the oil council's september 2010 edition of 'drillers and dealers

8/8/2019 The Oil Council's September 2010 Edition of 'Drillers and Dealers'

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Forging Global Partnerships

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The dening event for the global oil and gas, nance

and investment communities

• Industryleadersdiscussthedynamicsanddrivingfactorsoftoday’sneweconomicandnanciallandscapes

• OilandgasCEOsandCFOstalkonthechallengestheynowfaceinensuringnewgrowthagainstabackdropofmarketuncertainlyandincreasedvolatilityandregulation

• Bankingexpertsexplorethefutureofenergybanking,nancialreformandmarketliquidityandtheirimplicationsonoilandgascompanies

• Aplethoraofinvestors,capitalprovidersandnancierstacklethebigissuesfacingoilandgasexecutives:newinvestmentstrategies,capitalexpenditure,

accessingthecurrentpublicandprivatemoneymarkets,capitalraisingtrends,M&AandA&Ddealowandexplorationstrategies• PlusspecialsessionsfocussingonAfricaandtheMiddleEast,RussiaandtheCIS,

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23 – 25 November 2010

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‘Drillers and Dealers’

Published by:

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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.

Ross Stewart CampbellChief Executive Officer,The Oil CouncilT: +44 (0) 20 7067 [email protected]

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„Drillers and Dealers‟ – September 2010 Edition

Incidents At Offshore Facilities – Who Is Responsible For EnvironmentalDamage?

o By Written by Stephen Shergold (Partner), Danielle Beggs (Partner) and Sam Boileau (Senior Associate), Denton Wilde Sapte

Doing Business in Uganda: A Guide and Review of Uganda‟s Oil Sector o Written by: Atipo Ambrose Peter Jr., Partner and Head, Energy, Mining and

Infrastructure, Kiiza & Kwanza Advocates & Legal Consultants

„On the Spot‟ with our Question of the Month (Part One)o What emerging legal challenges are (i) oil and gas companies (ii) oil and gas

service companies, now facing?

„On the Spot‟ with our Question of the Month (Part Two) o Bullish, bearish, uncertain? What does the future hold for the Gulf of Mexico?

What role will it play in tomorrow’s global energy landscape?

„On the Spot‟ with our Question of the Month (Part Three) o Survival. Stability. Growth. What key challenges are oil and gas CFOs currently

facing in today’s marketplace?

Analyst Notes – September – E&P Outlook and Services Outlook

“Wall Street Investor” (Column) – Why "Fed Easing" will not get us out of the financial mess we are in today!

o By Ziad Abdelnour, President & CEO, Blackhawk Partners, Inc.

“Golden Barrels” (Column) – No Single Factoro By Simon Hawkins, Head, Oil & Gas Research, Ambrian

“The Oil Outlook” (Column) – Chinese Demands Buoys Crude Priceso By Gianna Bern, President, Brookshire Advisory and Research

Do You Feel Lucky?o By Elaine Reynolds, Oil Analyst, Edison Investment Research



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Incidents At Offshore Facilities –Who Is Responsible For Environmental Damage?

Written by Stephen Shergold , Danielle Beggs and Sam Boileau

The catastrophic events in the Gulf of Mexico have focused the industry on the environmental liability risksassociated with offshore oil and gas exploration and production. It is pertinent to consider the liability regime thatwould apply if such an incident occurred in the UK North Sea, and how the UK Government and industry hasresponded to this issue being brought into the spotlight.

For the purposes of our discussion we have assumed that both the incident which causes damage and thedamage itself occur in the jurisdiction of the UK, and we do not consider issues relating to damage from seavessels.

Origins Of Liability

Where there is an operational incident on an oil and gas installation which injures employees or third parties or gives rise to environmental harm it can give rise to criminal liability, statutory remediation or improvement costsand/or civil liability in the form of damages. On the UK Continental Shelf (UKCS), regulatory responsibility for safety and environment is split. The Health and Safety Executive is responsible for regulating health and safetyrisks, principally through the Offshore Installations (Safety Case) Regulations 2005. The Department of Energyand Climate Change (DECC) regulates the environmental impact and risks, principally through the PetroleumLicence and certain industry specific legislation.

Petroleum Licences (other than those granted to or held by a single licensee) must be granted to or held by agroup of licensees on a joint basis. This means that each licensee is jointly and severally liable for allobligations under the Licence. However, it is usual for licensees to enter into Joint Operating Agreements (JOAs)to govern their relationship and vary the liability position in connection with a particular Petroleum Licence.Liability allocation

JOAs commonly vary the liability position by:

stating that all costs and obligations incurred in the conduct of the joint operations shall be owned by and borne by the licensees in proportion to their respective participating interest share;

stating that liability is "several" and not "joint or collective" and each licensee shall be responsible only for its individual obligations under the JOA;

requiring each licensee to indemnify the others, to the extent of its participating interest share; and

excluding (i) any claim or liability which is caused by the wilful misconduct of any licensee; and (ii) any liability for the consequential loss of another party.

The usual position under environmental and safety law is that primary obligations and liabilities rest with the

operator of the relevant installation. The position is different in relation to offshore oil and gas installationsbecause conditions in the Petroleum Licence (which include environmental conditions) can be enforced by DECCdirectly against all licensees, since liability under the Petroleum Licence is joint and several.

The intention of the JOA is then to allocate this liability according to the agreement between the licensees, i.e.pro-rata as set out above. This sharing of operational liability between the licensees on a pro-rata basis is a well-established and long-standing concept in the upstream oil and gas sector. However, there are both legal andcommercial signs that this concept may be under threat.

Criminal liability is becoming an increasingly important potential liability in the oil and gas sector. Major criminalpenalties could be imposed under both environmental and health and safety regimes following any major offshorespillage, leak or accident. As criminal liability cannot generally be indemnified against for reasons of public policy,it is likely that the burden of any significant criminal fines will remain with the operator. Importantly, such criminalfines can generally be imposed without the need for the prosecution to show wilful misconduct.

Some environmental and safety related offences are imposed on a "strict liability" basis whereas others require adegree of fault (e.g. negligence or a management failure amounting to a negligent breach at corporate level).



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This public policy point (if relied upon by one or more of the licensees) could result in a failure of the contractualdocumentation to achieve what many regard as one of the fundamental aims of JOAs: that all operationalliabilities except for wilful misconduct are shared on a pro-rata basis.

Commercially, health, safety and environmental oversight is usually exercised by licensees through regular

meetings with the operator. In circumstances where all liability, other than criminal penalties and those lossesthat can be shown to arise from wilful misconduct (a high threshold), rests with the licensees, considerationshould be given on a case by case basis to whether the industry practice is a sufficient tool for managing such aliability exposure. This issue is already being aired in the context of the Deepwater Horizon, with interest holder Anadarko intimating that the spill was caused by wilful misconduct of BP, and BP defending its position.

Financial Provision For Liability

Under the Petroleum Licences, DECC can require a licensee to show that it has funds available to discharge anyliability for damage caused by pollution. This obligation is generally fulfilled by the operator of the relevantPetroleum Licence participating in the Offshore Pollution Liability Agreement dated 4 September 1974 (asamended from time to time) (OPOL). Moreover, the Oil & Gas UK industry standard JOA provides that theoperator as a party to the OPOL and as a member of the Offshore Pollution Liability Association Limited, agreesthat it will be bound by and will comply with the requirements from time to time of OPOL.

OPOL applies to those offshore facilities within the United Kingdom and a number of other jurisdictions fromwhich there may be a risk of an escape or discharge of oil causing pollution damage. These facilities includewells (including gas wells when being drilled, re-completed or worked upon), drilling units, platforms, offshorestorage/loading systems and offshore pipelines, but do not include abandoned wells, installations or pipelines, or facilities for the production, treatment or transport of natural gas or natural gas liquids.

Under OPOL, operators bind themselves, by contract to the other parties, to be liable for the costs of pollutionfrom their own facilities, subject to certain limits. Operators are also obliged to make contributions in the eventthat another member of OPOL defaults.

Operators are required to maintain insurance or other financial provision to cover these liabilities. However, giventhe limits which are in place (US$120m per incident) the OPOL regime is unlikely to be sufficient to addressremedial liabilities in large-scale disasters. Indeed, in view of the scale of costs arising out of the Deepwater Horizon incident, these limits will need to be reviewed. Indeed, Oil & Gas UK has proposed that the existing limitper incident be raised to US$250m per incident.

For losses in excess of the OPOL limits, or outside the scope of OPOL, the overlay of the JOA with the specificnature of liabilities arising from the incident will determine ultimate responsibility.

Due Diligence Issues

Given the evolving nature of both legal and commercial appreciation of liabilities arising from an incident at anoffshore facility, operators and licensees should be considering a range of issues including:

whether the terms of their JOAs effectively overlay with the nature of liabilities that may arise. In particular, how will criminal penalties be dealt with under 'wilful misconduct' exclusions, and to what extent will negligence or nuisance claims be indemnified by licensees;

recognition of the reach of regulators beyond those named in permits or in contracts as 'operators' to the persons actually controlling operational decisions (particularly as a result of the Court of Appeal judgment in the Buncefield litigation);

the extent of financial provision given the relatively low level of protection offered under OPOL whencompared to the spiralling costs in the Gulf of Mexico; and

the nature of likely changes to the current framework that may arise from the DECC review and EU Commission intervention.



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Looking Forward

With the UK Government considering exploration in deeper waters West of Shetland, DECC has now initiated aformal review of current practices and arrangements and is collaborating with the industry body Oil & Gas UK. Asa first and immediate measure, DECC has announced that it will double the number of its annual environmentalinspections of drilling rigs. It is also reviewing the indemnity and insurance requirements for operating in theUKCS. In May 2010 Oil & Gas UK set up the Oil Spill Prevention and Response Advisory Group (OSPRAG),

comprising representatives from production companies, drilling contractors, DECC, the HSE and the Marine andCoastguard Agency. Working with the UK Government, OSPRAG is currently:

reviewing UKCS regulation and arrangements for pollution prevention and response;

assessing the adequacy of financial provisions for a UKCS response; and

monitoring and reviewing information from the Deepwater Horizon incident and will facilitate theimplementation of any relevant recommendations arising from it.

OSPRAG has said that it is liaising closely with the Gulf of Mexico Joint Industry Task Force to ensure technologydevelopments and lessons learned are shared. In August Oil & Gas UK commissioned an engineering study toassess subsea capping and containment options for the UK continental shelf, with recommendations to bepresented in September.

There is also action at the European level, with the EU Commission becoming increasingly vocal about standardsof risk management and prevention. In particular EU Energy Minister, Günther Oettinger, has supported amoratorium on deep water drilling until the causes of the Deepwater Horizon spill are known.

With all facets of the liability analysis applying to offshore facilities on the UKCS currently in flux, it is critical for operators and licensees to benchmark their current exposures and begin to evaluate ways to manage or mitigateunanticipated issues. The options available to all parties include contractual revisions, reviewing and if necessaryreconfiguring management structures and chains of control, and a range of financial provision mechanisms. Oneway or another, development in these areas seems inevitable.

It remains to be seen how much of the development will be driven by Government, and how much will be initiatedthrough changes to practices within the industry.

Stephen ShergoldPartner Environment & SafetyDenton Wilde Sapte LLPT +44 (0) 20 7320 [email protected]

About Denton Wilde Sapte LLP

Danielle BeggsPartner Oil & GasDenton Wilde Sapte LLPT +44 (0) 20 7246 [email protected]

Sam BoileauSenior AssociateOil & GasDenton Wilde Sapte LLPT +44 (0) 20 7320 [email protected]









The Oil and Gas Group provides a broad array of investmentbanking services to clients involved in every aspect of the oil andgas business. Clients include integrated oil companies, upstreamexploration and production and oil field service companies,midstream companies involved in transportation and processing,and downstream clients involved in refining and marketing.

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Doing Business in Uganda:

A Guide and Review of Uganda’s Oil Sector

Written by Atipo Ambrose Peter Jr., Partner and Head, Energy, Mining and Infrastructure,Kiiza & Kwanza Advocates & Legal Consultants

Uganda is one of the new oil states that are currently attracting a great deal of global attention for the right reasons – its huge oil potential! It is against this background that an informative piece has been put together for The Oil Council’s Members and readers of ‘Drillers and Dealers’ to provide a legal, regulatory and fiscal overview,as well as, an analysis of recent developments in the country’s oil sector.

Uganda is bordered by Eastern DRC in the West and Southern Sudan in the North. These countries offer amassive market, and are likely to join the East African Common Market soon, making the East African region oneof the world’s illustrious mineral rich regions. Uganda has had a relatively stable political environment since 1986when the current ruling party took over power, and has successively maintained power through democratic

process of universal adult suffrage since 1996. The rest of East Africa has also had a relatively stable politicalenvironment save for the DRC that was plagued by wars in the not so distant past.

The government has three organs namely the Executive, The Legislature and the Judiciary. These organs areheaded by the President, Speaker of Parliament and the Chief Justice respectively enhancing a democraticsystem of checks and balances.

With a current GDP of $36,745bn and a GDP per Capita of US $1,146, the country has realised massiveeconomic progress, and with the prevailing fiscal and economic stability, the future of this small nation of 236,040square kilometres is looking very bright especially amidst the recent discoveries of massive quantities of commercial oil and gas reserves, which so far stand at a minimum 2bn barrels which still represents less than30% of the explored areas.

Exploration Areas and Current Operators

The country is divided into various blocks and currently the number of licensed blocks stands at eight –covering atotal area of approximately 18,000 square kilometres, with four of the eight blocks being major blocks that haveproven successful. There are four major operating companies namely Tullow Oil, Heritage Oil, DominionPetroleum and Tower Resources, all being independents.

However, with their recent successes in commercial discoveries and the recent farm out of Heritage from theTullow-Heritage Joint Development, majors such as Eni International, Exxon Mobil, CNOOC and Total haveincreasingly expressed interest in participating in the development of the Ugandan Oil sector, with most of themdesiring farm ins or farm downs into already existing explored and proven blocks – particularly the blocks whereTullow is involved, in the oil rich Albertine Grabben.

This has presented Tullow with an array of suitors to choose from for joint development and is mainly a matter of strategy for Tullow, when it decides to chose who to work with however; infrastructure capabilities are consideredthe main strength Tullow will require from its new partners.

Exploration Gains

In just 10 years from the year 2000, approximately 40 E & A wells have been drilled in the major oil basin, theAlbertine basin, which covers an area of 20,000sqkm, recording an impressive success rate of approximately92%. The Albertine basin has had a total of 39 E & A wells drilled with two wells coming out P & A dry.

Oil Blocks and Fields

1. Buffalo-Giraffe in Block 1 discovered in 2008 with reserve estimates in the region of 400mmbbls, whichwas under the operation of Heritage and under a 50:50 joint development with Tullow, before the farmout and is now under Tullow

2. Ngassa Well in Block 2 discovered in 2009 and potentially the biggest oil field in the Albertine basin withreserves estimated at close to 2billion barrels and is under the operation of Tullow previously under a

50:50 JD with Heritage and 3. Kingfisher well in Block 3A discovered in 2006 with reserves in the region of 400mmbbls too and isunder the operation of Tullow but used to be under a 50:50 JD with Heritage before the farm out.



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The Kingfisher oil field has however been withdrawn by the government because of the failure of the operator toapply for a production licence in time. Tullow should have picked this up in its due diligence and moved swiftly tohave it rectified either before the farm out (if time allowed) or should have gotten assurances from thegovernment before buying Heritage’s stake in it. This well was expected to be the first of all wells to produce oilunder the early production scheme late this year or early next year. There is however still an option to apply for the licence, however it will be competitive since the law also allows other interested parties to apply.

Map of Uganda showing Oil Blocks and inset is the Albertine Grabben.http://www.heritageoilplc.com/images/maps/Uganda%20Map%2013.4-300.jpg

http://www.heritageoilplc.com/images/maps/Uganda%20Map%2013.4-300.jpg





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Policy and Laws - Recent Developments

These successful discoveries have necessitated the government to fast track all necessary measures to ensureorganised and optimum production and development hence the new oil bill which is supposed to operationalisethe National Oil and Gas Policy.

There is an official moratorium on awarding any oil blocks till the new law is in place, with negotiations ongoingthrough the official Ministry of Energy channels. Currently, Uganda uses an old oil law, The Petroleum(Exploration and Production) Act – Cap 150 (Laws of Uganda) of 1985. However, a new more robust and modernlaw, The Petroleum (Exploration, Development, Production & Value Addition) Act [2010] is in the pipeline and thebill is currently heading back to Parliament for review. The timeline given for enactment of this bill into law is byDecember 2010.

Legal Regime Overview

The Ministry of Energy & Mineral Development is the main point of contact for petroleum licensing, with their Petroleum Exploration and Production Department directly mandated to handle such activities. With theenactment of the new law, this department is going to be broken up to create (i) the Petroleum Ministry to providegeneral policy formulation, guidance and oversight, (ii) a National Oil Company for the commercial participation of the state in development of the petroleum industry and (iii) the National Petroleum Authority to carry out theindustry regulatory functions.

PSA

Uganda operates under the PSA licensing regime with a 2006 model PSA offering the current major guidelineinto Uganda’s petroleum licensing terms and conditions. The PSA is characterised by negotiable SignatureBonuses that present an opportunity for explorers to negotiate on a rate as opposed to a fixed one. This iscoupled with a royalty based system on a sliding payment scale linked to production with rates varying frombetween 5% to 13%. Since the size of the Signature Bonus is generally based on the exploration licence’spresumed recovery potential (and value), as well as, the market’s interest in the rights, the Bonus is expected toincrease in the next bid round because of higher competition for the exploration licences.

State Participation

In regard to state participation, up to the current day, there is no state participation mainly due to a lack of an

NOC. However in the next licensing round, state participation is expected at a limited but increasing rateconsidering the limited capacities in terms of human and technical resource. Despite this, the PSA provides for compulsory state participation in all E, P & D programs and from the different PSAs signed so far, indications of the figure for compulsory state participation is in the region of 20% which is expected to remain this low for sometime as the state builds its capacity.

Fiscal Regime Overview

The fiscal regime allows for ring fencing within the contract area for purposes of cost recovery and profit sharingpurposes and under cost recovery, indications from the cost recovery provisions in the current PSAs signed sofar put cost recovery in the region of 50%-60%.

Tax

The Income Tax Act Cap 340 and the VAT Act Cap 349 constitute Uganda’s tax code and provide for a 30%Corporate Income Tax rate – chargeable on corporate income within a financial year for operations within thecountry for any corporate entity. There is also a 30% Capital Gains Tax on capital gains within Uganda and isusually payable on value gained on business assets. This is the subject of dispute between Heritage and theUgandan Government. These several taxes and charges are typical for the petroleum industry.

It is expected that the tax provisions for minerals and petroleum are going to be revised and separate taxprovisions that take into account industry specific issues will be created by the end of 2011 and before the nextbidding round so as to avoid disputes related to retrogressive application of the law.

Local Content

Local content provisions require utilisation and employment of local human and technical resources wherenecessary and applicable, however, with the proposed law, the local content provision do not provide for thepercentage. Since a specific law that exclusively deals with local content is to be enacted, the details will beincluded therein. The current provisions in the bill are therefore not exhaustive.



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National Oil & Gas Policy and Proposed Oil Law

There is a new proposed law as mentioned earlier, and it proposes to combine the upstream and downstreamoperations in the same piece of legislation. However, there has been widespread commentary against such aproposal, and it is expected that downstream will be handled under its own separate law.

The main concerns of the government are that if downstream and upstream are handled under different laws, itwill create a loophole through which the government will lose money to companies engaged in both upstreamand downstream operations as the two activities are governed by different tax provisions. The proposed oil lawattempts to be robust, taking into account modern petroleum industry practices. It however also attempts to dealwith many issues at the same time hence being too crowded and to some extent disjoined and contradictory.Provision for the institutions and some other aspects should be given in the act and the relevant detail detailed insubsequent regulations.

Value Addition, Refinery and Pipeline

The government under the National Oil & Gas Policy is 100% behind the development of a refinery and as such,the proposed law allows government to insist on production of a stream of oil that is sufficient to operate arefinery, and that would be able to meet the domestic needs of the EA Common Market as described earlier.

Tullow is under pressure from the government to deliver on this aspect and as such has chosen CNOOC andTotal for the farm down so as to benefit from their deep pockets and infrastructure expertise in building therefinery, pipeline and other relevant infrastructure.

Environment

On the environment, the proposed law prohibits earthen storage of oil and gas, and also prohibits flaring exceptin circumstances where it is necessary for safe operations. There is need to set the parameters of safeoperations so as to make this provision definite, otherwise it is likely to cause confusion and conflict between thegovernment and the operators. Safe operations within certain defined industry safety standards would be moreappropriate so as to create definiteness in this.

It also provides for compulsory decommissioning in accordance with modern industry practice and further provides for the setting up of a decommissioning fund which will be capitalised regularly up to an agreed amounteither when production has reached 50% of aggregate estimated recoverable reserves, or 5 years before the

expiry of the production license. This is a good step in the right direction because it takes into account industrybest practice principles by providing for decommissioning and the decommissioning fund.

However, it does not state whether the environment provisions of the petroleum law are the principle or subject tothe general environment law. This can be taken care of in the general contract; however there is a need to comeout with provisions specific to the petroleum industry because of the different nature of the industry, therefore allenvironmental provisions related to the petroleum industry should be put in the petroleum law.

The challenge firms have found so far in regard to the environmental laws is that the laws are not exhaustive andas such present problems for the government in trying to enforce certain provisions which might not necessarilybe in line with industry environmental practice thus causing confusion. Otherwise, they leave the operators in aposition where they cannot comfortably make a decision that might have environmental consequences.

Stabilisation Clause

On stabilisation clauses, the proposed law is silent and as such, it is expected that the international principles onstabilisation of petroleum contracts will apply. The practice has been to have this aspect taken care of in the PSAor any other licensing contract since it is a contractual term and would be well taken care of during PSAnegotiations.

Next Steps

Once this law is in place, Uganda will go on to announce a major bidding round within the first Quarter of 2011,under a more organised system, as it is expected that all the institutions namely the National Oil Company, TheOil Ministry and The National Petroleum Authority among others will all be in place. This bidding round isexpected to attract a great deal of international interest from even the majors.

The Revenue Management Bill, 2010 which is to provide for the management of petroleum revenues, is currentlybefore cabinet. It is however expected to come into force before the next bidding round in the first quarter of nextyear if all goes according to plan.



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Recent Developments – Dispute

The Heritage-Tullow deal will go down as the first major transaction in Uganda’s oil industry to date, and alsoreveals a taste of the kind of money characteristic to the oil industry. The bill paid out by Tullow for Heritage’s50% stake in the JD being $1.5bn, a windfall profit indeed considering that they had only invested $150m so far.This didn’t however go down smoothly as the Uganda tax authority levied a $404m tax bill on Heritage for capital

gains which money Heritage wasn’t ready to pay apparently based on the advice of their advisors.

Unfortunately for Tullow, in its quest to meet a deadline in which to exercise its pre-emption rights under the JD,so as to prevent what seemed like an already sealed sale transaction between Heritage and Eni International, itwent on to seal a deal with Heritage and paid out the full sum of $1.45bn with another $150m agreed to be paidat a later date.

After Heritage’s farm out, Tullow retained the residual interest in the Tullow Heritage JD and is in the process of farming down Total and CNOOC, mainly because of a need to meet its commercial obligations while alsomeeting the government’s desires and objectives vide the National Oil and Gas Policy, which emphasises theneed for value addition for maximum economic gain, and thus requires the construction of a refinery to refine thelocally produced crude and a pipeline to distribute the finished product to the regional and international markets.CNOOC recently built a similar refinery in China that utilises the same grade of crude as Uganda’s and coupledwith the deep pockets it has as well as its willingness to obtain rights at almost any price, it is Tullow’s first choiceand seemingly the best candidate for the farm down.

Total is a major that has also expressed interest in a joint development with Tullow and as such is going to beinvolved with the two on an shared interest basis of one third of the entire area for each of the players.

Recent Developments – Is Tullow pulling out?

It is noteworthy that, Tullow who are increasingly tending towards production are likely to go the whole nine yardsand take part in production and development despite expectations that they are pulling out soon. The farm downwith CNOOC and Total into Tullow’s entire Ugandan interest, has introduced into the market two majors withdeep pockets, experience and capabilities and as such, Tullow has reduced its production and developmentburden by two thirds which indicates that they are seriously considering taking part in the more expensiveProduction and Development stages.

Yet again, it could also be a strategy by Tullow to increase the value of its position through the association with

majors who are hungry to fully take advantage of the Ugandan oil finds, and in the process, make a killing when itdecides to sell off its stake but only after the government is comfortable and satisfied that the JD partners aremeeting or will have met and complied with the national development objectives as per the PSA includingbuilding a refinery and pipeline among others.

Yet from another angle, it would beat conventional wisdom for Tullow to sell at the brink of production of the firstoil yet it has the option of selling later in the course of production. The intentions of Tullow are not known,however, Tullow continues to emphasise that it is not going anywhere, and indications of Tullow’s behaviour sofar are not contradictory to that position.

Recent Developments – Why has Tullow lost Kingfisher?

This question can be answered by considering the history of the events that culminated into this rather absurdand careless situation for Tullow.

Firstly, Uganda Government was increasingly growing impatient with Tullow for failure to start the earlyproduction scheme early enough before 2010 and also coupled with subsequent failures by Tullow to meet itsdeadlines. All this, amid indications that Tullow, as a wildcatter would not be interested in going the whole nineyards (and as such would later sale off its interest to another oil company before production) did not help mattersin terms of its relationship with government.

Heritage later expressed interest in selling its entire Ugandan stake, and went shopping around for a potentialbuyer, without starting at home first. It found a very interested party in the oil major, Eni International, a subsidiaryof Eni Spa one of the most highly capitalised companies in the world. Eni convinced the government that it woulddo over and beyond what was required of Heritage in its PSA viz; build a refinery, sustain production at a levelthat will optimally serve the refinery, build a pipeline to the coast and most of all, start production immediately,since the reserves had been proven among others.

The government was smitten by the potential of what Eni would do, and thus threw its full weight behind it,despite the legal limitations in the Tullow-Heritage JDA which required a JD Partner interested in selling its stakein the JD, to give first priority to the remaining JD Partner.



www.oilcouncil.com

Whether this was a tactic by Heritage to get the most in terms of dollars from Tullow, we cannot tell, but itworked. If one were to consider that, had Heritage tried to sell to Tullow in the first instance, Tullow could haveoffered probably less than a billion dollars or at most 1 billion dollars for Heritage’s stake.

So, Heritage well aware of the existing and legally enforceable pre-emption right of the surviving JD Partner wenton and shopped for Eni and actually concluded a sale and purchase agreement with it in total disregard of the

contractual provisions of its JD Agreement, in what everyone considered a done deal, a deal with the full blessingof the government. All for what?

To get the most from its stake before its official exit from Uganda and it was successful in attracting a whopping$1.5bn from Tullow who decided, against government’s hopes and desires, to use its pre-emption right, thusslamming the first door on Eni to the chagrin and disappointment of the government.

What seemed like a simple legal battle on issues of pre-emption rights in Joint Development Programs and theright of the host state to sanction certain contractual transactions among and between developers in the oil sector has turned into a more serious battle with the government using all means to reassert its position as thesovereign, and Tullow is now paying the price for its ambition on one hand and its negligence in failing to applyfor a production licence on time on the other. If the government unduly retained permission to grant thedevelopment license, otherwise, Tullow shall be considered negligent and if I were to be asked, I would say thatTullow is in this opposition because of its own ambition and most of all trying to fight a host state that has gainedan increased bargaining position.

Considering that the government was highly in favour of Eni taking up the Heritage stake, it put government on acollision course with Tullow. It is suspect that the new twists witnessed recently stem from Tullow’s role in thefrustration of the Heritage-Eni deal and also Tullow’s rush payment to Heritage before the government wouldhave a chance to sanction the transaction, hence leading to Heritage leaving the country without settling its taxobligations, this decision has come back to haunt Tullow.

It is widely believed that the government’s withdrawal of Kingfisher from Tullow, is to create a situation where thegovernment will ultimately hand it over to Eni through competitive bidding with the best development plan takingthe day, or even still, arm twist Tullow through behind the scenes actions to accept a farm in by Eni who havebeen seriously lobbying since their failed Heritage stake takeover bid. Eni has much more potential than Tullow todevelop the Kingfisher well, in terms of finance, skill, expertise and experience and considering that they are inthe (very) good books of the government currently, they are considered the top contenders for the developmentof the Kingfisher oil field.

Recent Developments – Tax Dispute and Arbitration

The withdrawal of Kingfisher from Tullow is the latest twist in this Uganda oil industry drama and sends signalswhich indicate the government’s attempt to impress its sovereign position as having the ultimate power in allthese industry transactions, and a stern signal to the oil companies that they would go against the governmentposition at their own peril especially in instances where government cooperation is required.

Recent Developments – Improved Bargaining Position

Would government have acted like this earlier? Of course not, however with the changing fortunes, governmenthas attained a higher bargaining advantage in that, with the commercial discoveries, government is sought after by, more than it seeks after, oil companies because the oil companies are now attracted to the big finds.

What Uganda is experiencing are the effects of operating without a proper and well defined legal and fiscalframework, as well as, the effects of lack of skilled personnel in the petroleum industry and a major shift in thebargaining power of the government and the industry players with the government having attained a better bargaining position than it had previously. However, with the ongoing reforms and fast tracking of the new law,some problems and issues of the nature as discussed here above might not arise and all the money spent ininvesting in the Uganda oil sector will be money well spent. It is business as usual for petroleum industry players.

About Atipo Ambrose Peter Jr: The Author is a Lawyer and an International Independent Oil & Gas consultant. He is with the Law Firm Kiiza & Kwanza Advocates & Legal Consultants, where he heads the Firm’s Energy, Natural Resources and Infrastructure Group. (www.kkattorneys.com) and also consults under Lead Energy Consult, an Integrated East African based Energy & Natural Resources Consulting Firm. He heads the firm’s Energy, Mining and Infrastructure Practice. He is also a member of the Association of International Petroleum Negotiators (AIPN), Energy Institute UK, SPE, Aberdeen

Chapter. You can contact him directly at: [email protected]

Information on the Ugandan oil sector can be found at www.ugandaenergyportal.com

http://www.kkattorneys.com/




http://www.ugandaenergyportal.com/




http://www.kkattorneys.com/



Kinnear Financial Limited ‐ Profile

Kinnear Financial Limited (KFL) is a privately held, Calgary‐based merchant bank that nitiates, structures and finances innovative financial solutions for the resource sector. As a

merchant bank, we commit and invest our own capital alongside our investors in commodity‐

elated investments that provide current cash yields with limited downside risk.

KFL has

assembled

an

experienced

team

of

financial

and

technical

professionals

that

carefully

analyze, screen, structure, negotiate and finance various investment opportunities. Market

volatility, changing economics in the oil and gas sector in Canada and internationally and KFL’s

eputation and experience in the energy sector have created an environment of exceptional

opportunity for KFL’s investment model.

Over the years, the principals of KFL have been involved in the provision of strategic capital to

esource‐based companies which has fostered turnarounds and accelerated corporate growth.

We seek investment opportunities that provide a secure, steady stream of income to our

nvestors while at the same time helping the investees to grow and thrive.

A History of Performance

n 2009,

James

S.

Kinnear

retired

as

Chair

and

CEO

of

Pengrowth

Energy

Trust,

after

founding

and managing the trust for over 20 years. The principals of KFL were engaged in the

management and development of Pengrowth Energy Trust during that period.

Over two decades Pengrowth Energy Trust was one of the larger producing property

acquisitors in the Canadian oil and gas industry; initiating, analyzing, negotiating, financing and

closing some $5 billion in producing oil and gas assets through over fifty individual

ransactions.

These acquisitions were financed through the issuance of $3.5 billion in equity under 20 public

offerings together with issuance of $1 billion in investment grade private placement notes in

he United States and the United Kingdom.

Pengrowth paid $4.2 billion or $42.34 per trust unit in cash distributions to its unitholders over

wenty years to September, 2009. Including reinvestments, these distributions generated an

nternal compound rate of return in excess of 14% per annum since inception.

Caledonian Royalty Corporation Investment Rationale

KFL manages Caledonian Royalty Corporation (CRC), a private company founded to acquire oil

and gas royalties and other income generating interests. CRC recently concluded its first

acquisition of a 5% royalty interest on all the assets including undeveloped land of Compton

Petroleum for gross proceeds of $100 million. The royalty structure is an innovative method of

inancing oil and gas companies in a capital intensive industry.

Companies with proven management and solid assets are seeking innovative financing

structures for attractive development and exploration projects;

As

a

result

of

the

economic

downturn

and

the

decline

in

crude

oil

and

natural

gas

prices,

it

has become challenging for smaller and medium‐sized oil and gas companies to raise new

equity or debt capital, and the cost of capital has generally increased significantly;

The banking industry has generally reduced its exposure to the sector as a result of its own

internal restraints and the less buoyant industry outlook;

The sale of royalty interests enables companies to finance at reasonable costs while

retaining control and management of the assets;

Investors in a broadly structured royalty have a low‐risk, high‐yield participation in cash

flow from properties of an Issuer that are not burdened by rising operating and capital

costs.

James S. Kinnear, B.Sc., CFA,

D.Comm. (Hon.) Founder and Chairman and CEO

(403) 532‐8800 [email protected]

Charles V. Selby, P.Eng., LLB

President

(403) 262‐8880

Stuart Crichton, CA

Vice President Finance


Paul C.

Jackson,

P.Geol.

Executive Advisor, Business

Development


Matthew Andrade, CFA

Senior Investment Securities Analyst

(403) 532‐7790

[email protected]

2200, 300 – Fifth Avenue SW

Calgary, Alberta T2P 3C4

(403) 532‐8800

www.kinnearfinancial.com



The Current Royalty Investment Opportunity ‐ Why Invest in Resource‐based Royalties?

Over longer periods of time, oil and natural gas prices will continue to rise due to the higher cost of finding and developing new sources

of supply to offset depletion, and to provide energy for economic growth globally;

Oil and natural gas producers face continuing declines in their reserves and production due to ongoing depletion, and face the ongoing challenge of reserve replacement, either through capital intensive exploration and development, or through acquisitions;

One method of participating in the potential longer term increases in crude oil and natural gas prices is through the purchase of a

royalty cash

flow

stream

(Gross

Overriding

Royalties

–

GORR);

The GORR is based upon gross oil and gas production revenue and as a result is calculated prior to deductions of operating costs, capital

costs, general and administrative costs and other corporate expenses;

From a credit point of view, the royalty ranks ahead of the banks, and all other creditors – it is secured by a caveat on title to the assets;

The royalty provides a regular, steady, relatively stable monthly income stream to investors, with cash‐on‐cash yields generally at higher

levels than those provided by many conventional investments;

The GOGPE (Canadian Oil and Gas Property Expense) deduction, based on a 10% declining balance of the amount invested, makes the

investment tax effective for Canadian investors.

Caledonian Royalty Corporation has acquired a 5% gross overriding royalty on all current production and undeveloped lands of Compton

Petroleum Corporation for approximately $100 million. Caledonian is continuing to introduce the opportunity to accredited equity

investors to co‐invest and acquire Royalty Units in Caledonian at a price of $10.00 per unit. The principals of Caledonian currently own

approximately

half

of

the

Royalty

Units

outstanding.

The overriding royalty from Compton is a registered interest in land that applies to both existing production and potential future

production from an undeveloped land base of 595,000 net acres plus any lands that are sold. Royalty payments are based on gross

revenues generated from oil and natural gas sales, reduced by modest marketing fees and transportation fees. This investment is a

superior opportunity for investors who are interested in exposure to natural gas markets, believe that natural gas prices have limited

downside, and are seeking a steady cash flow return and yield.

Key Attributes of the Royalty The 5% Gross Overriding Royalty (GORR) applies to substantially all of Compton’s extensive asset base including current production of

approximately 19,400 BOE/d (prior to the disposition announced June 7, 2010), weighted 85% to natural gas and 15% natural gas liquids.

There is significant upside development opportunities on 595,000 net undeveloped acres of land on which

Caledonian would receive a 5% GORR;

The investment is a gross revenue stream providing

12

‐ 16%

cash

‐on

‐cash

returns

in

the

early

years

to

investors (based on the January 1, 2010 Gilbert Laustsen Jung engineering appraisal);

Since October 2009, due to lower realized gas prices, royalty unitholders have received an annualized cash yield of approximately 9% after all fees and expenses;

The investment is eligible for COGPE tax shelter with the deductions being 10% of the amount invested on

a declining balance basis (only Canadian investors are eligible for the GOGPE deduction);

There is upside potential with recovery in natural gas prices and development of Compton’s extensive land base;

There are no further capital requirements associated with the Royalty and it is not subject to Compton’s operating costs and G&A expenses or other corporate expenses;

The Royalty is an interest in land and ranks ahead of the banks and all other creditors. In the event of asset sales, the Royalty obligation becomes an obligation of the acquirer;

The Royalty is not subject to the new federal

tax

on

income

trusts

–

the

SIFT

tax.

Recent Developments As announced on June 7, 2010, Compton has agreed to sell approximately 3,100 BOE/d of its production located in the Niton and Gilby areas to two Calgary‐based oil and gas companies, including Angle Energy. The 5% Royalty will continue to apply to these assets and any

realized potential development;

Angle Energy announced on July 6, 2010 an increase in its 2010 capital expenditures from approximately $95 million to approximately

$160 million subsequent to their Edson acquisition from Compton;

On July 19, 2010 Compton announced a recapitalization transaction including net debt reduction of $217.4 million to improve the

company’s capital structure so that Compton can focus on production and cash flow growth going forward. This opportunity is available only to accredited investors and should not be construed as an offer to buy or sell securities.

Compton Lands



www.oilcouncil.com

‘On the Spot ’ with our Question of the Month (Part One)

“ What emerging legal challenges are

(i) oil and gas companies and (ii) oil and

gas service companies, now facing?”

“U.S. lawmakers are prone to overreact in response to any perceived crisis. Just as theSarbanes-Oxley Act, hastily passed in the wake of the Worldcom and Enron scandals, caused extensive damage to the U.S. financial services industry, the U.S. Congress is once again passing poorly thought-out and overly burdensome legislation in response to the recent Gulf of Mexico oil spill.

These new and proposed regulations are the greatest single threat to the stability of the oil and gas industry in recent history and will likely cause significant damage to the sector in the yearsto come. Although they provide little to no true benefit to either the environment or to

individuals, the regulations are overly burdensome to honest and diligent oil and gas companies, requiring themto spend significant amounts of money and resources on compliance issues.

The regulations also put many oil and gas companies in the U.S. at a competitive disadvantage with their international counterparts, creating an uneven playing field which will only hurt overall oil and gas production inthe years to come. The new regulations also subject oil and gas companies to extreme and wholly unreasonablelevels of liability for accidents which do not warrant such severe measures. If the oil and gas industry is tomaintain the highest levels of integrity, honesty and dedication to the environment, for which they have becomeknown, then these overly burdensome and poorly thought-out regulations must be repealed.”

... John Maalouf, Senior Partner, Maalouf Ashford and Talbot LLP (Oil Council Member)

“The legal frameworks surrounding oil and gas producers are designed to create predictability.However, every so often an event happens which has a fundamental effect on a part of thelegal framework. Decommissioning was perhaps under-represented until the Brent Spar fiasco.Regulation of tankers changed dramatically following the Exxon Valdez spill.

The loss of the Deepwater Horizon and the subsequent huge oil spill is emerging as the next catalyst for adjustment to the traditional legal structures. There are a number of separate areasof debate.

1. The first is liability for clean up – there is a liability cap in place, but BP has voluntarily taken commitments far in excess of the cap. Whilst there is an obvious reputational (and commercial) rationale behind the

company’s decision, in the bigger picture the purpose and value of the cap is called into question. The cap isdesigned to avoid the risk that unlimited liability destroys otherwise successful companies, and it is simple toensure that any operator is able to meet potential obligations under a cap. However, the cap is not being observed in this case. The existence, the size, and the enforceability of caps (not just in the Gulf of Mexico)are likely to be revisited. BP is a huge company which will survive and is able to pay compensation. Not all operators are in such a strong financial position and are therefore reliant on the cap. The challenge is to find appropriate liability provisions given the disparate financial strengths of operators.

2. The second area concerns operatorship. The classic model of operatorship is arguably dated – theassumptions come from an era when operators carried out much of the work themselves. The dominance of the classic model has been eroded over time as smaller operating companies emerge, with a large servicecompany standing behind them carrying out the work. Current legal frameworks define the roles precisely,but enormous claims for compensation beyond the cap are likely to put pressure on the existing arrangements. Operators will want to share more liability with contractors. Some contractors may be happy

to accept that provided they are remunerated. The dividing line between operators and service companiesmay become blurred. The challenge is to maintain clarity until any new roles are properly defined. As some



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operators are very small, and some service companies are very big, regulators are likely to look closely at the arrangement as they examine liability caps.

3. The third area concerns the relationship of safety regulation with economic regulation. A wholly separatesafety regulator is a feature of several jurisdictions – after the Deepwater Horizon spill, it is likely that virtually all jurisdictions will follow suit. The quality of evidence required to satisfy the safety case is also likely to rise

particularly for deep water drilling.

The fundamental legal environment of the oil industry is usually quite stable. After the Deepwater Horizon spill,the traditional assumptions are likely to be revisited. There is a great deal of legal thinking to be done in the next few years as this accident hammers home the risks regulators face in dealing with small operators.”

... Stephen Dow, Lecturer in Energy Law, Centre for Energy, Petroleum and Mineral Law and Policy(CEPMLP), University of Dundee

“The overwhelming new legislation and (modified and) enhanced regulation will be driven by political motivation trying to exploit the drummed-up “public anger” and, therefore, will seek to“punish” rather than introduce sensible possible improvement and safe-guard measures. This(mainly Democratic Party) motivation, especially under the threat of changing voter preferencesrelatively close to the crucial November elections, will produce a great number, and mostly outrageous and ridiculous, legislative initiatives all promotionally targeted at “Bad Big Oil”.

While the majority of such legislation will not be passed since most of the “Oil States” Congressional Representatives are likely to vote reason rather than political opportunity, these

initiatives will be kept alive in both Houses of Congress until the passing of the Election so that theRepresentatives can tour those in their campaign speeches …. That’s very despicable, but just age-old politics.

Measures that will tighten oversight and control by government agencies have the greatest chance to be passed.While the implementation of such additional control measures will obviously add substantial administrative cost and are likely to slow down exploration and production, the industry can live with these rules and regulations.Drilling bans will continuously be used as a threat but in the long-term they will not be sustainable.”

... Franz Ehrhardt, CEO and Principal Consultant, CASCA Consulting (Oil Council Committee Member)

“The environmental scrutiny as a result of the Gulf of Mexico spills and the Alberta oil sands is a key challenge that all oil and gas companies, including service companies will have to face and address. Companiesthat are not complying with regulations will suffer significantly.”

... Janan Paskaran, Senior Associate, Blake, Cassels and Graydon LLP (Oil Council Partner)


http://slidepdf.com/reader/full/the-oil-councils-september-2010-edition-of-drillers-and-dealers 19/36www.oilcouncil.com/ecaa [email protected]

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‘On the Spot ’ with our Question of the Month (Part Two)

“ Bullish, bearish, uncertain?

What does the future hold for the Gulf of Mexico? What role will it play in

tomorrow’s global energy landscape?

“The Gulf of Mexico will be a challenged area for producers to operate for the near-term. It appears that bureaucrats are unable to distinguish between shelf and deepwater plays, nor arethey distinguishing between oil and gas exploration and production dynamics.

Consequently, only those companies with extremely large balance sheets that are able tonavigate the new bureaucracy and to stand behind the uncapped contingent liabilities will be

able to consider offshore activities. These companies are not interested in the smaller targetsassociated with the shelf.

Consequently, only a few companies will play and they will play in the deepwater. Ultimately, the servicecompanies will leave the Gulf of Mexico and it will stabilize at a lower level of activity. Of course, if politiciansultimately see the need, the attitude against the industry could soften and there could be a return to the shelf by the smaller independents. However, that appears to be a lower probability outcome, even though we continue to push for rational heads to prevail.”

... Ken Hersh, CEO, NGP Energy Capital Management and Managing Partner, Natural Gas Partners(Oil Council Committee Member)

““The BP Deepwater Horizon tragedy that occurred during the drilling of the Macondo well will undoubtedly change the regulatory environment for offshore drilling in the United States, and the potential for punitive taxes and unrealistic liability requirements could temporarily slow down drilling in the Gulf of Mexico.

However, since U.S. offshore exploration and production are large and growing componentsof domestic oil production, it is unlikely that a long term moratorium or slowdown in offshore

drilling will occur.

The Gulf of Mexico produces about 30% of U.S. oil and 10% of U.S. natural gas today, and as such it is a critical element of U.S. energy security. The real story is jobs and economic impact. The Gulf of Mexico oil and gasindustry accounted for almost $70 billion of economic value and nearly 400,000 jobs in 2009. The industry also provided about $20 billion in revenues to federal, state, and local governments through royalties and taxes.

Recent analysis indicates that the Gulf of Mexico could contribute $300 billion in revenues for federal, state, and local governments over the next 10 years if drilling and production are allowed to continue.

With the health of the U.S. economy still in question, and government deficits at record levels, this revenue and the jobs created by the offshore industry cannot be ignored.

The current problem is that the federal government and our current administration were not prepared for such a

disaster, and have implemented new regulations and increased bureaucracy, rather than waiting to find out what happened on the Macondo well and then taking action as required to assure that offshore drilling is being conducted safely in U.S. waters.

“ It appears that bureaucrats are unable to distinguish between shelf and deepwater plays, nor are they distinguishing between

oil and gas exploration and production dynamics.”



www.oilcouncil.com

The current drilling permit process at the Bureau of Ocean Energy Management (the new name for the MMS) haseven slowed shallow water drilling permits, where operations have been conducted safely for years. Thisslowdown has occurred even though there is no official moratorium on shallow water drilling.

Fifteen shallow water rigs are now idle waiting on permits, and by the end of September 2010 this number could grow to almost 40 idle rigs if the process doesn’t improve. This doesn’t look like there’s no moratorium on shallow water drilling to me.

Why is the government moving so slowly?

When the Interior Department left shallow water operation out of its moratorium on deepwater drilling activity, wewere pleased that authorities seemed aware of the 60-plus years our industry had been extracting natural gasand oil safely and without major incident.

In the last 15 years alone, over 11,000 shallow water wells have been drilled in the Gulf, with only 15 barrels of total oil spilled in that time.

If the government takes a similar approach to deepwater drilling once the moratorium is finally lifted, it could takemonths and years before we see a resumption of deepwater drilling in the Gulf of Mexico.

However, drilling in the Gulf will eventually return. The question is just how long it will take our government torealize the urgent need for Gulf of Mexico drilling from an economic and energy security standpoint.

I’m hopeful that it will happen sooner rather than later, and for that reason I’m still bullish on the Gulf of Mexico.”

... Randy Stilley, President and CEO, Seahawk Drilling (Oil Council Member)

“There may be a somewhat “bearish” attitude for a short time caused by a temporary cautionary period by the industry, at least until the results of the Elections are in and reasonable voiceshave restored some sanity.

There is, however, no question that the longer term outlook is bullish simply because of the fact that the hydrocarbon reserves in the politically safe and stable Gulf of Mexico are a crucial and reliable supply contributor for the energy demand of the U.S. Not even the Democrats with their industry-hostile attitude can block that for very long.”


“The impact of the disaster in the Gulf of Mexico is now beyond the direct damage done to theenvironment and the industry. In the U.S. these days, a variety of concepts and proposals tofreeze, ban or increase regulation of deep-sea and offshore drilling in general seem to be in the pipeline.

Despite wide spread acknowledgement that offshore drilling cannot but increase globally,because the biggest fields are still expected to be deep-sea, the electorate sensitivegovernments will likely withhold their support, considering for example the moods in Washington,where the offshore drilling moratorium now in place is likely to be extended.

“ With the health of the U.S. economy still in question, and

government deficits at record levels, this revenue and the jobs created by the offshore industry cannot be ignored.”

“These developments will change the KPI’s on the dashboard

of any Oil Company ’ s CFO and CEO. The ability to adapt and being agile will proof the key to survival and growth.”



www.oilcouncil.com

One of the consequences of this freeze and other countries with (deep) sea drilling in their territorial watersfollowing suit, is a slow reduction of the stock in both (floating) crude and oil products.

Eventually, likely as early as 2012, we will face market conditions where demand will outrun supply. What are theadditional reasons, to deep-sea-drilling-moratoria all over the world, triggering this market situation?

1. First, the economic crisis seems to have reached its bottom earlier this year. Together with the reboot,global energy demand is returning, although not in dramatic big steps, but rather in small steps,unbalanced and geographically widespread.

2. Second, new drilling projects require about five years getting on-stream, with the moratoria now in place,it is clear that production will not be able to meet market demand in and on time.

3. Third, geopolitical unbalances and tensions always have a major impact on the oil price because of thesupply shortage threat. Upsets in connection with Iran, Nigeria and Venezuela for example tend to havea direct impact on the spot price of oil and causes volatility, as these countries are all significant oil exporters. These days, we witness increasing tensions regarding Iran, and although not so much related to Iranian export, the threat of the control Iran has over its side of the Strait of Hormuz (through whichabout 20% of the world’s daily oil production is transported), is the wild card in the timing of a supply crunch coming up.

Consequences will be that the transition from oil to gas will intensify, new funding (increasingly with subsidies)will speed up the development of alternative sectors and the combination of both renewable and alternativeenergy sources. These developments will change the KPI’s on the dashboard of any Oil Company’s CFO and CEO. The ability to adapt and being agile will proof the key to survival and growth.”

... Ennio H.A.R. Senese, Executive Partner, Resources, Accenture (Oil Council Member)

“I don't think the future for the area will become clear until a sense of perspective is restored. Given theseriousness of the initial tragedy and apparent scale of the environmental impact (at least as first perceived), I think this will take a while – especially as the politicians and lawyers are now firmly entrenched in the issue.

My own view is that when the investigations have made their reports, the blame has been properly apportioned and the commercial angles have been properly assessed, some balance will probably return.

It is at this stage, we must hope that a rational, effective but not over proscriptive set of new safety and environmental regulations emerge. The US public and politicians will have to realise what the long-term economic and energy security impacts will be of a greatly reduced level of activity and greatly increased costs in the Gulf .

While this may be sustainable for natural gas, given the advent of shale gas, the situation with regards to liquidscertainly would not be. A pragmatic way forward for the industry will have to be found.”

Nick Holloway, Editor, Global Window, IHS (Oil Council Member)

“Bearish. The second blowout in early September certainly leads me to believe that in the short-term this area will continue to have significant issues.”

Janan Paskaran, Senior Associate, Blake, Cassels and Graydon LLP (Oil Council Partner)

“ The US public and politicians will have to realise what the long- term economic and energy security impacts will be of a greatly reduced level of activity and greatly increased costs in the Gulf ”



www.oilcouncil.com

‘On the Spot ’ with our Question of the Month (Part Three)

“ Survival. Stability. Growth.What key challenges are oil and gas

CFOs currently facing in today’s marketplace?”

““In the drilling and service sector side, many CFOs are facing the challenge of managing theworking capital lines of credit they took out to rapidly expand their equipment fleet back in2007-08, as rig and equipment utilization has, for a broad swath of drilling and servicescompanies, not matched their expectations.

Obvious exemptions from this are the companies that focused on shale-driven equipment and

capabilities; their challenge is to keep their growth in balance with projected capital spend,especially trying to project operator activity where gas is the prevailing play, rather than oil.

In the E&P sector, CFOs are still finding that lending bank capacity is lower than was expected, despite the returnof some key banks to active lending for development. CFOs with large exploration plans are still hampered by lack of access to equity capital markets to fund "pure E". The challenge there is to focus on channelling liquidity into "P", so that cash flow will be realized quickly enough to support drilling commitments on leases or in blockswhere drilling deadlines loom.

Whether the company is large or small, the main issue for CFOs is to be able to convince the potential capital providers, debt or equity, that their company is in the top-25% of peer performers in a sector that doesn't havethe impact right now of "a rising tide lifts all boats".”

... Terry Newendorp, Chairman and CEO, Taylor-DeJongh (Oil Council Committee Member)

“We believe that there is no “one size fits all” go forward plan for E&P companies in the current equity market and commodity price uncertainty. One of the key challenges facing today’s CFOsis developing an understanding of the specific needs of their companies, their asset base and in particular their shareholders. Despite turbulent capital markets, companies with a focussed

business plan who have demonstrated proper execution will continue to have access to funds. It is these companies that need to take advantage of the current landscape and who will emergeas strong E&P entities. We also believe that as supply and demand fundamentals are shifting rapidly, particularly in North America, choosing the right asset mix to focus on is crucial toensure future success.”

... Adam Janikowski, Vice President, Investment Banking, BMO Capital Markets (Oil Council Member)

“The Macondo blow-out demonstrated just how quickly even a highly credit-worthy company can experience asevere liquidity squeeze. I’m sure oil and gas CFOs are currently re-examining their financial contingency plansand giving them further liquidity stress tests. Despite the financial crisis of 2008/9 many oil and gas companies,

particularly larger ones, enjoyed the continuous availability of low-cost uncommitted lines of credit. In some casesquite high proportions of their trading activities have been financed with this source of money. Prudent CFOs will

“ Whether the company is large or small, the main issue for CFOs is to be able to convince the potential capital providers, debt or equity, that their company is in the top-25% of peer performers ”



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be ensuring that their committed credit lines are sufficient for extreme liquidity conditions but will be reassured by BP’s demonstration of just how liquid good quality assets are even in difficult times.”

... Ben Morgan, Head of European Energy, TD Securities – Investment Banking (Oil Council Member)

“The key challenges Sylvan Energy faces as an onshore-US, emerging oil and gas explorationand production company are: (a) access to additional capital, and (b) supply and demand volatility caused by uncertainty within the US economy.

Using the last three years and $50 million in equity and $10 million in debt, we completed the“creation” stage of our company where we have successfully (1) amassed >100 MMboe of reserves on >65,000 net acres in the Gulf Coast, Appalachian, and Michigan basins, (2)commenced our acquisitions and drilling programs, and (3) prepared our remaining projects for the drillbit. We are now in the process of raising additional debt and equity capital to fund our

ongoing “development” stage, where we will continue drilling our projects to prove them up.

Thereafter, we will enter the “exploitation” stage, where the company will generate substantial cash in a low-risk drilling environment, all while generating new oil and gas projects.

We have addressed the standard challenges faced by E&P companies, such as (i) developing the infrastructurefor a successful company and (ii) managing growth through a disciplined, long-term focus. Importantly, wesuccessfully attract scarce human capital and have found large oil and gas fields onshore US, in an industry that is facing a large “experience gap” and reduced onshore exploration, caused by prior price volatility.

We addressed this challenge through a basic approach to our engineers and geoscientists: provide them with thenecessary tools and data to explore for oil and gas effectively, and grant them minor participation in their discoveries. This has incentivized them to not only stay with the company, but to bring their friends, too!

As we continue to raise additional capital, we are focused on attracting and rewarding investors that seek theholistic, diversified, and balanced approach we have taken to building our company and are predisposed to joinus on our drive to becoming a top-25 E&P company - $2 billion in revenue, $2 billion market cap, and 333MMboe (2 Tcfge) in proved reserves in the next five years.”

... Mäny Emamzadeh, Chief Financial Officer, Sylvan Energy (Oil Council Member)

“The most ignored and overlooked oil and gas component that requires huge replacement investments is the age and rust factor of installed equipment. A substantial share of the installed equipment is way past normal operating life-spans and urgently needs major repair or replacement. This “outdated” equipment represents also a considerably elevated safety (and environmental) risk.

The biggest financing challenge for CFOs … and CEOs … is the fact that the repair and replacement of these investments do not generate incremental cash flow like one would receivefrom new exploration and production. This will not only be a tremendous drain on cash flow but also on the level of RONA or ROAE, which will negatively affect the share price ... and so forth ..!”


“ The key challenges Sylvan Energy faces as an onshore-US,emerging oil and gas exploration and production company are:

(a) access to additional capital, and (b) supply and demand volatility caused by uncertainty within the US economy.”



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“Access to capital on suitable terms remains the prominent challenge for OIL AND GAS CFOs. In the past year,our fund raising initiatives with clients has shown that, while less problematic for well managed oil companies withquality portfolios, the issue is more marked for CFOs of early stage explorers, or of oil companies lacking thecritical mass to attract investors’ attention. With over 80 oil companies on the London market alone, and thereforeover 80 different investment cases, competition for capital remains intense, amid the continuing uncertaineconomic backdrop. CFOs will increasingly need to consider a broader array of possible finance pools, ranging

from the traditional institutional equity and debt markets, to private equity/hedge funds, strategic investors, HNWI,M&A, farm-outs/carry arrangements, and more innovative structures, such as royalty based financings.”

... David Porter, Director, Corporate Finance (Oil and Gas), Fox-Davies Capital (Oil Council Member)

“Gas prices going through the floor, oil prices going nowhere and service companies enjoying strong negotiating leverage, what’s a CFO to do? Two things. Firstly, bring a business perspective to internal strategic discussionsso as to offset the natural exuberance of the typical aggressive E&P CEO. And secondly, shore up your balancesheet. In a bull market anyone can make money.

In a down market everyone who is still alive tends to watch from the sidelines. In a choppy market only the nimblethrive. Focus on opportunities that add value, not those that demonstrate activity. If you are sitting on a significant HBP acreage position in a resource play persuade your CEO and board to sell. Value is captured on the front end of these types of plays, not in the development phase.

If you are looking for new oil plays in North America look in and around the big old fields of yesteryear. Make sureyour company’s operating team show up with real expertise in the application of new technology. And when you do the unit level economics be sure to factor in increased service costs, longer delays between drilling and completion, and depending on the basin, price realization differentials that reflect transportation bottlenecks.

Above all, just as was the case of Napoleon’s most favored General, Marshall McMahon (no relation) be lucky.”

... Michael McMahon, Managing Director, Pine Brook Partners (Oil Council Member)

“I think the headline summarises well - Survival, Stability, Growth. CFOs need to be very clear on what thestrategic aims are for their company in order to frame their discussions with investors/banks/etc, as well as, toframe their own budgeting efforts. Of course, it is not as simple as that, as for example, companies will not want to stay in the survival box forever.

Therefore financing decisions for these companies whilst needing to protect the company in the short term, must also not create too many obstacles for down the road when prospects are better. There are also nuancesbetween stable growth and aggressive growth. If a company sets a course for stable growth then it needs to beclear with its investor base that this is the type of company it is.

Equally, those looking to grow more aggressively will need to manage investors and banks more dynamically toensure that both are pulling along in the same direction.”

... Tom Woolgar, Associate Director, Oil and Gas, Lloyds Banking Group (Oil Council Member)

“Markets are continuing to pick up and oil prices have been reasonably steady. I think generally CFOs will belooking at growth and trying to find ways to finance such growth.”

... Janan Paskaran, Senior Associate, Blake, Cassels and Graydon LLP (Oil Council Partner)

“ CFOs need to be very clear on what the strategic aims are for their company in order to frame their discussions with investors/

banks, as well as, to frame their own budgeting efforts.”



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Analyst Notes - E&P Outlook

Despite on-going fears over the sustainability of the global economic recovery, oil prices remain stubbornlyrange-bound between US$70-80/bbl. This level of oil prices, in our view, represents a relatively comfortableenvironment for those E&P shares with meaningful production, and should generate cash flow to at least supporta similar level of drilling in 2011 as seen in 2010 to date. Raising new equity for exploration focused playscontinues to depend on acreage quality, management track records and timing of drilling, although in general,high-profile exploration success throughout the sector in 2010 continues to support positive sentiment.

However, it remains to be seen to how much, if any, of recent and anticipated shareholder returns (either throughspecial dividends and/or M&A activity) ends up being redeployed into the E&P sector. Recent drilling news flowfrom Greenland and the DRC is a timely reminder of the realities of frontier exploration, although with theopportunities for significant absolute gains in many other sectors limited by a weak outlook for economic growthin many regions, the E&P sector continues to attract a significant amount of investor interest. We see thiscontinuing into 4Q11, particularly given the likely confluence of a number of high-profile drilling results.

- Phil Corbett, Oil & Gas Analyst, RBS

The independent Exploration and Production sector has had a renaissance over the course of 2010. As theinvestment community became less risk averse, funds became available for the independent explorers to raisemoney for exploration, allowing many companies to drill some of their more exciting prospects.

This has led to several notable successes amongst the smaller companies such as Cove Energy (Mozambique),Faroe Petroleum (Norway) and Rockhopper Exploration (Falkland Islands) allowing the institutional investors tobenefit from significant capital gains. Additionally, there have been capital returns which have helped maintainpositive market sentiment.

This has come back by the traditional method of corporate take-over as the NOCs (National Oil Companies)maintain their thirst for reserves and production. Somewhat unusually, upstream companies are also returningcash to shareholders with Heritage Oil giving 100 pence/share back to shareholders (after the sale of itsUgandan assets) while Cairn Energy plans to give much of the US$8.5 billion of proceeds, from the planned saleof a 51% stake in Cairn India, back to shareholders early next year.

Drilling programmes are continuing with a plethora of wells over the remainder of the year. We believe that thereneed to be a modicum of success to maintain the sector’s appeal thus allowing access to capital markets for theexciting drilling programmes into 2011 and beyond.

- Peter Hitchens, Oil & Analyst, Panmure Gordon

The oil & gas Industry’s ability to invest in future capacity continues to be challenged by price volatility andprevailing economic uncertainty. The power balance in the industry is moving eastwards with energy demandcentres shifting away from OECD areas to emerging markets. In this environment, the lack of coherentpartnerships between major players still remains a major hurdle in addressing emerging demand andenvironmental challenges. Further the industry faces additional cost burdens from new safety and environmentalregulations following the Macondo accident.

Majors are likely to increase focus on exploration and M&A/partnerships to overcome lack of production growth,poor profitability of the refining and marketing businesses and restricted resource access. The new businessmodels will require them to be nimble and entrepreneurial.

The difficult economic environment increases state influence over NOCs and curtails autonomy forcing NOCs toincrease their involvement with industry players to achieve higher growth. In the past few years independentshave taken the mantle of exploration and have opened new frontier areas and new plays like shale gas/oil.Independents with strong balance sheets and strong focus are likely to continue to thrive. However their successis also likely to make them targets for resource short NOCs and Majors seeking growth.

Eastern NOCs are likely to remain active buyers of oil & gas assets as they expand internationally to meetgrowing domestic consumption and to build new expertise. If the industry fails to address capacity issues to meetgrowing global energy needs, it risks further oil & gas price spikes so hampering future economic growth.

- Industry Advisory Perspective



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Although several deals have been announced recently, merger and acquisition activity in the E&P sector has notreached the heights that many analysts and participants in the sector have predicted over the past few years.While there are no doubt many reasons for this, one factor that has limited the number of deals, in our view,appears to be becoming more favourable. We are referring to the oil price itself.

Over the year to 7 September 2010, the oil price has fluctuated between a high of nearly $87 and a low of around$66 per barrel. By contrast, the previous year (9 Sept 2008 to 4 Sept 2009), the price moved between $121 and

$31 per barrel. While recognising that corporate and asset transactions are completed with a view towards thelong term, there is no escaping the fact that current market conditions also play an important role. For instance,many readers will recall that long-term oil price assumptions were regularly being revised upwards during periodsof high spot prices in the recent past.

When viewed from the different perspectives of a buyer and seller, the large swings in the oil price made for verydifferent interpretations of value by respective parties. As such we believe this simple mismatch of expectationswould have contributed significantly to a lack of deal making.

Now, however, with oil prices remaining more steady, the environment for closing the valuation gap betweenbuyers and sellers should improve. The recent uptick in deal flow may be the first indication of this and, shouldprices remain steady, we would expect more deals in the coming year as the always-difficult task of agreeingvalue becomes less buffeted by wild swings in oil prices.

- David Hart, Oil & Gas Analyst, Westhouse Securities

Analyst Notes - Services Outlook

In recent months, the service sector has seen consolidation as players strive to boost both technology portfolioand size. Post Macondo, offshore and deepwater service players are likely to require deeper pockets (i.e. size) tomanage potential liabilities. Technology applications are on the rise to access and exploit complex reservoirs andunconventional oil & gas plays. North American unconventional gas has adopted a manufacturing approach toproduction requiring service companies to offer a combination of scale and a diverse mix of services.

The North American service sector is likely to face a period of increased uncertainty as result of thedeepwater/offshore moratorium and weak gas prices. North America service players are likely to seek newmarkets to deploy available capacity having already rationalised capacity during the 2009 slow down.

E&P companies continue to be well rewarded by the equity markets for their exploration success as futureproductive capacity is seen key to reduce long term oil/gas price volatility. The E&P players push for explorationin new frontier areas is likely to benefit seismic and drilling service companies.

Technical service contract holders in Iraq have started their rehabilitation projects and are likely to rely heavily onservice companies with a strong Middle East presence to execute the work.

Efforts to recreate North American Shale gas miracle are already underway in Europe, China and Australia.These new areas the lack the service infrastructure required to support North American style development andoffer early service entrants the chance to establish a vital foothold for the future.

- Industry Advisory Perspective



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Wall Street Investor – Why "Fed Easing" will not get us

out of the financial mess we are in today!

Written by Ziad Abdelnour, President and CEO, Blackhawk Partners Inc

A debate is being played out today in the Fed about whether it should return to the so-called "quant easing" --buying more mortgage-backed securities, Treasury bills, and other bonds -- in order to lower the cost of capitalstill further.

The sad reality is that cheaper money won't work. Individuals aren't borrowing because they're still under a huge

debt load. And as their homes drop in value and their jobs and wages continue to disappear, they're not in aposition to borrow. Small businesses aren't borrowing because they have no reason to expand. Retail business isdown, construction is down, even manufacturing suppliers are losing ground.

That leaves large corporations. They'll be happy to borrow more at even lower rates than now – even thoughthey're already sitting on mountains of money.

But this big-business borrowing won't create new jobs. To the contrary, large corporations have been investingtheir cash to pare back their payrolls. They've been buying new factories and facilities abroad (China, Brazil,India), and new labour-replacing software at home.

If Bernanke and company make it even cheaper to borrow, they'll be unleashing a third corporate strategy for creating more profits but fewer jobs and a spree of company mergers and acquisitions…..good for Wall Street for sure. Remember your economics courses back in college if you ever took any? When an economy is very slack,

cheaper money is not going to induce much in the way of real economy activity.

Unless you are a financial firm, the level of interest rates is a secondary or tertiary consideration in your decisionto borrow. You will be interested in borrowing only if you first, perceive a business need (usually an opportunity).The next question is whether it can be addressed profitably, and the cost of funds is almost always not asignificant % of total project costs (although availability of funding can be a big constraint).

So cheaper money will operate primarily via their impact on asset values. That of course helps financial firms,and perhaps the Fed hopes the wealth effect will induce more spending. But that’s been the same pathetic movieof the last 20+ years, and Japan pre its crisis, of having the officialdom rely on asset price inflation to induce



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more consumer spending, and we know how both ended.

But (to put it charitably) the Fed sees the world through a bank-centric lens, so surely what is good for its chargesmust be good for the rest of us, right? So if the economy continues to weaken, the odds that the Fed will resort toit as a remedy will rise, despite the evidence that it at best treats symptoms rather than the underlying pathology.

As I pointed it out in one of my recent blogs: "Deficit doves" – i.e. Keynesians like Paul Krugman – say that

unless we spend much more on stimulus, we'll slide into a depression. And yet the government isn't spendingmoney on the types of stimulus that will have the most bang for the buck: like giving money to the states,extending unemployment benefits or buying more food stamps - let alone rebuilding America's manufacturingbase.

Keynes implemented his policies in an era of much less debt than we have today. We're now bankrupt, with debtlevels so high that they are dragging down the economy.

Even if Keynesian stimulus could help in our climate of all-pervading debt, Washington has already shotAmerica's wad in propping up the big banks and other oligarchs.

Keynes implemented his New Deal stimulus at the same time that Glass-Steagall and many other measureswere implemented to plug the holes in a corrupt financial system. The gaming of the financial system wasdecreased somewhat, the amount of funny business which the powers-that-be could engage in was reined in to

some extent.

As such, the economy had a chance to recover (even with the massive stimulus of World War II, unless somebasic level of trust had been restored in the economy, the economy would have not recovered).

Today, however, Bernanke, Summers, Dodd, Frank and the rest of the “big boys” haven’t fixed ANY of the major structural defects in the economy. So even if Keynesianism were the answer, it cannot work without theimplementation of structural reforms to the financial system.

A little extra water in the plumbing can't fix pipes that have been corroded and are thoroughly rotten. Thegovernment hasn't even tried to replace the leaking sections of pipe in our economy.

The Bottom Line

Fed easing can't and won’t patch a financial system with giant holes in it. What's needed has been obvious to usfor years: break up the big banks, prosecute the criminals whose fraud caused the financial crisis, and restore therule of law and transparency.

Until those basic steps are taken, nothing else will work to fix our broken economy…..You wait and see. Time for a real clean up starting with Congress in November

Your feedback as always is greatly appreciated.

Ziad K. Abdelnour,President and CEO, Blackhawk Partners, [email protected]

About Ziad K. Abdelnour: Once referred to by the New York Times as one of the 100 most creative and fiercest investment bankers on Wall Street, Ziad K. Abdelnour is a dealmaker, trader and financier with over 20 year experience in merchant banking,

private equity, alternative investments and physical commodities trading. Since 1985, Mr.Abdelnour has been involved in over 125 transactions totaling over $30 billion and has been widely recognized for playing an integral role in those three key market sectors. He founded Blackhawk Partners, Inc., in 2004; a New York based private equity ”family office” that focuses on originating, structuring and acting as equity investor in management-led buyouts, strategic minority equity investments, equity private placements, consolidations,buildups, and growth capital financing. For more info visit: http://blackhawkpartners.com



http://blackhawkpartners.com/







Onthenightof25thofNovemberTheOilCouncilwillbehostingourAnnualAwardsofExcellence,recognisingtheindustry’sbestperformingcompaniesandexecutives,thosewhohaveachievedexcellencethroughouttheiractivitiesin2010.

Categories include:• NOCoftheYear:AwardforExcellence•MajoroftheYear:AwardforExcellence•Mid-capoftheYear:AwardforExcellence• Small-capoftheYear:AwardforExcellence• Exploration:AwardforExcellence• ExecutiveoftheYear:AwardforExcellence

Ourawardsrecogniseindustryleadership,contributionandinnovation,beitinthenominees’operations,services,productsand/orindustryknowledge/reputation.

MaximisingyourinvolvementattheAwardsandDinner

WehaveexcitingopportunitiesavailableforindustryleadingcompaniestosupportanAwardcategoryandpresenttheAwardtothewinningindividual/company.WealsohaveVIPtablesavailableforcompanieslookingtobringadelegationofyourcolleaguesorclientstothe

Awardsnight.

• A VIP Table of 10 is available at a cost of: £4,500.00• Sponsorship of Award Category is available (and includes a position in the Awards Judging Panel; branding at the Awards ceremony, on

the Awards Dinner Cards and AV screens; the presentation of the Award at the ceremony to the winner and a VIP table of 10) at a costof: £7,500.00

TheOilCouncil’sAnnualDinner andAwardsofExcellence

Formoreinformation,tobookaVIPtableortosponsoranAwardcategorycontact:

Ross Stewart Campbell Laurent Lafont,CEO VicePresident,BusinessDevelopmentT:+44(0)2070671877|E:[email protected] T:+44(0)2032873447|E:[email protected]

Guillaume BouffardVicePresident,BusinessDevelopmentT:+44(0)2070671876|E:[email protected]

Vikash MagdaniExecutiveVicePresident,CorporateDevelopmentT:+44(0)2070671872|E:[email protected]

Ken LovegroveVicePresident,DelegateRegistrationsT:+16045664949|E:[email protected]

Booking Hotline + 44 (0) 207 067 1876 www.oilcouncil.com/weca [email protected]

25 November 2010,The Northumberland, Trafalgar Square

London, UK

Dr Mike WattsDeputyChiefExecutive

CairnEnergy

Awards Guest of HonourSpeaker:



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The Oil Outlook

September 2010: ChineseDemands Buoys Crude Prices

By Gianna Bern, President,

Brookshire Advisory and Research

Chinese authorities released Major EconomicIndicators in August revealing continued strengththroughout the country’s industrial sector. Bothstate- and investor-owned enterprises continue togrow amidst Chinese belt-tightening measures.

For the month, industrial production was 13.9%above the prior August. For the first eight months of the year, growth was 16.6% above the same periodlast year. During August 2010, heavy industry

growth was 14.2% and light industry increased13.1%. This is in line with the year-to-date growthrates of 17.9% for heavy industry and 13.6% for light industry.

Despite steps taken by governmental authorities tocool China’s economy, August 2010 production of general purpose and transport machinery increased20.1% and 16.6% respectively, when compared toAugust 2009.

Equally encouraging is Chinese automobileproduction and steel output, which increased 38.4%and 21.4% respectively, for the period January toAugust 2010. Other data reveals continued growth

among the retail, housing, and metals industries.Overall, these results are good news for the globaleconomy.

What this also means is a growing demand for crude and refined product in the world’s fastestgrowing major economy. Asian demand for refinedproducts, and crude oil in general, will help tomaintain a floor in prices.

Currently, we expect crude prices to remain in the$73 to $80 per barrel holding pattern. At this

juncture, there isn’t much on the economic horizonthat will push crude oil beyond the $80 per barrelprice level.

Double Dip Implications Mitigated

Despite the plethora of negative economic newsgenerated on both sides of the Atlantic, crude oil

prices have held their own and haven’t fallen belowthat dreaded $70 per barrel mark.

Nevertheless, economic woes proliferate amongmany European countries while the U.S. GDP grewless than 2% for the second quarter. Given theworld’s economic state of affairs, the outlook for crude oil prices remains muted at best.

However, the details behind Chinese industrialproduction picture lend credence to our view thatcrude oil prices will remain within the $73 to $80 per barrel range despite concerns of a possible doubledip U.S. recession.

Record Crude Oil Inventories

Now let us add to the picture the increasing level of inventories held by various entities. The U.S. EIAreported commercial crude oil inventories at 359.8million barrels and total crude oil and refinedproducts at 1.14 billion barrels.

With record low interest rates, the financial cost of storing crude products is minimal; therefore pricedifferentials among crude grades and geographiescan be readily arbitraged. Certainly the massivecrude oil and refined product inventory overhang isnot supportive of a sustained increase in prices.

For now, emerging market demand is supportingcrude oil prices and large inventories are limitingupward price pressures. We don’t see this dynamicsoon changing to the downside.

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

“ At this juncture, there isn’t much on the

economic horizon that will push crude oil beyond the $80 per barrel price level.”

http://www.brookshireadvisoryandresearch.com/






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“ We look at the track record of the

management team to make assumptions about

future performance.”

Do You Feel Lucky?

Written by Elaine Reynolds, Oil Analyst, Edison Investment Research

The biggest challenge facing every oil company,from smallest exploration start-up to supermajor, isthe need to consistently find hydrocarbons.

The problem is, how do you build teams andprocesses within your company to maximize thechance of success?

I know of at least one company where explorationgeoscientists were ranked purely on hydrocarbonsfound during their career.

The exploration manager was convinced that certainexplorers were innately lucky, and those were theones he wanted in his organization.

For many of us who have come up through theappraisal and development side, this approach mayseem simplistic at first, and we look for some moretangible evidence of success.

But what this manager was doing in his rankingmethods was really only what investors and analysts

do every time they consider if a company is worthinvesting in.

We look at the track record of the management teamto make assumptions about future performance.

The idea that certain individuals are uniquely suitedto becoming successful geoscientists (or chief executives), is supported in a forthcoming book‘Where Good Ideas Come From’ by Steven Johnson.

Johnson argues that ‘Chance favours the connectedmind’, that is, that what appears to us to come aboutby chance is really the outcome of a set of

experiences coming together in one person, who isthen able to generate a new and successful idea.

But he also goes on to discuss the way in whichcertain environments seem to be disproportionatelysuccessful at fostering and sharing good ideas, andthis brings me back to our ‘lucky’ geoscientists.

Once hydrocarbons are found on a prospect, thefocus shifts to bringing the discovery into productionquickly, and, in order to achieve this, somecompanies try to impose similar processes andsystems on exploration as used in assessingappraisal and development activities.

This usually means more technical scrutiny andchallenging of explorers’ proposals, and the higher grading of opportunities that can be put intodevelopment more quickly post discovery.

However, imposing this discipline on exploration canbe counter-productive, with either the creativitysqueezed out of the geoscientists, or their replacement with those who care more about theprocess than the result, and the supply of discoveries dries up.

In this case then, the environment kills the creativitythat brought success in the first place.

So, in thinking about your own company, you have toask yourself, ‘do you feel lucky?’ Well, do you?

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 NorthSea and Shell in Oman and The Netherlands.

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 includesover 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 withcorporates, investment banks, brokers and fund managers. Edison’s research is read by every major institutional investor in the UK, as well as by the private client broker and international investor communities: www.edisoninvestmentresearch.co.uk

http://www.edisoninvestmentresearch.co.uk/






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the oil council's september 2010 edition of 'drillers and dealers

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