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Guest Foreword

Drillers and Dealers ::: ::: September 2011 Edition

New Rules or a New Game?

Guest Foreword by Iain Pitt, COO, The Oil Council

As I sat down last week and watched the opening of the Rugby World Cup and National Football League (NFL) itgot me thinking about the similarities and common histories of the two games. American Football as we know ittoday first developed on college campuses in the 1870s and for a steady period had only minor adjustments tothe rules of Rugby which famously began in 1843, when a young student named William Webb Ellis at RugbySchool in Warwickshire, England, seemingly tired of the restrictions placed on him during a traditional game ofassociation football, picked up the ball and ran with it down the field.

Indeed this early innovation of football even in recent years left some folks confused by the sport, includingfamously Sir Tasker Watkins who with tongue in cheek was quoted in 1979 saying:

In 1823, William Webb Ellis first picked up the ball in his arms and ran with it. And for the next 156 yearsforwards have been trying to work out why."

Rugby and American Football largely mirrored one another until Walter Camp, head coach at Yale put a spannerin the works (or ingenuity depending on which side of the Atlantic you reside) by adapting the rules by introducingdowns and eliminating the restriction on forward passing that you see in rugby to this day.

Like the rules of American Football, at least certainly for this commentator, the recent collapse of the WTI-Brentspread is something that is bewildering. WTI crude has historically as we know largely mirrored Brent and whilewe often see the prices go out of alignment, the sheer length and spread that we are currently enduring isparticularly atypical.

Will WTI go the way of the NFL and slowly develop fundamental principles that ultimately create new rules ofengagement? Or will the two begin to merge back into one happy sporting entity?

Like the opening spectacle to last weekends sport it will be interesting to see how this develops over the comingmonths, particularly with the hopeful stabilising of Libya and the gradual and now somewhat more assuredcoming back on-stream of its oil production.

No-one is better positioned to discuss the challenges and opportunities this spread offers than Pierre Andurand,Chief Investment Officer at BlueGold Capital Management whose hedge fund of ~$2.5 Billion bets almostexclusively on oil futures. Pierre is graciously joining us next month in NYC to share his thoughts at our NYCAssembly. Well keep you posted on what he says.

As Ross shared with our Members online earlier this month weve had many exciting new developments at TheOil Council, from new colleagues joining the team to the development and launch of our new event websites.

Were now in the midst of planning to redesign our main portal to make it clearer, more concise and easier toaccess. As always were very interested in your comments and feedback and wanted to ask your opinions onwhat youd like to see in the new Oil Council portal.

How you would like it to present content, what functions do you like from a site, what things annoy you about

other sites (you don't have to name them!) that you'd like us to avoid?

Please email me [email protected] youve anything to share. Many thanks and I leave you with a quotefrom the inspirational and enigmatic Vince Lombardi in which one can draw reflections and references not only inany sport but in any business and in life as a whole.

I firmly believe that any man's finest hour, the greatest fulfilment of all that he holds dear, is that moment whenhe has worked his heart out in a good cause and lies exhausted on the field of battle - victorious.

Yours,

Iain Pitt, COO, The Oil Council
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Welcome to Drillers and Dealers September 2011


Contents

Guest ForewordIain Pitt, COO, The Oil Council

Executive Q&AJohn McGoldrick, Executive Chairman, Caza Oil & Gas

Cross Border M&A in the Canadian O&G SectorJohn Kousinioris and Alan Rautenberg, Bennett Jones LLP

South Sudan: The New Ministers In-TrayDavid Tennant, Partner, SNR Denton

Special Focus on Corporate Governance and

Human Capital

Getting it Right in the BoardroomDominic Schofield, Senior Client Partner, Korn/FerryInternational

Leadership and Talent Management A Scarce

Resource?

4

8

10

13

17

20

William Clarey, Founding Partner, Clarey/Napier

International

Good Governance MattersDr Keith Myers, Partner, Richmond Energy Partners

23

ON THE SPOT PART ONEWhat qualities/experiences must an O&G co look to

include when constructing/enhancing their Board to

ensure they can meet all the challenges tomorrowsmarkets pose?

28

Perspectives from Partners and Members Across the Globe

ON THE SPOT PART TWOWhat practices and initiatives must we as an

industry adopt to tackle the increasing talent crunch

now stemming across not just G&G and engineering

but also O&G finance?

31

Perspectives from Partners and Members Across the Globe

Meet The Member 35

Copyright, Commentary and IP Disclaimer: *** Any content within this publication cannot be reproduced without the express permission of The Oil Council and the respectivecontributing authors. Permission can be sought by contacting the authors directly or bycontacting Iain Pitt at the above contact details. All comments within this magazine are the views of the authors themselves unless otherwise attributed to their company /organisation. They are not associated with, or reflective of, any official capacity, or any otherperson in their company / organisation unless so attributed ***

Drillers & Dealers

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Executive Q&A


Executive Q&A with John McGoldrick,

Executive Chairman, Caza Oil & Gas

Drake Lawhead (DL) interviews John McGoldrick (JM)

DL: Cazahad a busy drilling schedule in 2011. Youve had a number of successes, but is it fair to say somedisappointments as well?

JM: The well on the Arran prospect was a disappointment, but it is important to remember that the datagained from that well is extremely valuable, as it allows us to better correlate our models. Arran tested a

new play type and although the result was not what we were hoping for in the short term, it has providedus with a wealth of geological data that is being applied to future efforts. Exploration is a process ofpulling together data from various sources, and even though Caza has the benefit of a very large 3Dseismic database, theres no substitute for the real data acquired from drilling wells in a given area.

DL: What are you looking forward to for the rest of the year and into 2012 for Caza?

JM: We are at an interesting point in the evaluation of our projects. Over the summer we have fraccedfour wells and they are now flowing back. Small E&P companies have to be agile and able to adapt tocircumstance. The performance of these wells will help us to refine our efforts and set the direction ofthe ongoing exploration and development campaign.

Our Louisiana 3D seismic database alone covers approximately 18,000 km2 in some of the most prolifichydrocarbon producing basins in the US. Our current review of this data is progressing well, and Im

looking forward to drilling an exploration well there as early as Q4 2011, with more to follow in 2012.

DL: Were looking at leadership and corporate governance issues this month in Drillers & Dealers what, in youropinion, are the most essential qualities an O&G CEO or Chairman ought to possess to manage a successfulcompany?

JM: Resilience. Anyone who has worked in the industry will tell you that exploration has more lows thanhighs but the aim is to ensure that the cumulative size of the highs is bigger than the costs of the lows.That takes time and perseverance. The other useful quality is being a good communicator, both internallyand externally: this includes with staff, with advisors, with host communities, with partners, withcounterparties amongst others. It is particularly important that the local communities where you operateunderstand exactly what it is that you are doing and how your operations will benefit them in the short,medium and long term. With the unfairly negative press surrounding fracture stimulation of wells at themoment, it has become increasingly important that we communicate with the local communities to allayany fears that they might have. In business, as in all walks of life, honesty and integrity are key.

DL: Something else were asking this month: Is talent getting any harder to find these days?


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Executive Q&A


JM: Yes. The average age of subsurface geoscientists is getting older. Successful people tend to havedone quite well in their careers so the normal motivator, money, doesnt work as well as it might foryounger hungrier talent, so lifestyle aspects and corporate culture are the best ways to attract talent. AtCaza we have a small but incredibly talented team of engineers, landmen and geoscientists. We have avery flat corporate structure, which encourages all of the team to think independently andentrepreneurially. For anyone in the oil industry, there can be no greater thrill than identifying a lead andprogressing it through to a successful discovery. As a small company, we offer that opportunity in a way

that just isnt possible in a larger organization, and I think that is a major at traction.

DL: Which other oil companies do you admire, and why?

JM: Tullow and Rockhopper come to mind. Tullow because of its focus in exploring so successfully in acore area. Rockhopper for sticking to its program when others around were failing.

DL: How would you describe Cazas business model for creating shareholder value to an investor?

JM: We are of the belief that significant value remains to be found in the onshore area of the US throughthe use of advanced evaluation techniques. Using our seismic database and knowledge of the regionalgeology, we believe we can sufficiently manage risk and identify value in undiscovered fields and playsthat are only now becoming commercially exploitable with the use of modern technology. The onshoreUS also offers many advantages. It is relatively cheap, has a great deal of existing infrastructure and

offers quick hookup of production. It also has relatively low political risk.

DL: Looking at the wider market, where do you see value in todays oil and gas markets? Which plays do youconsider most intriguing/hottest right now?

JM: The Bone Springs play in the Permian, the Bakken and the Woodbine; all plays that have been knownabout for years but where recent advances in frac technologies and horizontal drilling have raisedproductivity.

DL: Concerns about the economy and market volatility have returned recently to levels last seen a few yearsback. What do you think the main effect of that has been, or is, on independent E&P companies?

JM: Obviously its not good. The E&P business is very cash intensive and access to the funds in themarket is crucial for independents. The E&P sector has been hit particularly hard in the recent stockmarket sell-offs, and unfairly so, in my opinion. For canny investors it should provide a great buyingopportunity as there are undoubtedly some fantastic little companies out there.

DL: How has the deal market been for you and your peers? Is there a shortage or surfeit of good partners forfarm-ins/outs?

JM: As yet we have not had any problems in finding partners for our projects. I would like to think thatthis also reflects well on the quality of our asset base. If Companies continue to become more cashstrapped this may become an issue, however, whenever the market place becomes competitive then thequality of the projects is what matters.

DL: What is the most exciting thing(s) about Caza from the point of view of a potential investor?

JM: We target material prospects. As a small company, one or two good finds can have a hugely positiveimpact on the share price. That is why a shareholder would choose to put their money in our stock as

opposed to a supermajor where the discovery of an elephant (far rarer than most people appreciate)might only move the stock by a couple of percent.

DL: Finally, when youre away from work, how do you enjoy spending your spare time?

JM: I learned to fly in 1983 and have been passionate about flying ever since, however more recently Ihave started to sail. Much slower and cocktails are allowed!

About John McGoldrick:

John Russell McGoldrick is a director and Executive Chairman of Caza and a director and Executive Chairman ofCaza Petroleum. From February 2004 to August 2006, John served as Executive President of Falcon Bay. Priorthereto, John was employed by Enterprise Oil from June 1984 to October 2002, serving in a number of positions,

including President of Enterprise Oil GoM. from August 2000 to October 2002 and Managing Director ofEnterprise Energy Ireland Ltd. from December 1997 to August 2000. John is a graduate of the University ofBradford (Bachelor of Engineering Chemical Engineering with Management Economics).


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Guest Article


Cross Border Mergers and Acquisitions in the Canadian Oil & Gas

Sector: Transaction Tips and Trends

Written by John Kousinioris (Partner) and Alan Rautenberg (Partner), Bennett Jones LLP

The Canadian oil and gas sector has traditionally had, and continues to have, significant M&A activity, with domestic andforeign intermediate and larger players acquiring smaller players, and smaller companies acquiring non-core assets from largerplayers rationalizing their asset portfolios.

Alberta has approximately 175 billion barrels of proven synthetic oil reserves in its oil sands and a further four billion barrels ofconventional crude oil reserves, making Canadian oil reserves second only to Saudi Arabia. Canada is also the third largestproducer of natural gas in the world with reserves in excess of 50 trillion cubic feet.

The abundance of Canadian natural resources has been of continuing interest to foreign investors, traditionally from the UnitedStates, but more recently from Asia.

Transaction Structuring

Business acquisitions in Canada are typically completed by purchasing the voting securities of a business entity or by

purchasing the assets of the business.

Public business acquisitions must comply with a variety of corporate and securities regulatory requirements andtypically employ a take-over bid or plan of arrangement.

Private business acquisitions require less regulatory compliance and can usually be completed by way of a share orasset purchase agreement.

Plans of Arrangement

A plan of arrangement is a court-sanctioned corporate reorganization procedure that allows a company to reorganize, combinewith another company or effect fundamental changes to its capital structure. This acquisition method is frequently used forfriendly M&A transactions because it is flexible, facilitates complex multi-step transactions, avoids the application of the moreprescriptive take-over bid rules and avoids the need for second stage transactions to eliminate residual shareholder interests.In addition, a court-approved arrangement may provide a section 3(a)(10) exemption for the issuance of share considerationunder U.S. securities laws and avoid material SEC review of a registration statement.

Once negotiated by the bidder and the target, a plan of arrangement is submitted to the target's security holders for approvaland, upon receipt of that approval, submitted to the court for ultimate approval and subsequent implementation.

A plan of arrangement typically requires approval by two-thirds of the votes cast at a special meeting of security holders andbinds all security holders once approved.

Take-Over Bids

A take-over bid is the Canadian equivalent of the U.S. "tender offer" and is defined as an offer to acquire outstanding voting orequity securities of a class that would bring the holdings of the bidder (and its joint actors) to 20% or more of the securities ofthe class.

A take-over bid must remain open for at least 35 calendar days and no securities may be taken up by the bidder until the end ofthat period. All shareholders must be offered identical consideration and collateral agreements are generally prohibited.

Unlike a plan of arrangement, adequate (i.e., clear and unequivocal) arrangements must be in place before a take-over bid iscommenced to ensure that the bidder has the necessary funds available to pay for all of the securities subject to the take-overbid. Although financing conditions are permitted, the bidder must reasonably believe it to be unlikely that the conditions to itsfinancing cannot be met.

Exchangeable Shares

Exchangeable shares are often used in cross-border share exchange transactions to provide a tax deferral for Canadianvendors. A foreign acquirer will establish a Canadian subsidiary that will, at the option of the target shareholders, either

(i) deliver shares of the foreign acquirer, or(ii) issue shares that are exchangeable for the shares of the foreign acquirer.

Exchangeable shares mirror the voting, dividend and return of capital rights of the foreign acquirers shares and allowshareholders of a Canadian target company to defer tax until they exercise the exchange right inherent in the exchangeableshares.


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Guest Article


Deal Terms Similarities and Differences

Although there are many similarities in deal terms between Canada and the USA, marked differences remain which should berecognized in the context of cross-border M&A transactions, including the following which we believe should be highlighted:

"Go-shop" provisions appear far less frequently in Canadian transactions; Canadian transactions involve far fewer earnouts; The survival period for representations and warranties is typically longer in Canada; Caps on indemnity claims are much higher in Canada, with almost half of Canadian transactions limiting indemnities

claims to the full purchase price of the transaction; and

Canadian transactions contain escrow or holdback components much less frequently.Alternative Transaction Types

Over the past few years, we have noted a number of trends in the Canadian oil and gas sector that have impacted, and weexpect will continue to impact, M&A activity including:

Risk Sharing Rather than focusing on the control associated with owning high percentage working interests in oiland gas properties, industry participants have begun to focus on risk sharing, particularly for large projects with multi -year development horizons and high capital requirements. This has led to an increasing number of projects,including exploration and development programs, being structured as partnerships and/or joint ventures, as well asthe sale of significant minority interests in projects and prospects to industry partners.

Technology The oil and gas business has never been as focused on proprietary technology. Access to thespecialized technology required to exploit a resource opportunity is critical, resulting in an increasing interest intechnology-driven joint ventures, increased spending on research and development and renewed interest in theenhanced exploitation of oil fields using technologies such as horizontal drilling and multi -stage fracturing.

Foreign Ownership Restrictions

Notwithstanding the Government of Canadas recent decision on BHP Billitons proposed U.S.$39 billion unsolicited bid forPotashCorp, Canada remains open for foreign investment and it will be business as usual for most foreign acquisitions ofCanadian businesses. Foreign investment review thresholds under the Investment Canada Actcontinue to rise with the reviewand approval threshold for foreign acquisitions presently being C$312 million, based on the book value of the target's assets,subject to certain exceptions.

About the Authors:

John Kousinioris, co-chair of the firm's corporate commercial department, focuses his practice on securities law, mergers andacquisitions and commercial transactions. His experience includes public and private offerings of equity, near equity and debtsecurities, particularly in the energy sector, financing, acquisition and conversion transactions in the royalty trust and incomefund sector, domestic and international takeover bid transactions, asset and share purchase and sale transactions, corporatereorganizations, debt restructuring, joint ventures and the negotiation and implementation of commercial transactions. You cancontact John directly [email protected]

Alan Rautenberg has a tax planning practice where he advises on the tax issues relating to domestic and cross-border mergersand acquisitions, public market debt and equity transactions and corporate reorganizations. Generally, Alan acts for publiccorporations and large, closely-held companies. He has particular experience with mergers, acquisitions and dispositions andsecurities and financing transactions in the energy and natural resources sector, acting for O&G, mining and alternative energycompanies. Alan has provided tax advice on the formation of several royalty trusts and has advised on acquisition, disposition,merger and financing transactions involving royalty trusts. You can contact Alan directly [email protected]

About Bennett Jones

Bennett Jones is Canada's leading energy f irm, founded and focused on principles of professional excellence, integrity, respectand independent thought. With offices in Calgary, Toronto, Edmonton, Ottawa, Dubai, Abu Dhabi and Beijing, our practiceencompasses virtually every sector of business, industry and government. Please visit:http://www.bennettjones.ca
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.bennettjones.ca/http://www.bennettjones.ca/http://www.bennettjones.ca/http://www.bennettjones.ca/http://www.bennettjones.ca/mailto:[email protected]:[email protected]://www.bennettjones.ca/http://www.bennettjones.ca/http://www.bennettjones.ca/


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Guest Article


South Sudan: The New Minister of Petroleum's In-Tray

Written by David Tennant, Partner, Energy, Transport and Infrastructure Sector, SNR Denton

Much has been written about South Sudan's prospects since independence was achieved on 9 July 2011.

As others noted at that time, the question of oil was very much the elephant in the room. However, if South Sudan is to achieveindependence in a meaningful sense, this question of the sharing of oil revenues, in terms of what has happened in the past,and what needs to happen in the future, must be answered. If South Sudan is to see its abundant oil resources deliveringeconomic benefit, in the form of new infrastructure and social reforms, then arrangements with existing oil contractors, and theincreasing number of new contractors visiting Juba, must be formalised at the earliest opportunity.

A key task for the new Minister of Petroleum and Mines is to look at the terms of the existing oil contracts covering producingblocks situated in South Sudan. Approximately three quarters of Sudan's oil reserves are situated in the south with estimatedproduction levels varying between 350,000 and 400,000 barrels per day.

Although this level of production is delivering around US$40 million in revenues each day, the new government has shown awillingness to review the existing arrangements. International consultants have been engaged for this purpose and the lawyersare expected to report soon to Minister Stephen Dhieu Dau and Nilepet on the key terms previously agreed betweencontractors and Sudapet, the former national oil company. Existing exploration and production agreements are in place with the

Greater Nile Petroleum Operating Company, China National Petroleum Corporation, Total and Petronas. It is expectedparticular focus will be given to the fiscal terms dealing with cost recovery, sharing of profit oil and custom and tax exemptions.

Early indications are that the existing exploration and production contracts are not unfavourable from a South Sudan viewpoint.The big question is: what if South Sudan decides it does not like the terms?

Short of contractors agreeing to a renegotiation the question becomes one of whether or not South Sudan remains bound bythe terms agreed on by Sudapet. This is not an easy problem to resolve and there no clear-cut answers. While lawyersgenerally accept government succession (i.e. regime change) does not invalidate pre-existing contracts and internationaltreaties (as there is no change in the legal personality of the state), views are much more wide ranging on the issue ofsuccessor states.

Two broad schools of thought exist.

The first concludes that the successor state remains bound by the obligations of the predecessor state. Here thearguments rest on issues of natural law and justice, occasionally supplemented by arguments around the concept of

unjust enrichment.

The other school sees the question of state consent as crucial. Just as the predecessor state was only bound byprivate contracts and international treaties where it had given its consent, so it must be for the successor state. So inthe absence of the successor state giving its express consent, the successor state is not to be bound.

Recent international experience does not favour one school of thought over the other (contrasts abound when considering theapproach taken to state succession on the dissolution of the Soviet Union, the breakup of former Yugoslavia and East Timor'sindependence from Indonesia). Coupled with little international case law on state succession and the absence of internationalagreements and treaties on the issue, the outcome in the South Sudan context may not be known for some considerable time.That alone may be persuasive. If oil revenues are to continue to flow to Juba then government may decide lengthy disputeswith contractors are best avoided. After all, well over 90 percent of South Sudans revenues are oil dependent.

A second task for the Minister is to implement a new petroleum law. At present the body of law in South Sudan is something ofa mosaic. Some new South Sudan laws exist (though not in relation to key economic areas, such as petroleum resources, theelectricity supply industry or mining rights).

There are also various quasi laws that were enacted pre independence. Both of these are supplemented where necessary bylaws enacted by the predecessor Sudan. If new investment is to be encouraged, in terms of both new petroleum concessionsand new infrastructure, such as a refinery or new export pipeline, then a new legal and regulatory framework is needed fast.Experience suggests this too may not be easy to achieve: a draft Electricity Act has been with the predecessor to the newMinistry of Electricity and Dams for over two years, with no sign of implementation anytime soon. Oil revenue dependencyshould accelerate enactment of a new Petroleum Act; however, until this happens, no new exploration is likely to take place.

The success of the new Petroleum Act (currently under development with the assistance of the Norwegian government) will insome senses be dependent on who is being asked the question. From South Sudan's perspective the main requirement is toestablish a new framework that is attractive to contractors and encourages new exploration.

This does not mean the act has to be exhaustive in detailing all features of the regulatory framework, but it must be sufficient inscope and intent to foster new investment. In short it must cover core concepts without too much detail and avoid setting inconcrete concepts that prove difficult to change in light of later experiences.

Good petroleum legislation (from both a government and a contractor standpoint) must identify a competent governmentalagency which will be mandated (ideally on an exclusive basis) to control and implement petroleum sector policy. This is likely tobe a particular challenge for Juba. Expertise is thin on the ground: government run Nilepet has minimal staff, a situation shared


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Guest Article


with the petroleum unit with the Ministry. Getting the new legislation in place will be critical, but so will be creating the requiredskills and capacity within government to administer it.

Others will view the success of the Petroleum Act as measurable by its approach on transparency and independent verification.Concerns have longed been aired about the lack of transparency in Sudan, a concern much vindicated by the present delay inthe agreement between Khartoum and Juba on sharing revenues and access to export infrastructure.

Many view the management of the petroleum sector as the single most important task for government. With national income so

dependent on oil revenues (something unlikely to change in the foreseeable future), South Sudan's long-term viability isdependent on the responsible and economic management of the sector. So commentators interested in ethical and governanceissues will judge success by the acts approach to data transparency, contract transparency, access to information,independent auditing and fair contract allocation. In their eyes a robust and comprehensive act, effectively implemented, will goa long way towards providing political stability and economic success in South Sudan.

Settlement of terms under existing exploration and production contracts and enacting new legislation will get South Sudan sofar, but a new export pipeline may get the government a lot further. Current export facilities are restricted to two pipelines,refining capacity and the Port Sudan terminal, all controlled from Khartoum. Several new routes are under consideration.

Option one is to build a pipeline to Melut in Upper Nile continuing on to Ethiopia and Djibouti. Option two is to join Melut with theDoba/Kribi pipeline between Chad and Cameroon. The third option, presently the front-runner, is a pipeline between Malakal inUpper Nile and Lamu on the Kenyan coast.

The Lamu project has a head start. First conceived in the 1970s, the planned pipeline forms part of the larger Northern Corridorproject, in turn part of Kenya's 2030 economic blueprint. A commercial necessity for the Northern Corridor project is an

independent South Sudan. Lamu is attractive for a number of reasons.

Apart from being an alternative to Port Sudan, it would provide South Sudan with its shortest link to the sea and with access tocheaper infrastructure. The proposed Lamu port, with its deep-water harbour and planned road and rail network, will give SouthSudan a land bridge, so facilitating exports of oil and minerals and the import of materials needed to develop local and regionalinfrastructure projects.

While it is clear that the Kenyan authorities are pushing ahead with Lamu - the Ministry of Transport gave it the green light lastmonth - the position is less clear in Juba. The South Sudan end of the land corridor will only develop if the right legal andcontractual structures are in place.

At a minimum this will require new inward investment, taxation, public procurement and finance legislation, none of which islikely to be implemented in the short term. Possible pipeline extensions and/or tie-ins with Ethiopia and Uganda and the cross-border nature of the project will also add complexity. This will necessitate individual host government agreements with theproject developers, an inter-governmental agreement between South Sudan and Kenya (and possibly others) and alsocomplicated capacity sharing arrangements.

So the new Minister of Petroleum and Mines, appointed only earlier this month, has plenty to keep himself and his Ministrycolleagues busy.

About David:

David Tennant is a Partner in the Energy, Transport and Infrastructure Sectors at SNR Denton. Hespecialises in the oil & gas sector and has wide experience of upstream, midstream and downstreammatters. He has worked in the UK, the Middle East, the CIS and throughout Africa, acting for a mixture ofhost governments and NOCs, IOCs and independent oil & gas companies and industry regulators

Contact David directly on +44 (0)20 7246 7660,[email protected]

About SNR Denton

SNR Denton is a client-focused international legal practice delivering quality and value. We serve clients in key business andfinancial centers from more than 60 locations in 43 countries, through offices, associate firms and special alliances across theUS, the UK, Europe, the Middle East, Russia and the CIS, Asia Pacific and Africa, making us a top 25 legal services providerby lawyers and professionals worldwide.

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Special Focus


Getting it Right in the Boardroom

Written by Dominic Schofield, Senior Client Partner, Korn/Ferry International

The legendary Peter Drucker once said, People use the word guru because they cant spell charlatan. This piece does notseek to point to a corporate governance nirvana somewhere there yonder, but instead to describe the board landscape as wesee it today and point to some practical steps a company can take to get the best out of its board. This is based on our workwith a wide variety of boards over the years.

The past decade has seen a sharp increase in both focus on and pressure for stronger corporate governance. Each corporatescandal has been followed by new enquiries and calls for greater scrutiny and tighter guidelines. In the US, Sarbanes-Oxleyfollowed the collapse of Enron, WorldCom and Tyco. In the UK, the corporate turbulence in the boardrooms at roughly thesame time led to the Higgs Review of Corporate Governance. The 2008-09 global financial crisis triggered another bout ofcorporate governance angst and another round of guidelines and regulation tightening. The Walker Review into the Boards ofBanks and Financial Institutions (BOFIs) in the UK has led to a revision of the existing UK Code of Corporate Governance(published in June 2010). The new Code strongly encourages boards to undergo an annual internally led and tri-annualexternally led performance review.

If, as the UK Code states, the purpose of corporate governance is to facilitate effective, entrepreneurial and prudentmanagement that can deliver the long-term success of the company, then the pressure and focus to develop and maintain a

strong and effective board is unlikely to abate any time soon. That pressure will come as much from investors and potentialinvestors as from regulatory and listing bodies. As reputational risk increases, we may see a war for talent emerge forboardroom non-executive talent, with perceived strong boards being a greater factor in the market value of a company. By wayof illustration, a recent guidance note from Ernst & Young to companies considering a London listing illustrates this point: Withgreater scrutiny and liability for public company directors, substantial time and effort is required to identify, appoint and groom aqualified board of independent directors... investors are placing a premium on corporate governance (Exploring Options IPOReadiness, Ernst & Young, 2010).

Recent episodes at FTSE100-listed miner Eurasian Natural Resources Corporation demonstrate the damage boardroomconflict can have on a companys share price and value. Over the course of six months, despite stellar financial results, thecompanys market capitalisation has fallen by nearly half primarily as a market reaction to governance concerns, not helpedby one of its ousted non-executives accusing the company of being more Soviet than City.

Good governance goes beyond just being compliant; it strays into the difficult to quantify realm of behaviour and humaninteraction. As David Nadler of Mercer Delta wrote in the Harvard Business Review in 2004: The key to better corporategovernance lies in the working relationships between boards and managers, in the social dynamics of board interaction, and in

the competence, integrity and constructive involvement of individual directors (Building BetterBoards, HBR, May 2004).

Four Types of Boards: Which One Is Yours?

At least as many Non-Execs asexecs, a Chairman, a SID and 3sub-committees (Audit, Rem,Noms)

At least 50% of the NEDs,excluding the Chairman, areindependent

NEDs have 20-25 days availablea year for the role

Chairman and Chair of Auditcredible with Investor communityand well versed in corporategovernance best practice

Board aligns NEDs with thecompanys 5yrs objectives

Sector speciality for either Chairor SID

Chair able to devote a third tohalf of his/her time to the role

NEDs could spend 30-35 dayson role post 2010

International / M&A experience tohelp growth

Exposure to new businessmodels

High IQ and EQ NEDs, able tobe forensic on arguments andengage positively with others

Talent focused, mentor execs

Global mindset & globalnetworks

Strong track record of growth

Combination of strategic andoperational

Board skill gaps and successionregularly addressed

Works as team

World-class insights

In-depth knowledge on bestpractice but relentless focus ontomorrow

Candid on development needs

Diversity of views

Live the values

Basic Compliance Future Proofing

Basic Compliance

Basic Compliance

High Performance

Future Proofing

Basic Compliance

Future Proofing

High Performance

Strategic Asset

Foundation Board Developed Board Advanced Board Strategic Board

Process

driven

Behaviour

driven

Strategic Board Framework


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Special Focus


No one board is the same. Our Strategic Board Framework puts boards into four broad categories, each with an increasinglysophisticated mix of executive and non-executive directors (NEDs). The four stages seen previously represent a continuum.

Foundation Board: A Foundation Board adheres to the corporate governance codes and regulations of thejurisdiction in which it is listed. A majority of its members will be independent, and its committees will be appropriatelystaffed. The cosmetics are right. There will be interaction between executives and non-executives; however, thereis likely to be a strong CEO who set the strategic course of the company and very much calls the shots. Littlethought is given to succession and the future competencies of independent directors.

Developed Board: A Developed Board is aligned to the companys strategic needs, both in terms of its current competency makeup and its future skill and competency requirements (future proofing). Careful attention is given toensuring the right competencies and skill mix. The chairman will ensure that all the right processes are followed.

Advanced Board: In an Advanced Board, directors are selected on the basis of experience/competencies as well astheir behaviours lets say, EQ as well as IQ. The chairman works hard to ensure that the board has lively andproductive conversations. Non-executives have good relations and interactions with the companys executives often providing mentoring support and/or effective soundboards. The board regularly addresses gaps and has a firmgrip on succession and talent management challenges. It is a board which will annually review its performance andprocesses.

The Strategic Board: The Strategic Board works as a team. It is a dynamic forum, which provides outstandingleadership for the company. NEDs will provide robust challenges and mentoring to the executive management inequal measure. The chemistry around the boardroom table is good, and worked on. Lively debate is the norm. Thechairman will conduct annual reviews of performance. Peers are open about each one anothers performance and

are candid about gaps and development needs. There is on-going learning, and the board has a penetratingunderstanding of the issues, challenges and risks facing the company and executive management. In short, theboard lives the values of the company and is a source of respect and inspiration for the rest of the company.

Boards in the first two categories tend to be process driven, whilst the boards in the latter two categories are more behaviourdriven. Yales Jeffrey Sonnenfeld has argued in the past that the most involved, diligent, value-adding boards may or may notfollow every recommendation in the good-governance handbook. What distinguishes exemplary boards is that they are robust,effective social systems (What Makes Great Boards Great, HBR, September 2002).

At the start of a board review/evaluation process, we always encourage our clients to take a cool and dispassionateassessment as to how they operate and roughly where they think they may sit along this continuum. In some cases, boards willexhibit features that cross the continuum. Nevertheless, knowing where you are right now is the best starting block for changeand getting you to where you wantto be.

In the energy sector, the geopolitical, financial and operational complexities and pressure arguably suggest the need forcompany boards to possess many of the qualities and features of an advanced or strategic board. The boardroom dynamics

will be critical.

How Boards Become More Effective

Board effectiveness and sound corporate governance cannot be legislated for. They are built over time, and directed andmaintained by strong boardroom leadership (most commonly in the guise of the chairman). The key features of building aneffective board should be:

Establishing a climate of trust and candour. Encouraging a culture of debate and open dissent where board members feel comfortable challenging and quizzing

proposals. This is the antidote togroup think.

Ensuring that board members develop a deep understanding of the business, from HQ to the coalface. Informationshould be disseminated on a timely basis, and directors should commit to putting in the time.

Regularly evaluating the boards performance. Ensuring that the boards makeup is aligned to the companys strategy in both its aggregate competencies and skills.

An additional feature of a strong energy sector board should be robust and effective scrutiny of risk as well as health, safetyand environmental issues.

Conclusion

Life in the boardroom of quoted companies has become more time consuming and demanding. Reputational risk hasincreased. However, for companies and investors alike, the returns are huge from building strong, functional boards withanimated, engaged and highly competent directors focused on imparting their collective wisdom and adding value. For energycompanies possibly more than for companies in other, more domestic business sectors the strength and power of theboardroom is of huge importance. Being able to draw on the wisdom and sound judgment, technical and financial skills, andgeopolitical nous of a strong group of directors (who work well as a group) is the surest way of navigating the ever-turbulentseas of the global economy.

Dominic Schofield is a Senior Client Partner inKorn/Ferry Internationals EMEA Board & CEO Practice.

Dominic is based in London and can be reached at: +44 20 7024 9000 [email protected]

For more information on Korn/Ferry International please visit:http://www.kornferry.com
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Special Focus


Leadership and Talent Management A Scarce Resource?

Written by William Clarey, Founding Partner, Clarey/Napier International

Management is doing things right, Leadership isdoing the right thingsPeter F. Drucker

Many people may have surmised that with all the challenges of the last decade Great Recession, current global malaise, 9-11, "Tech wreck (of 2000 2001)" several natural disasters, plus many other events that the War for Talent in the energyindustry was over or had been postponed.

The truth is with the industry planning to invest several hundred billion dollars in capital in the coming decade, the demand fortalent/leadership skills may be higher than ever. Companies like to promote the idea that their staffs are a big source ofcompetitive advantage. The reality is that most of them are as unprepared for the challenge of sourcing, developing, motivatingand retaining quality employees as they were a decade ago.

Pace of Change Accelerating

The issue of demographics, globalization, and the impact of knowledge workers has been widely documented. When you

combine these factors with the following, the industry is facing unprecedented levels of change to include:

Growing demand Shift of supply to even more remote locations Heightened environmental sensitivities Even larger capital requirements Evolving centers of activity (BRIC countries) Shortage of petrotechs (estimated to lose 5,000 experienced petrotechs by 2014)

We have all heard for many years about the looming demographics (median age of industry technical talent in the USestimated at almost 50), Workforce 2000 issues, the great "shift or crew change" that is occurring and many would suggest fartoo little management time and attention has been devoted to the issue.

With the thousands of unfilled professional level positions across the industry, one might suggest the battlefield for talent shouldbe viewed in the much same way a company would develop their supply chain strategy, their capital structure, government andpartner relations, etc. Talent sourcing, development, and leadership and succession planning must be viewed as an on-going

process - not a one-time event.

Emerging Markets Only a Partial Solution

While a number of companies may look to the emerging markets as a source of talent (they are currently graduating more thantwice as many university educated professionals as the developed world) a number of issues will need to be addressed beforethis can be a viable part of a resourcing strategy, to include: inadequate English skills, questionable academic curriculums,cultural deficiencies lack of experience working in teams and an unwillingness to assume leadership roles.

Additional Management Focus Required

A survey conducted by McKinsey and Company of CEOs, Business Unit leaders and Human Resource professionalsacknowledge that they fail to give the issue of talent and leadership management adequate time and attention. Over half of theinterviewees believed executive leadership doesnt align talent management with business strategies.

If one accepts the point of view that one of the basic goals of Leadership and Talent Development is to produce more leaders

and not more followers, than why hasn't the industry been more successful? A recent survey of over 10,000 employees in theenergy sector found the following competencies to be top priorities:

Improved ability to lead employees and teams Employee relations problem-solving skills Career development and learning opportunities that are cross-organizational

However, when asked to evaluate the effectiveness of their companies in meeting these priorities there was a significantshortfall in performance. Notable gaps were: building and leading a team, confronting problem employees, building a broadfunctional orientation and career management. When combined with the belief that the industry has invested heavily toimplement HRIS programs, outside consultants, etc. why the "dis-connect"?

Too many companies still view talent/leadership management as a short-term problem rather than an integral element of along-term strategy. Great talent and great leaders are hard to find...when we see the shelf-life of CEO's at a record low (and theturnover that creates on their direct reports) companies need to focus on finding a match between leadership strengths andcompetencies that matter most for their sustained growth.

Data suggests that candidate sourcing and recruiting, training and development, succession planning and individual andorganizational development activities might be best focused on these competencies.


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Special Focus


Impact of the HR Team and Organization

One could argue that HRs role and impact continues to decline. Questions to be asked include: what level in the c ompanydoes HR report to? Do HR professionals occupy the senior positions within the function? How is the HR professional staffcompensated in comparison to their peers in finance, IT etc?

Many times HR and Talent Acquisition staff may be criticized for lacking business knowledge and establishing credibility is acontinuing challenge. Organizations that deliver the highest return on their leadership development activities view HR as a

strategic function and not as administrators who do things on request.

In our experience, companies that perform and execute best practices in the Leadership and Talent Acquisition area do thefollowing:

Conduct detailed assessments of their talent requirements Create development targets and competencies that support growth strategies Include these into all aspects of the HR value chain recruiting, succession planning, performance management and

reward/incentive plans. Hold line management and the HR organization jointly accountable for the implementation and execution of programs

and systems

Review objectives and results at the Board and Compensation Committee level regularlyInvesting in leadership excellence must be strategically focused and the returns measured and should be a joint effort betweenbusiness operations, senior company management and the Human Resource organization.

Conclusion

If the industry is going to be able to avoid delaying projects due to talent shortages while simultaneously trying to staff a majorpush into Unconventional resource plays, (not to mention the amount of talent that has been siphoned recently to join privateequity sponsored start-ups), they should be involved in the following:

acknowledge that the status quo talent strategy will be inadequate to meet future growth targets develop a value proposition/brand that distinguishes your organization from all others avoid curtailing hiring when prices soften don't allow staffing and leadership issues to be delegated too low in the organization - has to be a C-level issue ensure compensation plan remain competitive maintain an active university relationship strategy to include Executive Development Programs

Investing in leadership excellence can payoff - for those who get it right they can develop an advantage that will be difficult toreplicate.

About Clarey/Napier International:

Clarey/Napier International is a Houston-based retained executive search firm established in 1998 to provide companies with adistinctive competence in the area of strategic staffing. Bill Clarey and Ginger Napier have a proven track record of excellencein identifying and attracting talent in a variety of industries and functional areas. Together, they offer over 30 years of executivesearch and management consulting experience. Clarey/Napier International is based in the center of the international energyindustry and over 50 percent of our executive search assignments are within this sector. The other business sectors in whichwe have experience include manufacturing, professional services, engineering and construction, power, and emerging growthbusinesses.

About William Clarey, II

Prior to joining the executive search industry, he spent seven years as a consultant with McKinsey & Company and HayAssociates. In that capacity, he helped large energy, manufacturing and diversified service companies among others address

major corporate strategy, organization, human resources and executive compensation issues. In 1987, Bill joined the executivesearch profession and over the next ten years served as a principal and partner with two major international executive searchfirms. During this period, he served clients in a variety of industries to include: energy, professional services, environmental,information services, private equity, manufacturing, and health care. He has conducted executive search assignments invarious functional disciplines to include: general management, risk management, business development, finance, operations,engineering, manufacturing, management consulting, systems, quality, and human resources. In 1998, Bill joined with hiscurrent partner to form Clarey/Napier International with the objective of delivering high level, client focused executive searchservices targeted at the global energy market place. Phone William on +1 713-238-6705

Footnotes: SBC, 2010 Oil & Gas HR Benchmark Study, Center for Creative Leadership, 2009
http://www.cnintl.com/web/default.asphttp://www.cnintl.com/web/default.asphttp://www.cnintl.com/web/default.asphttp://www.cnintl.com/web/default.asphttp://www.cnintl.com/web/default.asphttp://www.cnintl.com/web/default.asp


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Special Focus


Good Governance Matters Analysis of Mid-Cap E&P Companies

Written by Dr Keith Myers, Partner, Richmond Energy Partners

Summary

Richmond Energy assessed the quality of corporate governance for 30 mid-cap exploration and production companies againsta set of 13 measures covering board, management, transparency and reliability of reporting and compared the results to shareprice and operational performance over a 3-year period.

This assessment is primarily based on indicators of Good Governance, not actual good governance. An assessment for thelatter requires being privy to day to day decision making within the organisation. We focus on indicators for clarity of directionand operational plans, and disclosure of operational performance.

The scoring of corporate governance appears to correlate with average share price performance - The shares in 15 companiesthat ranked above the median score for evidence of good governance grew an average 54% in USD terms over a three yearperiod whilst the 15 that scored below the median grew an average 8%.

So, corporate governance of a mid-cap exploration and production company seems to make a difference to equity values andshould be a key consideration for investors.

The correlation between evidence of good governance and share price is not one to one companies with top scores forgovernance can fall in value and companies at the bottom end can increase but the difference on average is significant.

So why is this? Do better governed companies perform better in operational measures of growth such as production or oil andgas reserves. Possibly, but what is probably more important is that investors perceive less risk in companies that havecompetent management accountable to a knowledgeable board, who report regularly with a high degree of transparency.

The regulatory regime and geography of operations also makes a difference, as evidenced by the high scores of companieslisted in Toronto where regulation, particularly on reserve reporting is comprehensive. Companies with assets in Europe seemto score higher than companies with assets in the Middle East and Former Soviet Union. However, good governance practice isas much a matter of company choice as it is a choice of regulatory regime.

So the lesson for investors is to pay close attention to the board structure and the competence and accountability ofmanagement. Beware of companies that tell their stories infrequently or are sketchy on detail. If a company seems reluctant tocommunicate, it is maybe because it doesnt have a good story to tell.

Introduction

Corporate governance should be a key factor in determining investment decisions but it is one of the hardest elements toassess. Pre-IPO investors spend a great deal of effort in doing due diligence on the management team, but once a company islisted access to information is more limited.

The outsider is not privy to day to day decision-making inside a company and the investor must put its trust in the board toensure that its interests are being looked after, and rely on reporting from the company for its primary source of information onperformance.

After years of following smaller oil and gas companies we have encountered, from time to time, disturbing lapses in standardsof corporate governance, which have resulted in huge value destruction for shareholders.

We have used the lessons learned from these examples (1) and adapted principles of oil sector governance best practice fromKeith Myers work with Chatham House, the World Bank and the IMF to develop a set of 13 criteria to assess companies

against. The criteria are grouped under two headings - 1) Clarity of direction, board structure and management, 2)Transparency and reliability of reporting.

It should be emphasised that this assessment is based on indicators of Good Governance, not actual good governance. Weare not accountants and have not assessed companies compliance with financial accounting codes. Instead we focus more onclarity of direction, operational plans and disclosure of operational performance. Good governance requires:

1) Clarity of goals, roles and responsibilities2) Accountability for performance and decision-making3) Transparency and accuracy of reporting4) A management capability relevant to the objectives of the company5) Sustainable decisions and risk management

The assessment criteria listed below were developed for this study based on the principles above. Assessments were thenmade based on evaluation of the companies publicly available information. Sustainability and risk management factors we re

1Oilexco Lessons learned March 2009. REP briefing note


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Special Focus


not assessed in this study. Assessment of management capability is subjective and based on published management profiles.Potential conflicts of interests noted are those in the public domain and there maybe others we are unaware of.

The governance scores were then compared with share price changes from end 2007 to end 2010. Note that at the start andend of the three year period oil prices were at about the same level, which means that oil price should not have a significanteffect on performance.

Governance Criteria

1) Clarity of Goals and Strategy

This criteria concerns the communication of the goals of the company and its business strategy. These are more thanmotherhood statements and should set targets and measurable objectives and give the investor a good sense of what thecompany is aiming to achieve and hold management to account for.

2) Conflicts of interest

This criteria identifies potential conflicts of interest where the executive team or major shareholders have other business orpersonal interests that could potentially result in a conflict of interest at some future date. An investor needs to trust that thecompany decision-making is in the interests of all shareholders. This is quite a common issue in the oil and gas sector withcompany founders often being serial entrepreneurs with interests in several businesses. A notorious example of this was thepurchase by Sibir Energy of a Moscow property portfolio belonging to one of its Russian oligarch shareholders during the 2008financial crisis.

3) Clarity of Board Roles and Responsibilities

In this criteria we are looking for the accountability of the executive function to the board of directors. Companies score fullmarks if there is clear accountability of the CEO to an independent Chairman. This is difficult to judge without knowledge of thepersonalities involved but a separation of the roles is a good start. We also look for clarity in who is fulfilling key roles likefinance director and head of exploration and looking out for any gaps in the organisation.

4) Majority non-executives

This is another measure of accountability of the executives. Good practice is to have a majority of genuinely independent non-executives. Often independent non-executives carry this label but maybe close associates of executive management.

5) Non-execs with oil and gas experience

It is crucial for accountability that there are non-executives on the board that have oil and gas experience at both acommercial/financial and technical level. Otherwise, the board is less able to monitor or challenge the decisions and

performance of the executive effectively on behalf of shareholders.

6) Management Reputation

Management reputation concerns whether key members of the management team have the capabilities to deliver the strategyand goals of the company. This is a rather subjective judgement as to whether the management have a track record of deliveryin the focus area of the business, and is based upon what details the companies release.

7) Overheads

The overhead charge is effectively the fee the management team is charging shareholders for managing the capital assets forwhich they are responsible. Here we benchmarked companies against the ratio of overhead to booked oil and gas assets, i.e.capital actually deployed rather than sitting in the bank. A ratio >5% gets zero and a red flag and


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Special Focus


11) Operational Reporting

For E&P companies the challenge is to report all significant drilling results in sufficient detail for the informed investor to be ableto understand the significance of the event being reported. The investor should expect the company to report regularly onprogress of wells and if a discovery is made provide information as to what has been found and its likely significance. The onusis on providing the facts rather than optimistic interpretations. The results of any well tests should be reported with sufficientdetail on duration and flow rates for any caveats to be understood.

12) Reserves Reporting Detail

This is a crucial area of disclosure for oil and gas companies and practice varies enormously. Each stock exchange hasdifferent rules and each company interprets the rules differently. Reserve reporting is a dark art because of the uncertaintiesinvolved, so detail is important to be able to evaluate value. From an analysts perspective, the more detail provided the better.

Top scores go to companies that break down reserves on a field by field basis, distinguish reserves on production forundeveloped and contingent resource, and provide uncertainty ranges (usually 1P and 2P). Reserve movements from year toyear are important. The Canadian listed companies also often provide a NPV10 valuation of the reserve categories which canbe useful provided the assumptions are also laid out.

13) Independent Reserve Audits

Independent reserve audits by a Competent Person (CPRs) give a valuable layer of assurance if they are carried out by areputable company. Top marks go to companies that name a reputable reserve auditor and who provide information on thebrief given to the audit company.

Results

The average company score overall in 2011 was 70% and unchanged in the 26 companies that featured in both the 2010 and2011 studies. Seven companies scored more than 80% with no red flags and merit top grade for good governance indicators.These companies are spread across all the major exchanges with assets in different continents, demonstrating the goodgovernance is a corporate choice rather than a regulatory outcome.

The average score was 72% for Board and Management and 70% for Transparency. The two most common red flag issues areconflicts of interest (7 companies): and high overheads (6 companies).

Possible conflicts of interest are caused most commonly through a dominant individual or company shareholder with outsidebusiness interests. Note this criterion is not assessing an actual conflict of interest but assessing the potential for one. In somecases executives of the company may have shareholdings and directorships in companies potentially competing foropportunities.

In terms of transparency of reporting, the two most common weaknesses were infrequent and/or uninformative presentationsand lack of financial information broken down at a country level. The industry has broadly accepted reserve reporting to SPEstandards which helps comparison of one company to another. However there are no common standards for the detail ofreserves reporting across exchanges and it remains difficult to compare reserves from one company to another.

Third-party validation is critical for the analyst/investor to be able to assess oil and gas reserves confidently. Many companiesdo not acknowledge carrying out independent reserve audits. Some say they do without naming the engineer concerned or howmuch of the portfolio they have audited. Reserve audits are presented as tables and rely heavily on the integrity of the auditor.A Competent Persons Report can be more useful if it provides asset descriptions and technical backup.

We have observed a range of standards across in third-party reporting and also in the detail provided in CPRs. These reportsare only as good as the questions being asked, the depth of investigation and the competence and experience of theCompetent Person.

So does governance matter?

Based on our database, there is not an easily discernable correlation between the governance score and operationalperformance measures such as production and reserves growth and capital efficiency.

However, there is strong evidence that companies showing evidence of good governance performed better in terms of share.The top 15 companies for overall governance scores shares grew average +54% during 2008-10 whilst the bottom 15 grew+8% over the same period. The 14 companies that scored over the average score of 70% grew +69% whilst the 16 companiesthat scored less than 70% decreased by -3%.

Why do shareholders seemingly reward well governed companies even if they are not obviously performing better? It could bea matter of trust. Well governed, transparent companies are easier for the shareholder to trust. Its worth remembering that tofully trust a company you believe that its people are credible, reliable, open and not operating only out of self-interest (or that atleast their interests are aligned with yours).

Does the regulatory regime make a difference?

UK and Australian listed companies score lower for governance on average than Canadian or Scandinavian listed companies.


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The Canadian listed companies score particularly well for transparency. Canadian companies score an average 80% forreserves reporting detail compared to 55% for UK listed companies. Third party reserve audits are compulsory also and theAnnual Information Form system provides for consistency in reporting.

Regulatory rules are not the whole story though, as some of the highest scoring companies in the study are listed in Londonand a number of TSX listed E&P companies failed during the 2008 financial crisis. Good governance is also a matter ofcompany choice. Of the 12 UK listed companies the study the top 6 for governance grew an average +11% over the 3 yearswhilst the bottom 6 grew an average +3%.

The Toronto listed companies shares performed significantly better on average than companies listed on other exchanges. TheScandinavian companies significantly underperformed despite high transparency scores. Perhaps weaknesses or inexperiencein board and management in the Scandinavian companies is the key factor.

So the regulatory regime does make a difference and the Toronto exchange is leading the way. The UK and Australianexchanges need to raise their game and the Scandinavians need to look at why so many of their companies haveunderperformed.

Does the country of operation make a difference?

When companies are divided into subsets based on their principal areas of operation, some differences in governanceindicators are apparent. The sample set is perhaps too small to generalise but it appears that companies with operations inEurope tend to score significantly higher those in the Middle East and Former Soviet Union. So, it may be that the country ofoperation is at least as important as the stock exchange listing in influencing governance indicators.

Conclusions and Recommendations

The study has developed a methodology that enables governance risks to be identified and criteria against which they can bescored. It concludes that companies that score higher have delivered higher returns for shareholders on average over the pastthree years.

Standards of reporting and communication are highly variable between companies. The regulatory regime and geography ofoperations can make a difference as evidenced by the strong scores for companies listed in Toronto and for companiesoperating in Europe.

Although the SPE reserve reporting rules have generally been adopted, there is still huge discretion in what companies actual lydisclose. This lack of consistency makes it more difficult than it should be to evaluate and compare companies and assigncapital.

Investors should push for higher governance standards in the companies they own and should factor in corporategovernance when making investment decisions.

Directors and management of well-run companies should disclose more information and be as open as possible withregard to future plans and operational performance.

There should be common reserve reporting standards across the main UK, Australian, Canadian and Scandinavianexchanges. Ideally reporting should be on a field by field level with an external audit (whilst recognising that this maynot be practical for larger companies with 100s of fields).

There should be clearer rules on the use and abuse of Competent Persons Reports and independent reserve audits.

About Keith Myers:

After completing a Ph.D. at Imperial College, Keith joined BP in 1987 as a geologist. Following a variety of technical roles, hebecame a Senior Commercial Advisor in 1996 when he led several major negotiations for new business access as well asBusiness Strategies for BPs business in West Africa and BPs Strategic Alliance with Statoil. Since 2000 Keith has been an

advisor to numerous energy companies on strategy and partnership issues Keith founded Richmond Energy Partners in 2006to provide independent advice to investors in smaller oil and gas companies. Richmond Energy advise some of the largestfunds and institutions investing in the sector. Keith takes a keen interest in oil sector governance and served on the organisingcommittee of the Good Governance of the National Petroleum Sector Project at the think tank Chatham House

About Richmond Energy Partners

Richmond Energy Partners Ltd is a UK consultancy company who provide independent evaluations of smaller oil and gascompanies for professional investors. We provide an independent, conflict free approach to valuing smaller oil and gascompanies for professional investors and oil company clients. Our research is founded on deep industry knowledge and ourglobal expert network which provides clients insights into companies, their assets and their potential. For more information visit:http://www.richmondep.com
http://www.richmondep.com/http://www.richmondep.com/http://www.richmondep.com/http://www.richmondep.com/http://www.richmondep.com/http://www.richmondep.com/http://www.richmondep.com/http://www.richmondep.com/http://www.richmondep.com/


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The Harvey Nash Executive Search Oil & Gas Practice is enjoying

considerable success worldwide.

Under Sherree Youngs leadership, the practice is now firmly estab-

lished in the UK, its success is based on her deep understanding of

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organisations. It is her passion for the sector, for delivery, her open

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To find out more about how we are helping Oil & Gas organisations

secure the very best talent please contact:

Sherree Young

+44(0) 20 7333 0033

[email protected]

Harvey Nash Oil & Gas Practice

continues to grow rapidly


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Special Focus


On the Spot Part One

What qualities/experiences must an O&G co look to include when constructing/enhancing

their Board to ensure they can meet all the challenges tomorrows markets pose?Young E&P companies, during their initiation phase, tend to need entrepreneurialyet generalist boards, with a strong business network, that ensure the ability to raisefinance and connect to opportunities. A tightly focused board would seem to be onekey success factor in establishing the groundwork for company longevity. Boardcomposition should transition as the company moves from the embryonic phase tothat of an established and sustainable business, such as from private to public orfrom explorer to producer.

This life-cycle change can be rapid, perhaps due to instantaneous explorationsuccess, a game-changing acquisition, material production or the introduction oflarge institutional investment.

Board composition must mature in step with these changes, preferably inanticipation of each change: but not so far in advance that the additional specialistskills required, be they in corporate governance, government affairs, environmentalmanagement, engineering or such, are not warehoused and under-utilized.

The original entrepreneurs, at some point, will need to pass the baton on to thecompleter-finishers who can add the right mix of skills to lead the company in itsnext stage of development.

There undoubtedly will be board management issues regarding ego andownership. It is a wise Chairman or CEO who can judge the right moment togracefully reshape a board in line with the evolution of the companys business.

- Graham Lyon, CEO, MENA Hydrocarbons

Clearly the Board composition depends on the size of the company and stage ofmaturity of its assets. For production-biased, larger companies, the Board shouldinclude solid experience in operations, corporate finance

drillers and dealers september 2011

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