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 ‘Drillers and Dealers’
Published by:

The Oil Council

“Engaging Upstream Oil & Gas Communities World-wide”

Foreword

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

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Chief Executive Officer, Chief Operating Officer,
The Oil Council The Oil Council
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ross.campbell@oilcouncil.com iain.pitt@oilcouncil.com

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 „Drillers and Dealers‟ – March 2010 Edition

 About The Oil Council and „Drillers and Dealers‟

o Contact Details

 Executive Q&A
o An interview with Chris McLean, President, Stonechair Capital Corp

 When Will Unconventional Become Conventional?

o By Tim Heeley, Commercial Director, Nighthawk Energy

 Financing Oil Projects in Emerging Markets

o By Olivier Mussat, Director, Project Finance (Oil & Gas), Standard Chartered

 „On the Spot‟ with our Question of the Month

o “What’s the Biggest Challenge Independent Oil & Gas Companies Face Today?”

 Peak Oil Debate

o By Elaine Reynolds, Oil Analyst, Edison Investment Research

 The Oil Council‟s October Assembly in New York City

 “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

Ross Stewart Campbell (RSC) from
The Oil Council: Chris, many thanks
for joining us to share your thoughts
on today’s markets. Some of our
readers might not be familiar with
Stonechair Capital Corp. Can you
quickly introduce your company?
Chris McLean (CM) from
Stonechair Capital Corp:
Stonechair Capital is an advisory
firm that tries to align its interests
with that of its clients. After 10 years
in capital markets we saw a need for
a company to bridge the gap
between investment banks and private equity. Lately
deal volume has outpaced the need for deal quality
in our equity markets, something has been lost.
RSC: Let’s start with the wider Canadian markets
Chris. Last year we saw a record number of oil and
gas related financings take place and comparative to
other international markets Canada has proven to be
exceptionally robust.
What’s your take on this dynamic and why are your
markets have held up so well?
CM: I truly believe that the Canadian markets are the
best place in the world to list public exploration
companies. Our regulation is so front-end heavy
[compared to other international markets] that only
companies with viable chances are listed.
In „lean times‟ our investment community has shown
that it can direct capital into our markets and into
companies they trust. The reporting processes of
Canadian E&P companies and our regulatory
framework have allowed that capital to be raised
even in the markets‟ darkest hours.
RSC: Looking at recent investor and financier
sentiment in Canada what trends have you noticed
regarding the types of company and projects that are
getting most interest and most backing? Is it across
the oil and gas spectrum, or, for example, are
exploration-focussed companies winning more
market interest? Following on from this point are
www.oilcouncil.com
Executive Q&A
With
Chris McLean,
President,
Stonechair Capital Corp
Talking with
Ross Stewart Campbell, CEO, The Oil Council
Date: 10th March 2010
investors and financiers looking more favourably at
companies operating domestically or internationally?
“I do think that new capital
is now starting to be a little
more adventurous, looking
towards East Africa, Central
Australia and Europe”
CM: Throughout the latter half of 2009 there was a
substantial increase in pure exploration financings,
with Kurdistan and Columbia being the big recipients
of this initial capital flow. I do think that new capital is
now starting to be a little more adventurous, looking
towards East Africa, Central Australia and Europe.
Furthermore by applying recent developments in
heavy oil recovery techniques (perfected of course in
Western Canada) many marginal fields in Europe
have now opened up. Multi-stage fracs are now
being applied to prospects globally and management
teams who are raising capital with these processes
continue to attract attention as they move onto other
basins.
Like most things once the perceived risk is removed
then capital is willing to follow – with the jurisdictions
spreading out further and further from domestic
basins.
RSC: Stonechair works primarily with private and
public exploration companies on an equity
partnership basis, how important have strategic
investors and partners like Stonechair become in the
last few years to oil and gas companies? What are
the advantages to this approach over companies
working directly with investment dealers and banks?
CM: The equity partnership approach aligns the
common interests of the exploration company and
the advisors it works with. Rather than a fee-based
approach that rewards short-term goals the equity
partnership model ensures that management has a
voice when working with the fee-based community.
Helping management and boards that have little or,
no capital market experience ensures that they make
choices that have long and short-term benefits for
their company.
“It does matter whether
your legal counsel knows
the regulators and has a
dialogue with them. A
Partner just saying their
firm has done the work
doesn’t cut it.”
For example: A private company looking towards the
public markets would traditionally call on an
investment dealer and look for support to raise the
capital required. Once agreed upon the dealer
develops a marketing story to raise the capital. The
actual „going public‟ process is often then referred to
legal counsel to “paper up the deal” and
management is left to figure it out alone.
Having an equity partner that has been thought this
entire process ensures that the dealer, the lawyer
and the company keep the primary objective in mind.
Different investment banks have reputations and
skills in different areas; the same holds true for legal
counsel. It does matter whether your legal counsel
knows the regulators and has a dialogue with them.
A Partner just saying their firm has done the work
doesn‟t cut it.
Working with strategic and equity partners can
provide access to a network of intellectual capital
that is not easily found and extremely important.
RSC: You’ve witnessed the good, the bad and the
ugly Chris when it comes to how companies
approach the Canadian markets.
What pitfalls do companies often make when
approaching the Canadian regulatory system, capital
markets and investor pools?
CM: The biggest pitfall is underestimating the time it
takes to complete the entire process. Most
companies come to Canada looking for quick equity
needs and get lost in the process.
The Canadian markets are a permission-based
system versus a reporting-based system. Our
regulators take keen interest in management, board
members and controlling shareholders.
This is perhaps the most important element to
consider when approaching the Canadian system.
People are what investors look for; assets are the
tools they use. All that being said a company should
look to the public markets in Canada 6-8 months
ahead of their need.
www.oilcouncil.com
RSC: Is there a limit to what a company should seek
to raise from the market at any one given time?
CM: Take the money. Take all the money. Take it
now. Junior exploration companies get lulled into
thinking that they can always come back to market to
raise capital. 2008-2009 has shown us that this is
not always the case. Look ahead at least one year
for a Capex program and G&A – this should be a
starting point. Investors are willing to commit to
exploration but you are going to need to demonstrate
tangible results.
RSC: You’ve worked recently with Black Marlin
Energy to help raise capital for their East African
operations, what lessons from that capital raising
can you share with the wider market?
CM: Again, take the money, take all the money and
take it now. Windows of capital open and close with
amazing speed. Black Marlin Energy was fortunate
to be going to market in one of those open windows
at the start of the year but it was preceded by a
couple months of preparation groundwork on behalf
of the dealer and management.
I would encourage management teams that are
passionate about their projects not to take rejection
personally. Often portfolio managers need time to
understand new plays and want to see management
more than once. After all they are really buying into
management that has a good idea so finding the
right team is not a quick decision.
“Going public is about
starting a second business
that has nothing to do with
your primary business –
finding oil and gas.”
RSC: A lot of private companies are now looking at
moving some of their equity onto the public markets
to raise capital for new development. Of course
managing a private company and managing a public
company are two different beasts entirely.
How tough a transition – from being private to going
public – is this for the management and the boards
of private companies, particularly within today’s
market dynamics?
CM: This is probably where the biggest
misconceptions about being public appear. Going
public is not about raising equity, raising corporate
profile, or a CEO‟s ego. Going public is about
starting a second business that has nothing to do
with your primary business – finding oil and gas.
The second business has new compliance
requirements that your Chief Financial Officer
perhaps has never experienced; your board has new
responsibilities to a shareholder base that extends
past the founders, friends and early venture capital; Canadian markets? What makes for the ultimate
and timely results matter. marketable management team?

CM: Hmmm…Two things come to mind. A

“Most companies come
to Canada looking for
quick equity needs and
get lost in the process.”
The second business is a tool of the primary but
cannot be neglected for the sake of the first. Being a
public company is more than “creating shareholder
value”. No one asks, “value for which shareholder?”
This is the art of being public.
RSC: “Management is the key to success!” Is
management the defining quality of a world-class oil
and gas company today? And also Chris what role
must a Board and its Non-Executive Directors play in
the growth and development of an oil and gas
company today?
CM: Management is what early stage investors in
exploration are buying. The asset, the play, the
interpretation, are all tools that allow the
management team to do what makes them excited
to get out of bed in the morning.
This brings me to another topic that is passionate to
me. I truly believe that there is a generational gap in
corporate experiences that needs to be filled. Senior
management in oil and gas have been heavily
recirculated in the last 10-15 years.
President/CEO that understands that it is their main
job to stay in constant communication with the
market. This person understands that exploration
never happens on time and rarely happens on
budget but isn‟t afraid to pick up the phone, get on a
plane, or eat another rubber chicken lunch to let his
investors know what‟s going on.
The second is an executive suite comprised of a
CFO and VP Exploration that are not order takers
but creative thinkers in their own right. They can
come to a management meeting and press the
matters that need attending and keep the company
on track.
To me this is the perfect management setup for
junior exploration companies – the dreamers are
kept in line, the analysts are forced to find other
ways to solve problems and no single person is left
in charge.
RSC: If I may Chris I’ll wrap up by asking your one-
word opinion (bullish, bearish or uncertain) on the
future of the following. Bullish, Bearish or Uncertain?
RSC: Natural Gas E&P companies operating in
North America?
CM: Bearish
RSC: Canadian Royalty Trusts?

Because of this there is a gaping hole in experienced CM: Uncertain

board members and younger executives that have
had experience in their 30‟s and early 40‟s. I would
highly encourage senior executives reading this to
consider mentoring younger executives.
This would make an immense contribution not only
to the future health of boards and executive suites
but also the oil and gas industry as a whole.
RSC: When assessing the strengths and
weaknesses of the various management teams
you’ve worked with Chris are there specific
management styles, strategies and traits that have
proved more successful when working within the
RSC: Columbia as a major area for oil and gas
growth?
CM: Bullish with a caveat . . . . look to see other
South American countries start to raise their profile
as they see the irresistible draw of oil revenue.
RSC: The TSX-V?
CM: Bullish
RSC: Chris many thanks for your time and of course
your insight

About Chris: Chris McLean is President of Stonechair Capital Corp. He has been an active
participant of venture capital projects for the last ten years. Prior to starting Stonechair Capital
Corp, he was the Head of Capital Markets and Senior Investment Banker at a resource
focused boutique bank and the VP of International Opportunities at a national firm. His
experience with public and private companies has seen him finance projects throughout Africa,
Europe, South and North America and Australia.

Stonechair Capital is a corporate finance advising firm specializing in the development of

energy and resource companies. Our operations are based in Calgary, Alberta and we
represent public and private companies throughout Canada, the United States and Europe. For
more information and how to contact Chris directly please visit: www.stonechaircapital.com

www.oilcouncil.com
 Financing Oil Projects in Emerging Markets
Written by Olivier Mussat, Director, Project Finance (Oil & Gas), Standard Chartered Bank
Following the credit crunch, the finance world as we
knew it changed, as we saw the classic „western
model‟ suffer from its appetite for increased
leverage, whilst emerging markets weathered the
storm.
One of the main reasons for this comes from the
fact that emerging markets have typically had a
[sometimes misguided] reputation of being a rather
„unsafe place from an investment point of view.
This resulted in conservative financing structures,
as well as, an increase in the due diligence of
projects and companies working in that space.
But realistically, it is mostly an affair of specialists,
as understanding the dynamics of emerging
markets requires many years of experience, local
knowledge and presence, even more so in the
context of oil/gas.
That being said the financial products offered are
the same as you would find anywhere else, you just
have to apply specific covenants and ratios.
Known and Recognised Products
 Equity, typically for exploration
 Bridge Finance, for an acquisition or when
some regulatory approvals, such as Field
Development Plans, are delayed – here we
would typically look for a certain route to “take
out” that bridge (in the form of a Borrowing
Base for example)
 Reserve Based Lending, for single field and
producing assets in early producing stage,
typically lending on 1P reserves
 Borrowing Bases, where the company uses a
combination of assets to raise funds. As the
risk is mitigated by the number of assets, 2P
reserves can be considered on producing
assets with history.
 Junior debt, which can be structured in case of
cost overruns
www.oilcouncil.com
How to Choose Your Finance Partners When
You Are An Independent Oil & Gas Company?
First, you should always choose a bank with a
recognized track record in oil & gas! Oil & Gas
banking is very specific, and consequently you need
to find a bank that understands the industry
particularly well.
What we mean by this is that there is a specific and
separate Oil & Gas team, where a large portion of
staff comes from the industry itself, (either reservoir
engineers, petroleum engineers, commercial
analysts…) and this team will have to be
established within the bank for at least a few years,
as educating the credit chain within a bank on
upstream and midstream risk is particularly difficult.
Another aspect is balance sheet: in the wake of the
crisis, the value of balance sheets has been
rediscovered in financial institutions. What that
really means is that banks are much more unlikely
to utilise this balance sheet for “one-offs”, with the
paramount phrase now being „relationship-banking‟.
“…you need to do your
homework in order to
understand which
institution has been
leading transactions”
Lending on a single project is not as attractive now,
no matter how profitable the pricing can be.
The rationale is that banks are lending long-term to
a company and their management team, and the
bank‟s balance sheet should be used to initiate or
deepen this relationship, and follow the company as
it grows.
The balance sheet problem is particularly true in
emerging markets as the amount of capital
available in these markets is not as deep as in the
UK, US / etc.
This “country-limit availability” alone can be the
make or break of a good project as it can be limited
by this ceiling.
“We are looking for a good
mix of experience,
entrepreneurship and
competence. The larger the
project the more paramount
these elements become”
This is one reason why you need to do your
homework in order to understand which institution
has been leading transactions, in which countries,
and what alternative sources of funding are
available.
When looking for sources of funds, it is also
advisable to engage multilateral agencies, such as
the International Finance Corporation (“IFC”), as
they can not only bring funds, but also offer great
support at the local level and are very well
recognised by the finance market, enhancing the
attractiveness of your project.
Finally, make sure your financial advisors will have
long-term “skin in the game” and are recognized for
these particular types of projects and geographies,
as this will only help other lenders get comfortable
faster when raising a large amount.
The counterargument is always that an advisor
should be independent, but too often we have seen
advisors making unrealistic promises just to win a
mandate and not have to live with the
consequences of delayed or failed financings.
What do banks look for?
Last month‟s edition of „Drillers & Dealers‟ included
a comprehensive industry perspective from Dr Keith
Myers of Richmond Energy Partners, including what
he described as “must haves” for successful E&P
companies. These are not that different for banks:
= Strong Management, Good Project(s), Clear
Strategy and Strong Processes
1. Strong Management:
We are looking for a good mix of experience,
entrepreneurship and competence.
The larger the project the more paramount these
elements become, as a perfect project will fail
through bad management. We consider the
following...
 Management‟s Technical Track Record: have
they worked in this specific play / geography?
www.oilcouncil.com
 Management Track Record: have they already
tackled projects of that size?
 Financial Track Record: a strong financial team
will reassure lenders that the company is in
good order, has negotiated good arrangements
previously, and ensures a good relationship
between lenders and borrower, especially in
project finance, where lenders are required to
closely monitor the facilities.
There have been examples where management
has underestimated the necessity to adequately
communicate with lenders, and this can lead a
company into trouble, especially when the oil price
can drop from $140 to $35 within 6 months, as we
experienced in 2008-2009.
2. Good Project(s):
There are actually plenty of good projects around,
but what will differentiate your project to another?
 Is the project in a country where lenders can
operate freely, do you have good relationships
with local authorities?
 Does the borrower own the asset outright, or is
it JV partners, if so how reputable are the
partners?
 How reliable is your data? Do you have
reputable independent engineering reports
(reservoir & technical)? Have you done your
environmental due diligence?
 Are the companies involved in the construction
reputable?
“Working in emerging
markets can be seen as a
leap of faith for some, but
this is an affair of specialists,
with a clear desire to be
working there.”
 Can the project support a solid financing
structure? This is where the needs of the
project, the company and the servicing of the
debt are met within the base case and allows
for some flexibility for sensitivities
 Should there be some project delays, or
downward revision of your reserves is there
headroom to be able to support a junior or
bridge structure until this is resolved?
 Who is the off-taker of your oil and/or gas?
 3. Clear Strategy:
This is a strong element in emerging markets, and
one which has been a great success of Standard
Chartered Bank. Working in emerging markets can
be seen as a leap of faith for some, but this is an
affair of specialists, with a clear desire to be working
there.
“To be successful, make
sure your finance partner
has a strong Oil & Gas
team, a recognized
presence in the region, or
better yet in the country
your assets are”
Upstream oil & gas financing are typically medium
to long-term facilities, and lenders need to see that
borrowers have a focus to stay the distance.
What we look for is that the company is committed
to be in these markets for a reasonable amount of
time and has hired the best people to work there,
only then will it reap the full benefits.
Furthermore, you must not discount that oil & gas
projects rank very high in the agendas of local
government, as in many cases this is one of their
major streams of income, and they have to see that
your company and their interests are aligned.
4. Strong Process:
This is the final cornerstone guaranteeing the long-
term viability of the company and the project. As
group and project expenditures need to be closely
monitored, and readily available to lenders.
 As usual you must look to have a good audit
trail, good procurement systems, HSE, etc…
 There is also an increasing need for good
Corporate and Social Responsibility, as these
are guarantors of your long-term relations in
the countries you work in.
 Finally don‟t underestimate the environmental
angle; the oil industry is increasingly in the
public eye, even more so in emerging markets.
A diminishing number of institutions are able to
finance projects which are not “Equator
Principle” compliant.
Conclusions
In a nutshell, the emerging markets have specific
and sometimes challenging characteristics, but a
good project and a good company should not be
hindered by this.
To be successful, make sure your finance partner
has a strong team, a recognized presence in the
region, or better yet in the country where your
assets are.
This ensures that the bank has the understanding
and the capacity to help you, and see you grow, this
has been one of the paramount advantages of
Standard Chartered Bank, as our footprint
combined with our industry knowledge have allowed
us to help Oil & Gas companies and projects grow
to their full potential in emerging market countries
such as Nigeria, Ghana, Uganda and India to name
only a few.
Written by Olivier Mussat,
Director, Project Finance (Oil & Gas)
Standard Chartered Bank

About Olivier: Olivier has 11 years of industry and banking experience in the oil and gas sector and emerging
markets. Before joining Standard Chartered Bank he was with Schlumberger where he was responsible for asset
economic valuations, portfolio management, and strategic planning for majors, independents, as well as national
oil companies in Europe, Africa and the Middle East. Olivier started his career with General Electric as a Field
Engineer. He holds a Master‟s degree from Ecole Centrale in Paris and is a member of the SPE.

About Standard Chartered Bank: Standard Chartered PLC, listed on

both London and Hong Kong stock exchanges, ranks among the top 25
companies in the FTSE-100 by market capitalisation. The London
headquartered Group has operated for over 150 years in some of the
world‟s most dynamic markets, leading the way in Asia, Africa and the
Middle East.

www.oilcouncil.com
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 When Will Unconventional Become Conventional?
Written by Tim Heeley, Commercial Director, Nighthawk Energy Plc
Rarely a day goes by in the industry journals - and
increasingly within the wider global financial press -
that unconventional hydrocarbons are not discussed
in some context, especially in regard to meeting
shortfalls in the predicted future global oil demand.
As a company actively involved in unconventional oil
development this exposure for Nighthawk Energy is
both a huge blessing but also, in some ways, a
curse, as the understanding of what constitutes an
unconventional development, or how they are
developed, is not widely understood; it can be hard
enough getting an investment following for the most
straightforward conventional story, let alone branding
something “unconventional”.
Both oil and gas are represented within the
unconventional hydrocarbon sphere, but the term
“unconventional” has become a catch-all term
encompassing a myriad of different types of
extraction method from “simply” hydraulically
fraccing a well to steering 30-ton bulldozers around
Alberta.
Unconventional Gas is principally focused on Coal
Bed/Mine Methane, Tight Gas and Shale Gas and is
possibly better understood than the unconventional
plays of their liquid cousins, which can encompass
all manner of concepts from Tight Oil (Shale Oil) all
the way to the energy intensive extraction of
synthetic heavy bituminous crudes from tar sands.
Many of these unconventional developments have
been exploited for many years with varying degrees
of success and are, by their very nature, highly
dependent on the underlying commodity prices for
economic viability.
However, as previously discussed, one only has to
glance at journals these days to see unconventionals
as the main topic of conversation in the industry,
especially shale gas.
This particular sector has been very active over the
last few years on the asset acquisition and
divestment front.
For example only the other day Mitsui spent $1.5bn
for a 35% stake in Anadarko‟s Shale Gas acreage in
the Marcellus, a major shale gas play in the NE US.
This follows many similar deals that have seen BP,
BG, Statoil, Eni and Total amongst others take
positions in the main US shale gas focus regions.
www.oilcouncil.com
These regions are becoming a major contributor to
supply, with the top five shale gas regions
accounting for more than 10% of US natural gas
production in 2008, a figure which is predicted to rise
to 19% by 2012 with an expected 20% of all US
drilling activity by this time too.
“So what’s in a name? Well
quite a lot really because Oil
Shale isn’t really even oil.”
Nighthawk‟s principal asset is a 370,500 gross acre
shale oil development in Colorado called Jolly
Ranch. Delineation of the project is well underway
way with numerous wells already drilled and in the
early stages of establishing full-scale production.
One of the principal messages in communicating
Nighthawk‟s strategy is clearly defining what Shale
Oil is and how it is developed, as it is often mistaken,
indeed probably quite fairly, for Oil Shale.
So what‟s in a name? Well quite a lot really because
Oil Shale isn‟t really even oil.
Although there are over 2.5 trillion barrels of
resource in place, quite an admirable figure, it is an
organic substance termed kerogen, which has to be
heated to over 500 degrees to recover a synthetic
crude, somewhat more intensive and expensive than
fraccing a well, and thus a very different ball game.
Shale Oil extraction methodology is very similar to
shale gas and indeed we prefer to refer to it as tight
oil. The development of shale oil has really only
taken off in the last decade and, like Shale Gas, is
very much continental US focused with the Williston
Basin Bakken play the only really established player
with full scale production.
In 2008 the USGS estimated there to be 3.8bn
barrels of recoverable reserves in the Bakken and
current production around 300,000 bopd across the
basin has led to claims that it is a bigger prospect
than Alaska.
Shale oil developments, like shale gas
developments, are typified by wells that produce
lower volumes than you normally see in conventional
oil developments (typically 100bbl/d = a vertical well)
but high drilling densities to extract the oil in place.
The formation of many of these plays makes them
attractive and whilst the ability of Shale‟s to produce
oil has been known about for considerable time, as
Shale acts as a source rock for many of the world‟s
oil fields, it is only within the last few decades that
the technology has been developed to economically
extract the oil.
The shale‟s are typically extensive in aerial extent,
covering 1,000‟s of sq km, and are generally uniform
in their petrophysical properties, not only does this
simplify the development process of drilling multiple
wells but also allows an assessment of the value of
the total acreage held to be relatively easy when
compared to possibly more complex conventional
reservoir developments.
Exploration risk is very minimal, as shale acts as
source, seal and reservoir but risk principally lies in
perfecting and optimising the completion techniques
to maximise recovery from the well bore.
This leads to a particular quark in the way shale
plays are valued and a metric rarely, if ever, seen
outside the US, known as „US$/net acreage held‟.
The typical development profile of a shale is to have
a large land position, knowing that the properties of
the shale are highly likely to be very similar across
the position, thus the initial development focus is
concentrated on a small area, say 10-15% of the
overall acreage, where recovery and completion
techniques are honed. These practices are then
applied across the wider area.
Nighthawk is positioning itself in this way and this
development practice is widely seen in more
developed shale oil plays, like the Bakken, and also
in other emerging analogs, such as Cardium in
Alberta. It is currently seen that once the initial
development stage has been reached by a junior
operator, whereby a level of production and reserves
have been established, the company is often
snapped up by a bigger company who moves into
full development.
“The Canadian Bakken is
currently an area of
intense M&A activity
with PetroBakken and
Crescent Point Energy
being particularly active”
The Canadian Bakken is currently an area of intense
M&A activity with companies such as PetroBakken
and Crescent Point Energy being particularly active.
Recent examples in this basin include the acquisition
of Result Energy by Petrobakken in a US$480mn
deal to buy 67,200 net acres of an emerging shale
oil play called the Cardium in Alberta.
www.oilcouncil.com
“... on closer inspection the
economics are far from
unconventional, the values
speak for themselves.”
The traditional metrics of this deal, where the 2P
reserves were 2.9 million barrels would value the
transaction at US$165/bbl, heady even for the deals
being done in 2008 in $140/bbl oil prices. However,
utilisation of the US$/acre metric yields around a
$7,000/acre value and implies a significant value to
Nighthawk reading across these values.
So what drives these acquisitions? Principally it is
based on an understanding of the uniformity of the
geology; the other critical element is the economics
of the development.
At first inspection a low volume well, when compared
to conventional developments, and a multiple well
program to maximise recovery of the oil in place,
would not immediately lead to the conclusion that the
economics are significant.
However on closer inspection the economics are far
from unconventional and the values speak for
themselves. Nighthawk‟s preliminary economic
analysis undertaken on Jolly Ranch indicates that at
US$70 oil and 100,000 barrels of recoverable oil per
vertical well, the company net backs 40% (post tax),
pays back capital outlay in six months and sees over
a 3 fold return on investment.
In the Bakken, where production has been
established for a couple of years, the bigger players
report net backs in excess of 50%, making these
exceptionally high-yielding developments and highly
cash generative ventures, therefore leading to the
flurry of M&A activity.
With growing production, increased land grabs and
strong economics it cannot be long before shale oil
in particular becomes difficult to bundle in to the
“unconventional” categories, indeed this type of play
is now emerging outside the US and activity is
building in countries such as Poland and even
untypical hydrocarbon provinces such as France and
South Africa.
Indeed, with the restrictions being witnessed by the
IOC‟s in accessing large reserves and the increasing
depths needed to drill to find large accumulations;
one could easily argue BP‟s recent Tiber well to just
over 35,000 ft can hardly be described as
conventional; shale oil will almost certainly become a
major area of development and focus for M&A into
the future. „US$/acre‟ may even become a
recognised metric outside of the US.
Written by Tim Heeley,
Commercial Director,
Nighthawk Energy Plc
 Development Work at Jolly Ranch

Source: Nighthawk Energy

About Tim Heeley:

Tim joined Nighthawk with four years of equity and debt experience in the City, most recently as Head of Oil and Gas Research
at stockbroker Daniel Stewart & Co. Previously he was Senior Manager of Standard Bank's Oil and Gas team and Senior Oil
and Gas Analyst at Panmure Gordon. Prior to working in the City, Tim enjoyed an eight year career in the E&P sector as a
project development engineer working with such companies as Shell, BP, Exxon and BG on numerous international
hydrocarbon projects. Tim is a Chartered Engineer, a member of the Energy Institute and a Member of the Society of
Petroleum Engineers.

About Nighthawk Energy: AIM quoted Nighthawk Energy plc (ticker HAWK) is a dynamic UK registered energy company with
a focus on the development of, and production from, hydrocarbon projects in the USA, a country with low political risk and a
major shortfall in domestic oil and gas production.

Nighthawk holds substantial equity in four projects across the US mid-continent, all of which are operated by Running Foxes
Petroleum Inc., Nighthawk's partner and holder of the remaining interest in each project. Of our four projects, thr ee are either in
production or at the development stage and we expect all of our projects to make material contribution to the value of the
Company in the future. www.nighthawkenergy.net

Contributing an Article

Oil Council Partners have first option on writing articles and papers for
inclusion in Drillers and Dealers.

We do welcome other recognised executives, organisations and

companies to contribute articles on topical oil and gas matters.

Articles must be content-led rather than sales-led.

If you would like to write and contribute an article for a future edition of
Drillers and Dealers please express your interest by contacting either:

Ross Stewart Campbell Iain Pitt

CEO COO
ross.campbell@oilcouncil.com iain.pitt@oilcouncil.com

www.oilcouncil.com
 ‘On the Spot’ with our Question of the Month

““What is the Biggest Challenge

Independent Oil & Gas
Companies Face Today?”

“The greatest challenge for independent oil and gas companies today is consistent access
to capital. Since most independents are project-rich and cash-poor, it is hard to fund a
sustainable, planned capital expenditure program year-in and year-out with the capital and
bank markets, which ebb and flow. In the past, the bank markets were reasonably constant,
so combined with internally generated cash flow, the independents had available a base
amount of capital.

Today, banks are significantly constrained due to the realities of the current financial crisis
and the equity markets come and go. As a result, independents lack clarity as to the long-
term availability of capital and need to instead rely on both debt and equity markets that open and close at
different times. From a planning perspective this will continue to be a challenge that drives all other activities in
the independent oil and gas space.”

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

“A key threat is the continuing price volatility of natural gas and crude oil, with the latter
mainly caused by the favoured quota cheating by many OPEC members, as well as by
select Non-OPEC “opportunists”. This volatility will certainly continue even if global
consumption picks up again. There is [again] a notable excess production capacity that will
grow further with the expected substantial growth of production in Iraq. The impact of this
volatility threat will be even more significant if Congress proceeds with the discussed
elimination of optional financial protection like hedging … again a badly misguided idea that
targets the wrong issue!

The threat caused by the prevailing global banking crisis on the ability to secure adequate funds to finance new
prospects and new exploratory drilling can have a survival-endangering impact. This includes the threat of
securing adequate funds to finance the replacement of outdated and dysfunctional equipment (age and rust
factor), a need whose dimensions are far beyond most present views and estimates.

Another threat is the ability of finding adequate qualified operating personnel to replace the labour force that
approaches retirement … for quite some time the industry did not hire sufficient personnel on a pro-rated basis
during the extended period of low oil & gas prices. There is a substantial gap in the 35 – 50 y.o. age range.

The most significant threat is an increasing rate of diminishing E&P prospects left that fit the profile of
independents. There is a significant increase in resource nationalization; government-to-government deals that
are concluded at economic terms that would be highly unattractive for independents; the shrinking availability of
onshore and shallow water prospects; while the still emerging deepwater and hostile-environment (i.e. arctic)
prospects are simply far beyond justifiable risk and cost levels. While there may be suitable prospects left in
certain on-shore areas the associated political and extortion risks make such opportunities unacceptable.

Then there is the very significant threat coming from a highly politically motivated – and very liberal leaning –
White House and Congress, seeking to eliminate the tax incentive that has been a substantial enabler for
independents to take on higher risk but promising E&P prospects.

This political threat doesn‟t stop there … envisioned proposals for new and very restrictive regulations regarding
hydraulic fracturing, which enables natural gas production from unconventional resources, will severely impair the
ability of independents to pursue such avenues, especially in the absence of adequate conventional prospects.”

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

www.oilcouncil.com
 “I think it‟s getting access to good quality assets on attractive terms. It‟s the same challenge
that has been there all along only it‟s getting harder. With host governments looking for
better fiscal terms; fresh competition from NOCs, private equity companies and indigenous
players; and high oil prices providing a more competitive backdrop for the industry as a
whole, independent oil and gas companies need to have a unique combination of skills,
technology and relationships to establish a role for themselves.”

...Simon Hawkins, MD, Omni Investment Research (Oil Council Monthly Columnist)

“Today‟s markets are characterized by limited capital availability, both in terms of equity and
debt financing. Despite the return to risk and some interest in earlier-stage higher-risk
exploration and development companies, only a few are able to raise sufficient capital.
Those with production who are able to sustain operations even if their exploration and
development programmes stumble in unsuccessful wells (or other delays) seem to be better
positioned. In my view, sustainability in a down-cycle is the biggest challenge for junior E&P
companies today. Those with no production should seek to acquire producing assets that
would diversify their viability risk and provide a platform to raise additional capital to fund
riskier projects.”

...Angelos Damaskos, CEO, Sector Investment Managers (Oil Council Committee Member)

“Whilst the answer is in large predicated upon the strategy of each independent, there is
not one issue but a confluence of two; (i) access to world-class reserves, and (ii) the finance
to develop them and survive when events conspire against you the first time round.
Increasingly, companies are turning to the deep offshore [or high capex] and difficult to
produce to access “company-maker” reserves. And, if by chance the reserves are not in the
deep offshore (or constrained by API, porosity / permeability or depth issues) it is likely that
they exist in political environments that have not always been conducive to the creation of
shareholder value.

Creating value in these environments calls for patient capital. 2009 was a record year for equity raisings by
independent oil and gas companies in London (LSE and AIM) so it is not evident that finance is a constraint.
Patient, knowledgeable capital is however very scarce. AIM and TSX have been the principal providers of risk
growth capital to junior companies. However, listed markets are unforgiving, and are not set-up to cope with the
uncertainties that are inherent in our sector.

Furthermore, these markets do not provide the education and experience that comes from sector specific private
equity investors; not only in day-to-day business but in the art of running a company and managing a board.
Hopefully, greater regulation of the junior markets will ensure that companies come to market later. But for that to
happen there needs to be a venture capital layer beneath AIM and TSX.”

...Alistair Stobie, CFO, Pan Petroleum (Oil Council Partner)

“Earning and maintaining a „license to operate‟. People say that „easy oil‟ is over, but they‟re
generally referring to the subsurface technical challenges.

But „easy oil‟ is also over because companies, whether multinational giants, or small
independents, face an ever harder challenge to earn and maintain the support of all their
stakeholders: host governments, local communities and NGOs where they operate; and
shareholders, lenders and often also NGOs wherever they are based.

Just because an independent upstream company doesn‟t have a major consumer brand and
visible petrol stations, as the super-majors do, doesn‟t mean it can afford not to focus at least as much on the
reputational and „above ground risks‟, as it does on the subsurface ones.”

...Rob Sherwin, Managing Director, Middle East, Regester Larkin (Oil Council Partner)

www.oilcouncil.com
 “While several E&P companies have successfully raised equity capital to fund the
exploration phase of the sector‟s value creation chain, less appears to be occurring later
when the conversation turns from exploration and appraisal to development. As such,
raising equity finance through the longer, more capital intensive [and smoother] value
creating development phase is a significant challenge in the best of times let alone so soon
after the latest financial crisis.”
...David Hart, Senior Analyst, Oil & Gas, Westhouse Securities (Oil Council Partner)

“The biggest challenge we have today is to focus our effort on items where we can add
value where others can‟t. That can be on specific geography, specific application of
technology or specific types of assets. In Canamens we focus on applying our skills to
assets in the early appraisal stage where 3D seismic and drilling of appraisal wells is
important to get the best information to make decisions to advance our assets through to
development.”

...Greg Coleman, CEO, Canamens Energy

“The biggest challenge facing independent oil and gas companies today continues to be
access to prospective exploration acreage and resources. Many traditional hydrocarbon
basins such as the Gulf of Mexico, the Western Canadian Sedimentary and the North Sea
are becoming increasingly mature and expensive to operate in. NOCs typically have had the
“first mover” advantage into a number of emerging basins through direct political access
with minimal work commitments. The result is often idle regions of highly prospective
resource potential that go undeveloped for many years. This scarcity of opportunities has
been detrimental to the competitive application of new technology and knowledge that
independents usually possess. The lack of development of large resource basins and
economic repercussions on global supply, result in higher commodity prices, which force a number of nations to
increase government take-on contracts. This erosion of fiscal terms for independents only adds another layer of
discouragement in an attempt to competitively bid on emerging basins.”

...Adam Janikowski, Vice President, Investment Banking, BMO Capital Markets

“I would say that there are two major challenges that confront independent oil and gas
companies. First, even though we're seeing some green shoots in the economy and in the
financial markets, the ability to raise capital will be a major challenge in 2010. The trend
seems to point in the direction of PE to fill some of the capital gaps that independents face.

Second, given the fact that many new reserves are in Asia, Latin America and Africa,
independents will have to deal with accessing those reserves via NOCs. Therefore, expect
to see political risk as an ongoing challenge. Robust political risk assessments and
strategies will be key to ensuring stable access.”

...Eva Thorne, Co-Founder and Principal, Corporate Governance Solutions

“Today, independents vary in size ranging from big independents like Marathon to
thousands of small and mid-cap companies. For years, independents have been able to
survive and thrive thanks to their unique operational models and applications of niche
technologies and markets. Given the changing competitive landscape, while state of the art
technological solutions and talented management teams remain effective, integrating their
future business processes and re-focusing on what they can do best are among the biggest
challenges facing independents across the world.”

...Xiaojie Xu, President, BOODC International

www.oilcouncil.com
 “I think the greatest challenges faced by most independent oil and gas producers in the current environment all
evolve around capital. Whether it‟s obtaining access to capital, deciding how to best employ existing capital or
developing and implementing a commodity price risk management program to manage cash flows and revenues,
many producers are facing challenges today that they haven‟t experienced in the past decade. We are receiving
calls, on a daily basis, from independent producers seeking advice on both hedging and raising capital. Until
recently, many independents thought they would simply be able to tighten their belt and ride out the storm, but for
many that hasn‟t proven to be a sustainable strategy.”

...Mike Corley, President, EnRisk Partners, LLC

“Working for a minor E&P Company operating onshore Russia and narrowing the question to this environment,
the biggest challenge is to find and acquire new E&P licenses at a time where securing finance for the
acquisitions and their development has become much more difficult. The financial crisis has made investors even
more risk averse, which has increased the cost of capital, especially in emerging markets – if at all available.
Hence, attracting equity and consequently debt has become difficult, which in turn hurts performance and growth.
Hence, a vicious circle is easily at work. Thus, the challenge rests mainly with the respective company‟s ability to
maintain investor confidence.”

...Jørn Barkenæs, CFO, Aladdin Oil & Gas Company ASA

“One of the key problems that I see, particularly for the smaller independents who rely heavily on capital raised
in The City to fund their exploration programmes, is the squeeze put on them by The City to deliver results in the
short term. This is particularly acute with the more frontier and therefore higher risk exploration, to which the
smaller independents are very exposed, where invariably a learning curve is required before the ''prize'' can be
delivered.”

...Chris Brown, Director, Exploration, Aurelian Oil and Gas

“It appears to me that the biggest challenge for the independent oil & gas companies, and in particular the
medium and smaller sized companies, is access to capital.”

...Herman Franssen, President, International Energy Associates

“In the coming years the oil and gas sector will be confronted by a vast range of challenges. The main factors all
will have to tackle will be cost increases, depletion of reservoirs and lack of access to new assets. At the same
time, cost increases will not only be focusing on the current upward trend again in raw materials (iron, steel,
aluminium) but also in relation to workforce. The human factor in the whole conundrum is still forgotten. IOCs and
engineering companies will have to set up a full-fledged approach to increase the availability of young engineers
and oil-gas experts. If not, the sector will lose around 50% of their total workforce. The global competition for
engineers will be bloody.

Upstream operations will face increased threats. A growing lack of access to new reserves, increased resource
nationalism and resource depletion, have been discussed at length during the last few years. However, looking at
hot-spots, such as Iraq, IOCs and independents now have to get used to working in a totally new environment.
From asset-owner and operator, with full power of decision making, the current trend is that IOCs and others will
only be engineering and investment providers, without a real say in the project. An additional threat is that the
profit margins of new projects, such as in Iraq, Libya or Iran, have plummeted. A diminishing commercial
attraction exists on a project that offers a margin of US$1.85 – $2.80 per barrel to an IOC, requiring the latter to
take the total investment risk for development. Oil and gas companies seem to be becoming the new engineering
giants of the future, leaving their historical position to the upcoming powers, NOCs.

The growing role of local content, now seen by most IOCs and international engineering companies as not
threatening at all, will play an increasingly important role in the future. The local content drive in West Africa,
Middle East and North Africa, will in the end result in a removal of the expatriate workforce. At the same time, the
forced technology transfer by NOCs and others also means that IOCs will partly lose their USPs. Most NOCs
now are setting up their own R&D departments, still filled and supported by international experts, but in the long
run meant to counter current expatriate management issues. With relation to the drilling sector, main targets here
will be to build and develop cheaper and more efficient drilling rigs, whilst developing new technologies to lower
wells / completion costs to develop marginal / remote fields. If this is not done soon, new smaller drilling
companies, most often owned by national oils, will be taking over the normal work flow.”

...Dr Cyril Widdershoven, Senior Business Consultant, TNO BU Oil & Gas

www.oilcouncil.com
 An intelligent way to add
value to your business
Edison adds value
By improving capital valuation, liquidity and investor
knowledge via our highly regarded RESEARCH, produced
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By reaching thousands more investors previously
untapped via our DISTRIBUTION throughout the global
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By identifying worldwide investor interest in your
company via our READERSHIP TRACKING.
By providing a route to access professional investors
via our additional INVESTOR ACCESS road show service.

RESEARCH – What do we deliver?

Edison’s investment research reports on client companies
cover the business model and strategy and include
revenue and P&L forecasts as well as discussing equity
valuation and key sensitivities.

DISTRIBUTION – Who does it go to?

We make our research on client companies available
to all investors worldwide. Our research is distributed
direct to our own expansive database and is available on
all major online information platforms (including Bloomberg,
Reuters, Thomson, Factset, JCF). It is also posted on
Edison’s website, can be posted on our client’s website, Who is Edison? The facts
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including more than 35 analysts covering in excess of 250
READERSHIP TRACKING – How do we companies. We provide award-winning services to over
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managers in the UK and sector specialists throughout is authorised and regulated by
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 Peak Oil Debate

Written by Elaine Reynolds, Oil Analyst, Edison Investment Research

For as long as the world has been fuelled by oil,
there have also been voices predicting the demise of
the petroleum driven economy. So far, they have all
been proved wrong and the peak oil debate has
rumbled on, but one recent report on the subject did
make me stop and think.
Yet the fact that this view is mainly put forward by oil
companies and oil producers, such as Saudi Arabia,
means that there are those whose stock response is
“they would say that wouldn‟t they”.

The ‘Industry Taskforce on Peak Oil and Energy

Security’ predicts an „oil crunch‟ in the next five
years, but it was its backing by Sir Richard Branson
that ensured maximum publicity for the report.
My first reaction was to ponder how the man who
would like to make space tourists of us all, thereby
consuming vast quantities of fuel, could be so
concerned about it running out.
Of course, this response only serves to trivialise an
important debate that deserves to be treated
seriously, and increasingly there are other voices
supporting the peak oil pessimists.
The IEA has been downgrading its forecasts of
global oil supplies in 2030 over recent years, and the
chief executive of Total, Thierry Desmarest, has
voiced concerns that it will be a challenge to produce
more than 95m barrels of oil a day in future, only
10% above present levels.
The opposing view is that improved technologies will
enable companies to find and extract more oil, and
that the opening up of areas such as Iraq will allow
the oil supply to keep up with demand. Furthermore,
a drive for energy efficiency and a shift to natural gas
will result in a peak of demand for oil, with signs that
this is already occurring in Western economies.
“Furthermore, a drive for
energy efficiency and a
shift to natural gas will
result in a peak of demand
for oil, with signs that this
is already occurring in
Western economies.”
Credit crunch bankers and expense scandal
politicians may have currently overtaken oil
companies in the minds of the public as those to be
least trusted, but scepticism still remains and is hard
to overcome.
Indeed I read one reaction to the Branson-backed
report that felt that reports of an imminent „oil crunch‟
was scare tactics by Big Oil to cause a panic and
push oil prices up.
And therein lies the problem in the peak oil debate.
We all bring our individual experiences and
prejudices to bear in our responses, so it seems that
with such a polarisation of views, and in the absence
of available definitive data, it is unlikely that this
debate will be resolved anytime soon.

About Elaine Reynolds:

Elaine is an oil analyst at Edison Investment Research. Prior to joining Edison she had fourteen years
experience as a petroleum engineer with Texaco in the North Sea and Shell in Oman and The Netherlands.

About Edison Investment Research:

Edison is Europe’s leading independent investment research company. It has won industry recognition, with
awards in both the UK and internationally. The team of more than 50 includes over 30 analysts supported by
a department of supervisory analysts, editors and assistants. Edison writes on more than 250 companies
across every sector and works directly with corporates, investment banks, brokers and fund managers.
Edison’s research is read by every major institutional investor in the UK, as well as by the pr ivate client
broker and international investor communities. Edison was founded in 2003 and is authorised and regulated
by the Financial Services Authority. www.edisoninvestmentresearch.co.uk

www.oilcouncil.com
 The Oil Council’s
Americas Assembly

26-28 October, 2010

The Westin (Times Square), New York, USA
In October we are hosting the ‘2010 Americas Assembly’. At this important gathering
over 300 executives from across The Americas will discuss the challenges and
opportunities that lie ahead for independent oil and gas executives, as well as oil and
gas focussed, Bankers, Brokers, Accountants, Economists, Venture Capitalists,
Investors, Advisors and Service Providers.

Future growth strategies; increasing shareholder confidence, cash flow and revenues;
managing market volatility and risk; accessing capital and investment; understanding
new financing trends and vehicles; maintaining margins; leveraging innovative and
strategic leadership, asset and production development, and finding new reserves
remain major challenges to independent executives, as well as their investors,
financiers, partners and service providers. Our Assembly will discuss what challenges
and opportunities tomorrow’s markets now hold for these executives, as well as
highlighting those companies who are demonstrating great business practice.

Areas of focus 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; CEO/CFO leadership; project finance; small-cap
financing; cost management and capital restructuring; private equity; independent growth
strategies; corporate governance; changing investment strategies; creating shareholder value;
frontier exploration; and regional forums on Latin America & the Gulf of Mexico.

www.oilcouncil.com
 Early Confirmed Speakers Include:
 Matthew Simmons, Chairman, Simmons & Company International (awaiting final confirmation)
 Ken Hersh, CEO, NGP Energy Capital Management
 Ed Morse, Managing Director and Head of Commodity Research, Credit Suisse
 Terry Newendorp, Chairman and CEO, Taylor-DeJongh
 Scott Johnson, Co-Founder, Weisser, Johnson & Co. and GasRock Capital LLC
 Lawrence Eagles, Global Head, Commodities Research, JPMorgan Chase
 Jan Stuart, Global Oil Economist, Macquarie Group
 Lance Crist, Global Head, Oil & Gas, IFC / World Bank
 Antonio Barbalho, Global Head, Oil, Gas, Mining and Energy, MIGA, World Bank
 Kelly Plato, Managing Director, NGP Capital Resources Company
 Brian Spector, Managing Director, Financial Products Origination, BP Americas
 David Greer OBE, CEO, Regal Petroleum
 Steve Bell, President and CEO, Remora Energy (awaiting final confirmation)
 Laurent Lavigne du Cadet, Deputy CEO, Taylor-DeJongh
 Alistair Stobie, CFO, Pan Petroleum
 Roger Diwan, Partner and Head, Financial Advisory, PFC Energy
 Ian Fay, Founding Partner, Odin Advisors LLC
 John Graves, Founder and President, Graves & Co.
 Mike Corley, Founder and President, EnRisk Partners, LLC
 Ian Gollop, Executive Vice President, Petrosantander
 Shawn Reynolds, Senior Energy Analyst and Investment Team Leader, Van Eck Global
 Christopher Sheehan, Senior Vice President and Director, M&A Research, IHS Herold
 James "JW" Vitalone, Senior Vice President, Investment Banking, Oberon Securities
 Dr Ian Potter, Vice President, Alberta Innovates - Technology Futures
 Silvana Tordo, Lead Energy Economist, World Bank
 Ben Dell, Senior Energy Analyst, Sanford Bernstein (awaiting final confirmation)
 Tray Black, Former CFO, Lime Rock Resources

Our Audience of Partners, Members and Guests

Oil & Gas

Companies
Investment Law Firms
Managers

Private Accountancy
Equity Firms Chief Officers, Firms

Executives,
MDs, Partners
Risk
Managers /
and VPs from Oil & Gas
Insurers Consultants

Financial
Service IT Providers
Providers Oil & Gas
Service
Companies

www.oilcouncil.com
 Diary of a
Commodity Trader
March: China’s Hunt for Resources
By Kevin Kerr, President and CEO, Kerr Trading International
China’s quest for all things commodities,
especially energy, is heating up as most of
the West twiddles its thumbs debating,
discussing, and debasing their currencies.
So as China scours the World for everything from
agriculture and base metals to of course all things
energy, the rest of the World seems to be oblivious to
the coming resources disaster.
China is creating strategic partnerships with key
resource suppliers, such as Russia, South America,
Africa, etc. Meanwhile at home the country is
stockpiling massive fuel supplies and creating new
emergency reserves of energy, and this is ramping up
quickly too.
The first phase of the project holds the equivalent of
about 16.4 million cubic meters of oil, or about 30 days
of net imports, according to reports last summer. The
stockpiles are located in Zhenhai and Zhoushan in
Zhejiang province, Dalian in Liaoning province and
Huangdao in Shandong province.
According to a report in ChinaDaily.com, China will
build oil reserves equal to 100 days of net imports
before 2020, China Petrochemical Corp, the nation's
top refiner, said on Sept. 23, citing a plan approved by
the State Council (Cabinet).
China is the world's second-largest energy-consuming
nation whose demand is growing everyday at an
alarming rate. China is embarking on a multi-phase
project to build more emergency reserves, taking
advantage of oil prices weakened by the global
slowdown.
The government said last year it's planning to build the
second phase in the northeast and work on storage
tanks in the Western province of Xinjiang has
commenced. More are planned and with good reason,
demand is simply exploding, and we have to keep in
mind that this is with a global economy that is in
tatters. What happens when the economy improves
and factories fire up again and people go back to
work?
Fuelling a Hungry Dragon
It’s hard for most of us to fathom the true extreme
demand for fuel in China, and how fast it’s continuing
to grow. The countries demand for oil jumped by an
unbelievable 28% in January compared with the same
month a year earlier, according to the latest
International Energy Agency (IEA) data.
The IEA expects demand for oil in 2010 to hold steady
or move higher due mainly to rising demand from
www.oilcouncil.com
emerging markets. In fact half of all growth is expected
to come from Asia.
But the IEA also predicted demand in developed
countries would fall by 0.3%. The IEA has increased
its global oil demand forecast for 2010 by 1.8% to 86.6
million barrels a day.
Oil prices were above $83 a barrel recently, the
highest in two months, but dropped back to closer to
around $80. Prices remain locked in a fairly narrow
range yet oil at or above $80 with the global economy
struggling sends a clear message to me that when the
economy recovers and as usage picks up, the price of
oil will surge.
The IEA said the high price level was due to
"heightening of geopolitical tensions affecting some
producing countries", but that this had been balanced
by "ample physical oil supplies". Sure, that may be
true for the time being but supplies of crude, while
“ample” at the moment, does not mean enough refined
product is being made.
Refineries are operating at extremely low capacity and
gasoline and heating oil are not being produced at a
fast enough pace. Summer 2010 could see a major
spike in gasoline prices in my opinion.
Pumping More for Less
Crude oil production by countries in OPEC rose to a
14-month high of 29.2 million barrels a day in
February. During February, Iraq pumped an extra
115,000 barrels a day. Yet the price of WTI crude has
climbed or held steady at around $80
I believe OPEC will continue keep production steady
and offer little relief to an already high crude price for a
very long time to come; the cartel is in no rush to add
significant supply to an already weak and saturated
market. My other prediction is that within the next 3-5
years, or sooner, the cartel will decide to price crude in
a basket of currency or a gold backed Dinar,
something, anything other than US Dollars, this will be
necessary as the greenback continues to weaken in
the world market. OPEC is simply losing too much to
sit by and let it continue. Oil prices back over $100 is
in the not too distant future indeed, but we will need to
see more economic recovery first, then lookout.
Markets Can Make for Strange Bedfellows
In my 21 year career trading commodities I have seen
many, many changes in these markets. I guess I am
old (42) , well not that old, and I can still remember
when basically there were no computers involved on
the trading floor at all, well more or less anyway
compared to today. Back then it was all different, lots
of paper everywhere, most of the markets were only
open during the day, and there was no real electronic
trading of markets. History has always fascinated me
and the story of the birth of energy trading is one of
the most interesting stories of all.
sugar. For domestic supply and consumption but also I
believe for ethanol creation.
White sugar jumped 4.0% in London recently on the
news. In New York raw sugar added about 3%. The
jump in prices followed reports that China had bought
about 100,000 tonnes of sugar from Australia.

Most people aren’t aware of it, but The New York
Mercantile Exchange opened in 1872 as the Butter
and Cheese Exchange of New York. It was founded by
a group of dairy merchants who were trying to bring
order and standardization to the chaotic conditions
that existed in their industry, which is the reason most
exchanges evolved and still do to this day. As time
went on, the various product base of the exchange
was broadened, and the name was changed to the
New York Mercantile Exchange 10 years later.
As the years passed the NYMEX increasingly shifted
its product mix toward industrial products, and during
the early 1970’s the Exchange struggled. However in
1978 they had a vision and became the first exchange
to successfully trade energy futures, and later options,
it was a decision that would reshape the World.
The introduction of the Heating Oil futures contract
happened several years before I arrived on the floor of
the exchange. I remember almost everyone figured
the contract would fail. It’s funny how things happen in
life, and you never know what the next big thing will
be.
So why do I mention the history lesson in the diary
today? What purpose does it serve? It reminds me to
never close my mind as a trader to new markets and in
the energy sector we are seeing new opportunities all
the time.
For example, 5 years ago if you had told me that crude
oil futures and sugar futures would be strongly
correlated I would have laughed at you. Now I am not
laughing anymore, except on my way to the bank.
It’s important to note that China is the world's third-
biggest sugar consumer. Traders had been expecting
to see China to rebuild state stockpiles of sugar but
not until a couple of months from now, China is
moving quickly, and at these levels sugar may be a
bargain.
China is not the only country buying into the long
prospects for sugar either, a long list of sugar buyers
already included the likes of Pakistan and Tunisia,
also Egypt confirmed plans to buy 1m tonnes of raw
sugar in 2010.
Clearly Oversold
Many technical factors are in place which also
supports sugar and fundamental factors such as a
weaker dollar and higher crude price also will add
support. Many fund managers who have already
seemed to have taken large short positions are now
limiting or paring back further selling.
Other technical indicators, such as the Relative
Strength Index (RSI), which compares averages of
positive and negative closes, also indicated that the
market was due for a bounce. RSIs are well into
oversold territory in my opinion
I feel that if your short this market it is probably not a
bad idea to lock in some profit… as it seems likely that
at some point we will see a sizeable technical
correction. So as we watch the energy markets we can
also see opportunity in other markets such as sugar
too. You see can teach and old “trader dog” new tricks
after all.

Sweet Something’s
I expect sugar prices to surge, maybe double in price,
as the crude prices climbs. And this brings us full circle
back to China. Just recently China reportedly added
itself to the list of buyers lured out by lower prices on
As Chinese demand continues to soar not only for fuel
and food, but all things resources, the trading
opportunities will be enormous. It is one of the most
exciting times to be involved in these markets and
2010 is a critical opportunity year for everyone’s
portfolio.

About Kevin Kerr:

Kevin Kerr is a TV and radio investment advisor, his unparalleled expertise in futures and commodities has made him a regular
contributor to news outlets like CNBC, CNN, FOX News, CBS Evening News, Nightly Business Report and many others.
Recently, he was even featured on Jon Stewart's The Daily Show. What's more, Kevin has traded commodities professionally
for the last 19+ years. Kevin began his career on Wall Street in 1989 acting as a currency arbitrage clerk on the former New
York Cotton Exchange and has worked on and owned seats on several of the Commodities Exchanges in North America.

About Kerr Trading International:

Kerr Trading International is a diversified commodities firm providing education,

trading and consulting services worldwide. In the fast paced commodities markets it
can be difficult to find someone who wants to take the time to help you understand
the potential profit opportunities as well as the risks involved in today's markets. KTI
is a full service commodity research company and advisor that always puts its
customers first. www.kerrtrade.com

www.oilcouncil.com
 The Oil Outlook
March 2010:

The Call on OPEC – Stay the Course

By Gianna Bern, President, Brookshire Advisory and Research

What the market gives, the market can quickly take
back. There is no doubt the recent rally in crude oil
prices is welcome news to the industry. But are $81
per barrel crude prices sustainable?
Brookshire believes that the flattened out forward
curve in both Brent and WTI concurrent with robust
crude inventories are indicative of a pending
retrenchment in crude prices. 321 crack spreads
have soared as has the gas crack on burgeoning
spot gasoline prices.
Brookshire believes there will be a looming
correction in the futures markets as global demand
and economic recovery are still lacklustre at best.
As the upcoming OPEC March 17 meeting in Vienna
fast approaches, Brookshire also expects the cartel
to stay the course and hold crude production at its
current level of 24.845 million barrels per day
(mmbpd). Throughout the financial crisis, OPEC has
played an unusual role.
Among OPEC observers, we recall OPEC as having
a role of managing price levels particularly as crude
oil prices increased. As OPEC by-laws state, the
cartel has a vested interest in maintaining its
economic interest as dictated by market pricing and
its production quotas.
The OPEC of days gone by has rarely had to
manage through market shocks that sent crude oil
prices plummeting.
OPEC Production Cuts
Let' us fast forward to 2008. OPEC implemented a
series of production cuts aimed at stemming the free
fall in crude prices after prices began to plunge in the
4Q of 2008. At the time, the approx. 2.5 mm barrels
taken off of the global market made a difference in
establishing a floor in the crude markets.
Unlike the OPEC of a decade ago when crude prices
plunged to $10 per barrel in the late 1990’s, this
group managed to act in a cohesive effort and
attempt to play a role in stabilizing prices. As global
economies came to a standstill, crude oil prices
never bottomed out at $10 per barrel as they had
during the Asian crisis of the late 1990’s.
“…there will be a looming
correction in the futures
markets as global demand
and economic recovery are
still lacklustre at best.”
One can conclude that what OPEC says, and does,
may indeed differ. As the recent crude rally has
resulted crude oil futures prices in the $81 per barrel
range, it is not surprising that OPEC production
quota compliance has considerably weakened.
“Fair Crude Prices”
In recent months, OPEC has publicly said that crude
oil prices in the $70 to $80 per barrel range are a fair
price for both producers and consumers. Today, we
have an OPEC organization that is actually
contemplating the effects of a crude oil price that
may get too high and endanger a very fragile global
economic recovery. This group also appears to
recognize or appreciate the potential impact of
higher oil prices on inflation and the increased cost
structures to global business.
Nevertheless, OPEC economies are the
beneficiaries of higher oil prices. For now, the market
appears to be content with a near $80 per barrel
crude price. As the cartel convenes once again, we
can aptly say, "stay the course."

About Gianna: Gianna Bern is president of Brookshire Advisory and Research, Inc. a registered investment advisory and
energy research firm focused exclusively on the oil and gas markets. Gianna Bern is publisher of The Brookshire Energy
Weekly and various other oil and gas investment research.

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 US. www.brookshireadvisoryandresearch.com

www.oilcouncil.com
 Golden Barrels
March: Lucky Management
By Simon Hawkins, Managing Director,
Omni Investment Research

Last November I was interviewing Andy Brough from got excited, making Cove one of the best performing
Schroders at a major industry conference and asked stocks in the sector last month. Lucky management?
him what he looked for in an E&P company. After
mentioning a few of the usual things he said,
“There can be few other
“Actually, I just look for lucky management.”
sectors where management
His answer prompted a ripple of laughter among the are generally as up front
audience, but I believe what he said was actually
much more profound than some people might have about risk as we are in E&P”
realised.
On the other side of the coin, Tower Resources and
It feels like we know a lot about risk in the E&P sector,
Global Petroleum, have provided chilling reminders of
spending much of our time and money trying to
how the market can respond to bad news when earlier
measure it, feeding any new pieces of information
this month they announced the abandonment of the
(especially information on failure) into the equation,
Avivi-1 well in Uganda and their shares plunged by up
looking at charts, models, tables, commissioning
to 75%. With Two consecutive failures in a country
reports, analysing logs, etc. Many in the industry
where Tullow has built such an extraordinary track
would consider balancing risks as central to the way
record of success, this feels particularly unlucky.
they do business.
Then there are companies in a third group - those who
There can be few other sectors where management
are either about to or are in the middle of drilling
are generally as up front about risk as we are in E&P.
company-critical wells. For any executive working in
And it is right that they should be, since investors are
one of these, such as the four juniors with acreage
generally asked to contribute very large amounts of
around the Falklands, it must have been sobering
risk capital. In any other industry it would be
watching the fortunes of Tower and Global at the
extraordinary to put such large amounts of cash on the
same time as the Ocean Guardian got started with
table with exploration success rates for the industry
drilling its first well.
traditionally around 20%.
After 6 years of a lot of hard work and investment we
We have met with the management of a large number
are approaching that killing binary moment – will Liz
of explorers over the past few weeks and would
be a success or failure? I, for one, am wishing them all
identify three groups.
the luck in the world.
Some companies, like Cove Energy, are excited about
Let me know your views at:
several potentially ‘company-making’ opportunities.
goldenbarrels@omniir.co.uk
But it was only with early exploration success,
announcing a significant discovery at its Windjammer *** Look out for Simon’s regular column, which is
exploration well in Mozambique, that the market also released at the middle of every month. ***

About Simon: Simon is Managing Director of Omni Investment Research. Previously, Simon
held senior positions at UBS and Dresdner Kleinwort, having been ranked number one by
Thomson Extel for his coverage of the European Gas sector, number two in European Oils and
three in European Utilities. 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 & 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
London, at New Broad Street House, EC2.

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 *** Lead Partners ***

*** Partners ***

*** Associate Partners ***

*** Lead Media Partners ***

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