‘Drillers and Dealers’

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 Azerbaijan 2010

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“Société Générale Corporate & Investment Banking is a recognised world leader in project finance, upstream oil & gas finance, commodities
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 „Drillers and Dealers‟ – November 2010 Edition

 In Defense Of The Status Quo: One Banker's Perspective On The

Future Of The Global Energy Markets
o By Andrew Moorfield, Global Head, Oil & Gas, Lloyds Banking Group

 Post Event Report from The Oil Council‟s „Americas Assembly‟

 Changes: The Emergence of Singapore as an Oil Centre

o Al Troner, President, Asia Pacific Energy Consulting

 Why Blaming China On Our Economic Woes Is A Cover Up That Is

Foolish And That Will Not Stand
o By Ziad Abdelnour, President & CEO, Blackhawk Partners

 PWC‟s Q3 Analysis – US Oil & Gas Sector Deals

o With comments from Michael Collier, Partner, Transaction Services,
PricewaterhouseCoopers

 Credit Suisse Analyst Note – November – E&P Outlook

 “Golden Barrels” (Column) – The Vortex

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

 “The Oil Outlook” (Column) – Quantitative Easing Sends Commodity

Prices Higher
o By Gianna Bern, President, Brookshire Advisory and Research

 “Diary of a Commodity Trader” (Column) – The Energy Policy of „No‟

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

 Asian Takeaway?
o By Elaine Reynolds, Oil Analyst, Edison Investment Research

www.oilcouncil.com
 In Defense Of The Status Quo
- One banker's perspective on the future of the global energy markets
Written by Andrew Moorfield, Global Head, Oil & Gas, Lloyds Banking Group
Bankers are currently unpopular, including
unfortunately those from the oil and gas world.
As financiers, there is a certain amount of
commonality in the products we offer; term loans,
reserved based lending, trade finance, and working
capital facilities are all (to some extent, at least)
interchangeable in the eyes of our customers.
The same level of flexibility cannot be said to exist
amongst the sources of global energy supply:
hydrocarbons, renewables, nuclear, and hydro-
electric power are not direct substitutes.
Oil and gas remain the dominant players and the
world's most important source of energy. Despite
some exaggerated publicity over recent years and
an increasing social trend to look to them as a
comprehensive alternative, renewable energy is still
nowhere near to becoming a scalable and viable
substitute for hydrocarbons.
I do not say this merely to defend my oil & gas turf,
but because it is imperative to acknowledge both
the continued importance of oil and gas and the
numerous challenges to the alternatives others put
toward if we are to have a reasoned debate about
our energy future.
The most cursory glance at the IEA's latest World
Energy Statistics will reveal a startling gap between
the supply of energy from renewables and the
supply from oil and gas. Last year, renewable
energy (including hydroelectric power) supplied c.84
million tonnes of oil equivalent (mtoe) towards our
global energy requirement.
This figure may initially sound impressive, but it is
dwarfed by the 6,600 mtoe that was contributed
from oil and gas sources. A decade into the 21st
Century, and despite all the hype (and considerable
government support) renewable energy still only
accounts for c. 0.7% of global supply.
Simple maths reveals that to bridge this energy gap,
wind, geothermal, solar and tidal sources will need
to boost their supply over 7,750% to replace our
“Those who now suggest peak oil is imminent, and that
it brings with it a period of terminal decline for the global
economy, are no less myopic than Malthus.”
www.oilcouncil.com
use of hydrocarbons. This arithmetic assumes that
energy demand will remain constant – a
nonsensical notion as non-OECD countries attempt
to drive up standards of living for their citizens.
Therefore, the IEA's World Energy Outlook
suggests that over the next 20 years fossil fuels will
remain the premier source of energy worldwide and
they are projected to account for 77% of the energy
demand increase by 2030.
Oil demand alone is expected to rise from 2008's 85
million barrels per day to 105 mb/d in 2030, a
sizeable 24% uplift. Demand for natural gas is
projected to increase even more impressively; up
42% over the next 20 years.
Is this a problem? Simply put, no.
The more ardent campaigners for a 'switch to
renewables' (as if there is a button that simply can
be pressed) argue that 'peak oil', the point after
which production enters terminal decline, is near or
even here.
However, as many economists will tell you, peak oil
is an irrelevance. In the early 1800s, the Reverend
Thomas Malthus put forward his theory that,
because populations at the time were growing
exponentially, food supplies would soon run out.
The result would be that society would rapidly
collapse into a spiral of "misery and vice". He was
of course wrong.
Those who now suggest peak oil is imminent, and
that it brings with it a period of terminal decline for
the global economy, are no less myopic than
Malthus. Their kind of thinking ignores the power of
the markets and turns a blind eye to mankind's
ability to push technological boundaries.
Ever since 1956, when Hubbert first predicted that
US oil production would peak before 1970, the
anticipated turning point in global oil production has
been pushed further and further back - largely by
improvements in E&P technology.
Even today, more than half a century after the idea
was first articulated; there is little agreement about
when the peak will occur. Markets play a key role in
this and price signals incentivise consumers to use
supplies more efficiently and encourage companies
to both take more exploration risk and maximise
recovery rates from fields.
Just because the doomsday advocates of peak oil
lack the imagination and technical knowhow to
search and find new sources of hydrocarbons does
not mean that they do not exist and that they will not
one day become commercial reserves.
If the remaining global hydrocarbon reserves begin
to dwindle (which seems by no means certain
when, according to the IEA, the world's remaining
resources of natural gas appear to be able to cover
any conceivable increase in demand well beyond
2030) then free market theory suggests that
commercial alternatives, be they nuclear-based or
from renewable sources, will become available as
economically competitive alternatives. However,
this day appears a long way off.
With this in mind, let us look at the example of the
UK. Here, on this blustery outcrop on the edge of
the Northern Atlantic, wind power has long been
touted as the future for the nation's energy supply
and the heir in waiting to North Sea Oil and Gas.
However, hydrocarbons are still king owing to one
key difference between these energy sources:
North Sea oil and gas makes money; wind power
loses it.
Nevertheless, the UK has committed to targeting
that 15% of all energy is generated from
renewables by 2020 (the bulk of which is expected
to come from increased use of renewables for
electricity generation).
Even with ten years left on the clock, this target has
already been described as "very challenging" by the
government, and in far less favourable terms by
many more independent commentators.
A UK Parliamentary Committee has estimated that
the total annual cost of increasing the share of
renewables in electricity generation from 6% to 36%
(the level required to meet the UK's overall 15%
renewables target) would be £6.8bn.
www.oilcouncil.com
“However, hydrocarbons
are still king owing to one
key difference: North Sea
oil and gas makes money;
wind power loses it.”
This would be a sizeable figure at the best of times,
but its significance is further highlighted when one
considers that the UK's recent spending review (the
deepest and most swingeing cuts to government
spending since 1945) has highlighted the need to
cut £81bn from the budget over the next 4 years.
Wind power, like all renewables, is a long way from
stacking up commercially and subsidies are
inevitably required (in the UK, this is provided via
the Renewables Obligation that has been estimated
to add £90 to the normal £50 cost of a megawatt
hour of electricity).
In austere times the price of renewables looks hard
to swallow but, even if this was not a concern,
serious technical issues with wind power remain.
Many of these have yet to be widely acknowledged,
let alone satisfactorily addressed. Perhaps, the
most significant point to make is that the supply
from wind power (like most renewable sources) is
intermittent and unreliable.
Owing to the considerable difference between the
capacity of wind farms and the load factor (i.e. the
amount of electricity they actually produced –
usually assumed to be just 30% of capacity)
standby forms of electricity generation will still
always be required.
Given the costs associated with nuclear fuels, this is
most likely to take the form of gas power plants. In
short, even if the renewables capacity could be
scaled to meet national demand, the cost, reliability
and flexibility of hydrocarbons makes them difficult
to replace.
In the UK the problems are further complicated by
an anticipated shortfall in overall energy supply.
Ageing power stations up are due to be
decommissioned and this expected to put
considerable strain on UK energy generation Andrew will be speaking at The Oil
capacity. Council’s ‘World Assembly’ on the
If some 30 GW of additional renewable capacity is
25th November in London. We hope
required in the UK to meet the EU’s 2020 target, a you can join us there and meet
further 14-19 GW of fossil fuel or nuclear capacity Andrew and other members of the
will still be required to replace old plants and meet
new demand.
Lloyds Oil & Gas Banking team.

Any renewable investment will have to be in the country. Oil and Gas in the UK, as it does in so
addition to the hydrocarbon (or nuclear) technology many countries, remains a stalwart of the nation's
required to replace those old power plants going off economy.
line before 2020.
The economic benefits of oil & gas are not the only
reason for their continued popularity.
“Last year the UK Oil and
 The technological and efficiency breakthroughs
Gas industry improved the that have been made over the past years have
nation's balance of trade been staggering.

by £27bn, a figure which  Costs of conventional drilling have fallen and

acted to halve the nation's new hydrocarbon frontiers have opened up.

entire trade deficit.”  Intrepid exploration companies are exploring off

Therefore, even in the most optimistic scenario, in a
country that enjoys considerable natural
advantages when it comes to onshore and offshore
wind power, hydrocarbons will remain by the most
vital energy source for the foreseeable future.
Perhaps, given the fiscal challenges that lie ahead
in the UK, this is fortunate. According to Oil and
Gas UK in 2009-2010 (despite low oil prices) the
industry contributed £6.4bn in corporation tax,
which represents some 20% of the total corporation
tax received.
For the fiscal year ending in April 2011, this figure is
anticipated to increase by 45% to £9.4bn. The vital
economic contribution does not stop with bolstered
government tax revenues.
Last year the UK Oil and Gas industry improved the
nation's balance of trade by £27bn, a figure which
acted to halve the nation's entire trade deficit. The
industry also provides much needed, and often well-
paid, employment to 450,000 people up and down
Greenland, the Falklands, and in the
deepwaters offshore Brazil – to name just a few
places.
 Shale gas and LNG technology have
revolutionised the gas markets and new
downstream technologies have drastically
changed the face of refining.
Furthermore, hydrocarbons are becoming ever
cleaner and rates of efficiency, across the industry,
have reached remarkable levels – with more
improvements happening all the time.
Let us celebrate then the contribution that the oil
and gas industry makes. It has become very easy to
knock hydrocarbons in recent times, but as yet few
viable alternatives exist. Oil and gas will remain the
fuel that will heat our homes, power our industry,
transport us, and drive economic development and
well-being for the foreseeable future.
Bankers may remain unpopular for some years to
come; the people who work in the industry so vital
to improving our standards of living should not.

- Andrew Moorfield,
Global Head, Oil & Gas, Lloyds Banking Group

Andrew is Managing Director and Head of Oil & Gas at Lloyds Banking Group. Prior to joining Lloyds Banking Group in 2006,
he was Managing Director and Co-Head of General Industrials at Bank of America EMEA with responsibility for the Basic
Materials sector. He joined Bank of America in 2001 after working at Citibank and Diageo plc in Europe and Asia. Andrew has
an Economics Degree (Hons) from the University of Melbourne and an MBA from the Wharton School.

About Lloyds Bank Oil & Gas: The Oil and Gas team manages relationships across a spectrum of industry disciplines, ranging
from Majors to Independents, Service Providers and Traders, as well as financing refineries and pipeline projects. The team is
based in London and Edinburgh. Our unparalleled track record of delivering tailored financing solutions to our clients is made
possible by our team of industry professionals, including reservoir engineers and experienced bankers. We are also one of the
few players to have maintained a constant presence in the sector through all economic cycles, helping secure our reputation as
the leading provider of financing to Oil & Gas companies.

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

Date: 26-28 October

2010
Location: Eventi Hotel
New York, NY, USA

Pre-Assembly Press Conference (Courtesy of Platts)

Edward Morse, Managing Director and Global Head, Commodities Research, Credit Suisse

Central bank easing has led to a depreciating dollar, and we're seeing phenomenal growth of the flows of capital
into passive investments...It's a heavy maintenance season and European runs this month are going to be down
about 1 million b/d as a result, and US runs will be down about 1.5 million b/d....non-OPEC growth is surprisingly
strong, and with that growth, it means there won't be significant inventory change in 2011, so the fundamentals
will keep the price rangebound. Back in 2008, with capital costs high, most capex in the marginal barrel projects -
- like the oil sands -- needed a price of $95/b. But now, that range is $45-$75. Even if the cost is $75, the forward
curve allows a developer to lay off a lot of risk. "The futures curve should be supporting any project." The
"wedge" of lost production because of the Gulf of Mexico moratorium could be up to 500,000 b/d by 2017.

Terry Newendorp, Chairman and CEO, Taylor-DeJongh

There's substantially more dollar flow into the market from the bond side... the banks are not back to the full pre-
crisis levels. Bonds are now preferred for raising capital, and on a global basis, capital raising from the bond
market in energy is now running ahead of a boom year like 2007. In the services sector, in the first nine months
of the year, the capital raising has been $120 billion from the bond market, and only about $15 billion from banks.
Companies often say that their bankers don't want to talk to them anymore..."and they're right."

Ian Fay, Founding Partner, Odin Advisors

The Chinese are driving deal values, and they are overpaying. Shale gas is providing about 1/3 of all upstream
deals worldwide, and that doesn't even include the XTO deal, which was announced in 2009. The acquisition of
XTO by ExxonMobil was impressive. ExxonMobil got punished right after that, but XOM lacked a very long term
perspective. When ExxonMobil takes a bite, they need to take a big bite. Because of the growing spread between
the price of natural gas and price of liquids produced from the shale, it has caused the price of acreage to
quadruple in some cases. If you are a 500 million capitalization company you should be looking for a merger
partner. The debt markets are back but through the bond markets. Banker relationships are "dry."

New York, New York: Shalesman, Yeomans, Analysts

& Pundits Council In The Big Apple (Courtesy of PLS)

The buffet of presentations here at The Oil Council’s Energy Capital assembly provided a selection broad enough
to sate the appetites of the most intellectually voracious delegates as 50 presenters addressed a topical
spectrum that ranged from private equity’s influence shaping industry evolution in changing times to an
unexpectedly newsworthy session delving into the economic nuts and bolts of unconventional gas.

www.oilcouncil.com
If variety is the spice of life, then this was one hot event. Day two stood alone from recent conferences with its
primary focus on oil and scarce mention of natural gas. The break in themes was welcome for anyone suffering
from natural gas fatigue. But that changed on day three when natural gas and shale gas in particular, became the
subtext of a lively intra-conference discussion from an eclectic mélange of skeptics and proponents who mirrored
the larger debate about shale gas in the current industry.

The Oil Council Assembly, which alternates a couple times annually between Europe and North America, is
notable for its international orientation and features a smorgasbord of global accents and viewpoints. Of value is
a format that mixes a handful of formal presentations with panels open to interaction with delegates, creating a
dynamic, unrehearsed forum that keeps attendees talking at the social networking mixer at the end of the day
and on into dinners – and beyond since New York bars don’t close until 4 a.m.. or so we’ve been told.

Key Takeaways

Diversity leads to consensus in unexpected ways. While commodities experts disagreed on the reasons
surrounding the puzzling post-2004 decoupling in oil prices from supply/demand fundamentals, those who
interpreted historical events differently—as well as future demand—converged when it came time for a 2011 oil
price forecast. With one exception, everyone—whether bull or bear—picked the same per barrel number: $85.

The lone dissident, Alange Energy CEO Luis Giusti (former CEO of PDVSA) foresaw a price closer to $75,
reflecting his view that the lower figure was, in fact, the number targeted by OPEC and specifically Saudi Arabia.

While shale plays have become a disruptive, transformative event in the U.S. over the last half decade, the shale
revolution is likely to unfold at a slower pace overseas, according to PFC Senior Director Raoul LeBlanc and
Schlumberger’s Dale Logan. To paraphrase, it is not a matter of resources; rather, it’s a function of regional
idiosyncrasies in the oil and gas business. In the U.S., dozens of companies scramble to develop shales.

As LeBlanc explained, it’s a market that conducts 30,000 discrete experiments each year (gas wells), all
invariably under $10 million and each specifically tweaking one component or the next with knowledge spreading
quickly industry-wide through service companies. In contrast, international shale plays feature one or two
companies in a play drilling one well per quarter. Absent the creative ferment in the U.S. market place,
knowledge will unfold more slowly because the ingredients of success in each shale play are based on multiple
efforts employing different combinations over hundreds of wells.

Are the shale plays for real? If the question is about resource potential, the answer is a definite yes. If the
question is about economics and profitability, the answer is: it depends.

Can companies make money in shale plays at low gas prices? Again, the answer is yes, if they have joint venture
partners. Individual plays may not make specific economic success at sub-$4 gas, but the operator is buoyed by
investment capital from abroad. However, the fact that breakeven prices involve widely divergent price levels for
JV investors and operators may in fact increase geopolitical friction, one of the themes cited by NGP Energy
Capital Management CEO Ken Hersh. By the way, said one speaker- those disparate price decks can be as
much as $5.00 per Mcf higher for the JV partner than for the JV operator.

To B or not to B factor

Shale plays remain economically challenging economic ventures that provide a modest rate of return of about 7%
over the long term for the right companies in the right locations, according to the analysis of Jason Ambrose,
CEO of Palantir Solutions. Ambrose looked at a variety of variables in shale well economics, including royalty or
severance tax regimes, production volume, natural gas pricing, decline curves, EURs etc. Plugging those
variables into a sensitivity analysis led Ambrose to conclude that shale plays can be a good business for some
companies in a mid-level price environment, but entail significant risk in a poor price environment.

“Definitely this is an investment that can make money,” Ambrose said. “The question is what investor wants to
make an investment with a 7% return, given the risks and uncertainties involved?”

Ambrose proffered a technical discussion of shale well type curves—the most frequently cited metric in the
industry today for attendees at the final session of the Assembly. As it turns out, type curves are a theoretical
construct that forecasts hydrocarbon recovery as EURs. The industry’s mathematics for creating type curves is
based on conventional gas well decline data. Shale plays are still early in their evolution without a large base of
well histories so it is not clear that conventional well decline curves can be extrapolated to shale wells.

However, the data that exists suggests reasonable alterations of the mathematics behind the decline curve,
notably how one figures the B-Factor component in the equation, produce alternative EURs well below some of
the commonly discussed numbers extent in the industry. In other words, the industry is using highly optimistic
assumptions to forecast long-term recoveries rather than a range of potential outcomes.

www.oilcouncil.com
 Herman Franssen opens the discussion with a focussed Jim Wicklund from Carlson Capital and Theodore Helms
session on today’s macroeconomic environment from Petrobras watch on

“The Oil Council’s forum was refreshingly different from the usual trade events that sometimes become predictable sales pitches.
Instead the impression was more of an impressive group of high-level insiders comparing notes and sharing insights among peers, in a
relaxed atmosphere of thoughtful conversation. It was a pleasure taking part.”
Antoine Halff, First Vice President and Deputy Head of Research, Newedge

Luis Giusti discussed the emergence of Latin America as the Atlas Energy’s Chairman Ed Cohen is one of many guests to
next big play for independent oil and gas companies be in the audience and network with attendees

"Spectacular event!! Thoroughly enjoyed it and would love to do it again, and stay longer. Excellent across the board."
James Wicklund, Principal and Portfolio Manager, Carlson Capital LLC

Ian Fay from Odin Advisors poses some tough questions to Jose Arrata, President of Pacific Rubiales was another
the panellists about the availability of capital special guest at the Assembly

“Extremely instructive conference where high level executives share their hands-on experience and views of the industry”
Alberto Maria Finali, CEO, Symposium Capital Management LLC

www.oilcouncil.com
 Terry Newendorp (Taylor-DeJongh), Tom Petrie (BAML) Jim Wicklund, Mark Warner (UTIMCO) and John
and Lance Crist (IFC) explore the future of energy banking D’Agostino (SecondMarket) share a joke

“Not the everyday oil and gas conference.

World class panellists and current energy topics made this assembly one of my top industry events for 2010.”
Jaime Gualy, Managing Partner, 1859 Partners LLC

Robert Harvey (Harvest Petroleum) and Bob Szczuczko Bobby Tudor (Tudor, Pickering & Holt) and Lance Crist
(Quetzal Energy) deep in conversation listen to Andrew Moorfield (Lloyds Banking Group)

“Congratulations to all for such an outstanding event.

I've not seen a conference with this impressive roster of participants in a long time.”
Eliecer Palacios, CEO, Energy Sector Specialist, Maxim Group

Marc Helsinger and Grant Darnell in high spirits Steve Bell from Remora answers questions from floor

“I was very impressed with the presenters and general attendance. Networking opportunities were ample – your group clearly went
out of their way to encourage attendees to meet one another. Can’t wait for the next event…”
Ari Fuchs, Senior Vice President, Midtown Partners & Co., LLC

www.oilcouncil.com
Economic experts Lawrence Eagles (JP Morgan) and Mark John Schiller from Energy XXI shares his thoughts on the
Findlay (BP) debate current commodity prices future of the Gulf of Mexico

“The Oil Council is truly becoming the ultimate authority on geopolitical and geo-economic trends regarding the oil industry”
Ziad Abdelnour, President & CEO, Blackhawk Partners

Shawn Reynolds from Van Eck Global asks a question Jan Stuart from Macquarie explains his thoughts on future
through a crowded conference hall demand and supply dynamics in oil and gas

“You are to be congratulated not only for having the foresight to conceive an industry organization that is The Oil Council, but
especially for sponsoring your America’s Assembly. In my opinion your America’s Assembly unquestionably epitomized the Oil
Council’s mission of promoting knowledge and thought-leadership across the E&P industry. Expect to see me at next year’s event.”
James 'JW' Vitalone, Senior Vice President, Oberon Securities

Attendees relax at one of the many networking receptions Kelly Plato from NPG Capital Resources Company before
across the Assembly sharing his thoughts on the future of mezz capital

"It was a great event for oil and gas executives to network with key colleagues from the financial side of the industry."
Brian Spector, Managing Director, Structured Products, BP Corp North America Inc.

www.oilcouncil.com

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 Changes: The Emergence of Singapore as an Oil Centre

Written by Al Troner, President, Asia Pacific Energy Consulting (APEC)

The Asia Pacific Petroleum Conference (APPEC) completed its 26th gathering this year in Singapore in October.
I attended for the first time in some years and the conference made me consider what has changed there over
the course of a quarter century.

I left Europe to work in Singapore in 1983 and I was fortunate enough to arrive in Singapore Back in the Earlies,
as an English friend used to call these times – it was just as Asia Pacific‟s energy sector began to take off.
APPEC 2010 underscored for me just how different Asia Pacific was back then and, what has changed in
Singapore, in the region and in global energy, over the past quarter century.

Firstly the place. Leaving Italy to work in Singapore in the early 1980s kept on reminding me of Alice in
Wonderland and I found myself muttering “Rabbit down the hole, rabbit down the hole…”. Singapore then was
shop-houses and go-downs, people living on the river in bumboats, a fabulous mélange of all things Chinese,
Malay and Indian. This was the first time I had seen the fabled East.

The industry was shifting into modern times as Singapore overtook Tokyo as the regional trading center.
Singapore was a major refiner in 1983 with capacity less only than Japan, China and India. By 1990, products
trade shifted mainly to the Island Republic, with crude following shortly after. Gas trade did not yet exist and gas
development and sales were a peripheral activity in the sector. While Singapore was already a center for oil
shipping, insurance and trade support, banks kept strictly to the issuing of commercial credit, exploration activity
was minimal and the Island Republic just began to produce petrochemicals. The most important changes include:

 Singapore overtaking Tokyo

 New players
 Growing formality & 24-hour trade
 New technology – communications, Internet and computers
 Maturing paper trade, hedges and swaps
 Realization that Asia Pacific will lead world oil demand growth

Singapore at the time was a low-rise, large-scale „kampong‟ (Malay for village), with a small number of
companies actively trading oil products and crude. It was a sort of club, a small closely knit community that could
allow a newcomer the chance to see every company and most people trading oil within 6 months of arrival.

The wet barrel was king – basic daily tools included reading the shipping fixtures and viewing through a spyglass
all the tankers in the Inner and Outer Roads. Paper trading and hedging were just beginning to percolate through
the global trading companies, most of all the large independent traders, many of which now gone – Trans-World,
Marc Rich, Phibro and Coastal. In 1984, some 50 companies traded crude and products; by 2010 the number of
energy companies registered for Singapore tax breaks totaled more than 150 firms.

However the majors dominated trade, sales and blending based on their substantial refining and huge tank farms
in this pivotal trading point. Shell operated one of the largest refineries in Asia and even after mothballing two of
its five distillation towers, operated a refinery with greater capacity than a half dozen Asian markets at that time.

Caltex, the joint venture of Chevron and Texaco, held smaller refining assets, but was by far the undisputed
leader of Asia-Pacific product sales. Singapore cargoes moved to the Mediterranean, East Africa, the Mideast
Gulf, North Asia, Australasia and the US West coast, as well as, supplying local markets. BP and Mobil both used
their refineries as pivots to leverage out trade volumes far beyond their ability to process oil.

Japanese trading houses (Sogo Shosha) – the most active Mitsubishi, Mitsui, Itochu (then C. Itoh & Co.) and
Sumitomo - served as middlemen for Japanese refiners, as well as, sellers into smaller Asia-Pacific markets.
South Korea just was beginning to trade internationally but the biggest players of 2010 were still missing (i)
China, which only began in 1984 to process crude in Singapore, and (ii) India which mainly purchased crude
through tenders.

It was an informal, but intensely personal, world. Deals were concluded on a handshake, often negotiated over
many beers. At lunch appointments you asked the waiter to sit you far away from other tables, as it was probable

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you would bump into other traders. Secrets, even trade secrets, had a very short shelf life. Suits were worn only
for a visit to the Prime Minister and to Japanese cocktail parties. If lunch proved to be too liquid, there was always
a welcoming office couch and time to wake up for the London opening.

Singapore in 2010 is a very different place, with many more players working on a 24- hour trade clock and never
shutting off their hand phones. It is not unusual to see many oil executives in full suits, even if their jacket
immediately goes upon a hanger once they get to work and no one, from the smallest firm to the largest major,
can afford to take a half hour nap – certainly the volume of alcohol consumed at lunch has dwindled to near nil,
as it has in the West.

The oil trade has changed in Singapore – profoundly, consistently and across the board. A number of factors
have caused the shift, far more players, far more trade in paper (both formal and in swaps), the emergence of
bank and financial-based oil trade and the emergence of the Island Republic as the vital third leg in international
trade. But in the end we believe it has been technology that has accelerated this trend and that far better
communications, electronic trading, computer generated trade and near instantaneous changes of price
assessments have all fuelled greater activity – if not profits.

In the world of wet barrel trade in the early 1980s the fax was considered a great leap forward in
communications, particularly for companies using languages with non-Latin letters. Most traders knew how to
operate a telex; a few remembered using telegraph.

While Singapore‟s telephone system was better than most, traders would dread having to call India, Saudi
Arabia, China or Indonesia. Certain places one would never dream of telephoning, such as Vietnam, Myanmar or
Bangladesh. Like most traders I developed strong wrists from constantly re-dialling the rotary telephone – and
when the monsoon rains came down hard, one would not even think of using the telephone.

Personal computers were just beginning to impact trading operations. Typewriters remained an office staple and
lists were often handwritten. The personal computer, with the parallel developments of Internet and the Excel
sheets, made it possible to collect, collate and keep large amounts of statistics. By the 1990s, computer-initiated
trading programs emerged and began to shape trade on the formal paper exchanges such as NYMEX and the
IPE. My small consulting company Asia Pacific Energy Consulting (APEC) would not be able to operate with
colleagues many locations across the globe, without these technical advances.

And this has impacted price assessment services, as Platts, Argus and Reuters have moved to real-time pricing
information and quotes. The Platts window in late afternoon Singapore time has become as important as the
opening of the London market. And the tremendous growth of non-formal paper – derivatives loosely describes
the many trading tools currently used in Singapore as much as London or New York – would not be possible
without the computer, the internet and the hand phone.

Finally, a big shift has been the emergence of Asia Pacific as the world‟s fastest growing oil consumption region –
poised to overtake North America in 2011 as it did Europe in the 1990s. China‟s oil use in 2009 was about 45%
of the US; in 1984, it was roughly 15% of American consumption. Asia Pacific will remain the epicentre of oil
demand growth for the foreseeable future.

In the 17th century cartographers labelled the vast empty spaces unknown to Europe as Terra Incognita, i.e.
Unknown or Unrecognized territory. In 1983, few recognized that Asia Pacific would emerge as the top energy
growth region worldwide.

I made my move to Singapore, like most major moves in life, half on luck and half on calculation. Who knows –
perhaps Shanghai will replace Singapore as the region‟s oil and gas trading centre – possibly the top global
energy trading centre – by 2035?

But for now that is simply Terra Incognita.

About Al Troner: Al is President of APEC. Since 1984, Al has worked in Asia’s

energy sector, establishing Dow Jones/Telerate's regional energy services that
year. He returned to Singapore in 1989 to found and then direct PIW’s Asia-Pacific
bureau. He won the International Association of Energy Economics award for
Energy Journalism in 1994, retiring from journalism the following year to co-found
APEC. Al has published studies on China, Vietnam, Singapore, Asia-Pacific
Product Quality, Asia-Pacific and Global LNG, Pipeline Gas Development, East of
Suez Condensate, World Crude Survey and on Global Acidic Crude Trade and
Markets. He has worked in the energy industry in the U.S., Europe, North Africa
and Mideast, as well as in Asia Pacific. Please contact Al directly on
apenergy@apecconsulting.com +1 281 759 4440

www.oilcouncil.com
 RESEARCH & NETWORKS

BRAZIL RUSSIA INDIA CHINA EM MACRO

Making sense of
emerging markets

KNOWLEDGE JUDGEMENT OPPORTUNITY

 Wall Street Investor – Why blaming China on our economic
woes is a cover up that is foolish and that will not stand
Written by Ziad Abdelnour, President and CEO, Blackhawk Partners Inc
There is clearly a tendency today for countries all
over the world to “beggar thy neighbour” (just as
happened during the 1930s) and gain a leg up for
their exports by cheapening their currencies.
“Beggar thy neighbour” for those who are not
familiar with the term or “beggar-my-neighbour”, is
an expression in economics describing policy that
seeks benefits for one country at the expense of
others. Such policies attempt to remedy the
economic problems in one country by means which
tend to worsen the problems of other countries.
The term was originally devised to characterize
policies of trying to cure domestic depression and
unemployment by shifting effective demand away
from imports onto domestically produced goods,
either through tariffs and quotas on imports or by
competitive devaluation. The policy can be
associated with mercantilism and the resultant
barriers to pan-national single markets..
"Beggar thy neighbour" policies were widely
adopted by major economies during the Great
Depression of the 1930s and proved ruinous for the
global economy then.
Is the world setting off down the same slippery
slope again? Let‟s hope not.
If you recall, the House recently passed legislation
saying China is a currency manipulator and has to
raise the value of the Yuan.
The rationale being that the Chinese Yuan is
undervalued by 25%, which makes Chinese exports
artificially competitive. Hence, the U.S. Congress is
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trying to blame China's undervalued currency for
America's bad economy and unemployment woes.
But the former U.S. trade representative, Susan
Schwab, says that - while there's a very real
problem in terms of China artificially keeping the
renminbi low - this isn't the way to solve anything.
Schwab calls it "a signal-sending exercise during an
election season". She says that the bill won't really
do anything, even if the Senate passes it and it is
signed into law. Schwab says it "makes no sense",
won't solve any problems, will escalate tensions,
and will only divert attention from the real trade
problems between the U.S. and China.
Schwab further warns that other countries might
decide that the U.S. bill means that it‟s open season
for addressing currency manipulation, and that
other countries believe that the U.S. is manipulating
our currency. She says there could be a
"boomerang effect" from the legislation.
Ironically, an anti-sourcing bill - the kind of
legislation which might actually keep jobs in the
country - was defeated in the same week that the
toothless China bill passed.
To put things into perspective China is currently in
the middle of revaluing its currency and I frankly
believe it has nothing to do with America's
economic woes.
There is indeed a direct line between China, its
currency, its exports of lower-cost goods to the
United States, and the erosion of middle-class life
and now soaring unemployment. But U.S.
manufacturing has been bleeding jobs for decades.
What's more, the recent loss of millions of jobs
since 2008 has everything to do with the collapse of
the construction and housing industries along with
the near-death of the Big Three American auto
makers than with any competitive challenge from
China. China has become a large car market for
General Motors, but not for export to the United
States: for sale in China.
It would take a massive leap unsupported by any
fact to lay the demise of the U.S. auto industry at
the feet of China, or for that matter hold China
responsible for the sub-prime and derivative
debacles. Those are the cause of recent job loss.
Furthermore, China has been revaluing its currency,
nearly 20% between 2005 and 2008 and now
nearly 3% since June when the government
resumed that policy having shelved it during the
midst of the global financial crisis. It is in the
domestic interest of the Chinese government to
raise the value of their currency because they are
focused on building up on internal, domestic
consumption market.
They have no wish to be dependent long-term of
the vagaries and whims of American consumers,
and higher purchasing power for Chinese
consumers is the answer. They are not revaluing
quickly enough to suit an America stuck in second
gear and looking for someone to blame, but
revaluing they are.
I believe the real problem is global weakness in
demand, and China is understandably trying to
avoid what happened to Japan's ramped-up
currency, which led to the Lost Decade.
Further, it is not hard to see China‟s point of view: it
is desperate to avoid what it views as the dire fate
of Japan after the Plaza accord. With export
competitiveness damaged by its soaring currency
and pressured by the US to reduce its current
account surplus, Japan chose not the needed
structural reforms, but a huge monetary expansion,
instead. The consequent bubble helped deliver the
“lost decade” of the 1990s. Once a world-beater,
Japan fell into the doldrums. For China, self-
evidently, any such outcome would be a
catastrophe.
To be perfectly candid, I believe that the trouble
with today's capitalism is that there is little honest
capital left in it. It has been drained away by
quackery, debt and fraud. Real capitalism requires
solid capital - money you can trust. But real money
disappeared nearly 40 years ago. That was when
the last traces of gold were removed. Since then, all
currencies have been "managed." No longer fixed
measures of real wealth, they have become
tools...supposedly used by the authorities to
promote full employment and growth...but in fact
little more than monetary felonies.
From the end of the Napoleonic wars until the
beginning of World Wars of the 20th century, the
world's money system was backed by gold. You
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couldn't "manage" it. You couldn't devalue it. You
couldn't talk it up or talk it down. You couldn't
“beggar thy neighbour” by cheapening it or enrich
him by making it more dear. It was what it was. The
new experimental money system began in the Year
of Richard Nixon, 1971. Thereafter, the supply of
money could increase much faster than the supply
of goods and services. US money supply (M2) rose
1,314% between 1970 and 2008, from $624 billion
to $8.2 trillion. What did all this new money do?
First it flattered...then it corrupted...and finally, it
robbed.
America's working stiffs were the first to get
whacked. Inflation made them feel like they were
earning more; but they haven't had a real, hourly
raise since the system was put in place 4 decades
ago. And now, America is struggling to make sure
they get none in the future either. Lowering the
dollar against the renminbi increases the cost of
probably 90% of the goods in Wal-Mart and Costco
- where the working classes shop.
But this has been going on ever since the managers
began taking liberties with the dollar. In the 1960s,
the working man - 90% of the population - got 60%
of the income gains of the period. By the end of the
bubble years - 2001- 2007 - he got just 11%. This
has resulted in a "record income gap". Half the
nation's income goes to the top 20% of the
population, nearly twice as much, compared to the
bottom 20%, as in 1967; it's the biggest gap since
they began keeping track.
Consumer prices rose 5 times over the last 40
years. The stock market went up 15 times - from
800 in January 1970 to over 12,000 in 2008 -
roughly in line with the increase in the money
supply. But the phony money betrayed the rich too.
Investors were misled. Capitalists erred. Trillions of
dollars went down rat-holes.
Consumers were spent out, but the capitalists kept
building shopping malls. Now, stock market prices
have gone nowhere for more than a decade. And
household net worth - most of it in the hands of the
wealthy - has declined $12.3 trillion from the peak.
When the mistakes are finally flushed out, they
could be down another $12 trillion.
The horns have sounded and bells have been rung.
It is 1939 in the currency war - just the beginning.
When it is over, every managed currency in the
world will be dead or wounded.
But we will be wiser, too. When the new managed
dollar was introduced in the "Nixon Shock" of
August, 1971, nobody knew what it was worth.
When the end comes, everyone will know.
Using a weak dollar to create American jobs is
foolish, for two reasons.
First, no other country wants to lose jobs because
its currency becomes too high relative to the dollar.
So a weak dollar policy invites currency wars.
Everyone loses.
Second, even if we succeed, a weak dollar makes
us poorer. Imports are around 18 percent of the US
economy, so a dropping dollar is exactly like an
extra tax on 18 percent of what we buy.
It's no big accomplishment to create jobs by getting
poorer. You want to know how to cut unemployment
by half tomorrow? Get rid of the minimum wage and
unemployment insurance, and make everyone who
needs a job work for a dollar a day.
The goal isn't just more jobs. Its more jobs that pay
enough to improve our living standards. Hence,
using a weakening dollar to create more jobs
doesn't get us where we want to be.
With the dollar as the world's reserve currency -
every county, including China, must devalue their
currencies just to stabilize their economies:
It is traditional for our politicians to blame foreigners
for problems that their own policies have caused.
And in today‟s zero-sum economies, it seems that if
America is losing leadership position, other nations
must be the beneficiaries. Inasmuch as China has
avoided the financial overhead that has painted
other economies into a corner, nationalistic U.S.
politicians and journalists are blaming it for
America‟s declining economic power.
In fact, accusations that Japan, South Korea and
Taiwan are “making their currencies cheaper” by
recycling their dollar inflows into U.S. Treasury
securities simply means that they are trying to
maintain their currencies at a stable level.
It is how most central banks throughout the world
are responding to the global dollar glut. They are
increasing their international reserves by the
amount of surplus free credit” dollars that the U.S.
payments deficit is pumping out. To pretend that
China is “manipulating its currency” by doing what
central banks have done for over a century is utterly
false. Back in the early 1970s, U.S. officials told
OPEC governments that if they did not do this, it
would be deemed an act of war.
And Congress has refused to let China buy U.S.
companies – so China can only recycle its dollar
inflows by buying Treasury securities, thereby
financing the U.S. federal budget deficit.
To pretend that exchange rates are determined
mainly by international trade is “Junk Economics”.
International currency speculation and investment is
much larger than the volume of commodity trade.
The typical currency bet lasts less than a minute,
often being computer-driven by arbitrage swap
models. This financial fibrillation has dislodged
exchange rates from purchasing-power parity or
prices for export and imports.
The largest payments imbalances have little to do
with “market forces” for imports and exports. They
are what economists call price-inelastic – money
spent without regard for price. This is true above all
for military spending and maintenance of America‟s
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vast network of foreign bases and political
manoeuvrings to control foreign countries. During
the 1960s and „70s U.S. military spending
accounted for the entire balance-of-payments
deficit, as private sector trade and investment
remained in balance. Escalation of America‟s oil
war in the Near East and the hundreds of billions of
dollars spent to prop up America-friendly regimes,
end up in central banks – whose main option is to
send them back to the United States in the form of
purchases of U.S. Treasury bills – to finance further
federal deficit spending!
None of this can be blamed on China.
U.S. strategists would not mind seeing China‟s
economy similarly untracked by letting global
speculators bid up the renminbi‟s exchange rate –
by enough to let Wall Street speculators make
hundreds of billions of dollars betting on the run-up.
“Free capital markets” and “open financial markets”
are euphemisms for setting the renminbi‟s
exchange rate by U.S. and European currency
arbitrage and capital flight. The U.S. balance-of-
payments outflow would increase rather than shrink,
thanks to the ability of American banks to create
nearly “free” credit on their keyboards to convert
into Chinese or other currencies, gold or other
speculative vehicles that look to rise against the
dollar.
“An undervalued currency always promotes trade
surpluses,” Prof. Krugman explains. But this is only
true if trade is “price-elastic,” with other countries
able to produce similar goods of their own at only
marginally different prices. This is less and less the
case as the United States and Europe de-
industrializes and as their capital investment shrinks
as a result of their expanding financial overhead
ends in a wave of negative equity.
Congress is increasing the drumbeat of accusations
that China is violating international trade rules by
protecting itself from financialization.
“Democrats in Congress are threatening to slap
huge tariffs on Chinese goods to undermine the
advantages Beijing has enjoyed from a currency,
the renminbi, that experts say is artificially
weakened by 20 to 25 percent.” The aim is to make
China “lift the strict controls on its currency, which
keep Chinese exports competitive and more factory
workers employed.” But such legislation is illegal
under world trade rules.
This kind of propaganda does not see the United
States as guilty of “managing the dollar” by its
quantitative easing that depresses the exchange
rate below what would be normal for any other
economy suffering so gigantic and chronic s
payments deficit. What makes this situation
inherently unfair is that while the Washington
Consensus directs other countries to impose
austerity plans, raise their taxes on consumers and
cut vital spending, the Bush-Obama administration
blames China, not the U.S. financial system or post-
Cold War military expansionism.
The cover story is that foreign exchange controls
and purchase of U.S. securities keep the renminbi‟s
exchange rate low, artificially spurring its exports.
The reality is that these controls protect China from
U.S. banks creating free “keyboard credit” to buy
out its companies or load down its economy with
loans to be paid off in renminbi whose value will rise
against the deficit-prone dollar.
It‟s the arbitrage opportunity of the century that
lobbyists are pressing for, not the welfare of
workers.
Paul Krugman and Robin Wells blame China for
Wall Street‟s junk mortgage binge. Instead of
pointing to criminal behaviour by the banks,
brokerage companies, bond rating agencies and
deceptive underwriters, they take the financial
sector off the hook: “Just as global imbalances – the
savings glut created by surpluses in China and
other countries – played an important part in
creating the great real estate bubble, they have an
important role in blocking recovery now that the
bubble has burst.”
This sounds more like what one would hear from a
Wall Street lobbyist than from a liberal Democrat. It
is as if the real estate bubble didn‟t stem from
financial fraud, junk mortgages, NINJA loans or the
Federal Reserve flooding the U.S. economy with
credit to inflate the real estate bubbles and sending
electronic dollars abroad to glut the global
economy. It‟s China‟s fault for running large trade
surpluses “at the rest of the world‟s expense.”
Wall Street‟s idea of “equilibrium” is for foreign
countries to financialize themselves along the lines
that the United States is doing, then global
equilibrium could be restored.
Such suggestions are a cover story for America‟s
own financial mismanagement. The U.S. idea for
global equilibrium is to demand that that the rest of
the world follow suit in adopting the short-term time
frame typical of banks and hedge funds whose
business plan is to make money purely from
financial manoeuvring, not long-term capital
investment. Debt creation and the shift of economic
planning to Wall Street and similar global financial
centres are confused with “wealth creation,” as if it
were what Adam Smith was talking about.
China is trying to help by voluntarily cutting back its
rare earth exports. It has almost a monopoly,
accounting for 97% of global trade in these 17
- Ziad K. Abdelnour, President and CEO, Blackhawk Partners, Inc
www.oilcouncil.com
metallic elements. These exports are “price
inelastic.” There is little known replacement cost
once existing deposits are depleted. Yet China
charges only for the cost of digging these rare
metals out of the ground and refining them.
They are used in military and other high-technology
applications, from guided missile steering systems
and computer hard drives to hybrid electric
automobile batteries. This has prompted China to
recently cut back its exports to save its land from
environmental pollution and, incidentally, to build up
its own stockpile for future use.
So I have a modest suggestion. If and when China
starts re-exporting these metals, raise their price
from a few dollars a pound to a few hundred dollars.
According to theory put forth by Mr. Krugman and
the U.S. Congress, this price increase should slow
demand for Chinese exports.
It also would help promote world peace and
demilitarization, because these rare metals are key
elements in missile guidance systems. China
should build up its national security stockpile of
these key minerals for the future – say, the next
prospective five years of production. Let this be a
test of the junk paradigms at work.
After all, there is a trade imbalance with China
which needs to be addressed over some
reasonable time-frame. But it cannot be done
overnight.
By now nearly everyone recognizes that raising the
value of the renminbi is a necessary part of the
process of raising the real value of household
income and improving the balance between
producers and consumers, but if the currency rises
too quickly and so leads to rising unemployment, it
will actually cause household income (and with it
household consumption) to decline as
unemployment rises.
The imbalance will still improve, but it will improve in
the “wrong” way, in the form of production declining
faster than consumption.
In the meantime, America has not addressed its
own fundamental problems (such as rampant
speculation and fraud) which led to our financial
crisis. And as former trade representative Susan
Schwab notes, the Congressional bill is nothing but
political theatre which might boomerang on all of us.
ziad@blackhawkpartners.com
 PWC’s Q3 Analysis – US Oil & Gas Sector Deals

Despite ongoing uncertainties about future business in the Gulf and cautious and uneven equity markets, merger
and acquisition (M&A) activity in the U.S. Oil & Gas sector overcame challenges to surpass 2009 levels in the
third quarter of 2010. According to PwC US, the increase in oil and gas deal activity is attributed to companies'
ongoing effort to reorder their portfolios, continuing interest by non-U.S. oil companies in shale plays, and the
expansion of product lines and markets served by equipment and service companies.

According to PwC, for the three month period ending September 30, there were 39 deals with reported value
greater than $50 million (totaling $17.6 billion in deal value) representing an increase of 19.7 percent from the
same period last year. In terms of volume, the third quarter of 2009 saw nine fewer deals (30) over $50 million
with total deal value of $14.7 billion.

"The oil and gas sector continues to see a strong level of activity, despite lingering uncertainty regarding equity
markets, relatively low commodity prices (particularly gas), and uncertainty surrounding relative currency values,"
said Michael Collier, U.S. leader of the energy M&A practice at PwC. "Not only are we seeing steady deal flow
among corporates in the space, financial sponsors are starting to emerge again and we expect they will be major
players this year and next. We're optimistic for the remainder of 2010 and 2011, and the significant backlog of
deals in the pipeline is generating a lot of activity."

A continuing theme from the previous quarter, upstream asset-focused deals dominated deal activity, comprising
71 percent of deal volume and 57 percent of value in the third quarter of 2010. According to PwC, the relatively
large volume of asset sales reflects the size of major upstream transactions, particularly in the shale plays.

"There is a healthy level of deal volume around divesting of non-core assets as companies look to maximize their
return on capital deployed and raise funds to continue their development efforts, particularly in the shale plays,"
continued PwC's Collier. "As for the Gulf, players are in the process of deciding whether they will be in or out, and
while the moratorium was technically lifted recently, there is still a de-facto moratorium as permits remain difficult
to secure. Drilling activity in the Gulf will take time to fill in, and we're seeing capital budgets being set for 2011
that assume very low activity. Companies are actively working on the decision to either leave the Gulf or ride out
the storm."

Of the $17.6 billion in value, 25.7 percent involved shale gas plays, as companies looked to secure their position
for the longer term and have access to newly developing technology, according to PwC. "Shales with higher
liquid content like the Eagle Ford have been particularly attractive acquisition targets as companies look to take
advantage of what many perceive to be a sustained period of low gas prices," Collier stated.

In the third quarter of 2010, the average value of deals over $50 million fell to $450 million from an average of
$490 million in the same period of 2009, demonstrating oil and gas companies' ongoing focus on optimizing their
portfolios. "While we're seeing an increase in larger deals, the average deal value is not rising; in fact, it declined
slightly. This alone doesn't represent a significant trend, except that it's relatively strong for the third quarter,
which is historically a seasonally slow time for deals," added PwC's Collier.

For the first nine months of 2010, there were 141 deals, with reported value greater than $50 million, representing
$100.4 billion versus 70 deals with $34.9 billion in the first three quarters of 2009 -- a 101 percent increase in
volume and a 187 increase in value.

"Despite the possibility of tax increases in 2011, we aren't seeing many deals rush to close before year-end,"
continued PwC's Collier. "Dealmakers remain conservative and are focused on creating value and avoiding costly
mistakes. They are taking their time to make sure the value in the deal is protected, through careful diligence and
thorough preparation before signing and close. We're also seeing more attention paid to post-deal performance
particularly in the first 100 days. As companies emerge from the financial crisis, it is clear they are very focused
on operational excellence. The same seems to characterize M&A activities. As we head into the next energy
M&A upcycle, it feels as though the bar has been set very high in terms of deal execution excellence."

About the PwC U.S. Energy Practice: We focus on customizing three things- assurance, tax and advisory services- to meet the
unique challenges of energy companies. How we use the knowledge and experience we've gained from serving the largest and
most complex energy companies to the entrepreneurial start-ups depends on our clients' goals and culture: www.pwc.com

www.oilcouncil.com
 Analyst Notes - E&P Outlook
The European Mid Cap E&P sub-sector outperformed the broader sector in 3Q10, with stock prices up 29% on
average for our universe versus the average achieved by the Service companies (+21%), Integrateds (+11%)
and Brent crude (+3%). The third quarter was marked by a number of catalytic events, such as KNOC’s approach
for Dana Petroleum (announced 2 July), the completion of Heritage’s Ugandan asset sale to Tullow (27 July) and
the results of Cairn’s first wildcat exploration well in Greenland (24 August).

Although much has been made of the success of the small cap explorers (e.g. Cove Energy, Rockhopper,
EnCore) in the first half of the year, we highlight the approach for Dana as the main catalyst for the Mid Cap sub-
sector re-rating over the past three months. The bid by KNOC pointed to the nascent value of the Mid Cap E+P
universe within a global context of resource scarcity and the scramble for reserves and production by energy-
hungry nations in Asia.

With the market in a relatively bullish mood and value more difficult to find amongst the Mid Caps, we continue to
favour what we view as reasonably priced exploration programmes that are either well diversified across
numerous prospects or that do not have success priced in yet. However, drilling success and redistribution of the
Dana Petroleum returns have seen two of its previously under-appreciated peers, Premier and Lundin, achieve
top quartile share price appreciation in the third quarter.

Figure 1: Selected Stock Performance between 1 July to 30 September, 2010

80%

60%

40%

20%

0%
Cairn
Lundin
Dana

Soco
Heritage
Afren
Tullow
Premier

E&Ps
Integs
Refiners
OFS

MSCI Europe
MSCI Energy
DNO

Brent

Source: Thomson Reuters DataStream

What holds for 4Q10? The results of several ongoing drilling programmes will help to feed the flames in the E&P
sector, which attracted considerable positive sentiment in 2010 for the first time since early 2008. But this should
not come as a surprise; part of the E&Ps’ investment proposition is their ability to create significant value through
exploration over and above the absolute returns of a bullish global economy. With the oil spot price trading above
$80/bbl, there are few signs of this attraction waning just yet.

We continue our conservative stance with regard to exploration drilling. In general terms, 1 in 5 exploration wells
are normally commercially successful, but in frontier terms this decreases to 1 in 10. We advise investors to pick
their stocks carefully and be aware that as more of the potential ‘ups’ are already priced in, so the investor should
become much more wary of the potential ‘downs’ should a well come in dry. Geologists dreams are like rainbows,
chasing them are more likely to get you wet feet than a pot of gold.

- Credit Suisse

www.oilcouncil.com
Golden Barrels: The Vortex
By Simon Hawkins, Head, Oil & Gas Research, Ambrian

I like meeting companies. I’m happy to go to see them
and I’m even happier when they come in to see me.
My record is five companies in one day: two results
presentations in the morning, two corporate
presentations after lunch and a sales presentation
later on in the afternoon with a nice cup of tea. I’m
happy to see every shape and size, whatever region
or corner of the globe they come from.
companies have both low value and a low institutional
relevance, and 2) Top right, where companies have a
high value and a high institutional relevance.
I’m happy to see companies from all quadrants, but if
a CEO walks in wanting to move their company from
bottom left to top right he will almost certainly get more
of my attention. This is because there is a chance he
may well run into The Vortex.

The good thing about staring at a picture is that after a
while you start to see patterns. And this goes for the
companies in our sector too. One of the patterns that
started to appear is what I call ‘The Vortex’. I'm looking
forward to explaining a little more about this at The Oil
Council World Assembly next week.
“When companies are
The Vortex is when a company gets so interesting that
it quickly gets even more interesting to more investors.
In other words, it reaches a stage when the story
starts to catch fire or build a momentum, which makes
it very difficult to ignore by the rest of the market.
When companies are caught up in The Vortex, you
can see faster growth in value for a smaller rise in
institutional relevance.

caught up in The Vortex,
you can see faster growth
in value for a smaller rise in
institutional relevance.”
It all started with looking at the sector in a different
way: plotting market capitalization (the Y axis) against
institutional relevance (the X axis).
Market capitalization is straightforward to measure,
right off Bloomberg. Institutional relevance is a little
more tricky but, the way I define it, it’s the percentage
of a company’s shareholders made up of blue chip,
premier division institutional shareholders such as
Blackrock, Schroders, JP Morgan, Jupiter etc.
We’ve seen this with a number of stocks this year
including those involved in the Falklands, other frontier
explorers and even companies operating in the North
Sea. Companies that are masters at riding The Vortex
for a long time would include some of the mid-large
cap E&Ps we recently initiated on, such as Cairn
Energy, SOCO International and of course the
company with a to-die-for shareholder register,
Premier Oil.
The big question is this: if you are down in the bottom
left quadrant, how do you start to tag the outer limits of
The Vortex in order to get sucked in and enjoy an
accelerated ride upwards and onwards?
Well, for that you’ll have to come along next week and
let me explain.

If you imagine those axes in front of you there are two Email me your views at: info@goldenbarrels.co.uk
extremes: 1) Bottom left of the graph, where

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.
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
 EXPLORATION
producTION
certificATION
DEDICATION
VISION
RESOURCE AND RESERVE CERTIFICATION AND TECHNICAL AUDIT SERVICES
SGS Horizon provides integrated solutions throughout the lifecycle of your reserves. We cover subsurface, well and engineering
processes at every stage, from exploration through to development, production and abandonment. Our solutions help you to
develop the value of your operations and deliver increased competitive advantage.
Our extensive experience in the area of reserve and resource assessment means you receive both the most appropriate and the
best independent evaluation available. All certifications and audits are conducted in compliance with your chosen as well as the
most suitable guidelines, which could be SEC, PRMS, NI51-101 or UKLA.
For more information, contact info@horizon ep.com or visit www.horizon-ep.com or www.sgs.com/horizon.
© SGS SA 2010. ALL RIGHTS RESERVED.

SGS IS THE WORLD’S LEADING INSPECTION, VERIFICATION, TESTING AND CERTIFICATION COMPANY

horizon
 The Oil Outlook
November 2010: Quantitative
Easing Sends Commodity Prices Higher
By Gianna Bern, President,
Brookshire Advisory and Research

Crude Oil Prices Increase

Over the last three weeks, the energy complex has

“Entering 2011, we
obtained renewed vigour with crude prices flirting anticipate that diesel
with $88 per barrel. Will this last? Or, is this
upswing to be short-lived? We believe this run up in and gasoil demand will
the energy complex has staying power. also remain robust
concurrent with global
“India and China expect demand recovery.”
GDP growth in 2011 to be
north of 7% – far outpacing Demand Uptick
OECD countries which are Global energy organisations, such as OPEC and
projecting a mere 2.5% the International Energy Agency are both
forecasting modest growth in 2011 among the 33-
growth in GDP.” nation membership of the Organization for
Economic Co-operation and Development (OECD).

Global commodity prices in the metals and
agricultural commodities are also experiencing
similar gains as a result of modest global recovery
and potential inflationary concerns. For 2011, crude
prices in the $90 to $95 per barrel range are
definitely in the range of possibilities.
Gasoline prices have also followed suit with a
market upswing as inventories on both sides of the
Atlantic begin to be chiselled downward. Better late
than never.
Given the robust economic growth in emerging
markets, such as India and China, this is further
evidence that crude oil prices will maintain their
upward momentum throughout 2011.
India and China expect GDP growth in 2011 to be
north of 7% – far outpacing OECD countries which
are projecting a mere 2.5% growth in GDP. Both
markets are still supportive of crude oil prices.
Currencies

Entering 2011, we anticipate that diesel and gasoil
demand will also remain robust concurrent with
global demand recovery. Both commodities are
trading near the upper bounds of their trading
range. Currently, December heating oil crack
spread is near $15 per barrel and the December
gasoline crack spread is approximately $8.50 per
barrel. Both of these spreads highlight the current
bullish environment for refined products.
Quantitative easing by the U.S. government
invariably will have upward pressure on
commodities as a weaker U.S. dollar emerges.
The global markets are already witnessing the
potential inflationary effects of such a policy.
While the merits of such a policy can be debated,
the effects are fairly evident.

The December 321 crack spread is in the $10.00 Going into 2011, a weaker U.S. dollar will result in a
per barrel range providing a relatively stable price bullish environment for the energy complex.
environment for refiners and producers.

Gianna Bern is president of Brookshire Advisory and Research, a Chicago-based independent investment advisory and
research firm focused on oil and gas investments. www.brookshireadvisoryandresearch.com

www.oilcouncil.com
 Diary of a
Commodity Trader

The Energy
Policy of ‘No’
By Kevin Kerr, President and CEO, Kerr Trading International

As the World tries to claw itself out of the
economic abyss, oil prices keep climbing.
Actually, regardless of what Fed Chairman
Bernanke says from his helicopter,
inflation is here and it’s getting worse.
The elections removed the mandate of the Democrats
and now uncertainty about future energy policy looms
large. The election losses were mainly due to
disappointment by voters over Mr. Obama’s
performance.

Consumers around the globe are getting hit from all
sides; prices are surging for everything from food and
textiles to electronics and soft commodities.
Far and away though, energy prices are leading the
pack higher. Crude prices are approaching $90 and
heating oil prices this winter could skyrocket if we have
an above average number of heating degree days this
year, as predicted. Already beaten up consumers and
manufacturers are going to have to make tough
choices into 2011. And yet there is still really no clear
energy policy in the US or abroad.
Every sunken ship had a chart!
OPEC seems satisfied with prices at the current level
but is also voicing continued concerns over pervasive
dollar weakness and continuing to mull the idea of
trading oil in something other than $. Say it isn’t so!
The denial of inflation by Mr. Bernanke will do little to
fix the real problem, the endless printing of money and
the loose fiscal policies of the US. We now have real
negative interest rates and billions in easing which is
adding even more pressure on the greenback, making
it less and less attractive.
So as oil prices rise the move higher is being fueled by
an ever falling dollar. On top of all this bad news the
US still has no real clear energy policy going forward.
Drilling offshore and finding more domestic resources
has all but dried up as the economy imploded, and on
top of that the Gulf oil disaster set things back even
further.
All the talk of a green energy revolution is also faced
with many obstacles: the weak economy, lack of the
rare earth metals, and tepid investment.
The elections in the US this month drove a big nail in
the Obama administration’s coffin, as gridlock is likely
to be the major activity for at least the next two years.
One of Obama’s biggest failures involves his attempt
to reduce greenhouse gas emissions by about 17% by
2020, as he had announced during the Copenhagen
Summit. Now, Obama is expected to rely more on the
Environmental Protection Agency (EPA) to enforce
relevant laws in a more stringent manner than before.
This means that the opposition will focus its attacks
and criticisms against this government agency, and
will also attempt to shrink its budget as much as
possible in order cripple its ability to act effectively.


The Obama administration has succeeded in
increasing the quantity of biofuels blended with
conventional gasoline and diesel, and also took the
initiative when it comes to improving fuel efficiency in
vehicles, enabling them to travel longer distances with
less fuel.
It is expected that the administration will continue
these attempts to reduce reliance on conventional
fuels, or to use them in a more economic manner,
through the laws that have been enacted but that are
yet to be implemented. Now with Republicans taking
over Congress, the uncertainty returns.
Such attempts are significant for the global oil industry,
given the fact that the use of fuel in transportation in
the United States accounts for about 25 % of total
global consumption.
This is not to mention the significance of the U.S. laws
pertaining to the quality of newly manufactured cars
that are in force and their implication in general in what
regards the quality of vehicles produces globally.
The fact remains that without a concise and clear
energy policy in the US the long-term implications are
grim. Consumers will have to get used to $100 plus
crude oil and much higher gasoline and heating fuel
prices at a time when they can least afford it.
*** Look out for Kevin’s regular monthly column. ***

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

www.oilcouncil.com
 Regester
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 Asian Takeover?

Written by Elaine Reynolds, Oil Analyst, Edison Investment Research

So farewell then Dana Petroleum. Despite the
protracted takeover process involved, the buyout of
one of the UK’s largest independent oil companies
by the Korean National Oil Company (KNOC) went
through without any of the political soul searching
that often occurs in the media when a British
company is targeted in this way.
Indeed the response is in total contrast to the furore
that erupted in the United States five years ago
when the Chinese National Offshore Oil Corporation
(CNOOC) attempted an $18.5bn takeover of US
company Unocal.
Living in Houston, as I was at the time, it was clear
that there was a great deal of fear and suspicion in
the US generally regarding the growing economic
power of China, but nothing could have prepared the
Chinese for the political firestorm that followed.
The affair came to symbolise the trade and political
tensions between the US and China, and CNOOC
finally pulled out when it looked likely that Congress
would pass legislation to block the deal.
During the recent crisis in the Gulf of Mexico, the
Chinese were regularly touted alongside Exxon as a
potential candidate to take over a stricken BP,
without any of the rancour evident five years ago.
“They will continue to buy
up oil and gas assets all
around the world to feed
their enormous domestic
demand for energy.”
Of course, as President Obama did not hesitate to
remind us, BP is perceived to be very British by the
Americans, possibly colouring their indifference to
such a deal, but clearly the company holds
substantial US assets.
A more realistic reaction would likely be the one
playing out right now in Canada over BHP Billiton’s
hostile bid for Potash Corporation.

Ironically, CNOOC had originally chosen Unocal as a
takeover target because it wanted to diversify its
asset base into more countries with low political risk,
but, in attempting to achieve this, it stirred up more
adverse political fuss than it cared to have to deal
with. In an unexpected outcome, CNOOC found it
was easier to do business with the developing world
than with the US.
When it became known that Sinochem might make a
counter-bid for Potash, Andrew Ross Sorkin,
financial columnist in The New York Times and
author of Too Big To Fail, asked in an article if
America really wants the Chinese to control the
company that has the largest capacity to produce
fertiliser, thereby potentially affecting US food
production.

These days, the Chinese are moving into America in
a more low key way, for example with CNOOC’S
recent $2bn deal to purchase a third of Chesapeake
Energy’s oil and gas assets in a south Texas shale
deposit. But, if it did try to take over a Unocal or
similar today, would the reaction be as toxic as it
was in 2005?
So attitudes seem to be ingrained, but whatever the
future holds for Asian oil companies in the United
States, one thing is very clear. They will continue to
buy up oil and gas assets all around the world to
feed their enormous domestic demand for energy.
The only question is where they will go next.

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
For further information contact
Ross Stewart Campbell
CEO
T: +44 (0) 207 067 1877
E: ross.campbell@oilcouncil.com
OILCOUNCIL
14
Vikash Magdani
Executive Vice President, Corporate Development
T: +44 (0) 207 067 1872 | M: +44 7540 765 293 | +1 347 633 7734
E: vikash.magdani@oilcouncil.com
Business solutions
2011
Palantir
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