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 „Drillers and Dealers‟ – September 2010 Edition

 Incidents At Offshore Facilities – Who Is Responsible For Environmental

Damage?
o By Written by Stephen Shergold (Partner), Danielle Beggs (Partner) and Sam
Boileau (Senior Associate), Denton Wilde Sapte

 Doing Business in Uganda: A Guide and Review of Uganda‟s Oil Sector

o Written by: Atipo Ambrose Peter Jr., Partner and Head, Energy, Mining and
Infrastructure, Kiiza & Kwanza Advocates & Legal Consultants

 „On the Spot‟ with our Question of the Month (Part One)
o What emerging legal challenges are (i) oil and gas companies (ii) oil and gas
service companies, now facing?

 „On the Spot‟ with our Question of the Month (Part Two)
o Bullish, bearish, uncertain? What does the future hold for the Gulf of Mexico?
What role will it play in tomorrow’s global energy landscape?

 „On the Spot‟ with our Question of the Month (Part Three)
o Survival. Stability. Growth. What key challenges are oil and gas CFOs currently
facing in today’s marketplace?

 Analyst Notes – September – E&P Outlook and Services Outlook

 “Wall Street Investor” (Column) – Why "Fed Easing" will not get us out of
the financial mess we are in today!
o By Ziad Abdelnour, President & CEO, Blackhawk Partners, Inc.

 “Golden Barrels” (Column) – No Single Factor

o By Simon Hawkins, Head, Oil & Gas Research, Ambrian

 “The Oil Outlook” (Column) – Chinese Demands Buoys Crude Prices

o By Gianna Bern, President, Brookshire Advisory and Research

 Do You Feel Lucky?

o By Elaine Reynolds, Oil Analyst, Edison Investment Research

www.oilcouncil.com
 Incidents At Offshore Facilities –
Who Is Responsible For Environmental Damage?

Written by Stephen Shergold, Danielle Beggs and Sam Boileau

The catastrophic events in the Gulf of Mexico have focused the industry on the environmental liability risks
associated with offshore oil and gas exploration and production. It is pertinent to consider the liability regime that
would apply if such an incident occurred in the UK North Sea, and how the UK Government and industry has
responded to this issue being brought into the spotlight.

For the purposes of our discussion we have assumed that both the incident which causes damage and the
damage itself occur in the jurisdiction of the UK, and we do not consider issues relating to damage from sea
vessels.

Origins Of Liability

Where there is an operational incident on an oil and gas installation which injures employees or third parties or
gives rise to environmental harm it can give rise to criminal liability, statutory remediation or improvement costs
and/or civil liability in the form of damages. On the UK Continental Shelf (UKCS), regulatory responsibility for
safety and environment is split. The Health and Safety Executive is responsible for regulating health and safety
risks, principally through the Offshore Installations (Safety Case) Regulations 2005. The Department of Energy
and Climate Change (DECC) regulates the environmental impact and risks, principally through the Petroleum
Licence and certain industry specific legislation.

Petroleum Licences (other than those granted to or held by a single licensee) must be granted to or held by a
group of licensees on a joint basis. This means that each licensee is jointly and severally liable for all
obligations under the Licence. However, it is usual for licensees to enter into Joint Operating Agreements (JOAs)
to govern their relationship and vary the liability position in connection with a particular Petroleum Licence.
Liability allocation

JOAs commonly vary the liability position by:

 stating that all costs and obligations incurred in the conduct of the joint operations shall be owned by
and borne by the licensees in proportion to their respective participating interest share;

 stating that liability is "several" and not "joint or collective" and each licensee shall be responsible only
for its individual obligations under the JOA;

 requiring each licensee to indemnify the others, to the extent of its participating interest share; and

 excluding (i) any claim or liability which is caused by the wilful misconduct of any licensee; and (ii) any
liability for the consequential loss of another party.

The usual position under environmental and safety law is that primary obligations and liabilities rest with the
operator of the relevant installation. The position is different in relation to offshore oil and gas installations
because conditions in the Petroleum Licence (which include environmental conditions) can be enforced by DECC
directly against all licensees, since liability under the Petroleum Licence is joint and several.

The intention of the JOA is then to allocate this liability according to the agreement between the licensees, i.e.
pro-rata as set out above. This sharing of operational liability between the licensees on a pro-rata basis is a well-
established and long-standing concept in the upstream oil and gas sector. However, there are both legal and
commercial signs that this concept may be under threat.

Criminal liability is becoming an increasingly important potential liability in the oil and gas sector. Major criminal
penalties could be imposed under both environmental and health and safety regimes following any major offshore
spillage, leak or accident. As criminal liability cannot generally be indemnified against for reasons of public policy,
it is likely that the burden of any significant criminal fines will remain with the operator. Importantly, such criminal
fines can generally be imposed without the need for the prosecution to show wilful misconduct.

Some environmental and safety related offences are imposed on a "strict liability" basis whereas others require a
degree of fault (e.g. negligence or a management failure amounting to a negligent breach at corporate level).

www.oilcouncil.com
This public policy point (if relied upon by one or more of the licensees) could result in a failure of the contractual
documentation to achieve what many regard as one of the fundamental aims of JOAs: that all operational
liabilities except for wilful misconduct are shared on a pro-rata basis.

Commercially, health, safety and environmental oversight is usually exercised by licensees through regular
meetings with the operator. In circumstances where all liability, other than criminal penalties and those losses
that can be shown to arise from wilful misconduct (a high threshold), rests with the licensees, consideration
should be given on a case by case basis to whether the industry practice is a sufficient tool for managing such a
liability exposure. This issue is already being aired in the context of the Deepwater Horizon, with interest holder
Anadarko intimating that the spill was caused by wilful misconduct of BP, and BP defending its position.

Financial Provision For Liability

Under the Petroleum Licences, DECC can require a licensee to show that it has funds available to discharge any
liability for damage caused by pollution. This obligation is generally fulfilled by the operator of the relevant
Petroleum Licence participating in the Offshore Pollution Liability Agreement dated 4 September 1974 (as
amended from time to time) (OPOL). Moreover, the Oil & Gas UK industry standard JOA provides that the
operator as a party to the OPOL and as a member of the Offshore Pollution Liability Association Limited, agrees
that it will be bound by and will comply with the requirements from time to time of OPOL.

OPOL applies to those offshore facilities within the United Kingdom and a number of other jurisdictions from
which there may be a risk of an escape or discharge of oil causing pollution damage. These facilities include
wells (including gas wells when being drilled, re-completed or worked upon), drilling units, platforms, offshore
storage/loading systems and offshore pipelines, but do not include abandoned wells, installations or pipelines, or
facilities for the production, treatment or transport of natural gas or natural gas liquids.

Under OPOL, operators bind themselves, by contract to the other parties, to be liable for the costs of pollution
from their own facilities, subject to certain limits. Operators are also obliged to make contributions in the event
that another member of OPOL defaults.

Operators are required to maintain insurance or other financial provision to cover these liabilities. However, given
the limits which are in place (US$120m per incident) the OPOL regime is unlikely to be sufficient to address
remedial liabilities in large-scale disasters. Indeed, in view of the scale of costs arising out of the Deepwater
Horizon incident, these limits will need to be reviewed. Indeed, Oil & Gas UK has proposed that the existing limit
per incident be raised to US$250m per incident.

For losses in excess of the OPOL limits, or outside the scope of OPOL, the overlay of the JOA with the specific
nature of liabilities arising from the incident will determine ultimate responsibility.

Due Diligence Issues

Given the evolving nature of both legal and commercial appreciation of liabilities arising from an incident at an
offshore facility, operators and licensees should be considering a range of issues including:

 whether the terms of their JOAs effectively overlay with the nature of liabilities that may arise. In
particular, how will criminal penalties be dealt with under 'wilful misconduct' exclusions, and to what
extent will negligence or nuisance claims be indemnified by licensees;

 recognition of the reach of regulators beyond those named in permits or in contracts as 'operators' to the
persons actually controlling operational decisions (particularly as a result of the Court of Appeal
judgment in the Buncefield litigation);

 the extent of financial provision given the relatively low level of protection offered under OPOL when
compared to the spiralling costs in the Gulf of Mexico; and

 the nature of likely changes to the current framework that may arise from the DECC review and EU
Commission intervention.

www.oilcouncil.com
Looking Forward

With the UK Government considering exploration in deeper waters West of Shetland, DECC has now initiated a
formal review of current practices and arrangements and is collaborating with the industry body Oil & Gas UK. As
a first and immediate measure, DECC has announced that it will double the number of its annual environmental
inspections of drilling rigs. It is also reviewing the indemnity and insurance requirements for operating in the
UKCS. In May 2010 Oil & Gas UK set up the Oil Spill Prevention and Response Advisory Group (OSPRAG),
comprising representatives from production companies, drilling contractors, DECC, the HSE and the Marine and
Coastguard Agency. Working with the UK Government, OSPRAG is currently:

 reviewing UKCS regulation and arrangements for pollution prevention and response;

 assessing the adequacy of financial provisions for a UKCS response; and

 monitoring and reviewing information from the Deepwater Horizon incident and will facilitate the
implementation of any relevant recommendations arising from it.

OSPRAG has said that it is liaising closely with the Gulf of Mexico Joint Industry Task Force to ensure technology
developments and lessons learned are shared. In August Oil & Gas UK commissioned an engineering study to
assess subsea capping and containment options for the UK continental shelf, with recommendations to be
presented in September.

There is also action at the European level, with the EU Commission becoming increasingly vocal about standards
of risk management and prevention. In particular EU Energy Minister, Günther Oettinger, has supported a
moratorium on deep water drilling until the causes of the Deepwater Horizon spill are known.

With all facets of the liability analysis applying to offshore facilities on the UKCS currently in flux, it is critical for
operators and licensees to benchmark their current exposures and begin to evaluate ways to manage or mitigate
unanticipated issues. The options available to all parties include contractual revisions, reviewing and if necessary
reconfiguring management structures and chains of control, and a range of financial provision mechanisms. One
way or another, development in these areas seems inevitable.

It remains to be seen how much of the development will be driven by Government, and how much will be initiated
through changes to practices within the industry.

Stephen Shergold About Denton Wilde Sapte LLP

Partner
Environment & Safety
Denton Wilde Sapte LLP
T +44 (0) 20 7320 6770
stephen.shergold@dentonwildesapte.com

Danielle Beggs
Partner
Oil & Gas
Denton Wilde Sapte LLP
T +44 (0) 20 7246 7442
danielle.beggs@dentonwildesapte.com

Sam Boileau
Senior Associate
Oil & Gas
Denton Wilde Sapte LLP
T +44 (0) 20 7320 6803
sam.boileau@dentonwildesapte.com

www.oilcouncil.com
Trevelyan_OilGas_1343279:Layout 1 06/07/2010 16:24 Page 1

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for ConocoPhillips (2009)

© Copyright 2010 CREDIT SUISSE GROUP AG and/or its affiliates. All rights reserved. 1346948 07.2010
 Doing Business in Uganda:
A Guide and Review of Uganda’s Oil Sector

Written by Atipo Ambrose Peter Jr., Partner and Head, Energy, Mining and Infrastructure,
Kiiza & Kwanza Advocates & Legal Consultants

Uganda is one of the new oil states that are currently attracting a great deal of global attention for the right
reasons – its huge oil potential! It is against this background that an informative piece has been put together for
The Oil Council’s Members and readers of ‘Drillers and Dealers’ to provide a legal, regulatory and fiscal overview,
as well as, an analysis of recent developments in the country’s oil sector.

Uganda is bordered by Eastern DRC in the West and Southern Sudan in the North. These countries offer a
massive market, and are likely to join the East African Common Market soon, making the East African region one
of the world’s illustrious mineral rich regions. Uganda has had a relatively stable political environment since 1986
when the current ruling party took over power, and has successively maintained power through democratic
process of universal adult suffrage since 1996. The rest of East Africa has also had a relatively stable political
environment save for the DRC that was plagued by wars in the not so distant past.

The government has three organs namely the Executive, The Legislature and the Judiciary. These organs are
headed by the President, Speaker of Parliament and the Chief Justice respectively enhancing a democratic
system of checks and balances.

With a current GDP of $36,745bn and a GDP per Capita of US $1,146, the country has realised massive
economic progress, and with the prevailing fiscal and economic stability, the future of this small nation of 236,040
square kilometres is looking very bright especially amidst the recent discoveries of massive quantities of
commercial oil and gas reserves, which so far stand at a minimum 2bn barrels which still represents less than
30% of the explored areas.

Exploration Areas and Current Operators

The country is divided into various blocks and currently the number of licensed blocks stands at eight –covering a
total area of approximately 18,000 square kilometres, with four of the eight blocks being major blocks that have
proven successful. There are four major operating companies namely Tullow Oil, Heritage Oil, Dominion
Petroleum and Tower Resources, all being independents.

However, with their recent successes in commercial discoveries and the recent farm out of Heritage from the
Tullow-Heritage Joint Development, majors such as Eni International, Exxon Mobil, CNOOC and Total have
increasingly expressed interest in participating in the development of the Ugandan Oil sector, with most of them
desiring farm ins or farm downs into already existing explored and proven blocks – particularly the blocks where
Tullow is involved, in the oil rich Albertine Grabben.

This has presented Tullow with an array of suitors to choose from for joint development and is mainly a matter of
strategy for Tullow, when it decides to chose who to work with however; infrastructure capabilities are considered
the main strength Tullow will require from its new partners.

Exploration Gains

In just 10 years from the year 2000, approximately 40 E & A wells have been drilled in the major oil basin, the
Albertine basin, which covers an area of 20,000sqkm, recording an impressive success rate of approximately
92%. The Albertine basin has had a total of 39 E & A wells drilled with two wells coming out P & A dry.

Oil Blocks and Fields

1. Buffalo-Giraffe in Block 1 discovered in 2008 with reserve estimates in the region of 400mmbbls, which
was under the operation of Heritage and under a 50:50 joint development with Tullow, before the farm
out and is now under Tullow
2. Ngassa Well in Block 2 discovered in 2009 and potentially the biggest oil field in the Albertine basin with
reserves estimated at close to 2billion barrels and is under the operation of Tullow previously under a
50:50 JD with Heritage and
3. Kingfisher well in Block 3A discovered in 2006 with reserves in the region of 400mmbbls too and is
under the operation of Tullow but used to be under a 50:50 JD with Heritage before the farm out.

www.oilcouncil.com
The Kingfisher oil field has however been withdrawn by the government because of the failure of the operator to
apply for a production licence in time. Tullow should have picked this up in its due diligence and moved swiftly to
have it rectified either before the farm out (if time allowed) or should have gotten assurances from the
government before buying Heritage’s stake in it. This well was expected to be the first of all wells to produce oil
under the early production scheme late this year or early next year. There is however still an option to apply for
the licence, however it will be competitive since the law also allows other interested parties to apply.

Map of Uganda showing Oil Blocks and inset is the Albertine Grabben.
http://www.heritageoilplc.com/images/maps/Uganda%20Map%2013.4-300.jpg

www.oilcouncil.com
Policy and Laws - Recent Developments

These successful discoveries have necessitated the government to fast track all necessary measures to ensure
organised and optimum production and development hence the new oil bill which is supposed to operationalise
the National Oil and Gas Policy.

There is an official moratorium on awarding any oil blocks till the new law is in place, with negotiations ongoing
through the official Ministry of Energy channels. Currently, Uganda uses an old oil law, The Petroleum
(Exploration and Production) Act – Cap 150 (Laws of Uganda) of 1985. However, a new more robust and modern
law, The Petroleum (Exploration, Development, Production & Value Addition) Act [2010] is in the pipeline and the
bill is currently heading back to Parliament for review. The timeline given for enactment of this bill into law is by
December 2010.

Legal Regime Overview

The Ministry of Energy & Mineral Development is the main point of contact for petroleum licensing, with their
Petroleum Exploration and Production Department directly mandated to handle such activities. With the
enactment of the new law, this department is going to be broken up to create (i) the Petroleum Ministry to provide
general policy formulation, guidance and oversight, (ii) a National Oil Company for the commercial participation of
the state in development of the petroleum industry and (iii) the National Petroleum Authority to carry out the
industry regulatory functions.

PSA

Uganda operates under the PSA licensing regime with a 2006 model PSA offering the current major guideline
into Uganda’s petroleum licensing terms and conditions. The PSA is characterised by negotiable Signature
Bonuses that present an opportunity for explorers to negotiate on a rate as opposed to a fixed one. This is
coupled with a royalty based system on a sliding payment scale linked to production with rates varying from
between 5% to 13%. Since the size of the Signature Bonus is generally based on the exploration licence’s
presumed recovery potential (and value), as well as, the market’s interest in the rights, the Bonus is expected to
increase in the next bid round because of higher competition for the exploration licences.

State Participation

In regard to state participation, up to the current day, there is no state participation mainly due to a lack of an
NOC. However in the next licensing round, state participation is expected at a limited but increasing rate
considering the limited capacities in terms of human and technical resource. Despite this, the PSA provides for
compulsory state participation in all E, P & D programs and from the different PSAs signed so far, indications of
the figure for compulsory state participation is in the region of 20% which is expected to remain this low for some
time as the state builds its capacity.

Fiscal Regime Overview

The fiscal regime allows for ring fencing within the contract area for purposes of cost recovery and profit sharing
purposes and under cost recovery, indications from the cost recovery provisions in the current PSAs signed so
far put cost recovery in the region of 50%-60%.

Tax

The Income Tax Act Cap 340 and the VAT Act Cap 349 constitute Uganda’s tax code and provide for a 30%
Corporate Income Tax rate – chargeable on corporate income within a financial year for operations within the
country for any corporate entity. There is also a 30% Capital Gains Tax on capital gains within Uganda and is
usually payable on value gained on business assets. This is the subject of dispute between Heritage and the
Ugandan Government. These several taxes and charges are typical for the petroleum industry.

It is expected that the tax provisions for minerals and petroleum are going to be revised and separate tax
provisions that take into account industry specific issues will be created by the end of 2011 and before the next
bidding round so as to avoid disputes related to retrogressive application of the law.

Local Content

Local content provisions require utilisation and employment of local human and technical resources where
necessary and applicable, however, with the proposed law, the local content provision do not provide for the
percentage. Since a specific law that exclusively deals with local content is to be enacted, the details will be
included therein. The current provisions in the bill are therefore not exhaustive.

www.oilcouncil.com
National Oil & Gas Policy and Proposed Oil Law

There is a new proposed law as mentioned earlier, and it proposes to combine the upstream and downstream
operations in the same piece of legislation. However, there has been widespread commentary against such a
proposal, and it is expected that downstream will be handled under its own separate law.

The main concerns of the government are that if downstream and upstream are handled under different laws, it
will create a loophole through which the government will lose money to companies engaged in both upstream
and downstream operations as the two activities are governed by different tax provisions. The proposed oil law
attempts to be robust, taking into account modern petroleum industry practices. It however also attempts to deal
with many issues at the same time hence being too crowded and to some extent disjoined and contradictory.
Provision for the institutions and some other aspects should be given in the act and the relevant detail detailed in
subsequent regulations.

Value Addition, Refinery and Pipeline

The government under the National Oil & Gas Policy is 100% behind the development of a refinery and as such,
the proposed law allows government to insist on production of a stream of oil that is sufficient to operate a
refinery, and that would be able to meet the domestic needs of the EA Common Market as described earlier.

Tullow is under pressure from the government to deliver on this aspect and as such has chosen CNOOC and
Total for the farm down so as to benefit from their deep pockets and infrastructure expertise in building the
refinery, pipeline and other relevant infrastructure.

Environment

On the environment, the proposed law prohibits earthen storage of oil and gas, and also prohibits flaring except
in circumstances where it is necessary for safe operations. There is need to set the parameters of safe
operations so as to make this provision definite, otherwise it is likely to cause confusion and conflict between the
government and the operators. Safe operations within certain defined industry safety standards would be more
appropriate so as to create definiteness in this.

It also provides for compulsory decommissioning in accordance with modern industry practice and further
provides for the setting up of a decommissioning fund which will be capitalised regularly up to an agreed amount
either when production has reached 50% of aggregate estimated recoverable reserves, or 5 years before the
expiry of the production license. This is a good step in the right direction because it takes into account industry
best practice principles by providing for decommissioning and the decommissioning fund.

However, it does not state whether the environment provisions of the petroleum law are the principle or subject to
the general environment law. This can be taken care of in the general contract; however there is a need to come
out with provisions specific to the petroleum industry because of the different nature of the industry, therefore all
environmental provisions related to the petroleum industry should be put in the petroleum law.

The challenge firms have found so far in regard to the environmental laws is that the laws are not exhaustive and
as such present problems for the government in trying to enforce certain provisions which might not necessarily
be in line with industry environmental practice thus causing confusion. Otherwise, they leave the operators in a
position where they cannot comfortably make a decision that might have environmental consequences.

Stabilisation Clause

On stabilisation clauses, the proposed law is silent and as such, it is expected that the international principles on
stabilisation of petroleum contracts will apply. The practice has been to have this aspect taken care of in the PSA
or any other licensing contract since it is a contractual term and would be well taken care of during PSA
negotiations.

Next Steps

Once this law is in place, Uganda will go on to announce a major bidding round within the first Quarter of 2011,
under a more organised system, as it is expected that all the institutions namely the National Oil Company, The
Oil Ministry and The National Petroleum Authority among others will all be in place. This bidding round is
expected to attract a great deal of international interest from even the majors.

The Revenue Management Bill, 2010 which is to provide for the management of petroleum revenues, is currently
before cabinet. It is however expected to come into force before the next bidding round in the first quarter of next
year if all goes according to plan.

www.oilcouncil.com
Recent Developments – Dispute

The Heritage-Tullow deal will go down as the first major transaction in Uganda’s oil industry to date, and also
reveals a taste of the kind of money characteristic to the oil industry. The bill paid out by Tullow for Heritage’s
50% stake in the JD being $1.5bn, a windfall profit indeed considering that they had only invested $150m so far.
This didn’t however go down smoothly as the Uganda tax authority levied a $404m tax bill on Heritage for capital
gains which money Heritage wasn’t ready to pay apparently based on the advice of their advisors.

Unfortunately for Tullow, in its quest to meet a deadline in which to exercise its pre-emption rights under the JD,
so as to prevent what seemed like an already sealed sale transaction between Heritage and Eni International, it
went on to seal a deal with Heritage and paid out the full sum of $1.45bn with another $150m agreed to be paid
at a later date.

After Heritage’s farm out, Tullow retained the residual interest in the Tullow Heritage JD and is in the process of
farming down Total and CNOOC, mainly because of a need to meet its commercial obligations while also
meeting the government’s desires and objectives vide the National Oil and Gas Policy, which emphasises the
need for value addition for maximum economic gain, and thus requires the construction of a refinery to refine the
locally produced crude and a pipeline to distribute the finished product to the regional and international markets.
CNOOC recently built a similar refinery in China that utilises the same grade of crude as Uganda’s and coupled
with the deep pockets it has as well as its willingness to obtain rights at almost any price, it is Tullow’s first choice
and seemingly the best candidate for the farm down.

Total is a major that has also expressed interest in a joint development with Tullow and as such is going to be
involved with the two on an shared interest basis of one third of the entire area for each of the players.

Recent Developments – Is Tullow pulling out?

It is noteworthy that, Tullow who are increasingly tending towards production are likely to go the whole nine yards
and take part in production and development despite expectations that they are pulling out soon. The farm down
with CNOOC and Total into Tullow’s entire Ugandan interest, has introduced into the market two majors with
deep pockets, experience and capabilities and as such, Tullow has reduced its production and development
burden by two thirds which indicates that they are seriously considering taking part in the more expensive
Production and Development stages.

Yet again, it could also be a strategy by Tullow to increase the value of its position through the association with
majors who are hungry to fully take advantage of the Ugandan oil finds, and in the process, make a killing when it
decides to sell off its stake but only after the government is comfortable and satisfied that the JD partners are
meeting or will have met and complied with the national development objectives as per the PSA including
building a refinery and pipeline among others.

Yet from another angle, it would beat conventional wisdom for Tullow to sell at the brink of production of the first
oil yet it has the option of selling later in the course of production. The intentions of Tullow are not known,
however, Tullow continues to emphasise that it is not going anywhere, and indications of Tullow’s behaviour so
far are not contradictory to that position.

Recent Developments – Why has Tullow lost Kingfisher?

This question can be answered by considering the history of the events that culminated into this rather absurd
and careless situation for Tullow.

Firstly, Uganda Government was increasingly growing impatient with Tullow for failure to start the early
production scheme early enough before 2010 and also coupled with subsequent failures by Tullow to meet its
deadlines. All this, amid indications that Tullow, as a wildcatter would not be interested in going the whole nine
yards (and as such would later sale off its interest to another oil company before production) did not help matters
in terms of its relationship with government.

Heritage later expressed interest in selling its entire Ugandan stake, and went shopping around for a potential
buyer, without starting at home first. It found a very interested party in the oil major, Eni International, a subsidiary
of Eni Spa one of the most highly capitalised companies in the world. Eni convinced the government that it would
do over and beyond what was required of Heritage in its PSA viz; build a refinery, sustain production at a level
that will optimally serve the refinery, build a pipeline to the coast and most of all, start production immediately,
since the reserves had been proven among others.

The government was smitten by the potential of what Eni would do, and thus threw its full weight behind it,
despite the legal limitations in the Tullow-Heritage JDA which required a JD Partner interested in selling its stake
in the JD, to give first priority to the remaining JD Partner.

www.oilcouncil.com
Whether this was a tactic by Heritage to get the most in terms of dollars from Tullow, we cannot tell, but it
worked. If one were to consider that, had Heritage tried to sell to Tullow in the first instance, Tullow could have
offered probably less than a billion dollars or at most 1 billion dollars for Heritage’s stake.

So, Heritage well aware of the existing and legally enforceable pre-emption right of the surviving JD Partner went
on and shopped for Eni and actually concluded a sale and purchase agreement with it in total disregard of the
contractual provisions of its JD Agreement, in what everyone considered a done deal, a deal with the full blessing
of the government. All for what?

To get the most from its stake before its official exit from Uganda and it was successful in attracting a whopping
$1.5bn from Tullow who decided, against government’s hopes and desires, to use its pre-emption right, thus
slamming the first door on Eni to the chagrin and disappointment of the government.

What seemed like a simple legal battle on issues of pre-emption rights in Joint Development Programs and the
right of the host state to sanction certain contractual transactions among and between developers in the oil sector
has turned into a more serious battle with the government using all means to reassert its position as the
sovereign, and Tullow is now paying the price for its ambition on one hand and its negligence in failing to apply
for a production licence on time on the other. If the government unduly retained permission to grant the
development license, otherwise, Tullow shall be considered negligent and if I were to be asked, I would say that
Tullow is in this opposition because of its own ambition and most of all trying to fight a host state that has gained
an increased bargaining position.

Considering that the government was highly in favour of Eni taking up the Heritage stake, it put government on a
collision course with Tullow. It is suspect that the new twists witnessed recently stem from Tullow’s role in the
frustration of the Heritage-Eni deal and also Tullow’s rush payment to Heritage before the government would
have a chance to sanction the transaction, hence leading to Heritage leaving the country without settling its tax
obligations, this decision has come back to haunt Tullow.

It is widely believed that the government’s withdrawal of Kingfisher from Tullow, is to create a situation where the
government will ultimately hand it over to Eni through competitive bidding with the best development plan taking
the day, or even still, arm twist Tullow through behind the scenes actions to accept a farm in by Eni who have
been seriously lobbying since their failed Heritage stake takeover bid. Eni has much more potential than Tullow to
develop the Kingfisher well, in terms of finance, skill, expertise and experience and considering that they are in
the (very) good books of the government currently, they are considered the top contenders for the development
of the Kingfisher oil field.

Recent Developments – Tax Dispute and Arbitration

The withdrawal of Kingfisher from Tullow is the latest twist in this Uganda oil industry drama and sends signals
which indicate the government’s attempt to impress its sovereign position as having the ultimate power in all
these industry transactions, and a stern signal to the oil companies that they would go against the government
position at their own peril especially in instances where government cooperation is required.

Recent Developments – Improved Bargaining Position

Would government have acted like this earlier? Of course not, however with the changing fortunes, government
has attained a higher bargaining advantage in that, with the commercial discoveries, government is sought after
by, more than it seeks after, oil companies because the oil companies are now attracted to the big finds.

What Uganda is experiencing are the effects of operating without a proper and well defined legal and fiscal
framework, as well as, the effects of lack of skilled personnel in the petroleum industry and a major shift in the
bargaining power of the government and the industry players with the government having attained a better
bargaining position than it had previously. However, with the ongoing reforms and fast tracking of the new law,
some problems and issues of the nature as discussed here above might not arise and all the money spent in
investing in the Uganda oil sector will be money well spent. It is business as usual for petroleum industry players.

About Atipo Ambrose Peter Jr: The Author is a Lawyer and an International Independent Oil & Gas
consultant. He is with the Law Firm Kiiza & Kwanza Advocates & Legal Consultants, where he heads
the Firm’s Energy, Natural Resources and Infrastructure Group. (www.kkattorneys.com) and also
consults under Lead Energy Consult, an Integrated East African based Energy & Natural Resources
Consulting Firm. He heads the firm’s Energy, Mining and Infrastructure Practice. He is also a member
of the Association of International Petroleum Negotiators (AIPN), Energy Institute UK, SPE, Aberdeen
Chapter. You can contact him directly at: atipoap@kkattorneys.com

Information on the Ugandan oil sector can be found at www.ugandaenergyportal.com

www.oilcouncil.com
 Kinnear Financial Limited ‐ Profile 
Kinnear  Financial  Limited  (KFL)  is  a  privately  held,  Calgary‐based  merchant  bank  that 
initiates,  structures  and  finances  innovative  financial  solutions  for  the  resource  sector.  As  a 
merchant bank, we commit and invest our own capital alongside our investors in commodity‐
related investments that provide current cash yields with limited downside risk.   
 
KFL has assembled an experienced team of financial and technical professionals that carefully 
analyze,  screen,  structure,  negotiate  and  finance  various  investment  opportunities.  Market 
volatility, changing economics in the oil and gas sector in Canada and internationally and KFL’s 
reputation  and  experience  in  the  energy  sector  have  created  an  environment  of  exceptional 
opportunity for KFL’s investment model.  
 
Over the years, the principals of KFL have been involved in the provision of strategic capital to 
resource‐based companies which has fostered turnarounds and accelerated corporate growth.   James S. Kinnear, B.Sc., CFA,  
  D.Comm. (Hon.) 
We  seek  investment  opportunities  that  provide  a  secure,  steady  stream  of  income  to  our  Founder and Chairman and CEO 
investors while at the same time helping the investees to grow and thrive.  (403) 532‐8800 
 
jim.kinnear@kinnearfinancial.com 
A History of Performance   
In 2009, James S. Kinnear retired as Chair and CEO of Pengrowth Energy Trust, after founding   
and  managing  the  trust  for  over  20  years.  The  principals  of  KFL  were  engaged  in  the  Charles V. Selby, P.Eng., LLB  
management and development of Pengrowth Energy Trust during that period.  President 
 
(403) 262‐8880 
Over  two  decades  Pengrowth  Energy  Trust  was  one  of  the  larger  producing  property 
 
acquisitors in the Canadian oil and gas industry; initiating, analyzing, negotiating, financing and 
 
closing  some  $5  billion  in  producing  oil  and  gas  assets  through  over  fifty  individual 
Stuart Crichton, CA 
transactions.  
  Vice President Finance 
These acquisitions were financed through the issuance of $3.5 billion in equity under 20 public  (403) 532‐8804 
offerings together with issuance of $1 billion in investment grade private placement notes in  stuart.crichton@kinnearfinancial.com 
the United States and the United Kingdom.    
   
Pengrowth paid $4.2 billion or $42.34 per trust unit in cash distributions to its unitholders over  Paul C. Jackson, P.Geol.  
twenty years to September, 2009.  Including reinvestments, these distributions generated an  Executive Advisor, Business 
internal compound rate of return in excess of 14% per annum since inception.  Development  
 
(403) 532‐7788 
Caledonian Royalty Corporation Investment Rationale  paul.jackson@kinnearfinancial.com 
KFL manages Caledonian Royalty Corporation (CRC), a private company founded to acquire oil   
and  gas  royalties  and  other  income  generating  interests.  CRC  recently  concluded  its  first   
acquisition  of a  5%  royalty  interest  on  all the  assets  including  undeveloped  land  of Compton  Matthew Andrade, CFA 
Petroleum for gross proceeds of $100 million.  The royalty structure is an innovative method of  Senior Investment Securities Analyst 
financing oil and gas companies in a capital intensive industry.  (403) 532‐7790 
 Companies  with  proven  management  and  solid  assets  are  seeking  innovative  financing  matthew.andrade@kinnearfinancial.com 
structures for attractive development and exploration projects;   
 As a result of the economic downturn and the decline in crude oil and natural gas prices, it   
has become challenging for smaller and medium‐sized oil and gas companies to raise new   
equity or debt capital, and the cost of capital has generally increased significantly;   
 The banking industry has generally reduced its exposure to the sector as a result of its own  2200, 300 – Fifth Avenue SW 
internal restraints and the less buoyant industry outlook;  Calgary, Alberta  T2P 3C4 
 The  sale  of  royalty  interests  enables  companies  to  finance  at  reasonable  costs  while  (403) 532‐8800 
retaining control and management of the assets;   
 Investors  in  a  broadly  structured  royalty  have  a  low‐risk,  high‐yield  participation  in  cash  www.kinnearfinancial.com 
flow  from  properties  of  an  Issuer  that  are  not  burdened  by  rising  operating  and  capital   
costs. 
  

The Current Royalty Investment Opportunity ‐ Why Invest in Resource‐based Royalties? 
 Over longer periods of time, oil and natural gas prices will continue to rise due to the higher cost of finding and developing new sources 
of supply to offset depletion, and to provide energy for economic growth globally; 
 Oil and natural gas producers face continuing declines in their reserves and production due to ongoing depletion, and face the ongoing 
challenge of reserve replacement, either through capital intensive exploration and development, or through acquisitions;  
 One  method  of  participating  in  the  potential  longer  term  increases  in  crude  oil  and  natural  gas  prices  is  through  the  purchase  of  a 
royalty cash flow stream (Gross Overriding Royalties – GORR); 
 The GORR is based upon gross oil and gas production revenue and as a result is calculated prior to deductions of operating costs, capital 
costs, general and administrative costs and other corporate expenses; 
 From a credit point of view, the royalty ranks ahead of the banks, and all other creditors – it is secured by a caveat on title to the assets; 
 The royalty provides a regular, steady, relatively stable monthly income stream to investors, with cash‐on‐cash yields generally at higher 
levels than those provided by many conventional investments; 
 The GOGPE (Canadian Oil and Gas Property Expense) deduction, based on a 10% declining balance of the amount invested, makes the 
investment tax effective for Canadian investors.   
 
Caledonian Royalty Corporation has acquired a 5% gross overriding royalty on all current production and undeveloped lands of Compton 
Petroleum  Corporation  for  approximately  $100  million.    Caledonian  is  continuing  to  introduce  the  opportunity  to  accredited  equity 
investors to co‐invest and acquire Royalty Units in Caledonian at a price of $10.00 per unit. The principals of Caledonian currently own 
approximately half of the Royalty Units outstanding.   
 
The  overriding  royalty  from  Compton  is  a  registered  interest  in  land  that  applies  to  both  existing  production  and  potential  future 
production  from  an  undeveloped  land  base  of  595,000  net  acres  plus  any  lands  that  are  sold.    Royalty  payments  are  based  on  gross 
revenues  generated  from  oil  and  natural  gas  sales,  reduced  by  modest  marketing  fees  and  transportation  fees.    This  investment  is  a 
superior opportunity for investors who are interested in exposure to natural gas markets, believe that natural gas prices have limited 
downside, and are seeking a steady cash flow return and yield.  
 

Key Attributes of the Royalty  
 The 5% Gross Overriding Royalty (GORR) applies to substantially all of Compton’s extensive asset base including current production of 
approximately 19,400 BOE/d (prior to the disposition announced June 7, 2010), weighted 85% to natural gas and 15% natural gas liquids. 
There is significant upside development opportunities on 595,000 net undeveloped acres of land on which 
Caledonian would receive a 5% GORR;  
 The  investment  is  a  gross  revenue  stream  providing  12  ‐  16%  cash‐on‐cash  returns  in  the  early  years  to 
investors (based on the January 1, 2010 Gilbert Laustsen Jung engineering appraisal); 
 Since October 2009, due to lower realized gas prices, royalty unitholders have received an annualized cash 
yield of approximately 9% after all fees and expenses;   
 The investment is eligible for COGPE tax shelter with the deductions being 10% of the amount invested on 
a declining balance basis (only Canadian investors are eligible for the GOGPE deduction); 
 There is upside potential with recovery in natural gas prices and development of Compton’s extensive land 
base; 
 There are no further capital requirements associated with the Royalty and it is not subject to Compton’s 
operating costs and G&A expenses or other corporate expenses; 
 The Royalty is an interest in land and ranks ahead of the banks and all other creditors.  In the event of asset 
sales, the Royalty obligation becomes an obligation of the acquirer;  Compton Lands
 The Royalty is not subject to the new federal tax on income trusts – the SIFT tax.  
 

Recent Developments 
 As announced on June 7, 2010, Compton has agreed to sell approximately 3,100 BOE/d of its production located in the Niton and Gilby 
areas to two Calgary‐based oil and gas companies, including Angle Energy.  The 5% Royalty will continue to apply to these assets and any 
realized potential development; 
 Angle Energy announced on July 6, 2010 an increase in its 2010 capital expenditures from approximately $95 million to approximately 
$160 million subsequent to their Edson acquisition from Compton;   
 On  July  19,  2010  Compton  announced  a  recapitalization  transaction  including  net  debt  reduction  of  $217.4  million  to  improve  the 
company’s capital structure so that Compton can focus on production and cash flow growth going forward.
This opportunity is available only to accredited investors and should not be construed as an offer to buy or sell securities. 
 ‘On the Spot’ with our Question of the Month (Part One)

“What emerging legal challenges are

(i) oil and gas companies and (ii) oil and
gas service companies, now facing?”

“U.S. lawmakers are prone to overreact in response to any perceived crisis. Just as the
Sarbanes-Oxley Act, hastily passed in the wake of the Worldcom and Enron scandals, caused
extensive damage to the U.S. financial services industry, the U.S. Congress is once again
passing poorly thought-out and overly burdensome legislation in response to the recent Gulf of
Mexico oil spill.

These new and proposed regulations are the greatest single threat to the stability of the oil and
gas industry in recent history and will likely cause significant damage to the sector in the years
to come. Although they provide little to no true benefit to either the environment or to
individuals, the regulations are overly burdensome to honest and diligent oil and gas companies, requiring them
to spend significant amounts of money and resources on compliance issues.

The regulations also put many oil and gas companies in the U.S. at a competitive disadvantage with their
international counterparts, creating an uneven playing field which will only hurt overall oil and gas production in
the years to come. The new regulations also subject oil and gas companies to extreme and wholly unreasonable
levels of liability for accidents which do not warrant such severe measures. If the oil and gas industry is to
maintain the highest levels of integrity, honesty and dedication to the environment, for which they have become
known, then these overly burdensome and poorly thought-out regulations must be repealed.”

... John Maalouf, Senior Partner, Maalouf Ashford and Talbot LLP (Oil Council Member)

“The legal frameworks surrounding oil and gas producers are designed to create predictability.
However, every so often an event happens which has a fundamental effect on a part of the
legal framework. Decommissioning was perhaps under-represented until the Brent Spar fiasco.
Regulation of tankers changed dramatically following the Exxon Valdez spill.

The loss of the Deepwater Horizon and the subsequent huge oil spill is emerging as the next
catalyst for adjustment to the traditional legal structures. There are a number of separate areas
of debate.

1. The first is liability for clean up – there is a liability cap in place, but BP has voluntarily taken commitments far
in excess of the cap. Whilst there is an obvious reputational (and commercial) rationale behind the
company’s decision, in the bigger picture the purpose and value of the cap is called into question. The cap is
designed to avoid the risk that unlimited liability destroys otherwise successful companies, and it is simple to
ensure that any operator is able to meet potential obligations under a cap. However, the cap is not being
observed in this case. The existence, the size, and the enforceability of caps (not just in the Gulf of Mexico)
are likely to be revisited. BP is a huge company which will survive and is able to pay compensation. Not all
operators are in such a strong financial position and are therefore reliant on the cap. The challenge is to find
appropriate liability provisions given the disparate financial strengths of operators.

2. The second area concerns operatorship. The classic model of operatorship is arguably dated – the
assumptions come from an era when operators carried out much of the work themselves. The dominance of
the classic model has been eroded over time as smaller operating companies emerge, with a large service
company standing behind them carrying out the work. Current legal frameworks define the roles precisely,
but enormous claims for compensation beyond the cap are likely to put pressure on the existing
arrangements. Operators will want to share more liability with contractors. Some contractors may be happy
to accept that provided they are remunerated. The dividing line between operators and service companies
may become blurred. The challenge is to maintain clarity until any new roles are properly defined. As some

www.oilcouncil.com
 operators are very small, and some service companies are very big, regulators are likely to look closely at
the arrangement as they examine liability caps.

3. The third area concerns the relationship of safety regulation with economic regulation. A wholly separate
safety regulator is a feature of several jurisdictions – after the Deepwater Horizon spill, it is likely that virtually
all jurisdictions will follow suit. The quality of evidence required to satisfy the safety case is also likely to rise
particularly for deep water drilling.

The fundamental legal environment of the oil industry is usually quite stable. After the Deepwater Horizon spill,
the traditional assumptions are likely to be revisited. There is a great deal of legal thinking to be done in the next
few years as this accident hammers home the risks regulators face in dealing with small operators.”

... Stephen Dow, Lecturer in Energy Law, Centre for Energy, Petroleum and Mineral Law and Policy
(CEPMLP), University of Dundee

“The overwhelming new legislation and (modified and) enhanced regulation will be driven by
political motivation trying to exploit the drummed-up “public anger” and, therefore, will seek to
“punish” rather than introduce sensible possible improvement and safe-guard measures. This
(mainly Democratic Party) motivation, especially under the threat of changing voter preferences
relatively close to the crucial November elections, will produce a great number, and mostly
outrageous and ridiculous, legislative initiatives all promotionally targeted at “Bad Big Oil”.

While the majority of such legislation will not be passed since most of the “Oil States”
Congressional Representatives are likely to vote reason rather than political opportunity, these
initiatives will be kept alive in both Houses of Congress until the passing of the Election so that the
Representatives can tour those in their campaign speeches …. That’s very despicable, but just age-old politics.

Measures that will tighten oversight and control by government agencies have the greatest chance to be passed.
While the implementation of such additional control measures will obviously add substantial administrative cost
and are likely to slow down exploration and production, the industry can live with these rules and regulations.
Drilling bans will continuously be used as a threat but in the long-term they will not be sustainable.”

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

“The environmental scrutiny as a result of the Gulf of Mexico spills and the Alberta oil sands is a key
challenge that all oil and gas companies, including service companies will have to face and address. Companies
that are not complying with regulations will suffer significantly.”

... Janan Paskaran, Senior Associate, Blake, Cassels and Graydon LLP (Oil Council Partner)

www.oilcouncil.com
 Oil & Gas Company Executives Register Today for only $1,395!
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Global Oil Economist,
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The defining event for the global oil and gas, finance Alange Energy Corp

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• Industry leaders discuss the dynamics and driving factors of today’s new
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NGP Energy Capital Management
new growth against a backdrop of market uncertainly and increased volatility
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www.oilcouncil.com/ecaa info@oilcouncil.com
 ‘On the Spot’ with our Question of the Month (Part Two)

“Bullish, bearish, uncertain?

What does the future hold for the Gulf
of Mexico? What role will it play in
tomorrow’s global energy landscape?

“The Gulf of Mexico will be a challenged area for producers to operate for the near-term. It
appears that bureaucrats are unable to distinguish between shelf and deepwater plays, nor are
they distinguishing between oil and gas exploration and production dynamics.

Consequently, only those companies with extremely large balance sheets that are able to
navigate the new bureaucracy and to stand behind the uncapped contingent liabilities will be
able to consider offshore activities. These companies are not interested in the smaller targets
associated with the shelf.

Consequently, only a few companies will play and they will play in the deepwater. Ultimately, the service
companies will leave the Gulf of Mexico and it will stabilize at a lower level of activity. Of course, if politicians
ultimately see the need, the attitude against the industry could soften and there could be a return to the shelf by
the smaller independents. However, that appears to be a lower probability outcome, even though we continue to
push for rational heads to prevail.”

“It appears that bureaucrats are unable to distinguish between

shelf and deepwater plays, nor are they distinguishing between
oil and gas exploration and production dynamics.”
... Ken Hersh, CEO, NGP Energy Capital Management and Managing Partner, Natural Gas Partners
(Oil Council Committee Member)

““The BP Deepwater Horizon tragedy that occurred during the drilling of the Macondo well will
undoubtedly change the regulatory environment for offshore drilling in the United States, and
the potential for punitive taxes and unrealistic liability requirements could temporarily slow
down drilling in the Gulf of Mexico.

However, since U.S. offshore exploration and production are large and growing components
of domestic oil production, it is unlikely that a long term moratorium or slowdown in offshore
drilling will occur.

The Gulf of Mexico produces about 30% of U.S. oil and 10% of U.S. natural gas today, and as such it is a critical
element of U.S. energy security. The real story is jobs and economic impact. The Gulf of Mexico oil and gas
industry accounted for almost $70 billion of economic value and nearly 400,000 jobs in 2009. The industry also
provided about $20 billion in revenues to federal, state, and local governments through royalties and taxes.

Recent analysis indicates that the Gulf of Mexico could contribute $300 billion in revenues for federal, state, and
local governments over the next 10 years if drilling and production are allowed to continue.

With the health of the U.S. economy still in question, and government deficits at record levels, this revenue and
the jobs created by the offshore industry cannot be ignored.

The current problem is that the federal government and our current administration were not prepared for such a
disaster, and have implemented new regulations and increased bureaucracy, rather than waiting to find out what
happened on the Macondo well and then taking action as required to assure that offshore drilling is being
conducted safely in U.S. waters.

www.oilcouncil.com
The current drilling permit process at the Bureau of Ocean Energy Management (the new name for the MMS) has
even slowed shallow water drilling permits, where operations have been conducted safely for years. This
slowdown has occurred even though there is no official moratorium on shallow water drilling.

“With the health of the U.S. economy still in question, and

government deficits at record levels, this revenue and the jobs
created by the offshore industry cannot be ignored.”
Fifteen shallow water rigs are now idle waiting on permits, and by the end of September 2010 this number could
grow to almost 40 idle rigs if the process doesn’t improve. This doesn’t look like there’s no moratorium on shallow
water drilling to me.

Why is the government moving so slowly?

When the Interior Department left shallow water operation out of its moratorium on deepwater drilling activity, we
were pleased that authorities seemed aware of the 60-plus years our industry had been extracting natural gas
and oil safely and without major incident.

In the last 15 years alone, over 11,000 shallow water wells have been drilled in the Gulf, with only 15 barrels of
total oil spilled in that time.

If the government takes a similar approach to deepwater drilling once the moratorium is finally lifted, it could take
months and years before we see a resumption of deepwater drilling in the Gulf of Mexico.

However, drilling in the Gulf will eventually return. The question is just how long it will take our government to
realize the urgent need for Gulf of Mexico drilling from an economic and energy security standpoint.

I’m hopeful that it will happen sooner rather than later, and for that reason I’m still bullish on the Gulf of Mexico.”

... Randy Stilley, President and CEO, Seahawk Drilling (Oil Council Member)

“There may be a somewhat “bearish” attitude for a short time caused by a temporary cautionary
period by the industry, at least until the results of the Elections are in and reasonable voices
have restored some sanity.

There is, however, no question that the longer term outlook is bullish simply because of the fact
that the hydrocarbon reserves in the politically safe and stable Gulf of Mexico are a crucial and
reliable supply contributor for the energy demand of the U.S. Not even the Democrats with their
industry-hostile attitude can block that for very long.”

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

“The impact of the disaster in the Gulf of Mexico is now beyond the direct damage done to the
environment and the industry. In the U.S. these days, a variety of concepts and proposals to
freeze, ban or increase regulation of deep-sea and offshore drilling in general seem to be in the
pipeline.

Despite wide spread acknowledgement that offshore drilling cannot but increase globally,
because the biggest fields are still expected to be deep-sea, the electorate sensitive
governments will likely withhold their support, considering for example the moods in Washington,
where the offshore drilling moratorium now in place is likely to be extended.

“These developments will change the KPI’s on the dashboard

of any Oil Company’s CFO and CEO. The ability to adapt and
being agile will proof the key to survival and growth.”

www.oilcouncil.com
One of the consequences of this freeze and other countries with (deep) sea drilling in their territorial waters
following suit, is a slow reduction of the stock in both (floating) crude and oil products.

Eventually, likely as early as 2012, we will face market conditions where demand will outrun supply. What are the
additional reasons, to deep-sea-drilling-moratoria all over the world, triggering this market situation?

1. First, the economic crisis seems to have reached its bottom earlier this year. Together with the reboot,
global energy demand is returning, although not in dramatic big steps, but rather in small steps,
unbalanced and geographically widespread.

2. Second, new drilling projects require about five years getting on-stream, with the moratoria now in place,
it is clear that production will not be able to meet market demand in and on time.

3. Third, geopolitical unbalances and tensions always have a major impact on the oil price because of the
supply shortage threat. Upsets in connection with Iran, Nigeria and Venezuela for example tend to have
a direct impact on the spot price of oil and causes volatility, as these countries are all significant oil
exporters. These days, we witness increasing tensions regarding Iran, and although not so much related
to Iranian export, the threat of the control Iran has over its side of the Strait of Hormuz (through which
about 20% of the world’s daily oil production is transported), is the wild card in the timing of a supply
crunch coming up.

Consequences will be that the transition from oil to gas will intensify, new funding (increasingly with subsidies)
will speed up the development of alternative sectors and the combination of both renewable and alternative
energy sources. These developments will change the KPI’s on the dashboard of any Oil Company’s CFO and
CEO. The ability to adapt and being agile will proof the key to survival and growth.”

... Ennio H.A.R. Senese, Executive Partner, Resources, Accenture (Oil Council Member)

“I don't think the future for the area will become clear until a sense of perspective is restored. Given the
seriousness of the initial tragedy and apparent scale of the environmental impact (at least as first perceived), I
think this will take a while – especially as the politicians and lawyers are now firmly entrenched in the issue.

“The US public and politicians will have to realise what the long-
term economic and energy security impacts will be of a greatly
reduced level of activity and greatly increased costs in the Gulf”
My own view is that when the investigations have made their reports, the blame has been properly apportioned
and the commercial angles have been properly assessed, some balance will probably return.

It is at this stage, we must hope that a rational, effective but not over proscriptive set of new safety and
environmental regulations emerge. The US public and politicians will have to realise what the long-term economic
and energy security impacts will be of a greatly reduced level of activity and greatly increased costs in the Gulf .

While this may be sustainable for natural gas, given the advent of shale gas, the situation with regards to liquids
certainly would not be. A pragmatic way forward for the industry will have to be found.”

Nick Holloway, Editor, Global Window, IHS (Oil Council Member)

“Bearish. The second blowout in early September certainly leads me to believe that in the short-term this area will
continue to have significant issues.”

Janan Paskaran, Senior Associate, Blake, Cassels and Graydon LLP (Oil Council Partner)

www.oilcouncil.com
 ‘On the Spot’ with our Question of the Month (Part Three)

“Survival. Stability. Growth.

What key challenges are oil and gas
CFOs currently facing in today’s marketplace?”

““In the drilling and service sector side, many CFOs are facing the challenge of managing the
working capital lines of credit they took out to rapidly expand their equipment fleet back in
2007-08, as rig and equipment utilization has, for a broad swath of drilling and services
companies, not matched their expectations.

Obvious exemptions from this are the companies that focused on shale-driven equipment and
capabilities; their challenge is to keep their growth in balance with projected capital spend,
especially trying to project operator activity where gas is the prevailing play, rather than oil.

In the E&P sector, CFOs are still finding that lending bank capacity is lower than was expected, despite the return
of some key banks to active lending for development. CFOs with large exploration plans are still hampered by
lack of access to equity capital markets to fund "pure E". The challenge there is to focus on channelling liquidity
into "P", so that cash flow will be realized quickly enough to support drilling commitments on leases or in blocks
where drilling deadlines loom.

“Whether the company is large or small, the main issue for CFOs
is to be able to convince the potential capital providers, debt or
equity, that their company is in the top-25% of peer performers”
Whether the company is large or small, the main issue for CFOs is to be able to convince the potential capital
providers, debt or equity, that their company is in the top-25% of peer performers in a sector that doesn't have
the impact right now of "a rising tide lifts all boats".”

... Terry Newendorp, Chairman and CEO, Taylor-DeJongh (Oil Council Committee Member)

“We believe that there is no “one size fits all” go forward plan for E&P companies in the current
equity market and commodity price uncertainty. One of the key challenges facing today’s CFOs
is developing an understanding of the specific needs of their companies, their asset base and in
particular their shareholders. Despite turbulent capital markets, companies with a focussed
business plan who have demonstrated proper execution will continue to have access to funds. It
is these companies that need to take advantage of the current landscape and who will emerge
as strong E&P entities. We also believe that as supply and demand fundamentals are shifting
rapidly, particularly in North America, choosing the right asset mix to focus on is crucial to
ensure future success.”

... Adam Janikowski, Vice President, Investment Banking, BMO Capital Markets (Oil Council Member)

“The Macondo blow-out demonstrated just how quickly even a highly credit-worthy company can experience a
severe liquidity squeeze. I’m sure oil and gas CFOs are currently re-examining their financial contingency plans
and giving them further liquidity stress tests. Despite the financial crisis of 2008/9 many oil and gas companies,
particularly larger ones, enjoyed the continuous availability of low-cost uncommitted lines of credit. In some cases
quite high proportions of their trading activities have been financed with this source of money. Prudent CFOs will

www.oilcouncil.com
be ensuring that their committed credit lines are sufficient for extreme liquidity conditions but will be reassured by
BP’s demonstration of just how liquid good quality assets are even in difficult times.”

... Ben Morgan, Head of European Energy, TD Securities – Investment Banking (Oil Council Member)

“The key challenges Sylvan Energy faces as an onshore-US, emerging oil and gas exploration
and production company are: (a) access to additional capital, and (b) supply and demand
volatility caused by uncertainty within the US economy.

Using the last three years and $50 million in equity and $10 million in debt, we completed the
“creation” stage of our company where we have successfully (1) amassed >100 MMboe of
reserves on >65,000 net acres in the Gulf Coast, Appalachian, and Michigan basins, (2)
commenced our acquisitions and drilling programs, and (3) prepared our remaining projects for
the drillbit. We are now in the process of raising additional debt and equity capital to fund our
ongoing “development” stage, where we will continue drilling our projects to prove them up.

Thereafter, we will enter the “exploitation” stage, where the company will generate substantial cash in a low-risk
drilling environment, all while generating new oil and gas projects.

We have addressed the standard challenges faced by E&P companies, such as (i) developing the infrastructure
for a successful company and (ii) managing growth through a disciplined, long-term focus. Importantly, we
successfully attract scarce human capital and have found large oil and gas fields onshore US, in an industry that
is facing a large “experience gap” and reduced onshore exploration, caused by prior price volatility.

“The key challenges Sylvan Energy faces as an onshore-US,

emerging oil and gas exploration and production company are:
(a) access to additional capital, and (b) supply and demand
volatility caused by uncertainty within the US economy.”
We addressed this challenge through a basic approach to our engineers and geoscientists: provide them with the
necessary tools and data to explore for oil and gas effectively, and grant them minor participation in their
discoveries. This has incentivized them to not only stay with the company, but to bring their friends, too!

As we continue to raise additional capital, we are focused on attracting and rewarding investors that seek the
holistic, diversified, and balanced approach we have taken to building our company and are predisposed to join
us on our drive to becoming a top-25 E&P company - $2 billion in revenue, $2 billion market cap, and 333
MMboe (2 Tcfge) in proved reserves in the next five years.”

... Mäny Emamzadeh, Chief Financial Officer, Sylvan Energy (Oil Council Member)

“The most ignored and overlooked oil and gas component that requires huge replacement
investments is the age and rust factor of installed equipment. A substantial share of the installed
equipment is way past normal operating life-spans and urgently needs major repair or
replacement. This “outdated” equipment represents also a considerably elevated safety (and
environmental) risk.

The biggest financing challenge for CFOs … and CEOs … is the fact that the repair and
replacement of these investments do not generate incremental cash flow like one would receive
from new exploration and production. This will not only be a tremendous drain on cash flow but
also on the level of RONA or ROAE, which will negatively affect the share price ... and so forth ..!”

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

www.oilcouncil.com
“Access to capital on suitable terms remains the prominent challenge for OIL AND GAS CFOs. In the past year,
our fund raising initiatives with clients has shown that, while less problematic for well managed oil companies with
quality portfolios, the issue is more marked for CFOs of early stage explorers, or of oil companies lacking the
critical mass to attract investors’ attention. With over 80 oil companies on the London market alone, and therefore
over 80 different investment cases, competition for capital remains intense, amid the continuing uncertain
economic backdrop. CFOs will increasingly need to consider a broader array of possible finance pools, ranging
from the traditional institutional equity and debt markets, to private equity/hedge funds, strategic investors, HNWI,
M&A, farm-outs/carry arrangements, and more innovative structures, such as royalty based financings.”

... David Porter, Director, Corporate Finance (Oil and Gas), Fox-Davies Capital (Oil Council Member)

“Gas prices going through the floor, oil prices going nowhere and service companies enjoying strong negotiating
leverage, what’s a CFO to do? Two things. Firstly, bring a business perspective to internal strategic discussions
so as to offset the natural exuberance of the typical aggressive E&P CEO. And secondly, shore up your balance
sheet. In a bull market anyone can make money.

In a down market everyone who is still alive tends to watch from the sidelines. In a choppy market only the nimble
thrive. Focus on opportunities that add value, not those that demonstrate activity. If you are sitting on a significant
HBP acreage position in a resource play persuade your CEO and board to sell. Value is captured on the front
end of these types of plays, not in the development phase.

If you are looking for new oil plays in North America look in and around the big old fields of yesteryear. Make sure
your company’s operating team show up with real expertise in the application of new technology. And when you
do the unit level economics be sure to factor in increased service costs, longer delays between drilling and
completion, and depending on the basin, price realization differentials that reflect transportation bottlenecks.

Above all, just as was the case of Napoleon’s most favored General, Marshall McMahon (no relation) be lucky.”

... Michael McMahon, Managing Director, Pine Brook Partners (Oil Council Member)

“I think the headline summarises well - Survival, Stability, Growth. CFOs need to be very clear on what the
strategic aims are for their company in order to frame their discussions with investors/banks/etc, as well as, to
frame their own budgeting efforts. Of course, it is not as simple as that, as for example, companies will not want
to stay in the survival box forever.

Therefore financing decisions for these companies whilst needing to protect the company in the short term, must
also not create too many obstacles for down the road when prospects are better. There are also nuances
between stable growth and aggressive growth. If a company sets a course for stable growth then it needs to be
clear with its investor base that this is the type of company it is.

“CFOs need to be very clear on what the strategic aims are for
their company in order to frame their discussions with investors/
banks, as well as, to frame their own budgeting efforts.”
Equally, those looking to grow more aggressively will need to manage investors and banks more dynamically to
ensure that both are pulling along in the same direction.”

... Tom Woolgar, Associate Director, Oil and Gas, Lloyds Banking Group (Oil Council Member)

“Markets are continuing to pick up and oil prices have been reasonably steady. I think generally CFOs will be
looking at growth and trying to find ways to finance such growth.”

... Janan Paskaran, Senior Associate, Blake, Cassels and Graydon LLP (Oil Council Partner)

www.oilcouncil.com
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horizon
 Analyst Notes - E&P Outlook
Despite on-going fears over the sustainability of the global economic recovery, oil prices remain stubbornly
range-bound between US$70-80/bbl. This level of oil prices, in our view, represents a relatively comfortable
environment for those E&P shares with meaningful production, and should generate cash flow to at least support
a similar level of drilling in 2011 as seen in 2010 to date. Raising new equity for exploration focused plays
continues to depend on acreage quality, management track records and timing of drilling, although in general,
high-profile exploration success throughout the sector in 2010 continues to support positive sentiment.

However, it remains to be seen to how much, if any, of recent and anticipated shareholder returns (either through
special dividends and/or M&A activity) ends up being redeployed into the E&P sector. Recent drilling news flow
from Greenland and the DRC is a timely reminder of the realities of frontier exploration, although with the
opportunities for significant absolute gains in many other sectors limited by a weak outlook for economic growth
in many regions, the E&P sector continues to attract a significant amount of investor interest. We see this
continuing into 4Q11, particularly given the likely confluence of a number of high-profile drilling results.

- Phil Corbett, Oil & Gas Analyst, RBS

The independent Exploration and Production sector has had a renaissance over the course of 2010. As the
investment community became less risk averse, funds became available for the independent explorers to raise
money for exploration, allowing many companies to drill some of their more exciting prospects.

This has led to several notable successes amongst the smaller companies such as Cove Energy (Mozambique),
Faroe Petroleum (Norway) and Rockhopper Exploration (Falkland Islands) allowing the institutional investors to
benefit from significant capital gains. Additionally, there have been capital returns which have helped maintain
positive market sentiment.

This has come back by the traditional method of corporate take-over as the NOCs (National Oil Companies)
maintain their thirst for reserves and production. Somewhat unusually, upstream companies are also returning
cash to shareholders with Heritage Oil giving 100 pence/share back to shareholders (after the sale of its
Ugandan assets) while Cairn Energy plans to give much of the US$8.5 billion of proceeds, from the planned sale
of a 51% stake in Cairn India, back to shareholders early next year.

Drilling programmes are continuing with a plethora of wells over the remainder of the year. We believe that there
need to be a modicum of success to maintain the sector’s appeal thus allowing access to capital markets for the
exciting drilling programmes into 2011 and beyond.

- Peter Hitchens, Oil & Analyst, Panmure Gordon

The oil & gas Industry’s ability to invest in future capacity continues to be challenged by price volatility and
prevailing economic uncertainty. The power balance in the industry is moving eastwards with energy demand
centres shifting away from OECD areas to emerging markets. In this environment, the lack of coherent
partnerships between major players still remains a major hurdle in addressing emerging demand and
environmental challenges. Further the industry faces additional cost burdens from new safety and environmental
regulations following the Macondo accident.

Majors are likely to increase focus on exploration and M&A/partnerships to overcome lack of production growth,
poor profitability of the refining and marketing businesses and restricted resource access. The new business
models will require them to be nimble and entrepreneurial.

The difficult economic environment increases state influence over NOCs and curtails autonomy forcing NOCs to
increase their involvement with industry players to achieve higher growth. In the past few years independents
have taken the mantle of exploration and have opened new frontier areas and new plays like shale gas/oil.
Independents with strong balance sheets and strong focus are likely to continue to thrive. However their success
is also likely to make them targets for resource short NOCs and Majors seeking growth.

Eastern NOCs are likely to remain active buyers of oil & gas assets as they expand internationally to meet
growing domestic consumption and to build new expertise. If the industry fails to address capacity issues to meet
growing global energy needs, it risks further oil & gas price spikes so hampering future economic growth.

- Industry Advisory Perspective

www.oilcouncil.com
Although several deals have been announced recently, merger and acquisition activity in the E&P sector has not
reached the heights that many analysts and participants in the sector have predicted over the past few years.
While there are no doubt many reasons for this, one factor that has limited the number of deals, in our view,
appears to be becoming more favourable. We are referring to the oil price itself.

Over the year to 7 September 2010, the oil price has fluctuated between a high of nearly $87 and a low of around
$66 per barrel. By contrast, the previous year (9 Sept 2008 to 4 Sept 2009), the price moved between $121 and
$31 per barrel. While recognising that corporate and asset transactions are completed with a view towards the
long term, there is no escaping the fact that current market conditions also play an important role. For instance,
many readers will recall that long-term oil price assumptions were regularly being revised upwards during periods
of high spot prices in the recent past.

When viewed from the different perspectives of a buyer and seller, the large swings in the oil price made for very
different interpretations of value by respective parties. As such we believe this simple mismatch of expectations
would have contributed significantly to a lack of deal making.

Now, however, with oil prices remaining more steady, the environment for closing the valuation gap between
buyers and sellers should improve. The recent uptick in deal flow may be the first indication of this and, should
prices remain steady, we would expect more deals in the coming year as the always-difficult task of agreeing
value becomes less buffeted by wild swings in oil prices.

- David Hart, Oil & Gas Analyst, Westhouse Securities

Analyst Notes - Services Outlook

In recent months, the service sector has seen consolidation as players strive to boost both technology portfolio
and size. Post Macondo, offshore and deepwater service players are likely to require deeper pockets (i.e. size) to
manage potential liabilities. Technology applications are on the rise to access and exploit complex reservoirs and
unconventional oil & gas plays. North American unconventional gas has adopted a manufacturing approach to
production requiring service companies to offer a combination of scale and a diverse mix of services.

The North American service sector is likely to face a period of increased uncertainty as result of the
deepwater/offshore moratorium and weak gas prices. North America service players are likely to seek new
markets to deploy available capacity having already rationalised capacity during the 2009 slow down.

E&P companies continue to be well rewarded by the equity markets for their exploration success as future
productive capacity is seen key to reduce long term oil/gas price volatility. The E&P players push for exploration
in new frontier areas is likely to benefit seismic and drilling service companies.

Technical service contract holders in Iraq have started their rehabilitation projects and are likely to rely heavily on
service companies with a strong Middle East presence to execute the work.

Efforts to recreate North American Shale gas miracle are already underway in Europe, China and Australia.
These new areas the lack the service infrastructure required to support North American style development and
offer early service entrants the chance to establish a vital foothold for the future.

- Industry Advisory Perspective

www.oilcouncil.com
 Wall Street Investor – Why "Fed Easing" will not get us
out of the financial mess we are in today!
Written by Ziad Abdelnour, President and CEO, Blackhawk Partners Inc

A debate is being played out today in the Fed about whether it should return to the so-called "quant easing" --
buying more mortgage-backed securities, Treasury bills, and other bonds -- in order to lower the cost of capital
still further.

The sad reality is that cheaper money won't work. Individuals aren't borrowing because they're still under a huge
debt load. And as their homes drop in value and their jobs and wages continue to disappear, they're not in a
position to borrow. Small businesses aren't borrowing because they have no reason to expand. Retail business is
down, construction is down, even manufacturing suppliers are losing ground.

That leaves large corporations. They'll be happy to borrow more at even lower rates than now – even though
they're already sitting on mountains of money.

But this big-business borrowing won't create new jobs. To the contrary, large corporations have been investing
their cash to pare back their payrolls. They've been buying new factories and facilities abroad (China, Brazil,
India), and new labour-replacing software at home.

If Bernanke and company make it even cheaper to borrow, they'll be unleashing a third corporate strategy for
creating more profits but fewer jobs and a spree of company mergers and acquisitions…..good for Wall Street for
sure. Remember your economics courses back in college if you ever took any? When an economy is very slack,
cheaper money is not going to induce much in the way of real economy activity.

Unless you are a financial firm, the level of interest rates is a secondary or tertiary consideration in your decision
to borrow. You will be interested in borrowing only if you first, perceive a business need (usually an opportunity).
The next question is whether it can be addressed profitably, and the cost of funds is almost always not a
significant % of total project costs (although availability of funding can be a big constraint).

So cheaper money will operate primarily via their impact on asset values. That of course helps financial firms,
and perhaps the Fed hopes the wealth effect will induce more spending. But that’s been the same pathetic movie
of the last 20+ years, and Japan pre its crisis, of having the officialdom rely on asset price inflation to induce

www.oilcouncil.com
more consumer spending, and we know how both ended.

But (to put it charitably) the Fed sees the world through a bank-centric lens, so surely what is good for its charges
must be good for the rest of us, right? So if the economy continues to weaken, the odds that the Fed will resort to
it as a remedy will rise, despite the evidence that it at best treats symptoms rather than the underlying pathology.

As I pointed it out in one of my recent blogs: "Deficit doves" – i.e. Keynesians like Paul Krugman – say that
unless we spend much more on stimulus, we'll slide into a depression. And yet the government isn't spending
money on the types of stimulus that will have the most bang for the buck: like giving money to the states,
extending unemployment benefits or buying more food stamps - let alone rebuilding America's manufacturing
base.

Keynes implemented his policies in an era of much less debt than we have today. We're now bankrupt, with debt
levels so high that they are dragging down the economy.

Even if Keynesian stimulus could help in our climate of all-pervading debt, Washington has already shot
America's wad in propping up the big banks and other oligarchs.

Keynes implemented his New Deal stimulus at the same time that Glass-Steagall and many other measures
were implemented to plug the holes in a corrupt financial system. The gaming of the financial system was
decreased somewhat, the amount of funny business which the powers-that-be could engage in was reined in to
some extent.

As such, the economy had a chance to recover (even with the massive stimulus of World War II, unless some
basic level of trust had been restored in the economy, the economy would have not recovered).

Today, however, Bernanke, Summers, Dodd, Frank and the rest of the “big boys” haven’t fixed ANY of the major
structural defects in the economy. So even if Keynesianism were the answer, it cannot work without the
implementation of structural reforms to the financial system.

A little extra water in the plumbing can't fix pipes that have been corroded and are thoroughly rotten. The
government hasn't even tried to replace the leaking sections of pipe in our economy.

The Bottom Line

Fed easing can't and won’t patch a financial system with giant holes in it. What's needed has been obvious to us
for years: break up the big banks, prosecute the criminals whose fraud caused the financial crisis, and restore the
rule of law and transparency.

Until those basic steps are taken, nothing else will work to fix our broken economy…..You wait and see. Time for
a real clean up starting with Congress in November

Your feedback as always is greatly appreciated.

Ziad K. Abdelnour,
President and CEO, Blackhawk Partners, Inc
ziad@blackhawkpartners.com

About Ziad K. Abdelnour: Once referred to by the New York Times as one of the 100
most creative and fiercest investment bankers on Wall Street, Ziad K. Abdelnour is a
dealmaker, trader and financier with over 20 year experience in merchant banking,
private equity, alternative investments and physical commodities trading. Since 1985, Mr.
Abdelnour has been involved in over 125 transactions totaling over $30 billion and has
been widely recognized for playing an integral role in those three key market sectors. He
founded Blackhawk Partners, Inc., in 2004; a New York based private equity ”family office”
that focuses on originating, structuring and acting as equity investor in management-led
buyouts, strategic minority equity investments, equity private placements, consolidations,
buildups, and growth capital financing. For more info visit: http://blackhawkpartners.com

www.oilcouncil.com
 25 November 2010,
The Northumberland, Trafalgar Square

London, UK

The Oil Council’s Annual Dinner

and Awards of Excellence
On the night of 25th of November The Oil Council will be hosting our Annual Awards of Excellence, recognising
the industry’s best performing companies and executives, those who have achieved excellence throughout Awards Guest of Honour
their activities in 2010. Speaker:

Categories include:
• NOC of the Year: Award for Excellence
• Major of the Year: Award for Excellence
• Mid-cap of the Year: Award for Excellence
• Small-cap of the Year: Award for Excellence
• Exploration: Award for Excellence
• Executive of the Year: Award for Excellence
Dr Mike Watts
Deputy Chief Executive
Our awards recognise industry leadership, contribution and innovation, be it in the nominees’ operations,
Cairn Energy
services, products and/or industry knowledge/reputation.

Maximising your involvement at the Awards and Dinner

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Golden Barrels: No Single Factor
By Simon Hawkins, Head, Oil & Gas Research, Ambrian

BP published its internal report on the causes of the
Deepwater Horizon accident on Wednesday this week.
58,927 words, 192 pages, 7 sections and 8
appendices – we were given a wall of information to
digest. By the close of play, the market breathed a
sigh of relief that the threat of „gross negligence‟ had
subsided and the shares rose 2%.
But was I the only one who still felt that there was
something wrong?
Let‟s look at it another way. If I came home to find my
6 year old son had broken my MacBook and tried to
explain it by saying "no single factor caused it", my
response would be something like "well, no single
factor will enable you to watch television for the next
month".
But this is more serious. I‟ve already said in this
column that I think Tony Hayward was one of the good
guys, despite being branded "the most hated and
clueless man in America".

The first sentence of the press release went like this – I also said the way BP responds will tell the world a lot
“No single factor caused the Macondo well tragedy”. about the corporate character of Western oil
companies. This in turn will have an important
It reminded me of a website listing funny statements influence on the global opportunities for both the
from real life car insurance claims, like: industry and investors.

 “An invisible car came out of nowhere, struck my
car and vanished”,
 “Coming home I drove into the wrong house and
collided with a tree I don't have”,
 “I collided with a stationary truck coming the other
way” and my favourite,
 “As I approached an intersection a sign suddenly
appeared in a place where no stop sign had ever
appeared before and I was unable to stop in time
to avoid the accident.”
“No single factor, really
doesn’t help our industry.”
The fact is, in all of these cases, the driver was of
course responsible. So who was driving Macondo?
One of the first jobs I had in Shell was to implement a
global IT system. My job was to make it work. It wasn‟t
my job to put in a process to make it work, but to take
responsibility to make sure the system worked.
Maybe that‟s why the “no single factor” phrase rang
my bell. If no single factor really was the cause, it
implies that no single person really was responsible.
I was hoping to be proved wrong but I always
suspected that a lack of responsibility, rather than
process, was the real cause of this tragedy.
Despite all the words in this week‟s report, the
underlying message, “No single factor”, really doesn‟t
help our industry.
Email me your views at: info@goldenbarrels.co.uk

About Simon:
Previously, Simon was
founder of Omni
Investment Research,
and 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 Shell, working in economics and finance
in Nigeria, The Netherlands, the Far East and the US. He is
now Head of O&G Research at Ambrian, a specialist energy
and resources investment bank.

Ambrian provides full service investment banking to a broad range of institutional and corporate clients, including Corporate
Finance, Corporate Broking and Equities. Ambrian is focused on three key sectors, Oil and Gas, Mining and
Cleantech/Alternative Energy, where it has developed in-depth expertise and relationships. www.ambrian.com

www.oilcouncil.com
 The Oil Outlook
September 2010: Chinese
Demands Buoys Crude Prices
By Gianna Bern, President,
Brookshire Advisory and Research

Chinese authorities released Major Economic
Indicators in August revealing continued strength
throughout the country’s industrial sector. Both
state- and investor-owned enterprises continue to
grow amidst Chinese belt-tightening measures.
Currently, we expect crude prices to remain in the
$73 to $80 per barrel holding pattern. At this
juncture, there isn’t much on the economic horizon
that will push crude oil beyond the $80 per barrel
price level.

For the month, industrial production was 13.9%
above the prior August. For the first eight months of
the year, growth was 16.6% above the same period
last year. During August 2010, heavy industry
growth was 14.2% and light industry increased
13.1%. This is in line with the year-to-date growth
rates of 17.9% for heavy industry and 13.6% for
light industry.
Despite steps taken by governmental authorities to
cool China’s economy, August 2010 production of
general purpose and transport machinery increased
20.1% and 16.6% respectively, when compared to
August 2009.
Equally encouraging is Chinese automobile
production and steel output, which increased 38.4%
and 21.4% respectively, for the period January to
August 2010. Other data reveals continued growth
among the retail, housing, and metals industries.
Overall, these results are good news for the global
economy.
“At this juncture, there
isn’t much on the
economic horizon that will
push crude oil beyond the
$80 per barrel price level.”
What this also means is a growing demand for
crude and refined product in the world’s fastest
growing major economy. Asian demand for refined
products, and crude oil in general, will help to
maintain a floor in prices.
Double Dip Implications Mitigated
Despite the plethora of negative economic news
generated on both sides of the Atlantic, crude oil
prices have held their own and haven’t fallen below
that dreaded $70 per barrel mark.
Nevertheless, economic woes proliferate among
many European countries while the U.S. GDP grew
less than 2% for the second quarter. Given the
world’s economic state of affairs, the outlook for
crude oil prices remains muted at best.
However, the details behind Chinese industrial
production picture lend credence to our view that
crude oil prices will remain within the $73 to $80 per
barrel range despite concerns of a possible double
dip U.S. recession.
Record Crude Oil Inventories
Now let us add to the picture the increasing level of
inventories held by various entities. The U.S. EIA
reported commercial crude oil inventories at 359.8
million barrels and total crude oil and refined
products at 1.14 billion barrels.
With record low interest rates, the financial cost of
storing crude products is minimal; therefore price
differentials among crude grades and geographies
can be readily arbitraged. Certainly the massive
crude oil and refined product inventory overhang is
not supportive of a sustained increase in prices.
For now, emerging market demand is supporting
crude oil prices and large inventories are limiting
upward price pressures. We don’t see this dynamic
soon changing to the downside.

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
 Do You Feel Lucky?

Written by Elaine Reynolds, Oil Analyst, Edison Investment Research

The biggest challenge facing every oil company,
from smallest exploration start-up to supermajor, is
the need to consistently find hydrocarbons.
The problem is, how do you build teams and
processes within your company to maximize the
chance of success?
I know of at least one company where exploration
geoscientists were ranked purely on hydrocarbons
found during their career.
But he also goes on to discuss the way in which
certain environments seem to be disproportionately
successful at fostering and sharing good ideas, and
this brings me back to our ‘lucky’ geoscientists.
Once hydrocarbons are found on a prospect, the
focus shifts to bringing the discovery into production
quickly, and, in order to achieve this, some
companies try to impose similar processes and
systems on exploration as used in assessing
appraisal and development activities.

The exploration manager was convinced that certain
explorers were innately lucky, and those were the
ones he wanted in his organization.
For many of us who have come up through the
appraisal and development side, this approach may
seem simplistic at first, and we look for some more
tangible evidence of success.
But what this manager was doing in his ranking
methods was really only what investors and analysts
do every time they consider if a company is worth
investing in.
We look at the track record of the management team
to make assumptions about future performance.
The idea that certain individuals are uniquely suited
to becoming successful geoscientists (or chief
executives), is supported in a forthcoming book
‘Where Good Ideas Come From’ by Steven Johnson.
This usually means more technical scrutiny and
challenging of explorers’ proposals, and the higher
grading of opportunities that can be put into
development more quickly post discovery.
However, imposing this discipline on exploration can
be counter-productive, with either the creativity
squeezed out of the geoscientists, or their
replacement with those who care more about the
process than the result, and the supply of
discoveries dries up.
“We look at the
track record of the
management team to
make assumptions about
future performance.”

Johnson argues that ‘Chance favours the connected
mind’, that is, that what appears to us to come about
by chance is really the outcome of a set of
experiences coming together in one person, who is
then able to generate a new and successful idea.
In this case then, the environment kills the creativity
that brought success in the first place.
So, in thinking about your own company, you have to
ask yourself, ‘do you feel lucky?’ Well, do you?

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
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