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 ‘Drillers and Dealers’
Published by:

The Oil Council

“Engaging Oil & Gas Communities World-wide”

Foreword

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industry. It is entirely focused on sharing insight, analysis, intelligence and thought
leadership across the E&P sector.

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

Ross Stewart Campbell Iain Pitt

Chief Executive Officer, Chief Operating Officer,
The Oil Council The Oil Council
T: +44 (0) 20 8673 3327 T: +27 (0) 21 700 3551
ross.campbell@oilcouncil.com iain.pitt@oilcouncil.com

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 „Drillers and Dealers‟ – May 2010 Edition

 About The Oil Council and „Drillers and Dealers‟

o Contact Details

 Executive Q&A
o An interview with Jess Larsen, President and Senior Managing Director,
Katana Energy Fund LP

 The Oil Council‟s Assemblies in New York City and London

 Executive Q&A
o An interview with JW Vitalone, SVP, Investment Banking, Oberon Securities

 The Finance Forum – Executive Q&A

o An interview with Steve Mills, CEO, Abbotwood (Former Head, Oil & Gas, RBS)

 Oil & Gas Hedging in 2010 and Beyond

o By Mike Corley, Founder and President, EnRisk Partners

 Accelerating Your Projects and Wealth with Private Equity

o By Emilie Sydney-Smith, Partner, MZ Finance S.A

 Our Partners

 Executive Summary – Enhanced Oil Resources Inc.

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

o “Which geographical region(s) holds the greatest (i) exploration potential and
(ii) new growth potential for O&G companies in 2010?”

 “Golden Barrels” (Column) – Processing the Slick

o By Simon Hawkins, Managing Director, Omni Investment Research

 “The Oil Outlook” (Column) – Crude Falls on Sovereign Debt Fears

o By Gianna Bern, President, Brookshire Advisory and Research

 The Gulf Widens

o By Elaine Reynolds, Oil Analyst, Edison Investment Research

www.oilcouncil.com

Ross Stewart Campbell (RSC) from
The Oil Council: Jess, many thanks
for joining us to share your thoughts
on today’s markets. Some of our
readers might not be familiar with
Katana; can you quickly introduce
your company and the investments
in your portfolio?
Jess Larsen (JH) from Katana:
Thanks Ross, Katana is a Calgary
based Private Equity Firm. We invest
growth capital into junior oil and gas
and renewable energy developers.
We typically target what we believe
are more reliable returns; limited-
exploration risk for oil opportunities
and non-technology risk for renewables projects. Our
other soap box is low-cost production like our high
net-back Bakken play in Manitoba that provides our
limited partners with ongoing disbursement checks.
RSC: Looking first at the small-cap (junior) oil and
gas sector Jess, what is the role of juniors in today’s
oil and gas landscape? And how significant a role
will they play in determining the future success of the
industry as a whole?
JL: Juniors will be responsible for enabling the
progression of our industry. Many young engineers
at large firms seem too concerned about protecting
their bonuses to be willing to really push the
envelope or scrounge for every last drop of oil/gas in
a property/field.
“Juniors will be responsible
for enabling the
progression of our industry”
In contrast we often see the best talent leaving those
firms to start junior companies, where going the
extra mile can not only make them millions
personally but also very strong rates of returns for
their investors. This form of reward usually seems to
win when compared to the modestly bigger bonus
www.oilcouncil.com
Executive Q&A
With Jess Larsen,
President and
Senior Managing Director,
Katana Energy Fund LP
Talking with
Ross Stewart Campbell, CEO, The Oil Council
th
Date: 12 May 2010
and pat on the back approach large firms‟ offer for
completing the same work.
-
Juniors will always have a significant role to play
because they are statistically so much better at
finding and proving up new reserve additions than
larger producers. For stock prices these larger
producers need to replace the oil they pump each
year and when they fall short of finding enough
reserves the answer is simply to buy up some juniors
and top up their [possible] growth reserves.
RSC: Many believe in the potential and strong
upside of the junior sector but conversely many also
believe that the sector is too risky to be involved in.
With this in mind would you say Katana has a
greater appetite for risk in your investments, or, that
in fact you’re geared up for greater growth potential
and higher returns on investment?
JL: Listen, there‟s no getting around the fact that
many CEOs in this end of the business are total
gamblers who want to make their next big bet with
your money. Without the right team to verify stories
and top-shelf technical talent to confirm reservoir
characteristics, it can be very hard to tell the
difference between the gamblers and the really great
and reliable management teams.
That said, so many of the truly great management
teams are just not willing to settle for a few hundred
thousand a year, riding a desk, when their own track
record has proven they can consistently create
millions for themselves and others by simply running
their own junior company. At Katana we spend a lot
of time sorting through the chaff until we find these
guys, and it works for us.
RSC: What size of return(s) are Katana typically
looking to make from an investment and do you have
a standard investment period before executing an
exit strategy?
JL: It takes a lot of deal sourcing to find them but
between cash flow and sale price we typically want
to see a project have a 4x–7x upside over maybe
five years or so. With these kinds of goals you can
see why we favour low-cost production, such as oil
wells that only have $20/bbl in costs instead of some
of the giant projects that only have $20/bbl of profit.
“...many CEOs in this end
of the business are total
gamblers who want to
make their next big bet
with your money.”
RSC: In today’s small-cap companies what qualities
and characteristics are you looking for in a future
investment? How do you separate the wheat from
the chaff? Is management the defining key? And
what attracts Katana more: an exploration focus, a
development focus, a production focus, or a mixture
of assets/plays?
JL: We want experienced developers Ross. Teams
that know who is doing what in their area of
operation(s) and how they can acquire and improve
undervalued assets.
Our favourites are management teams that can
show they have done this before and that have
created an entire new opportunity to do it again. We
want to fund a team which has all the details worked
out and the last thing they need is the money, those
are stories that get our attention.
RSC: Turning the tables somewhat now, with your
niche in the marketplace Jess what are companies
who approach Katana typically looking for? Is it
merely a ‘capital pit-stop’, or, are they looking for
management expertise, technical ability, increased
operating capacity, or perhaps a new network of
future investors?
“Juniors should put their
money where their mouth
is and invest more personal
capital. We want to see
100% commitment,
unshakable confidence and
third-party verification.”
JL: Mostly it‟s just the money until they find out what
kind of active partners we are. Once they realize that
we‟re not “bleacher” type investors and that we‟re
willing to get into it up to our elbows with them they
start to view us more like a real business partner, not
“just the investors”.
This includes being willing to help source third party
capital for JVs, or contribute our technical and legal
teams at no cost to them in order to preserve capital
for oil producing capex costs.
www.oilcouncil.com
RSC: Due diligence is key in any transaction Jess.
Do juniors make any typical (and therefore
avoidable) mistakes when looking to attract and
secure private equity partners?
JL: Ross this is something that the industry could
use some work on. Many teams disqualify
themselves early on by not being committed enough
to risk their own dollars and pay for a solid third-party
evaluation of their opportunity. Capital sources like
Katana are typically looking for something that will
be reliably profitable.
The oil business has profit, the first breakdown
comes in how reliably that management team can
execute their plan and come up with the results they
are promising.
Juniors should put their money where their mouth is
and invest more personal capital; proving reliability
with third-party reserves verification and recruiting
more team members and advisors until they know
they have a top 10 sector team. This type of
reliability attracts investment. We want to see 100%
commitment, unshakable confidence and third-party
verification.
RSC: What role should a private equity company
ideally play in a management and direction of a
small-cap oil and gas company?
JL: We think private equity should be the jet fuel in
the small-cap vehicle; more money, more
connections, more senior-level strategy.
RSC: When we spoke with Chris McLean
[Stonechair Capital] earlier this year we discussed
the need for some oil and gas companies to look
more internationally for investment and partners as
some were perhaps guilty of focussing their efforts
too much on local and regional sources of
capital/service.
Are some companies in Western Canada – where a
lot of your investments are based – doing enough to
reach out to the international capital community and
make themselves known?
JL: Unfortunately not. We have recently started The
Energy Entrepreneur (TheEnergyEntrepreneur.com)
to be used as a tool for making that connection, but it
takes real effort if someone wants results.
Many claim their dream is more important to them
than anything else but then aren‟t willing to pay the
price to secure international contacts/expertise and
find those experts to ask how it all works.
One way would be to go to your New York Assembly
this fall where you can meet these kinds of
international investors and financiers.
These energy capital conferences are a great
meeting point to hear real-life stories from veterans
and meet advisors [like Managing Directors of large
investment banks, consultants, brokers and law
firms] who already know people at the capital
sources that a junior would want to get introduced to.
RSC: How underexploited is Western Canada is
terms of small (but economically viable) oil and gas
fields? Would you advise international E&P
companies to look more seriously at the region for
new E&P plays rather than more exotic E&P
opportunities in Africa and Latin America?
the rest of us can do; such as run free seminars to
give entrepreneurs access to known experts and
successful mentors, and have lunch with local
politicians to lobby on their behalf.
On the business side these individuals are the „soon
to be rich‟, they‟re worth investing in by key service
providers (financial, legal, etc) so that they can learn
to make the money needed to build new businesses
and perhaps in turn hire you later in your career.

“...these individuals are the RSC: I’ll wrap up Jess by asking your one-word
„soon to be rich‟, they‟re opinion on the future of the following. Bullish,
Bearish or Uncertain?
worth investing in by key
RSC: The Canadian Economy
service providers”
JL: Bullish
JL: There are positives and negatives about RSC: Stephen Harper
everywhere but the positives in Western Canada are
quite enviable: access to skilled labour and service JL: Uncertain
companies support, possibly the best public
reservoir data of any country in the world, healthy RSC: Oil over $100 before the end of 2010
Canadian banking system for sourcing debt and
economic stability, a well developed regulatory a JL: Uncertain
environment, and security are all favourites of ours.
RSC: The TSX-V
RSC: What’s your outlook for the future of oil and
gas focussed private equity in 2010/2011? Are we JL: Bullish
going to see a new wave of investment and the
resurgence of their involvement and influence in the RSC: Oilsands
industry?
JL: Bullish
JL: With the prospects of higher prices coming,
many more players are already coming to the table. RSC: Thanks for your time Jess.
We have had unsolicited calls from large „household
name‟ financial institutions looking to start new fund
of funds to get into the profits of this business. A lot
of people now realise that even though the recession
has [we believe] been and gone, our world is out of
cheap and easy oil.

RSC: With the risk of perhaps revisiting previous

ground I’d like to ask your opinion on one last topic:
entrepreneurism in the oil and gas industry. Are we,
as an industry, doing enough to foster – and even
champion – entrepreneurs? Are there ways we can
look to reward entrepreneurism more?

JL: My personal opinion is that not enough is done

for entrepreneurs. They‟re the reason we have
progress and adaptation and they deserve all the
help they can get.

On the community citizen side, we hope to inspire

some of our peers to copy us by starting The Energy
Entrepreneur.com, but there are many more things

About Katana and Jess Larsen:

Katana provides growth and development capital to renewable and traditional energy producers and projects. His
career in the energy industry began by building oil and gas pipelines and has progressed beyond the petroleum
industry into the hydro electric and other clean energy production companies. His finance background stems from
his time in Mergers & Acquisitions with Citigroup and subsequent services provided for Energy Private Equity
Groups and Family Offices. For more information on Katana please visit: www.katanaoil.com

www.oilcouncil.com
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23 – 25 November 2010
London, UK

Ross Stewart Campbell (RSC) from
The Oil Council: JW, many thanks
for joining us to share your thoughts
on today’s markets. To cover off
introductions first can you quickly
introduce Oberon Securities and
your position within it?
JW Vitalone (JWV) from Oberon:
Oberon Securities is a New York-
based investment bank that works
with small and mid-sized companies
across a broad range of industries by
providing capital formation and M&A
advisory services, and assists in
obtaining financing through privately
placed equity and debt. The entrepreneurial spirit on
which Oberon was founded nearly ten years ago
also serves as the basis for our approach of working
closely with each individual client to partner with
them and create financial solutions that will best help
achieve its unique financial or strategic objective.
RSC: Looking first JW at the current state of play
with oil and gas investment banking, we endured a
torrid time in 2008-2009 followed by a record year for
many banks and financial service providers in 2009-
2010. What is the general sentiment of oil and gas
bankers in the US today? It is one of optimism,
cautiousness, or, dare we say it bullishness?
“I think it‟s an optimism
that might best be
considered as „guarded‟.”
JWV: As you point out Ross, 2008 – 2009 was a
torrid time for both capital seekers and providers
characterized by a rapid decline in market liquidity
and the sharp drop in commodity prices.
And as you know that led to a good deal of
discussion concerning the possibility of a severe and
prolonged contraction in global economic growth and
the demand for oil and gas. Those markets
subsequently began their recovery as those
concerns became less immediate.
www.oilcouncil.com
Executive Q&A
With JW Vitalone,
Senior Vice President,
Investment Banking,
Oberon Securities
Talking with
Ross Stewart Campbell, CEO, The Oil Council
th
Date: 11 May 2010
As to your question I think oil and gas bankers today
are generally optimistic but even so I think it‟s an
optimism that might best be considered as „guarded‟.
The banker that sees the longer-term oil and gas
supply-demand outlook influencing a positive
operating environment for oil and gas companies is
likely to regard itself as optimistic.
However, that banker probably regards the post-
recovery financial markets as unsettled and
recognizes that the recovery in commodity prices
has more or less been the result of improving oil
prices with natural gas prices improving less so in
the context of increased volatility.
In the current environment the banker is likely to
guard its longer-term optimism by taking a more
selective approach on a near-term basis to its deal
participation.
RSC: Reflecting on the past twelve months JW do
you think the role (and responsibility) of an energy
investment banker has changed in any way following
the crises?
JWV: I‟m not sure the role of the energy banker has
necessarily changed over the past year. Like all
investment bankers their role takes on a number of
different roles with their client during the course of
completing a transaction. However from our recent
experience I‟d say some roles are being taken on
more frequently.
The role of advisor seems to have defaulted to the
top of our list. This has resulted from a higher than
usual level of constant communication with clients
revisiting deal strategies and their likely outcomes, or
involving the preparation of responses to an
increasing number of additional questions posed by
investors/lenders to requests for more detail
concerning the information our client has provided.
Broadly speaking I think the role of advisor will
continue to dominate all others until the capital
markets renew their previous comfort with risk.
On the other hand I‟m not sure that an investment
bank, especially one interested in being successful,
will regard its responsibility as something to be
dialled up or down although I suppose some may
feel it appropriate to expand or shrink the list of
those it regards as having a responsibility to based
on the particular circumstances at the time.
Let me add that here at Oberon there has been no
change to rather high responsibility bar we set when
we fist founded the company.
RSC: Many analysts commented that the crises
removed a number of oil and gas companies from
the marketplace that were not built on viable
business models and strong management teams.
Does the same hold true for energy investment
banking? Have the strongest banks/advisors
survived; those with the greatest depth of expertise,
most diverse business offerings and strongest client
relationships?
JWV: I think there‟s little doubt that to be a
successful company regardless of the industry
requires a viable business model that a strong
management team executes well.
So yes both would also be characteristic of any
successful investment bank. However just as
important to the investment bank‟s success is its
depth of expertise and strength of client relationships
because they speak to the essence of the trust and
confidence that its clients and the markets will
repeatedly look to.
Just as the inefficiencies of certain poorly run
companies tend to be obscured by the veil that
periods of consistently higher oil and gas prices will
provide, periods of “irrational exuberance” can
provide the same cover for those poorly run financial
service companies.
A subsequent crisis or sustained business downturn
will have the effect of lifting that cover exposing each
industry‟s poorly managed organizations and their
inefficiencies. However for investment banks lifting
the curtain is likely to also reveal a misplaced trust
and confidence.
RSC: What should an oil and gas company look for
in their financing partners/advisors?
JWV: That‟s a great question Ross but also one that
is hard to answer because when all is said and done
it‟s the relationship that is established between the
oil and gas company and its investment bank that
will account for much of a successfully completed
capital raise.
“However for investment
banks lifting the
curtain is likely to
also reveal a misplaced
trust and confidence.”
www.oilcouncil.com
What I‟ve found particularly interesting is while it is
easy to get management teams all nodding in
agreement with that premise, there‟s a good chance
there‟s no agreement on what criteria it should
consider to determine whether the desired
relationship with a particular bank is possible.
But because the situation, objectives and financing
goals will be unique to each company, rather than
offering a list of things to look for in their banker, I
can suggest that any company will find helpful clues
by listening carefully to information the banker gives
about itself and the things it considers important to
being a valued partner.
“I think the role of advisor
will continue to dominate
all others until the capital
markets renew their
previous comfort with risk.”
And I can suggest with great certainty that it‟s
virtually impossible for any oil and gas company to
get an appreciation for the relationship it will have
with its banker if the company‟s most important
criteria are how that banker compares relative to
others and the time the bank suggests it will take to
complete the deal.
RSC: Moving onto current market dynamics and
trends JW, you work internationally but with a large
focus on The Americas, what financing trends have
you seen emerging in the past 6-12 months,
particularly for (i) medium-large independents, and
(ii) smaller independents?
JWV: I think we‟ll need to see a few more data
points before we can be certain of any particular
trend emerging.
Our target market is focused on the smaller
independents where more often than not when
engaged to assist with a capital raise the strategy we
present to our client will likely have been strongly
influenced by its profitability, balance sheet and
existing cap structure.
However, considering the general nature of our more
recent strategies we have tended to not include
reserve-based loans as a possible source of funds
because of lenders‟ present level of risk-aversion
and the more conservative LTVs now being applied
to reserves across all categories.
RSC: With regards to demand for capital and supply
of capital, is there enough money to go around
currently?
JWV: Our recent experience involving a couple of
capital raises for small independents would suggest
there is. However it also suggested getting an
investor [or lender] to part with their money is a
different matter as many capital providers continue
to approach new opportunities in the context of a
relatively lower tolerance for risk.
So even though sufficient liquidity exists to fund
capital needs, an oil and gas company preparing to
tap the capital markets will need iron-clad reserve
reports and financials, a well-articulated business
strategy backed by a management team capable of
executing it, plus a fair amount of patience for the
added time needed with more extensive due
diligence.
RSC: Looking at the companies who have
successfully raised capital [and done so with
favourable T&Cs] do they exert qualities and
characteristics that have benefited them in raising
funds and completing transactions more successfully
than their competition?
JWV: Regardless of their size, those companies that
come to the market with opportunities where the
value-added benefit to the company is quickly
recognized along with attractive risk-adjusted
economics readily apparent to the investor or lender
are best positioned for a successful completion of a
financing or acquisition.
Oil and gas companies approaching the market
having a less visible value proposition or economics
have ultimately enjoyed a similar success because
of a constructive relationship with its banker that
enabled the company to convincingly validate its
pursuit of that opportunity.
RSC: Are there any recent deals in the marketplace
that in their own right are either market leading in
their innovation / deal-structuring / value creation?
JWV: Offhand none of recent vintage come to mind
which I think isn‟t surprising given the generally
conservative nature of the industry.
On the other hand I think it‟s possible to consider
deals like ExxonMobil‟s acquisition of XTO or
Chesapeake‟s reordering of it asset portfolio as
market leading – either because of their timing or for
what they reveal about a company‟s perspective of
future commodity prices, its financial health, its
current competitive position or its regulatory outlook.
RSC: What can small-cap oil and gas companies do
better to ensure they can (i) raise capital with more
favourable T&Cs, and (ii) complete A&D and M&A
transactions to receive optimal deal value?
JWV: We frequently remind the small independents
we work with of the importance a rock-solid pro
forma cash flow and production growth projections
and evidence suggesting management‟s ability to
effectively execute its business strategy has leading
up to a successful capital raise or asset transaction.
However, more recently and despite the apparent
ample liquidity available to fund both development
drilling and A&D transactions, we tell those clients
that because of an apparent increase in deal flow –
www.oilcouncil.com
that investors and lenders tell us they‟re now seeing
–, solid pro forma projections and the promise of a
well-executed strategy are necessary for a proposed
deal to make it onto the short list. So within this
context capital raises and asset transactions are
more likely to involve term sheets or deal valuations
that are “competitive”.
Registration is now open for
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RSC: We’ve seen a record amount of A&D and M&A
in the marketplace in the past 6-12 months. Do you
still believe there is value to be acquired from the
range of current assets/companies for sale? Or are
we now getting to the point where assets and plays
are not only as ‘cheap’ as they were but perhaps
‘more expensive’ than they should be? How inline or
skewed are current asset/company valuations?
JWV: Certainly relevant questions but because of
the high degree of correlation, directly and indirectly,
between valuations of oil and gas transactions (or oil
and gas company shares) and oil and gas prices,
current and future, I think they need context to be
best considered.
For example taken from a broader perspective I am
less certain of whether it‟s still possible in today‟s
market to acquire value, than I might be about
whether that likelihood exists for the company that
has engaged us to assist with the A&D transaction it
intends to pursue.
From our initial due diligence and before bringing the
deal to market we will have identified where our
client sees value resulting from that transaction, and
with the synergies or operating efficiencies
anticipated as well as the commodity price
environment assumed, how and how much value it
expects to realize.
RSC: If I may JW I’ll wrap up by asking your one-
word opinion (bullish, bearish or uncertain) on the
future of the following. Bullish, Bearish or Uncertain?
JWV: Sure. But because Oberon Securities is a
regulated broker/dealer under provisions established
by the Financial Industry Regulatory Authority, or
FINRA, I must first preface my one-word responses
by mentioning that they are my opinions only and not
necessarily those of Oberon Securities.
In addition none of my opinions should not be
regarded as investment advice nor as a
recommendation to buy or sell. Also I may or may
not maintain a position in an investment related About JW Vitalone: Prior to joining Oberon Securities, JW
directly or indirectly to the general topics. spent nearly 15 years as an Energy sector equity research
analyst with Wells Fargo Bank, Wachovia Corporation and
Palladian Research covering Oil and Natural Gas
RSC: Understood JW. First up, Barack Obama
Exploration & Production, Oilfield Services & Equipment,
and Power Generation companies. JW‟s extensive
JWV: Uncertain research experience includes macro analysis of oil and gas
markets, fundamental equity analysis and institutional buy-
RSC: The US Dollar side marketing. Soon after earning a law degree, JW
interned with the European Economic Commission as a
JWV: Bearish Charles A. Dana Fellow in International and Comparative
Law, where he worked on developing alternative
approaches to financing lesser developed countries.
RSC: Oil Shale

JWV: Bullish

RSC: Domestic Natural Gas Plays

JWV: Bullish About Oberon Securities: Oberon Securities a New York

based financial advisor addressing the financial needs of
RSC: Small-cap Domestic Focussed Independents small and midsize companies across a broad range of
industries. Our company was founded by senior
JWV: Bullish professionals who have extensive experience in corporate
finance, venture capital, research and operations. Oberon
provides creative financial solutions to innovative
RSC: Small-cap International Focussed
companies that are seeking a significant market presence
Independents in their respective industries. Oberon's professionals have
an average of more than 10 years on Wall Street; that
JWV: Bullish combined experience and our market focus allow us to
bring a level of service and expertise normally available
RSC: Large-cap Domestic Focussed Independents only to large companies. For more information please visit:
www.oberonsecurities.com
JWV: Bullish

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Ed Morse, Tom Petrie, John
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JWV: Uncertain NYC (Oct 26-28). Book now at
RSC: JW, thanks very much for your time and your www.oilcouncil.com
sharing your thoughts.

www.oilcouncil.com

In the first of our interviews on the financing scene for independent oil & gas companies, Ross Stewart
Campbell (RSC) talks to Steve Mills (SM), Head of Oil & Gas at RBS until 2007 and since then a trainer in
project finance and the CEO of Abbotwood Limited.
RSC: Steve, welcome and thanks for agreeing to talk
to us. If my maths are right you had something like a
30-year career in banking before you left to establish
Abbotwood.
SM: That’s right Ross. I worked first for
the HSBC Group, had a spell of a few
years in a corporate finance advisory
“boutique”, which I helped to establish
and then went to Sumitomo Bank as it
was then. I then had a brief period with
Commerzbank before moving to RBS
where I became, as you know, Head of
Oil & Gas Project Finance in London.
The RBS job was definitely the most interesting and
challenging role I have ever had.
RSC: So why leave the world of investment banking to
pursue a career in business training?
SM: A work-life balance issue I suppose. I had always
enjoyed training and mentoring and I wanted to see if I
could make a second career out of it.
I wanted to spend more time with my family too before
the kids left home.
RSC: Where is your work coming from Steve and how
significantly did the financial crises and market
downturn affect your business?
SM: I suspect I’ll answer the first part of your question
as we go along but let me address the second part
first because I think it is probably of more interest to
your readers. There has definitely been an impact
because the raising of debt finance has become
“There is a definite trend
towards club transactions
with joint underwrites.”
www.oilcouncil.com
Executive Q&A
With Steve Mills,
CEO, Abbotwood Ltd, and
Former Head, Oil & Gas,
RBS
Talking with
Ross Stewart Campbell, CEO, The Oil Council
th
Date: 13 May 2010
harder. As I’m sure many of your readers know the
crisis caused a dramatic shrinkage in bank debt
capacity.
Some banks who were formerly big market players
have been taken over by others so the number of
sophisticated lenders has gone down.
And there has been a degree of retrenchment on the
part of some institutions to markets closer to home.
Companies of course still need to raise finance but the
banks are no longer beating on the doors of
borrowers. We’ve witnessed bank credit processes
slow down a bit and credit committees are more
difficult to predict.
For a couple of years now we’ve been out of the liquid
debt market that borrowers enjoyed before the crunch
and it’s now much more about getting the deal
financed than about shaving the last few basis points
off the margin.
Borrowers want to know how to approach banks, how
lenders do their risk assessment and what they can do
to maximise their chances of raising the finance they
need.
RSC: Does that mean that borrowers – both oil and
gas companies and oilfield service companies –
dominate your universe of trainees at the moment?
SM: Definitely not. We training and advising a lot of
bankers too. I think there is a definitely a concern on
the part of some lenders that there’s a need for a
return to basics in terms of careful application of best
practice in both loan origination and portfolio
management.
We’re getting quite a few front-office associates and
managers coming in for the basic “toolkit” of risk
evaluation, debt structuring and documentation skills.
There’s a fair bit of focus too on making sure that the
portfolio managers have the right level of training to be
able to administer and actively manage limited-
recourse oil and gas loan financing books.
There’s also been a fair amount of interest among
banks in the project documentation area – as opposed
to finance documentation that is. While banks are
reasonably good at arranging training for their staff on
loan dox, I don’t think they are always so good on EPC
contracts, sale and off-take agreements, insurance
documentation and so on. We’ve developed some
new products in that area.
With some banks being less keen on emerging market
risk we’ve also seen a resurgence of the export credit
agencies. We’ve had a lot of ECA staff on our courses
over the last year or so.
RSC: Just how tough do you think the market is for
borrowers at the moment?
SM: Well you have to remember that I see the market
at one remove, now that I’m no longer a lender day-to-
day. So my feel for what is going on comes from
conversations with our trainees and with lenders who
are still active.
The sense that I get is that the market is definitely
there for the well managed independent, but some
things have changed. Spreads and fees have
increased, perhaps not as sharply as in some other
project financing areas, but they’re definitely up.
Deals are being run more by the book too – in the
sense that term-sheets are tightening up. Features
that were relinquished by banks having to compete
very hard pre-crunch are back in banks’ first-shot term
sheets and actually I don’t get the sense that banks
are particularly minded or required to negotiate them;
for example 12 month debt service reserve accounts.
You wouldn’t be surprised to see banks looking for
pre-payment penalties either in a market where they
will expect borrowers to refinance when margins and
fees start to fall. For the moment though the
impression that I get is that they are more talked about
than used. I’d welcome other people’s comments on
this.
Some of the more leading-edge products we saw
before the credit crunch have now disappeared, such
Abbotwood Limited provides project finance
training in the oil and gas, power, mining,
infrastructure and PPP/PFI sectors. Its clients
include world-scale banks and project sponsor
companies, market-leading law firms active in
limited-recourse finance and multilateral and
development agencies.
Steve Mills can be contacted at:
Abbotwood Limited
T: +44 118 9472166 / M: + 44 7515 660943
E-Mail: abbotwood@btinternet.com
www.oilcouncil.com
as loans against undeveloped assets. I think banks
are concentrating on good solid borrowing bases for
more established players and where they do single
field financings they want the deal to be fairly classic in
structure
RSC: Classic in what sense Steve?
SM: Good quality sponsor, not too high a
concentration in terms of field ownership, credible field
partners, debt based on P90 reserves, loan value
driven by Loan Life NPV of cash flow over 1.5, that
sort of structure.
RSC: And on that basis you believe deals can get
done?
SM: Absolutely. It means of course that there is more
of an equity requirement than perhaps there was
before the crisis.
Probably the biggest issue still though is syndication.
Smaller deals – say up to €150 million – can be done
on the basis of a club of banks. It’s the bigger deals
that pose the problems.
Arranging banks are still extremely reluctant to
underwrite transactions for fear of ending up with large
unsyndicated exposures on their own balance sheets.
Any underwrite will probably come with market
flexibility clauses which allow the underwriters to
adjust the pricing and indeed the structure of the deal
if this is necessary for them to be able to sell down to
their agreed net-take. There is a definite trend towards
club transactions with joint underwrites.
RSC: Steve thanks for sharing your thoughts with us
and we wish you continued success with Abbotwood.
As this Finance Forum develops we plan to have input
from other bankers, financial officers and advisors and
look forward to this feature of The Oil Council
becoming a very active forum for trading views and
experiences.
SM: Well I would welcome that – particularly if we can
have the experiences and views of a broad spectrum
of lenders, borrowers and equity providers who are
actively arranging transactions in the market right now.
 ENERGY INVESTMENT BANKING

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 Oil & Gas Hedging in 2010 and Beyond
Written by Michael Corley, Founder and President, EnRisk Partners
Since the NYMEX crude oil futures were introduced
in 1983, exploration and production companies
have had the ability to hedge their exposure to
volatile oil and gas prices. However, for many
companies, hedging and risk management can
create as many challenges as they are intended to
solve.
In the past few years we have seen crude oil prices
rise from $50 to $147 only to quickly decline back
to $35 and then rising back to $75 as this article is
being written. A similar history can be shown for
natural gas, with NYMEX futures declining from a
peak of $13 in the summer of 2008 to under $3 in
the fall of 2009 and back to $6 this past winter.
In addition, we have witnessed a credit
environment like none other in recent memory,
which has created many additional challenges for
E&P companies. As if price volatility and credit
constraints aren’t challenging enough, the industry
now faces potential regulatory challenges,
disguised as financial reform, that will most likely
create additional challenges as it relates to oil and
gas hedging.
As we all know, predicting future oil and gas prices
is very difficult, if not impossible. No matter how
sound your analysis it’s simply a very difficult
undertaking as there are so many variables that
come into play.
So what’s an E&P company to do with respect to
hedging? For starters, you need to begin by
determining your tolerance for risk as well as your
hedging goals and objectives.
That is, what are you trying to accomplish by
hedging? Smoothing out volatile cash flows?
Guaranteeing a minimum revenue stream? How
much upside price participation are you willing to
“give up” in order mitigating your exposure to
declining and/or low prices?
www.oilcouncil.com
Only after you have answered these and many
related questions should you begin to determine
what hedging instruments, and the related tenor,
you should consider employing in any given
environment.
Swaps, collars, put options and three-way options,
among others, are all viable hedging instruments
but without proper analysis and planning, an
improper hedging program can create numerous
challenges as well.
In the current environment we can create a strong
case for both $50/BBL and $100/BBL, the key to
hedging success for E&P companies is
implementing a hedging program that “works” in
both high and low price environments.
While price risk is the “energy risk” (the others
being credit, basis, operational and regulatory) that
receives the most attention in the E&P business,
credit risk cannot be ignored, especially in the
current environment.
While credit risk is traditionally viewed, as it relates
to hedging, as the risk related to a counterparty’s
ability to perform, which is most definitely a risk that
demands constant and consistent due diligence,
there is also another aspect of credit risk that has
become prevalent in the current environment.
As an example, in recent months we’ve received
numerous inquiries from O&G producers that are
being forced to find new hedging counter-parties as
their current/former counter-party(s) are no longer
able to provide them the ability to hedge, most
often due to credit related issues.
The reasons are many, but among others, here are
a few that we are witnessing first hand:
 E&Ps’ credit facilities being reduced, which in
turn reduces their credit available for hedging
 Banks energy companies reducing /
eliminating their trading businesses
 Counterparties, both banks and energy
companies, reassessing their risk tolerance
which has forced many counterparties to
severe relationships with their all but their
best/largest customers
So what should E&P companies be doing in order
to avoid these potential scenarios?
Number one, it’s ideal to have at least several
potential counterparties. In addition to traditional
lenders that offer hedging, there are many energy
companies, ranging from boutique trading firms to
major oil companies, which provide E&P
companies the ability to hedge their exposure to oil
and gas prices.
ability of “banks” to trade to trade OTC swaps and
options, etc.
While there are many flaws related to trading in the
proposed legislation, the current version does
include exemptions for “end-users”, which we
believe would include most energy companies,
including E&P companies.
What is not clear is whether a trade between an
E&P company and a bank would have to be
cleared via an exchange or approved clearing
organization. While we are optimistic that the end-
user exemption will allow E&P companies, as well
as all end-users, to hedge in the OTC markets as
they do today, it’s simply too early to say whether
this will actually be the case if/when the legislation
is passed.

Having said that, the process of establishing a
relationship with an additional counterparty(s) can
take weeks, if not months, so it’s best to begin the
process well before you anticipate needing or
wanting to execute a trade.
On this note, if you need assistance locating
potential counterparties please give us a call, we
would be glad to make the proper introductions.
In addition to price and credit risk, E&P companies
may very well be subjected to hedging related
regulatory risk in the months and years to come.
As has been well publicized in the media, the
“financial reform” package being proposed in the
United States seeks to move the majority of over-
the-counter trading onto exchanges, limits the
Which begs the next question, if the majority of
energy trading in the US moves to a cleared
trading environment, will the other major energy
trading hubs (London, Singapore and Calgary)
follow suit with similar legislation and regulations?
Again, it’s too early to tell, especially given the
current political environment across the globe.
In summary, the coming months and years are
going to present many hedging and risk
management challenges to the E&P industry.
All companies will be well served to create and
implement a proper hedging and risk management
policy (or to review and reassess your current
policy(s) if you already have one in place) which
not only addresses price, credit and regulatory risk
but operational and basis risk as well.

Michael Corley is the Founder and President of EnRisk Partners, a Houston based energy trading
and risk management advisory firm. Prior to founding EnRisk Partners, Mr. Corley worked for
several energy consulting firms where he served as an energy trading and risk management
advisor to oil & gas producers, commercial and industrial energy consumers and energy marketers.
Earlier in his career, Mr. Corley was an independent energy trader and a natural gas options broker
at Cantor Fitzgerald. While at Cantor Fitzgerald he also served as a risk management consultant to
a natural gas utility company. Mr. Corley began his career at El Paso Merchant Energy where he
held various positions in trading, structuring, scheduling and quantitative analysis; covering crude
oil, electricity, natural gas, natural gas liquids and refined products.

As a subject matter expert, Mr. Corley regularly advises commercial banks, hedge funds, private
equity firms and professional services firms on various aspects of energy trading and risk
management. Mr. Corley is a graduate of The University of Oklahoma. Mr. Corley can be reached
at +1 713 844 6384 or via the firm’s website: www.enriskpartners.com

www.oilcouncil.com
 Accelerating Your Projects and Wealth with Private Equity
Written by Emilie Sydney-Smith, Partner, MZ Finance S.A.
The year is 2016. 1,000 E&P executives around the
world have just become seriously wealthy. They are
also now revered for turning ambitious projects into
legendary success stories.
They did this by winning their share of the $40
billion worth of the private equity that was allocated
to oil and gas companies in 2010 and 2011.
Private equity accelerated their success.
Stable, Unconstrained Capital
Many E&P companies go public well before they
have the scale to deliver quarter on quarter growth.
They then limp along in an anemic, capital-
constrained state, fearing dilution, and preoccupied
with satisfying the whims of the market, rather than
on actual operations or deal-making. What a waste
of E&P talent.
In contrast, private equity funds generally invest $75
to $300 million with each portfolio company and like
to see projects prudently accelerated. No more
fragmented capital raises.
Private equity’s Limited Partners cannot ask for
their money back early, unlike hedge funds and the
like that were selling out of perfectly good
investments in 2008, because of redemptions.
The Time is Nigh
The stars are now aligning again for this private
equity alternative. Private equity is sitting on a $40
billion war chest, dedicated to oil and gas. Other
than about $12 billion, the bulk was raised in 2007
and early 2008 – in fact in record amounts
compared to previous years.
Private equity literally stopped investing for the last
“The stars are now
aligning again for this
private equity alternative.
Private equity is sitting on
a $40 billion war chest,
dedicated to oil and gas.”
www.oilcouncil.com
two years, except to prop up existing portfolio
companies. For example, in the first half of 2009,
around the bottom of the market, private equity
invested an additional $2.3 billion into 200 of its
existing oil and gas portfolio companies.
Given that much of the $40 billion has been now
burning a hole in their pockets for two of the seven
– ten years that the capital has been available to
the funds from their own Limited Partners, and it
takes three – five years to build and sell a company
for high rates of return, private equity needs to
invest that capital soon.
If you would like a share, it is time to start securing
that capital now. Since last September, we are
seeing private equity investing in new oil and gas
companies again.
Why? Well, their existing portfolio companies have
stabilized, so they are no longer focused solely on
providing executive support. Their confidence is
returning and they are kicking themselves about
missing the bottom of the market. The terms on
offer are normalizing, as they remember that the
best of the best management teams must be
properly compensated.
They are also being more realistic about risk and
opening their minds to exploration and development
projects again, after being wholly preoccupied with
production last year. Plus, the newly minted deals
are creating much needed market metrics, and a
sense of urgency to keep up with their competitors.
Partners with Aligned Interests
Instead of thousands of public market investors,
private-equity backed companies only need to
manage the expectations of one main investor –
one that really understands its business.
Many private equity fund managers were previously
very successful E&P executives, so they know how
to identify like-minded leaders. They often have
their own geologists or engineers on staff to provide
extra back-up in determining who can best discover
and produce oil and gas.
Private equity managers do not only bring capital to
the table. They are so ingrained in the industry that
they can also bring exceptional new assets,
projects, joint venture partners, personnel and
technical ideas. They are like a member of their
portfolio company’s executive team and are fully
invested in the success of the company, but do not
require a salary, or part of the management profit.
The most important thing is to view it as a
partnership and to have a shared vision of how to
develop the company and its assets, just as you
would with your fellow executives.
Double Dip Wealth Creation
The biggest misunderstanding about private equity
is usually about dilution. Given that all the equity
needed by the company is committed upfront by
private equity, subject to juicy new opportunities,
there is no dilution along the way.
This contrasts with public equity raisings where your
equity ownership gets diluted many times (death by
many cuts). In fact, for oil and gas executives, their
equity ownership may even out in the end between
the public and private cases.
With private equity, the company equity is divided
up pro rata between the technical valuation of the
pre-finance company and the capital being
invested, with no upfront promote.
However, with public companies, your equity is all
you have – unlike working with private equity, where
MZ assists small to medium sized oil and gas exploration and production companies around the world to raise
capital, particularly private equity, utilising time-tested, proven methods. Emilie can be reached at: ess@mzf.lu
www.oilcouncil.com
you get to double dip. It is a big double dip: often 20
– 25% of the profits, once the company is sold.
“The most important
thing is to view it as a
partnership and to have
a shared vision of how
to develop the company
and its assets, just as you
would with your
fellow executives.”
Cubic Double Dip
In fact, working with private equity delivers a cubic
double dip for the management team. If you are
working with the optimal amount of capital to
accelerate your dream business plans, you are
generating a return on a larger base.
If you are an E&P executive looking to accelerate
your projects and wealth, while partnering with
investors who are talented peers, you should
consider accessing your share of the $40 billion of
private equity currently available.
Oil Council Partners

www.oilcouncil.com
 Executive Summary
Enhanced Oil Resources Inc. (TSX-V Exchange Symbol EOR.V) is a Houston based oil company that
owns, operates and produces oil from 3 legacy oilfields in the Permian Basin of eastern New Mexico.
The Company’s vision is to become a leading energy producer in the Permian Basin through
development of its oil reserves by utilizing technology improvements such as well down-spacing,
fracture stimulation methods and, longer term, through CO2-EOR enhanced oil recovery. The
Company’s independent engineering consultants have estimated that these 3 legacy oilfields have
produced only 55 Million barrels of oil from a total in-place resource of approximately 320 million
barrels. By utilizing modern technology improvements including full field CO2-EOR these fields could
produce an additional 60 Million barrels of oil and, once developed, could produce in excess of
10,000 barrels of oil per day.

Enhanced Oil Resources is a profitable company, producing an average of 520 barrels of oil per day
at the end of Q1 2010. The Company has assembled an asset base of legacy oilfields that have
considerable potential for reserves and production growth through redevelopment of these assets
by well down-spacing and enhanced oil recovery processes. The Company purchased the oil fields
for less than 10 cents a barrel of potentially recoverable oil, initiated and completed a successful
CO2 pilot flood, commissioned and received independent reserve reports on the EOR-CO2 oil
potential and secured a near term supply of CO2 through a gas delivery contract with Kinder Morgan
CO2 Company, L.P. With the CO2 contract now in hand Enhanced Oil Resources has put in motion the
development of the full CO2 flood that is projected to increase production from current levels to
over 4,500 barrels per day within 4 years.

Enhanced Oil Resources Inc has initiated the re-development of the Milnesand field in preparation
for CO2 injection that is scheduled to begin no later than August 2012. The re-development includes
up to 64 producers and 89 injectors. The re-development plan begins by decreasing well spacing
from 40 acre spacing to 20 acres spacing to increase reserves and production not previously
accessed by the broader well density. The systematic program would consistently increase daily
production up to the injection phase and then increase it once again once injection starts. Estimated
production over the initial infill development program is:

New Wells /
Date Quarter BOPD
St. Johns He/CO2
Q4 2010 5 800
Q1 2011 6 1000
Permian
Q2 2011 6 1200 Basin

Q3 2011 6 1400
Q4 2011 6 1600
Q1 2012 6 1800
Q2 2012 6 2000 Image of Permian Basin,
Q3 2012 6 2200 Eastern New Mexico, USA

Enhanced Oil Resources Inc. TSX-V – EOR www.enhancedoilres.com

CO2 Injection starts during the 4th Quarter of 2012 with peak CO2-EOR oil production increasing by
an additional 3,500 BOPD in Year 4 (2016) of the CO2 flood.

Enhanced Oil Resources Inc. Asset Base

Permian Basin – Oil – Eastern New Mexico

1. Milnesand- San Andres – Roosevelt County, NM – 6,000 Acres

 Discovered in 1956. 93 mmbo in place. Recovered 11 mm bbl oil (mmbo) to date
 Proved: 2.0 mmbo; Probable: 4 mmbo; Possible: 8 mmbo for 3,000 acre project
 Total field potential under full field CO2 flood: 14 mmbo

2. Chaveroo- San Andres – Chavez County, NM – 28,000 Acres

 Discovered in 1952. 180 mmbo in place. Recovered 23 mmbo to date
 Total field potential under full field CO2 flood: 34 mmbo

3. Crossroads (Siluro-Devonian Unit)– Lea County, NM – 800 Acres

 Discovered in 1942. 50 mmbo in place. Recovered 22 mmbo to date
 Proved Developed Reserves 0.8 mmbo
 Total EOR field potential under full field CO2 flood: 11 mmbo

4. St. Johns Field –Helium/CO2– New Mexico & Arizona

 Discovered by the Company in 1994; 36 wells drilled to date
 Potentially the largest undeveloped field of Helium in North America
 In place resource of 62 Bcf Helium; 15 Tcf CO2
 3rd party reserve estimates 26 Bcf Helium; 6 Tcf Co2

Current Focus: Increase oil production through infill drilling of San Andres Reservoirs

Milnesand and Chaveroo

 Potential for 250 20-Acre infill wells  Cumulative production: 38,000 barrels per well
 Capex per well: $500,000  IRR 60%
 Initial Production: 40 bopd  Peak Production under infill drilling:5,500 bopd

Recent Operational and Corporate Highlights

 Executed a 5 Year CO2 supply agreement with Kinder Morgan CO2 Company, L.P.
 Increased YE 2009 Proven & Probable oil reserves by 1300% to 4.5 mmbo
 Increased oil production in 2010 by over 300 %
 Generated positive cash flow for 4th Q 2009 and 1st Q 2010

Contact Information:

Barry Lasker
President, CEO and Director
blasker@enhancedoilres.com

Don Currie, Director, Investor Relations

dcurrie@enhancedoilres.com
+1 604 488 1514

Enhanced Oil Resources Inc. TSX-V – EOR www.enhancedoilres.com

 ‘On the Spot’ with our Question of the Month

“Which geographical region(s) holds the greatest

(i) exploration potential and (ii) new growth
potential for O&G companies in 2010?”

“Any significant exploration potential for IOCs is rapidly diminishing due to the continuing –
and expanding – effort of key producing and highly prospective resource countries to keep
full control over their resources, and/or, to extract previously given concessions back from
IOCs. These “repatriations” are frequently acts of blatant blackmail, i.e.: Russia,
Kazakhstan, Venezuela, Bolivia, etc.

Consumer countries [like China] have now entered into the bidding for the few remaining
prospects open to IOCs with offers that are strictly politically motivated (for a variety of
reasons including creating markets for consumer goods and trade agreements, political
alliances and energy source protection) and have no resemblance of any minimum economic returns typically
required by IOCs, have cleaned out most of the opportunities for the IOCs.

State-controlled or state-owned companies are also willing to take much higher risks than reasonable IOCs can
afford, i.e.: in Iraq or bypassing and ignoring sanctions in countries like Iran and Syria, etc.

Then there is the challenge of NOCs that expand beyond their own borders and avail themselves of Government-
to-Government deals that are outside the reach of IOCs, i.e. Malaysia, etc.

There are certainly some prospects for the IOCs left, especially in areas that require unique expertise to extract
the resources at acceptable risks and expenses – i.e.: Golf of Mexico, North Sea, West Africa, Alaska, etc. – as
well as non-traditional resources like, sour gas, tight gas, oil sands, shale oil, super heavy and sour crude, all of
which however have substantial economic and environmental challenges.

Finally, those historic opportunities for IOCs requiring their unique expertise have been virtually eliminated by the
respective expertise gained by the NOCs and by the considerable expansion of the services of the Oil Service
Companies to whom much of the respective IOC‟s expertise has been outsourced during the recent 1-2 decades.

The pie of opportunities has significantly shrunk. However, for the truly innovative operator and oriented niche
companies there are still a few attractive pieces left that have to be targeted with a matching of unique skills with
unique opportunities.

I wish I could be more optimistic, especially since I am still holding plenty of IOCs stock, but the longer term
outlook for the IOCs looks bleak in upstream.”

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

“Areas which were previously closed with proven hydrocarbon plays offer the greatest
exploration potential. Developments in technology can unlock vast new resources that are
not being targeted. Iraq/Kurdistan, Libya and the US Eastern Gulf of Mexico & East coast
are the most prominent examples of areas which were closed for political reasons.
Environmentally sensitive areas such as the disputed zone between Norway & Russia and
the Norwegian Nordland 6&7 areas offshore Lofoten both offer great potential.

New ideas and play concepts are always going to be important. The old maxim “oil is found
in the minds of people” is key. Analogues are often important in identifying new play types.
In Morocco, Canamens has accessed a complete play fairway based on an analogy where we are evaluating
opportunities that have not been explored previously. In another part of North Africa we have identified a
stratigraphic play with significant potential.

www.oilcouncil.com
Technology is also opening up new oil and gas resources. Over the last 15 years the use of sophisticated seismic
undershooting of salt canopies in the deep water Gulf of Mexico, and development of new seismic processing
algorithms for pre-stack depth migration to create high quality imaging of sub-salt structures have proved very
important. Application of 3D seismic in proven hydrocarbon basins where it has not been previously applied will
dramatically increase success rates, and enable imaging of plays not yet targeted. Canamens is applying this in
western Kazakhstan, where seismic attributes will be used to evaluate Cretaceous and Jurassic channels.”

... Greg Coleman, CEO, Canamens Energy including the thoughts of colleagues John Pickard, Vice
President of Exploration and Peter Manoogian, Vice President of Business Development
(Oil Council Members)

“2009 was characterised by economic uncertainty and falling oil prices which actually saw
global offshore expenditure decrease by 5.0% to just over $230bn. As the oil price and
economies have begun to recover, we expect to see confidence creep back into the industry
with slightly higher E&P budgets with offshore spending forecasted to reach just over
$233bn.

We see regions in the deep water arena continue to play a major part in the portfolios of the
major IOCs (such as Total, Shell and BP) and some NOCs (Petrobras and Statoil).
Regionally, the focus will remain on the deep water „golden triangle‟ (the African, Gulf of
Mexico and Brazilian areas) which will represent 79% of deep water spend in 2010.

The emergence of Asia as a significant deep water region should not be overlooked. Asian deep water
expenditure in 2010 is expected to reach $1.6bn – with the main developments to occur off Malaysia and
Indonesia. Shell‟s Gumusut and Chevron‟s Gehem & Gendalo, for example, are scheduled to come on-stream in
2010.

Whilst there is substantially more production from onshore areas than offshore, onshore areas have been
relatively well explored and have been exploited for much longer with far more fields in production. Offshore
production is now increasing and will continue to rise in the future especially as more deep water fields come on-
stream.

There are challenges however. The tragic incident at the Macondo well in the US Gulf of Mexico is illustrative of
the danger and technical difficulties of operating in deep environments. While the fallout on offshore operations in
general remains to be seen, there is no doubt that the industry and governments will react to the incident with
increased legislation.”

... Andrew Reid, Managing Director, Douglas Westwood

“As a successful international oil finder with 30 years of experience on most but not all
continents, I think my perspective will be found of some interest. The question is oddly
phrased, as “exploration potential” is not something that can be realised in the seven
months remaining in 2010. Growth, however, can be viewed as reflecting where attention is
about to focus. Let‟s go through this at the continental scale:

 North America: unconventional and then shale gas have revolutionised exploration
activity there this last decade. What about fractured and dolomitised limestones?
All this could be dwarfed by the opening up of the Atlantic and then Pacific shelves.
Never forget the Cook Inlet.

 Central America: will Mexico ever be open to the foreign risk capital it needs? Cuba could yet lead the
way. In the rest of the Caribbean, evolving tectonic models nudge us towards countries and island
territories, many with little by way of precedence for material discoveries.

 South America: if we write-off Venezuela, the issue becomes almost one of defining space to swing the
proverbial cat in investment-friendly countries such as Colombia and Peru. But no one shows any
intention of drilling my pet prospects there, because they are further up the risk-reward profile than
capital-constrained operators have been prepared to contemplate this last decade. Watch the large
hydrodynamic play out in the sub-Andean basins. In slightly less attractive countries such as Brazil and
Argentina, there is still a great deal to be done, provided regulations don‟t stifle innovative activity.

www.oilcouncil.com
  Africa: the littoral and deep shelf off West Africa continues rightly to surprise, and with so many
unexplored zones along that trend, will carry on doing so. As to East Africa, although I have been
proven wrong several times already, I still feel uncomfortable with this as a major focus area; offshore
makes more sense than onshore. The southern half of the continent is still so underexplored, one hardly
knows where to start; this is for the longer term. North Africa will continue to bubble away, but it is hard
to see any marked changes to the status quo there. Oh to have a free hand to explore in Libya again!

 Europe: the geopolitical paradigm sets the pace here, demanding constant re-evaluation of the most
studied basins on the planet. Both CBM and unconventional/shale gas could have great futures, if costs
can be kept down and prices rise, almost irrespective of resource materiality. Still great conventional
opportunities along the Atlantic margins of Iberia, Ireland and Norway.

 FSU: such a shame that political and legal issues get between foreign capital and some of the greatest
untapped reserves on the planet. This is no more likely to improve in the next decade than the last.

 Middle East: the highlight here is Kurdistan. Those who entered early and built the relationships are
going to see the rewards. But my “fantasy exploration playground #1” is still Iran.

 South Asia: great things have been achieved in India this last decade; they could be continued if the
game were raised in the fold belt of the north-eastern states, in and around Bangladesh.

 East Asia: so competitive, but the Philippines has so many un- or under-explored basins.”

... Dr Martin Keeley, President, Cascadia Hydrocarbon Incubator Funds and CEO, Finavera Gas
(Oil Council Member)

“In some ways, as in geology, the past holds the key to the future. The exploration hot
spots of recent years have been Brazil, the US Gulf of Mexico, Angola/Congo,
Ghana/Uganda, Iraq and Norway. Although these are places for larger volume success,
they also bring their own challenges either in terms of fiscal regime/contracts, politics, water
depth/cost and obviously competition. All of those areas will provide production growth in
the short-term but some will also provide exciting discoveries in the future. Iraqi Kurdistan is
one of those promising area: onshore with low geological risk and at the low point of the
political cycle, ready for a bounce in asset prices and further discoveries.

New exploration hotspots may open up, subject to wildcat success, from ongoing programs in Greenland, the
Falklands and East Africa. The latter in particular is also very promising, with the whole African rift valley and the
Indian oceanic margin still at an early stage of exploration.

Exploitation contracts to develop discovered fields in Iraq and Venezuela look commercially challenging, but the
potential oil volumes are huge, hence will continue to attract the interest of the industry.

Unconventional sources have obviously seen massive growth in the US, Canada and Australia. The significant
unproven unconventional gas potential in Europe, China and India could provide a long-term source of clean
energy, feeding growing economies in China and India, or diminishing European dependence on Russian gas. In
that respect, the forthcoming exploration of the shale gas play in Poland is of particular interest.”

... Lionel Therond, Head, Oil & Gas Research, Fox-Davies Capital
(Oil Council Member)

“From a new growth potential, Colombia has shown over the past five years that it can provide very interesting
exploration potential. In addition to smaller size fields (double digit million boes), high-impact exploration potential
exists both offshore as well as in the llanos basin. Albania has an interesting sub thrust belt play unfolding right
now (Petromanas). Off-shore Indonesia is another area of interest (although Exxon might not agree after their
last two wells there). While not exploration, Alberta's oil sands could prove to be a large area of growth going
forward.”

... Rafi Khouri, Oil & Gas Equity Analyst, Raymond James
(Oil Council Member)

www.oilcouncil.com
“I feel that the next “big” thing will lie in deep water offshore Brazil. Whilst most of the noise is concentrated
around the Santos Basin the, not-so-widely-discussed, subsalt areas of the Campos Basin – which are still
largely unexplored – have the potential to be a prolific and exciting area for explorers.”

... Rajat Kapoor, Deputy General Manager, Business Development, Essar Oil Limited
(Oil Council Member)

"North America and Africa may hold the greatest potential for oil and gas companies in
2010, albeit for different reasons. Technological advances will continue to enhance the
prospects of shale gas in North America. The abundance of shale gas reserves mean
significant growth potential for operators in the US and Canada. Eventually, this „gas rush‟ is
expected to carry over to other continents, though that is unlikely to happen in 2010. The
deep water potential of the Gulf of Mexico, indisputable just a few weeks ago, may be limited
in 2010 given the BP oil spill, which has lead to a backlash against offshore drilling in
general.

Africa offers significant exploration potential. Ghana‟s new Jubilee field, expected to come
on line late 2010, has estimated reserves of 1.2 billion barrels. Tullow and Heritage estimate
that Uganda may have reserves of up to 2 billion barrels. A range of countries, including Sao
Tome, Gabon and Mozambique, are in the process of licensing significant exploration
properties. However, oil companies operating in Africa must be prepared to face challenges
stemming from political uncertainty and limited infrastructure."

... Shamshek Asad, Head of Research, Taylor-DeJongh and

... Eugene Zamastsyanin, Associate, Taylor-DeJongh
(Oil Council Partners)

“2010 is of particular interest from an exploration perspective due to operational activity in a

number of regions that are largely unexplored. Early news from the South Atlantic has been
somewhat mixed. Turning to Greenland, whose latitude is further north than the Falkland
Island is south; Cairn Energy‟s summer programme of exploration drilling will be keenly
watched.

North Africa and the ME hold the largest growth potential for 2010. The brightest spot is Iraq
which will be resurgent and command significant industry resource and expertise. Certain
countries in South America, West Africa and Central Asia also offer significant upside.

Looking forward beyond the current year, alternatives, in particular tar sands, will look attractive if commodity
prices increase further in 2010. Canada will once again boom. Countries such as Venezuela, Mexico, Russia,
Nigeria and Iran have considerable potential to unlock should they offer more favourable business environments.
Libya is a good example of the industry‟s ability to re-energise a market in response to a positive change in
energy policy.”

... Colin David, International Business Development Manager, Senergy

(Oil Council Member)

“East Africa is becoming an obvious first choice for E&P companies looking for high potential projects. In fact,
East Africa holds very large areas that have only been sparsely explored and largely underexploited and that are
showing today the highest potential in the African continent.

For example most recently with the Uganda Lake Albert basin (700 mmboe reserves estimates), the huge gas
discoveries in Tanzania and Mozambique (i.e. Anadarko‟s Rovuma basin February 2010 discovery), as well as,
the Morondava basin in Madagascar with the multi-billion heavy oil discoveries (Bemolonga and Tsimiroro
onshore discoveries currently under feasibility assessment by Total and Madagascar Oil), and the recent light oil
discovery from Sunpec (October 2009, South West Madagascar, reserves not communicated yet).

www.oilcouncil.com
As more and more mid-cap and major E&P companies invest here, MOCOH understands this huge potential and
has decided to be part of the East African upstream development and success by exploring the very prospective
onshore acreages of Madagascar. We‟re currently considering deploying more resources in this region for the
future.”

... Michael Hacking, Managing Director, MOCOH SA

(Oil Council Member)

 Which geographical region(s) do you feel holds the greatest (i) exploration potential?

“Demand for new fossil fuels has increased dramatically over the last few years, partly due to the need of the
Chinese and Indian NOCs to secure energy supplies to support their GDP growth projections. This will likely
result in a global search, including an increase in M&A activity, in parallel with exploration efforts continuing into
deeper waters offshore West Africa, Brazil and India. In particular, SE Asia (where I have been working for the
last two years) still holds tremendous potential despite the intense drilling activity over the last 20 years. The
MOC‟s and NOC‟s can still focus on new deep water exploration (such as the Makassar Straits and Papuan
Basins), mid-caps continue to discover new fields on the shelfal regions and onshore, where new entrants can
focus on low-cost onshore exploration, near-term development opportunities and even reworking “old” plays with
new concepts.”

 Which geographical region(s) do you feel holds the greatest (ii) new growth potential for O&G
companies in 2010?

“I work for a small company which has the ability to compete within a niche play in SE Asia. Despite the large
number of active players, opportunities are abound for companies that are willing to take a technical risk of new
play concepts, and willing to take a commercial risk regarding “delivery”. The latter includes regulatory delays in
terms of permits and approvals, plus uncertainty about commodity prices especially when monetising gas
discoveries.

However, many SE Asian Basins are under-explored, especially in terms of deeper Tertiary plays. There are still
frontier basins that have limited seismic and no well penetrations which are currently attracting renewed attention
from new entrants (and even MOC‟s in the deeper waters). The region appears to have emerged from the global
financial crisis relatively unscathed, and in recent months M&A activity has increased – including the acquisition
of Black Gold by Niko, the purchase of Nations Petroleum assets and new entrants like KrisEnergy making an
immediate impact, to name a few. This is of course within a backdrop of continued farm outs, licensing rounds
and ongoing exploration activity.”

... Shaun Richardson, Director, Far East, Exploration, Harvest Far East Pte Ltd
(Oil Council Member)

www.oilcouncil.com
 Rystad Energy – ‘Drillers and Dealers’, May 2010

May’s Question of the Month:

“Which geographical region(s) holds the greatest (i)

exploration potential and (ii) new growth potential for O&G
companies in 2010?”
 Which geographical region(s) holds the greatest
exploration potential:
Figure 1
Resources (Mmboe)
Which
geographical
region(s) holds
the greatest
exploration
potential:

According to
expected yet-to-
find resources in
licensed areas
and expected
expenditure in
exploration
activities by the
world wide O&G
community,
Rystad Energy
expects South
America (Brazil)
to hold biggest
exploration
potential in 2010
followed by
North America
(US) and the
Middle East
(Iraq).

Source: UCubeTM – a proprietary, global upstream database developed by Rystad Energy – a Norwegian upstream consultancy firm.
 Which geographical region(s) holds the greatest
exploration potential:
Figure 2
Resources (Mmboe)
Which
geographical
region(s) holds
the greatest
exploration
potential:

The
corresponding
exploration
expenditure is
revealing a
somewhat
different picture,
were exploration
expenditure in
the US is
markedly higher
than for example
Brazil and the
Middle East

In immature
basins like
offshore Brazil
the exploration
efficiency per
invested US$ is
higher than in
the more mature
provinces like
North America
and Europe

Source: UCubeTM – a proprietary, global upstream database developed by Rystad Energy – a Norwegian upstream consultancy firm.
 Which geographical region(s) holds new growth
potential for O&G companies in 2010

Resources (Mmboe)
Which
geographical
region(s) holds
new growth
potential for O&G
companies in 2010:
If asset interests
held by national oil
companies
(NOC/INOC) are
excluded from the
dataset and we only
focus on entitled
conventional
resources (i.e. exc.
unconventional and
government take in
production sharing
agreements) and
investigate resource
base (as per YE09)
for the individual
regions by a life
cycle palette, it is
evident that North
America and Russia
provides the overall
largest resource
base available for
non-government
controlled
companies.
However, if the
focus is on
undeveloped
resources rather
than production,
Australia and West
of Africa is more
attractive

Source: UCubeTM – a proprietary, global upstream database developed by Rystad Energy – a Norwegian upstream consultancy firm.
 Advisor
y Firm

UCube introduction Consult

Global
Resear
ing ch
Databa
Service Product
ses
s s

• UCube is a database for complete information access, analyses and decision making for the global
upstream oil & gas industry
• Provides field by field bottom-up reserves, production, financial figures and a range of additional
decision parameters with a time span of 200 years
• Contains 70,000 oil and gas fields and licenses and more than 3,000 companies.

UCube Benefits

• One integrated and easy-to-use database with instant graphs, maps and tables
• Complete global coverage of oil and gas including unconventional, NGLs, US onshore and yet-to-find
resources
• Forecasting of production and economics on asset level, aggregated along all dimensions
• State-of-the-art OLAP cube* technology enabling extremely quick slice & dice of data
• Easy export to PowerPoint and Excel for producing presentations and reports

UCube – Multi-Purpose Tool

• Multi-use – one database with flexibility for a variety of purposes within strategy and business
• Macro overview; Explore global production and oil economics by geography, owner, life cycle or
facility
• Competitor intelligence: Get immediate overview on competitors portfolio and cash flow situation
• Deal screening; Find targets for acquisitions or farm-ins from a wide range of search criteria
• Benchmarking; Compare companies on dimensions like production, reserves, exploration or
economics
• Valuation; Get immediate valuation of assets and portfolios globally.
• Oil service market: Map future markets for oil service broken down by operator, facility type and
geography
• Exploration analysis: Understand exploration trends and see acreage

For more information contact:

Knud Nørve,
Senior Partner,
T: +47 67 11 83 85
knud.norve@rystadenergy.com
 Golden Barrels
May: Processing the Slick
By Simon Hawkins, Managing Director,
Omni Investment Research

BP's first quarter analyst conference call felt a little like
visiting a sick relative in hospital – trying to process a
mix of human emotion and the reality of a situation you
really didn’t want to happen.
It was a week after the explosion of the Deepwater
Horizon and as Byron Grote, the company's CFO,
came to the end of talking us through the numbers the
call was opened up for questions. At that point we
were all wondering if it really was 'ok' to ask about the
things we were most worried about, like what exactly
happened? How serious is the situation? How long
until it gets better? And, the big one, despite being
deeply concerned about the human tragedy we really
did need some clarification on who's picking up the bill.
“...how can a leading
The growing slick threatening the Louisiana shores
has become a metaphor for the dark shadow the
incident has cast across the whole sector. We have a
little more information about what caused the accident
and, as companies appear before two US Senate
panels, some initial finger pointing has started. But we
still don't know just how bad this catastrophe is going
to get and, critically, how BP is going to stop 5,000 b/d
from further devastating the ecology and economy of a
beautiful coastline, which I now feel lucky to have
enjoyed on holiday just a few months ago.
A number if things still don't add up and probably won't
for some time. For me, the biggest question is this: if
BP has all the right processes in place, how can a
leading company in an industry that prides itself in the
way it manages risk, fall down what today seems to be
a bottomless chasm of exposure?

company in an industry Zooming out, is it possible this kind of exposure exists

that prides itself in the
way it manages risk fall
down what today seems
to be a bottomless chasm
of exposure?”
The questions were generally respectfully sombre and
the answers confirmed and clarified that yes, BP is
responsible for the cleanup and no, there was no third
party insurance so the company is basically liable for
everything. Inevitably, as questions got deeper, we got
fewer answers as the company still had limited
information.
As I type, we are another couple of weeks into this, BP
has had $30 billion wiped off its market value and
there are still a lot of unanswered questions.
right across the sector? What if it were to happen to a
smaller company? What is the 'right' size of company
to engage in deep-water drilling? Should we be linking
such exposure to market capitalisation? What are the
implications for investors?
The way BP responds to this tragedy will tell the world
a lot about the corporate character of Western oil
companies and this in turn will have an important
influence on the global opportunities for the industry
and investors. In many ways Tony Hayward is not just
leading what used to be Europe's largest oil company
but right now he is bearing a responsibility for the
whole of the industry.
As if containing oil gushing into the Gulf of Mexico and
processing the slick wasn’t enough.
Let me know your views at:
goldenbarrels@omniir.co.uk

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.

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.

www.oilcouncil.com
 The Oil Outlook
May 2010:
Crude Falls on Sovereign Debt Fears
By Gianna Bern, President,
Brookshire Advisory and Research

Over the course of several days, crude oil prices

proceeded to fall almost $10 per barrel, as the
markets continued to weigh the consequences of a
“…the risk and fear of a
spreading European sovereign crisis. sovereign debt contagion
Given that Greece is a relatively smaller economy, I
is far worse than the fear
am not overly concerned about a potential default. I of an actual Greek
tend to view the Greek drama situation as a wake-
up call for the UK, US, and other major economies sovereign default itself.”
with considerable budget deficits.
At worst, sovereign defaults have the potential to
On April 27th, Spain, Portugal, and Greek were
drag down commodity markets along with them.
furthered downgraded by one of the major rating
Think Russian default or Asian economic crisis of
agencies and placed on Negative Outlook triggering
the 1990’s.
the fall in both equity and commodity prices. So
what does that mean for crude prices?
Prior to this correction, crude oil prices were getting
ahead of themselves at $86 per barrel. At $75 per
It means that expectations of a global economic
barrel, crude oil prices are still healthy and permit
recovery may be postponed as markets now
the industry to continue investing.
encounter and digest yet another crisis.
Furthermore, the Contango spread has increased
If a global economic recovery stalls, looming
as Cushing and Oklahoma crude oil inventories
sovereign downgrades have the potential to put
increase. The result of this now has Brent crude
downward pressure on crude oil prices.
trading at a premium (over $4 per barrel) to WTI.
It is also important to note that Spain, Portugal, and
Storage becomes a strategic advantage in these
Greece were all placed on Negative Outlook.
situations where potential arbitrage opportunities
may be present.
“This is a shot across the Inventories levels on the US side of the Atlantic are
bow to get your respective currently 10 million barrels above the five-year
economic house in order average of 349.9 mm barrels.

sooner rather than later.” Given that there is ample inventory of crude and
refined products, a market correction was expected.

This signifies that further downgrades may be
imminent, within the next year, if these countries
don’t take considerable measures to improve their
economies to the satisfaction of the rating agencies.
This is a shot across the bow to get your respective
economic house in order sooner rather than later.
Over the near term, I anticipate continued market
volatility until the European sovereign issues
stabilize and a resolution implemented.
What is becoming readily apparent is the risk and
fear of a sovereign debt contagion is far worse than
the fear of an actual Greek sovereign default itself.

About Gianna: Gianna Bern is a registered investment advisor and President of Brookshire Advisory and Research, Inc.

About Brookshire: Brookshire is an investment advisory firm focused on energy investment research, risk management, and
credit portfolio management with clients in Europe, Latin America & the U.S: www.brookshireadvisoryandresearch.com

www.oilcouncil.com
 Regester
Larkin

Regester Larkin helps IOCs, NOCs, Independents Some of our clients include:
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For 15 years, we have been pioneering reputation management in the oil Conoco Phillips
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oil industry incidents (eg: Sea Empress, Braer, Buncefield). We have also Dubai Petroleum
helped many of the world’s largest energy companies proactively to manage Eni
both short and long-term threats to their hard-won global reputations. ExxonMobil
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 The Gulf Widens

Written by Elaine Reynolds, Oil Analyst, Edison Investment Research

In a world where National Oil Companies control
access to much of the prolific petroleum regions of
the world, and with returns squeezed until the pips
squeak, where can an oil major go these days to
replace reserves and grow production?
The answer is the Gulf of Mexico, which continues to
throw up surprises, with new plays and large
discoveries featuring regularly on the news wires.
In particular, the emerging Lower Tertiary play has
generated interest, with Petrobras expected to bring
its Cascade and Chinook projects on-stream later
this year, Chevron moving ahead with its Jack
discovery and BP announcing its three billion barrel
Tiber prospect barely six months ago.
So the commencement of production from the Shell
operated Perdido hub in March is significant, as it is
the first to do so from this new play in a technically
challenging area. Floating in almost 8000ft of water
and designed to produce 100,000 bopd and 200
mmscfd, the ultra deep water production
technologies that have made Perdido possible were
not available as recently as 10 years ago.
combined with the predictable fiscal regime of the
US and easy access to markets, ensures continuing
investment on a large scale. Indeed, Congress has
bent over backwards to accommodate the oil
companies, with a 1995 bill that gives royalty relief
for deep water exploration estimated to add up to
$53 billion in future royalties.
And now prospects are opening up in the relatively
underexplored eastern part of the Gulf of Mexico,
with BPs Tiber and, most recently, Shell’s
Appomatox discovery, underpinning the belief that
there remains significant reserves to be discovered
in what many thought was a mature province.
Even President Barack Obama wants more of it,
saying in March he wants Congress to lift a drilling
ban in the eastern Gulf of Mexico in a move to
unearth more home-grown oil and gas.
With the US Minerals Management Service
estimating up to 41.5 billion barrels of undiscovered,
recoverable oil and 207 trillion cubic feet of
undiscovered natural gas in the area, it’s little
wonder that the majors love the Gulf of Mexico.

Postscript: As this article went to press, it is likely

“For the majors, operating
in a region where
technology is king plays
to their strengths”
The performance of the hub will be watched closely
by an industry determined to keep innovating its way
to growth, and a string of projects will learn from
Perdido’s successes and mistakes.
For the majors, operating in a region where
technology is king plays to their strengths, and this,
that the aftermath of the explosion on the Deepwater
Horizon rig will have lasting ramifications for the
industry in the Gulf.
In the first instance, the potential environmental
impact on Louisiana’s coastline will put pressure on
Obama to keep the drilling ban in place in the
eastern Gulf of Mexico.
In addition, once the cause of the explosion is
understood, the industry will also need to review its
operational procedures, and any resulting changes
will most likely make drilling in the Gulf even more
costly and challenging than before.

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

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

www.oilcouncil.com
 ‘Drillers and Dealers’
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