ

G&G, Engineering & Commercial

Farm-out process underway looking to maximise shareholder ÎÎ

value and manage risk, strong interest received from majors

Aim to drill Q4 2011 – drill ready inventoryÎÎ

www.chariotoilandgas.com

Chariot Oil & Gas Limited (AIM: CHAR) is an independent oil & gas exploration company with interests in Namibia. Enigma Oil and Gas Exploration (Pty) Limited is a wholly owned subsidiary of Chariot and is the operator of the licence areas.

Chariot’s blocks of interest are located off the coast of Namibia – in one of the last West African frontier areas for oil and gas exploration.

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On The Spot


*** On the Spot ***

“In 2011 which O&G companies will be most influential in shaping the

future O&G landscape – NOCs? IOCs? Independents?”

“With oil prices trending higher on the back of growth from industrializing and emerging economies, we believe that NOCs will play the most influential role in re-shaping the oil sector this year. The most important NOCs are supported by a vibrant and growing domestic economy and, in most cases, by a command political structure where government plays an influential role in the national efforts to secure future supplies of energy. In short, money is no object and energy is such a vital input in the industrialization effort that places its acquisition on top of the agenda. Even if there is a significant correction in oil prices and the markets sometime in the future because of market sentiment, NOCs will use it as a buying opportunity. We expect that the high profile transactions will continue to focus on regions such as Africa, Latin America and Asia as these present the lowest regulatory barriers to an NOC acquisition of large resources. We also believe that reserve-rich, producing companies will be preferred to earlier-stage, development plays. The hunt continues to go on; who are the prey?”

- Angelos Damaskos, CEO, Sector Investment Managers

“It is not often the Independents in the Industry have an advantage over the super majors, the free-cash generational ability of these mega companies alone is something to behold. That being said, I believe it is easier for a smaller Independent to deliver greater value for shareholders and in a shorter time than the super majors – delivery of free cash is not actually everything. As we have recently seen with BP, if free cash return to shareholders in the shape of dividends dries up, value is easily eroded. Not only do Independents have the ability to react quicker and in more esoteric frontiers than Super Majors, they quite often think smarter and quicker and adopt emerging industry trends quicker. Exclusive access by NOCs to 75% of proven conventional oil is all very well and good and shouldn’t be ignored, but we should not ignore the unconventional reserve/resource potential. Shale Gas and increasingly now Oil is transforming the North American market and is now encroaching into Europe. This wasn’t started by an Exxon or Chevron but a small US independent in the early 90’s. Recent entries by super majors has enabled the smaller, early entrant independents to realize significant value. The future for independents remains bright.”

- Tim Heeley, Chief Executive Officer, Nighthawk Energy

“Rising oil prices in 2010 meant there was naturally a significant focus throughout the year on the macroeconomic factors driving the demand for hydrocarbons. However, with Brent now returning to over $100/bbl we expect to see increasing attention paid to the supply side of the oil price equilibrium in 2011: When and by how much will OPEC increase production? What opportunities does this strong and seemingly robust price environment bring with regards to exploration? Where are the reserves of the future to be found? In such an environment, attention naturally falls on the National Oil Companies with their potentially vast resource bases. However, access to such riches alone is not enough to make the NOCs singularly influential. As we have seen in the recent BP-Rosneft deal the International Oil Companies still have a crucial rule to play in helping to exploit these potential reserves given their superior technical and frontier exploration skills. The challenge for the IOCs, if they wish to remain highly influential, is to transform the opportunities that their technical expertise provides them with into a slice of this future reserves growth, whilst managing the not inconsiderable political and technical risks associated with such transactions. Needless to say, if any class of company are best able to successfully handle this balancing act it is the super majors with their unrivalled exploration and development skills, political nous, and conservative, well managed, balance sheets.”

- Andrew Moorfield, Global Head, Oil & Gas, Lloyds Banking

Group

On The Spot


“In order to make the requested determination, the division as laid out of NOCs, IOCs and Independents is somewhat irrelevant. The categorization should more properly be based on issues such as production capacity, market access and control, geographical areas of influence, financial muscle, capacity to execute and deliver, political leverage, prospective exploration acreage and reserves, among others. IOCs like Exxon, Shell, Conoco and Chevron, will no doubt be at the top of the list, but NOCs like Saudi Aramco, Petrobras and Gazprom will also be in top positions on that list. On the other hand, NOCs like PDVSA, Pemex and Pertamina will continue to struggle to keep up with national needs and domestic political pressures and will thus have little influence in shaping the future global landscape. Meanwhile some mid-size efficient and well managed international companies, such as Hess, Talisman, Husky Energy, ONGC and OGX, will have growing influence in selected regions of the globe.”

- Luis Giusti, Senior Advisor, CSIS

“All of them; the E&P industry requires each part of the sector to be alive and well for the industry to prosper. Independents have opened up new frontiers in East Africa and along the West Africa Transform Margin. In North America, Independents have led the way in developing the frac’ing technologies required to produce from shale. The Brazilian sub-salt play has been largely opened up by Petrobras, a NOC. And whilst the excitement may reside elsewhere, the IOC’s have continued to deliver highly complex engineering projects often on time and on budget. Each of these achievements are worthy in their own right but they have significant knock-on effects across the E&P ecosystem. Asian NOCs, in particular, have helped to underwrite valuations through their desire to acquire reserves. Capital providers need to know that a well run company will have competition to acquire it once it reaches a certain size and maturity. Competitive exits provide a spur to entrepreneurs to take the risks required to move out from under the security blanket provided by large companies. The arrival of the Asian NOCs as bidders, and even as hostile bidders, for global assets is relatively recent. So much so that it is not always viewed as the new normal. Portfolio rationalization by the IOCs to focus on core areas of expertise both technically and geographically has provided another source of reserves to those companies with brown field and end-of-life field experience. This has been going on for some time in the North Sea, but BP’s recent sell offs around the globe and Shell’s much publicized divestments in Nigeria are the first concentrated divestments for some time and provide the impetus to build relatively large producing companies from scratch.”

- Alistair Stobie, Corporate Finance Manager, Oando

“Looking into the crystal ball, my view is that in the short to medium term power will continue to shift in favour of the NOCs at the expense the IOCs. Generally speaking, the NOCs (especially in the less developed world) are sitting on the vast bulk of the remaining reserves. As they gain confidence and influence, they will increasingly seek to develop and receive a bigger share of their own natural resources at the expense of the incoming IOC investors (as witnessed in Uganda and Kazakhstan etc). In addition, certain NOCs are now developing huge independent wealth (eg Petrobras) which means that their dependence on IOCs is effectively being reduced to the area of technology. We are also repeatedly seeing alliances developing among NOCs (for example, in the broader Islamic world). NOCs now appear to hold the upper hand and to be intent on breaking the stranglehold which the IOCs have enjoyed over the last 50 years or so. Having said that, IOCs will clearly still have a role, especially where conditions are so difficult that the latest cutting-edge technologies will be required (eg deepwater drilling, the Arctic etc). In addition, it will be interesting to see to what extent (i) the “shale revolution” becomes exportable to other jurisdictions outside of the US; and (ii) IOCs can keep the technology to themselves and dominate the development of the shale industry outside the US. There will still be a place for independents – whose role historically has been to explore and develop in the remotest or most risky regions in the most cost-effective way (eg Kurdistan, Russia, East and West Africa, Kazakhstan, Turkmenistan). But as those territories continue to make bigger discoveries (eg Kosmos in West Africa, Heritage/Tullow in Uganda and Cove Energy in Tanzania), we can expect the larger companies to prey on them. However, the big question now is whether those predators will be IOCs (such as ExxonMobil, Shell, BP) or NOCs (such as CNPC, CNOOC, Sinopec, ONGC). My strong suspicion is that for political reasons we will see the balance of power shifting in this area also to the NOCs at the expense of the IOCs – both because (i) they will be the preferred choice for political reasons; and (ii) they will continue to offer the highest prices (given that hydrocarbons will have a greater value to them as a feedstock for their domestic manufacturing industries compared to the “onward sale to consumers” model practised by the IOCs.”

- Greg Hammond, Partner, Akin Gump

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N e W Yo R k | Wa s h i N gto N D.C . | Lo N D o N

Online Columnists This Month Include...

Drillers and Dealers ::: ::: February 2011 Edition

“Clearly, investing in independent oil and gas companies like Mantra is for

investors who have much more of an appetite for risk tolerance. Even so, as we

watch the unravelling in the Middle East and elsewhere, Russia somehow seems

suddenly more appealing.”

Read the rest of Kevin’s column here...

“The current market shock is indeed one we have not seen since the 1990’s.

Currently, we don’t see any retrenchment in the market. We do have significant

concerns about the potential of $120 per barrel on fragile OECD economies.”

Read the rest of Gianna’s column here...

“But, with events taking a much more sinister turn in Libya, a positive outcome

hangs in the balance and markets have taken fright that the unrest will spread to

other oil exporting countries, notably neighbouring Algeria or even Saudi Arabia.”

Read the rest of Elaine’s column here...

http://www.oilcouncil.com/index.php?page=kevinkerr

http://www.oilcouncil.com/index.php?page=giannabern

http://www.oilcouncil.com/index.php?page=elaine

http://www.oilcouncil.com/index.php?page=kevinkerr

http://www.oilcouncil.com/index.php?page=giannabern

http://www.oilcouncil.com/index.php?page=elaine

http://www.oilcouncil.com/index.php?page=zaid

http://www.kerrtrade.com

http://www.brookshireadvisoryandresearch.com

http://www.edisoninvestmentresearch.co.uk

Corporate and Financial Public Relations

Independently ranked No.1 in the Oil and Gas sector

www.pelhambellpottinger.co.uk

Are you an Oil Council Member? If not apply now:

http://www.oilcouncil.com/index.php?page=becomeamember

Meet The Members

Committee Member

Member

Lance Crist, Head, Oil & Gas, IFC / World Bank

Christyan Malek, Global Oil & Gas Research, Global Markets, Deutsche Bank

How did you come to be in the oil industry? How did you come to be in the oil industry? I joined the oil industry at the age of 13, pumping gasoline at an Exxon station in Massachussetts. I spent five years after school "in the business", before heading to university, Wall Street, grad school, eventually working for IFC in Eastern Europe, returning to DC to manage our downstream refining & petrochemicals group, and moving over in 2007 to run our global oil & gas team.

After completing an MEng degree in Chemical Engineering with very high honors at Imperial College and working for BP across my degree, I decided I wanted to work in oil but from a financial and top down perspective. My family has a background in oil and many of our connections are in oil so it seemed like the natural transition. The oil industry is fascinating and it pulls together so many variables such as socio-economic, geo-political issues not least financial and environmental ones.

What is your proudest work-related achievement?

What is your proudest work-related achievement?

Working for a development institution, I'm most proud of the impact we strive to achieve in emerging economies; helping to set global transparency, governance and environmental standards; and helping sustain and grow junior and independent companies. Our deal-of-the-year awards for working with the likes of Cairn, Tullow, Kosmos and Peru LNG all point to the successful track record we've had.

Taking the oil field services department, which did not exist at Deutsche Bank three or four years ago, and making it into one of the top three rated franchises worldwide without the help of additional headcount.

Where do you see the greatest opportunity in today’s oil and gas markets?

Where do you see the greatest opportunity in today’s oil and gas markets?

The African gas market – the recent discoveries in East Africa in particular have the potential to transform the energy and industrial landscape in that region in the medium term.

Taking a parallel to the spike of the 1970s, high oil prices are making E&P capex structurally more attractive in complex areas of the world e.g. oil sands, deepwater, frontier development. Higher commodity prices coupled with increasingly limited access to ‘easy oil’ (in part, a function of their higher risk premium e.g. Middle East) are driving a completely different set of investment criteria now.

Are you an Oil Council Member? If not apply now:

http://www.oilcouncil.com/index.php?page=becomeamember

Meet The Members

Where do you see the greatest challenge? Where do you see the greatest challenge? The African gas market -- to commercialize the discoveries and build downstream linkages will require significant reform to the regulatory and investment frameworks, in order to mobilize the investment needed throughout the value chain.

Securing access to reserves for the Western Oil Companies, especially with increased competition from Emerging NOCs and contractors to secure assets/market share at inflated prices and with readily available capital.

What was the wisest advice you ever received from a mentor?

What was the wisest advice you ever received from a mentor?

Make sure to have fun. If you're not enjoying what you're doing, others won't either and the whole enterprise crumbles.

What doesn’t kill you makes you stronger

What advice would you pass on to a recent graduate wishing to work in your line of business?

What advice would you pass on to a recent graduate wishing to work in your line of business?

Spend time living or traveling in the developing world; you can't relate to the world's challenges sitting insulated in London, New York etc.

Listen well and get as much constructive criticism as you can – in this industry you will work with some amazing people so never lose an opportunity to learn and grow.

What’s the one interesting fact about you that no one would suspect?

What’s the one interesting fact about you that no one would suspect?

I have finished 14 marathons (personal best in 3:00), as well as a 50-mile ultramarathon.

I write music and poetry. In another life I might have been a poet.

How do you prefer to spend your spare time? How do you prefer to spend your spare time?

Running, coaching my son's soccer team, watching my kids' ice hockey games.

Sleeping, sun and eating good food.

Favourite holiday destination? Favourite holiday destination? Sun Valley, Idaho

Sharm El Sheikh (place never changes which in a fast past environment like London is perfect)

All time favourite book? All time favourite book? Undaunted Courage, by Steven Ambrose, about the1804-06 Lewis & Clark expedition.

The Godfather, Mario Puzo

All time favourite film? All time favourite film? A Fistful of Dollars (Clint Eastwood)

The Godfather Trilogy

What three things would you take to a desert island?

What three things would you take to a desert island?

A raft, a fishing line, and the Rolling Stones' Exile on Main Street

My wife, a yacht, a chef

[Type text]

Rialto Energy Ltd – Level 1, 34 Colin Street, West Perth 6005, Western Australia. Tel: +61 (8) 9211 5000 Fax: +61 (8) 9486 9362 Rialto Energy UK Ltd – 8th Floor, 1 Southampton Street, London WC2R 0LR United Kingdom. Tel: +44 (0) 20 7042 8500 Fax: +44 (0) 20 7042 8501 e-mail: [email protected] www.rialtoenergy.com

WEST AFRICAN ENERGY FOCUS

ASSETS

CI – 202 Cote d’Ivoire

Rialto are 63.75% shareholders in the CI-202 field located in the shallow water, offshore Cote d’Ivoire.

A highly prospective exploration licence that contains four pre-existing un-appraised oil and gas discoveries.

CI-202 is located just 80km west of and in the same geological province (basin) as the giant Jubilee Field and

Tweneboa/Owo and Odum oil and gas discoveries in Ghana.

WA-399-P Australia

Rialto holds a 12% stake in the WA-399-P exploration permit, located offshore in the prospective Exmouth Sub-Basin on

the North West Shelf, of Western Australia.

Rialto are in joint venture with majority stakeholders Apache Energy and planning is now underway for the acquisition of new seismic data to comprehensively study the existing prospect portfolio.

NEW VENTURES

Ghana – Offshore Accra

Rialto through its International Joint Venture Agreement with Challenger Minerals Inc (CMI) has the right to seek 18% equity interest in the Accra Block subject to the approval of the Accra Block Joint Venture, GNPC and the Ministry of Energy of the Republic of Ghana.

The Offshore Accra block is located in the underexplored and emerging oil province on the West Africa Transform Margin, Offshore West Africa.

To date, almost 2 Billion barrels of oil have been discovered by a consortium led by Tullow, Kosmos and Anadarko in Western Offshore Ghana.


drillers and dealers march 2011

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