the oil council's 'drillers and dealers' - april 2010 issue
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‘Drillers and Dealers’ is The Oil Council’s pioneering monthly e-magazine for the upstream industry. It entirely focused on sharing insight, analysis, intelligence and thought leadership across the E&P sector. To receive free monthly editions of ‘Drillers and Dealers’ , as well as, discounts to all upcoming Assemblies run by The Oil Council please visit our website now (www.oilcouncil.com) to sign up as a Member of The Oil Council. Membership is FREE.TRANSCRIPT
DRILLERSAND
DEALERS
ISSUE 4
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Foreword
‘Drillers and Dealers’ is our pioneering free monthly e-magazine for the upstream industry. It is entirely focused on sharing insight, analysis, intelligence and thought
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Ross Stewart Campbell Chief Executive Officer,
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„Drillers and Dealers‟ – April 2010 Edition
About The Oil Council and „Drillers and Dealers‟ o Contact Details
Executive Q&A o An interview with Attila Holoda, Managing Director, Eurasian E&P, MOL Plc.
Exploration and Production
Giving Birth to Shareholder Value o By Alistair Stobie, Chief Financial Officer, Pan-Petroleum
Our Partners
2010 Global Oil & Gas Survey Results
„On the Spot‟ with our Question of the Month o “What defining qualities and characteristics do oil and gas executives (CEOs,
CFOs and COOs) need to possess to lead their company to new growth in today's marketplace?"
The Oil Council‟s Assemblies in New York City and London
Crude Enterprise in Iraq o By Elaine Reynolds, Oil Analyst, Edison Investment Research
“Diary of a Commodity Trader” (Column) – Ahead of the Curve: Getting in
Front of the Coming Energy Crisis! o By Kevin Kerr, President and CEO, Kerr Trading International
“The Oil Outlook” (Column) – Crude's Irrational Exuberance
o By Gianna Bern, President, Brookshire Advisory and Research
“Golden Barrels” (Column) – Lifestyle Companies o By Simon Hawkins, Managing Director, Omni Investment Research
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Executive Q&A
With Attila Holoda,
Managing Director,
Eurasian E&P, MOL Plc.
Exploration and Production
Talking with Ross Stewart Campbell, CEO, The Oil Council
Date: 11th
April 2010
Ross Stewart Campbell (RSC) from The Oil Council: Attila thanks for joining us. There are a number of topics that I wanted to discuss with you today but if I may I’d like to start with exploration. As we move into a world where all the ‘easy oil’ has
been found, E&P companies are facing a raft of new challenges when looking to find and extract oil and gas in increasingly far flung locations and complex environments. In your opinion what are the biggest exploration challenges facing oil and gas companies and how are MOL planning on overcoming these?
Attila Holoda (AH) from MOL: Ross, the oil industry in the first decade of the 21st century faces a range of new challenges in the replacement of hydrocarbon reserves. In competing for exploration areas, companies have
witnessed that the sizes of conventional field discoveries tend to be smaller and smaller, while they are forced to execute work programs and to perform operations in harder and tougher environments.
Two good examples of this phenomenon are the activities carried out in deep or ultra-deep off-shore and arctic conditions. But apart from the climatic and geographical hardships, safety risks are also now increasingly high on the agenda to a certain degree. Despite intense conventional and unconventional exploratory activities these days, currently 65% of the global crude oil production still comes from fields
which have a production history of more than 30 years and are now in a ‟mature age‟. As these fields still hide significant potential reserves that can to be produced, the industry gives plenty of room for the implementation of new techniques and technologies, in order to intensify the fields and to improve the efficiency of production from them (Brownfield developments). MOL‟s upstream portfolio (including INA‟s US portfolio which has been fully controlled by MOL since mid-2009) has a solid basis for future growth, with sizeable production in seven countries, and further exploration potential in 15 countries. All these operations leverage off our 70+ year-old E&P experiences gained in the Central-European region. As one of the largest operators in the region we have introduced and successfully implemented a wide range of enhanced and improved techniques for maturing oil fields in the last 40 years. For the MOL Group, our main task in the coming few years is to maximise the value of our existing upstream portfolio. Our key focuses are;
To progress high-return, early-cash generation development projects in CEE, Syria, Pakistan, Kurdistan and Russia;
To increase our production levels;
To contribute significantly to Group-level EBITDA; and
All while extending MOL‟s outstanding efficiency to our whole upstream portfolio.
To help do this we‟ll carry out extensive conventional and unconventional exploration to further increase our reserve base. RSC: We’ve recently witnessed a record amount of M&A and A&D activity in the oil and gas sector as companies ‘fight’ to acquire new assets needed to fulfil their growth potential. With this activity burns the age old question of whether companies should focus on organic or inorganic growth to build their reserves base.
“For the MOL Group, our main task in the coming few years is to maximise the value of our existing
upstream portfolio.”
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Is exploration still the ultimate key to growth, or, has M&A overtaken it as the leading factor in building one’s reserves? AH: In my opinion Ross exploration provides a hugely important organic method of value generation for all industry players. But today‟s best and quickest opportunities for growth may come from the M&A marketplace. Companies who aligned themselves to ride out the cyclicality of the oil and gas industry are much better positioned to significantly benefit from arising M&A opportunities. For those who can apply rigorous strategies in “contango” years and preserve significant financial resources, there are currently multiple inorganic growth opportunities available at very attractive and hugely discounted prices.
If we analyze the last “oil price crisis” at the end of the 1990‟s, a significant consolidation process took place based on accumulated and preserved resources, which have been mainly spent right after the bottom of the cycle, providing significant inorganic value generation for those who could survive the crisis. RSC: Looking at your global exploration strategy Attila where geographically is MOL focusing on to find new reserves? What particular country (countries) do you view as most opportunistic for future growth? And how large ‘a play’ and part of this strategy is the Eurasia region? AH: MOL pursues exploration opportunities in the CEE region, in the Middle East, in Central Asia and in the Northern and Western parts of Africa –altogether in 15 countries. As our domicile region, Eastern Europe, is relatively explored compared to [e.g.] Western Africa and as such it therefore provides little room to further increase our reserve base. We are continuously analyzing further opportunities within our other core regions (e.g. Western Africa, Middle East, and Central Asia) to replace reserves at an appropriate risk level. We enter certain projects on a case-by-case basis, where we see real potential for significant value creation, either by utilizing our knowledge gained in
the past 75 years in E&P activities, or, by applying creative financing and structuring alternatives. Let me draw you (and your readers) a few examples Ross on our most recent exploration activities: 1. In Hungary, we implemented a new concept in
our exploration activities in 2006, which resulted in an above 70% exploration success ratio [since the initiation of this concept], proving that a mature area can also be important part of an exploration strategy
2. In Russia we had 100% success rate in our exploration activities in 2008, where we utilized the experiences we gained in Hungary
3. We had one of the world‟s top 10 discoveries in
2009 (according to Wood Mackenzie) in the Kurdistan region of Iraq, which is one of the most promising regions for growth
RSC: What are your main exploration objectives in the Eurasia region in the short, medium and long-term, and what news flow should the industry look out for later this year and moving into 2011/2012? AH: We would like to continue our domestic conventional exploration in our most successful areas but we are becoming more and more focused on several existing unconventional targets (i.e. the Pannonian Basin). Beside our Hungarian exploration activity we would like to enter other Central-European areas, like the Romanian, Polish and Croatian exploration arenas.
In the short-term we want to use our [similar] geographic, geological and infrastructural experiences in Central-Europe here.
In the medium-term we would like to strengthen our presence in these countries by building up a new asset portfolio.
Considering long-term objectives we would like to enter in to exploration of the offshore Black Sea, either on the Romanian part, or, on other offshore sections of the sea. We believe that this region of Eurasia is one of the most promising areas to discover considerable hydrocarbon reserves.
RSC: On a similar note what production milestones within the region have you set yourself this year? Are you on track to reach these milestones?
“...we are continuously analyzing further
opportunities within our other core regions to replace reserves at an appropriate risk level.”
“Forming partnerships and strategic alliances have
had a clearly visible effect on the performance of the
oil and gas industry.”
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AH: This year we would like to stabilize our domestic production (in essence stop falling production rates). However our medium-term objective is to slightly increase domestic production by developing current, and near-future, discoveries and start work on some very promising IOR/EOR projects in our more “mature” fields. As is widely known [and recognized] about MOL we have a strong background in field rejuvenation methodologies; horizontal wells, infill drilling, 3D seismic programs, state of the art geological modeling, methane and CO2 injection, and improved water flooding. Considering the region I do hope that we can reach the pre-mentioned exploration objectives and in addition that we can start production from each of the new discoveries we have made. I believe that we are on track to reach these milestones. RSC: I’d like to ask your opinion on four key issues that are currently influencing the mindsets of E&P executives: (i) partnerships, (ii) costs, (iii) technology and (iv) people. Starting with partnerships, how is MOL positioning itself to work with other oil and gas companies? Are you looking to work as JV Partners with other IOCs, NOCs and perhaps even independents? What are the opportunities of partnering MOL on new ventures? And are you always looking to retain operatorship and ownership of any new venture?
AH: Forming partnerships and strategic alliances have had a clearly visible effect on the performance of the oil and gas industry. If the NOC–IOC–Service Sector is working well together, the case-by-case oil and gas supply-demand output gaps can be filled in. It is important to note that in terms of NOC–IOC relationships and partnerships, in MOL‟s operations a dual role can be recognized:
On one hand, MOL is the custodian of the Hungarian E&P sector; owning more than 50% of acreages in Hungary, and contributing approx. 99% of the country‟s production – which is typical to NOCs
On the other hand MOL is building an international asset portfolio, has a diversified shareholder structure, and as a listed company
focuses on shareholder return – of course typical to IOCs
We utilize this dual role in our partnerships and alliances as well. For example as an NOC, MOL has taken an active role to unlock the potential in unconventional hydrocarbon resources in Hungary with the active participation of ExxonMobil. While as an IOC, MOL is utilizing our ability to develop certain [technically difficult] assets in Pakistan, where the NOC here didn‟t have the necessary expertise to develop their assets – our partnership provided both parties significant results. In order to exploit the opportunities arising in the currently challenging market environment, we have built up several strategic alliances recently – with OOC, INA, CEZ and other MENA partners.
RSC: What qualities do MOL look for in a potential partner? And for those companies perhaps looking for new industry partners, what can MOL bring to the table that the industry should be more aware of? AH: MOL has been creating partnerships in the past few years along two different models. In unconventional plays, we seek experienced and financially robust partners, while in our conventional plays, where exploration was extended to smaller prospects close to known accumulations, we teamed up with other industry players contributing a different approach with special regional know-how. This approach has helped us decrease industry-specific risks in our unconventional plays. Our exceptional success rate in the CCE region in the past couple of years is a clear sign that this was the right approach to take. As a Group we have a legacy of over 70 years in oil and gas E&P and in developing partnerships since the end of the 1990s. Our experts have proven their skills in many projects around the globe. The key to their success was the combination of high quality performance with the understanding for our partners‟ culture and needs. RSC: For many companies last year was about streamlining their businesses and reducing costs wherever possible. How can E&P companies look to reduce their costs without losing their competitive
“If the NOC – IOC – Service Sector is working well together, the case-by-case supply-demand
gaps in oil and gas output can be filled in.”
“...money and energy need to be (re)invested to renew our most important
human resources”
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edge and effectiveness? Are their some examples from within MOL you could share with us? AH: At times of crisis major oil companies used to regard the closure of weaker fields almost as the only solution. In reality, writing off and liquidating human resources are such steps whose reinstatement costs cannot, or can fully, be assessed accurately (fundamentally for the time required for reinstatement). In our endeavour not only to sustain but to develop the machines and devices that we use, we fight against their depreciation and their replacement through accurately planned accounting rules, planned refurbishment and renewal. Likewise, money and energy need to be (re)invested to renew our most important human resources, since such technical and technological challenges, such as developing and adopting EOR/IOR techniques, or, exploring and exploiting the reserves in operation, are impossible to resolve without them! Technically responsible and financially accountable managers; experts who often possess specialised knowledge; background workers; and technicians; all play a similarly important role in (i) the efficient operation of technological systems and (ii) helping to breed the talents of a new generation who themselves bring new, fresh ideas, as well as, new paradigms.
Together with the maintenance personnel dedicated to the given technological area, operators have a joint responsibility to run the process systems, the existing technical devices, machines and equipment at a constant optimum. One staff member complements the other. They must not only intend to fulfil the responsibility they have taken, or the joint necessity they have to operate the field, but strive to sustain [and even develop] their personal existential status. Personnel, unified in this sense, who breathe together with the technological systems they run, are profoundly knowledgeable about each element of the process. Practice from daily operations, gaining experiences and developing skills will allow them to filter out the inevitably inherent but superfluous elements in our systems, and to discover the optimisation potentials, to the smallest details, of all technological processes. Thus, a manager‟s responsibility is not only to track the realisation of a business plan – prepared with the help of a well-established planning method called Zero Based Budgeting (or ZBB), i.e. an operation case-map designed to the minute detail at asset and service level, with a constant and continuous engineering and cost-centre control – but also to
involve to the highest possible degree the operators‟ staff into the continuous process optimisation. RSC: Moving the discussion onto technology Attila, in the past few years a wave of innovative technology has emerged that is now allowing E&P companies to operate successfully in previously uneconomical and/or inaccessible oil and gas plays. How large a factor will technology be for tomorrow’s E&P companies? AH: Generally technology can create a massive competitive advantage over those companies that are behind the cutting edge of technology. Nevertheless this competitive advantage can be perceived from at least two perspectives.
Firstly that companies who use less sophisticated technology in areas that are accessible to most of their competition are in a less favourable position than companies who can apply state of the art of technologies. Here the competitive advantage seems to be very straightforward, like the Olympic motto „Citius, Altius, Fortius‟, which in this case means that a certain exploration project can be accomplished faster, cheaper and more efficiently than those that are run on has-been kind of technologies. Secondly that companies who work in areas that are only accessible to high-level technology. In this case new technology is instrumental in achieving any success. If a company does not have such technologies their efforts will be in vain, and it can be concluded that technology is an essential part of the game and its lack forms a barrier to success. Suffice to think about the success ratio of exploration ops focusing on unconventional plays. State of the art technologies, especially a series of technologies logically built along the line of
“Competition makes it compulsory for every
economic performer to enhance efficiency.
Change and innovation are essential in improving
competitiveness.”
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information acquisition and interpretation can provide a considerable amount of competitive advantage in decision making and profit realization with companies that are in a position to apply them. Professionals who have the privilege to be responsible for developing or implementing state of the art technologies also bear the responsibility for making their company‟s decision makers aware of the advantages and the risks of the technology. This includes the risks that might come from the inappropriate application of the technology and losing control over its budget. Well-trained experts and state of the art technology go hand in hand. If any of these two prerequisites for success are missing then failure becomes inherent in the system. Competition makes it compulsory for every economic performer to enhance efficiency. Change and innovation are essential in improving competitiveness.
RSC: Moving finally onto people – many large oil and gas companies are struggling to secure skilled talent and we’re already seeing a [growing] shortfall of skilled personal within the industry (particularly engineers and geologists). Are we, as an industry, heading towards a ‘skills/talent crunch’? How is MOL looking to capture and retain skilled E&P staff (both in management and in operations)? AH: As I touched on earlier trained managers, skilled experts and technicians all play an important role in the efficient operation of technological systems and continuous improvement. To retain them is crucial and a critical factor of the future success of any E&P company. Nowadays the war for talent has become really very aggressive. In this situation our managerial responsibility is to offer our staff a long-term professional career opportunity with personal and professional development.
All companies should be aware at all times of the corporate capabilities and expert skills they need to meet their own strategic goals. For this aim we worked out and implemented a transparent and controllable performance evaluation system based around a continuous capability matrix which incorporated a career management system for each member of our staff. It is highly important to harmonize the personal futures of your staff (including benefits, packages, trainings, professionals or managerial careers) with your company‟s own fortune making them aligned to common success as much as possible. RSC: If I may Attila I’ll wrap up by asking your one-word opinion (bullish, bearish or uncertain) on the future of the following. Bullish, Bearish or Uncertain? RSC: China? AH: Bullish RSC: Russia? AH: Uncertain RSC: Oil at $100 before the end of 2010? AH: Bearish RSC: Attila, thank you very much for your time and your thoughts. We wish you and the team all the very best in reaching your goals.
About Attila Holoda: Attila graduated (M.Sc.) from Gubkin University of Moscow, Russia in petroleum engineering in 1989. He has MBA (finance) graduation from Budapest University of Economic Sciences as well. He joined MOL as a production engineer in 1989. He worked in different leading positions in production, operational maintenance and investment until 1999.
He headed a Hungarian-Kazakh joint venture, and represented at the same time MOL in Atyrau, Kazakhstan between 1994 and 1995. Since 1999 he held different mid and top level managerial positions in the domestic production and exploration. He is responsible for Hungarian and Russian E&P activities of MOL, as managing director of Eurasian E&P.
About MOL: MOL Group is an integrated oil and gas group in Hungary. In addition to Hungary, the company is present in the Europe, the Middle East and Africa region, as also in the CIS countries, with interests in exploration, production, refining, marketing and petrochemicals. MOL Group’s upstream operations expands in Central Europe, the CIS countries, Middle East
and North Africa. www.molgroup.hu
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Giving Birth to Shareholder Value
Written by Alistair Stobie, Chief Financial Officer, Pan-Petroleum
As I subjected my wife to the vicissitudes of the latest transaction in the Stobie household she remarked that transactions seem not entirely dissimilar to the latter stages of pregnancy; you feel bloated,
immobile, exhausted and can’t wait for the whole thing to be over. Which is exactly the point at which the problems really start. I wasn’t quite sure though how ice cream fitted into the analogy. Pan-Petroleum’s recent announced merger with the Brazilian arm of Norse Energy Corp and subsequent listing to create a cross-Atlantic independent with assets in Brazil, Nigeria, Gabon and the Republic of Congo will, if I may continue to borrow from the analogy above, mark the end of the pains of childbirth and the beginning of a new corporate life. Whilst some would suggest that the time to think about how others created value was perhaps prior to the transaction, it is of course the nature of life that the process has caused a rethink on what made others successful in the past. And success in this case is breaking out of the crowded small-cap space into the headier realms of the mid-cap space. In search of the minnow’s nirvana, shareholder returns (read personal enrichment), the small and mid-cap E&P sector is somewhat wedded to deals; farm-in’s, farm-out’s, farm-down’s, portfolio rationalisation, the desire for scale and above all the need for capital to feed the exploration and development beast. Deals in this case would seem to be a proxy for value creation. And yet if you were to read the management bios of a random selection of AIM-listed companies it wouldn’t be entirely clear where the art of creating shareholder returns was learnt. Whilst, subsurface skill (and luck) and execution excellence inevitably play a substantial role, there is a theme that runs through successful companies that would suggest that these are necessary but not sufficient conditions.
Nor are they a great place to understand the investor mind-set, or put another way, the mind-set that
provides the capital that allows the wells to be drilled and the fields developed. The ex-private equity man inside me thinks that a lifetime of investment banking is hardly ideal either. And this is long before we get into the discussion of who has the right to apply the portfolio approach to managing risk; the investor or the oil and gas company.
Access to capital, at more or less the right price which is also aligned in its timing and expectations, is the lifeblood of our sector. It was fashionable for a brief moment in the dark days of early 2009 to talk about the length of the funding runway. The shorter the runway, the higher the cost of capital. Those companies able to source capital relatively easily, and it’s never easy, are able to focus on adding value, growing their portfolio and taking out their less successful brethren. Those who struggle are reduced to farming down earlier than they would like in order to keep going. I can think of a number of companies who have fed frequently at the capital trough before creating much by the way of shareholder value. And I am not sure that is a criticism. A day or so of mine was recently spent trying to merge decision making processes across two companies. Sitting on the table was a weighty capital values tome from an estimable multi-billion market-cap independent with an enviable record of executing complex North Sea developments on time and on budget. There was a lot of very good material on what has to be included in the decision gates and how to ensure that you are on track between them, but very little on how to apply risk to the value and whether, as a
“I can think of a number of companies who have
fed frequently at the capital trough before
creating much by the way of shareholder value.”
www.oilcouncil.com
small company, the returns would still be commensurate with our own cost of capital. But does it really matter? My personal list of small companies that became bigger, and in some case really quite big, over the past few years include Burren Energy, Tullow, Addax and Imperial Energy. I’ve selected these naturally through past personal involvement or because they operate in geographies in which I am interested. You will note there are no North Sea, Asia, or North America focussed companies – I’m sure plenty of wealth has been created in these places; I just haven’t followed it.
I don’t have personal knowledge of all these companies; one I do and two others I have followed directly or indirectly quite closely. Those I am most familiar with shared a common theme of being process light, and rapid executive-decision heavy. These qualities maybe necessary for success but definitely not sufficient. There are plenty of small E&P companies which also had rapid executive-decision making as a key quality, which are no longer with us or reside in AIM’s living dead category. I have tried to identify a common theme between companies that have either broken out into the sunlit uplands of the FTSE250, or been acquired by a NOC or IOC.
There is some, but imperfect, correlation between sufficient early production to fund more
than G&A, which keeps the institutional shareholder-base happy, even when other events are following a more normal oil and gas emerging market path.
There is no correlation between their success and value created through exploration, with one notable and honourable exception
Similarly there is little evidence of a combined focus on low-cost operations – probably because growth was deemed to be more important than counting the pennies.
One common strand was having a core shareholder base who believed in the vision management was promoting. It maybe a little farfetched to refer to them as an ‘investor fan base’, but given the hurdles that can impede progress in our sector having a core group of shareholders who continue to believe in the big picture is as important, if not more so than technical skill. The investor base won’t stick around if faced with too many disappointments and it’s clear that they became fans because targets were set and met. Beyond that each of these companies is relatively easy to understand. There was a relative geographic focus – extreme in Imperial’s case – and an ability to control one’s own destiny [that is, if you believe that you can control your destiny in Nigeria and Russia]. Value could be easily identified in relatively few assets and a story could be easily constructed which spoke to value catalysts. Cause and effect; but were they rewarded by the market for geographic and asset focus, or, was their geographic and asset focus the key to their wealth creation? Strangely, these companies also share one other common strand – their CEO did not come from a big oil background and serendipity has worked in their favour.
Written by Alistair Stobie, Chief Financial Officer, Pan-Petroleum
About Alistair Stobie: Alistair is the EVP, New Ventures and Commercial-designate at the merged Pan-Petroleum - Norse do Brasil company and is CFO at Pan-Petroleum. Prior to Pan-Petroleum Alistair was CFO at Volga Gas, an AIM listed oil and gas producer with assets in the European part of Russia. At Volga Gas, Alistair was responsible for all aspects of the company’ IPO
which raised $135 million in April 2007. Before Volga he worked for Baring Vostok Capital Partners, the manager of the First NIS Regional Fund, a leading FSU-focused private equity firm. Whilst at Baring Vostok, he was responsible for the fund’s investment in Burren Energy and represented the fund on the board of directors from 1994 – 1998. After Baring Vostok, Alistair
worked for Urals Trading and a Burren Energy subsidiary establishing new business ventures in Russia.
Contributing an Article
Oil Council Partners have first option on writing articles and papers for inclusion in ‘Drillers and Dealers’. We do welcome other recognised executives, organisations and companies to contribute articles on topical oil and gas matters. Articles must be content-led rather than sales-led. If you would like to contribute an article for a future edition of ‘Drillers and Dealers’ please express your interest by contacting either: Ross Stewart Campbell, CEO, [email protected], or Iain Pitt, COO, [email protected]
“Strangely, these companies also share
one other common strand – their CEO did not come from a big
oil background”
*** Oil Council Partners ***
www.oilcouncil.com [email protected] Oil Council
2010 Global Oil & Gas Survey Results1. What type of company/organisation do you represent?
2. Are you bullish, bearish or uncertain, about the future of:
Independent Oil & Gas CompanyOil & Gas ConsultancyFinancial Service Provider (Bank/Advisor/Stockbroker/Investment Dealer)Major Oil & Gas CompanyInvestor (SWF/Institutional/Asset Management/Private Equity/HNWI)Law/Accountancy FirmOil &/or Gas Service CompanyNational Oil & Gas CompanyEquipment or Technology ProviderGovernment Official / RegulatorOtherInsurance Broker or Risk Management Firm
Bullish
Bearish
Uncertain
Nat
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l Oil &
Gas
Com
pani
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Maj
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as C
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Mid
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Oil &
Gas
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0
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www.oilcouncil.com [email protected] Oil Council
3. What do you expect to see happen to the oil and gas markets in 2010?
4. Which of the following holds the greatest investment potential in 2010?
10
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www.oilcouncil.com [email protected] Oil Council
6. What in your opinion will be the peak oil price in 2010?
7. What in your opinion will be the average oil price in 2010?
$80 $95 $110 $125 $140+
<$50 $50-60 $60-70 $70-80 $80-90 $90+
0 5 10 15 20 25 30
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5. Are we likely to see another oil price spike in 2010?10
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Yes No Uncertain
www.oilcouncil.com [email protected] Oil Council
Access to capital and finance for new investment Access to new reserves Manpower crunch / lack of leadership and talent
9. Which of the following will be most important in determining the success of an oil and gas company in 2010?
10. Who will be most influential in determining the landscape of the oil and gas industry in 2010?
8. What are the three biggest challenges facing oil and gas companies in 2010?
0 5 10 15 20 25 30
0 5 10 15 20 25 30
Exploration / drill-bit successStrong cash flow and access to capital / investment Acquisition of new reservesA strong leadership / management teamIndustry partnerships with governments, advisors and other partners Investor relations and corporate communicationsCapital and cost management Asset quality and increasing the efficiency and development of existing producing assets
Governments and Regulators
Investors
Traders and Speculators
Banks and Financiers
Major Oil & Gas Companies
National Oil & Gas Companies
China
The USA
The Middle East
OPEC
www.oilcouncil.com [email protected] Oil Council
11. Which geographic region now offers the best exploration opportunities to oil and gas companies?
12. In comparison to 2009 will the industry in 2010 see more, less, or the same volume, of:
0 5 10 15 20 25 30
West Africa East AfricaNorth Africa and the Middle EastNorth America Central and South America Russia and the CIS Southern Asia South-eastern AsiaThe North Sea and Norwegian Continental ShelfOther (please specify)
More
Less
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Shar
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vola
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www.oilcouncil.com [email protected] Oil Council
14. What source of capital / finance will be most utilised in 2010 by oil & gas companies?
15. Value for money in service provision? Are current service costs:
13. Are banks providing enough capital to ensure the continued recovery of the oil and gas industry?
01020304050607080
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YesYes but more is needed as are better terms and conditions No
Equity Capital Markets
Debt Markets
Mezzanine Finance
M&A / A&D deals
Private Equity
IPOs
JVs, Farm-ins, Concessions. PSAs
Large Strategic Investors
Other
Sign
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Slig
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www.oilcouncil.com
‘On the Spot’ with our Question of the Month
““What defining qualities and characteristics do oil and gas executives (CEOs, CFOs and COOs) need to possess to lead their company to new
growth in today's marketplace?”
“The defining characteristic for leaders in the energy business to have is the ability to manage effectively amidst heightened uncertainty. Simply put, there is a greater list of unknowns than ever before, so leaders must be those who are able to be decisive and provide organisational direction when not all the answers are readily apparent.”
... Ken Hersh, CEO, NGP Energy Capital Management and Managing Partner, Natural Gas Partners (Oil Council Committee Member)
“The single most essential quality and characteristic is really mindset based and not complicated at all. The CEO that possesses, or acquires, the unwavering mindset to continuously and exclusively focus on establishing a sustainable competitive advantage in every action or initiative, no matter how large or how small, will unquestionably achieve performance superiority. Such a composite, sustainable competitive advantage will produce superior financial results as a natural by-product.” ... Franz Ehrhardt, CEO and Principle Consultant, CASCA Consulting LLC (Oil Council Committee Member)
“In the oil and gas world „what‟ questions normally require an „it depends‟ answer. In the posed question the phrase „new growth‟ may need to be defined and then any likely answer will tend to „it depends‟! It may depend on the stage of the company (explorer, pre-production, producer, domestic, international, multi-location, etc), or on the size of the company (market capitalisation, number of employees, balance sheet, etc). However in very broad terms oil and gas executives need to have vim, vigour, dash and determination. It also helps to sport a Stetson, bootlace tie and cowboy boots!”
... Jonathan Morley-Kirk, Director, Petrokamchatka
“Senior management at all oil and gas companies in today's environment needs to be both innovative and flexible in order to steer their organisations toward successful growth, whether it be organic or through strategic asset or corporate acquisition. The true test today for the CEO of a junior or independent E&P company, particularly one with a portfolio in need of geographic diversification, will be in his ability to convince the Board to maintain a nimble attitude towards capital allocation in order to position the company to take advantage of the increasingly active marketplace for assets in certain "hot" areas like the US shale plays, West Africa and several spots in Southeast Asia (Vietnam and Indonesia in particular). If that CEO can approach asset acquisition and/or partnership decisions efficiently and marshal the cash and managerial resources to execute and integrate, the current environment is ripe for deals which could provide for solid growth, enhanced corporate visibility and risk diversification – all potentially very good for the shareholders.” ... Ian Fay, Founding Partner, Odin Advisors (Oil Council Partner)
www.oilcouncil.com
“Growth is many faceted, from reserves growth, to production in BOE/day growth, to prime license acreage held, to profitability, or more accurately, lowering finding and development costs / bbl produced. Our perspective is identified by the following points below, all of which can be attributed back to the adoption of sound principles of eCommerce:
A CFO needs to have the vision to recognise the latent and un-tapped value in his supply chain, not (just) through driving down vendor costs using his Procurement department as a battering ram, but understanding his supply chain‟s pain points, collaborating with them to ease the pain (if not remove it entirely), and liberate value, which just like cream, will rise to the top when encouraged.
A CEO needs to recognise one of their roles is being the ultimate long-term executive sponsor of driving business process efficiency into their organisation. Challenging the way business is done today, not just electrifying paper business processes, but looking to streamline efficiencies through their supply chain, and even enforcing change management, against the natural human resistance.
All three, the CEO, COO and CFO have a responsibility for shareholder value growth. To do this they need to be able to demonstrate a very high level of transparency in all aspects of the organisation‟s business. This would start perhaps with full SOX compliance, and extend to contract compliance, tendering processes, and the accounting for all cash flow out of the company being simple and clearly identifiable. Having as high a proportion of the business run as eCommerce facilitates this significantly.”
... William Le Sage, CEO, OFS Portal, LLC (Oil Council Partner)
"In a timeless way, today's successful oil and gas executives will either posses those characteristics attributed to a Renaissance person, or, have built a team that accomplishes this by sufficiently complimenting one another. They need to be diplomats by nature, whilst being highly calculating, with the ability to intimately integrate their skills by communicating effectively. They need to be both individually and collectively capable in a multidisciplinary sense, thereby bringing together specific industry expertise and experience, technical and otherwise, as well as, a thorough understanding of the financial and commodities markets – past, present and projected."
... Chris Valenti, Energy Investment Banker, Starlight Investments, LLC (Oil Council Member)
“Integrity, drive and effective motivational skills are common among top executives, regardless of sector. Leading oil and gas executives, however, are characterized by additional qualities and skills:
Vision – to articulate (and stick to) clear strategies
Boldness – to identify and seize opportunities as yet unexploited by others, but tempered by…
Risk awareness – to take calculated risks, and know when to walk away from a deal
Network – to bring together the right team of experts, financers and advisers both inside and outside the company
Experience – the most successful executives have been in the industry for a long time, and understand the business from the ground up (in fact, from the sub-surface up)
Socio-political awareness – local, regional and global political, environmental and security issues impact oil and gas companies to a far greater degree than many other sectors. Understanding the wider context in which E&P companies operate can mean the difference between success and failure.”
... Afonso Reis e Sousa, Director, Taylor-DeJongh (Oil Council Partner)
“Courage and honesty. With the exception of downstream sales, the oil and gas industry produces commodity products – oil and gas. The principal area of differentiation lies in a company‟s reputation for responsible excellence with resource holders. Yet it is often hard to see this differentiation in practice, and the industry as a
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whole has at best a tarnished reputation. If a „customer‟ is someone who allows you to make a profit, then, by definition, a „customer‟ is anyone who has the ability to stop you making a profit. I would argue that having the courage to truly engage with these „customers‟ is essential to earn and maintain the license-to-operate. To do so requires honesty, the willingness to listen and, once promises are made, the relentless drive to always live up to those promises. Amongst the myriad of challenges senior executives face, this is one that leverages the most
skills – and experience has shown that earning the trust of the public at large is not through technical or commercial „logic‟, but by recognising that people form views based on emotions. If oil and gas executives are unable to engage constructively in this way, and ensure that all employees live up to promised actions and values, reputation can be destroyed overnight, severely compromising one‟s licence-to-operate. The only source of true future value is sustainable profits – sustainable companies are therefore sustainable businesses.”
... Lew Watts, Chairman, Regester Larkin North America (Oil Council Partner)
“The defining qualities and characteristics that we look for and that we think executives need to posses starts with their ability to recruit and lead their team, potential joint venture partners and the service companies that will be a part of any project‟s success. An executive with that level of leadership and people skills stacks the odds in their favour. This needs to be followed up with self-discipline and attention to detail to mitigate risk; like pursuing low-cost production options and following through on accountability systems they set up for the teams they work with. The greatest results are delivered by an executive with a relentless tenacity to reach a well defined destination [that they themselves have chosen] and who has the friendly people skills that cause others to want to do business with them.” ... Jess Larsen, President and Senior Managing Director, Katana Oil & Gas Fund (Oil Council Partner)
“So you want to start up an oil and gas company? Did you get your team altogether? Did you get a list of everything you needed? Great! Did you remember the soapbox, the slide ruler and the steak sandwich? Running a junior oil and gas company in today's marketplace is no different than it has been in the past. Yes the regulations have been increased, yes the costs are higher, and yes the basins are harder to find but one thing remains...it's about effectively working with different kinds of people towards a common goal. The three best tools an executive team can use for managing people in an oil and gas company are (i) the soapbox, (ii) the slide ruler and (iii) the steak sandwich.
i. A soapbox is required to raise oneself up to make an impromptu speech. Every company needs an executive that has the passion to tell the corporate story to investors, analysts, board members, and staff. The vision of success is orated at every opportunity keeping corporate objectives in the forefront at all times.
ii. A slide ruler is required to ensure that the facts are correct. This executive has a passion for the
empirical facts and calculations. They are an irreplaceable addition to the finance department, the technical team and the board of directors. They keep the dreams in check with reality.
iii. A steak sandwich is a Friday lunch tradition in the oil patch. It‟s about actively listening to, and
observing, those you are with and those in the room around you. This executive is the one that is asked the hard questions first and is first approached with the new ideas to bring up at management meetings.
The interesting thing about these three items is that they cannot be placed specifically into the CEO, CFO or COO roles. The qualities that each item brings to the effective leadership of an oil and gas company has been indispensible for growth in the past and remains so in the future. So my questions are, which one are you and what is your team missing?”
... Chris McLean, President, Stonechair Capital Corp. (Oil Council Member)
www.oilcouncil.com
“Leadership roles in oil and gas companies need multi-dimensional skills and experiences. Oil and gas is a long-term business. To ensure enduring success, leaders must develop longer term strategic perspectives, which will assist the organisation to navigate during short-term cyclical swings, typical of the industry. More importantly, leaders must have the ability to execute and deliver the strategy in an increasingly complex global business. Given that growth will come from emerging economies like China, India and Africa, leaders must have multi-cultural insights and global work experiences in these geographies – to build organisations aligned to local priorities while maximising shareholder/local government value. Given also the concentration of resources within national companies – who increasingly demand more “value” for their resources and have to serve domestic development agendas – leaders must also have the strategic priority to be aligned with host nations and NOCs. The majority of oil and gas businesses are developed in joint ventures and partnerships. Local partners often assist in developing the business on the ground. Leaders must have the experience and ability to forge win-win partnerships with unity of vision and mutually beneficial objectives, and have the diplomatic expertise to manage any conflicts and differences. Leaders should also be able to strongly articulate and implement standards of corporate governance, ethical values, business principles and HSE without compromise. Leaders must develop local talent to fill senior positions (rather than expatriates) and to also ensure appropriate social responsibility/community development efforts, which are often crucial for projects round the world. Leaders must lead their organisations to “globalise with localisation”, i.e., ensure multi-prong sharing of ideas, best practices and benchmarking. Emerging technologies will hold the key for many of today‟s strategic issues facing the industry, including climate and environmental impact. Leaders must lead their organisations to leverage on these developments and carry out business with minimum damage to environment. Other key areas of expertise required to be successful include: (i) commercial and market access (ii) robust project investment decisions based on sound judgement, economics, screening, risk management and financing, and (iii) execution capabilities, whether in-house or outsourced.” ... Soumo Bose, Former CEO, Gasol
“As someone who raises capital for oil and gas management teams from private equity funds, my views mirror those of private equity. The track record of the management team is paramount to private equity investment decisions. Past achievements such as sizable discoveries, raising production and reducing costs are valued. Management teams that have previously built and sold companies for high ROIs and IRRs are also prized, as are ones that have demonstrated capital allocation acumen, making good choices where [and where not] to deploy similar scales of capital as they will steward in the new company. Management teams that have worked for many years together are preferable in order to avoid personality conflicts and allow them to really hit the ground running together. Equally, they should be highly experienced in the region or play type to avoid nasty surprises. A North Sea team now deciding to focus of shale does not fly, and vice versa. Management teams that have invested 30-50 % of their liquid net worth in the company are also more likely to attract private equity, as their interests are aligned with the funds when their financial futures are dependent on the success of the company. Equally, managers of successful private equity backed companies stand to build considerable personal wealth. Drive, vision and passion for building their company is vital, along with intelligence, expertise and interpersonal abilities. After the trials of the last couple of years, funds are definitely also looking for teams that will be adaptable and responsive, but also steady hands and pleasant to work with to overcome challenges together.”
... Emilie Sydney-Smith, Partner, MZ Finance
“For publicly listed companies (any exchange), I would venture that an ability to communicate the company's message to the investor base is critical for the executive members. In addition, for all companies (public and private) two key attributes are: (i) a the ability to attract and motivate the right talent (very critical in today's oil and gas world), and (ii) negotiation skills (be it with host governments or partners on concessions).” ... Rafi Khouri, Oil & Gas Equity Analyst, Raymond James
“I would add that an ability to adapt to change is vital. The oil and gas industry is sometimes criticised as traditional and unbending, and not open to using new methods of communication, in particular Web 2.0. In times of economic constraint it is a willingness to be open to new ideas that may give a competitive edge.”
... Tracey Dancy, Marketing Executive, RPS Energy
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Crude Enterprise in Iraq
Written by Elaine Reynolds, Oil Analyst, Edison Investment Research
With the Iraqi elections of March 7th now over, oil companies will be watching the outcome with interest and hoping for a government that can provide stability and continuity. Since the secular party of Ayad Allawi has won by a margin of just two seats over incumbent Prime Minister Nuri al Maliki, it seems likely that months of post-results wrangling lie ahead in order to achieve a new coalition.
For the oil companies, this will be just one more issue to live within the world of oil and gas in Iraq. The lack of a national oil law to guarantee that contracts will be met by future governments is of major concern, as are doubts regarding the ability to work in the semi-autonomous region of Kurdistan. In addition, Iraq’s tough oil minister, Hussein al-Sharistani, has driven a hard bargain with the oil companies, insisting that they can take no more than $2/bbl. These brutal terms will ensure thin profit margins, playing well with Iraqis who are touchy about giving away their oil wealth to foreign companies. But he has also set an ambitious production target of 12 million bbl/day by 2015, up from current production rates of around 2.4 million bbl/day. It will be a huge task to upgrade and replace Iraq’s decrepit and decaying infrastructure, not to mention resource the manpower required for such a job.
The effects of war and sanctions will quite probably have also taken their toll on the oil and gas reservoirs themselves. Years of Soviet-style engineering and poor reservoir management will have resulted in damaged reservoirs and permanently lowered recovery factors. Hardware can be replaced, damaged reservoirs cannot. This, as Donald Rumsfeld would say, is the ‘known unknown’ for the oil companies. Meanwhile, Mr Sharistani wants OPEC to accept 12 million bbl/day as Iraq’s quota, arguing that his nation’s need for reconstruction, and loss of income over years of sanctions should be taken into account when determining quotas. If accepted, this rate would seriously challenge Saudi Arabia’s long-held position as swing producer and force other OPEC members to cut back production or face lower oil prices. However, OPEC Secretary General Abdalla El-Badri has suggested 4-5 million bbl/day as a more meaningful quota. Expect trouble at future OPEC meetings. But it’s Iraq’s old rival Iran that seems to be most put out by this potential shifting of power in the Middle East. How else to explain the brief incursion of Iranian troops into Iraq last December to occupy the al-Fakkah oil field? Iran relies on high oil prices to prop up support at home, but has also historically received backing from China in the UN to avoid sanctions over its nuclear programme. China’s motivation has been to secure much-needed energy supplies from Iran, but with new supplies becoming available from Iraq, this may no longer seem so critical. And so, given the variety of issues at play here, it looks like interesting times ahead for the industry in Iraq.
About Elaine Reynolds: Elaine is an oil analyst at Edison Investment Research. Prior to joining Edison she had fourteen years
experience as a petroleum engineer with Texaco in the North Sea and Shell in Oman and The Netherlands.
About Edison Investment Research:
Edison is Europe’s leading independent investment research company. It has won industry recognition, with awards in both the UK and internationally. The team of more than 50 includes over 30 analysts supported by
a department of supervisory analysts, editors and assistants. Edison writes on more than 250 companies across every sector and works directly with corporates, investment banks, brokers and fund managers. Edison’s research is read by every major institutional investor in the UK, as well as by the pr ivate client
broker and international investor communities. Edison was founded in 2003 and is authorised and regulated by the Financial Services Authority. www.edisoninvestmentresearch.co.uk
“... as Donald Rumsfeld would say, is the
„known unknown‟ for the oil companies.”
www.oilcouncil.com
Diary of a
Commodity Trader (April)
Ahead of the Curve: Getting in Front of the Coming Energy Crisis!
By Kevin Kerr, President and CEO, Kerr Trading International
As the World begins to show signs of a slow awakening from the economic implosion of 2007-2009, the window of opportunities for getting a handle on
energy prices is rapidly slipping away. When crude oil hit $147, most of us who have been trading it for a number of years felt that the price was not sustainable. Clearly we were correct. There is an old saying that traders use and it was drilled into my head back when I was on the trading floor at the ripe age of 19. The cure for high prices is high prices. The same saying holds true for extremely low prices as well.
First Blame All the Speculators When we saw oil prices fall from $147, the unwinding was dramatic and quick. Prices for crude actually got back down to $36 briefly and the hand wringing and blaming of speculators commenced. We saw government and regulatory investigations commenced immediately and the result was they uncovered little if anything, except maybe a free market doing what it does, trade free.
Prices quickly ramped back up to the $80 level and have been there ever since, regardless of the global economic condition and weak demand and oversupply. So what will happen as we start to see demand pick up? It’s a safe bet that oil prices will not go lower. Speculators and all of the new trading products certainly contributed to the volatility in the energy sector but quickly supply and demand brought the markets in line again – that is the entire purpose of price discovery and it worked perfectly. The problem with focusing solely on speculators is that it simply fostered the denial that got us to $147 in the first place. Crude at $90 was, and is, sustainable just with demand and pent up demand as well as growth, even in a slow economy. The reality is that the time we
wasted blaming speculators on running amok has simply taken away from any time spent on meaningful conversations about real solutions, or why the price spike happened in the first place. At $140 we began to hear earnest conversations about drilling offshore and in Alaska. We saw consumers begin to look seriously at hybrid vehicles, and most importantly we saw significant investment in alternatives. Everything from ethanol to solar and nuclear to shale was gaining momentum and investor interest. Suddenly as oil prices fell, all of that progress evaporated. The consequences of this will be grave, especially for Western economies that are completely dependent on foreign oil.
Boom to Bust: Denial is not just a river in Egypt Like any addiction, the oil addiction in much of the World, especially America, is insidious and one key element that keeps that addiction going is denial. Denial is powerful and unfortunately it is leading us right back down the path for even higher oil prices this time around. Pain has always been a great motivator and clearly oil at $147 caused pain to consumers and the government, now I think it will take oil at $200 before we see real angst again. The reality of Chinese demand is the fact that the countries thirst for oil products is growing by at least 5% a year and likely much more. As the populations of both India and China grow their middle classes and continue to purchase cars, better food, and other items, demand for energy will only grow. Leadership and a true energy policy for the United
“The consequences of this will be grave, especially for Western economies
that are completely dependent on foreign oil.”
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“Leadership and a true energy policy for the United
States is sorely lacking if not non-existent.”
States is sorely lacking if not non-existent. Policy makers seem to simply be adrift in a sea of problems.
As regulators try to appease the public and find the smoking gun that caused high oil prices, precious little is being done to find real solutions. The only good news is [if you want to call it that] a "price limit" of about $100 a barrel that likely will only stall things temporarily. When crude reaches $100 again economies would likely rapidly switch to alternative fuel sources. However that demand is unlikely to fall fast enough to match dwindling supplies and as a result, unrest could still occur as people are forced to rapidly reduce their oil consumption. Getting Serious About Alternatives The truth is that oil supplies are dwindling and while new oil field discoveries are being made, the costs of extracting that oil will be significant, those costs will get passed on to consumers at the pump. On hand supplies cannot last forever and key suppliers such as the Cantarell field in Mexico are facing peak oil and dying. Cantarell is down to around 1 million BPD and dropping, for Mexico the impact will be devastating. The Mexican government gets around 40% of its revenue from PEMEX and the oil exported from Cantarell. The first symptoms of a genuine oil crisis became more and more apparent in 2007 as PEMEX was forced to cut back on exports to the United States.
While more oil maybe in the region it won’t be easy or cheap to get to. Major drillers like Exxon and BP can’t, and won’t, get involved in projects in Mexico because of government restrictions and costs. Other exploration projects from the Arctic to the Gulf hold promise but also come with a big price tag and even worse they will take years to develop. The prognosis for consumers is not good for the next decade and if we don’t get serious about getting ahead of the curve on this issue it will surely be the demise of the Western economy. I recently spoke to CNBC and Larry Kudlow, as well as, Addison Armstrong of Tradition Energy; all are deep in denial about the coming high prices for oil, in my opinion.
Two weeks after this interview, crude oil was $5 higher and gasoline prices spike up 20 cents or more at the pump nationwide. You can decide for yourself by watching the interview: http://kerrtrade.com/blog/?p=1034 The days of cheap and easy to find energy are gone. Those of us traders who know that are already ahead of the curve, and as traders, that’s always a good place to be.
*** Look out for Kevin’s regular column, which is released at the middle of every month. ***
About Kevin Kerr: Kevin Kerr is a TV and radio investment advisor, his unparalleled expertise in futures and commodities has made him a regular contributor to news outlets like CNBC, CNN, FOX News, CBS Evening News, Nightly Business Report and many others.
Recently, he was even featured on Jon Stewart's The Daily Show. What's more, Kevin has traded commodities professionally for the last 19+ years. Kevin began his career on Wall Street in 1989 acting as a currency arbitrage clerk on the former New York Cotton Exchange and has worked on and owned seats on several of the Commodities Exchanges in North America.
About Kerr Trading International: Kerr Trading International is a diversified commodities firm providing education,
trading and consulting services worldwide. In the fast paced commodities markets it can be difficult to find someone who wants to take the time to help you understand the potential profit opportunities as well as the risks involved in today's markets. KTI
is a full service commodity research company and advisor that always puts its customers first. www.kerrtrade.com
“As regulators try to appease the public and find
the smoking gun that caused high oil prices,
precious little is being done to find real solutions.”
www.oilcouncil.com
The Oil Outlook
April 2010: Crude's Irrational Exuberance
By Gianna Bern, President, Brookshire Advisory and Research
While the oil industry value chain is generally quite happy with $86 per barrel crude prices, one must ask whether this recent rally is sustainable. On April 6th crude reached an 18-month intraday high of $87.09 per barrel. In just the past 10 to 15 days, crude has increased $4 to $5 per barrel depending on how you view the situation. Place this within the context of relatively high U.S. crude oil inventories and it begs the question, is there the fundamental strength in the market?
Crude Inventories For those who follow U.S. crude oil inventories, inventory levels have posted 10 weeks in-a-row of inventory growth. The bright spot in the market has been a fairly healthy RBOB / gasoline complex. Gasoline inventories have begun to come into line with the seasonal draw downs as we approach northern hemisphere summer drive season. As a result, gasoline spot prices on both sides of the Atlantic have had healthy upticks in pricing.
However, U.S. crude inventories are still above the five-year average of 337 mm barrels. The U.S. Energy Information Administration just reported yet another week of inventory builds of 1.98 mm barrels to bring the most recent report to 356.2 mm barrels. All things considered, it may be fair to say the crude market is getting ahead of itself.
Greek Drama
The Euro has been somewhat volatile in recent weeks as the market sorts out reaction to Greek debt plans. As a result, the dollar has had some recent strength. On April 7th, the U.S. dollar was at $1.3327 to the Euro. I don't think the market is in the clear on the Greek situation. Finally, there has been some recent strong economic data that has been released regarding manufacturing and job creation that has buoyed the market. The market is looking for any positive economic data even though the jury is still out on sustainability.
Crude Outlook I do think the crude market will experience a retrenchment in the very near-term. I define this time horizon as the next several weeks. Certainly, over the remainder of the year, crude oil prices will still have a very good story. As long as economic recovery proceeds, I believe that we will see crude prices in the $90 to $95 dollar per barrel range. Therein remains the wild card. To date, I would characterize global economic recovery at fragile at best. Without a doubt, Asian economies are leading the way in terms of growth. The U.S. and European economies are slowly trailing behind. Most economists are placing average OECD GDP growth numbers in the 2% to 3% range. These conservative estimates are far below that of emerging market economies such as India, or China that are posting GDP numbers in the 5% to 6% range. All told, crude oil is enjoying a rally that will generally support the market into the remainder of the year. While we may experience some near-term retrenchment, l anticipate healthy crude oil prices north of $90 per barrel into the third and fourth quarter of 2010.
About Gianna: Gianna Bern is a registered investment advisor and President of Brookshire Advisory and Research, Inc.
About Brookshire: Brookshire is an investment advisory firm focused on energy investment research, risk management, and credit portfolio management with clients in Europe, Latin America & the U.S: www.brookshireadvisoryandresearch.com
“The market is looking for any positive
economic data even though the jury is still out on sustainability.”
www.oilcouncil.com
Golden Barrels
April: Lifestyle Companies
By Simon Hawkins, Managing Director, Omni Investment Research
A cynical institutional investor once said to me that the E&P sector is full of lifestyle companies. That typically management have come from Big Oil [and gas] companies because they were frustrated and wanted to run their own operation. They pointed to the lack of M&A in the sector when assets were cheap during the credit crunch as being the ultimate proof that management were too ‘baronial’ to achieve the kind of consolidation that many commentators have been predicting for some time, limiting value opportunities for shareholders.
As an analyst it’s sometimes difficult to get inside the heads of management but I would say this has generally not been my experience at all. At Omni we talk to a large number of companies in the sector. Companies that we consider for corporate clients go through an invisible vetting process and as part of that we make our own assessment of how shareholder friendly their management is. That’s how we know that our research adds genuine value. After all, we help no one by putting lipstick on a pig. I can honestly say that none of our corporate clients are lifestyle companies. The charge that management come out of bigger oil companies is difficult to refute. But I would argue that in most cases experience in Big Oil is a good thing, providing a solid grounding in how these companies approach the industry, the technology they employ,
the economics of exploration, how they balance portfolio risk and, importantly, how a smaller independent can generate attractive farm-in opportunities. The lack of M&A over the last two years is a complex story. I’d argue that an element of corporate resistance to an unsolicited bid is good business in terms of maximizing shareholder value. It’s true that assets were cheap during the credit crunch as oil plummeted from $147 to $30/bbl and those with low liquidity were particularly vulnerable. But in talking to companies throughout the crisis many were too focused on their own survival to want to take on additional financial, operational and exploration risks by acquiring another business. I’d therefore reject the idea that the credit crunch was an ideal time for consolidation. I think in any industry there are bound to be networks and alliances (as we have here in The Oil Council), which foster a level of cooperation and even friendships. I’ve often said that for a global industry we live in a very small village. And this is compounded by the technical nature of our sector. We have our own ‘Six Degrees of Kevin Bacon’. But it’s not six. Maybe it’s the ‘Three Degrees of Aidan Heavey’? I can see how the demands of the industry invade personal lives and that has to be a lifestyle choice. But this does not mean the sector is full of lifestyle companies.
Let me know your views at: [email protected]
*** Look out for Simon’s regular column, which is released at the middle of every month. ***
About Simon: Simon is Managing Director of Omni Investment
Research. Previously, Simon held senior positions at UBS and
Dresdner Kleinwort, having been ranked number one by
Thomson Extel for his coverage of the European Gas sector, number two in European Oils and three in European Utilities.
About Omni Investment Research: With over 70% of the UK E&P sector now under coverage Omni Investment Research is the only independent research house that
focuses exclusively on the global oil and gas sector.
“I’ve often said that for a global industry we live in
a very small village.”
RegesterLarkin
Reputation Strategy and Management
Regester Larkin helps IOCs, NOCs, Independents and utilities – both upstream and downstream - to protect and capitalise on their reputation. For 15 years, we have been pioneering reputation management in the oil industry. Our expertise has been honed by helping energy companies maintain their license to operate in the aftermath of many of the UK’s most high-profile oil industry incidents (eg: Sea Empress, Braer, Buncefield). We have also helped many of the world’s largest energy companies proactively to manage both short and long-term threats to their hard-won global reputations. Our specialists work with energy companies on a local, national and international basis, providing in-depth analysis, independent advice and tailored coaching and training.
Whether you want to protect your reputation in the face of local concerns, global issues or full-blown crises, or capitalise on your reputation to achieve your business goals, we have a comprehensive range of services to assist you, including:
Reputation risk audits
Evaluating emerging issues
Industry benchmark studies
Special advisers to top management
Deploying reputation for business growth
Crisis leadership coaching
Crisis spokesperson training
Media and family response training
Crisis exercises and simulations
Examples of our recent work in the energy sector
Crisis management:Advising a supermajor on its external communications when an oil tanker ran aground in ecologically sensitive waters.
Designing and facilitating crisis exercises at country, divisional and group level for worldscale energy companies.
Conducting a two-year programme to enhance crisis preparedness at one of the world’s largest gas companies.
Issues management:Helping an IOC consider its external engagement and media strategy related to a major potential project in Iraq.
Advising an oil and gas transportation company on its position during industry discussions on proposed new shipping emissions regulations
Helping an IOC develop and implement its issues management strategy around a product legacy land contamination issue.
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Some of our clients include:
Air Products BG Group
Conoco Phillips Dolphin Energy
Dubai Petroleum Eni
ExxonMobil Hess
Karachaganak Petroleum Operating,
National Grid Nexen
Oil & Gas UK Oman LNG
OMV Petro-Canada
Petroleum Development Oman Premier Oil Qatargas
Shell TAQA Total
Contact us Regester Larkin Limited
21 College Hill, London,
EC4R 2RP, United Kingdom
T: +44 (0)20 7029 3980
Regester Larkin Middle East
PO Box 77768
twofour54, Al Salam Street
Abu Dhabi, United Arab Emirates
T: +971 2 401 2585
www.regesterlarkin.com
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