Professional Documents
Culture Documents
We dont just offer professional advice. Our uniquely collaborative approach means we work with you to maximise your business opportunities. We offer a broad range of fully integrated solutions across audit, tax, corporate finance and consulting. Each of our services gives you the depth, dimension and experience to create and innovate. www.deloitte.co.uk/energy
Editors Remarks
Contents
2012 Global Oil & Gas Survey Results Dragon Rising While West Waivers By Hugh Ebbutt, Senior Consultant CRA Marakon SPECIAL FOCUS: INDEPENDENT OIL & GAS The Case for E&Ps Combining Historical Outperformance and Attractive Valuations By Tracy Mackenzie (Director, Research) and Jack Allardyce (Analyst, Research), N+1 Brewin EXECUTIVE Q&A: AARON DESTE, AZIMUTH Stock Market View Lessons for 2012 By Simon Hawkins, MD, Omni Investment Research EXECUTIVE Q&A: TIM HEELEY, NIGHTHAWK ENERGY 2012 Independent Oil & Gas Outlook By Ian McLelland, Head, O&G, Edison Investment Research EXECUTIVE Q&A: ALEC ROBINSON, LION PETROLEUM Trends, Analysis and Outlook of AIM E&P & Oil Prices By Andrew Matharu, Head, Oil & Gas, Westhouse Securities Meet The Members (Part One) EXECUTIVE Q&A: ANDREW BENITZ, LONGREACH OIL & GAS ON THE SPOT: What issues are your Independent O&G Clients most concerned with in 2012; how can they overcome the challenges these issues present? By Partners and Members from across the world U.S. Natural Gas: A Buyers Market For How Much Longer? By Terry Newendorp, Chairman and CEO, Taylor-DeJongh Alberta: The Rising Global Energy Provider By Jeffrey Sundquist, Government of Alberta (UK Office) Oil Spikes, Iran and Sanctions By Nigel Kushner, CEO, Whale Rock Legal Overcoming Impediments to Shale Gas Development By James Green, Partner, K&L Gates LLP Meet The Members (Part Two)
Copyright, Commentary and IP Disclaimer: *** Any content within this publication cannot be reproduced without the express permission of The Oil Council and the respective contributing authors. Permission can be sought by contacting the authors directly or by contacting Iain Pitt at the above contact details. All comments within this magazine are the views of the authors themselves unless otherwise attributed to their company / organisation. They are not associated with, or reflective of, any official capacity, or any other person in their company / organisation unless so attributed ***
6 10
13
19 22 26 29 30 33
38 41 43
53
54 56 58 59
1836 responses to our 2012 Survey Over 100 O&G companies participated Uncertainty and bearishness over World Economy and Eurozone World Economy is the major influence over industry in 2012 Very positive outlook for Majors and Oilfield Services Companies Positive outlook for increased M&A and A&D activity More bearish outlook for availability of debt finance Availability of capital, volatility of world economy and human talent crunch named as three biggest challenges facing companies in 2012 East Africa, Kurdistan, West Africa, Argentina and Offshore Australia named as the most exciting oil and gas provinces for 2012 Bearishness and uncertainty on the future of The Falklands
OILCOUNCIL
2012 Survey
Oil Council
Progressive weakening / deterioration Slow, steady growth Stagnant performance with little movement up or down Volatility and uncertainty Other
www.oilcouncil.com
info@oilcouncil.com
OILCOUNCIL
2012 Survey
Oil Council
Which three of the following qualities will be most important in determining the success of an Oilfield Services / Engineering company in 2012?
Ability to attract, retain and incentivise their human capital (workforce) Ability to win business in new markets Ability to cope with increasing demand for their services Strategic technology alliances with NOCs & IOCs Strong leadership and management team Good risk management: geopolitical, regulatory, environmental, financial, legislative Ability to access to new capital and investment Successfully managing their client relationships and delivering excellent service Value creation through acquisition of new products and services Sound corporate governance and boardroom practices Other Successfully managing their corporate image and industry / investor reputation
Which three of the following qualities will be most important in determining the success of an Oil & Gas company in 2012?
Ability to acquire / find attractive prospects / assets Ability to access to new capital and investment Ability to attract, retain and incentivise their human capital (workforce) Good risk management: geopolitical, regulatory, environmental, financial, legislative Strong leadership and management team Exploration / Drill-bit success Ability to utilise new technologies and innovative operational practices Increasing the efficiency and development of existing producing assets Ability to manage weak gas prices and volatile energy demand Cost control (internal, service costs, exploration) Successfully managing their corporate image and industry / investor reputation Sound corporate governance and boardroom practices
www.oilcouncil.com
info@oilcouncil.com
OILCOUNCIL
2012 Survey
Oil Council
Who will be most influential in determining the landscape of the Oil & Gas industry in 2012?
The World Economy The Eurozone Governments, Policymakers and Regulators Investors Banks and Financiers Major Oil & Gas Companies National Oil & Gas Companies Independent Oil & Gas Companies Oilfield Services, Engineering and Technology Companies Chinese, Indian and Korean NOCs and SWFs
In comparison to 2011 will the industry in 2012 see more, less, or the same volume, of:
Asset-level (A&D) deals Corporate-level (M&A) deals World-class exploration successes Consolidation amongst US independents Consolidation amongst non-US independents Disposing by majors and large-caps of non-core assets PE capital deployment NOCs and SWFs acquiring foreign assets Reserve Based Lending / Finance Debt defaults IPOs Secondary capital raisings Dual-listings De-listings More 57.0% 59.9% 19.8% 42.6% 47.2% 57.7% 24.5% 59.6% 17.8% 36.5% 23.8% 35.2% 21.6% 23.8% Less 9.3% 11.1% 31.2% 8.0% 6.2% 11.4% 21.0% 6.8% 34.0% 18.6% 33.2% 20.6% 15.0% 11.9% The Same 26.3% 24.4% 37.7% 29.0% 30.1% 25.6% 30.4% 27.3% 31.5% 23.8% 27.9% 27.1% 26.6% 27.5% Unsure 7.4% 4.6% 11.4% 20.4% 16.5% 5.2% 24.1% 6.2% 16.8% 21.1% 15.0% 17.1% 36.9% 36.9%
www.oilcouncil.com
info@oilcouncil.com
Guest Article
Welcome to the Year of the Dragon! As its name suggests, the twelve months from Chinese New Year (on 23 January) are likely to be volatile and unpredictable, with plenty of challenges and risks, and probably some dramatic flare-ups. Already some key energy trends are emerging. As 2012 progresses, imbalances and emerging stresses, events and new ideas will make many things turn out quite otherwise than most now expect.
rd
Gas Galore
With gas everywhere, prices in North America are likely to stay low. Under the enormous momentum of US gas shale drilling and production, they hit $2.3/mcf in January more than seven times cheaper than oil on an energy basis, and probably well below cash costs for many dry gas producers. US gas storage utilization is 20% higher than normal and demand is down, with several months of warmer weather in both the US and Europe (2011 was the second warmest year on record after 2006). Despite recent signals of cut-backs, over 700 rigs remain active with many E&Ps still committed to drilling natural gas; while 1200 rigs are now committed to oil plays. Rich gas and liquids wells can generate cash, but their associated gas adds to the surplus. This gas glut offers low cost feedstock for US industries. Perhaps we need more power from gas and real incentives for CNG vehicles and gas stations. In contrast, gas demand in Asia and other growing economies, is still growing strongly. Tight LNG supply in the near term - impacting particularly Japan (as it moves away from nuclear) means high prices look set to stay for now in the Far East (currently near the equivalent of $90/boe). But more gas in three or four years from the current wave of Australian LNG projects underway is likely to change this. US LNG exports and shale potential in places like China and Argentina, when realised, could have an impact on some of those big LNG projects. Chinas ability to throw human and financial resources at industrial challenges has been extraordinary and should not be underestimated.
Guest Article
In Europe, pipeline investment uncertainties may lead to renewed security of supply concerns. The UK looks rather dependent on spot LNG from Qatar, some of which could get diverted, given the wide regional gas price divergence. Germany seems headed firmly in the direction of the Russian bears embrace. But Gazprom has a propensity to cut exports in cold snaps to meet higher domestic demand. Gas shale production in Europe offers new supply, but may progress slower than some expect and, for now, material volumes look some way off. Green concerns are now clearly playing second fiddle to near term economic worries. Many renewables are wobbling - as capital outlay and subsidies get too expensive and carbon targets are allowed to slide. Relatively cheap gas is also hurting investment in both wind and solar. But perhaps lower subsidies will stimulate a real fall in costs and the strongest technologies will before long rise from the ashes. Improved, safer nuclear reactors (perhaps not sited quite so near major tectonic fault lines) may also slowly come back into favour. Overall more effective, less wasteful use of energy makes both economic and environmental good sense.
Making Choices
Well see elections, selections and referendums - of various sorts - in Russia, France, Egypt, Palestine, Pakistan, Kenya, Mexico, Venezuela, China and the US. These, with likely changes of leadership elsewhere, make for policy uncertainty. In the UK, apparently more English think Scotland should be independent than Scots do themselves. When and if that happens, Scottish legislators may be tempted to tax the still significant remaining oil a wee bit more at least until they, like their counterparts to the south, see how sensitive investment can be to uncertain returns. More broadly, as China, India and other growing economies stretch the worlds resources, we in the West need to decide how best to develop our own strengths to prosper as the world evolves and grows. We are in for a year full of energy, passion and surprises. Therell be lots of sport to watch in the UK and, perhaps a stronger incentive to get fitter and leaner: the costs of Greek holidays and retsina are likely to be distinctly lower by summer! As you progress your own plans in 2012, have an enjoyable, productive and rewarding year ahead.
Hugh is a London-based Senior Consultant with CRA Marakon, a distinctive corporate strategy firm with a strong track record of helping leadership teams add real value. Before becoming a VP with CRA International, he worked as a Partner in Arthur D. Littles Global Energy Practice, based originally in London and then in Houston, where he led and grew ADLs upstream business for six years. Hugh has over 30 years of global experience in the energy business. His main areas of expertise are upstream strategy, competitive analysis and portfolio growth options in oil and gas. Originally an explorer with BP in the UK, Egypt and San Francisco, his experience includes five years with Chevron, working in business planning, exploration and development, and with Hess, as it rapidly grew its upstream position in the North Sea. Hugh holds an M.B.A. from LBS and has published a number of articles on the outlook for energy companies, resources, and supply and demand drivers.
CRA Marakon is a high-end strategy and organisation management consulting boutique. Marakon, now part of CRA, brings uniquely tailored and integrated advice to its clients, backed by rigorous analysis, holistic thinking and strong industry experience. Our practice has evolved over 30 years and maintains a high degree of integrity, objectivity and focus. Marakon has been described by Fortune magazine as the best kept secret in consulting. We work with senior management teams of highly ambitious multinationals and mid-sized companies to help them deliver superior results and accelerated value growth. Many of our long-standing clients rank amongst the world's most respected companies. Please visit us: http://www.crai.com/
For enquiries, please contact Nick Tulloch or Derrick Lee. N+1 Brewin 12 Smithfield Street London EC1A 9LA +44 (0) 20 3201 3710
N+1 Brewin is the trading name of Nplus1 Brewin LLP, a limited liability partnership, registered in England and Wales, with registered number OC364131. The firm's principal place of business is 12 Smithfield Street, London EC1A 9LA. Registered office: 150 Aldersgate Street, London EC1A 4AB. Nplus1 Brewin LLP is a member of the London Stock Exchange, authorised and regulated by the Financial Services Authority, registration number 568323. VAT number GB-118 2192 31.
The Case for E&Ps Combining Historical Outperformance and Attractive Valuations
Written by Tracy Mackenzie (Director, Research) and Jack Allardyce (Analyst, Research), N+1 Brewin
As uncertainty continues to grip the financial markets and macroeconomic environment, shareholder registers and ratings have exhibited a flight to safety, with moves away from frontier explorers and inadequately financed companies (unsurprising given ongoing tightness in the debt markets). This has seen our selected listed E&Ps underperform the wider market across the last 12 months (-15% vs -2% for the FTSE All Share (ex. IT)), despite ongoing strength in the oil price. Does this then represent a buying opportunity, given historical sector outperformance (particularly in the wake of an economic recovery) and current ratings? We believe this to be the case, but first let us expand our view and look to the past for lessons.
Historical Outperformance
Across a reasonable time horizon, listed E&Ps have typically outperformed the wider market. The absolute performance of our basket of selected companies (which includes our coverage constituents along with four 1 larger mid-caps) is represented by the red line below. The constituents largely comprise established FTSE 250 E&Ps that have cash generative portfolios and a few more romantic constituents, which have more emphasis on exploration and appraisal (Borders, Bowleven and Nautical). The combination of more established producers (still with growth acreage) and the spice of the frontier explorers offers the potential for significant outperformance. The chart below quite clearly demonstrates how the FTSE O&G Index (which is dominated by Shell, BP & BG) tracks the broader FTSE All-share. In stark contrast our basket of E&Ps has diverged significantly. Over a 12 month period, on a relative basis, our E&P basket has underperformed the FTSE All-share by 13%. However, over a five year period the basket has outperformed by 124%, rising to 983% over ten years.
Comparative 10 Year Absolute Performance
1800 1600 1400 1200 1000 800 600 400 200 0 Feb-02
Feb-03
Feb-04
Feb-05 Brent
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
E&P Basket
We believe this evidences that identifying a sensible range of small and mid-cap. E&Ps and retaining holdings in successful players in the space can lead to very significant outperformance. However, we would caveat that our selected constituents largely comprise the winners and exclude some of the less successful constituents, as well those no longer listed due to take-overs or ultimate failure.
Afren, Borders & Southern, Bowleven, Cairn Energy*, EnQuest*, Heritage, JKX Oil & Gas, Melrose Resources, Nautical Petroleum, Premier Oil*, Salamander Energy, Soco International, Tullow Oil* and Valiant Petroleum. * = consensus NAV estimates.
Nautical (A) Bow leven (A) Afren Borders (A) Heritage Brent Premier Salamander Cairn Valiant (A) Tullow JKX (B) FTSE All Share (ex. IT) Soco Melrose (B) 0% 200% 400% 600% 800% 1000% 1200% 1400% 1600%
The subsequent slowing of growth and Eurozone debt crises have been unkind to the sector. The grim reality of progressing discoveries to developments or even staying afloat against a backdrop of difficult equity markets and cautious debt providers has largely pulled back valuations. Unsystematic issues have compounded poor performance, with the deepwater Macondo disaster almost seeming to set off a conveyor belt of negative news flow. Drilling successes in the Falklands turned to failures, Cairn kept missing in Greenland, EnCore Oils fortunes flipped after a single well and negotiations between the KRG and Baghdad seemed to go into reverse. In Heritages case, oil even turned into gas. Not all news was bad, with Anadarko, Eni and partners enjoying huge successes off East Africa. However, this merely broadened the divide between top and bottom, as those with recent failures at the drill-bit/poorer balance sheets (typically smaller players) were increasingly punished by investors. This has led to increased M&A activity, as larger players have used stronger equity to take over their smaller brethren. This is only likely to increase in the shorter term if a lack of liquidity in the markets and sovereign debt concerns continue to compress valuations. The absolute performance of our constituents from 2011 onwards (see chart below) betrays the disappointments and the markets aversion to risk, underperforming Brent and (largely) a broadly flat market. The exceptions have been Tullow, where the market affords significant goodwill given its exploration track record, and Borders, with first results imminent from its potentially transformational two well drilling programme.
distillates . Crude prices can move markedly on account of certain products (clean middle distillates in particular), as witnessed during 07 and early 08 when crude prices surged due to a tightness in clean diesel supplies. With an estimated 50%+ of future demand growth expected to come from middle distillates, refinery outputs of these products may prove to be as important as OPEC quotas and/or upstream investment in determining market dynamics.
Absolute Performance: 01/01/11-current
Brent Tullow Borders (A) FTSE All Share (ex. IT) Afren Salamander Premier Soco Nautical (A) Valiant (A) Enquest Cairn Melrose (B) JKX (B) Heritage Bow leven (A) -100% -80% -60% -40% -20% 0% 20% 40%
Dec-09 Brent
Dec-11
The IEA estimates an underlying call on OPEC crude and stock change averaging 30.4 million b/d throughout 2012, keeping levels broadly in line with recent highs. This should help fill inventories depleted by the supply disruptions in Libya, particularly in Europe.
2
Petroleum products are usually grouped into three categories: light distillates (LPG, gasoline, naphtha), middle distillates (kerosene, diesel), heavy distillates/residuum (heavy fuel oil, lubricating oils, wax, asphalt).
However, there are new supply concerns from tensions in Iran and the possible blockade of the Strait of Hormuz. The US also (uncommonly) avoided hurricane outages last year, meaning a reversal of fortunes and the combination of continued supply disruption from Libya, the aforementioned Iranian unrest and any prolonged non-OPEC supply disruptions could result in upward price pressure in the shorter term. Whilst we have recently revised our 2012 Brent price assumption up from $90/bbl to $100/bbl we have retained a 2013+ average of $90/bbl. Our rationale is that market ratings/valuations are not discounting the forward curve. In our view M&A activity within the industry has not supported net asset valuations on a $/bbl basis generated from $100+/bbl. Uncertainty remains over the ability of companies to finance and monetise reserves, while lending banks are issuing debt on more conservative price decks.
SMDR
HOIL
PMO
MRS
BOR
BLVN
In conclusion, with history providing a strong motivation for owning a balanced E&P portfolio and current ratings at the less aggressive end of the historical range, we see value in the sector for those with a reasonable time horizon, who are able to hold their nerve. Its never a one way trajectory in the E&P world!
TLW
ENQ
AFR
CNE
VPP
NPE
JKX
SIA
Tracy Mackenzie Director, Equity Research T: +44 (0) 131 529 0376 M: +44 (0) 7748 593 920 E: tracy.mackenzie@nplus1brewin.com Following a degree in Economics Tracy went on to do a Masters in Financial Economics, where she specialised in Financial Modelling and Research Methods in Economics and Finance. Tracy joined Bell Lawrie in March 2001 where she specialised in the small cap Oil & Gas Sector. She subsequently worked as an Oil & Gas research analyst at Arbuthnot Securities before joining Brewin Dolphin in January 2009. Tracy has been a consistently rated oil and gas analyst by the Extel survey.
Jack Allardyce Analyst, Equity Research T.: +44 (0) 131 529 0267 M: +44 (0) 7500 794 509 E: jack.allardyce@nplus1brewin.com Jack joined Brewin Dolphin in 2009 as an analyst focused on the Oil & Gas Sector. Following a degree in Chemical Engineering at Heriot-Watt University, he gained engineering experience in the upstream sector with two consultancies before moving to energy research house Wood Mackenzie. There he specialised in UK and pan-European assets and fiscal systems, cash flow modelling, upstream costs and unconventionals.
N+1 Brewin is a leading corporate and institutional stockbroking and advisory business focusing on listed UK small and mid-cap companies. We are part of the N+1 Group, an established pan European investment banking and asset management group focusing on mid-market clients. On 01/02/12 the whole of Brewin Dolphin Corporate Advisory and Broking became Nplus1 Brewin. We have a strong track record built over a period of over 20 years, underpinned by our focus on developing long term relationships with clients, a reputation for integrity, and offering independent advice. These core principles help us to sustain effective business relationships with our clients and are consistent with our aim - to be the advisor of choice in our specialist sectors. Applying these values helps our research recommendations and corporate propositions deliver the returns sought by City institutions, which in turn enables N+1 Brewins corporate clients to access the capital they require.
The information contained in this report represents an impartial assessment of the value or prospects of the subject matter. Performance data and the other information contained in this report has been taken from sources disclosed in the report and is believed to be reliable and accurate but, without further investigation, cannot be warranted as to accuracy or completeness. The opinions expressed in this document are not the views held throughout N+1 Brewin. No partner, representative or employee of N+1 Brewin accepts liability for any direct or consequential loss arising from the use of this document or its contents. The value of your investment or any income from it may fall and you may get back less than you invested. Past performance is not a guide to future performance. If you are in any doubt concerning the suitability of these investments then you should seek the advice of a qualified investment adviser. N+1 Brewin is the trading name of Nplus1Brewin LLP, a limited liability partnership, registered in England and Wales with registered number OC364131. Registered office: 150 Aldersgate Street, London EC1A 4AB. Nplus1Brewin LLP is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority, registered number 568323.
PROGRESSIVE
For those of us who dont know how would you describe Azimuth in a sentence or two to the market? Azimuth is a well-funded, rapidly-growing E&P firm with the technical capabilities of a mid-cap oil company. We acquire prospective exploration acreage worldwide and advance our assets without delay to produce drill-ready targets underpinned by robust analysis. Tell us a little about the genesis of Azimuth where did the idea come from to form the new E&P venture and what was is the thesis based on? Elements in PGS wholeheartedly believe that proper application of the industrys leading seismic technology (such as GeoStreamerGS, Prospect Scanner, etc) can significantly improve drilling success rates worldwide. Together, we established Azimuth, and its predecessor PGS Ventures, to invest in prospective oil and gas assets (and companies) worldwide using insight gleaned from PGS multi-client seismic data library. What is the competitive advantage Azimuth brings to the table? I believe that Azimuths competitive advantage is threefold. 1. Our ability to leverage PGS multi-client library and the 85 subsurface experts in PGS Reservoir gives us an un-matched, uniquely competitive advantage to identify and analyze exploration acreage quickly. A capability that we believe only the major independents can match. Our majority-owner, Seacrest Capital, is an active and supportive investor that understands the industry and the Azimuth business model and shares our objectives, providing us with the ability to draw capital rapidly. This leaves Azimuth very well positioned to take advantage of industry volatility and execute acquisitions without delay. Thirdly, we have a strong team, unburdened by obsolete methodologies and ready to deploy new business models and novel deal structures, essential for achieving a stellar performance.
2.
3.
Being a private, fully-funded company obviously brings advantages in a period of volatile capital markets. What would you say the major constraints of being private are, and could your business model change in the future? As long as the key shareholders in a private company continue to strongly support the business, there are very few downsides to remaining private. Spreading the word and attracting deal flow can be more difficult, since fewer analysts and investment banks track your performance, but this is a manageable challenge. Your asset base so far consists of acreage offshore Italy, Benin, Ghana and Namibia. Is Azimuth to be an offshore specialist or do you have other areas of interest? Which parts of the globe do you see value in for a start-up E&P firm like yourself?
Staying true to our business model, Azimuth will predominantly target areas of the world where PGS multi-client seismic library is at its most dense. North Sea, Mediterranean and Africa are our highest priorities, but we are also looking to expand into South America, Gulf of Mexico and Asia Pacific over time. Success in certain regions requires a local presence and a level of understanding that few small companies can achieve. To help unlock value we have entered into strategic partnerships with Sahara Energy in Africa and Edgo in the Mediterranean. Both are leading indigenous companies with exceptional capabilities and relationships. With the right technical insight and the right partnerships, we believe that small E&P firms can get traction across the globe. Can you talk a bit more about the importance you place on possessing quality seismic to your company and to the exploration industry as a whole? Acquiring high-quality 3D seismic over a discrete prospect or block is essential for illuminating and understanding the reservoir(s) beneath. Utilisation of 3D seismic has grown year-on-year and it is now viewed as a pre-requisite to drilling by many oil companies. Access to high-quality regional seismic is arguably even more valuable for explorers. Interpreting a regional database helps identify trends and play types, it facilitates the latest reservoir characterization techniques, and helps explorers put discrete blocks into perspective. Acquiring oil acreage without regional seismic is like hiking in a minefield without a map. What are the companys goals over the next 2-5 years both financial and in exploration? Azimuth acquires exploration assets and then drives the de-risking program required to produce drillable prospects. Our goal for the next two years is to develop a robust portfolio of acreage packed with well-defined, exciting targets, ready for drilling in 2013-2014. Further funding and rapid growth to follow Which other E&P companies do you admire and why? I admire Cove Energy. From zero to hero in just over two years is a fantastic result. They eschewed the traditional model and immediately took a stake in frontier exploration assets where drilling was imminent. Eco Atlantic is another interesting company. They won Namibian assets in the middle of 2011 and have already taken material steps towards advancing their acreage. Their dynamism and ability to overcome market hesitation is impressive. San Leon Energy is another one to watch. The optionality in their portfolio is immense and their team had the insight to commit to several of the industry trends (oil shale, shale gas, etc) that have captivated the oil majors. I also admire the firm Cenkos. Their ability to understand E&P companies and ability to raise funds is unparallel in the UK market. Jon Fitzpatrick runs an excellent ship.
Finally, three questions we always ask: First, when youre away from work, how do you enjoy spending your spare time? I enjoy driving any available vehicle over any and all available terrain. Trying new activities from sushi making to fencing to bootcamps, its all good. And writing novels (under a pseudonym). Second, what do you enjoy most about working in the oil and gas industry? The oil industry, quite literally, underpins the worlds economy. Why work anywhere else? Finally, I cant let you go without asking our standard question. Youre on a desert island what three luxuries have you chosen to bring? (N.B. Raft Building for Dummies, satellite phone, teleportation device etc., not allowed) A Trident missile, the relevant arming codes, and a map pointing to the bloke who left me there
Before Azimuth, Aaron was a Managing Director of PGS Ventures; Segment President in Schlumberger; a Senior Manager in Booz Allen Hamilton and Co-Founder of the Simmons & Company PE Fund.
2011 saw significant volatility in both commodity and stock markets resulting in a major dislocation between capital markets and fundamental drivers of the O&G industry. In this article Simon Hawkins, former Head of Energy Equity Research at MF Global, looks back at what happened in 2011 from a stock market viewpoint and draws out a number of practical lessons for 2012.
Oil Prices
Although the key driver of the sector, crude oil prices, were volatile - especially over the summer Brent crude generally stayed strong within a band around $95-120/bbl. I see this as one of the most significant events of 2011 (alongside Tullows Zaedyus success) since there is now lot more confidence across the industry that oil prices are likely to stay strong for the medium term. I would suggest the way Big Oil has renewed its focus on frontier exploration and its strategic shift towards upstream is evidence that even these oil-tanker-like entities are buying into it.
Stock Prices
While AIM stocks sank alongside the broader market it was interesting that companies in our sector (AIM Oil & Gas) suffered more: AIM fell around 25% by the end of 2011 and Oil and Gas stocks hit a low in September having lost c40% of their value. Was this justified? At the time I rationalized this on the back of three factors: 1. The summer season is always characterized by thin trading as investment managers exchange trading screens in the Square Mile for iPads on the beaches of the Caribbean, Mediterranean or, maybe last year, Cornwall. In declining markets investors generally shy away from risk. AIM Oil & Gas not only had exploration risk but funding risk as the threat of a return to tight equity markets loomed. Debt markets wouldnt help since exploration and debt are always a tricky combination. Between April and June, it seemed equity investors were starting to price in a fall in crude prices that eventually came through in August and September. Just the threat of falling oil prices can be enough to spook the markets.
2.
3.
However, I believe its too early to get excited, since: Macro uncertainties in Eurozone continue to weigh heavily on capital markets and, just as in 2011, the oil and gas sector is not immune. With the US economy appearing to show signs of green shoots, there is every reason for investors in the sector to take money out of UK/European oil and gas stocks and put them into their US or Canadian counterparts to avoid Euro exposure. I have already seen signs of this at some institutions. Even though industry fundamentals are strong for the oil and gas sector, this is a stark contrast to whats playing out in the rest of the economy, which is already showing signs of double dip recession. Capital markets are still struggling with significant (tectonic) changes taking place among small-mid cap brokers and investment banks. At some point this could have an impact on the ability of companies in the sector to raise cash.
Id be surprised to see the kind of declines we saw in 2011 repeated in 2012. However until problems in Greece (and probably Italy and Portugal) are resolved I expect a fairly muted stock performance in the sector and continued volatility. But at that point the value in the sector should be in the spotlight.
2.
3.
4. 5.
Simon Hawkins 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. He is also former Head of O&G at Ambrian and Head of Energy Equity Research at MF Global. 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. 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. Omnis coverage extends from large cap stocks like Tullow Oil and Cairn Energy to quality smaller cap juniors. Omnis 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. Omnis corporate research service is tailored to guarantee the highest return on investment for clients.
Executive Q&A with Tim Heeley, Chairman, Nighthawk Production By Drake Lawhead
Tim, Nighthawk is a closely-watch stock on the AIM, but for our international audience, explain to us in a few sentences what your company is about. Nighthawk Energy is now the 75% working interest owner and operator of 410,000 gross acres we are engaged in developing an early stage but proven and producing shale oil play in the South Eastern DJ basin in Colorado. We are targeting the Cherokee Shales, these are Pennsylvanian age (Upper Carboniferous) formations around 6,500 7,000 ft in depth and have shown to produce not only on our acreage but on other licenses around us. We have established a number of key facts about the play to date and we now need to close the gap between our current valuation and the valuation seen in many transactions in the space currently. What kind of upside do you see the Jolly Ranch prospect possessing? Would its success have implications for other emerging shale oil plays? The upside in the project is very exciting and unlocking the potential is a process of demonstrating consistency and repeatability in the production from the existing wells plus drilling new ones to prove up the core area and the wider acreage. Undertaking this should close the value gap between us and other shale oil transactions that frequently are in the multiple thousand dollars per acre. New shale plays, especially oil, continue to be discovered in the United States, there is a mix in transactions at the minute of large majors acquiring proven and producing plays but also recently we are also seeing these large companies committing to largely undrilled unproven plays like the Tuscaloosa and Utica shale plays. All this serves to enhance the value of shale plays in general but increasingly oil and liquids rich plays. 2011 was a difficult one for the Jolly Ranch prospect, but youve managed to wrest operatorship of the asset from your partners whats the game plan now? We had a very clear game plan to acquire the operatorship and drive the development of the project, we had to appoint to certain key positions such as CFO and COO and we got excellent seasoned professionals for both in 2011. However the markets were the real issue and whilst we had a clear strategy the timing was not ideal. That being said we start 2012 as the operator and 75% working interest holder in the project and this means we can control the pace but also the development strategy. With a focused team being built in Denver we will have a tremendous amount of experienced field operations and scientific skills to call upon to turn around the perception and performance of the asset. In the first instance we are going to focus on what has been drilled already namely maximise the knowledge, and more importantly, the production from the existing wells. We will in parallel undertake new seismic reinterpretation and look to build some geological models to assist well placement and wider understanding of the Cherokee shale play. Off the back of this work later in the year we will commence the drilling of new wells; four vertical and one lateral step out. Where do you see Nighthawk in 3-5 years time? Will Jolly Ranch be enough to digest or do you have half an eye on other prospects? The key thing about the Jolly Ranch project is that there has been a huge amount of leasing around our land position in the last 12 months; Devon, Chesapeake and Newfield, amongst others, all have varying land positions. This has led to the take up of most of the available land and thus almost impossible for new entrants to replicate large, contiguous land packages.
The land position alone at Jolly, 410,000 gross an acre, which is similar to the area within the M25, and is more than adequate to keep the Company busy for the foreseeable future as there are many opportunities in the stratigraphy at Jolly Ranch and whilst the Cherokee is our primary focus there are multiple objectives to explore. For instance, our acreage has Niobrara present across it and this younger formation, which has not been tested to date in this part of the basin, is really heating up the Denver Basin to the North and West of our land position with both drilling activity and land acquisition, and. Is shale oil understood well enough by the market in your opinion? Is it an advantage for you or a disadvantage to be working on a play type that is still relatively new compared with shale gas and conventional oil and gas? Shale Oil began serious development around the turn of the 2000s, the Bakken, focused on North Dakota, being the key play. The relatively new focus on shale oil was clearly an advantage in accessing cheaper land for initial leasing however, in the early stages of the assets development, it was harder to communicate the potential in an emerging area of the oil industry. However the success of shale gas and the subsequent drop in gas prices has led many focused on that area to refocus their expertise and equipment on shale oil. This has led to further acreage building in new and established plays and also periods of intense M&A activity. With gas looking more than likely to drop below $2/mcf, coupled with a rise in oil prices; shale oil in the United States, where already in 2012 transactions dont seem to be letting up, is looking increasingly unconventional. What were the lessons of 2011 that you would incorporate into 2012s business planning, and that you would internalize as an O&G CEO in general? Have a plan B a plan C wouldnt go amiss either. As the Operator of the project now we have been designing operating and financial plans well ahead of the actual appointment and our focus on the business is now to deliver the value for the most optimal cost possible. What next bit of news flow should we look out for from Nighthawk? Were now focused on gearing up operationally and we will communicate our work over program in the next few weeks. The results of these will form part of our regular quarterly updates, which are a natural way of informing the market given the way shale assets are developed. Which other E&P companies do you admire and why? Ive always had great admiration for Faroe Petroleum. The business has been built with a very clear focus and in a very clever way. Excellent exploration focus but growing production base obtained through clever asset trades in the early days building an excellent asset base. Above all the executive teams always seem to enjoy what they are doing and communicate their objectives very clearly. I also have an eye on FOGL at present to see if the much more structurally defined Southern Falklands basin can replicate some of the success seen in the north. When youre away from work, how do you enjoy spending your spare time? Ive a young family so spending time with them is always rewarding, I enjoy spending time on boats and this is always relaxing, it also requires 100% attention so work does get forgotten about. Although the boots were hung up years ago I am an avid rugby fan and am eagerly awaiting the 6 Nations this year (albeit probably watching from behind the sofa). What do you enjoy most about working in the oil and gas industry? It is a hugely diverse industry and has implications from what microbes were doing millions of years ago to todays geopolitics a truly global industry and a very misconceived one. The people you meet in it are generally very good, friendly people which makes working all that easier. Youre on a desert island what three luxuries have you chosen to bring? (N.B. Raft Building for Dummies, satellite phone, teleportation device etc., not allowed) I spend too much time away from my family as it is so theyd have to be deserted too (it would be worth Hobbs and Joules opening a branch there however!) In addition I would like ownership of the continental shelf resources there would bound to be an oil company along in the near future and rescue may as well have some kind of royalty interest attached.oh and some decent malt whisky.
Investor Access
Edison Investor Access actively markets companies to professional investors not normally accessible via their traditional advisors. We organise road shows to wealth managers in the UK and sector specialists throughout Europe.
Contact Us
Tel: +44 (0)20 3077 5700 enquiries@edisoninvestmentresearch.co.uk www.edisoninvestmentresearch.co.uk
Edison Investment Research is authorised and regulated by the Financial Services Authority.
2011 was undoubtedly a difficult year for independent oil and gas companies, with the junior sector in particular suffering in the wake of tough economic conditions. In hindsight, this was partly a necessary correction from the euphoria of 2010 when equities clearly disconnected from fundamentals, while uncertainty over commodity prices and access to capital heaped further pressure on the sector. However, moving into 2012 there are clear signs of renewed interest, with three key issues in play that we see pointing to a more promising year ahead.
Executive Q&A with Alec Robinson, CEO, Lion Petroleum Corp. By Drake Lawhead
Lion Petroleum is a privately owned company based in London with 9.7m acres in two blocks onshore Kenya. Alec Robinson, the CEO, talks to Drake Lawhead of The Oil Council.
There was a time not long ago where I might have started by asking why Kenya? But its no secret that East Africa is undergoing a boom in E&P. However, can you briefly describe for us the theory behind your focus on Kenya and what kind of opportunity youre pursuing there? As you say, the East African region has become an international hot spot for oil and gas exploration and the recent major gas discoveries offshore Mozambique and Tanzania have led to a significant increase in exploration activity. Kenya is clearly under-explored with only 28 exploration wells drilled onshore Kenya to date, one every 20,000 sq km on average, and only one well since 1992. Our team has long been involved in Kenya with our key success being the identification of the potential of Block 10BA in our Centric days which saw us, at the time, attracting Tullow as a partner. Now through Lion, we are currently engaged in moving our assets, Block 1 and Block 2B to the next exploration phase and evaluating other opportunities we have in the pipeline. Our blocks are in basins where there have been encouraging oil and gas shows, oil seeps, and where there are untested plays. We are very excited by the opportunities that we have. Can you briefly describe for us the business model Lion is based on? Is this Centric Energy - part two? Lions business model is to build and create shareholder value through leading exploration in Africa by leveraging our relationships and our first-mover advantage. The sale of Centric was a very good deal for our shareholders. We like to think that as a team, we draw on our networks and experience gained through Centric and aim to deliver the same success for our investors in the region. We already knew Lion Petroleum and its assets so when we were offered the opportunity to manage Lion and take it public, and grow the company, we were very pleased to accept. The intention is to complete the listing and then grow the company focusing on sub-Saharan Africa. How would you describe the risk environment of operating in Kenya is it mainly political, operational, environmental, or something else? How significant is risk planning in your business? Over the past few years, political risk in Kenya has seemed low. At the present time, however, with an election coming up sometime in the next 12 months, political sensitivities are increasing. As political parties seek to gain advantage over each other, the high profile of the oil exploration industry means that it is at risk of being a target. With regards to security, there is natural concern about the situation in light of the recent incursion of Kenyan armed forces into neighbouring areas of Somalia. Companies active in north-eastern Kenya are monitoring the security situation very closely. A number of countries, including the UK, USA and Canada, have posted warnings regarding the risks of travel in north-eastern Kenya. There are a lot of big companies in East Africa such as Shell, Total, ENI, Anadarko, Tullow, but also a lot of smaller players like Lion. Weve seen some M&A activity in 2011, what are your expectations for 2012? French multinational Total joined the jostle for opportunities recently in Kenya; that signals entrance of supermajors into the region. This is very exciting for companies like Lion, smaller players that can benefit from building rewarding partnerships with larger companies who have the operational resources to move things forward. I expect consolidation to continue driven by the need to access funds, the increasing rarity of prospective new acreage, and of course by successful exploration results.
Would you consider an acquisition in the near future, whether asset-level or company-level, and if so, where do you currently see value? We are very keen to work with other companies on either level assetbased or at the corporate level. Firstly, however, we need to complete our listing. Whats the advantage of being a private company operating in East Africa, and are there any constraints? How will your move onto the Toronto Stock Exchange change business for you? There are pros and cons of each corporate structure. Being private means that there is less of the administrative paperwork, with its associated expense, that the stock exchange requires. For example, TSXV requires quarterly financial reporting. Also, the company is not subject to the vagaries of the equities markets, and can take a longerterm view of opportunities. Being listed, however, provides investors with increased liquidity and the ability to trade shares, and can provide improved access to the capital markets. What will be said about East African E&P at the end of 2012, will it be a story of M&A or drill-bit success? Therell likely be some exciting news from the onshore drilling, in Kenya and neighbouring countries. Of the upcoming onshore wells, Im particularly excited about the drilling in the Tertiary rift, where a well has just started on a play that is similar to the Tertiary play in our Block 2B; the planned well offsetting the 1972 El Kuran wells in Ethiopia just over the border from our Kenyan Block 1 which is in the same basin; and the planned well in Block 10A in the Anza Graben. Each of these is offsetting wells with very good indications of oil and are very exciting. Itll take additional drilling to define the sizes of any discoveries, and thatll likely not happen until 2013. Offshore, Ive no doubt that there will be further gas discoveries - the intrigue now is whether there will be an oil discovery. What next bit of news flow should we look out for from Lion? The seismic that is currently underway in Block 1 will almost certainly lead to drilling in that Block in 2013. Seismic will start in Block 2B once we have completed the listing. And also, once the listing is completed, we have some deals we are working on that we will then be able to complete. Which other E&P companies do you admire and why? Cove Energy has done very well as a result of acquiring an excellent portfolio of assets. Tullow over the years has successfully made the transition from a start-up E&P company to being a very strong mid-cap; that transition is difficult to do successfully. Afren is making the same transition now and from what I see is doing a very good job of it. Ophir had a risky strategy which has played-out well, culminating in their recent IPO. When youre away from work, how do you enjoy spending your spare time? Because I travel a lot, when I have spare time in the UK I greatly enjoy being with my wife. Together, we enjoy gardening, and we try to get to the gym five to six times a week, if my schedule allows; the hard exercise is destressing, and I consider that remaining physically fit is very important and greatly improves quality of life. Of course, we also take advantage of the cultural benefits of living near London and enjoy the opera when we can. What do you enjoy most about working in the oil and gas industry? The challenges, whether technical, political, legal or whatever, and the effort to overcome them, makes this industry really exciting. The intellectual effort to solve the exploration puzzle is unique. In addition, the international experiences that I have had have been amazing, working in places as diverse as the jungles of Irian Jaya, the deserts of Oman, Norway, Argentina, Colombia, and now Africa. It has been fascinating to experience and work in those different cultures, and to meet so many fine people. My nightmare scenario for a job would have been commuting to work 9-to-5 in London. Youre on a desert island what three luxuries have you chosen to bring? (N.B. Raft Building for Dummies, satellite phone, teleportation device etc., not allowed) 1. Pencils and paper, for keeping records, etc., 2. A mirror, to use the reflection of the sun for signalling, and lastly 3. Packets of vegetable seeds (hoping that there is fresh water on this island)
Maps available on request of Lion acreage areas. Contact Gayle Meikle, Investor Relations g.meikle@lionpetroleumcorp.com
Over 80 corporate clients Corporate finance & broking, equity trading, sales and research Research includes Mining, Oil & Gas, Investment Funds, Strategy, Media, Alternative Energy and Growth Companies Merger with Arbuthnot Securities completed in January 2012
www.westhousesecurities.com
Westhouse Securities is authorised and regulated by The Financial Services Authority and is a member of The London Stock Exchange. Registered Office: One Angel Court, London, EC2R 7HJ. Registered in England Number: 762818
Trends, Analysis and Outlook for the AIM E&P Sector and Oil Prices
Written by Andrew Matharu, Head, Oil & Gas, Westhouse Securities
350
300 250 200 150 100 50
0 1/10 3/10 5/10 7/10 9/10 11/10 1/11 3/11 5/11 7/11 9/11 11/11
SOURCE: AIM monthly statistics.
Current situation Iran appears to be developing the capacity for nuclear weapons against international wishes
Disruptive scenario A military strike by Israel and/or the US against Iranian nuclear sites with Iranian retaliation
Impact on the oil price Iran would probably seek to close the Straits of Hormuz, stopping oil and gas exports through that route, sending oil prices sharply higher
There have apparently been low levels of internal dissent in Saudi Arabia, especially in minority Shia areas. There are a number of causes of potential internal dissent, most importantly economic conditions (especially inflation), and friction between religious leaders and the President
Levels of internal dissent increase and spread geographically, putting the operations of oil installations under threat
Saudi oil exports would probably drop and oil prices would likely be driven sharply upwards by higher risk premiums
Economic conditions, and/or internal political ructions, and/or a spill-over from Syria, cause increased levels of internal dissent; operation of oil installations might come under threat
Iranian oil exports would probably drop and oil prices would likely be driven sharply upwards by higher risk premiums
Following the US withdrawal, the Shia and Sunni factions within the Iraqi government appear to have split
De facto separation of the Shia areas of South and East Iraq from the Sunni areas in the North and West
Possible disruption of Iraqi exports through Turkey and Syria, or the danger of terrorist attacks on industry installations throughout the country
Violent protests against the Assad regime continue; there are reports of continuing desertions from the government military
Violent protests escalate into a de facto civil war, led by the Sunni majority
The Sunni-led revolt worries the Shia-led governments of Iraq and Iran, which try and bolster their own positions, increasing the risk premium in the oil price
It appears that the future government of Egypt will be dominated by Islamic popularists; the new government will probably put pressure on Israel by various means
Egypt unilaterally abrogates its peace treaty with Israel; violence increases around Gaza and the West Bank.
Unless there is military action between Israel and a significant regional power (which we do not expect), it is unlikely that physical supply would be disrupted. However, oil prices would probably be driven upwards by higher risk premiums
Following the disputed Duma elections of December 2011, presidential elections are due to be held in March 2012
Political dissent causes a loss of political legitimacy for the newly-elected President Putin; inward and domestic investment slows due to uncertainty
Probably little disruption to oil and gas exports in 2012. However, oil prices are likely to be affected by higher risk premium. Lower production profile of oil and gas in the medium term
Disruptive scenario Blocking of the Straits of Hormuz Disruption of Saudi production Disruption of Iranian production Break-up of Iraqi government Civil war in Syria Increased Egypt/Israel tension Increased internal dissent in Russia Increased exports from Kurdistan Hard landing to economic growth in China Faster than expected recovery in Iraqi production Faster recovery in Libyan production Deeper recession in the Eurozone
Maximum effect 1 (mmbpd ) -15.5 -7.2 -2.4 -2.0 Higher risk premium Higher risk premium Higher risk premium
2
Source Average daily traffic level. US EIA 2010 net exports from BPSR 2010 net exports from BPSR WS estimate of 2010 net exports
+0.50 +0.75
NOTES: 1. Minus represents loss of crude availability. Plus represents increase in crude availability. 2. We do not expect increased internal dissent in Russia to affect oil exports, unless there is a very serious challenge to the governments authority. Exports in 2010 were around 7.1mmbpd (Source BPSR) SOURCES: As described above. BPSR =BP Statistical Review of World Energy June 2011.
Overall, we consider that the probability of one of the four price positive scenarios which would cause physical disruption to oil supplies taking place (see Table 2), is significant, but lower than one in four. In the event that one of these price positive scenarios does occur, the oil price upside is likely to be considerable. By contrast, we are of the view that that the chance of one of the five price negative scenarios occurring is higher than one of the price positive scenarios but any absolute effect on the oil price will be lower, particularly if Saudi Arabia dampens the negative effect by lowering its production in response. Our central forecast is that oil will continue to trade in the $100-120 per barrel range. However, we consider the risk to this forecast to be on the upside, rather than the downside, and believe that the trading strategies which are likely to be more correct are those that concentrate on the upside.
Summary
Given a combination of distressed NAVs across the sector, coupled with our assumption of the Brent oil price continuing to trade between US$100 and US$120 per bbl, with upside risk and delivery from near-term high impact exploration in East Africa (Tanzania) and pre-salt basinal West Africa (Namibia, Angola and Gabon), we believe the potential exists for a positive re-rating of the sector in early 2012. However, in the absence of political clarity on the European debt crisis, investors aversion to risk may mean that they continue to shy away from the pure explorers that offer the exact quantum of upside they are seeking from the market, in favour of their cash-generative producing cousins.
About the Author Andrew joined Westhouse Securities in 2011 and has over 15 years experience in the O&G sector, commencing his career as a Petroleum Engineer with Chevron and KerrMcGee. Andrew went on to join Cazenove in Equity Research, covering the European integrated oil sector, before moving into Corporate Finance where he has held positions in a variety of firms including PwC, Bridgewell Securities and City Capital Corporation. Andrew is a Chartered Engineer, graduating from the University of Sheffield with a degree in Chemical Engineering and gaining a Ph.D in Chemical Engineering from Cambridge University. You can contact Andrew directly at: T: +44 (0)20 7601 6129 andrew.matharu@westhousesecurities.com About Westhouse Securities Westhouse Securities is a corporate and institutional stockbroking group with particular sectoral expertise in natural resources, investment funds, UK industrial and environmental technology. Regionally the Group's clients have significant exposure in Europe, Africa, Central Asia and China. Through its division Smith's Corporate Advisory, Westhouse has a strong focus on widening share ownership for quoted companies of all sizes. In January 2012 Westhouse acquired Arbuthnot Securities and the two businesses were fully integrated. The Company continues to exploit opportunities in overseas markets through its strategic alliance with Agile Partners, based in Beijing, and through close working relationships with a number of other advisory businesses worldwide. To learn more please visit: http://westhousesecurities.com/index.asp
Committee Member
Angelos Damaskos, CEO, Sector Investment Managers
Member
Stuart Cooper Vice President, Business Development, Oil & Gas, TAQA
How did you come to be in the oil industry? Having graduated with an engineering degree from University of Glasgow, i continued my education with an MBA from Sheffield University. Upon graduation i was offered a position in the natural resources M&A team of BHK-Bank where i specialised in energy financings.
How did you come to be in the oil industry? I was looking for an opportunity to live and work in Scotland as an in-house lawyer and was lucky enough to be invited to join Total in Aberdeen.
What is your proudest work-related achievement to date? The successful merger of Great Artesian Oil and Gas Limited into Undoubtedly setting up Sector Investment Managers as a start-up with initial assets of about 3.6m and seeing it grow to what it is today.
What is your proudest work-related achievement to date? The successful re-negotiation of six EPSA contracts in Libya for Petro-Canada although I was just a part of what was a real team effort!
Where do you see the greatest opportunity in todays oil and gas markets? Smaller, development-focused listed companies are today valued at historically low multiples. This is unlikely to continue for long so a re-rating is due.
Where do you see the greatest opportunity in todays oil and gas markets? For me, the greatest opportunity is working to build long-term energy supply with the emerging regimes in Africa and the Middle East. From a purely economic perspective, there is also huge potential in seeking arbitrage advantage from North American commodity pricing.
Where do you see the greatest challenge in todays oil and gas markets? Large indebtedness in developed economies will hamper global economic growth. We are in a situation that could last for several years as we slowly reduce debt.
Where do you see the greatest challenge in todays oil and gas markets? The greatest challenge for the industry as a whole is to change the pattern of global energy demand and consumption in order to ensure a sustainable and cleaner future for everyone.
What was the wisest advice you ever received from a mentor? Look for value and invest long-term. Trading is for computers.
What was the wisest advice you ever received from a mentor? Listen, and seek first to understand.
Committee Member
Angelos Damaskos, CEO, Sector Investment Managers
Member
Stuart Cooper Vice President, Business Development, Oil & Gas, TAQA
What advice would you pass on to a graduate wishing to work in your line of business? Try to understand lasting, long-term value drivers in any investment model.
What advice would you pass on to a graduate wishing to work in your line of business? Make sure that you have mastered a core discipline and then grab your opportunities (wherever they may be) with both hands. Whats the one interesting fact about you that no one would suspect? I fence (foil). How do you prefer to spend your spare time? With family and friends. Favourite holiday destination? Cornwall for surfing and Ibiza to completely unwind.
Whats the one interesting fact about you that no one would suspect? I thrive in adrenalin outdoor sports! How do you prefer to spend your spare time? On horseback Favourite holiday destination? St. Moritz
All-time favourite book? Neverwhere by Neil Gaiman it reveals a secret part of London that just might exist All-time favourite film? The Italian Job Hang on, lads; Ive got a great idea. What 3 things would you take to a desert island? Im a survivor (and a bit of a boy-scout), so Id take a big knife, a fire-steel and a proper first aid kit. That way I stand a good chance of staying alive, being rescued and getting home to see my wife and kids.
What 3 things would you take to a desert island? 1. A strong, large knife, 2. Metal match to light fire, 3. Nylon line and hooks for fishing
Regester Larkin Energy is an international energy consultancy that advises companies operating and serving in the energy, extractive and related industries to earn, maintain and expand their license to operate.
Providing expert counsel in: Business intelligence and insight Strategy development Policy and positioning Strategic communications Crisis management and emergency response Assurance and assessment
Executive Q&A with Andrew Benitz, COO, Longreach Oil & Gas By Drake Lawhead
Andrew, how would you describe Longreach in a single sentence to an investor? Longreach is a fast growing oil and gas exploration company listed on Torontos TSX-V developing significant licence interests in offshore and onshore Morocco. Morocco isnt a well-known petroleum hotspot, but presumably youve seen something there you like. Can you explain the thesis behind the decision to focus exclusively there? Morocco is an underdeveloped exploration area and is also Africas second largest energy importer. They import 93% of their oil and 91% of their natural gas consumption. The country needs solutions to cut their dependence on energy imports, estimated at US$10.7 billion in 2011, while they face the challenge of a robust growth of energy demand: +54% over the past 10 years, and forecasts predict it could triple by 2030. For Longreach, Morocco is a growing economy and a stable political regime; the country offers an attractive fiscal environment for foreign investors with the state only taking a capped 25% interest in discoveries, with low royalties of 5% for gas and 10% for oil and there is the benefit of a 10 year corporate tax holiday on discovery which is hugely competitive compared to neighbouring areas. From a geological point of view, Morocco is surrounded by hydrocarbons in North Africa with Algeria, Libya and Egypt to the east, and East Canada to the west, which was part of the Moroccan Atlantic during the late Triassic. There is clearly potential yet the country remains under explored. Moroccos hydrocarbon potential is now beginning to be realised with recent discoveries being made and increased investment from foreign companies driving the industry. This is why we have committed our efforts on developing significant acreage positions which can be easily tied into the domestic market. Morocco avoided hitting the headlines last year as other North African states experienced major political turmoil. Can you talk about political risk in Morocco and how you find working with the authorities? Morocco is a constitutional monarchy ruled by King Mohammed VI sharing powers with a democratically elected parliament. The King set about modernising the constitution when he ascended to the throne in 1999. There have been a series of constitutional changes over the last decade at the Kings behest before the Arab Spring mobilisation in 2011. Since then there have been further constitutional amendments towards greater democracy. The country recently had legislative elections which resulted in a new coalition government. I can say confidently that the degree of political risk in Morocco is low. Weve great relationships with ONHYM, the state energy company and enjoy working with officials in Morocco who are eager to work alongside international E&P cos. What is/are the comparative advantage Morocco possesses over its more prolific neighbours? The topside advantages are clear; political and economic stability, phenomenal fiscal terms for oil and gas exploration and a very robust and growing domestic energy market, ensuring no discoveries in country will be stranded. Longreach was one of the first movers in Morocco when we started acquiring licence interests in 2007. We were able to build a substantial acreage position of some 13 million gross acres of meticulously handpicked land in which we are very confident hydrocarbons can be recovered. Looking elsewhere, what other parts of Africa do you find most interesting from an E&P perspective, and would you consider venturing into some of those?
Longreach is uniquely 100% Morocco focused. At this moment in time weve no plans to expand: we simply want to concentrate on achieving our goals within Morocco. However, with that being said, as with any company, once one set of goals are achieved we would always be looking for the next challenge, whatever that may be. What are the biggest challenges of operating in Morocco? The risks are within exploration as the country remains sparsely explored. Yet this is now changing. ONHYM was set up at the turn of the century with a defining remit to attract foreign investment into domestic hydrocarbon exploration. This strategy has been highly successful, in 1997 there were only 9 exploration permits and by 2011 this number had increased to 115, with operators such as Anadarko, Kosmos and Repsol now in country. What other E&P activities are happening in Morocco is it attracting more widespread interest or does it, and will it, remain a somewhat niche play for a handful of independents? Exploration is gaining momentum in Morocco. Every few weeks ONHYM announces new licence agreements with international E&P companies. It is true that so far Morocco has been a destination of choice for independent companies but the country is starting to tell the story of successful discoveries and production such as Circle Oil which is completing the construction of a gas pipeline from its Sebou licence to Kenitra in the north. Offshore Morocco is also gaining significant interest, most notably from Kosmos which has recently added two exploration licences to its existing acreage. Onshore there is growing interest in the shale gas potential of the country, with Anadarko exploring just to the north of our Zag licence and EOG Resources further north. What next bit of news flow should we look out for from Longreach? We are making excellent progress with the seismic interpretation on our operated Sidi Moktar licence and are working towards building a list of leads and prospects. This will be followed by new seismic acquisitions in order to rank prospects and identify possible drill targets and we expect this to be completed by mid-year. The licence is within the Essaouira basin, a proven hydrocarbon region in central Morocco, where ONHYM is currently producing gas and condensate. For our non-operated licences, on Tarfaya and Zag we have now completed 2D seismic acquisition and are busy processing this data. For the offshore licences we have now completed the G&G phase of the programme and have built an impressive resource estimate for identified prospects. The licence is probably the best explored offshore acreage in Morocco, with over 5,000km of excellent quality 3D seismic coverage. It is drill ready so together with our partners we are opening a data room to attract interest from large oil groups; so we are confident of some very positive news flow throughout the course of this year. Which other E&P companies do you admire and why? I like companies that have not spread themselves too thin, have a focused regional strategy and through good technical work have advanced licences through the exploration phase to successful commercialisation. Africa continues to have significant untapped resource potential, so junior companies with big resource potential and a clear route to development are interesting. The companies that have taken a big resource play and commercialised it, attract my admiration. When youre away from work, how do you enjoy spending your spare time? I have a young family, two girls below three; so much of my spare time is spent with them. Last weekend I was building a snowman I havent been able to do that since I was six years old, so having them allows me to relive all my childhood dreams without too much embarrassment! What do you enjoy most about working in the oil and gas industry? Its an incredibly dynamic and exciting industry, with a full spectrum of skill sets. Its also an industry that is often under appreciated. We are dealing with the most important commodity in the world, which accounts for c.40% of global commodity trading and supports the largest and most valuable companies in the world. And yet there is room for little companies like Longreach, who through sensible use of risk capital can build a business that fits into the industry dynamics. Exploration is not for the faint hearted but when done well the upside is without limit. Youre on a desert island what three luxuries have you chosen to bring? I think it would have to be my wife and two girlsand possibly another desert island!
Akin Gump
Financial Times Innovative Lawyers 2011 Award Corporate Law Emerging Markets Law Firm of the Year
THE LAWYER
Oil & Gas Projects both conventional and unconventional M&A (public and private) and Joint Ventures Private Equity Equity and Debt Capital Markets Debt and Project Financing
More than 100 energy lawyers in the key energy centers around the world, including London Houston Moscow Abu Dhabi Beijing Geneva DOUG GLASS dglass@akingump.com +44 20 7012 9605 GREG HAMMOND ghammond@akingump.com +44 20 7012 9630
akingump.com
2011 Akin Gump LLP. Attorney Advertising
assets. Aside from a total or partial sale, there is also the option of swapping discoveries for a slice of an already developed asset. The larger independents will also benefit from the increasing opportunities for linking up with national oil companies, with the two way partnership driven by a simple swap of technological know-how for cash. Accessing capital will therefore remain a key challenge for the independent in 2012. Like the resource itself though, if you look hard enough, and dig deep enough, it's there somewhere. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Kirk Sherr, President and Managing Director, Regester Larkin Energy North America
As we look at recent trends in the principal emerging markets, we see three trends that every independent should have clearly in focus on their license to operate radar: environmental, social and human rights issues. Of course each market is different, and the capacity of the company to address the issues will depend in part on size, but they should at least be aware of the potential risks and have a plan in place to face them. First, environmental risks and issues will continue to grow in importance worldwide and they present one of the biggest challenges for independent oil and gas companies, particularly those that are heavily involved in waterintensive unconventional plays. Water handling, waste-water treatment, disposal/storage, and management will be in focus worldwide. Note that regardless of whether or not industry wins the international debate over the impact of hydraulic fracturing on groundwater, the priority should be to develop pre-emptive industry practices and safeguards against real water contamination accidents. Offshore drilling is another area where independents may face significant liabilities and exposure, particularly in emerging markets. As a recent incident in Brazil has demonstrated, regulators drawing lessons from BPs Gulf of Mexico debacle are increasingly likely to impose harsh fines and penalties on all operators and service companies with perceived or real responsibility for any accident. Same can be said for rapidly developing Artic drilling operations. Are independents, with such stretched personnel remits, truly prepared for similar circumstances in their far-flung operations? Social issues are a second big challenge facing Independents in 2012, as governments seek to impose great obligations on companies in their relationships with local communities, tribes and potentially impacted groups where operations are located. The boomtown syndrome from the influx of oil company money and workers leads many host communities to confront rapid social change, imported inflation, and strained capacity of public infrastructure and services. Man camps with 24 hour electricity and a high standard of living only inside the fence can call even more attention to dire local conditions. Independents are in danger of underestimating the medium to long term implications of their commitments to these communities. The internet and social media in opening societies will accelerate the risks independents face. Finally, human rights issues, broadly interpreted, will be a third challenge as they begin to appear in select markets. To date, this has not been an issue in developed markets like the UK, US and Canada because they have strong human rights governance. But, as 2012 develops, we expect human rights risks to become much more relevant in markets like Asia, Africa, and Latin America. Consider for example, the exposure independents may face for alleged human rights violations from security forces or even for aligning with the wrong side in countries where regime change has been accompanied by considerable violence. At minimum, independents will need to be well-prepared for heightened scrutiny from the international NGO community, in part emanating from the June 2011, adoption by the United Nations of the Guiding Principles on Business and Human Rights. The Guiding Principles dictate a general framework for the responsibility of business in protecting human rights. As a recent report from the Heinrich Boell Foundation highlights, there is a push for governments to mandate corporate adoption of the Guiding Principles, posing a potential threat to many independents license to operate. As experienced independents know only too well, the above-ground risks to their license to operate for international operations increase every year and 2012 will not be an exception. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Follow changes and proposed further changes in the regulatory landscape closely, getting involved in industry consultations and ensuring they are ready to meet more onerous requirements; Watch the case law develop in particular in relation to how gross negligence and willful misconduct get interpreted and be ready to revisit the indemnification and cash call provisions in JOAs and contracts accordingly; Stress-test their contractual arrangements review them case by case in the light of the specific liabilities and risks that apply and ensure they have a full understanding of applicable laws in the relevant jurisdiction(s) and where responsibility and liability (contractual, civil, regulatory, criminal) would fall in the event of an incident; Ensure that their contractual arrangements properly cover allocation of all relevant risks and liabilities and allocate reward proportionately to the risks (and if those arrangements cannot be changed, put in place all possible mechanisms to manage and mitigate those risks); Ensure their contractual arrangements include proper monitoring and communication provisions to ensure risks are managed right through the contractual chain; Ensure that their contractual arrangements contain workable incident management (as well as dispute resolution) mechanisms that quickly and clearly get the required processes in motion; Review where they are seconding in employees and their level of control over operational decisions as (certainly in the UK post Buncefield) this can potentially shift the legal risks and liabilities irrespective of contractual provisions; Review and regularly monitor the financial strength of parties they will depend on for contributions/indemnification, consider whether need to take further steps to secure those contributions. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
U.S. is obviously still facing many challenges as well. On the other hand, the economic environment in both Latin America and Canada appears to be quite robust given the weak conditions in much of the world. Regarding North American natural gas prices, this is clearly presenting a challenge for all who arent well hedged and is likely to continue to do so for quite some time. While reducing drilling for gas and shutting in gas production as well as, in due time, exporting LNG could improve the situation, the increasing production of associated gas and the increase in global gas production are both likely to dampen the impact of reduced North American production and LNG exports. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
James Ward, Founder and Chairman, Whale Rock Professional Services Group
2012 is anticipated to be a year of activity in the O&G sector after depressed capital markets in 2011. It is our belief that the capital markets will continue to recover after a strong January 12 and that this should facilitate the raising of money for increased activity by Independents. We expect that the oil price will continue to rise driven by the Syrian and Iranian crisis and demand fuelled largely by China and Japans post Fukushima move away from nuclear power. We see the issues and challenges faced as including: Ability to access capital markets 2011 saw depressed capital markets and the Independents are likely to require funding in 2012 to deliver their plans and drive shareholder value. It will be interesting to see how many of the delayed IPOs succeed in raising finance in 2012. Oil price volatility and uncertainty impact commercial viability of exploration and appraisal programmes and the capital markets are likely to discount risk until price consensus emerges. Opening up of new exploration areas new areas include the Falklands, Azerbaijan and Eastern Mediterranean. Whilst there are political issues between Israel & Lebanon and UK & Argentina there are opportunities for Independents Renewal of fields and equipment in re-emerging producing areas Libya and Iraq in particular are geographical areas where Independents can access and partner with majors and NOCs. We expect Libya to be of particular focus towards the end of 2012. Threat to Independents resulting from the expansion of non-producing NOCs looking, with home Government support to secure long terms access to oil and gas. Regulatory conditions post BPs Macondo - all companies and governments are now awake to the corporate shareholder damage that environmental accidents can inflict Skills shortage -The industry has a general skills shortage and coupled with often hostile locations of operations this skills shortage needs to be addressed to secure long term resource of a sufficient calibre.
Independents with strong management and having refocused operating costs after a poor capital markets year in 2011 should be placed to access finance through enhanced confidence in 2012 to fund existing operations and to exploit the new and re-emerging exploration areas so long as they can attract appropriate personnel and maintain appropriate HSE controls. You can reach James directly at: james.ward@whalerock.co.uk ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Reduced overall economics and net present values will result in less equity being available for gas weighted producers. Even if a company has assets with strong economics but is too highly levered, they may not have the liquidity to weather any operational setbacks or any further gas price degradation. To overcome this challenge, prudent management of the companys balance sheet is essential and the company must be able to differentiate themselves from their peer group to generate interest from equity investors. Strong resolve by management, directors, shareholders and providers of capital (lenders and equity firms) will be required to survive in this challenging natural gas market. Softness in the natural gas forward curve has made lofty oil/NGL prices even more attractive to producers. Many gas weighted companies are attempting to transition their operations to target oil or liquid rich gas reserves. Another option is to sell assets to increase corporate liquidity and allow management the ability to transition to higher netback projects. However, gas transactions would likely occur at depressed valuations as evidenced by the last four month softness in the existing merger and acquisition market. One challenge oil weighted entities operating in the western Canadian sedimentary basin will encounter is the ability to secure rigs, equipment and personnel to execute their scheduled drilling programs. This could be further impacted by a warmer than average winter, resulting in a shorter drilling season in some areas. Indifferent to play type, the higher cost of technologically driven plays has changed the landscape for junior O&G companies. Horizontal wells utilizing multi-stage fracturing are significantly more expensive than conventional horizontal wells. To fund these drilling programs many companies look to joint ventures, farm-outs, or the use of sub-debt in their capital structure. Alternatively, we have most recently seen sales of these assets by juniors to capture premiums being paid by larger or new foreign entrants in the WCSB who are looking to gain an entry into these new and promising play types. The challenges in this market, while significant, are not new to many management teams. Historically the majority have proven themselves to be very resilient; we expect 2012 will be no different. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
OIL
& GAS
www.taylor-dejo n gh.com
contactTDJ@taylor-dejongh.com +1 202 775 0899
WA S H I N G TO N L O N D O N PA R I S D U B A I
* PFI 2011 league table ranking by number of financial advisory mandates won, January 2012; 2nd consecutive year. **Infrastructure Journal H1 2011 league table ranking by total value of financial advisory mandates won, July 2011.
The current low natural gas price environment serves as a catalyst for extensive debates on the viability of proposed shale gas to LNG schemes and additional uses of cheap natural gas. Wed like to consider whether such projects are as much a bow to producers as some commentators have suggested. First, it is easy to get excited when comparing a Henry Hub price of under USD 3/MMBTU to the liquids-linked price of USD1416/MMBTU paid by Asian consumers of LNG. This spread is obviously attractive, even after accounting for liquefaction and transportation costs from the Gulf of Mexico to Asia. Cheniere Energy estimates the (liquefaction and transportation) costs to be about USD6/MMBTU. At such a low Henry Hub price, even shipping LNG to Europe appears likely to be profitable, though the margins are thinner since the European cost threshold is much lower, given the ability of Europeans to switch to other sources of gas, or to use different fuels altogether. But investing in long-term liquefaction capacity and betting on low Henry Hub prices for the next 20 years, is a tough business proposition. It is possible that increased LNG exports from the U.S., coupled with LNG coming from the proposed Australian and East African LNG projects, could eventually arbitrage away much of the current price imbalance in the global gas markets. However, in domestic U.S., LNG exports will have to compete for natural gas feedstock with other industries vying for the same prize. Cheap natural gas already sparks enthusiasm among the petrochemical and fertilizer producers in the U.S. who see the low prices as a major opportunity to reignite domestic production. The reaction from power utilities has been more muted, given their recent historical ride on gas prices ranging from USD 4 to USD 12. But cheap gas will certainly drive increased investment in gas-fired power plants. The Energy Information Agency believes that increased demand for cheap natural gas either from petrochemical/utilities users or from LNG exporters, will likely lead to an increase in Henry Hub prices, thus reducing some of the projected profit margins of LNG producers. The current global natural gas glut cannot last forever. Natural gas producers with significant exposure to dry gas basins realize this and have taken appropriate measures to refocus on liquids production. Some companies can do nothing more than close some of their operations and move on to the next opportunity, as EQT Corp. plans to do with its shale gas drilling in Kentucky. Others have redirected their drilling programs to more liquidsprospective plays. Chesapeake Energy recently announced its decision to re-focus its capex spending away from dry gas. The move had been long expected, but was nonetheless surprising in its scale and boldness. Equally impactful was the action of some of Chesapeakes significant competitors within days ConocoPhillips, Continental and Consol announced similar cuts to their natural gas production and capex targets. Chesapeake, the largest natural gas producer in the U.S., is unequivocally stating its preference for liquids-rich plays, cutting rigs drilling for dry gas, curtailing dry gas production and pushing the completion of dry gas wells as far into the future as possible. Savings are being re-invested into liquids-rich plays. Chesapeake is reportedly even walking away from leases that do not offer attractive returns. ConocoPhillips announced its decision to shut-in some of its dry gas production, indicating that the firm expects the long-term Henry Hub price to get back to USD5/MMBTUUSD6/MMBTU as more producers cut down their spending in developing dry gas plays. The above-noted companies (and most others) will continue drilling for liquids-rich plays, producing substantial volumes of gas in the course of these operations, but the obvious intent to curtail unrestricted drilling for gas appears to be a serious move by U.S. independents to cope with todays low gas prices. Commodity markets took note of these companies press releases, and natural gas futures went up almost 8% the day Chesapeake announced the planned cuts. Prices crept further up in the few days that followed. A week, a few weeks, or even a few months does not make a long term trend. But U.S. gas producers are clearly redirecting their drilling programs to the century-old truism of the oil industry: find liquids and dispose of the associated gas for whatever marginal price you can get. The U.S. finds itself in a rather unusual situation of reasonable elasticity of supply in a vital energy resource with many industrial demands, only one of which is export LNG. Even though demand for gas continues to increase, it can be met with a readily produceable fuel supply and gas prices will face a slow but steady upward pressure in coming years.
Guest Article
Thoughts of Alberta, Canada may conjure up images of the majestic Rocky Mountains or wide open prairies, but its whats under the ground that has captured the attention of the world energy market. The Province of Alberta, located in Western Canada, holds significant energy reserves. With a landmass only slightly smaller than that of France, Alberta holds more than 169 billion barrels of recoverable oil and 36.4 trillion cubic feet of natural gas. While the reserves are significant, so are the opportunities for investment. Alberta welcomes international companies to help develop these resources in an environmentally responsible manner. With its business-friendly investment climate and plans for increased production, theres never been a better time to invest in Alberta.
Oil: Albertas energy resources will help Canada play a key leadership role in a world where energy demand is
expected to double over the next several decades. Only 21 per cent of the worlds proven oil reserves are accessible to private sector investment and of those, 53 per cent are in Albertas oil sands. Alberta will double its oil production to 3.7 million barrels per day in the next eight years. This increased production will help meet an increasing share of North Americas demand, including that of the United States, which currently imports 1.4 million barrels of Canadian oil a day. Canadas reputation as a stable, secure, reliable, and responsible partner is a key advantage in the global energy market. There are also proposals for new pipeline access to Canadas west coast which would open up new overseas markets. There are also many opportunities for downstream resource development in Alberta, as well as for technologies that improve efficiency and minimize environmental impacts of oil production.
Renewables: The renewable energy sector also has great potential. Alberta has clean energy initiatives
supporting wind, solar, and biofuels that have allowed it to increase its renewable energy output by more than 70 per cent since 1998. Alberta is the second largest producer of wind power in Canada with plans to grow this capacity substantively in the future.
Gas: Opportunities also abound in Albertas natural gas industry. Alberta accounts for nearly 75 per cent of the
natural gas produced in Canada. With 36 trillion cubic feet of conventional natural gas and the potential for an additional 500 trillion cubic feet of coal bed methane, the province is well equipped to supply the gas needs of North Americans for the foreseeable future. Another huge potential unconventional gas source is shale gas, which is still in the very early stages of development in Alberta.
Environmental Commitment: One of the defining features of Alberta as a world-scale energy producer is
its commitment to responsible development. In 2007, Alberta became the first jurisdiction in North America to regulate large industrial greenhouse gas emissions. Emitters were required to immediately reduce per unit greenhouse gas output by 12 per cent either by physically reducing emissions, purchasing accredited Alberta offsets, or paying $15 dollar/tonne towards a technology fund. As a result, 23.8 million tonnes of emissions have been avoided, $257 million has been collected into the Climate Change and Emissions Management Fund, and $126 million has so far been committed to 27 clean technology projects. Having created Canadas first environment ministry, Alberta has a proven track record of delivering a strong regulatory system that allows for development while protecting the air, land and water. The province is currently taking significant action to enhance its oil sands monitoring program for air, land, water and biodiversity and building a cumulative effects program that will set strict limits for industry. Albertas network of researchers, engineers and scientists are also focused on continued development of new technologies to improve environmental performance of the oil sands just as their expertise unlocked this resource in the first place.
Business-friendly Investment Climate: While Albertas abundant energy reserves and commitment to
responsible development are compelling reasons to invest; it is the provinces business-friendly investment climate and strong economic outlook that makes it even more attractive. Alberta has no net debt and a low corporate tax regime with one of the most competitive tax environments in North America. Alberta has been a leading economy in Canada for the past 20 years and the province is poised to lead Canada again in 2012. Energy investors have shown confidence in Albertas strong fiscal regime, setting a provincial record sale of $3.5 billion for mineral rights in 2011. Investors from around the world are finding Albertas royalty structure, regulatory certainty, and stable and democratic government extremely attractive. The province is also working towards a more streamlined regulatory system to enhance efficiency and speed up the approval process. Alberta is full of opportunity and eagerly seeks investors who share its vision for responsible development. For information about these opportunities contact Jeffrey directly: jeffrey.sundquist@international.gc.ca
Range Resources: A diversified international oil and gas exploration, development and production company
n Trinidad
Exploration, Development and Production P1 reserves of 15.4mmbls (Range 100%)
n Texas
Development and Production P1 reserves of ~ 10m boe (Range ~ 20%)
n Puntland
Exploration First of two wells spud in Jan 2012 estimated recoverable reserves of 300-375 mmbls per well (Range 20%)
n Georgia
Exploration Estimated oil in place of 2 bl bbls (Range 40%)
www.rangeresources.com.au
ASX:RRS
AIM:RRL US-OTC:RYRYY
London Office Suite 1a, Princes House, 38 Jermyn Street, London SW1Y 6DN Telephone +44 207 025 7040
Australian Office Ground Floor, 1 Havelock Street, West Perth, Australia WA 6005 Telephone +61 8 9488 5220 Email admin@rangeresources.com.au Website www.rangeresources.com.au
With the onset of robust international sanctions against Iran we may well see oil th spikes over the coming months as tensions rise. Since 24 October 2010, the EU has banned the export of named oil and gas related products and technology rd to Iran. On January 23 2012, the EU announced a ban on the import, purchase and transport of Iranian crude oil and petroleum products, including related financing and insuring. In order to allow buyers of Iranian oil an opportunity to st make alternative arrangements, the ban will not kick until 1 July 2012. One school of thought says that by agreeing a 6 month lead in, the EU are doing no more than firing a shot across the bows of Iran in the hope that they will see sense. Another says that there was concern an immediate ban would result in Iran closing the Straits of Hormuz something which would cause an immediate oil crisis and possibly, military conflict. The EU could not stomach this prospect. Who currently buys Iranian oil? Estimates are as follows: China: 549,000 bpd / EU (Greece, Italy and Spain): 50,000 bpd / Japan: 341,000 bpd / India: 330,000 bpd / South Korea: 244,000 bpd / Turkey 182,000 bpd / South Africa: 98,000 bpd / Taiwan: 33,000 bpd / Sri Lanka: 39,000 bpd
The EU: The EU ban will be a blow to Iran if it comes into force in July although those EU entities who
currently receive Iranian oil in lieu of outstanding historic debts (for example, ENI of Italy) will benefit from an indefinite carve out.
US Pressure: The US has recently been doing the rounds trying to persuade other buyers of Iranian oil to
cease doing so. These buyers would be wise to listen carefully because the US has the right to sanction those entities (and their banks) and ultimately deprive them of their ability to access the US financial system. Japan and South Korea will likely reduce their purchases but China and India are showing no signs of relenting. The US has bigger fish to fry in its relationship with China and India and appear unable to force the issue. We believe the US will now shift its strategy and instead seek to persuade China, India and others to seek discounts from Iran. With fewer buyers in the market this should be eminently achievable and punishes the Iranian economy.
Impact on Iran: In its latest comprehensive assessment of the Iranian economy, the IMF estimated energy
exports would amount to $103 billion to the fiscal year end (March 20, 2012), some 78% of total exports. It has been mooted that Iran might have to sell its oil at a discount of 1015% to find buyers under sanctions. Assuming a 15% discount applied to all shipments and a further expected 10% cut in overall shipments, Iran's energy export earnings would shrink by around $24 billion. The difficulties in finding banks to pay Iran will result in the increased use of costly middlemen in Asia and neighbouring states which have not signed up to tough sanctions. We shall also see greater use of barter deals. Ultimately, we may see Iran enter into a recession. The IMF estimated Iran would post a budget surplus of about 2.8% of GDP this fiscal year; the fall in oil revenues, combined with an expected 10% cut in tax receipts due to a slower economy, could convert that into a deficit of over 2% of GDP next year. The Rial has fallen by some 40% against the Dollar in recent months and life is becoming harder for Iranians.
Oil Spike? The big worry is that domestic discontent could encourage Iran to up the tempo in its aggressive
attitude to the West in a desperate bid to unite the Iranian people. It is difficult to see Iran giving in and even more difficult to see the US standing by and allowing Iran to continue its nuclear development foray. This will be a critical factor in the price of oil in 2012. As a minimum, we expect the war of words resulting in occasional shortlived oil spikes. At its worst, a full blown conflict would see the oil price rocket. Nigel Kushner is CEO of Whale Rock Legal, a legal practice specialising in International trade and natural resources. You can contact Nigel directly using: nigel.kushner@whalerocklegal.com
Rialto is an ASX listed West African focused oil and gas explorer with offices in Perth, London and Cte dIvoire. Rialto holds an 85% working interest in and is the Operator of Block CI-202, located offshore Cte dIvoire. Existing discoveries in Block CI-202 have been independently certified at 50 MMbbls (Mean Contingent Resource) for oil and condensate and 396 Bcf (Mean Contingent Resource) for gas and associated gas. Further, a Mean Prospective Oil and Condensate Resource of 511 MMbbls and 1.8 Tcf Mean Prospective Gas and associated Gas Resource has also been certified.
Block CI-202 contains the Gazelle Field which is to be the subject of a two well appraisal/development drilling campaign scheduled to commence in February 2012. Additionally, one exploration well will also be drilled as part of this programme.
Rialto Energy Limited Level 1, 34 Colin Street, West Perth WA 6005, Australia T: +61 8 9211 5000 | F: +61 8 9486 9362
Rialto Energy UK Limited 22 Long Acre, London WC2E 9LY, United Kingdom T: +44 20 7042 8500 | F: +44 20 7042 8501
admin@rialtoenergy.com | www.rialtoenergy.com
What Are The Impediments To The Development Of The Shale Gas Industry In Europe And How Can These Be Overcome?
Written by James Green, Partner, EMEA Oil & Gas Group, K&L Gates LLP
The International Energy Agency (IEA) currently estimates unconventional-gas reserves in Europe including tight gas, shale gas and coalbed methane to be around 3500 trillion cubic feet. This would be sufficient to supply European gas demand for more than 60 years. However, there are some significant hurdles to be overcome if shale gas is to have as profound an effect on the energy market in Europe as it has had in the US. The industry faces several practical challenges. Drilling costs are higher in Europe. European shale gas deposits are generally deeper underground and harder to extract. The oil services industry is less developed than in the US, with a shortage of rigs and qualified personnel. Europe does not have the existing pipeline infrastructure that the US does. All of these factors will have gradually less impact as the industry develops, the understanding of the regions geography improves, advances in technology reduce costs and infrastructure is put in place. Higher European gas prices - around twice those in the US - will also help overcome many of these challenges. In addition, whilst in the US subsoil rights are generally in private ownership (and often held by the owner of the surface land), in most European countries subsoil rights are usually owned by the State, which is entitled to receive royalties in respect of gas that is generated. Local landowners in the US are therefore more likely to support shale gas operations, for financial reasons, than in Europe where there is not such an incentive. Conversely, the exploitation of shale gas reserves in Europe is likely to be a more politicized issue. These impediments may be offset, 'though, by the higher gas prices in Europe. Environmental issues are also a key concern. France has banned hydraulic fracturing -fracking - the process by which gas is extracted, based on concerns over the contamination of water sources. There are also concerns that fracking can cause minor earthquakes. In the UK, fracking in Lancashire was shown to have resulted in tremors, as a result of which test drilling was suspended. The industry will need to be carefully regulated and operators will have to implement high standards of practice if governments are to persuade the public that these are not causes for concern. On a wider scale, some climate-change campaigners see shale gas as preferable to other fossil fuels (which produce greater levels of carbon dioxide), whilst others consider that Europe should not be focusing on shale gas at all, but should be moving towards a truly low-carbon energy sector, based on renewable sources of energy. Governments' policies may also be influenced by certain factors that support the development of the industry in Europe. Energy security is a major political consideration for governments that are now, or are likely to become, increasingly dependent on gas imports from Russia. For them, shale gas offers an opportunity to reduce the extent of reliance on a single external source. In any event, it will be several years before we see serious shale gas production in Europe. Whether the industry fully realizes its potential, however, will depend upon how the major stakeholders - governments (including the EU), investors, developers, drilling companies and consumers - address these issues.
About the Author: James Greens practice covers a broad range of corporate areas, including fundraising and other transactions on the Official List and AIM (acting for both companies and nominated advisers/ brokers), mergers, acquisitions, joint ventures, group reorganisations and venture capital investments. James has experience in a range of sectors, but has a particular focus on oil and gas, mining and cleantech/ renewable energy.
Editors Note: This April we are very pleased to be working alongside K&L Gates, a leading international law firm to host our London Social. K&L Gates' international oil and gas practice spans across their network of more than 40 offices across 4 continents. For more information please visit: http://www.klgates.com/old-oil--gas-practices
Member
Peter McAteer, Managing Director, Allomax
Member
Katya Zotova, Head, International A&D (Oil & Gas), Citigroup (outside of Americas)
How did you come to be in the oil industry? Following mining experience in South Africa, Germany and the UK I developed an avid interest in travel and looked for the most international business I could find. The demise of the UK coal industry was a timely and highly beneficial prompt. What is your proudest work-related achievement to date? Purchasing 40 producing fields as a member of the Talisman acquisitions team as they grew more quickly than any previous Operator in the UK. Where do you see the greatest opportunity in todays oil and gas markets? Deepwater in the Atlantic valley (West Africa or the South American equivalent).
How did you come to be in the oil industry? I wanted to learn from those who can transform the world
What is your proudest work-related achievement to date? Getting a few major projects off the ground in the GoM, Middle East and South America. It's never easy but few things beat that feeling in the end. Where do you see the greatest opportunity in todays oil and gas markets? I'm looking for the next landscape transformer. Watch the unconventionals space - there's more to come. Where do you see the greatest challenge in todays oil and gas markets? Political unrest affecting market confidence What was the wisest advice you ever received from a mentor? In the end nothing is impossible, if it feels impossible - it is not the end.
Where do you see the greatest challenge in todays oil and gas markets? National Oil Company partnerships. What was the wisest advice you ever received from a mentor? Focus on the economics - University Mentor and world expert in geostatistics.
Member
Peter McAteer, Managing Director, Allomax
Member
Katya Zotova, Head, International A&D (Oil & Gas), Citigroup (outside of Americas)
What advice would you pass on to a graduate wishing to work in your line of business? Learn fast. There is a demographic timebomb about to knock out your competition.
What advice would you pass on to a graduate wishing to work in your line of business? Whether it is one transaction or a global partnership - always see the bigger picture and think long term. This is an elephant memory business.
Whats the one interesting fact about you that no one would suspect? I've been writing songs since I was a teenager. How do you prefer to spend your spare time? Climbing a mountain or walking around the estuary where I live. Favourite holiday destination? Anywhere I have never been.
Whats the one interesting fact about you that no one would suspect? I used to tame horses How do you prefer to spend your spare time? Explore new places and cook 5 course dinners for friends Favourite holiday destination? Italy, San Diego, New York and Asia
All-time favourite book? Bizarre it should be on TV as I write. Birdsong. I am ex Royal Engineers (TA) and fascinated by the bravery of the early sappers that this book so eloquently describes. All-time favourite film? Jungle Book. Why grow up? What 3 things would you take to a desert island? My wife, my memories and my imagination.
All-time favourite film? The Thomas Crown Affair What 3 things would you take to a desert island? A chess set to keep me sane, a signaling mirror and a whistle
www.control-risks.com
Visit www.cliffordchance.com/oilandgas to discover more about Clifford Chances oil and gas expertise.