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 ‘Drillers and Dealers’
Published by:

The Oil Council

“Engaging Upstream Oil & Gas Communities World-wide”

Foreword

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Chief Executive Officer, Chief Operating Officer,
The Oil Council The Oil Council
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 „Drillers and Dealers‟ – January 2010 Edition

 About The Oil Council and „Drillers and Dealers‟

o Contact Details

 Executive Q&A
o An interview with Terry Newendorp, Chairman and CEO, Taylor-DeJongh

 “What‟s likely to be the big deal in the new decade?”

o By David Greer OBE, Chief Executive, Regal Petroleum plc

 “Junior oil companies set to outperform in 2010”

o By Angelos Damaskos, CEO, Junior Oils Trust & Sector Investment Managers

 “2010: The Return of the IOCs?”

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

 “2010 oil price forecast: less change expected”

o By David Hart, Oil & Gas Analyst, Westhouse Securities

 Future Oil Council Assemblies

 “Hearts and minds as important as oil finds”

o By Rob Sherwin, Middle East, Managing Director, Regester Larkin

 “Diary of a Commodity Trader” (Monthly Column)

o By Kevin Kerr, President and CEO, Kerr Trading International

 “The Oil Outlook” (Monthly Column)

o By Gianna Bern, President, Brookshire Advisory and Research

 “Golden Barrels” (Monthly Column)

o By Simon Hawkins, Managing Director, Omni Investment Research

 Our Partners

www.oilcouncil.com
 Executive Q&A

With Terry Newendorp,

Chairman and CEO,
Taylor-DeJongh
Talking with
Ross Stewart Campbell, CEO, The Oil Council

Date: 11th January 2010

Ross Stewart Campbell (RSC) from
The Oil Council: Terry, great to see
you again, many thanks for joining us.
As we usher in 2010 I thought we’d
begin by gauging your general
thoughts on 2009, and what was for
many a rollercoaster year.
RSC: With the recent global economic and financial
crises there’s a need for us to learn from past
mistakes, yet we are now witnessing more
underinvestment in the industry, particularly in
exploration. What are your thoughts on this and do
you foresee another oil price spike and/or supply
crunch in the future as a result?

Terry Newendorp (TN) from Taylor- TN: The smaller guys cut back very significantly in
DeJongh: Thanks, Ross. It’s great to 2009, and their capital plans for 2010 are down again.
see you as well. Happy New Year. We There is heavy commitment to the shale gas plays in
did have a roller coaster in 2009, with USA, so if total capital budgets are down by say, 20-
oil rocketing down to the $30’s after 25% overall, but the Marcellus shale commitments are
hitting an all-time high just half a year a large part of what makes up even that spend plan,
before. With the banks dried up and then a lot of places in the world are going without
capital markets closed, we expected a lot of deals to adequate investment. The oil industry is a long-term
be transacted by mid-2009, but the widely diverse investment/reward industry. Under-investment doesn’t
views as to the forward price curve, kept buyers and show up for a few years and is manifest in reduced
sellers of assets far apart. By the 3rd quarter, with oil supply. So, as the global economy picks up speed
stabilized around $75/bbl, transactions started to get over the next couple of years, the demand-supply gap
done. And the 4th quarter saw some moves on the buy will get closed, and the result will be another price
side by ExxonMobil and portfolio rationalization by spike within a couple years. I have seen plenty of
even big boys like ConocoPhillips. articles opining that we’ll never see $100 oil again in
our lifetimes, but the demand-supply balance will
RSC: You and your team work at the coalface of rapidly close and this 2-3 year period of
finance, capital and investment. How has investor underinvestment will catch up with us.
appetite for oil and gas changed over the past 12
months? Which companies / countries are now RSC: Of course you need capital to invest and with
investing heaviest in tomorrow’s industry and how only a few sources of capital currently being available
might this affect future market dynamics? what is your outlook on financing and capital raising in
2010? When, if at all, do you see sufficient access to
TN: Oil (and gas) price volatility was scary for financial the global capital markets re-opening to everyone?
value investors. The IOCs, especially the super
majors, held their budgets and spend plans pretty TN: The IOCs have access right now. Most
close to forecast. Large independents kept their Independents do as well. The smaller balance sheets
spend-plans really focused on their highest value are the ones with the impaired access to capital
assets. The small caps have been hit hard with lack of markets. If oil stays stable trading around $75 +/- $5
access to capital markets such as AIM, and by an and we continue to pull the big economies out of
extended “freeze’ at the banks. China, as we all know, recession, then some companies with well-placed
was a more aggressive player for assets and solid operating
companies, not just single assets. records, should be able to get
Their pricing does not correlate with “Investment in E&P back to some bank lending and
an IOC forward price curve, as it is
access to and quantity of reserves
is holding the course some (less frothy) public
market access in 2H10.
(P1 and P2) that they are seeking, only with the largest
and that makes it difficult to
compete with them on a price basis.
IOCs and a few large RSC: We saw an increase in
deal flow at the end of 2009,
Independents.” particularly in M&A and capital

www.oilcouncil.com
placements, what volumes, sizes and types of deal
flow are you and your team forecasting in 2010?
TN: We think that the M&A flow that many predicted
would happen last year will finally show up in 2010.
We think there will be some “needle-moving” deals by
a few IOCs. There will be fewer “marginal” assets
trading hands, because it is difficult to get investors to
accept now that just because someone has lease
rights somewhere, there will be an inevitable gain in
value.
“I believe that Dubai is a
real estate bubble, not a
natural resource or
commodity crash.”
RSC: Risk is now front of mind with every investor and
lender. How has the financial risk landscape evolved
over the past 12 months? And do you think oil and gas
company executives, as well as oil and gas investors
and financiers, completely understand this landscape
when approaching new financing, investments and
acquisitions?
TN: I think that’s the extension of my preceding
comment. While it is true that a number of investors
are moving their dollars into commodities, especially
oil, that doesn’t mean that they are willing anymore to
just buy into undeveloped prospects. I think that the
IOC managements certainly understand this. I think
that a lot of mid-market companies may be thinking
that “pretty soon” the banks will be back lending to
them. I think that the closure of the CDO market is still
going to be problematic for the commercial banks who
seek to package large sized debt financings for
development projects. As for Private Equity going into
the oil & gas sector, there is still a lot of money out
there looking for deals, but they are much more “picky”
about the transactions than in 2007-2008. Mezzanine
debt with warrants and kickers are getting to be pretty
common now, as financial investors insist on steady
cash flow on their investments.
RSC: Looking at the old adage of ‘size matters’ how
important is size for today’s oil and gas companies? Is
bigger really better?
TN: If “big” means “portfolio diversity”, then it definitely
matters. One of the key reasons that small cap
companies have been hit so hard by this market, is
that they tend to have relatively few prospects or
assets, and those may not be in production and
therefore generating cash flow. Operational optionality
is really crucial.
RSC: With this in mind Terry what advantages do
small and mid-cap independents have over large IOCs
and NOCs in today’s markets?
TN: Well, in order to seize their traditional advantage
of being small and nimble and able to “take chances”
and find new fields that the IOCs haven’t been able to
www.oilcouncil.com
tap yet, many small and mid-cap companies are going
to have to strengthen banking relationships, shed
peripheral assets, and focus on cash-producing deals.
Right now, the small cap guys are mostly in a pretty
rough spot, if they haven’t had time to get assets into
production.
RSC: Recent problems in the Middle East and
specifically in Dubai have stirred investors’ concerns
about the future of the region. Taylor-DeJongh have a
proud history of operating in the Middle East now for
over 20 years. What in your opinion went wrong in
Dubai and do you see any long-term ramifications on
the region’s oil and gas industry and its dynamics?
TN: I believe that Dubai is a real estate bubble, not a
natural resource or commodity crash. It is noteworthy
that Abu Dhabi, which is where the bulk of UAE’s oil is,
has been able to provide liquidity and stability in the
face of a banking crisis driven by crashing real estate
prices. The new private oil & gas companies formed in
the Gulf during the oil price boom have been hurt by
the collapse of Dubai’s stock market and the illiquidity
of the banks there – but these companies did not
cause the problem; over-exuberant real estate
development was the cause. The good ones are
already bouncing back, and the NOCs are doing just
fine, although both Mubadala and TAQA are being
threatened with downgrades, the latter primarily
because of the heavy debt load it took on in order to
rapidly expand.
RSC: 2009 of course ended with the UN Climate
Change Conference in Copenhagen. Do you have
confidence in the future of renewables and alternative
energy? Are you seeing increased appetite or
increased scepticism from investors looking at this part
of the industry?
“Right now, the small-cap
guys are mostly in a pretty
rough spot, if they haven’t
had time to get assets into
production.”
TN: Europe has been about 10 years ahead of the US
in the renewables arena, because public policy
embraced alternative energy and provided incentives
such as the Spanish feed-in tariffs. Now in the US, the
Obama administration has provided some real
incentives at the federal level, and many states have
created “Renewable Portfolio Standards”, setting
targets for percentage of total electricity supply from
renewables. Even with the Department of Energy loan
guarantees, the accelerated depreciation treatment,
cash from Treasury in lieu of investment tax credits,
what I see are large capital gaps between the
technology creation and the technology deployment.
There was a lot of venture capital money that poured
into renewables in the US. But the traditional VC
model of spending about $20mm to get a technology
ready for market and then doing an IPO (to both
provide liquidity to the VC firms and also capital for RSC: To conclude Terry I’ll ask your one-word opinion
running the company) just doesn’t work when the on some key market components. Are you bullish,
technology deployment requires $500mm-$800mm- bearish or uncertain about The US Dollar?
even $1.5bn in capital in order to achieve utility-scale
power generation project. This capital gap is an TN: Bearish.
interesting opportunity.
RSC: China?
RSC: Looking ahead now at 2010, a lot can change in
a year as we all know. What is your outlook for oil and TN: Bullish.
gas in 2010? Will there be winners and losers? And
what must companies do to ensure not only survival RSC: Dubai?
but growth in this new era?
TN: Still bearish for another year.
TN: There are winners and losers in up markets and in
down markets. 2010 will see plenty of winners. Focus RSC: Oil Service Companies?
on cash flow. I don’t mean to sound rudimentary, but
the fact is that companies are going to have to look to TN: Bullish for specialty services that are required in
themselves to stay afloat, and that means production, shale and unconventional plays.
production, production. New leases and raw
exploration plays will have to wait a year or so. RSC: Unconventional Oil?

TN: Bullish over the long term, especially in US and

“There are winners and China.

losers in up markets and RSC: As always Terry many thanks for your time and
your insight, we wish you and the Taylor-DeJongh
in down markets. 2010 will team a prosperous 2010.
see plenty of winners. *** A paper discussing if 2010 will be the year for the return of
Focus on cash flow.” the IOCs has been written by Taylor-DeJongh executives and
can be found on our website and in Drillers and Dealers.***

About Terry:

Terry Newendorp, founder, Chairman and CEO of Taylor-DeJongh, has more than 35 years of experience in international and
cross-border capital investments, financial structuring, project financing, debt and equity raising and private placements of
capital. He has negotiated and closed deals in 75 countries, aggregating more than US$70 billion.

About Taylor-DeJongh:

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

www.oilcouncil.com
 What’s likely to be the big deal in the new decade?
Written by David Greer OBE, Chief Executive, Regal Petroleum plc.
As the economic and financial storms of
the last year slowly recede, Drillers and
Dealers alike are unlikely to miss or
forget 2009. Many Drillers and Dealers entered 2009
in a state of extreme uncertainty and apprehension
and only a relative few had much to celebrate by year-
end. The global financial crisis of 2008-2009 turned
the world’s economic landscape upside down, with
huge implications and consequences for the oil and
gas sector and for all the Drillers and Dealers both
large and small that work within it.
The outlook for both E&P companies and service
contractors (the “Drillers”) may be improving slightly
however, the same may not be said of the reputation
of global bankers (the “Dealers”) who have not fared
well over the last year. Amongst Drillers and Dealers,
there are two prevailing, wrestling, schools of thought
about the long-term impact of 2009. In the Dealer
corner, there are those who say that the while the
economic recession witnessed at the end of the last
decade was grim, it was nothing more than yet
another seismic tremor in our ever cyclical industry.
The recent Dubai financial scare did however lend
some weight to the argument that we are in a W-
shaped recession and showed how quickly such
scares can emerge with hardly any warning. In the
Driller corner however, many believe that this was the
year when our business models and realities changed
forever. Regardless of which argument is correct, and
only time will tell, Drillers and Dealers must now all
collectively face up to the new industry and
commercial cards that have been dealt if we are to
overcome the challenges and opportunities that lie
ahead in 2010 and beyond.
Two years of global oil demand contraction in 2008-
2009 reflect the worst economic recession in over fifty
years and this contraction has forced Drillers and
Dealers to review and adjust their business,
contracting and resourcing models in ways and to
levels that they have hitherto never experienced.
Meanwhile, for the first time in fifty years, the world will
witness a drop in gas demand in many areas.
As a consequence, oil and gas companies are driving
painful and potentially damaging cost reduction
pressures upon their staff and supply chain providers
and they, in turn, on their contractors and service
providers on whom they depend so greatly. E&P
engineering contractors have so often taken the full
brunt of oil price downturns in the past but it is
debatable whether there are enough fully resourced
and well-financed companies remaining to be able to
cope and recover from the current recession swiftly.
www.oilcouncil.com
This crucial resource has been stretched so many
times in the past due to cyclical downturns that it
remains to be seen whether the number of cycles it
has experienced has finally resulted in fatigue. If this is
the case, it is fair to say that the E&P industry, as a
whole, did it to themselves. E&P companies set tough
contract models in the past and the contractors that
were eager for work were bold enough to accept tough
terms, often driven by potential incentive bonuses and
often blind to the pitfalls and penalties of failure.
Thousands of man-years of experienced staff are
being cast off from an already greying but valuable
pool of globally mobile industry practitioners who were
once prepared to venture off to new, and often hostile,
frontiers where future hydrocarbon resources will be
extracted.
Meanwhile, the national oil companies (NOCs)
continue to hold onto the bulk of the world’s remaining
hydrocarbon reserves and now actively compete
against and with international oil companies in bidding
competitions outside their traditional regions. China’s
CNPC, Malaysia’s Petronas, Angola’s Sonangol and
Russia’s Gazprom have all won shares of contracts in
Iraq recently. If these NOC’s are successful in
assisting with the development of such large fields as
those found in Iraq, the production and revenue from
these giant fields could be transformational for each of
the companies involved. So, when the upturn in
demand and activity does eventually arrive, on which
NOC’s, companies, contractors and staff shall we rely
upon to do the needful in terms of meeting any oil and
gas shortfalls?
These factors suggest that elements of care, caution
and urgent attention are required if the global industry
expects to be able to respond effectively to the
challenges ahead and to meet society’s energy
expectations across the world. For the challenges
ahead will be many as the world’s growing band of
NOCs, international oil giants and small to mid-size
independents all compete and collaborate to try and
match global oil and gas supplies with demand.
For the oil sector, analysts deal with these
uncertainties by portraying divergent scenarios that
show the risk of a rapidly tightening oil market from
2012 onwards on the one hand, offset by other
scenarios that show OPEC spare capacity remaining
around a comfortable 6 million barrels a day over the
short to medium term.
There is little doubt that a return to wafer-thin crude oil
spare capacity and the resultant price fluctuations are
not in the interests of either consumers or producers.
 Whether the world ends up facing a
supply crunch again by 2015, or, with a
more comfortable buffer of supply
flexibility, market price stability, most analysts agree
that this will depend largely on the pace of economic
recovery and midterm GDP trends.
Oil demand is currently expected by the International
Energy Agency (IEA) to grow at between 0.4% and
1.4% annually from 2010 onwards. The difference
between these projections is very significant in relation
to projected global oil balances. The IEA forecasts that
demand will increase from the current 85 million
barrels per day to 89 million barrels per day in 2030. It
remains too early to detect any definitive reduction in
global oil use and dependency. However, some
growth trends are evident, with Asia and the Middle
East generating the bulk of demand growth and non-
OECD demand potentially overtaking OECD demand
by 2014. The IEA believes that half of the required
increase will come from already discovered fields, with
the remainder yet to be discovered.
However, oil industry investments are reportedly down
by almost 20% compared to 2008 and a significant
increase in expenditure and human resources will be
required in the oil and gas sector to cope with the
decline in production from existing fields and to
develop the new fields required to meet the IEA’s
projected growth in demand. However, according to
the 2009 Uppsala University Report on giant oil field
decline rates and their influence on world oil
production, the struggle to maintain production and
compensate for the decline in existing production is
going to become harder and harder. The report
forecasts that the world will face an increasing oil
supply challenge over the next two decades, as the
decline trends in existing production are not only high
but are also increasing.
Even though oil prices have begun to strengthen
again, due in part to a perception that economic
recovery may be just around the corner, they are still
only around half the level seen in July 2008 when they
peaked at almost $US 150/barrel. The recent recovery
in London and US markets and in oil and gas stocks
has also been driven upwards by positive economic
news and speculators and the continuing weakness of
the US dollar have helped to promote the value of oil.
Whilst demand in the physical crude market is also
rising, the natural gas sector remains depressed in
many areas, notably in the USA as the supply and
demand balance has moved from a very tight position
with extremely high gas prices to an easing one with
falling prices, in general. There are notable exceptions
of course, such as Ukraine, where gas prices continue
to rise to European border prices.
2008 was also neatly divided into two halves: a tight
supply and demand balance with rising energy prices
was followed by a weakening of demand and spot
prices plummeted. We all witnessed the legacy of this
last period in 2009 as the world went through the
unprecedented combination of a global recession and
financial crisis. Whereas, recessions in the past have
been consumer/demand led, this one has been
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caused by a loss of liquidity in the credit markets
because of toxic, bad, credit deals that were recycled
and repackaged by the banks. The oil industry
normally contracts and expands in line with the oil
price, which is not always in line with the wider
economy as a whole (remember the collapse in oil
price in 1986 for example). The big difference this time
around is that the oil industry was also hit by this credit
tightening.
Let’s face it, at the start of the recession in Q3 2008,
most people thought the oil price of $US 150/bbl would
leave the industry largely unscathed by the economic
recession, as most pundits, even then, were still
forecasting high oil prices (remember Goldman Sachs’
oil price forecast?). The stark reality couldn’t have
been further from the truth and small players in “riskier
emerging markets” found themselves in just as much
difficulty as any other business or economic sector –
possibly even harder, since their fields do not tend to
reside in politically stable regions and lenders
tightened up on their willingness to expose themselves
to anything at all to do with “risk”.
The IEA is already warning of a natural gas glut over
the next few years due to the rise of unconventional
production projects e.g. shale gas, gas in tight sands
and coal bed methane. It is likely that if this forecast
gas glut does indeed emerge, it will have far-reaching
consequences for the structure of gas markets and for
the way gas will be priced in Europe and in Asia
Pacific. LNG producers are continuing to step up
production e.g. in Qatar, Sakhalin and Tangguh and
such producers may be forced to offer liquefied gas
into spot markets at whatever price is needed to
attract buyers.
This in turn could limit the volumes of gas that would
otherwise be sold via pipeline. The one market that
LNG suppliers have always been able to rely on to
soak up excess gas volumes has been the USA.
However, unconventional gas production, especially
shale gas, is now ramping up at unprecedented levels
and last month’s acquisition by Exxon of XTO Energy
highlights not only the shrewdness of the largest
integrated major energy company but the priority that
Exxon is placing on unconventional gas.
The concern though is that increasing shale gas and
other unconventional gas sales could potentially drive
down gas trading prices. This is of particular concern
in the USA and it is here that LNG producers may be
forced to take the biggest cut in liquefied sales prices.
Ultimately however, the extent to which shale gas will
substitute LNG sales will be directly dependent upon
the eventual cost of shale gas production; this
continues to be a hotly debated topic.
The dollar’s steady fall in 2009 helped push crude
prices up from a low of just over $US 30 per barrel in
late December 2008. Less than six months earlier,
crude had hit a peak of nearly $US 150 per barrel.
However many Drillers and Dealers remain wary and
aware that the recent increases in oil and gas equities
over the last twelve months is still not
enough to put them back where they
were eighteen months ago. Analysts
report that there has been a dramatic reduction in the
number of wells being drilled in the North Sea year on
year, largely due to the difficulties that exploration and
production companies have in raising cash and not
helped by the UK government’s tax regime.
Meanwhile, the UK and other Governments have
recently been exhibiting their low carbon credentials at
Copenhagen and many people clearly want to see the
transition to a low carbon economy as soon as
possible. Such a transition however will not occur in
the UK unless the UK government grasps the severity
of the current situation or without the prudent
management of what is left of North Sea reserves.
Neither will it help maintain the country’s faltering
security of supply or its corporation tax receipts, where
the industry still makes a very significant contribution.
Whilst there has been a recent bounce back in most
oil and gas players’ share prices and oil prices in
general, the outlook for Drillers and Dealers remains
very uncertain. The economic
stresses and strains of the last
decade have changed our “Whilst there has
business models and realities
forever. Markets face enormous
been a recent bounce
uncertainty surrounding the back in most oil and
timing, pace and extent of any
economic rebound, which gas players’ share
affects all prognoses for oil and prices and oil prices in
gas market fundamentals and
activity levels over the next five general, the outlook
years. This makes it very for Drillers and
difficult for E&P companies and
contractors alike to forecast and Dealers remains very
meet resourcing needs and to
commit to new expenditure.
uncertain.”
Despite the recent Copenhagen summit and Kyoto
before it, we all remain members of the genus Homo
Hydrocarbon and as the world shows no immediate
signs of shedding its dependency on hydrocarbons,
the need for well resourced companies and industry
Drillers and Dealers who are competent and willing to
develop these resources in far flung places has
arguably never been greater but yet more concerning.
However, recent published research suggests that the
UK alone needs over half a million new “engineers” (in
the narrowest sense of this often poorly defined
profession in the English language) within the next
seven years if it is to maintain its present strength in
engineering and manufacturing and build new sectors.
Meanwhile the number of new entrants entering the
engineering profession at graduate and apprentice
level is reported to be equal to about half of the
projected demand. The engineering world believes
that the economy and the world could be stronger and
more stable with a robust and innovative engineering
sector, but such a scenario will not be realised if the
engineering world at large, including the E&P sector,
cannot retain existing experienced talent or attract
fresh talent to the sector to replenish an ageing skills
base throughout the engineering and E&P world.
Whilst kids’ mechanical skills from my generation were
weaned on Meccano, metal-work, woodwork and
working under car bonnets, many kids technical
exposure today is sadly limited to changing a SIM card
in a cell phone.
Society, government, professional institutions, junior
and senior academia, Drillers and Dealers must all
provide more support to their children and students to
encourage them to join our exciting and challenging
industry. There was little evidence at the end of
recessionary 2009, that the
Driller and Dealer industry was
doing anything at all to
encourage anybody to join our
industry; on the contrary,
some former industry giants
are reported to be shedding
thousands of jobs and man-
years of international oil and
gas E&P experience.
Our industry has managed
uncertainty in the past and no
doubt will continue to do so
but as we enter this new
decade, the new cards that
have been dealt following last
year’s financial crisis and parallel recession have
created stresses and tensions within the Driller and
Dealer community that will arguably test our industry’s
resourcefulness and responsiveness like never before.
Unlike a game of playing cards where we can choose
what hand we play and choose how we interpret the
hands we receive to win, the big deal of the decade
may result in a higher degree of shuffling by Drillers
and Dealers than we have been accustomed to in the
past if they are to avoid being stuck with a bad hand
over the longer term.
*** Copyright and IP: The author retains the copyright and
intellectual property rights of this article. Anyone wishing to
promote / copy / market / distribute this article must seek the
express permission of the author before doing so. ***

About Mr Greer: Mr Greer is an accomplished professional chartered engineer with over 30 years of experience in
a very wide range of engineering, commercial and management positions, in a variety of environments around the
world. He assumed the position of Chief Executive of Regal Petroleum in November 2007. In his short time at
Regal Petroleum, he has been responsible for implementing a major turnaround and transformation plan within the
Company which, having successfully raised new share capital from international investors, is now very well
positioned and resourced to embark on a major expansion of its exploration and production activities in Ukraine,
Romania and Egypt. Prior to this assignment, he worked for Shell International Exploration and Production for 28 years latterly
as the Project Director of the landmark Sakhalin Phase 2 Project based in Yuzhno-Sakhalinsk, Sakhalin Island, Eastern Russia.

About Regal Petroleum: Regal is an independent UK based Group with significant operated gas field development interests in
Ukraine where the Company has audited 2P reserves of 169 mmboe and an estimated 860 mmboe resource potential from
deeper resevoirs, and current production of 1600 boepd. Regal also has oil and gas assets in Romania and Egypt under
appraisal. For more information visit: www.regalpetroleum.co.uk

www.oilcouncil.com
Need professional
advisers who
know the oil and
gas sector as well
as you do?
Well look no further. BDO’s Natural Resources team are considered specialists in the sector. They
spend 100 per cent of their time working with a diverse range of companies – from those with
early stage exploration activities to those with full production portfolios, from those who are
looking to raise funds to those already listed on the world’s major exchanges. Our team provide
a wide range of services, including:
n Audit and Accountancy services
n Corporate and Personal Taxation services
n Corporate Finance and Transaction services
n Forensic and Advisory services.

BDO is the fifth largest accountancy network in the world which ensures that we can provide our
services to you whenever and wherever your assets may be.

To find out more about our Natural Resources team and how we can help you, please contact
Scott Knight on +44 20 7893 3319 or scott.knight@bdo.co.uk

www.bdo.co.uk

BDO LLP and BDO Northern Ireland are both separately authorised and regulated by the Financial
Services Authority to conduct investment business.
 Sector Investment Managers Limited

Junior oil companies set to outperform in 2010

Sector Investment Managers Limited

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

The year that went by was one of the most volatile
periods for equity markets in modern history. The year
started in the middle of a severe credit crisis with
central banks pumping record amounts of liquidity to
rescue the banking system. Investor confidence was
frozen and by early March global equity markets were
trading at levels not seen in decades.
In March, however, several indicators pointed to a
turnaround. First, everyone was despondent,
sentiment was bleak and flight out of equities was
faster than it had been for decades. Second,
commodity prices had stabilised and started a slow
rise in response to re-stocking by industrialising China
and India. Third, commodity producing companies
experienced higher levels of corporate activity
indicating that strategic investors maintained their
confidence in the long-term demand for energy and
basic materials. Equity markets then started what was
to be the greatest bear-market rally seen in recent
history.
In such market conditions, it has become apparent
that there were few successful investment strategies
especially as all asset classes experienced high
volatility regardless of fundamentals. One of the best
would have been to be patiently invested in well-
capitalised energy and basic materials producing
companies which had little debt and owned solid
commodity producing assets, riding the market
turbulence of the last two years. The commodities
sector not only produced the best returns in 2009 but
recovered all of its losses of 2008 which, as we know,
was a terrible year. By comparison, the largest equity
market indices in the UK, US and Europe ended 2009
well below their start of 2008.
In managing the Junior Oils Trust, our approach was
largely one of patiently believing in the fundamental
value of our portfolio holdings. In the crisis of the last
quarter of 2008, we did prune the portfolio out of those
companies with weaker balance sheets and high
reliance on exploration success for their progress. We
invested, instead, in high-yielding convertible debt
issues of companies such as Dana Petroleum, Soco
International and Norwegian Energy Company. The
rest of the portfolio, comprising two thirds of the fund’s
value, was run following the development of the
markets. This strategy proved quite successful in the
first quarter of 2009 when the convertible issues we
had invested in three months earlier at deep discounts
quickly re-rated to near par values. As their future yield
potential was reduced, in March 2009, we switched
that part of the portfolio back to some fundamentally
undervalued companies which had been oversold in
the dramatic market conditions. In particular, we
bought into Afren, which the market thought might be
close to default on its debt, after we met with the
management and analysed this risk to be very low. We
also invested in Bowleven believing in the underlying
value of its development areas and the strong
possibility of an approach by a larger investor as the
company was trading near its cash levels – it
subsequently received such an approach which,
nevertheless, failed to proceed. Another successful
investment made in the first quarter was in Questerre
Energy, a company where we have had a small
interest for some time, but which had made great
progress in proving up and developing its shale gas
business in Canada. These three were the star
perfomers in 2009 but the rest of the portfolio also
produced good recovery. Holdings in Tullow, Venture
Production (which was taken over by Centrica) and
Dragon Oil (also approached for takeover) recovered
all of their losses of 2008 and more.
Looking into the future, it is difficult to make any
prediction. Whilst we still believe that oil prices will
trend higher as demand recovers, there are so many
fundamental problems with the global economy
casting doubts on the rate of future global economic
growth. Unemployment rates in the major developed
economies are at very high levels. The banking
system is still weak with a large overhang of doubtful
debts in the real estate and corporate sectors.
Massive government indebtedness raised to bail out
the banks and provide liquidity to the markets is
creating problems to smaller countries. Finally, the
recovery of commodity prices is certain to creep into
higher CPI inflation. What is obvious to us,
nevertheless, is that assuming oils prices trade around
the current levels, there are many opportunities for the
re-rating of smaller oil and gas companies’ shares. In
particular, those with significant reserves in the
ground, growth in cashflow, prudent balance sheet
and competent management teams that continue to
explore and add to their reserves base, should
outperform the market and the sector. In 2009
investors focused on the more liquid middle
capitalisation companies with trading liquidity that
would enable a swift switch in strategy. In 2010, it is
likely that focus will shift to the smaller capitalisation
companies which did not benefit as much last year.
The criteria for investment, nevertheless, should be
just as robust and disciplined to avoid any expensive
mistakes.

About Sector Investment Managers: is a natural resources-focused investment management firm. It advises
three open-ended products with combined Assets Under Management of US$65 million: (i) the Junior Oils Trust,
(ii) Junior Mining, an authorized OEIC investing in smaller mining companies, and (iii) Junior Energy, an
unregulated collective investment scheme investing in energy resource companies. www.sectorinvestments.com

www.oilcouncil.com
 Forthcoming Assemblies & Events

26-28 October 2010 23-25 November 2010

New York, USA London, UK

*** Capital: Finance: Liquidity: Investment ***

Value-led discussion for CFOs, Finance Directors, Commercial Directors, Accountants

and Treasurers, as well as bankers, brokers, analysts, private equity partners,
financial advisors and deal makers

 Areas of focus to include: macroeconomic environment; commodity price forecasts;

transaction trends; capital/equity/debt markets; Reserve Based Lending and
Mezzanine Capital; M&A and A&D; taxation and financial reporting; CFO leadership;
project finance; cost management and capital restructuring; private equity; small-
cap financing; credit ratings and risk; asset valuations; and new financial
instruments/IT.

26-28 October 2010

New York, USA

*** Challenges: Opportunities: Survival: Growth ***

Value-led discussion for Independent Oil and Gas Company Executives, as well as their
service providers, advisors, analysts, financiers, investors and suppliers

 Areas of focus to include: independent growth strategies; cost management;

organic vs. inorganic growth; corporate governance; CEO leadership; PSAs, JVs and
farm-ins; changing investment strategies; oil service provision; shareholder value;
frontier exploration; new E&P technology; and regional forums on Africa, Latin
America, Canada, Asia, Russia and the CIS, The Falklands, Asia & The Middle East.

*** For more information on speaker, sponsor, exhibitor and delegate opportunities
please contact The Oil Council directly or visit www.oilcouncil.com ***

www.oilcouncil.com
 2010 oil price forecast: less change expected

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

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

WTI two year chart, US$

Source: Bloomberg

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

Quarterly and Full Year WTI forecast

Q1 Q2 Q3 Q4 FY2010
$80.00 $70.00 $75.00 $80.00 $76.25
Source: Westhouse Securities

The Forecast

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

 Global Economic Growth,

 The US Dollar, and
 OPEC Compliance

Each of these is equally as difficult to forecast as oil itself, as such, we have not attempted to make specific
forecasts but rather focus on direction. For example, global economic growth in 2010 could be 2.9% or 3.1%. The
importance here, however, isn’t which of those figures is correct rather the change vis à vis the negative growth
of 1.1% last year along with those regions where growth is expected to be strongest.

www.oilcouncil.com
Global Economic Growth

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

Global oil demand and GDP growth

Year Global Oil Global GDP Advanced GDP Emerging

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

Source: OPEC and the IMF

In 2008 there was an exception where demand for oil began to fall before global growth began to contract. This
may be explained by the sharp decline in advanced economies and the relatively fast changes in behaviour
brought about by the rapid rise in gasoline prices, part of the demand destruction story which we heard plenty
about that year.

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

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

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

The US Dollar

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

2009 US dollar index and WTI chart

www.oilcouncil.com
Given the turmoil of the financial markets, the dollar is effectively acting as a gauge for investors’ risk appetite. As
the appetite for risk increased earlier in the year, investors became more comfortable with riskier assets like
equities and commodities. The previous rush to safety and US Treasuries that had supported the dollar eased
and the greenback weakened.

Another factor to bear in mind is the Federal Reserve’s ultra loose monetary policy which is hardly dollar
supportive. The flood of cheap dollars has revived the carry trade, this time with the greenback acting as the
funding currency for investing in higher yielding assets (i.e. higher risk) including commodities.

An important question that looks likely to be resolved in 2010 is

how will the dollar react to the Fed tightening monetary policy “Given the turmoil of
and investors’ perception of risk. Our view is that the Fed will
not act hastily by tightening too soon, which makes a change in the financial markets,
policy most likely a 2H 2010 event when sustainable economic the dollar is effectively
growth has been established. This should help avoid a
stampede to safety as investors take the view that the Fed acting as a gauge for
would not tighten before it felt confident that the worst outcomes
had been avoided.
investors’ risk appetite.”
The carry trade, the size of which is the subject of wide speculation, would also begin unwinding in earnest. This
would lead to the sale of dollar financed higher yielding assets with the effect of strengthening the dollar as USD
is purchased to pay back loans. Overall, and in the absence of further financial turmoil, we believe that 2010 is a
year when the dollar can strengthen. This is based on the improved economic outlook, the eventual withdrawal of
ultra loose monetary stimulus and the unwinding of carry trade offset somewhat by the reduction of risk in the
market.

OPEC Compliance

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

Next year, OPEC is forecasting oil consumption to be 85.1m bopd based on global economic growth of less than
2.9%. This figure represents growth of nearly 1.0m bopd over 2009 estimates and in our view may be
conservative.

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

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

Summary

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

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

About Westhouse Securities: Westhouse Securities is an integrated corporate finance and broking house with a strong track
record across a number of market sectors and particular expertise in emerging markets, natural resources and small to mid cap
stocks. The business focuses on providing specialist corporate finance advice together with excellent research and trade
execution through its sales and trading teams. The senior management team puts a great deal of emphasis on relationship, as
opposed to transaction, banking. For more information visit: www.westhousesecurities

www.oilcouncil.com
 Hearts and minds as important as oil finds
Written by Rob Sherwin, Middle East, Managing Director, Regester Larkin
Reports emerging during the latter half of 2009 from
bloggers and journalists based in Baghdad provided a
sobering reminder, if one were needed, of the complex
reputational and operational challenges that will face
the numerous companies, both IOCs and NOCs who
have recently won the right to help Iraq develop its
oilfields.
Referring to the China National Petroleum
Corporation’s (CNPC’s) work at the Ahdab field, the
first post‐2003 oil field development contract signed
with Baghdad, the reports have highlighted
dissatisfaction among the local population and the
project’s direct neighbours that they are benefiting so
little from a multibillion dollar development.
The manifestations of this
discontent, particularly about
the small number of jobs that “The oil and gas
have been given to locals,
have apparently included the
industry is all about the
sabotage of equipment and management of risk.
the emergence of a local
rights movement to lobby the Exploration risk,
Iraqi government for greater technical risk, price risk,
local benefits.
safety risk, security risk,
The oil and gas industry is all
about the management of
political risk”
risk. Exploration risk,
technical risk, price risk, safety risk, security risk,
political risk: all of these are managed on a daily or
sometimes minute-by-minute basis by energy
companies wherever they operate in the world.
And yet it is extraordinary how often these same
companies are blind-sided by a key risk that they have
failed to mitigate: reputation risk.
Although there are many ways to attempt to calculate
it, the only sure way for an energy company to
understand the value of its reputation is to lose it.
Anyone who has tried to win new contracts, enter new
markets, recruit talented staff, access finance or
maintain good relations with their neighbours when
their organisation’s reputation is being dragged
through the mud will tell you that reputation is a
valuable asset worth protecting.
Many energy companies now take precautionary steps
to prepare themselves to protect their reputation in the
event of a major accident. In addition to all the
procedures and drills to ensure that the company can
respond swiftly and effectively at an operational level
to any incident ‘inside the fence’, the best prepared
companies also have plans, and staff who are trained
www.oilcouncil.com
and rehearsed, to respond to all those who care about
the incident ‘outside the fence’: the media, the
government, relatives of staff, shareholders, and the
company’s own employees.
However, as health, safety and environmental
standards constantly improve across the industry, it is
thankfully increasingly rare that oil companies have to
respond to such sudden operational accidents.
Instead, it is now more common that an oil company’s
reputation is damaged by either a ‘corporate incident’
– something that happens at headquarters rather than
in the field – or criticism of the company’s behaviour
that steadily grows to fever pitch.
Readers of this ‘Drillers and
Dealers’ will likely be just as
familiar with corporate
scandals such as Shell’s
reserves ‘rebookings’, or
arrests at Total, as they will
be with infamous operational
accidents such as the Exxon
Valdez oil spill or BP’s Texas
City refinery explosion.
But the negative perceptions
that are hardest for an oil
company to shed are those
created by long‐lasting ‘open sore’ issues such as
Total’s presence in Burma, ExxonMobil’s public stance
on climate change, or Shell’s community relations in
the Niger Delta.
Which brings us back to Iraq. All the oil companies
that have recently signed preliminary deals in Iraq will
have spent much effort identifying and mitigating the
direct physical security risk of operating in the country;
weighing up the operational and perception risks of
operating under armed security, against the risk of
attacks and kidnappings of staff.
At first glance, this may appear to be the biggest risk
that oil companies will face in the country, but it would
seem that both the improved security environment,
and the security companies’ six years of experience of
protecting people on the ground has enabled oil
companies, whether Asian, Russian or western, to feel
that they can reduce the risk of violence towards their
employees to a level that is ‘as low as reasonably
possible’ (ALARP in the industry jargon).
Equally, many companies will have considered the
reputation risks of signing deals that will undoubtedly
attract criticism from various quarters of the
international media, civil society and some well‐provisioned, air‐conditioned comfort, some degree
shareholders. of resentment is almost inevitable.

Companies have had more than six years to consider
their communications strategy around this issue and
should by now have decided how much time and
attention to focus on discussions with those who are
passionately against foreign oil companies returning to
Iraq, and how much with the larger majority that is
either ambivalent or at least open to hearing the oil
companies’ case.
However, almost certainly, the single most challenging
risk for oil companies entering Iraq will be winning the
support of their project’s immediate Iraqi neighbours.
As CNPC is apparently experiencing already, if the
local or ‘fenceline’ community feels that it is being
negatively impacted by the development, and that too
few of its benefits and too little of its wealth are flowing
directly to them, then they will find all sorts of ways to
cause the company embarrassment and operational
cost and delay.
The key is to start engaging with the population as
early as possible to give yourself the best chance of
understanding and managing their expectations
(before you even start trying to meet those
expectations). This involves helping the community to
organize itself to tell you their collective needs and
interests (rather than just listening to those who shout
loudest or approach you first), being clear about what
you will not do (otherwise you will be asked to provide
everything for evermore) and finding ways to build
local capacity such that the community is better able to
compete for jobs or low‐tech service or supply
contracts.
If foreign oil companies get this right, they will be
welcomed locally, and praised internationally. But any
company that gets this wrong may well find that
people all over the world are still referring to its
mistakes in 20 years’ time.

There is no simple solution. The local community’s
expectations will always be extremely high;
everywhere in the world, populations are disappointed
that oil projects are so much more capital and
technology intensive than they are labour intensive.
When poor rural communities suddenly have
corporate neighbours living in high‐tech,
So the most important step is to understand that
winning the local community’s acceptance and support
is absolutely as critical as protecting staff, or indeed,
finding oil in the first place.
Earlier versions of this article have appeared in The National
and the Middle East Economic Survey (MEES).

About Mr. Sherwin:

Mr. Sherwin has provided strategic communications advice and crisis training to both international and locally-based companies
and joint ventures across the Middle East region. He joined Regester Larkin from the UK Foreign and Commonwealth Office
(FCO), where, as Middle East energy adviser, he engaged with Middle East governments and companies on issues of energy
security and climate change. Previously, Mr. Sherwin worked for Shell for 10 years, latterly based in Dubai.

About Regester Larkin:

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

Partnership / Advertising Opportunities with The Oil Council

We have a range of innovative sales, marketing and

business development solutions if you are interested
in partnering The Oil Council, advertising in Drillers
and Dealers, and/or speaking, exhibiting and
sponsoring one of our upcoming Assemblies.

For more information please contact:

Laurent Lafont
Vice President,
Business Development,
laurent.lafont@oilcouncil.com

www.oilcouncil.com
 Regester
Larkin

Regester Larkin helps IOCs, NOCs, Independents Some of our clients include:
and utilities – both upstream and downstream - to
Air Products
protect and capitalise on their reputation.
BG Group
For 15 years, we have been pioneering reputation management in the oil Conoco Phillips
industry. Our expertise has been honed by helping energy companies maintain Dolphin Energy
their license to operate in the aftermath of many of the UK’s most high-profile
oil industry incidents (eg: Sea Empress, Braer, Buncefield). We have also Dubai Petroleum
helped many of the world’s largest energy companies proactively to manage Eni
both short and long-term threats to their hard-won global reputations. ExxonMobil
Hess
Our specialists work with energy companies on a local, national and
international basis, providing in-depth analysis, independent advice and Karachaganak Petroleum
tailored coaching and training. Operating,
National Grid
Whether you want to protect your reputation in the face of local concerns,
global issues or full-blown crises, or capitalise on your reputation to achieve Nexen
your business goals, we have a comprehensive range of services to assist you, Oil & Gas UK
including: Oman LNG
OMV
• Reputation risk audits
Petro-Canada
• Evaluating emerging issues
Petroleum Development Oman
• Industry benchmark studies
Premier Oil
• Special advisers to top management
Qatargas
• Deploying reputation for business growth
Shell
• Crisis leadership coaching TAQA
• Crisis spokesperson training Total
• Media and family response training
• Crisis exercises and simulations

Examples of our recent work in the energy sector

Crisis management:
• Advising a supermajor on its external communications when an oil tanker
ran aground in ecologically sensitive waters. Contact us
• Designing and facilitating crisis exercises at country, divisional and group
level for worldscale energy companies. Regester Larkin Limited
• Conducting a two-year programme to enhance crisis preparedness at one 21 College Hill, London,
of the world’s largest gas companies. EC4R 2RP, United Kingdom
T: +44 (0)20 7029 3980
Issues management:
• Helping an IOC consider its external engagement and media strategy enquiries@regesterlarkin.com
related to a major potential project in Iraq.
• Advising an oil and gas transportation company on its position during Regester Larkin Middle East
industry discussions on proposed new shipping emissions regulations PO Box 77768
• Helping an IOC develop and implement its issues management strategy twofour54, Al Salam Street
around a product legacy land contamination issue.
Abu Dhabi, United Arab Emirates
T: +971 2 401 2585
mena_enquiries@regesterlarkin.com

Reputation Strategy and Management www.regesterlarkin.com

 2010: The Return of the IOCs?

Written by Afonso Reis e Sousa (Director), Shamshek Asad (Head of Research)

and Eugene Zamastsyanin (Associate) Taylor-DeJongh.

Annus Miserabilis

2009 was a miserable year for oil and gas M&A. With just 32 deals sized over US$ 10 million,1 the first quarter of
the year was described as “a 10-year low” by IHS Herold.2 In each of the ensuing two quarters the number of
deals recovered to around 70; however the combined value of all deals announced in the first three quarters
barely crossed the US$80 billion mark – and that includes the US$19.5 billion merger of Suncor and Petro-
Canada in the early part of the year, an outlier by any measure.

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

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

National Oil Companies Unleashed

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

Value
Date Target Status Acquirer
(US$mil)
12/13 XTO Energy Announced 40,763.53 Exxon Mobil
03/22 Petro-Canada Closed 19,478.12 Suncor Energy
06/24 Addax Petroleum Closed 8,882.35 Sinopec
03/24 Compania Espanola de Petroleos Closed 4,469.11 ADNOC
10/31 Encore Acquisition Announced 4,347.34 Denbury Resources
04/07 Gazprom Neft Closed 4,200.79 Gazprom
10/05 Jubilee Oilfield (Kosmos Energy) Announced 4,000.00 Exxon Mobil
10/21 Harvest Energy Trust Closed 3,809.61 KNOC
03/30 Bashkir Oil and Energy Group Closed 2,500.00 Sistema JSFC
08/04 Tristar Oil & Gas Closed 2,425.88 PetroBakken Energy
07/10 Venture Production Closed 2,316.86 Centrica Resources (UK)
03/30 MOL Closed 1,802.51 Surgutneftegaz
08/31 Athabasca Oil Sands Announced 1,726.64 PetroChina
11/23 Blocks 1 and 3A in Uganda Announced 1,500.00 ENI
04/27 Atlas Energy Resources Closed 1,427.63 Atlas Energy, Inc.
12/11 Block 32 oilfield in Angola Announced 1,300.00 Sonangol
07/14 KazMunaiGas E&P JSC Closed 939.00 China Investment Corporation
02/05 Petro-Tech Peruana S.A. Closed 900.00 KNOC; Ecopetrol
05/06 Oranje-Nassau Energie Closed 838.04 Sumitomo; Dyas UK; ONH
Oil & Gas Properties in Permian SandRidge Exploration and
11/25 Closed 800.00
Basin (TX and NM) Production

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

Considering the proportion of world oil reserves off-limits to IOCs (65% according to an estimate by PFC
3
Energy ), the growth of NOC-to-NOC relationships is a significant development.

www.oilcouncil.com
The “National Interest” considerations of the NOCs have also proven to be effective in dealing with “IOC-hostile”
oil provinces: Chinese, Korean and Russian NOCs and their affiliates have been able to pursue deals that are
perhaps too “difficult” for the IOCs. The latest heavy oil tender in Venezuela is a good example: of 19 potential
bidders, 12 are either NOCs or entities implicitly backed by their respective states.

However it was not all plain sailing for the NOCs in 2009 and they experienced disappointments as well. A joint
bid by CNOOC and Sinopec for Marathon’s 20% stake in Angola’s Block 32 was pre-empted by Sonangol.
Similarly, the Libyan government blocked an attempt by CNPC to acquire Verenex, a company primarily focused
on Libya. Verenex was instead bought by the Libyan Investment Authority for 30% less than the CNPC offer. The
“National Interest” cuts both ways.

IOCs Strike Back

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

Like their U.S. counterparts, European IOCs have also been conservative in their acquisition strategies – with
one notable exception: Italy’s ENI, led by Paolo Scaroni, has traded more than US$40 billion in assets (as both
seller and buyer) since the beginning of 2007, with the largest deals linked to Russian state oil companies.

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

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

What’s Next?

Oil prices have recently stabilised around US$75/bbl (if you can call $20 volatility “stable”), and OPEC appears
committed to maintaining prices in the range of US$70-80/bbl4. This in turn has led to greater convergence of
expectations between buyers and sellers. True, F&D costs have come down somewhat in recent months,
increasing the attractiveness of organic growth for the IOCs. Nevertheless, we expect M&A to pick up
significantly over the course of the year.

Resurgence of deal flow requires funding and the capital markets continue to show limited appetite for upstream
risk. Large, well capitalised firms – potentially pressured by expectations from analysts and shareholders to
replace reserves or diversify product mix or geographic presence – remain therefore in the best position to take
advantage of opportunities in 2010. Exxon Mobil’s recent bid for Kosmos Energy’s stake in Ghana’s Jubilee Field,
or ENI’s interest in Heritage’s Ugandan assets, illustrate the point. However, absence of financial market liquidity
continues to put pressure on smaller companies. The capital expenditure deferrals of the last couple of years
were short-term fixes, not long-term solutions.

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

 Financially robust independents and NOCs will be able to pick up assets thrown up by the IOC portfolio
optimization process. Shell’s recent decision to sell some of its North Sea and Nigerian assets is likely to
attract such buyers, as should the planned divestiture program of ConocoPhillips.

 The U.S. is bound to have relatively limited representation in global oil M&A, until there is greater
clarification on the current administration’s regulatory stance on the oil and gas sector. While any new
regulations are unlikely to cause a mass exodus of investment from the U.S. oil sector, changes could
affect the appetite for U.S.-based assets.

 Privately-held oil companies, which traditionally rely on acquisition debt finance and private-equity
funding, are likely to remain cautious in the short run. However, a recent lender price survey found that
5
banking price decks have increased, albeit marginally, from the previous third quarter.

www.oilcouncil.com
  Sovereign wealth funds may rise to prominence in 2010. 2009 witnessed the entry of new players into
the market, such as the China Investment Corporation (CIC) and the Libyan Investment Authority, as
well as Taqa’s continuing build-up of its portfolio.

 The largest M&A deals in 2009 were predominantly oil-focused. However, in December Exxon Mobil
announced its intention to acquire XTO for a staggering US$41 billion, valuing it at approximately
6
US$2.94/Mcfe. Given the outlook for US gas pricing, it is likely that Exxon Mobil is looking at the global
deployment of shale gas technology rather than a purely domestic play. XTO’s track record and
ExxonMobil’s global reach could lead to significant acquisitions overseas. However, the unresolved
water issues at the Marcellus shale suggest that this will take some time – particularly in more
environmentally conscious Europe.

In Summary

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

About the Authors:

Afonso Reis e Sousa (Director) – Mr. Reis e Sousa heads
TDJ’s London office. He advises on project financings, and
has acted on a number of asset acquisitions and other M&A
transactions. He specializes in the oil & gas sector and has
worked on projects across Europe, the Middle East and
Africa, in Russia and Australasia.
He has recently evaluated a number of investment
opportunities for placement of private capital in both
upstream and downstream segments. Mr. Zamastsyanin also
provides research support to the firm’s ongoing activities
related to the O&G sector.
About Taylor-DeJongh:

Shamshek Asad (Head of Research) – Mr. Asad manages
the collection and analysis of key country, sector and
business specific data, to be used in making credit and
investment decisions in the oil & gas and power sectors. He
assists with the negotiation of complex project finance
transactions and merger & acquisition deals. Mr. Asad has
significant experience in data analysis & reporting, strategy
development, execution & evaluation and business
development.
Eugene Zamastsyanin (Associate) – Mr. Zamastsyanin
supports the company’s M&A advisory business, performing
financial modeling, valuation and market research activities.
Taylor-DeJongh (TDJ) is an independent, specialist
investment banking firm that focuses on conventional and
renewable energy, oil & gas, industrial and infrastructure
business globally. The firm has over 28 years of success in
providing investment banking services, including debt and
equity raising, project financing advisory, project development
and structuring services for energy and infrastructure sectors
worldwide. TDJ has successfully structured and advised on
over US$70 billion worth of debt and equity investments in
100 countries, for power, renewable energy, oil & gas, LNG,
petrochemical, industrial, transportation and other
infrastructure projects. TDJ also advises clients on corporate
finance, M&A and capital raising. www.taylor-dejongh.com

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

Don’t forget to read our interview with Terry Newendorp, CEO and Chairman of Taylor-DeJongh as he
reflects on 2009 and looks ahead at the challenges and opportunities that await the industry as we move
optimistically but cautiously into 2010.

1 Capital IQ data.
2 “Upstream mergers revive after moribund first quarter,” Petroleum
Economist, September 2009.
3. “PFC Energy 50 Ranking of World's Top Energy Companies: Traded
NOCs Joining SuperMajors,”
MarketWire, 23 January 2008.
4 Javier Blas, “Opec signals oil price target of $70-$80,” Financial Times, 23

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

the announcement date,

and (2) XTO reserves of 13,862.7 Bcfe as of December 31, 2008, consisting
of: (a) Natural gas reserves
of 11,802.90 Bcf, (b) Oil reserves of 267.5 MMbbl, and (c) NGL reserves of
75.8 MMbbl.

www.oilcouncil.com
 The Oil Outlook
January 2010: Emerging Markets to Buoy Near-Term Crude Oil Demand

By Gianna Bern, President, Brookshire Advisory and Research

This inaugural column begins with a warm welcome to
our many readers, sponsors, corporate partners, and
global oil industry colleagues. It indeed is a privilege to
provide you with a monthly an outlook and perspective
on global crude oil markets.
This column will strive to present a view from the
crossroads of global crude markets and complex
industry economics.
The oil and gas industry is pleased to see 2009 recede
into unpleasant memories as it extends a hearty
welcome to 2010. The industry began 2009 with crude
oil prices near $35 per barrel after record high prices
in 2008. As a result, quarterly earnings for the first half
of last year declined 50% to 60% for most producers.
The industry happily begins 2010 with crude prices in
excess of $80 per barrel and expectations of a much
improved first half performance.
“A hiccough in one market,
may lead to flu in another.
Today’s markets and
economies are highly
interdependent. This was
not your father’s recession.”
First quarter earnings season 2010 will undoubtedly
depict a growth scenario with some producers posting
50% plus earnings gains when compared year over
year. What a difference a year makes.
considerable improvement in industrial manufacturing
activity bolstered by their massive US$586 Billion
stimulus package in 2009. Brazil has projected 2010
GDP growth to approximate 5%. India is projecting
GDP in the 6.0% range for 2009-2010. Crude oil
demand in OECD countries, however, is still projected
to be lackluster for most of 2010.
All told, this is welcome news to the industry as crude
prices reside in the $80 per barrel range. While market
fundamentals don’t necessarily support crude prices in
excess of $80, the market is being boosted by
euphoric global equity markets, severe northern
hemisphere cold weather, and some recent modest
improvements in crude oil inventories.
Nevertheless, crude and heating oil inventories still are
in excess of five-year averages and Brookshire’s
expectation is a retrenchment in near term crude
prices. {Please see Brookshire’s latest report, Big Oil
Consolidates, Rebounds in 2010 issued on December
30, 2009 for in-depth analysis}
As the world’s economy turns a corner, what remains
evident is the interrelationship of global markets. The
global financial crisis aptly illustrated that market
shocks are not necessarily events that can be
contained. A hiccough in one market, may lead to flu
in another.
Today’s markets and economies are highly
interdependent. This was not your father’s recession.

Emerging-market economic growth is widely perceived

*** Look out for Gianna’s regular column, which is
to be the engine behind projected increases in near-
released at the middle of every month. ***
term crude oil demand. China already has seen

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

About Brookshire Advisory and Research: Brookshire is an investment advisory

firm focused on energy investment research, risk management, and credit portfolio
management with clients based in Europe, Latin America, and the US. Brookshire
also is the publisher of The Brookshire Report (a quarterly global oil market outlook)
and The Brookshire Energy Series (energy sector investment research). For more
information please visit: www.brookshireadvisoryandresearch.com

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 Golden Barrels
January: Between Seasons

By Simon Hawkins, Managing Director,

Omni Investment Research

Welcome to Golden Barrels! From my time as delivering a better deal for everyone involved with the
Finance Controller of Shell’s Nigerian Joint Venture, I industry in Nigeria.
remember the best season in Port Harcourt was
normally a two week golden window between the rainy It’s interesting to observe how things have changed for
season and the dry season. During this time the sun companies entering new African oil and gas
would turn everything sepia and the air would turn opportunities.
cooler and fragrant.
Although I would like to see more
At sunset, with a large gin and done to demonstrate to a world
tonic at the Shell Club pool, you “But getting the that demands more of
could almost convince yourself structure of the oil corporations in 2010 than they
you were in Florence. did in the 1960’s, there seems to
industry more be a new awareness, a respect
Looking at developments in
Nigeria today from a colder
“right” must be the for local issues and people, a
genuine desire to be a good
climate, with the finalising of the best first step to citizen and a good steward of the
Petroleum Industry Bill, the rise of
credible indigenous operators in
delivering a better opportunities.

the form of Afren, Oando and deal for everyone I left Nigeria with a huge respect
others, reports in December that
Shell is planning to exit onshore
involved with the for the many good people I
worked with and worked for,
production assets after years of industry in Nigeria” especially those who didn’t have
crippling militant attacks on its the option of moving on to the
facilities (something of which my next expatriate posting.
family had firsthand experience), it feels like the oil
industry is also potentially between seasons. I am hoping for them that this critical time of deciding
the topography of the Nigerian oil and gas industry for
While for many this is a time of hope, I know the the next season will result in a more stable
challenges involved in planning in such a dynamic environment for investment which allows them to thrive
operating environment sometimes make it tricky to and prosper along with the communities that they
plan what will happen next week, let alone next year or come from.
next decade. But getting the structure of the oil *** Look out for Simon’s regular column, which is
industry more “right” must be the best first step to released at the middle of every month. ***

About Simon:

Simon is Managing Director of Omni Investment Research, an independent research

house focusing exclusively on the global Oil and Gas sector. Previously, Simon held
senior positions at UBS and Dresdner Kleinwort, having been ranked number one by
Thomson Extel for his coverage of the European Gas sector, number two in European
Oils and three in European Utilities. Prior to joining the City, Simon had eight years
international experience with the Royal Dutch Shell Group of companies, working in
economics and finance in Nigeria, The Netherlands, the Far East and the US. During
his time with Shell he was recipient of the UK's 'Young Accountant of the Year' award.

About Omni Investment Research:

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

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 *** Current Lead Partners ***

*** Current Partners ***

*** Current Associate Partners ***

*** Current Lead Media Partners ***

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 ‘Drillers and Dealers’
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