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‘Drillers and Dealers’
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„Drillers and Dealers‟ – February 2010 Edition

 About The Oil Council and „Drillers and Dealers‟

o Contact Details

 Executive Q&A
o An interview with Dr Keith Myers, Partner, Richmond Energy Partners

 Executive Q&A
o An interview with William Le Sage, CEO, OFS Portal

 “Standard, Premium or AIM Sir?”

o By Scott Knight, Partner and Head, Natural Resources, BDO LLP

 “Is Shale Oil Next?”

o By Elaine Reynolds, Oil Analyst, Edison Investment Research

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

o “How can we attract more young graduates and talented professionals to be
part of tomorrow’s oil and gas industry?”

 Future Oil Council Assemblies in New York City

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

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

 “The Oil Outlook” (Monthly Column)

o By Gianna Bern, President, Brookshire Advisory and Research

 “Golden Barrels” (Monthly Column)

o By Simon Hawkins, Managing Director, Omni Investment Research

 Our Partners
Executive Q&A

Dr Keith Myers,
Richmond Energy Partners
Talking with
Ross Stewart Campbell, CEO,
The Oil Council
Date: 5 February 2010

Ross Stewart Campbell (RSC) from increased. Over time we find share price performance
The Oil Council: Keith, some of our is most closely correlated to reserves growth so we
readers might not be familiar with focus a lot on that. However, to understand growth
Richmond Energy Partners and the prospects you need geological insight which financial
REP30. Can you quickly introduce investors struggle with.
your company and the REP30?
That’s where we come in. We find the equity markets
misprice E&P assets quite frequently and this is where
Dr Keith Myers (KM) from Richmond the opportunity for the informed investor lies.
Energy Partners: Richmond Energy
Partners are very experienced oil and RSC: Who in your opinion were the major success
gas professionals who provide stories of 2009 and did these companies display any
independent expert research and common characteristics compared with poorer
insights into smaller oil and gas performing companies?
companies for buy-side investors. The
REP30 are 30 E&P companies in the KM: If you judge success by share price only then the
$500m to $12bn market cap range operating outside winners in the REP30 in 2009 were Pacific Rubiales,
of North America that we select every year to OGX and Afren. The catalysts were different in each
research. case – heavy oil production ramp up onshore
Columbia for Pacific Rubiales, exploration success
RSC: What exactly are investors looking for today in offshore Brazil for OGX and a restructured balance
E&P companies? Have their investment criteria sheet and Nigerian reserves growth through appraisal
changed following the recent economic and financial for Afren.
crises and what are you advising your clients to focus
on? RSC: What companies do you believe are best
positioned for growth / success in 2010?
KM: The criteria haven’t changed that much since we
started back in 2006. If you are a long term bull on oil KM: We are not expecting oil price to be a particular
price, as many are, then investing in companies that catalyst in 2010 and therefore the focus is back onto
can access the barrels efficiently makes sense. The finding companies that have good growth prospects
larger the company, the more difficult it is to grow it. and/or undervalued assets. So the key is to find
You don’t expect growth from investing in companies exploring in a sweet spot or appraising
Supermajors; that’s all about the dividends and the discoveries at low cost. Unconventionals, particularly
risk reduction you gain by investing in an integrated shale gas, are hot and investors are looking for
company. companies that are exporting the know-how from
North America to Europe and
Smaller E&Ps are especially beyond. They are hard to find.
attractive as an asset class “We find the equity To find out which companies
as they can grow we favour you would need to
organically. A year ago there markets misprice E&P become a client unfortunately.
was a greater focus on assets quite frequently
financial risks following the RSC: Some E&P companies
collapse of Oilexco. With oil and this is where the struggle with the growth and
prices up 80% last year it
was hard to lose betting on
opportunity for the transition from small to mid-
cap. Is there a magical
E&Ps. In fact all the REP30 informed investor lies.” formula Keith that some of the
companies share values larger companies in the
REP30 have successfully used to achieve this growth Uganda, Cairn in Rajastan. To access an emerging
and sustain this transition? area you either buy your way in at high cost or you do
frontier exploration.
KM: There is not really a magic formula. Typically, the
transition to mid-cap has involved a few acquisitions to New plays can emerge in mature areas too through
scale quickly - e.g. Tullow’s growth has been built on geological creativity or through technological
foundations provided by the acquisitions of Energy innovation – e.g. pre-salt imaging or HPHT drilling
Africa and Hardman Resources in Africa and gas techniques. The common ingredients for success are
assets in the Southern North Sea. Organic growth via local knowledge, an appetite for risk and an ability to
exploration for Tullow has been a phenomenon of the manage it.
last few years only.
RSC: On raising capital, we saw last year a large
number of E&P companies raise funds through equity
“OGX is valued at over based financings. Do you see this trend continuing
$27bn, a lot of money for throughout 2010 and do you believe this deleveraging
is beneficial to the long-term success of the sector?
a company with four
KM: We saw a lot of money for placings by existing
discoveries, and no companies last year but very few IPO’s. The placings
reserves or production.” were required to deleverage balance sheets and/or to
allow the companies to execute their business plans.
Whilst reserves backed lending was still available last
However, recently this formula has been challenged year, pre-development debt funding all but dried up
through the emergence of the mega-explorers such as leaving some companies high and dry without an
OGX and Cobalt International. Here experienced equity injection. Often, existing investors had no
management teams have been backed with billions of choice but to put more money in or let the company
dollars to explore in the hottest exploration areas. This fold. New investors took advantage of lower asset
funding has allowed them to buy up leases by out- valuations.
bidding the majors and super-majors.
There is a big appetite for exploration – witness the
The exploration budgets of OGX and Cobalt are the $450m to fund Falkland’s exploration and the $850m
envy of any exploration manager. Is this a new raised by Cobalt International at IPO. The returns
paradigm – yes but it remains to be seen how much delivered by Kosmos in Ghana and Heritage in
value is created. OGX is valued at over $27bn, a lot of Uganda from pure exploration have not gone un-
money for a company with four discoveries, and no noticed. It is cheaper now for E&Ps to get funding from
reserves or production equity investors than it is from industry (through farm-
outs) and pre-development bank lending is hard to
RSC: Moving the discussion towards exploration, what come by. Whilst this situation exists we will continue to
hotspots have the REP30 focused their recent see more equity raisings.
exploration activity on? Are these regions proving
successful in terms of finding commercial discoveries? It will be beneficial in the long run if the cost of capital
doesn’t increase. However, if the appetite from equity
KM: For the REP30 there is a big difference between investors dries up then there could be a capital
where most wells are being drilled and where oil and drought and trouble ahead.
gas is being found. The drilling hotspots in terms of net
wells drilled for the past 2 years have been Australia, RSC: Many were predicting (expecting) huge M&A
Columbia and Egypt. The hotspots in terms of activity and increased sector consolidation in 2009. Of
discovered volumes have been Brazil and Uganda. course this turned out to be somewhat muted. What
are your thoughts on the “inevitable wave of industry
RSC: Following on, what exploration strategies are consolidation in 2010”? Will this year see significant
proving to be most successful? Are „emerging plays‟ sector consolidation?
the key to future exploration success? And how
important is local knowledge becoming in exploration?
“There is a big appetite for
KM: It depends on the size of the company. If we think
of exploration as a tool for growth rather simply exploration... The returns
replacing production, then the larger the producing
base of the company then the more needs to be found delivered by Kosmos in
to grow the resource base.
Ghana & Heritage in Uganda
Small companies can transform themselves still by from pure exploration have
exploring successfully in mature areas like the UK and
Norway where 10-50 mmbbl fields can still be found at not gone un-noticed.”
1 in 3 success rate.

Transformational exploration for larger E&Ps requires KM: In short, no. We find that 3-4 of the REP30
exposure to ‘emerging’ plays, e.g. Tullow/Heritage in companies are acquired every year usually for cash.
There is no reason to expect it to be any different this When Governments get it wrong the impacts are well
year. Mergers are very hard to make happen – money documented – the ‘Dutch disease’, conflict and
and egos get in the way. instability. Good governance is the key to making oil a
blessing for a country like Ghana. Part of the
challenge is managing expectations – the first phase
“Mergers are very hard to of the Jubilee development may only deliver revenue
make happen – money to the Government the equivalent of $50 per Ghanaian
per year. This will not transform anyone’s life.
and egos get in the way.”
The key is to have the right policies in place, an
effective system of regulation and efficient operations.
RSC: You‟ve been a long-term champion of corporate Ghana could be doing better on all three.
governance Keith and the importance it plays in E&P
companies. Are there simple governance mistakes RSC: If I may Keith I‟ll wrap up by asking your one-
that E&P companies are making that can be easily word opinion (bullish, bearish or uncertain) on the
corrected to strengthen this aspect of their business? future of the following.
KM: There are five principles to follow – Bull or Bear?
1) Clarity of goals, roles and responsibilities, RSC: West Africa?
2) Sustainability and risk management,
3) Accountability for performance, KM: Bull for geology – bear on politics
4) Transparency of information and
5) Management teams enabled with resources and RSC: East Africa?
KM: Bear for oil outside of the rift valley
Things we look for are separation of CEO and
Chairman roles, a majority of independent non- RSC: The AIM market?
executives, and non executives with E&P
management experience. We also rate companies on KM: Needs better regulation
transparency of goals, plans and operational
performance RSC: Micro-cap E&P companies?
RSC: Reflecting on your recent trip to Ghana, where KM: Bear generally but there are exceptions
you met with the Parliament to discuss oil sector
governance, what key challenges does petroleum RSC: As always Keith many thanks for your time and
present to developing countries? And what are your your insight.
thoughts about Ghana as a new oil and gas province?
Dr Keith Myers is a Partner and Director of Richmond
KM: Oil and gas belongs to the nation and the Energy Partners, an independent research house of oil
Government is the steward of the resource on behalf industry professionals who provide independent
of the people of the country. The challenge for an advice on small and mid-cap E&P companies to both
emerging producer is to convert oil in the ground into financial investors and oil companies. Their latest
sustainable financial resources that benefit the nation industry report is available online at
as a whole and not just the ruling elite.

About Keith:

After completing a Ph. D. at Imperial College, Keith joined BP in 1987 as a geologist. Following a variety of technical roles , he
became a Senior Commercial Advisor in 1996 when he led several major negotiations for new business access as well as
Business Strategies for BP‟s business in West Africa and BP‟s Strategic Alliance with Statoil. Since 2000 Keith has been an
advisor to numerous energy companies on strategy and partnership issues.

Keith founded Richmond Energy Partners in 2006 to provide independent advice to investors in smaller oil and gas companies.
Richmond Energy advises some of the largest funds and institutions investing in the sector. Keith takes a keen interest in o il
sector governance and served on the organising committee of the Good Governance of the National Petroleum Sector Project
at the think tank Chatham House.

About Richmond Energy Partners:

Richmond Energy Partners provide detailed analysis of smaller oil and gas companies up to
$12Bn market capitalisation operating principally outside North America. We commit to our
clients to always be independent, objective, and free of conflicts of interest. We believe that to
understand smaller oil and gas companies you have to get down to the rocks. We help our
clients make informed investment decisions founded on a deep understanding of the geology,
the assets and the capabilities of the oil company in question. We tailor our research to the
needs and interests of our individual clients.
In OIl, Gas, MInInG, and CheMICals, needs are very speCIfIC. so are our solutions.

InvestIng In OIL And gAs

IFC’s Oil & Gas Group provides equity and loan financing
to small and midsize independents and larger players in the
oil and gas sector. Our mission is to help companies reach
their full potential in emerging markets and benefit the
countries and communities in which they operate.
Our in-house expertise, regional presence, and detailed project
appraisal allow us to extend long-term financing in
challenging markets.

IFC is a global investor and advisor, supporting

sustainable economic growth in
developing countries by making
private sector investments, mobilizing capital
in the international financial markets, and
providing advisory services to businesses and
Global Oil and Gas Team financial products
• For each transaction we configure a • Equity and early equity (corporate/
dedicated team designed to respond UJV)
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value-added support they need.
• Senior debt (project finance, corpo-
• Our investment professionals carry
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deep sector expertise and a sophis-
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and World Bank industry and policy • Liquefied Natural Gas
• Oilfield Services
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advisory services
• Best practice environmental and
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Our Clients Contact Us
• Community development
• Our clients range from the small- We welcome investment inquiries
• Local supplier programs est of start-up companies to some regarding all emerging markets. If you
• Health and HIV/AIDS programs established multinationals. have an oil and gas project at any
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governance, environmental and Lance Crist
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Photo courtesy Cairn India

Executive Q&A
William (Bill) Le Sage,
OFS Portal
Talking with
Ross Stewart Campbell, CEO, The Oil Council

Date: 8th February 2010

Ross Stewart Campbell (RSC) from their customers, and membership is open to all oilfield
The Oil Council: Bill thanks for joining suppliers with activities in the upstream oil and gas
us today. The OFS Portal has been sector.
around for nine years now
championing eCommerce and its RSC: eCommerce might be for many companies a
importance in upstream oil and gas. secondary priority on their „list of things to do”. What
For those readers not familiar with dangers do companies (and indeed the industry as a
your organisation can you please quickly introduce whole) face if we continue to delay in implementing
yourself and perhaps with this the role of eCommerce eCommerce or adopting the standards?
in upstream oil and gas?
WLS: eCommerce is usually motivated by the benefits
William (Bill) Le Sage from OFS derived from either procurement effectiveness (doing
Portal: Thanks, Ross. OFS Portal the right things) or transactional efficiency (streamline
represents a group of diverse the process to reduce costs). Long term, procurement
suppliers, our Members, and has a effectiveness can provide the most significant benefit
non-profit objective to facilitate by placing more spend under active management.
eCommerce in the upstream oil and
gas industry. With these benefits in mind Ross, the industry is
moving forward. So the dangers of missing out of the
We encourage development and use of standard benefits of eCommerce are very much directed at
business processes and standard electronic those companies that delay implementation of
transactions. OFS Portal can also provide eCommerce. And as more and more companies
standardized electronic information through its own demand that their trading partners adopt eCommerce,
platform. All this is in an effort to respond to Operator it is only a matter of time.
needs and create faster adoption of eCommerce for
the cost savings and functional benefits offered by
electronic commerce. “If the industry is moving
To assist with standards development, we work closely
towards VHS, don’t buy a
with industry volunteer experts in PIDX (Petroleum fancy Betamax player your
Industry Data Exchange) – the industry standards
body. By spend, about 90% of the integrated oil consultant sells you.”
companies and over 30% of the NOCs and
independent oil companies have adopted the use of
these standards. It’s satisfying to see the benefits Not adopting the standards is a large risk for
accrue to these companies as they migrate from paper companies. The value of adopting “one offs” (non-
to electronic commerce. standard solution) might look good at first, but this will
ultimately have to be abandoned with great pain to
Being global in nature we are fortunate that we can implement the standards. Globally it is very difficult to
meet with trading partners all over the world to share conduct eCommerce without the adoption of the PIDX
best practices. Our Members are the best in the standards. If the industry is moving towards VHS,
upstream space and include Baker Hughes, BJ don’t buy a fancy Betamax player your consultant sells
Services, Cameron, Halliburton, M-I Swaco, you.
Schlumberger Oilfield Services, Smith International,
Trican Well Services, Vetco International and Part of successful standard business practices is for
Weatherford International. Our Members use OFS each trading partner to provide the other with
Portal to promote and implement on a consistent reasonable data protection. This would include each
basis, cost effective eCommerce for themselves and partner’s service provider. Buyers are usually
concerned with their data but often don’t realize that payments and visibility in the payment processes.
the suppliers’ data and buyer’s data is comingled in Given the cost and availability of funds, eCommerce
the transaction. Adequate protection of data must be has moved to the forefront for the Chief Financial
afforded the supplier and the buyer. Our experience Officer (and Finance Director).
shows that those buyers and/or their service providers
who do not provide suppliers and their data RSC: Every company and executive, particularly in
reasonable protection face lots of friction in today‟s marketplace, likes to hear the phrases
onboarding suppliers. “increased efficiency” and “cost reduction”. What real
savings can companies make by adopting these
RSC: Standardising global business practices and practices?
frameworks is never easy Bill. What challenges are
you and your team currently encountering and how are
you overcoming these? “eCommerce within NOCs
WLS: Like all good things Ross there is a cost, and it tends to be motivated less
comes in the form of honest organisational self
assessment and a willingness to be flexible. It takes by transactional efficiency
coordination between procurement, operations and
finance to produce a good internal solution. The
but more from transparency
challenges we encounter deal with the maturity of the and procurement
company’s systems but mostly the maturity of their
business processes and their willingness to change to effectiveness.”
meet the global market.

Rarely, is there a huge technical issue, but people WLS: There are real dollar savings. For transactional
often underestimate the extent to which existing efficiency, we hear a wide range of savings depending
business processes are tied to existing technologies – on what is counted in the economics. With some
and how deeply the changes in processes would upstream services, which require engineer input for
extend within an organisation to match new approval, the invoice process can cost well over
technology. $200/per invoice. In an automated process, these
costs can be significantly reduced, though not
As the challenges are mostly organisational issues, we eliminated. The cost savings can be more than two-
typically meet with the sponsor of such an effort in the thirds of that cost. For simple products and services
company to share best practices. Also, we organize the cost saving is not as high.
meetings with other industry trading partners and our
Members to put a real world face on the issues and For procurement effectiveness, eCommerce can
less of a consultant perspective. We encourage significantly increase competiveness of the market by
companies to join PIDX to share challenges and putting more spend under active management. Such
successes. activities have been reported to reduce spend
between 2% and 10%. Given today’s tight margins,
RSC: Have the recent economic and financial crises this is a compelling case.
altered the dynamics of eCommerce in anyway, for
example, the size of the buyer/seller universe, the RSC: Is there a risk that technology and eCommerce
volume of trading or the demands of buyers? in the oil and gas sector is might evolve faster than
standardising practices and processes?

“Given the cost and WLS: That has already been happening. In the early
availability of funds, days, the technology could not match the business
processes in the upstream as most of the purchases
eCommerce has moved were non-explicit purchases (Spend Limit POs, etc.)
But now you are quite right in your concern at the
to the forefront for the company level, in that the internal practices and
Chief Financial Officer processes need to be standardized to take advantage
of the benefits of eCommerce. PIDX by and large has
(and Finance Director).” been able to work as a group well ahead of the curve
to develop industry standards.
WLS: We have seen accelerated growth in
RSC: You appear to be very much ahead of the curve
eCommerce as companies want quick payback from
for what will be an inevitable industry-wide roll-out of
transactional efficiency. These companies can obtain
eCommerce. When you do foresee such a roll-out
savings through the reduction in manual handling and
approval, resulting in fewer errors which must be
resolved and greater visibility of the payment process.
WLS: The roll-out is happening now. Different
segments are moving at different speeds and at
The buyers in this industry who have been the main
different times. The challenge for the supplier is to
motivators and suppliers want to be responsive to
match these different expectations. Global operators
those needs. Suppliers also benefit from faster
have tended to roll-out their North American and/or
European operations first. Our community is defined can adopt and integrate the same practices and
as those operators who embrace the tenants of frameworks as NOCs and IOCs? Is there sufficient
standardized eCommerce. We have over 70 operators benefit / value in small and mid-cap companies
who have agreed to do business in this standardized adopting these standards?
approach and are rolling out their eCommerce
capabilities with their trading partners. WLS: Absolutely. There are networks, service
providers and market places that can help. For the
RSC: Focussing now Bill on some of your recent work small and mid-cap companies, it really is a question of
with NOCs, and in particular emerging market NOCs, desire. There are several low cost alternatives which
how receptive have these companies been in adopting provide PIDX functionality and standards which can
PIDX Industry standards and frameworks? Are all more than adequately serve the small to mid-cap
NOCs currently in a position to adopt these company needs. Some of the fastest adopters have
standards? If not, how far off are some companies been the smaller and more agile operators.
from developing effective eCommerce capability?
RSC: Looking first at this year and then over the
course of 2011-2013, what are the next big milestones
“For the small and mid- for OFS Portal?

cap companies, it really WLS: Geographic expansion is clearly a milestone.

is a question of desire... We have had some very successful meetings in South
East Asia and want to continue our presence in the
Some of the fastest Middle East. We are very much involved in those
adopters have been activities that focus on Africa as well. Continued
evolution of business in Latin America is important to
the smaller and more the industry. All this being said, we will be keeping an
agile operators.” open dialog with the all operators as the industry and
the influential players evolve. The needs will evolve
and we want to be there for them. I believe our
WLS: There is a wide variety of motivation and success proves the non-profit thought leader model.
capabilities, but in general, certainly among the larger We have an undying desire to support the operators in
NOCs, we have seen a strong willingness to a quest for a better industry.
standardize the processes to the extent possible by
local laws. ECommerce in particular gives a level of RSC: If there is one overriding message that you
transparency unavailable historically. Thus, would like our readers to take away with them having
eCommerce within NOCs tends to be motivated less read this interview Bill what would that message be?
by transactional efficiency but more from transparency Also if our readers want to learn more about
and procurement effectiveness. eCommerce where should they turn to?

Some processes are culturally driven within NOCs and WLS: The benefits of eCommerce are clear. Start
are well entrenched, so this is going to take time which now. Certainly we or others we know with experience
we recognise. Many of these processes can be can help your readers in their quest to develop these
accommodated within the current standards. capabilities. They can get back ground information
from us ( or PIDX (
Therefore, most NOCs are in a position to adopt these
standards. As an example, we are working with a large RSC: Thanks for your time Bill; this certainly sheds
Latin American NOC and PIDX, and have some much needed light on an important but
accommodated the standards to work with the tax underexplored topic. We wish you and the OFS team
requirements seen in most Latin American countries. great success in engaging with the industry and in
The larger NOCs with global reach, with which we developing eCommerce across the sector.
have worked, are highly motivated and are developing
very effective eCommerce capabilities.

RSC: Moving from NOCs to small and mid-cap

companies, is it realistic to think that these companies

About OFS Portal: OFS Portal is an organisation with a non-profit objective made up of diverse supplier members with
activities in the upstream oil and gas sector, which is committed to promoting eCommerce and reducing costs.

About William Le Sage: William Le Sage joined OFS Portal at its inception as its CEO; Bill‟s unique industry experience
includes business development and marketing roles at Gulf Oil, Occidental Petroleum and NL Baroid. He has worked with
many upstream Oil and Gas buyers and suppliers implementing their e-commerce solutions since 2001, which allows him a
unique view of the evolving upstream e-commerce landscape as well as practical lessons learned and common challenges
facing the upstream industry.

Within the last month the London Stock Exchange has However, the big difference between the two markets is
published its market statistics for both the Full list and the the average value of each further issue. On average each
AIM market. As to be expected the statistics show very of the further issues on the Full List raised £94.5m each.
different trends to those which we saw during the boom Over twenty times more than that raised on the AIM
years for the sector in 2006 and 2007 and during 2008 as market.
the market fell away.

However, this statistic is skewed by a number of £50

There was only new issue for both the AIM list and Full list million plus raisings during the year on AIM. In total eight
in the last twelve months raising £42 million and £64 companies raised £50million or more from further issues
million respectively. In contrast the number of further on AIM raising between them in excess of £560million.
issues on AIM in the period was a respectable 245 between Strip these companies out of the statistics for further
them raising a total of £1,045m. An average of £4.3m issues on AIM and the average funding raised by the
each. By contrast on the Full list there were only twelve remainder of the companies becomes approximately
further issues. As the table below shows from April £2million each.
onwards the market opened its doors again and allowing
for the traditional quieter summer remained strong.
Surely the question for the eight companies raising in
excess of £50m is which listing should your company be
on? On the one hand the money raised by these companies
Money raised through further issues on the AIM is more in line with the average raised by companies on
January to December 2009 the full list. But on the other hand do these companies
250 really need to deal with the increased regulation of the
200 full list when AIM seems to be working perfectly well for
150 them?

50 In the final quarter of 2009 the Financial Services
0 Authority (FSA) published amendments to the Listing Rules
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month which restructure the listing regime of the main market of
Money raised (£m) the London Stock Exchange into two segments – Premium
and Standard. Under the new regime, issuers with a
Premium Listing will be required to comply with the
‘super-equivalent’ standards while issuers with a Standard
Listing need only comply with the less onerous EU
Money raised through further issues on the Full minimum standards.
January - December 2009
500 Historically companies listed on the main market had to
400 comply with the premium standards to retain their

listings. There was however an exception to this in respect

of overseas companies which had their principle listing
elsewhere. These were known as secondary listed
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec companies and needed only to comply with the less
Month stringent EU minimum standards to retain their secondary
Money raised (£m)
listing in London.
In 2005 the Exchange extended this exception to allow any Whilst the new rules will be effective from 6 April 2010,
overseas company listed on the stock exchange to take the current Secondary Listing (or renamed ‘Standard
advantage of this less stringent regime. This caused two Listing’) Regime will be retrospectively available for UK
issues; companies from 6 October 2009. Companies historically
categorised as ‘Secondary Listed’ companies will now be
It created uncertainty in the market as to when which set referred to as ‘Standard Listed’ companies under the
of rules was applicable, and restructured regime.
It resulted in an approach which could be viewed as
prejudicial to UK companies who could not take advantage For companies looking to IPO the new menu of
of the less stringent EU minimum standards. opportunities provides more choice. It is however worth
noting that while the requirements for a Standard Listing
In making the changes to the listing rules the Stock are less onerous than those for a Premium Listing, they
Exchange has sought to clarify its position as to which will remain significantly more demanding than admission
listing standards apply to companies within each segment. to AIM, both in terms of the listing process and the
continuing obligations.

In summary, the principal changes to the Listing Rules are If AIM can recover its confidence and its position as one of
as follows: the world’s leading markets for emerging companies it
seems unlikely AIM will be threatened by a typical AIM
There will be two listing standards created - Premium
company looking to make the move to a Standard Listing.
and Standard;
What may be more likely is that if investors show
All Premium Listed companies (including overseas confidence in the Standard Listings, the typical Standard
companies) must comply with super-equivalent standards, Listing issuer may be one that might previously have
including a requirement to ‘comply or explain’ against the looked towards AIM rather than comply with the onerous
UK’s Combined Code on Corporate Governance; Premium List standards. Plus, of course, we may see the
likes of those companies already listed on AIM, but who
All Standard Listed companies must comply with EU stand apart from the average entity on AIM through their
minimum listing standards including the requirement to ability to complete significant fund raisings, making the
provide a corporate governance statement together with a leap from AIM to the Standard list. It will be interesting to
description of internal control and risk management watch what happens over the next six to twelve months.

Standard Listings will be available to UK companies and This article was written by Scott Knight, Partner, Head of
not just to overseas companies; and Natural Resources at BDO LLP.
The establishment of a simplified procedure allowing BDO’s Natural Resources team is ranked number one by
companies with an equity listing to transfer from one Hemscott in its quarterly rankings for auditors in the oil
segment to another without the need to cancel their and gas sector. With a dedicated team of professionals
listings. working with clients – from those with early stage
exploration activities to those with full production
In its commentary on the changes, the FSA has stated that portfolios, from those who are looking to raise funds to
the aim of this new approach is to ensure equality of those already listed on the world’s major exchanges, our
treatment between companies listed in the same segment team provide a wide range of services including audit and
regardless of their country of origin or operation. The FSA accountancy services, corporate and personal taxation
services, corporate finance and transaction services and
has also acknowledged that to be effective, the new
forensic and advisory services.
regime will need to be supported by an extensive
educational campaign, the principal purpose being to raise BDO is the fifth largest accountancy network in the world
awareness as to how the new structure will work. which ensures that we can provide our services to you
whenever and wherever your assets may be.

To contact Scott Knight please call +44 (0) 20 7893 3319 or


This publication has been carefully prepared, but should be seen as general guidance only. You should not act upon the information contained in this publication without obtaining
specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO accepts no responsibility for any loss incurred as a
result of acting on information in this publication.
BDO LLP operates across the UK with some 3,000 partners and staff. BDO LLP is a UK limited liability partnership and a UK Member Firm of BDO International. BDO Northern Ireland is a
separate partnership operating under a licence agreement. BDO International is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an
independent legal entity world-wide and no BDO Member Firm is responsible for the acts and omissions of another member. The network is coordinated by BDO Global Coordination B.V.,
incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels,
Belgium, where the International Executive Office is located.
BDO LLP and BDO Northern Ireland are both separately authorised and regulated by the Financial Services Authority to conduct investment business.
BDO is the brand name for the BDO International network and for each of the BDO Member Firms.
BDO LLP and BDO Northern Ireland are the Data Controllers for any personal data that they hold about you. We may disclose your information, under a confidentiality agreement, to a
Data Processor (Shamrock Marketing Ltd). To correct your personal details or if you do not wish us to provide you with information that we believe may be of interest to you, please
telephone (Great Britain - 0870 567 5678 or Belfast - 028 9043 9009).
Copyright © February 10 BDO LLP. All rights reserved.

BDO’s specialist Natural Resources team provide a wide range of

services to clients across the globe. Let us tell you more.

A TRULY INTERNATIONAL NETWORK The BDO network is a living network and our oil and gas
team work together and meet regularly at BDO’s
BDO is the fifth largest accountancy network in the world
international Oil and Gas conferences where there are real
with over 1,000 offices in over 100 countries world-wide
relationships and real personalities – the network is not a
(including exclusive alliances of BDO Member Firms). We
loose umbrella of firms where every firm is different. The
believe passionately in our client’s businesses and the
BDO network is one where the partners know each other
people behind them. We therefore seek to provide a
personally and work with each other on a regular basis to
distinctly different professional service to our clients.
service their client’s needs. These strong relationships
ensure the quality of our work internationally is also
OUR INTERNATIONAL OIL AND GAS TEAMS consistent – you can be sure that the advice you receive
from our African team will be the same standard as that
Our international oil and gas teams are based on five you receive from our Australian team.
continents in Australia, Russia, Africa, the United Kingdom
and the United States. These five centres of excellence
allow us to service our international clients wherever their Our local oil and gas experts have the network of contacts
operations take them. Each centre of excellence include to provide you with the range of services you require.
partner who are local experts in their jurisdictions and Whatever service you need, wherever your oil and gas
provide points of reference for neighbouring countries operations are in the world they will know the person to
when working in the sector. help you.

115 1,138
Present in over More than 1,000
115 countries offices

46,035 Fifth
44,035 partners and BDO is the world’s fifth largest
staff world-wide* accountancy network
Our international Corporate Finance teams provide a wide
BDO can provide you with the wide range of services range of specialist services ranging from flotations (LSE,
you would expect from a major international firm TSX, NYSE, ASX, AIM), due diligence and professional
including: advice in relation to mergers and acquisitions. We are also
able to provide assistance to companies looking to raise
• Assurance
private equity finance and fund private finance initiatives.
• Taxation
• Corporate finance, and
• Forensic services.
BDO has a dedicated and highly experiences international
All our services are tailored to the specific needs forensic accounting team who have the insight to help you
and circumstances of our clients. to solve the most challenging disputes and litigation. We
have a wealth of knowledge and technological expertise to
provide you with the right advice to meet your forensic
ASSURANCE accounting needs.
Our international assurance practice provides our clients We have a strong track record of working with clients in
with a robust external audit reporting service which the sector. Our teams forensic accounting services include
utilises a consistent audit methodology throughout the expert witness services, alternate dispute resolution,
world. Our audit teams spend the majority of their time fraud and financial crime, asset investigation and
working with clients in the sector therefore they recovery, anti-money laundering provisions, technology
understand your business and the issues you face. forensics and valuations.
If it is more than a statutory audit you require we also
provide specialist audit services covering PSC contracts, JV
requirements or governmental fiscal regimes, on top of WHO TO CONTACT
International Financial Reporting Standard conversions, If you are interested in discussing any of our services
technology risk reporting and internal audit services. further, require more information on BDO or you require
assistance in an overseas jurisdiction please contact:

Companies operating in the oil and gas sector often have
complex cross-border structures and employees who spend
long periods of time overseas. It is also becoming
increasingly important for companies to ensure they
minimise their exposure to costly tax regimes through
effective tax planning and for them to also look to
incentivise key employees in a tax efficient way.
Our tax teams provide a wide range of specialist services
covering international tax planning, compliance services
through to advising on the structure of share schemes,
remuneration and reward planning.

This publication has been carefully prepared, but should be seen as general guidance only. You should not act upon the information contained in this publication without obtaining
specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO accepts no responsibility for any loss incurred as a
result of acting on information in this publication.
BDO LLP operates across the UK with some 3,000 partners and staff. BDO LLP is a UK limited liability partnership and a UK Member Firm of BDO International. BDO Northern Ireland is a
separate partnership operating under a licence agreement. BDO International is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an
independent legal entity world-wide and no BDO Member Firm is responsible for the acts and omissions of another member. The network is coordinated by BDO Global Coordination B.V.,
incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels,
Belgium, where the International Executive Office is located.
BDO LLP and BDO Northern Ireland are both separately authorised and regulated by the Financial Services Authority to conduct investment business.
BDO is the brand name for the BDO International network and for each of the BDO Member Firms.
BDO LLP and BDO Northern Ireland are the Data Controllers for any personal data that they hold about you. We may disclose your information, under a confidentiality agreement, to a
Data Processor (Shamrock Marketing Ltd). To correct your personal details or if you do not wish us to provide you with information that we believe may be of interest to you, please
telephone (Great Britain - 0870 567 5678 or Belfast - 028 9043 9009).
Copyright © January 2010 BDO LLP. All rights reserved.
Is Shale Oil Next?

Written by Elaine Reynolds, Oil Analyst, Edison Investment Research

At the World Trade Economic Forum in Davos this This has all been made possible with the application
January, oil executives hit the headlines when they of horizontal drilling and multistage fracturing
heralded the development of unconventional gas technology.
plays as a ‘game changer’.
Modern fraccing technology has certainly moved on
BP CEO Tony Hayward stated that the ability to since I last worked on a frac job in The Netherlands
extract gas from shale rock has transformed the US in the 1990s, and today it is possible to successfully
energy outlook for the next 100 years. Now the carry out multiple fraccing and diversion, with
recent technologies used to access these vast operations that previously took up to four weeks to
quantities of gas are also being applied to shale oil, complete now being carried out in a single day. And
and starting to create a buzz all of their own. as the technology improves and operators gain
experience, the cost of these wells is estimated to
Not to be confused with the kerogen-rich shale oils have reduced by up to 40%.
that require intensive processing to extract, oil-prone
shales have the ability to produce in commercial The success in the Bakken has led to a surge in
quantities now. The predominant tight shale oil play interest in low permeability shale reservoirs, with
to date is the Bakken formation in Montana and companies now taking another look all across the
North Dakota in the US and Saskatchewan in Rockies and Great Plains.
But interest in these plays is no longer confined to
While it has been known for many years that the the US, with prospects now emerging in France,
Bakken contains large quantities of oil, the Poland, Argentina and China.
technology to extract it economically did not exist
until recently, with production rising from 14,000bopd For example, in 2009, the small independent E & P
in the early 1990s to almost 200,000bopd in 2009. company Toreador Resources Corp announced that
it was planning to utilise horizontal drilling and frac
technology on its shale oil assets in the Paris Basin
to the south and east of Paris, believing that this play
“But interest in these is geologically similar to the Bakken and could hold
plays is no longer 30 billion barrels of oil in place.

confined to the US, with And now it looks as if the majors are taking notice,
prospects now emerging with Shell, BP and Statoil reportedly in initial
discussions to buy or partner with Toreador.
in France, Poland,
Argentina and China” So, as you hear all the enthusiastic comments
championing shale gas, remember that shale oil
could be next, and coming to a play near you.

About Elaine:

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

About Edison Investment Research:

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

“How can we attract more young graduates

and talented professionals to be part of
tomorrow’s oil and gas industry?”

“Young professionals today often seek "a higher purpose" in defining their careers, and are thus
attracted more by those industries and firms demonstrating a clear commitment to corporate
social responsibility. The oil and gas industry has made progress on environmental and social
issues in recent years, and we are learning a great deal about how to work with local
communities to make sure they also benefit from our projects. If we want to continue recruiting
top talent, we have to push ourselves even further and make sure the next generation
recognizes that the oil and gas industry is not just about extracting value from the ground but
also giving value back to the community.”

...Lance Crist, Global Head, IFC Oil and Gas (Oil Council Committee Member)

“For me it was a simple decision; I wanted to travel and see the world and I was fortunate to
be in a profession and an industry that allowed me to pursue my passion and get paid for it! In
a career spanning over 40 years, I have worked and explored new oil and gas ventures
in more than 30 countries on six continents. Be a Geologist and See the World".

Abby Badwi, President & CEO, Bankers Petroleum (Oil Council Committee Member)...

“The industry has had its ups and downs and demand for geo scientists and petroleum
engineers has fluxuated with changes in the market place. The oil services industry, the real
innovators in our business, has tried (I should say rather successfully since the late 2008
downturn) to hold on to their technical staff. If the petroleum industry can be convinced to
follow this practice of holding on to their technical staff during periods of economic downturn,
young graduates may become more interested in careers in the industry. For technical people,
the most interesting phase in oil and gas development has only just started. As an industry we
must succeed in communicating this to graduate students and convince them of the
challenging careers in the petroleum sector.”

...Herman Franssen, President, International Energy Associates

“I am reminded of an initiative I found very valuable years ago. In Australia, the midstream and
downstream gas sectors annually invite around 30 rising stars under 30 years old to take part
in "Gas Speak". We were given two days of professional presentation skills training and each
had to give a presentation on the third day. These were judged by a panel of top industry
executives and we were then advised personally by each. It was an opportunity to get to know
our peers from across the country and form, sometimes, lifelong networks. We felt like we were
being recognised and encouraged. Many of us also found mentors. This concept could be
expanded to many areas of business leadership, to complement the many technical skills
courses available. It may not attract people to the industry in the first place (unless it becomes
famous and prestigious), but it does help retain them.”

Emilie Sydney-Smith, Senior Vice President, Investment Banking, Rodman & Renshaw...

“The Oil and Gas industry has, like many other industries, fallen foul of passive management
and a lack of human investment for over two decades now, compounded with the emergence
of competitive industries. A sweeping statement, maybe, maybe not.

However in order to try and create a strategy to redress what has been a continuing downward
spiral of interest in the industry and attract new talent we surely must look at lessons from our
past as part of any future strategy.

I can remember 1990 when E&P companies were conducting their graduate intake or „milk
rounds‟ as it was often referred. Majors such as Shell, BP and Exxon were competing with
each other and Schlumberger for the absolute top graduates, and they got them.
Fast forward to 2005, and one of these same super majors were over the moon because they were now in the
top forty potential employers! In real terms this means that, from the modern day graduates‟ perspective, there
are thirty nine preferred employers to them. We‟re in 2010 now, and it‟s much the same.

Our industry is full of contrasts. In recent years we have seen considerable leaps in certain technologies, and
some may well rival what we see in other industries. At the other end of the scale we have what can best be
described as basic mechanical engineering in a hostile environment, either politically or geographically. How we
survived in this state for so long is entirely down to the dependency we all have for the commodities that are Oil
and Gas. When we look at other industries such as automotive, aerospace, etc, in fact any industrial
manufacturing or services business that employs fully integrated supply chain management, we are, by and
large, decades behind them in our business thinking. Yet despite this we were an industry that graduates fought
to be in. So how do we get them and other skilled people back?

As the years progressed we saw the world move forward, we

saw industries in leisure, commerce, finance and the dot-com “The responsibility for
era boom. We didn‟t move on quite so well. We also saw a
different approach to our teaching and career guidance
change, and therefore
creeping in. Basically our educated and ambitious youth now change of mindset, must
had other options. The responsibility for change, and therefore
change of mindset, must be led by our education systems first be led by our education
and foremost. If that means mass investment and education by systems first and
our great industry into universities and colleges, so be it. The
initial spark of interested students will come from seeds sown foremost.”

As for other skilled personnel, it beggars belief that we are still reluctant to import from other industries. The Oil
and Gas industry has a huge variety of disciplines and sub-disciplines, yet only a tiny portion is actually
proprietary to Oil and Gas. The rest can be transferred, and transferred relatively easily. The initiative here must
surely come from the major players, whether E&P companies or large service companies. The E&P companies in
particular have the ability to train, develop and, as duty holders, can self-regulate in manner that most service
companies simply cannot.

Food for thought.”

...Brian Martin, Managing Partner, Opus Executive Partners

“The oil and gas industry is not what it used to be in terms of attractiveness, resourcefulness,
youthfulness and mobility. The industry used to attract the most revered and talented
professionals of the hydrocarbon era; the designers and builders of magnificent deep-water
drilling and production structures; the builders of mighty onshore and offshore pipelines and
facilities. Today, the industry comprises an increasingly greying and less mobile population
and the youth of today sees the industry as oily rag merchants. Meanwhile, universities
struggle to attract “the brightest and the best” away from the world of “Financial and
PowerPoint Engineering”. Therefore, the success of tomorrow‟s oil and gas industry depends
on recruiting, educating and retaining the most able, motivated and diverse young people,
today. This suggests that there is an urgent need to bring together the industry‟s most
eminent professionals from all disciplines to promote awareness and excellence in the science, black art and
practices of the oil gas industry. The industry‟s prerogative must be to enhance the world‟s oil and gas industry‟s
capabilities, to celebrate excellence and inspire the younger generation of today to follow where we have trod.

Thousands of engineers will be required to make our

“Thousands of engineers will sustainable future a reality. That growing demand sets
us a series of challenges – in education, recruitment
be required to make our and the way we use and promote science and
sustainable future a reality.” engineering for our collective economic benefit. There is
a particular window of opportunity for engineering to
raise its profile.

Whilst some professionals blow their own trumpet about how wonderful they are, most engineers will take a
trumpet apart to find out how it works rather than blow it to attract attention or to celebrate the profession. The
current focus on climate change and the need to complement, upgrade or replace ageing oil and gas
infrastructure, all require the practical solutions that only the wonder of engineering can provide.

While many young people of today remain unsure of the benefits of oil and gas engineering, there have clearly
been recent positive shifts in the perception of engineering amongst the general public and amongst educational
professionals. There must be a real drive towards ensuring that this increasingly positive perception and
recognition of engineering today is passed on to those who will be the oil and gas professionals of tomorrow.

In order to build upon these shifts in perception and keep the oil and gas industry at the forefront of
attractiveness, resourcefulness, youthfulness and mobility, a number of measures could be considered viz.:

 Greater involvement of parents and all educational establishments in oil and gas industry enhancement
and awareness activities;
 Creation of targeted activities and promotional materials communicating the range of benefits and
opportunities of international oil and gas industry careers in schools and universities;
 Oil and gas industry awareness and enhancement activities could be increasingly introduced in schools
and universities as an integral part of the many wider science, technology, engineering and mathematics
initiatives taking place.
 Enrichment activities could also be aimed at making the link between those elements of their studies
that young people enjoy much more explicit such as IT, design and technology and careers in oil and
gas. Oil and gas companies could be encouraged to play a significant role in this, providing site visits
and work experience opportunities in return for tax incentives and the opportunity to promote their
particular business and sector. In addition, by increasing the overall availability of such activities, it
would be likely that more young people will have had the opportunity to visit, see or hear of something
which will present the oil and gas industry in a positive light.
 Restoring Personnel Departments to deal with people‟s needs and abandoning internet based Human
Resource Systems, all in an effort to recognise young people‟s diverse needs, improve employment
terms and conditions and thus find ways to help businesses place and reward people where the
business best needs them.

Our oil and gas forefathers and heroes were very enterprising and the enterprise of the oil and gas industry will
continue to be essential to our future prosperity and sustainability. As an industry, we should always strive to help
society and youth, in particular, to develop in such a way that people can live their lives to the full, whatever their
background or identity. We are living through rapidly changing times, both economically and socially. The more
inclusive and enterprising we are, the more benefits our industry and society will reap. There is thus a clear
linkage between the human resource needs of the international oil and gas industry and the wider sustainability
objectives of our ever increasing global society at large.

We owe it to our children, to ensure that they inherit a better and more sustainable world than the world that we
were born into. There can be no more greater and powerful facilitator, than encouraging them into the great,
international oil and gas industry.”

...David Greer OBE, Chief Executive, Regal Petroleum (Oil Council Committee Member)

Partnership / Advertising Opportunities with The Oil Council

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

For more information please contact:

Laurent Lafont
Vice President,
Business Development,
T: +44 (0) 20 3287 3447

Michael Knowles
Vice President,
Business Development,
T: +44 (0) 79 2516 0724
The Oil Council’s
Energy Capital Assembly – Americas
26-28 October, 2010
The Westin (Times Square), New York, USA
In October we are hosting the ‘2010 Energy Capital Assembly – Americas’. At this
important gathering 300 executives from across The Americas will discuss the
challenges and opportunities that lie ahead for oil and gas focussed CFOs, Finance
Directors, Commercial Directors, Treasurers, Bankers, Brokers, Accountants,
Economists, Venture Capitalists, Investors and Advisors.

Areas of focus include: macroeconomic environment; commodity price forecasts; transaction

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

Confirmed speakers include:

 Matthew Simmons, Founder and Chairman, Simmons & Company (tentative)

 Ken Hersh, CEO, NGP Energy Capital Management
 Terry Newendorp, Chairman and CEO, Taylor-DeJongh
 Lance Crist, Global Head, Oil & Gas, IFC / World Bank
 Kelly Plato, Managing Director, NGP Capital Resources Company
 Brian Spector, Managing Director, Financial Products Origination, BP Americas
 Laurent Lavigne du Cadet, Deputy CEO, Taylor-DeJongh
 James "JW" Vitalone, SVP, Investment Banking, Oberon Securities
 John Graves, Founder, Graves & Co.
The Oil Council’s
Independents Assembly – Americas
26-28 October, 2010
The Westin (Times Square), New York, USA

In October we are hosting the ‘2010 Independents Assembly – Americas’ where over
300 senior-level executives from across The Americas will discuss the challenges and
opportunities that lie ahead for independent oil and gas companies, their partners,
bankers, brokers, advisors, service providers and investors.

Market survival / growth, increasing shareholder value, managing market volatility,

accessing capital and investment, leveraging innovative and strategic leadership, asset
and production development, and finding new reserves remain major challenges to
independent executives, as well as their investors, financiers, partners and service
providers. Our Assembly will discuss what challenges and opportunities tomorrow’s
markets now hold for these executives, as well as highlighting those companies who
are demonstrating great business practice.

Areas of focus include: independent growth strategies; cost management; capital raising; M&A
and IPOs; organic vs. inorganic growth; corporate governance; CEO leadership; PSAs, JVs and
farm-ins; changing investment strategies; sustainable growth; creating shareholder value;
frontier exploration; oil service costs and provision; unconventional oil and natural gas; and
regional forums on Canada, Brazil, Latin America & the Gulf of Mexico.

Speaking Opportunities:

We are currently selecting our executive speaking faculty for this important meeting. If there is
interest from your company in being involved please contact
Diary of a
Commodity Trader
February: Energy Future –
Half-Empty, Half-Full or Just Murky?

By Kevin Kerr, President and CEO, Kerr Trading International

Some say the future for energy is bright, It’s a wakeup call because I think it shocks folks who
others say bleak, the typical half-empty, mistakenly thought prosperity would go on forever.
half-full approach. In the case of energy I What’s the old saying?
believe the water maybe a bit murkier.
“Dinner is always fun until the waiter brings the check.
Murky Outlook It’s easy to look rich as long as you don’t ever pay the
The world keeps turning and the resources get used
up. It’s really quite simple, cheap easy oil is running No sector has recently hit Americans in the wallet
out. Despite that fact, the debates rage over Peak Oil, harder in the last 15 years than energy. But even with
Peak Food and peak everything else. It’s about as those dramatic price increases, major changes in
sensible as rearranging deck chairs on the Titanic. So energy policy are still not happening.
the “experts” continue to debate whether or not
resources are running low. But the evidence is pretty We have seen a very small decrease in gasoline
clear, at least to this trader. usage – only about 1% or so. But while some travel
may be down as costs have gone up, the numbers are
In recent years, we have seen the oil and agriculture not really dramatic.
markets explode. And this could be just the beginning
of the rally, not the end, as some would have you Now I am not pointing fingers. We still like to drive our
believe, especially in oil. Personally, I think we are big SUVs. We still drive alone to work. Most people
about halfway to the new top for many commodities. rarely take public transportation (if there is any). And
That means $200 oil (easily) and gold at $3000. The we love to run our air conditioners full blast while
agriculture markets have even further to go, in my watching the documentaries on global warming and
opinion. Ironically all of these commodities are tied dying polar bears on our 62-inch plasma TVs.
closely together.
Yes, we like to grumble when we fill up those big
Key commodities are becoming scarcer. So we can SUVs, mostly because it’s easier to complain than
expect to see more suffering in the poorest countries make the tough changes that are needed. We feel
first. The facts are fairly grim if we look at them closely. entitled to keep living as we do. Hey, after all, we’ve
There is going to be less of everything. Yet there will earned it. Right? Rather than make difficult choices,
be more people who want those things. Let’s face it – we are in that denial stage and buy the line from the
wars have been fought over far less. government and media that all is well.

Wake Up World The facts and the fiction often get mixed up when
discussing the issue of “Peak Everything.” Take the
In my opinion the World needs a serious wake up call, surging price of crude oil. Some people (including a lot
especially the American public, which is going through of politicians) want to blame the traders and
the classic stages of grief right now. Rising prices are speculators. Other people blame farmers and corn-
just a market-based signal that we are losing our based ethanol. A lot of people blame OPEC. The list of
economic and resource abundance. As the American culprits goes on ad infinitum.
dream fades away, it’s like a death in the family.
The fact remains that it’s not just one reason or
Right now, I think we are between the stages of denial another that we are in this energy disaster; it’s actually
and anger. Ask yourself these questions (depending all of these reasons and others. It’s a culmination of
on where you are in the World): many years of poor energy policy, short-sighted
planning (if you can even call it planning) and an
 What emotions do you think when you pull up overdose of arrogance that only superpowers can
to the fuel pump and have to pay $4+ or more have.
for a gallon of regular gas, or nearly $5+ for a
gallon of diesel? This time around, the demand growth isn’t limited to
 Or how about when you go to the the U.S. or even the Western world. There are 10
supermarket and have to pay $4 for a gallon million new cars and trucks hitting the road this year in
of “store brand” milk, or the same price for a China alone, and millions more joining traffic jams in
loaf of “store brand” bread? India and other emerging markets. OPEC is starting to
 Are your emotions between disbelief and realize that because of this new demand they need us
anger? a lot less than we need them.
Everyone in the Third World wants to live and drive In their quest for oil, the Chinese oil majors have
like big, fat Americans. The global recession may have acquired a variety of holdings in Angola, Azerbaijan,
slowed them down, but both India and China, to name Canada, Chad, Indonesia, Iraq, Iran, Kazakhstan,
two examples are still adding drivers at a furious pace. Myanmar (Burma), Nigeria, Peru, Russia, Singapore
In 2008, emerging markets combined (China, India, (pending), Saudi Arabia, Sudan, Turkmenistan,
Russia and their other "life in the fast lane" buddies) Uzbekistan, and Venezuela.
passed the U.S. in oil use.
You know what that means – the more oil that China
Much of the world saw its oil demand fall sharply in the uses, the less there is for us.
first part of 2009. But in China, oil demand bottomed
quickly and started right back up again. According to Peak Oil doesn't mean 'running out of oil', but rather oil
industry analysts at Platts, China consumed 33.23 production hitting a peak. That’s because we are
million metric tons of oil in May, up a strong 6% from rapidly running out of cheap and plentiful oil, and the
the same month in 2008. oil we have left is harder to get and therefore much
more expensive. Inexpensive oil supports our very
At the same time that China is using more oil, it is way of life, as we know it. But in the long run, it’s going
producing less. China’s own crude oil production to get a lot more expensive – probably so expensive
slipped by more than 1% in May. that we will have to seriously change our way of live,
or have change forced on us.
Why is demand so resilient in China? Well, it heavily
subsidizes the gasoline and diesel that its citizens buy. All in all, it’s a recipe for much higher prices. As long
They are buying more all the time – Chinese car sales as the world’s civilization runs on oil, we’ll pay
are soaring. And China’s aggressive stimulus whatever it costs. There are alternatives to oil, but they
spending is helping their economy recover quickly. aren’t ready yet. Oil prices went down in 2008 – great!
But when prices go lower, oil companies (a) stop their
high-cost production and (b) stop looking for more oil.
“The facts are fairly grim if So, cheaper oil prices just lay the groundwork for the
next oil shock.
we look at them closely.
There is going to be less of There are alternative energy sources, including
Canadian oil sands and shale natural gas. But all of
everything. Yet there will these have the same problem – none are as cheap or
easy to use as good ol’ petroleum. While we may use
be more people who want different energy sources in the future, for now, we
those things. Let’s face it – haven’t found a good replacement. Barring a
breakthrough technology, fossil fuels will remain a
wars have been fought major energy source for at least the next thirty to fifty
over far less.” years.

The Watchword for the Next Five Years: Volatility

To feed the thirsty tiger, China is aggressively looking
worldwide for oil. The major Chinese state oil Crude oil and natural gas seem to have put in major
companies China National Petroleum Corp., the China bottoms recently. But that doesn’t mean they’ll go
Petrochemical Corp. (Sinopec) and China National straight up. Indeed, we should see enough zigs and
Offshore Oil Corp., which itself accounts for more than zags to make a roller coaster ride seem tame. These
10% of China’s domestic crude oil production, are all zigs and zags can be very profitable for traders,
searching for new supplies furiously. especially traders in futures and futures options.

About Kevin Kerr:

Kevin Kerr is a TV and radio investment advisor, his unparalleled expertise in futures and commodities has made him a regular
contributor to news outlets like CNBC, CNN, FOX News, CBS Evening News, Nightly Business Report and many others.
Recently, he was even featured on Jon Stewart's The Daily Show. What's more, Kevin has traded commodities professionally
for the last 19+ years. Kevin began his career on Wall Street in 1989 acting as a currency arbitrage clerk on the former New
York Cotton Exchange and has worked on and owned seats on several of the Commodities Exchanges in N orth America. In
1993, Mr. Kerr joined Intercapital Brokers, in New York and London, trading OTC commodity swaps and options predominantly
in the energy and metals sectors.

About Kerr Trading International:

Kerr Trading International is a diversified commodities firm providing

education, trading and consulting services worldwide. In the fast paced
commodities markets it can be difficult to find someone who wants to take the
time to help you understand the potential profit opportunities as well as the
risks involved in today's markets. KTI is a full service commodity research
company and advisor that always puts its customers first.
The Oil Outlook
February 2010: Refining Doldrums

By Gianna Bern, President, Brookshire Advisory and Research

The close of fourth quarter 2009 earnings so aptly American refiners have been hit the hardest. Asia
illustrated the challenges associated in refining is the only glimmer of light in the global refining
today. Virtually every integrated oil major and sector where crack spreads have risen and refining
independent refiner posted losses in refining margins improved albeit modestly. The impact is
earnings driven by lacklustre global demand for both pervasive and global.
refined products. Even as improved economic
conditions emerge, the oil industry is still reeling Total, Valero, Shell, El Paso, and several other
from the adverse effects of global weakness in integrated majors have all announced refinery
refining. closures and we anticipate more to come.

Anaemic Crack Spreads and Refining Margins Inventories Above Five-year Highs

With the exception of Asia, global refined margins As of February 3, 2010, U.S. crude oil inventory
and crack spreads have declined, in some cases, levels reported by the U.S. Department of Energy
more than US$2.00 to $4.00 per barrel in the past were 328.9 million barrels reflecting healthy levels
two months. We expect both gasoline and heating of crude stocks. Crude oil inventories have been
oil crack spreads to remain anaemic throughout the consistently above five-year levels and we believe
remainder of 2010. The most profound weakness that we will continue to have an abundance of crude
appears in North American and European crack supplies until sustained economy recovery takes
spreads based on WTI or Brent crudes. At the place. Equally concerning, is the global supply of
moment, Asian gasoline crack spreads are north of crude stocks among many other OECD countries.
US$11.00 per barrel having increased almost Asian crude supplies have begun to whittle down in
US$6.00 per barrel since January driven by tighter recent weeks. However, certain Asian economies
supplies and growing gasoline demand. such as Japan, Australia, and New Zealand
continue to exhibit the same lacklustre crude
demand as their North American and European
“I expect continued counterparts.
closures among
Utilization Rates Decrease
independents and
integrated majors” As refiners adjust to the weakness in refined
product demand, global utilization rates are
declining. Both European and U.S. refiners are
Refinery Closures Mount operating at levels considerably below nameplate
capacities. Last week, U.S. refining utilization rates
Refinery closures are quickly becoming common plummeted to 77.7% as reported by the U.S.
place as the industry adjusts to the new normal of Department of Energy. Middle Eastern and Asian
prolonged decline in distillates and gasoline refineries, most notably those in India, are not-so-
demand. While a late January northern hemisphere quietly increasing refining capacity to meet growing
cold weather spell provided a much needed boost domestic demand.
to heating and gasoil prices, the underlying
fundamentals remain the same in the industry. Throughout the remainder of 2010, we anticipate
Integrated oil majors are focusing efforts on the prolonged difficulty throughout the global refining
more profitable exploration and production side of sector. Abundant crude supplies on both sides of
the business and beginning to shed or restructure the Atlantic coupled with pervasive weakness in
refining assets. commercial and industrial demand for refined
products will place the refining sector under
I expect continued closures among independents tremendous pressure. With the exception of the
and integrated majors as the industry seeks to Middle East and Asia, we will continue to witness
minimize losses. Both European and North the downsizing of the global refining industry.

About Gianna: Gianna is an investment advisor and energy analyst with over 20 years of experience in the energy sector (risk
management trading, corporate finance, credit portfolio management, and corporate banking). Gianna is frequently quoted
concerning the energy markets in Bloomberg News, Dow Jones Newswires, Reuters, and Business News Americas.

About Brookshire: Brookshire is an investment advisory firm focused on energy investment research, risk management, and
credit portfolio management with clients in Europe, Latin America & the US.
Golden Barrels
February: Cold Wind
By Simon Hawkins, Managing Director,
Omni Investment Research

It's 4pm on Friday and I’m one of 100 or so analysts least Shell’s relative performance with BP last year
spilling out into Moorgate from the warmth of BG and the fact that the company de-risked its dividend by
Group’s strategy presentation. The chilly Moorgate air announcing it with the results. But when you look what
reminds me of the cold wind that has blown through has happened to banking shares over the last 18
the sector this week: BP, Shell and BG reported months, it’s pretty impressive to be able to sustain
Q4/FY09 numbers and the market responded by such losses alongside such minimal damage to its
wiping off £10.5bn from their market value. share price.

Putting that into context, £10.5bn is equivalent to the But something bothers me. For a long time I’ve heard
combined value of over 100 smaller companies in our people say that the integrateds should be broken up
sector, everything from Sovereign Oil to Afren. I’m because they are too big. And it’s true that analyzing
sure I wasn’t the only analyst Shell is a very different game to
listening to Frank Chapman in
that room to have shivered “Could it be, after all analyzing, say, Tullow because
whatever any broker might try to
just a little when earlier this this time, that there tell you it’s impossible to do a
week we heard how risked NAV of Shell due to its
challenging the 2010 outlook could be an element of scale and complexity.
looks for BP and Shell. Dot-Com bubble sitting
What bothers me is that after
However, after 2 hours with inside the tummy of an many years of relative valuation
BG, I think some of us may be
feeling a little perkier. Not
old economy mollusc?” the integrateds could be
cruising so high that they could
because it’s Friday – though, have become detached from the
after a week like we’ve just had, that does help - but value of their parts, even having taken into account of
because a) the outlook for gas is clearly a lot rosier a “value of integration”. Could it be, after all this time,
than it looks for oil, b) BG Group’s promise to deliver that there could be an element of Dot-Com bubble
6-8% average growth each year for the next 10 years sitting inside the tummy of an old economy mollusc?
from existing assets is, well, pretty stellar and c) Frank
Chapman has an almost Steve Jobs-like passion for Now that would indeed be a cold wind.
his company, which is refreshing and maybe just a
little infectious. Let me know your views at:

The fact that Shell can lose $900 million in its refining
business in one quarter and the shares dip just 2-3%
is testament to just how stratospheric the integrateds
*** Look out for Simon’s regular column, which is
cruise at. Sure, there were some mitigating factors, not released at the middle of every month. ***

About Simon:

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

About Omni Investment Research:

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

*** Current Partners ***

*** Current Associate Partners ***

** Current Lead Media Partners ***
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