the oil council's 'drillers and dealers' magazine - january 2010 issue

8/9/2019 The Oil Council's 'Drillers and Dealers' magazine - January 2010 Issue

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Drillers and Dealers

Published by:

The Oil Council

Engaging Upstream Oil & Gas Communities World-wide

Foreword

Drillers and Dealers is our pioneering free monthly e-magazine for the upstreamindustry. It is entirely focused on sharing insight, analysis, intelligence and thoughtleadership across the E&P sector.

We hope you enjoy reading the articles our guest authors have so kindly contributed.

Yours,Ross Stewart CampbellChief Executive Officer,The Oil CouncilT: +44 (0) 20 8673 [email protected]

Iain PittChief Operating Officer,The Oil CouncilT: +27 (0) 21 700 [email protected]

Contact The Oil Council

For general enquiries and information on how to work with The Oil Council contact:

Ross Stewart Campbell, Chief Executive OfficerT: +44 (0) 20 8673 3327, [email protected]

For enquiries about Corporate Partnerships, attending one of our Assemblies and

advertising in a future edition of Drillers and Dealers contact:

Laurent Lafont, Vice President, Business DevelopmentT: +44 (0) 20 8673 3327, [email protected]

To receive free monthly editions of Drillers and Dealers , as well as, discounts to allour upcoming Assemblies please visit our website now (www.oilcouncil.com) to sign upas a Member of The Oil Council. Membership is FREE to oil and gas executives.

Copyright and IP Disclaimer

***Any content within this publication cannot be reproduced without the express permission of The Oil Council andthe respective contributing authors. Permission can be sought by contacting the authors directly or by contacting

Iain Pitt at the above details***
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Drillers and Dealers January 2010 Edition

About The Oil Council and Drillers and Dealerso Contact Details

Executive Q&Ao An interview with Terry Newendorp, Chairman and CEO, Taylor-DeJongh

Whats likely to be the big deal in the new decade?o By David Greer OBE, Chief Executive, Regal Petroleum plc Junior oil companies set to outperform in 2010

o By Angelos Damaskos, CEO, Junior Oils Trust & Sector Investment Managers 2010: The Return of the IOCs?

o By Afonso Reis e Sousa (Director), Shamshek Asad (Head of Research) andEugene Zamastsyanin (Associate), Taylor-DeJongh

2010 oil price forecast: less change expectedo By David Hart, Oil & Gas Analyst, Westhouse Securities

Future Oil Council Assemblies Hearts and minds as important as oil finds

o By Rob Sherwin, Middle East, Managing Director, Regester Larkin Diary of a Commodity Trader (Monthly Column)

o By Kevin Kerr, President and CEO, Kerr Trading International The Oil Outlook (Monthly Column)

o By Gianna Bern, President, Brookshire Advisory and Research Golden Barrels (Monthly Column)

o By Simon Hawkins, Managing Director, Omni Investment Research Our Partners


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Executive Q&A

With Terry Newendorp,Chairman and CEO,

Taylor-DeJongh

Talking withRoss Stewart Campbell, CEO, The Oil Council

Date: 11th

January 2010

Ross Stewart Campbell (RSC) fromThe Oil Council: Terry, great to see

you again, many thanks for joining us. As we usher in 2010 I thought wedbegin by gauging your generalthoughts on 2009, and what was formany a rollercoaster year.

Terry Newendorp (TN) from Taylor-DeJongh:Thanks, Ross. Its great tosee you as well. Happy New Year. Wedid have a roller coaster in 2009, withoil rocketing down to the $30s afterhitting an all-time high just half a yearbefore. With the banks dried up and

capital markets closed, we expected a lot of deals tobe transacted by mid-2009, but the widely diverse

views as to the forward price curve, kept buyers andsellers of assets far apart. By the 3

rdquarter, with oil

stabilized around $75/bbl, transactions started to getdone. And the 4

thquarter saw some moves on the buy

side by ExxonMobil and portfolio rationalization byeven big boys like ConocoPhillips.

RSC: You and your team work at the coalface offinance, capital and investment. How has investorappetite for oil and gas changed over the past 12months? Which companies / countries are nowinvesting heaviest in tomorrows industry and howmight this affect future market dynamics?

TN: Oil (and gas) price volatility was scary for financialvalue investors. The IOCs, especially the supermajors, held their budgets and spend plans prettyclose to forecast. Large independents kept theirspend-plans really focused on their highest valueassets. The small caps have been hit hard with lack ofaccess to capital markets such as AIM, and by anextended freeze at the banks. China, as we all know,was a more aggressive player forcompanies, not just single assets.Their pricing does not correlate withan IOC forward price curve, as it isaccess to and quantity of reserves(P1 and P2) that they are seeking,and that makes it difficult tocompete with them on a price basis.

RSC: With the recent global economic and financialcrises theres a need for us to learn from past

mistakes, yet we are now witnessing moreunderinvestment in the industry, particularly inexploration. What are your thoughts on this and doyou foresee another oil price spike and/or supplycrunch in the future as a result?

TN: The smaller guys cut back very significantly in2009, and their capital plans for 2010 are down again.There is heavy commitment to the shale gas plays inUSA, so if total capital budgets are down by say, 20-25% overall, but the Marcellus shale commitments area large part of what makes up even that spend plan,then a lot of places in the world are going withoutadequate investment. The oil industry is a long-terminvestment/reward industry. Under-investment doesnt

show up for a few years and is manifest in reducedsupply. So, as the global economy picks up speedover the next couple of years, the demand-supply gapwill get closed, and the result will be another pricespike within a couple years. I have seen plenty ofarticles opining that well never see $100 oil again inour lifetimes, but the demand-supply balance willrapidly close and this 2-3 year period ofunderinvestment will catch up with us.

RSC: Of course you need capital to invest and withonly a few sources of capital currently being availablewhat is your outlook on financing and capital raising in2010? When, if at all, do you see sufficient access to

the global capital markets re-opening to everyone?

TN: The IOCs have access right now. MostIndependents do as well. The smaller balance sheetsare the ones with the impaired access to capitalmarkets. If oil stays stable trading around $75 +/- $5and we continue to pull the big economies out ofrecession, then some companies with well-placed

assets and solid operatingrecords, should be able to getback to some bank lending andsome (less frothy) publicmarket access in 2H10.

RSC: We saw an increase indeal flow at the end of 2009,particularly in M&A and capital

Investment in E&Pis holding the courseonly with the largest

IOCs and a few largeIndependents.


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placements, what volumes, sizes and types of dealflow are you and your team forecasting in 2010?

TN: We think that the M&A flow that many predictedwould happen last year will finally show up in 2010.We think there will be some needle-moving deals bya few IOCs. There will be fewer marginal assetstrading hands, because it is difficult to get investors toaccept now that just because someone has leaserights somewhere, there will be an inevitable gain invalue.

RSC:Risk is now front of mind with every investor andlender. How has the financial risk landscape evolvedover the past 12 months? And do you think oil and gascompany executives, as well as oil and gas investorsand financiers, completely understand this landscapewhen approaching new financing, investments andacquisitions?

TN: I think thats the extension of my precedingcomment. While it is true that a number of investorsare moving their dollars into commodities, especiallyoil, that doesnt mean that they are willing anymore to just buy into undeveloped prospects. I think that theIOC managements certainly understand this. I thinkthat a lot of mid-market companies may be thinkingthat pretty soon the banks will be back lending tothem. I think that the closure of the CDO market is stillgoing to be problematic for the commercial banks whoseek to package large sized debt financings fordevelopment projects. As for Private Equity going intothe oil & gas sector, there is still a lot of money outthere looking for deals, but they are much more pickyabout the transactions than in 2007-2008. Mezzaninedebt with warrants and kickers are getting to be prettycommon now, as financial investors insist on steadycash flow on their investments.

RSC: Looking at the old adage of size matters howimportant is size for todays oil and gas companies?Is

bigger really better?

TN:If big means portfolio diversity, then it definitelymatters. One of the key reasons that small capcompanies have been hit so hard by this market, isthat they tend to have relatively few prospects orassets, and those may not be in production andtherefore generating cash flow. Operational optionalityis really crucial.

RSC: With this in mind Terry what advantages dosmall and mid-cap independents have over large IOCsand NOCsin todays markets?

TN: Well, in order to seize their traditional advantageof being small and nimble and able to take chancesand find new fields that the IOCs havent been able to

tap yet, many small and mid-cap companies are goingto have to strengthen banking relationships, shedperipheral assets, and focus on cash-producing deals.Right now, the small cap guys are mostly in a prettyrough spot, if they havent had time to get assets intoproduction.

RSC: Recent problems in the Middle East andspecifically in Dubai have stirred investors concernsabout the future of the region. Taylor-DeJongh have aproud history of operating in the Middle East now forover 20 years. What in your opinion went wrong inDubai and do you see any long-term ramifications ontheregions oil and gas industry and its dynamics?

TN: I believe that Dubai is a real estate bubble, not anatural resource or commodity crash. It is noteworthythat Abu Dhabi, which is where the bulk of UAEs oil is,has been able to provide liquidity and stability in theface of a banking crisis driven by crashing real estateprices. The new private oil & gas companies formed in

the Gulf during the oil price boom have been hurt bythe collapse of Dubais stock market and the illiquidityof the banks there but these companies did notcause the problem; over-exuberant real estatedevelopment was the cause. The good ones arealready bouncing back, and the NOCs are doing justfine, although both Mubadala and TAQA are beingthreatened with downgrades, the latter primarilybecause of the heavy debt load it took on in order torapidly expand.

RSC: 2009 of course ended with the UN ClimateChange Conference in Copenhagen. Do you haveconfidence in the future of renewables and alternative

energy? Are you seeing increased appetite orincreased scepticism from investors looking at this partof the industry?

TN: Europe has been about 10 years ahead of the USin the renewables arena, because public policyembraced alternative energy and provided incentivessuch as the Spanish feed-in tariffs. Now in the US, theObama administration has provided some realincentives at the federal level, and many states havecreated Renewable Portfolio Standards, settingtargets for percentage of total electricity supply fromrenewables. Even with the Department of Energy loanguarantees, the accelerated depreciation treatment,cash from Treasury in lieu of investment tax credits,what I see are large capital gaps between thetechnology creation and the technology deployment.There was a lot of venture capital money that poured

into renewables in the US. But the traditional VCmodel of spending about $20mm to get a technologyready for market and then doing an IPO (to both

I believe that Dubai is areal estate bubble, not a

natural resource orcommodity crash.

Right now, the small-capguys are mostly in a prettyrough spot, if they haventhad time to get assets into

production.


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provide liquidity to the VC firms and also capital forrunning the company) just doesnt work when thetechnology deployment requires $500mm-$800mm-even $1.5bn in capital in order to achieve utility-scalepower generation project. This capital gap is aninteresting opportunity.

RSC:Looking ahead now at 2010, a lot can change ina year as we all know. What is your outlook for oil andgas in 2010? Will there be winners and losers? Andwhat must companies do to ensure not only survivalbut growth in this new era?

TN: There are winners and losers in up markets and indown markets. 2010 will see plenty of winners. Focuson cash flow. I dont mean to sound rudimentary, butthe fact is that companies are going to have to look tothemselves to stay afloat, and that means production,production, production. New leases and rawexploration plays will have to wait a year or so.

RSC:To conclude Terry Ill ask your one-word opinionon some key market components. Are you bullish,bearish or uncertain about The US Dollar?

TN: Bearish.

RSC:China?

TN: Bullish.

RSC:Dubai?

TN: Still bearish for another year.

RSC:Oil Service Companies?

TN: Bullish for specialty services that are required inshale and unconventional plays.

RSC:Unconventional Oil?

TN: Bullish over the long term, especially in US andChina.

RSC:As always Terry many thanks for your time andyour insight, we wish you and the Taylor-DeJonghteam a prosperous 2010.

*** A paper discussing if 2010 will be the year for the return ofthe IOCs has been written by Taylor-DeJongh executives andcan be found on our website and in Drillers and Dealers.***

About Terry:

Terry Newendorp, founder, Chairman and CEO of Taylor-DeJongh, has more than 35 years of experience in international and

cross-border capital investments, financial structuring, project financing, debt and equity raising and private placements ofcapital. He has negotiated and closed deals in 75 countries, aggregating more than US$70 billion.

About Taylor-DeJongh:

Taylor-DeJongh (TDJ) is an independent, specialist investment banking firm that focuses on conventional and renewableenergy, oil & gas, industrial and infrastructure business globally. The firm has over 28 years of success in providing investmentbanking services, including debt and equity raising, project financing advisory, project development and structuring services forenergy and infrastructure sectors worldwide. TDJ has successfully structured and advised on over US$70 billion worth of debtand equity investments in 100 countries, for power, renewable energy, oil & gas, LNG, petrochemical, industrial, transportationand other infrastructure projects. TDJ also advises clients on corporate finance, M&A and capital raising.

There are winners andlosers in up markets and

in down markets. 2010 willsee plenty of winners.Focus on cash flow.


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www.oilcouncil.com

Whats likely to be the big deal in the new decade?

Written by David Greer OBE, Chief Executive, Regal Petroleum plc.

As the economic and financial storms ofthe last year slowly recede, Drillers andDealers alike are unlikely to miss or

forget 2009. Many Drillers and Dealers entered 2009in a state of extreme uncertainty and apprehensionand only a relative few had much to celebrate by year-end. The global financial crisis of 2008-2009 turnedthe worlds economic landscape upside down, withhuge implications and consequences for the oil andgas sector and for all the Drillers and Dealers bothlarge and small that work within it.

The outlook for both E&P companies and servicecontractors (the Drillers) may be improving slightlyhowever, the same may not be said of the reputationof global bankers (the Dealers) who have not faredwell over the last year. Amongst Drillers and Dealers,there are two prevailing, wrestling, schools of thoughtabout the long-term impact of 2009. In the Dealercorner, there are those who say that the while theeconomic recession witnessed at the end of the lastdecade was grim, it was nothing more than yetanother seismic tremor in our ever cyclical industry.

The recent Dubai financial scare did however lend

some weight to the argument that we are in a W-shaped recession and showed how quickly suchscares can emerge with hardly any warning. In theDriller corner however, many believe that this was theyear when our business models and realities changedforever. Regardless of which argument is correct, andonly time will tell, Drillers and Dealers must now allcollectively face up to the new industry andcommercial cards that have been dealt if we are toovercome the challenges and opportunities that lieahead in 2010 and beyond.

Two years of global oil demand contraction in 2008-2009 reflect the worst economic recession in over fifty

years and this contraction has forced Drillers andDealers to review and adjust their business,contracting and resourcing models in ways and tolevels that they have hitherto never experienced.Meanwhile, for the first time in fifty years, the world willwitness a drop in gas demand in many areas.

As a consequence, oil and gas companies are drivingpainful and potentially damaging cost reductionpressures upon their staff and supply chain providersand they, in turn, on their contractors and serviceproviders on whom they depend so greatly. E&Pengineering contractors have so often taken the fullbrunt of oil price downturns in the past but it isdebatable whether there are enough fully resourcedand well-financed companies remaining to be able tocope and recover from the current recession swiftly.

This crucial resource has been stretched so manytimes in the past due to cyclical downturns that itremains to be seen whether the number of cycles ithas experienced has finally resulted in fatigue. If this isthe case, it is fair to say that the E&P industry, as awhole, did it to themselves. E&P companies set toughcontract models in the past and the contractors thatwere eager for work were bold enough to accept toughterms, often driven by potential incentive bonuses andoften blind to the pitfalls and penalties of failure.

Thousands of man-years of experienced staff arebeing cast off from an already greying but valuablepool of globally mobile industry practitioners who wereonce prepared to venture off to new, and often hostile,frontiers where future hydrocarbon resources will beextracted.

Meanwhile, the national oil companies (NOCs)continue to hold onto the bulk of the worlds remaininghydrocarbon reserves and now actively competeagainst and with international oil companies in biddingcompetitions outside their traditional regions. ChinasCNPC, Malaysias Petronas, Angolas Sonangol andRussias Gazprom have all won shares of contracts in

Iraq recently. If these NOCs are successful inassisting with the development of such large fields asthose found in Iraq, the production and revenue fromthese giant fields could be transformational for each ofthe companies involved. So, when the upturn indemand and activity does eventually arrive, on whichNOCs, companies, contractors and staff shall we relyupon to do the needful in terms of meeting any oil andgas shortfalls?

These factors suggest that elements of care, cautionand urgent attention are required if the global industryexpects to be able to respond effectively to thechallenges ahead and to meet societys energy

expectations across the world. For the challengesahead will be many as the worlds growing band ofNOCs, international oil giants and small to mid-sizeindependents all compete and collaborate to try andmatch global oil and gas supplies with demand.

For the oil sector, analysts deal with theseuncertainties by portraying divergent scenarios thatshow the risk of a rapidly tightening oil market from2012 onwards on the one hand, offset by otherscenarios that show OPEC spare capacity remainingaround a comfortable 6 million barrels a day over theshort to medium term.

There is little doubt that a return to wafer-thin crude oilspare capacity and the resultant price fluctuations arenot in the interests of either consumers or producers.


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Whether the world ends up facing asupply crunch again by 2015, or, with amore comfortable buffer of supply

flexibility, market price stability, most analysts agreethat this will depend largely on the pace of economicrecovery and midterm GDP trends.

Oil demand is currently expected by the InternationalEnergy Agency (IEA) to grow at between 0.4% and1.4% annually from 2010 onwards. The differencebetween these projections is very significant in relationto projected global oil balances. The IEA forecasts thatdemand will increase from the current 85 millionbarrels per day to 89 million barrels per day in 2030. Itremains too early to detect any definitive reduction inglobal oil use and dependency. However, somegrowth trends are evident, with Asia and the MiddleEast generating the bulk of demand growth and non-OECD demand potentially overtaking OECD demandby 2014. The IEA believes that half of the requiredincrease will come from already discovered fields, with

the remainder yet to be discovered.

However, oil industry investments are reportedly downby almost 20% compared to 2008 and a significantincrease in expenditure and human resources will berequired in the oil and gas sector to cope with thedecline in production from existing fields and todevelop the new fields required to meet the IEAsprojected growth in demand. However, according tothe 2009 Uppsala University Report on giant oil fielddecline rates and their influence on world oilproduction, the struggle to maintain production andcompensate for the decline in existing production isgoing to become harder and harder. The reportforecasts that the world will face an increasing oilsupply challenge over the next two decades, as thedecline trends in existing production are not only highbut are also increasing.

Even though oil prices have begun to strengthenagain, due in part to a perception that economicrecovery may be just around the corner, they are stillonly around half the level seen in July 2008 when theypeaked at almost $US 150/barrel. The recent recoveryin London and US markets and in oil and gas stockshas also been driven upwards by positive economicnews and speculators and the continuing weakness ofthe US dollar have helped to promote the value of oil.

Whilst demand in the physical crude market is alsorising, the natural gas sector remains depressed inmany areas, notably in the USA as the supply anddemand balance has moved from a very tight positionwith extremely high gas prices to an easing one withfalling prices, in general. There are notable exceptionsof course, such as Ukraine, where gas prices continueto rise to European border prices.

2008 was also neatly divided into two halves: a tightsupply and demand balance with rising energy priceswas followed by a weakening of demand and spotprices plummeted. We all witnessed the legacy of thislast period in 2009 as the world went through the

unprecedented combination of a global recession andfinancial crisis. Whereas, recessions in the past havebeen consumer/demand led, this one has been

caused by a loss of liquidity in the credit marketsbecause of toxic, bad, credit deals that were recycledand repackaged by the banks. The oil industrynormally contracts and expands in line with the oilprice, which is not always in line with the widereconomy as a whole (remember the collapse in oilprice in 1986 for example). The big difference this time

around is that the oil industry was also hit by this credittightening.

Lets face it, at the start of the recession in Q3 2008,most people thought the oil price of $US 150/bbl wouldleave the industry largely unscathed by the economicrecession, as most pundits, even then, were stillforecasting high oil prices (remember Goldman Sachsoil price forecast?). The stark reality couldnt havebeen further from the truth and small players in riskieremerging markets found themselves in just as muchdifficulty as any other business or economic sector possibly even harder, since their fields do not tend toreside in politically stable regions and lenders

tightened up on their willingness to expose themselvesto anything at all to do with risk.

The IEA is already warning of a natural gas glut overthe next few years due to the rise of unconventionalproduction projects e.g. shale gas, gas in tight sandsand coal bed methane. It is likely that if this forecastgas glut does indeed emerge, it will have far-reachingconsequences for the structure of gas markets and forthe way gas will be priced in Europe and in AsiaPacific. LNG producers are continuing to step upproduction e.g. in Qatar, Sakhalin and Tangguh andsuch producers may be forced to offer liquefied gasinto spot markets at whatever price is needed toattract buyers.

This in turn could limit the volumes of gas that wouldotherwise be sold via pipeline. The one market thatLNG suppliers have always been able to rely on tosoak up excess gas volumes has been the USA.However, unconventional gas production, especiallyshale gas, is now ramping up at unprecedented levelsand last months acquisition by Exxon of XTO Energyhighlights not only the shrewdness of the largestintegrated major energy company but the priority thatExxon is placing on unconventional gas.

The concern though is that increasing shale gas andother unconventional gas sales could potentially drive

down gas trading prices. This is of particular concernin the USA and it is here that LNG producers may beforced to take the biggest cut in liquefied sales prices.Ultimately however, the extent to which shale gas willsubstitute LNG sales will be directly dependent uponthe eventual cost of shale gas production; thiscontinues to be a hotly debated topic.

The dollars steady fall in 2009 helped push crudeprices up from a low of just over $US 30 per barrel inlate December 2008. Less than six months earlier,crude had hit a peak of nearly $US 150 per barrel.However many Drillers and Dealers remain wary andaware that the recent increases in oil and gas equities

over the last twelve months is still notenough to put them back where theywere eighteen months ago. Analysts


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report that there has been a dramatic reduction in thenumber of wells being drilled in the North Sea year onyear, largely due to the difficulties that exploration andproduction companies have in raising cash and nothelped by the UK governments tax regime.

Meanwhile, the UK and other Governments haverecently been exhibiting their low carbon credentials at

Copenhagen and many people clearly want to see thetransition to a low carbon economy as soon aspossible. Such a transition however will not occur inthe UK unless the UK government grasps the severityof the current situation or without the prudentmanagement of what is left of North Sea reserves.Neither will it help maintain the countrys falteringsecurity of supply or its corporation tax receipts, wherethe industry still makes a very significant contribution.

Whilst there has been a recent bounce back in mostoil and gas players share prices and oil prices ingeneral, the outlook for Drillers and Dealers remainsvery uncertain. The economic

stresses and strains of the lastdecade have changed ourbusiness models and realitiesforever. Markets face enormousuncertainty surrounding thetiming, pace and extent of anyeconomic rebound, whichaffects all prognoses for oil andgas market fundamentals andactivity levels over the next fiveyears. This makes it verydifficult for E&P companies andcontractors alike to forecast andmeet resourcing needs and tocommit to new expenditure.

Despite the recent Copenhagen summit and Kyotobefore it, we all remain members of the genus HomoHydrocarbon and as the world shows no immediatesigns of shedding its dependency on hydrocarbons,the need for well resourced companies and industryDrillers and Dealers who are competent and willing todevelop these resources in far flung places hasarguably never been greater but yet more concerning.However, recent published research suggests that theUK alone needs over half a million new engineers (inthe narrowest sense of this often poorly definedprofession in the English language) within the nextseven years if it is to maintain its present strength in

engineering and manufacturing and build new sectors.Meanwhile the number of new entrants entering theengineering profession at graduate and apprentice

level is reported to be equal to about half of theprojected demand. The engineering world believesthat the economy and the world could be stronger andmore stable with a robust and innovative engineeringsector, but such a scenario will not be realised if theengineering world at large, including the E&P sector,cannot retain existing experienced talent or attract

fresh talent to the sector to replenish an ageing skillsbase throughout the engineering and E&P world.Whilst kids mechanical skills from my generation wereweaned on Meccano, metal-work, woodwork andworking under car bonnets, many kids technicalexposure today is sadly limited to changing a SIM cardin a cell phone.

Society, government, professional institutions, juniorand senior academia, Drillers and Dealers must allprovide more support to their children and students toencourage them to join our exciting and challengingindustry. There was little evidence at the end of

recessionary 2009, that the

Driller and Dealer industry wasdoing anything at all toencourage anybody to join ourindustry; on the contrary,some former industry giantsare reported to be sheddingthousands of jobs and man-years of international oil andgas E&P experience.

Our industry has manageduncertainty in the past and nodoubt will continue to do sobut as we enter this newdecade, the new cards thathave been dealt following last

years financial crisis and parallel recession havecreated stresses and tensions within the Driller andDealer community that will arguably test our industrysresourcefulness and responsiveness like never before.

Unlike a game of playing cards where we can choosewhat hand we play and choose how we interpret thehands we receive to win, the big deal of the decademay result in a higher degree of shuffling by Drillersand Dealers than we have been accustomed to in thepast if they are to avoid being stuck with a bad handover the longer term.

*** Copyright and IP: The author retains the copyright andintellectual property rights of this article. Anyone wishing topromote / copy / market / distribute this article must seek theexpress permission of the author before doing so. ***

About Mr Greer:Mr Greer is an accomplished professional chartered engineer with over 30 years of experience ina very wide range of engineering, commercial and management positions, in a variety of environments around theworld. He assumed the position of Chief Executive of Regal Petroleum in November 2007. In his short time atRegal Petroleum, he has been responsible for implementing a major turnaround and transformation plan within theCompany which, having successfully raised new share capital from international investors, is now very wellpositioned and resourced to embark on a major expansion of its exploration and production activities in Ukraine,

Romania and Egypt. Prior to this assignment, he worked for Shell International Exploration and Production for 28 years latterlyas the Project Director of the landmark Sakhalin Phase 2 Project based in Yuzhno-Sakhalinsk, Sakhalin Island, Eastern Russia.

About Regal Petroleum:Regal is an independent UK based Group with significant operated gas field development interests in

Ukraine where the Company has audited 2P reserves of 169 mmboe and an estimated 860 mmboe resource potential fromdeeper resevoirs, and current production of 1600 boepd. Regal also has oil and gas assets in Romania and Egypt underappraisal. For more information visit:www.regalpetroleum.co.uk

Whilst there hasbeen a recent bounceback in most oil and

gas players shareprices and oil prices in

general, the outlookfor Drillers and

Dealers remains very

uncertain.
http://www.regalpetroleum.co.uk/http://www.regalpetroleum.co.uk/http://www.regalpetroleum.co.uk/http://www.regalpetroleum.co.uk/


10/26

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Sector Investment Managers Limited

www.oilcouncil.com

Junior oil companies set to outperform in 2010

Sector Investment Managers LimitedWritten by Angelos Damaskos, CEO, Junior Oils Trust and Sector Investment Managers

The year that went by was one of the most volatileperiods for equity markets in modern history. The yearstarted in the middle of a severe credit crisis withcentral banks pumping record amounts of liquidity torescue the banking system. Investor confidence wasfrozen and by early March global equity markets weretrading at levels not seen in decades.

In March, however, several indicators pointed to aturnaround. First, everyone was despondent,sentiment was bleak and flight out of equities wasfaster than it had been for decades. Second,commodity prices had stabilised and started a slow

rise in response to re-stocking by industrialising Chinaand India. Third, commodity producing companiesexperienced higher levels of corporate activityindicating that strategic investors maintained theirconfidence in the long-term demand for energy andbasic materials. Equity markets then started what wasto be the greatest bear-market rally seen in recenthistory.

In such market conditions, it has become apparentthat there were few successful investment strategiesespecially as all asset classes experienced highvolatility regardless of fundamentals. One of the bestwould have been to be patiently invested in well-capitalised energy and basic materials producingcompanies which had little debt and owned solidcommodity producing assets, riding the marketturbulence of the last two years. The commoditiessector not only produced the best returns in 2009 butrecovered all of its losses of 2008 which, as we know,was a terrible year. By comparison, the largest equitymarket indices in the UK, US and Europe ended 2009well below their start of 2008.

In managing the Junior Oils Trust, our approach waslargely one of patiently believing in the fundamentalvalue of our portfolio holdings. In the crisis of the lastquarter of 2008, we did prune the portfolio out of thosecompanies with weaker balance sheets and high

reliance on exploration success for their progress. Weinvested, instead, in high-yielding convertible debtissues of companies such as Dana Petroleum, SocoInternational and Norwegian Energy Company. Therest of the portfolio, comprising two thirds of the fundsvalue, was run following the development of themarkets. This strategy proved quite successful in thefirst quarter of 2009 when the convertible issues wehad invested in three months earlier at deep discountsquickly re-rated to near par values. As their future yieldpotential was reduced, in March 2009, we switched

that part of the portfolio back to some fundamentallyundervalued companies which had been oversold inthe dramatic market conditions. In particular, webought into Afren, which the market thought might beclose to default on its debt, after we met with themanagement and analysed this risk to be very low. Wealso invested in Bowleven believing in the underlyingvalue of its development areas and the strongpossibility of an approach by a larger investor as thecompany was trading near its cash levels itsubsequently received such an approach which,nevertheless, failed to proceed. Another successfulinvestment made in the first quarter was in Questerre

Energy, a company where we have had a smallinterest for some time, but which had made greatprogress in proving up and developing its shale gasbusiness in Canada. These three were the starperfomers in 2009 but the rest of the portfolio alsoproduced good recovery. Holdings in Tullow, VentureProduction (which was taken over by Centrica) andDragon Oil (also approached for takeover) recoveredall of their losses of 2008 and more.

Looking into the future, it is difficult to make anyprediction. Whilst we still believe that oil prices willtrend higher as demand recovers, there are so manyfundamental problems with the global economycasting doubts on the rate of future global economicgrowth. Unemployment rates in the major developedeconomies are at very high levels. The bankingsystem is still weak with a large overhang of doubtfuldebts in the real estate and corporate sectors.Massive government indebtedness raised to bail outthe banks and provide liquidity to the markets iscreating problems to smaller countries. Finally, therecovery of commodity prices is certain to creep intohigher CPI inflation. What is obvious to us,nevertheless, is that assuming oils prices trade aroundthe current levels, there are many opportunities for there-rating of smaller oil and gas companies shares. Inparticular, those with significant reserves in theground, growth in cashflow, prudent balance sheet

and competent management teams that continue toexplore and add to their reserves base, shouldoutperform the market and the sector. In 2009investors focused on the more liquid middlecapitalisation companies with trading liquidity thatwould enable a swift switch in strategy. In 2010, it islikely that focus will shift to the smaller capitalisationcompanies which did not benefit as much last year.The criteria for investment, nevertheless, should be just as robust and disciplined to avoid any expensivemistakes.

About Sector Investment Managers: is a natural resources-focused investment management firm. It advises

three open-ended products with combined Assets Under Management of US$65 million: (i) the Junior Oils Trust,(ii) Junior Mining, an authorized OEIC investing in smaller mining companies, and (iii) Junior Energy, anunregulated collective investment scheme investing in energy resource companies. www.sectorinvestments.com
http://www.sectorinvestments.com/http://www.sectorinvestments.com/http://www.sectorinvestments.com/http://www.sectorinvestments.com/


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2010 oil price forecast: less change expected

Written by David Hart, Oil & Gas Analyst, Westhouse Securities

Last year when we were preparing our 2009 oil price forecast, the market was nearing the end of a dramatic selloff from the all time highs reached earlier in the summer of 2008 (see chart below). When we went to publication,WTI was trading at $43.60 and within a week would achieve its annual low, a level not since surpassed, below$32 per barrel. In this context, our statement that, we believe that oil will trade as high as $85 per barrel in2009, whilst averaging $65 for the full year was a relatively bold prediction.

WTI two year chart, US$

Source: Bloomberg

This year, we anticipate less change. Oil prices are entering the year on a much stronger footing given improvedeconomic sentiment, colder winter weather and weaker US dollar. Based on our quarterly forecast in the tablebelow, our 2010 average full year forecast for WTI is $76.25 per barrel.

Quarterly and Full Year WTI forecast

Q1 Q2 Q3 Q4 FY2010

$80.00 $70.00 $75.00 $80.00 $76.25

Source: Westhouse Securities

The Forecast

Whenever attempting to make a forecast, as the number of moving parts increases so typically does thecomplexity and margin of error inherent in the exercise. Oil is a classic case. The number of variables impactingits price is extensive to say the least. However, in arriving at our forecast, we have chosen to focus on threeprimary drivers:

Global Economic Growth, The US Dollar, and OPEC Compliance

Each of these is equally as difficult to forecast as oil itself, as such, we have not attempted to make specific

forecasts but rather focus on direction. For example, global economic growth in 2010 could be 2.9% or 3.1%. Theimportance here, however, isnt which of those figures is correct rather the change vis vis the negative growthof 1.1% last year along with those regions where growth is expected to be strongest.


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Global Economic Growth

Despite the rise in influence of external factors, oil as a commodity retains cyclical characteristics. As ageneralisation, strong economic growth will underpin demand for commodities such as oil. The table belowdemonstrates this point.

Global oil demand and GDP growth

Year Global OilDemand Growth

GlobalGrowth

GDP AdvancedEconomies

GDP Emergingand DevelopingEconomies

2006 1.2% 5.1% 3.0% 7.9%2007 1.3% 5.2% 2.7% 8.3%2008 -0.3% 3.0% 0.6% 6.0%2009 -1.6% -1.1% -3.4% 1.7%2010 1.0% 3.1% 1.3% 5.1%

Source: OPEC and the IMF

In 2008 there was an exception where demand for oil began to fall before global growth began to contract. Thismay be explained by the sharp decline in advanced economies and the relatively fast changes in behaviour

brought about by the rapid rise in gasoline prices, part of the demand destruction story which we heard plentyabout that year.

Next year, economic growth is expected to return although it will remain subdued in advanced economies. As isnow widely accepted, future demand growth will rely more and more on emerging markets and in particular Chinaand India where in addition to industrial growth, new vehicle registrations are driving strong growth.

The important take away from this is that beginning next year, economic conditions are expected to be sufficientlyrobust to staunch the decline in oil demand we have experienced in 2008 and 2009 and instead contribute togrowth once again.

The principle risk to the growth scenario in 2010 is how the economy and markets will react to the start of thewithdrawal of fiscal and monetary stimulus packages put in place by governments and central banks around theworld in response to the recession and potential collapse of the financial system.

The US Dollar

As the chart below shows, as the dollar began to weaken this year in March, oil prices moved in the oppositedirection. While this relationship is not as well established as that with gold, it is a relationship we are notsurprised to find. The question then becomes what is the direction of the dollar telling us and how does thisimpact oil prices?

2009 US dollar index and WTI chart


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Given the turmoil of the financial markets, the dollar is effectively acting as a gauge for investors risk appetite. Asthe appetite for risk increased earlier in the year, investors became more comfortable with riskier assets likeequities and commodities. The previous rush to safety and US Treasuries that had supported the dollar easedand the greenback weakened.

Another factor to bear in mind is the Federal Reserves ultra loose monetary policy which is hardly dollarsupportive. The flood of cheap dollars has revived the carry trade, this time with the greenback acting as the

funding currency for investing in higher yielding assets (i.e. higher risk) including commodities.

An important question that looks likely to be resolved in 2010 ishow will the dollar react to the Fed tightening monetary policyand investors perception of risk. Our view is that the Fed willnot act hastily by tightening too soon, which makes a change inpolicy most likely a 2H 2010 event when sustainable economicgrowth has been established. This should help avoid astampede to safety as investors take the view that the Fedwould not tighten before it felt confident that the worst outcomeshad been avoided.

The carry trade, the size of which is the subject of wide speculation, would also begin unwinding in earnest. Thiswould lead to the sale of dollar financed higher yielding assets with the effect of strengthening the dollar as USD

is purchased to pay back loans. Overall, and in the absence of further financial turmoil, we believe that 2010 is ayear when the dollar can strengthen. This is based on the improved economic outlook, the eventual withdrawal ofultra loose monetary stimulus and the unwinding of carry trade offset somewhat by the reduction of risk in themarket.

OPEC Compliance

A weaker dollar has propped up oil prices beyond levels supported by fundamentals for much of last year.However, we believe OPEC has the opportunity to once again impose itself on the market in 2010. After successearly in 2009, with an estimated 80% compliance level with announced production quotas, discipline hasslackened significantly as we enter 2010. Compliance is now estimated to have fallen below 60%. Improvingcompliance was a topic at the most recent OPEC meeting in Angola. This is sensible because given the modestgrowth in demand next year and the removal of the USD as a primary support, OPEC through improvedadherence to quotas are in a position to support prices around its preferred level of $75 per barrel.

Next year, OPEC is forecasting oil consumption to be 85.1m bopd based on global economic growth of less than2.9%. This figure represents growth of nearly 1.0m bopd over 2009 estimates and in our view may beconservative.

Meanwhile, non-OPEC production is expected by the cartel to grow by 0.3m bopd to 51.3m bopd and OPECnatural gas liquids by nearly 0.5m to 5.3m bpd. This leaves a shortfall to be made up by OPEC of around 28.5mbopd, well in excess of current OPEC-11 quotas of 24.8m bopd and Iraqi production of nearly 2.4m bopd.

Yet we believe the combination of a conservative 2010 consumption forecast and impact of investment decisionstaken earlier in 2009 when oil prices plunged restraining non-OPEC production growth makes the picture evenbrighter. And certainly easier for OPEC to assert more control over the market should compliance be reined in.

Summary

So where does this all leave our forecast for oils price next year? In the table below, we have once again brokendown the forecast into quarters. Seasonality as we already know has got the year off to a strong start as well ascontinuing optimism regarding economic growth. This is followed by the traditionally low demand Q2 which seesprices reeled back possibly aided by continued slack compliance by OPEC. However, assuming no furtherfinancial meltdowns, economic growth in H2 should pickup along with higher demand and improved OPECcompliance which will be adequate to offset a stronger US dollar.

About Mr. Hart:David began his career with Mellon Financial Corporation in 1993 where he gained a wealth of experience inthe Financial Services industry working as a financial analyst in Pittsburgh and London. In 2003, he joined independentresearch house Fat Prophets as an equity research analyst where he specialised in the O&G sector and natural resources ingeneral. In 2008, David joined Hanson Westhouse as an oil & gas analyst specialising in strategy and the mid-cap E&P sector.

About Westhouse Securities:Westhouse Securities is an integrated corporate finance and broking house with a strong trackrecord across a number of market sectors and particular expertise in emerging markets, natural resources and small to mid cap

stocks. The business focuses on providing specialist corporate finance advice together with excellent research and tradeexecution through its sales and trading teams. The senior management team puts a great deal of emphasis on relationship, asopposed to transaction, banking. For more information visit:www.westhousesecurities

Given the turmoil of

the financial markets,the dollar is effectivelyacting as a gauge for

investors risk appetite.
http://www.westhousesecurities/http://www.westhousesecurities/http://www.westhousesecurities/http://www.westhousesecurities/


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Hearts and minds as important as oil finds

Written by Rob Sherwin, Middle East, Managing Director, Regester Larkin

Reports emerging during the latter half of 2009 frombloggers and journalists based in Baghdad provided asobering reminder, if one were needed, of the complexreputational and operational challenges that will facethe numerous companies, both IOCs and NOCs whohave recently won the right to help Iraq develop itsoilfields.

Referring to the China National PetroleumCorporations (CNPCs) work at the Ahdab field, thefirst post2003 oil field development contract signedwith Baghdad, the reports have highlighteddissatisfaction among the local population and theprojects direct neighbours that they are benefiting solittle from a multibillion dollar development.

The manifestations of thisdiscontent, particularly aboutthe small number of jobs thathave been given to locals,have apparently included thesabotage of equipment andthe emergence of a localrights movement to lobby theIraqi government for greater

local benefits.

The oil and gas industry is allabout the management ofrisk. Exploration risk,technical risk, price risk, safety risk, security risk,political risk: all of these are managed on a daily orsometimes minute-by-minute basis by energycompanies wherever they operate in the world.

And yet it is extraordinary how often these samecompanies are blind-sided by a key risk that they havefailed to mitigate: reputation risk.

Although there are many ways to attempt to calculateit, the only sure way for an energy company tounderstand the value of its reputation is to lose it.Anyone who has tried to win new contracts, enter newmarkets, recruit talented staff, access finance ormaintain good relations with their neighbours whentheir organisations reputation is being draggedthrough the mud will tell you that reputation is avaluable asset worth protecting.

Many energy companies now take precautionary stepsto prepare themselves to protect their reputation in theevent of a major accident. In addition to all theprocedures and drills to ensure that the company canrespond swiftly and effectively at an operational levelto any incident inside the fence, the best preparedcompanies also have plans, and staff who are trained

and rehearsed, to respond to all those who care aboutthe incident outside the fence: the media, thegovernment, relatives of staff, shareholders, and thecompanys own employees.

However, as health, safety and environmentalstandards constantly improve across the industry, it isthankfully increasingly rare that oil companies have torespond to such sudden operational accidents.

Instead, it is now more common that an oil companysreputation is damaged by either a corporate incident something that happens at headquarters rather thanin the field or criticism of the companys behaviourthat steadily grows to fever pitch.

Readers of this Drillers andDealers will likely be just asfamiliar with corporatescandals such as Shellsreserves rebookings, orarrests at Total, as they willbe with infamous operationalaccidents such as the ExxonValdez oil spill or BPs Texas

City refinery explosion.

But the negative perceptionsthat are hardest for an oilcompany to shed are those

created by longlasting open sore issues such asTotals presence in Burma, ExxonMobils public stanceon climate change, or Shells community relations inthe Niger Delta.

Which brings us back to Iraq. All the oil companiesthat have recently signed preliminary deals in Iraq willhave spent much effort identifying and mitigating thedirect physical security risk of operating in the country;

weighing up the operational and perception risks ofoperating under armed security, against the risk ofattacks and kidnappings of staff.

At first glance, this may appear to be the biggest riskthat oil companies will face in the country, but it wouldseem that both the improved security environment,and the security companies six years of experience ofprotecting people on the ground has enabled oilcompanies, whether Asian, Russian or western, to feelthat they can reduce the risk of violence towards theiremployees to a level that is as low as reasonablypossible (ALARP in the industry jargon).

Equally, many companies will have considered thereputation risks of signing deals that will undoubtedlyattract criticism from various quarters of the

The oil and gasindustry is all about the

management of risk.Exploration risk,

technical risk, price risk,safety risk, security risk,

olitical risk


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international media, civil society and someshareholders.

Companies have had more than six years to considertheir communications strategy around this issue andshould by now have decided how much time andattention to focus on discussions with those who are

passionately against foreign oil companies returning toIraq, and how much with the larger majority that iseither ambivalent or at least open to hearing the oilcompanies case.

However, almost certainly, the single most challengingrisk for oil companies entering Iraq will be winning thesupport of their projects immediate Iraqi neighbours.As CNPC is apparently experiencing already, if thelocal or fenceline community feels that it is beingnegatively impacted by the development, and that toofew of its benefits and too little of its wealth are flowingdirectly to them, then they will find all sorts of ways tocause the company embarrassment and operational

cost and delay.

There is no simple solution. The local communitysexpectations will always be extremely high;everywhere in the world, populations are disappointedthat oil projects are so much more capital andtechnology intensive than they are labour intensive.When poor rural communities suddenly havecorporate neighbours living in hightech,

wellprovisioned, airconditioned comfort, some degreeof resentment is almost inevitable.

The key is to start engaging with the population asearly as possible to give yourself the best chance ofunderstanding and managing their expectations(before you even start trying to meet those

expectations). This involves helping the community toorganize itself to tell you their collective needs andinterests (rather than just listening to those who shoutloudest or approach you first), being clear about whatyou will not do (otherwise you will be asked to provideeverything for evermore) and finding ways to buildlocal capacity such that the community is better able tocompete for jobs or lowtech service or supplycontracts.

If foreign oil companies get this right, they will bewelcomed locally, and praised internationally. But anycompany that gets this wrong may well find thatpeople all over the world are still referring to its

mistakes in 20 years time.

So the most important step is to understand thatwinning the local communitys acceptance and supportis absolutely as critical as protecting staff, or indeed,finding oil in the first place.

Earlier versions of this article have appeared in The Nationaland the Middle East Economic Survey (MEES).

About Mr. Sherwin:

Mr. Sherwin has provided strategic communications advice and crisis training to both international and locally-based companies

and joint ventures across the Middle East region. He joined Regester Larkin from the UK Foreign and Commonwealth Office(FCO), where, as Middle East energy adviser, he engaged with Middle East governments and companies on issues of energysecurity and climate change. Previously, Mr. Sherwin worked for Shell for 10 years, latterly based in Dubai.

About Regester Larkin:

Regester Larkin is a strategic communications consultancy, specialising in the energy sector. We help IOCs, NOCs,Independents and utilities both upstream and downstream to protect and capitalise on their reputation. Our offices inLondon and Abu Dhabi have particular experience of helping energy companies, including complex IOC/NOC joint ventures, toidentify, prepare for and manage risks to their reputation, whether these arise from local concerns, global issues or full-blowncrises. Through in-depth analysis, independent advice and tailored training, our specialists work with energy companies allaround the world to help them win, secure and maintain their license to operate. www.regesterlarkin.com

Partnership / Advertising Opportunities with The Oil Council

We have a range of innovative sales, marketing andbusiness development solutions if you are interestedin partnering The Oil Council, advertising in Drillersand Dealers, and/or speaking, exhibiting andsponsoring one of our upcoming Assemblies.

For more information please contact:

Laurent LafontVice President,Business Development,

[email protected]
http://www.regesterlarkin.com/http://www.regesterlarkin.com/http://www.regesterlarkin.com/mailto:[email protected]:[email protected]:[email protected]://www.regesterlarkin.com/


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RegesterLarkin

Reputation Strategy and Management

Regester Larkin helps IOCs, NOCs, Independents

and utilities both upstream and downstream - toprotect and capitalise on their reputation.

For 15 years, we have been pioneering reputation management in the oilindustry. Our expertise has been honed by helping energy companies maintaintheir license to operate in the aftermath of many of the UKs most high-proleoil industry incidents (eg: Sea Empress, Braer, Bunceeld). We have alsohelped many of the worlds largest energy companies proactively to manageboth short and long-term threats to their hard-won global reputations.

Our specialists work with energy companies on a local, national andinternational basis, providing in-depth analysis, independent advice andtailored 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 achieveyour 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 tankerran aground in ecologically sensitive waters.

Designing and facilitating crisis exercises at country, divisional and grouplevel for worldscale energy companies.

Conducting a two-year programme to enhance crisis preparedness at oneof the worlds largest gas companies.

Issues management:Helping an IOC consider its external engagement and media strategyrelated to a major potential project in Iraq.

Advising an oil and gas transportation company on its position duringindustry discussions on proposed new shipping emissions regulations

Helping an IOC develop and implement its issues management strategyaround a product legacy land contamination issue.

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

QatargasShell

TAQA

Total

Contact us

Regester Larkin Limited

21 College Hill, London,

EC4R 2RP, United Kingdom

T: +44 (0)20 7029 3980

[email protected]

Regester Larkin Middle East

PO Box 77768

twofour54, Al Salam Street

Abu Dhabi, United Arab EmiratesT: +971 2 4012585

[email protected]

www.regesterlarkin.com


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2010: The Return of the IOCs?

Written by Afonso Reis e Sousa (Director), Shamshek Asad (Head of Research)and Eugene Zamastsyanin (Associate) Taylor-DeJongh.

Annus Miserabilis

2009 was a miserable year for oil and gas M&A. With just 32 deals sized over US$ 10 million,1

the first quarter ofthe year was described as a 10-year low by IHS Herold.

2In each of the ensuing two quarters the number of

deals recovered to around 70; however the combined value of all deals announced in the first three quartersbarely crossed the US$80 billion mark and that includes the US$19.5 billion merger of Suncor and Petro-Canada in the early part of the year, an outlier by any measure.

The widely expected resurgence in M&A activity in the latter part of the year failed to materialise. In part this wasdue to the continuing oil price volatility, but the relative leniency of lenders (who had been expected to sharplyreduce borrowing bases following the fall in oil prices) also helped avert the anticipated asset fire-sales.

National Oil Companies were the pre-eminent M&A players throughout much of 2008 and 2009, but their private-sector counterparties led by Exxon Mobil and ENI began to flex their muscles in late 2009. Is this the portentof things to come?

National Oil Companies Unleashed

There was a spurt of activity on the part of the NOCs, from both resource-poor and resource-rich countries,entering the market as acquirers in 2008 and 2009. Of the 20 largest deals announced in 2009, seven includedparticipation of NOCs on the buy-side (see table below). Their targets were often corporate entities, suggestingthat, in addition to seeking reserves, NOCs are actively targeting skilled personnel, management andrelationships.

Date Target Status

Value

(US$mil) Acquirer12/13 XTO Energy Announced 40,763.53 Exxon Mobil03/22 Petro-Canada Closed 19,478.12 Suncor Energy06/24 Addax Petroleum Closed 8,882.35 Sinopec03/24 Compania Espanola de Petroleos Closed 4,469.11 ADNOC10/31 Encore Acquisition Announced 4,347.34 Denbury Resources04/07 Gazprom Neft Closed 4,200.79 Gazprom10/05 Jubilee Oilfield (Kosmos Energy) Announced 4,000.00 Exxon Mobil10/21 Harvest Energy Trust Closed 3,809.61 KNOC03/30 Bashkir Oil and Energy Group Closed 2,500.00 Sistema JSFC08/04 Tristar Oil & Gas Closed 2,425.88 PetroBakken Energy07/10 Venture Production Closed 2,316.86 Centrica Resources (UK)03/30 MOL Closed 1,802.51 Surgutneftegaz08/31 Athabasca Oil Sands Announced 1,726.64 PetroChina11/23 Blocks 1 and 3A in Uganda Announced 1,500.00 ENI04/27 Atlas Energy Resources Closed 1,427.63 Atlas Energy, Inc.12/11 Block 32 oilfield in Angola Announced 1,300.00 Sonangol07/14 KazMunaiGas E&P JSC Closed 939.00 China Investment Corporation02/05 Petro-Tech Peruana S.A. Closed 900.00 KNOC; Ecopetrol05/06 Oranje-Nassau Energie Closed 838.04 Sumitomo; Dyas UK; ONH

11/25Oil & Gas Properties in PermianBasin (TX and NM)

Closed 800.00SandRidge Exploration andProduction

A new development in the NOCs (and other quasi-sovereign entities) acquisition strategy in 2009 was a focuson direct NOC-to-NOC dealing. A joint bid for Petro-Tech Peruana by KNOC and Ecopetrol, CICs investment inKazMunaiGas, and loans-for-oil deals between China and Rosneft and China and Petrobras suggest that NOCsare finding it easier to deal directly with one another.

Considering the proportion of world oil reserves off-limits to IOCs (65% according to an estimate by PFCEnergy

3), the growth of NOC-to-NOC relationships is a significant development.


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The NationalInterest considerations of the NOCs have also proven to be effective in dealing with IOC-hostileoil provinces: Chinese, Korean and Russian NOCs and their affiliates have been able to pursue deals that areperhaps too difficult for the IOCs. The latest heavy oil tender in Venezuela is a good example: of 19 potentialbidders, 12 are either NOCs or entities implicitly backed by their respective states.

However it was not all plain sailing for the NOCs in 2009 and they experienced disappointments as well. A jointbid by CNOOC and Sinopec for Marathons 20% stake in Angolas Block 32 was pre-empted by Sonangol.

Similarly, the Libyan government blocked an attempt by CNPC to acquire Verenex, a company primarily focusedon Libya. Verenex was instead bought by the Libyan Investment Authority for 30% less than the CNPC offer. TheNational Interest cuts both ways.

IOCs Strike Back

U.S.-based oil supermajors have been relatively inactive over the last few years, with the last major deal beingConocoPhillips acquisition of Burlington Resources in early 2006. Exxon Mobil, Chevron and their peers haveinstead focused on developing legacy projects and distributing excess cash to shareholders through share buy-backs. While they did sell and buy assets (that is, after all, the bread-and-butter of the E&P industry), the focuswas on optimising existing portfolios rather than acquisition-led growth.

Like their U.S. counterparts, European IOCs have also been conservative in their acquisition strategies withone notable exception: Italys ENI, led by Paolo Scaroni, has traded more than US$40 billion in assets (as both

seller and buyer) since the beginning of 2007, with the largest deals linked to Russian state oil companies.

Many IOCs explored JV structures to enter the capital-intensive U.S. unconventional gas market in 2008 with BP,Statoil and ENI joining forces with local producers in Barnett, Woodford and Marcellus. Rock-bottom Henry Hubpricing in 2009 dampened the Europeans ardour, although the first working day of 2010 saw Total announcingthe acquisition of a 25% share in Chesapeakes Barnett shale g as portfolio.

Despite significant cash reserves, the supermajors kept their powder dry for much of 2009. Undoubtedly, this wasin part a wait-and-see attitude in the face of declining oil prices and the global financial crisis; however, it alsoreflected a divergence in valuations. Potential acquisition targets, and their shareholders, were unwilling to sell-out at the low values caused by the market overcorrection. On the other hand the supermajors found it difficult to justify to their own shareholders paying significant premia during the worst of the crisis. Repeated rejection ofTotals bids by UTSs shareholders is a good example of the divergence in expectations between buyers andsellers.

Whats Next?

Oil prices have recently stabilised around US$75/bbl (if you can call $20 volatility stable), and OPEC appearscommitted to maintaining prices in the range of US$70-80/bbl

4. This in turn has led to greater convergence of

expectations between buyers and sellers. True, F&D costs have come down somewhat in recent months,increasing the attractiveness of organic growth for the IOCs. Nevertheless, we expect M&A to pick upsignificantly over the course of the year.

Resurgence of deal flow requires funding and the capital markets continue to show limited appetite for upstreamrisk. Large, well capitalised firms potentially pressured by expectations from analysts and shareholders toreplace reserves or diversify product mix or geographic presence remain therefore in the best position to takeadvantage of opportunities in 2010. Exxon Mobils recent bid for Kosmos Energys stake in Ghanas Jubilee Field,or ENIs interest in Heritages Ugandan assets, illustrate the point. However, absence of financial market liquiditycontinues to put pressure on smaller companies. The capital expenditure deferrals of the last couple of years

were short-term fixes, not long-term solutions.

Several other trends are likely to play out in 2010 as well:

Financially robust independents and NOCs will be able to pick up assets thrown up by the IOC portfoliooptimization process. Shells recent decision to sell some of its North Sea and Nigerian assets is likely toattract such buyers, as should the planned divestiture program of ConocoPhillips.

The U.S. is bound to have relatively limited representation in global oil M&A, until there is greaterclarification on the current administrations regulatory stance on the oil and gas sector. While any newregulations are unlikely to cause a mass exodus of investment from the U.S. oil sector, changes couldaffect the appetite for U.S.-based assets.

Privately-held oil companies, which traditionally rely on acquisition debt finance and private-equity

funding, are likely to remain cautious in the short run. However, a recent lender price survey found thatbanking price decks have increased, albeit marginally, from the previous third quarter.

5


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Sovereign wealth funds may rise to prominence in 2010. 2009 witnessed the entry of new players intothe market, such as the China Investment Corporation (CIC) and the Libyan Investment Authority, aswell as Taqas continuing build-up of its portfolio.

The largest M&A deals in 2009 were predominantly oil-focused. However, in December Exxon Mobilannounced its intention to acquire XTO for a staggering US$41 billion, valuing it at approximatelyUS$2.94/Mcfe.

6Given the outlook for US gas pricing, it is likely that Exxon Mobil is looking at the global

deployment of shale gas technology rather than a purely domestic play. XTOs track record andExxonMobils global reach could lead to significant acquisitions overseas. However, the unresolvedwater issues at the Marcellus shale suggest that this will take some time particularly in moreenvironmentally conscious Europe.

In Summary

In 2010, the M&A market is likely to be driven by buyers willing to pay a fair price for attractive assets orcompanies. While the NOCs are growing in importance, they lack (for now) the fire-power and expertise tocompete head-to-head with the supermajors. The interest of sovereign wealth funds in oil and gas assets willcontinue to grow, competing directly with traditional private equity firms for quality assets; but neither has theresources to truly compete with cash rich IOCs re-entering the market with their fat chequebooks. Wecomfortably predict that 2010 is likely to be the year of the IOCs. (But we could be wrong).

About the Authors:

Afonso Reis e Sousa (Director) Mr. Reis e Sousa headsTDJs London office. He advises on project financings, andhas acted on a number of asset acquisitions and other M&Atransactions. He specializes in the oil & gas sector and hasworked on projects across Europe, the Middle East andAfrica, in Russia and Australasia.

Shamshek Asad (Head of Research) Mr. Asad managesthe collection and analysis of key country, sector andbusiness specific data, to be used in making credit andinvestment decisions in the oil & gas and power sectors. Heassists with the negotiation of complex project finance

transactions and merger & acquisition deals. Mr. Asad hassignificant experience in data analysis & reporting, strategydevelopment, execution & evaluation and businessdevelopment.

Eugene Zamastsyanin (Associate) Mr. Zamastsyaninsupports the companys M&A advisory business, performingfinancial modeling, valuation and market research activities.

He has recently evaluated a number of investmentopportunities for placement of private capital in bothupstream and downstream segments. Mr. Zamastsyanin also

provides research support to the firms ongoing activitiesrelated to the O&G sector.

About Taylor-DeJongh:

Taylor-DeJongh (TDJ) is an independent, specialistinvestment banking firm that focuses on conventional andrenewable energy, oil & gas, industrial and infrastructurebusiness globally. The firm has over 28 years of success inproviding investment banking services, including debt and

equity raising, project financing advisory, project developmentand structuring services for energy and infrastructure sectorsworldwide. TDJ has successfully structured and advised onover US$70 billion worth of debt and equity investments in100 countries, for power, renewable energy, oil & gas, LNG,petrochemical, industrial, transportation and otherinfrastructure projects. TDJ also advises clients on corporatefinance, M&A and capital raising. www.taylor-dejongh.com

Executive Q&A with Terry Newendorp, Chairman & CEO of Taylor-DeJongh

Dont forget to read our interview with Terry Newendorp, CEO and Chairman of Taylor-DeJongh as hereflects on 2009 and looks ahead at the challenges and opportunities that await the industry as we moveoptimistically but cautiously into 2010.

1 Capital IQ data.2 Upstream mergers revive after moribund first quarter, Petroleum

Economist, September 2009.

3. PFC Energy 50 Ranking of World's Top Energy Companies: TradedNOCs Joining SuperMajors,

MarketWire, 23 January 2008.4 Javier Blas, Opec signals oil price target of $70-$80, Financial Times, 23

December 2009.5Energy Lender Price Survey Q4 2009,Macquarie Tristone .6 The value is based on: (1)Total consideration of US$40,763.53 million at

the announcement date,and (2) XTO reserves of 13,862.7 Bcfe as of December 31, 2008, consistingof: (a) Natural gas reserves

of 11,802.90 Bcf, (b) Oil reserves of 267.5 MMbbl, and (c) NGL reserves of75.8 MMbbl.
http://www.taylor-dejongh.com/http://www.taylor-dejongh.com/http://www.taylor-dejongh.com/


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The Oil Outlook

January 2010: Emerging Markets to Buoy Near-Term Crude Oil Demand

By Gianna Bern, President, Brookshire Advisory and Research

This inaugural column begins with a warm welcome toour many readers, sponsors, corporate partners, andglobal oil industry colleagues. It indeed is a privilege toprovide you with a monthly an outlook and perspectiveon global crude oil markets.

This column will strive to present a view from thecrossroads of global crude markets and complexindustry economics.

The oil and gas industry is pleased to see 2009 recedeinto unpleasant memories as it extends a hearty

welcome to 2010. The industry began 2009 with crudeoil prices near $35 per barrel after record high pricesin 2008. As a result, quarterly earnings for the first halfof last year declined 50% to 60% for most producers.The industry happily begins 2010 with crude prices inexcess of $80 per barrel and expectations of a muchimproved first half performance.

First quarter earnings season 2010 will undoubtedlydepict a growth scenario with some producers posting50% plus earnings gains when compared year overyear. What a difference a year makes.

Emerging-market economic growth is widely perceivedto be the engine behind projected increases in near-term crude oil demand. China already has seen

considerable improvement in industrial manufacturingactivity bolstered by their massive US$586 Billionstimulus package in 2009. Brazil has projected 2010GDP growth to approximate 5%. India is projectingGDP in the 6.0% range for 2009-2010. Crude oildemand in OECD countries, however, is still projectedto be lackluster for most of 2010.

All told, this is welcome news to the industry as crudeprices reside in the $80 per barrel range. While marketfundamentals dont necessarily support crude prices inexcess of $80, the market is being boosted by

euphoric global equity markets, severe northernhemisphere cold weather, and some recent modestimprovements in crude oil inventories.

Nevertheless, crude and heating oil inventories still arein excess of five-year averages and Brookshiresexpectation is a retrenchment in near term crudeprices. {Please seeBrookshires latest report, Big OilConsolidates, Rebounds in 2010 issued on December30, 2009 for in-depth analysis}

As the worlds economy turns a corner, what remainsevident is the interrelationship of global markets. Theglobal financial crisis aptly illustrated that market

shocks are not necessarily events that can becontained. A hiccough in one market, may lead to fluin another.

Todays markets and economies are highlyinterdependent. This was not your fathers recession.

***Look out for Giannas regular column, which isreleased at the middle of every month. ***

About Gianna: Gianna is an investment advisor and energy analyst with over 20years of experience in the energy sector (risk management trading, corporate finance,credit portfolio management, and corporate banking). Gianna is frequently quotedconcerning the energy markets in Bloomberg News, Dow Jones Newswires, Reuters,and Business News Americas. Prior to Brookshire, Gianna was a senior director inFitch Ratings Latin America Corporate Finance group (responsible for rating LatinAmerican corporate issuers in the energy sector including oil, gas, and regulatedutilities), a manager of risk management trading at BP Amoco Plc and a senior energyanalyst at Amoco Oil where she focused on global oil industry macroeconomics.

About Brookshire Advisory and Research:Brookshire is an investment advisoryfirm focused on energy investment research, risk management, and credit portfoliomanagement with clients based in Europe, Latin America, and the US. Brookshirealso is the publisher of The Brookshire Report (a quarterly global oil market outlook)and The Brookshire Energy Series (energy sector investment research). For moreinformation please visit:www.brookshireadvisoryandresearch.com

A hiccough in one market,may lead to flu in another.

Todays markets and

economies are highlyinterdependent. This wasnot your fathers recession.
http://www.brookshireadvisoryandresearch.com/http://www.brookshireadvisoryandresearch.com/http://www.brookshireadvisoryandresearch.com/http://www.brookshireadvisoryandresearch.com/


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Golden Barrels

January: Between Seasons

By Simon Hawkins, Managing Director,Omni Investment Research

Welcome to Golden Barrels! From my time asFinance Controller of Shells Nigerian Joint Venture, Iremember the best season in Port Harcourt wasnormally a two week golden window between the rainyseason and the dry season. During this time the sunwould turn everything sepia and the air would turncooler and fragrant.

At sunset, with a large gin andtonic at the Shell Club pool, youcould almost convince yourself

you were in Florence.

Looking at developments inNigeria today from a colderclimate, with the finalising of thePetroleum Industry Bill, the rise ofcredible indigenous operators inthe form of Afren, Oando andothers, reports in December thatShell is planning to exit onshoreproduction assets after years ofcrippling militant attacks on itsfacilities (something of which myfamily had firsthand experience), it feels like the oilindustry is also potentially between seasons.

While for many this is a time of hope, I know thechallenges involved in planning in such a dynamicoperating environment sometimes make it tricky toplan what will happen next week, let alone next year ornext decade. But getting the structure of the oilindustry more right must be the best first step to

delivering a better deal for everyone involved with theindustry in Nigeria.

Its interesting to observe how things have changed forcompanies entering new African oil and gasopportunities.

Although I would like to see moredone to demonstrate to a worldthat demands more ofcorporations in 2010 than they

did in the 1960s, there seems tobe a new awareness, a respectfor local issues and people, agenuine desire to be a goodcitizen and a good steward of theopportunities.

I left Nigeria with a huge respectfor the many good people Iworked with and worked for,especially those who didnt havethe option of moving on to thenext expatriate posting.

I am hoping for them that this critical time of decidingthe topography of the Nigerian oil and gas industry forthe next season will result in a more stableenvironment for investment which allows them to thriveand prosper along with the communities that theycome from.

*** Look out forSimons regular column, which isreleased at the middle of every month. ***

About Simon:

Simon is Managing Director of Omni Investment Research, an independent researchhouse focusing exclusively on the global Oil and Gas sector. Previously, Simon heldsenior 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 EuropeanOils and three in European Utilities. Prior to joining the City, Simon had eight yearsinternational experience with the Royal Dutch Shell Group of companies, working ineconomics and finance in Nigeria, The Netherlands, the Far East and the US. Duringhis time with Shell he was recipient of the UK's 'Young Accountant of the Year' award.

About Omni Investment Research:

With over 70% of the UK E&P sector now under coverage Omni Investment Researchis the only independent research house that focuses exclusively on the global Oil andGas sector, providing stock, company and asset research to investors, corporates andother asset holders. Omnis coverage extends from large cap stocks like Tullow Oil andCairn Energy to quality smaller cap juniors. Omnis staff are oil and gas specialists, withsenior management experience at top-tier companies together with access to a largenetwork of technical and other professionals to support their research. Omnis corporateresearch service is tailored to guarantee the highest return on investment for clients.Omni is located in the heart of the City, at New Broad Street House, EC2.

But getting thestructure of the oil

industry moreright must be the

best first step todelivering a betterdeal for everyoneinvolved with the

industry in Nigeria


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the oil council's 'drillers and dealers' magazine - january 2010 issue

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