Drillers and Dealers October 2012

in this edition
Executive interviews
Wentworth Resources, Hurricane and KKR
An
Drillers Dealers
publication
+
On the spot
CFOs challenges and best practice
Expert insight
Volume 3 | Issue 5 | October 2012
K&L Gates, Whale Rock and McCarthy Ttrault
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October 2012 + THE CFO ISSUE

6 10
28
55
The Editor
4 6-9 10-15 16-20 28-30 32-35 36-38 39-45
drake.lawhead@oilcouncil.com
ExEcutivE Q&A
Bob McBean, executive chairman, Wentworth Resources Dr Robert Trice, chief executive officer, Hurricane John F. Bookout III, managing director energy and infrastructure, KKR
James Green K&L Gates Combating corruption in oil and gas Alan Lewis Whale Rock How to make forecasting more of an exact science Sony Gill and Paul Blyschak McCarthy Ttrault Risk management in the era of anti-corruption law
ExpErts insight
On thE spOt
What are the three main challenges energy-focused CFOs face in todays markets and how can they overcome these?
What practices and processes must energy-focused CFOs/FDs apply when looking to increase the resilience of their business during turbulent and uncertain times?
In this issue: a Scots/Swiss, a Greogrian chanter, a rollerblader and a rodeo star
MEEt thE MEMbErs
47-55
THE EDITOR
Drake Lawhead
Too close to seperate Obama and Romney on oil and gas alone
y the time you read this, the third Presidential debate will have taken place, which may or may not have succeeded in separating the two candidates in the polls. At the time of writing, election-watchers are enjoying the closest election since Bush beat Gore by roomful of voters in 2000. Who can forget the prolonged kerfuffle around the recount that introduced such unforgettable terms as: hanging, dimpled and pregnant chads into the household lexicon. Energy policy after 2012 was one of the discussions at the North America Assembly in Houston we just returned from. Congressman Pete Olson, a Republican who sits on the House Energy Committee, blasted Obamas energy policy, or absence thereof, for its lack of cooperation in helping to promote domestic and international markets for natural gas something of a consensus view in the world of O&G in the States. The American public as a whole are remarkably engaged with their O&G industry. Oil majors such as BP, ExxonMobil and Chevron frequently run PR commercials on TV about how safe their fracking methods are, how theyre supporting communities around the Gulf of Mexico, while industry associations run TV spots on how natural gas is creating domestic jobs, creating energy independence, lowering fuel costs, and reducing carbon emissions.
The averagely informed American citizen is aware of the unconventionals boom, of Bakken oil, the question of arctic drilling, of the debate around fracking mainly via the images of farmers setting fire to their tap water in the film Gaslands, which despite a furore from an industry that cried foul with a long list of falsehoods and misinformation, won the Academy Award for best documentary in 2011. This is a country where fracking issues, pipeline politics, especially the Keystone XL pipeline, and LNG exporting frequently make the front pages of the newspapers and are discussed on network news shows. Regardless of who wins in November, energy policy will not change overnight. Conventional and unconventional O&G production will continue to grow under either president as the US continues on its path towards energy independence. Both would consider opening up Arctic and new offshore provinces to drilling. Coal would benefit more under Romney and wind would benefit a lot more under Obama, but O&G would carry on well with either candidate. On the other hand, I recently saw a blog that argued now was the time to sell O&G stocks now that a company had invented how to produce petrol from thin air, and plan to make up to a tonne a day in the next five year. Words fail. Drake Lawhead, London, October 2012
Conventional and unconventional oil and gas production will continue to grow under either president as the US continues on its path to independence
Drillers & Dealers
October 2012
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EXECUTIVE Q&A I Ross Campbell questions Bob McBean, executive chairman of Wentworth Resources, on the potential of East Africa, the challenges of delivering large-scale gas projects and how to build effective and collaborative industry partnerships
Bob, for those of our readers who might not know Wentworth Resources, can you share with us some information about your company?
We created Wentworth Resources in late 2009 to acquire an interest in three Rovuma Basin concessions: a working interest in the Mnazi Bay Concession in southern Tanzania; a working interest in the Onshore Rovuma Block in northern Mozambique; and a net profits royalty interest in Offshore Area 1, also in northern Mozambique. We were particularly interested in Mnazi Bay because it contained two stranded tertiary gas fields on tidewater. The fields contain more than .5Tcf of P50 contingent resources and prospective P50 resources approaching 2Tcf. At the time of our transaction there was virtually no local market for the gas. Since several of my partners and I had been involved in successfully monetising gas in the United Arab Emirates and Qatar, we thought if we could gain a foothold in the concession and the area we could help fund a drilling programme that could prove up sufficient resources to develop, finance and build a large-scale petrochemicals project to monetise this gas. We finalised our transaction in July 2010 so it has been just over two years since taking control of our assets. In that time we have seen more than 100Tcf of gas discovered by others in the Rovuma and Rufiji basins of Tanzania and Mozambique. The government of Tanzania is building a 532km gas pipeline from Dar es Salaam to us in Mnazi Bay and a 300MW gas-fired power plant is being developed in the nearby town of Mtwara. None of these gas discoveries or projects existed when we entered the Rovuma Basin, so although the area has changed dramatically our focus, plans, and objectives remain basically the same.
EASTERN
Drillers & Dealers
October 2012
EXECUTIVE Q&A I
Wentworth operates at Mnazi Bay under profit sharing agreement with Tanzanian government
A lot has been said recently about East Africas hydrocarbon potential and its Rovuma Basin has been touted as the next Qatar. What similarities do you see with Qatar and how much potential is there in the basin both for gas and oil?
What challenges do you see the region encountering in commercialising this potential and in attracting more investors to unlock its full potential?
Neil Kelly [Wentworths non-executive director] and I were directly involved in developing two of the earlier projects for Qatars North Field gas in the 1990s. I developed the QAFAC project, which has gone on to become one of the worlds most successful gas-to-petrochemicals projects, and Neil was the first managing director of RasGas, which to date has developed and built seven LNG trains. We see a lot of similarities between Qatar in the 1990s and East Africa now. We see the potential and we are working with the Tanzanians and Mozambicans to realise that potential. Given where we and others are with drilling in the areas basins, I believe the potential is much greater than what we know today. Certainly there will be additional gas resources discovered and developed, and there appears to be further potential for commercial oil in the system.
Given where we and others are with drilling in the areas basins, I believe the potential is much greater than we know today
The challenges of developing natural gas are the same all over the world. All parties involved, including host governments, have to be on the same page in that they have to work together to develop the gas business in such a way that it benefits all stakeholders. They have to know up front and be comfortable with the fact that developing a gas business requires: technologies and technical expertise; substantial amounts of capital relative to crude oil development; a well-trained workforce; significantly more infrastructure; longer lead times between investment and cashflow; and markets that are ready, willing and able to take and pay for the gas and/or its derivatives. As far as attracting and retaining investors, any country that is new to the gas business would do well to study and understand how Qatar did it. They brought in world-class partners. They created joint venture agreements that aligned everyones interests. They have honoured contracts once executed and that is critical to those of us who are investing, and we focus on this issue first and foremost.
>
PROMISE
Drillers & Dealers
October 2012
EXECUTIVE Q&A I
What experiences from your previous roles at QAFAC and Dugas are you drawing from that are helping you realise the vision of large-scale gas monetisation projects in Tanzania and Mozambique?
First I learned to seek partnerships with governments. We have a unique opportunity in Tanzania because we participate in the Mnazi Bay concession under the terms of a production sharing agreement (PSA). The government benefits from that agreement through its share of the profit petroleum and TPDC, the national oil company, has a 20% working interest in the concession. Even before we had completed the transaction to enter into Tanzania, I went to see the president, the minister of energy and minerals, and the national oil company. I proposed that we develop a downstream gas monetisation project within the framework of the PSA so that all interests would be fully aligned. I also learned that oil and gas projects should add value beyond just generating profits. At Dugas our associated gas processing eliminated flaring from the field, and the sales gas coming out of the plant is what powers DUBAL, the worlds largest modern aluminium smelter. QAFAC produces methanol and MTBE from natural gas and butane, and those products help diversify the Qatari economy beyond LNG. Producing methanol, ammonia/urea and other products derived from natural gas in East Africa will generate benefits well beyond profits. These products replace costly fuel and fertiliser imports and allow for incremental consumption of both. The amount of drilling and field development work that has to happen to supply gas to a project provides greater gas production for power generation. One petrochemicals project alone can generate 3,000 construction jobs and more than 600 permanent full time jobs. We, as operator, will train our permanent employees and in addition the contractors will also provide construction training. The technical skills taught during the construction phase will be used throughout the life of not only our project, but all projects in the region.
Methanol production in East Africa will help replace costly fuel and fertiliser imports
You have a rather hectic schedule of drilling exploration and development wells over the next 12 months. What do you have planned and how much upside is there at Mnazi Bay and Onshore Rovuma?
Is demand from Dar es Salaam strong enough to buy all of your future production or will you have to plan to sell it further afield?
In Tanzania our plan is to acquire new 3D seismic in the offshore section of the Mnazi Bay concession. We have two prospects already identified by 2D seismic and we want to high grade those and better understand the entire marine area geology. Once the new seismic is interpreted we will make drilling decisions. In Mozambique, our operator Anadarko has proposed, and we have agreed, to drill two wells in the Onshore Rovuma Concession in 2013. Depending on rig availability our plan is to spud the first well in July. We are especially pleased to have Anadarko as our operator because their knowledge of the basins geology has grown substantially since the last onshore well was drilled in 2009. Their understanding of the coastal and offshore geology and their drilling success offshore should benefit our work onshore. As for the upside, we are confident that we will be able to discover additional gas resources in Tanzania and prove up existing resources. In Mozambique the geology suggests that a gas discovery is more likely than oil, but if there is oil in the system we want to be the ones to discover it.
The government has provided us with a list of all current and proposed gas-fired power plant projects. It is a total of 10 projects with combined electricity production capacity of more than 2,000MW. Those projects are designed to consume over 500m ft3 of gas per day. So the short answer to your question is yes, there could be sufficient demand to consume everything we produce from Mnazi Bay. However, other producers are expected to bring incremental production online over time so we have to wait to see if and when that production is available to help satisfy the overall demand. It is also important to note that the government of Tanzania wants methanol and ammonia/urea production, so as additional gas comes on stream I think it is likely that some of our production can be used to supply a petrochemicals project.
Almost all recent E&P successes in East Africa have been a result of industry working together on frontier basins. You are in business with some world-class partners such as Anadarko and PTTEP, each enjoying significant success over the past two years. Are partnerships the key to unlocking East Africa? And what makes for a mutually beneficial partnership in todays market?
Drillers & Dealers
October 2012
EXECUTIVE Q&A I
As a result we made the decision to co-list our shares. In spite of the difficult market conditions at the time our last placement was 40% oversubscribed, so it was a positive move.
Weve witnessed a number of growing small-cap companies getting into financial trouble with capital commitments they cant honour and debilitating cashflow constraints. How well funded are Wentworth for your upcoming drilling program and other project developments?
We are well funded, at least for the remainder of our 2012 commitments and for our 2013 committed work. Our capital requirements could change if we decide to accelerate the timing of drilling one or more wells in the Mnazi Bay concession, but we are trying to weigh our desire to do this against the expected timing for completion of the new Tanzanian gas pipeline. If we wait until first gas production into the line, we can use the cashflow generated from sales and cost recovery to fund future drilling. That would push our timeline out somewhat but the benefits of self-funding and generating additional cost recovery funds are pretty attractive.
How would you describe Wentworth in one sentence to a prospective new investor?
Wentworth Resources is a pure, low entry cost Rovuma Basin play with: existing gas production; substantial near-term revenue and profit growth; exciting exploration acreage; all led by a team of professionals with proven gas monetisation experience.
A common theme in recent interviews with other oil and gas CEOs has been the human capital crunch our industry is now battling with. How are you finding, recruiting, retaining and incentivising skilled workforce in East Africa?
The government of Tanzania wants methanol and ammonia production, so as additional gas comes on stream some of our production can be used to supply a petrochemicals project
The complexity and the amount of capital required to be in our business means that good partnerships are critical to success. Our partnership with Anadarko is a good example of how we benefit from a company with proven upstream operating success while we have a lot to offer on the midstream and downstream sides of the business. \
We are fortunate in that we inherited a solid team of people in Tanzania and we intend to recruit and train from there and other areas where we operate. We also have an office in Calgary where we have access to a large pool of experienced professionals. As for attracting, retaining and incentivising good people, it helps to have a new company with great growth prospects.
Your career has lasted more than 40 years in the oil and gas business. Looking now and reflectively across your career, how can we better engage graduates and young business professionals to work in the oil and gas industry and is there any advice would you pass on to a recent graduate considering a job in oil and gas?
The health of our industry has a lot to do with attracting new students into the professions that we require. Currently it is not difficult to attract graduates to our industry but it is cyclical. My advice to recent graduates is to get as much early technical training as possible with companies that have well recognised programmes.
You successfully dual listed on Londons AIM exchange late last year during very tough market conditions. What was the thought process in deciding to raise capital in London and in reflection was that the right move?
We inherited an Oslo Stock Exchange listing when we did our initial transaction and in late 2010 we started the process of raising additional equity capital. At that time we found that most of the institutions that were interested in investing in a company like ours were either in London or conducting most of their trading through the London Stock Exchange.
Finally, a question we always ask, what three luxury items would you take to a desert island? (NB: You may NOT choose a boat, satellite phone, Practical Raft-building for Dummies, etc!)
My iPod with Creedence Clearwater Revival and Neil Young collections, and the book The Match by Mark Frost; my wife Barbara; and my labrador, Sam.
Drillers & Dealers
October 2012
EXECUTIVE Q&A II
HERE COMES THE STORY OF HURRICANE
We question Dr Robert Trice on how he successfully built the best oil company youve never heard of
For those of our readers who might not know about Hurricane, can you share with us briefly some information about your company?
I created Hurricane in 2005 with the help and encouragement of a private investor. For many years I worked for big oil companies and I developed a vision of how to exploit naturally fractured basement reservoirs and also a vision of the kind of company I would like to work in. In creating Hurricane we brought together expertise in an exciting technical niche and a clear set of principles: to be technically led, to absolutely minimise bureaucracy and to reward good people well. We have focused on the UK Continental Shelf (UKCS) and believe we are developing an important strategic resource for the country.
Many of our readers might not be aware of what fractured basement reservoirs are. Can you shed some light on their make-up, where they are found in the world and the investment potential you believe they have?
Naturally fractured reservoirs make up more than 20% of the worlds oil and gas reserves, so there is a lot of hydrocarbon to play for. Fractured basement is a specific type of fractured reservoir, as there is no oil in the rock itself, all the oil is in the fractures. So what we are interested in are the faults and fractures in the granite basement. That is where we have found significant volumes of oil. To give you an idea of the size of the fractures and faults we are interested in, the drilling targets are tens of metres wide and several kilometres long. Finding oil in basement is not a new concept. In California they were producing oil from basement back in the 1940s using very simple technology by comparison to todays standards. Vietnam and Yemen are examples where basement discoveries have made a material change to the countries resource base. In terms of potential, arguably the low-hanging fruit has all been picked and now the industry needs to get creative. For fractured basement reservoirs the potential is enormous.
Hurricane is recognised as one of the leaders in exploring these fields, as indeed are you as a world expert. What technical and operational challenges do they pose to E&P companies and why has Hurricane been so successful at overcoming these to develop highly commercial assets? >
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EXECUTIVE Q&A II
Our low profile has been strategic. We have kept our story quiet while procuring what we consider to be prime acreage and stayed in control of articulating the Hurricane story to make some noise at the optimum time.
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October 2012
EXECUTIVE Q&A II
The priority is to have the right mind set and the right skills. If a given set of data indicate something unusual or atypical, then it is best to trust the data and not be confined by industry norms. For example, Hurricane predicted it would find light oil at Lancaster but was criticised by experienced industry players who said: You only find heavy oil West of Shetland. However, the data indicated otherwise and the Lancaster discovery proved our prediction to be correct. The biggest challenge is imaging the fracture system and quantifying the oil volumes that can be extracted. This is particularly challenging in fractured reservoirs as key parameters such as water saturation cannot be directly measured. There are many techniques that can be used to evaluate fractured reservoirs, however there is no industry-recognised best practice and those companies that do explore for fractured reservoirs will have their own well-guarded methods for visualising and quantifying fracture systems. I think one of the reasons for our success is our operational philosophy. During drilling and testing operations we have Hurricane staff and handpicked consultants offshore on the rig. I have personally witnessed all our basement drilling and testing. Hurricanes presence offshore ensures good teamwork and rapid decision making. It is a very exciting niche, both challenging and rewarding. I love it.
Our business model is to find the oil, de-risk the recoverable volumes through appraisal drilling and then attract a suitable partner to take the field through to field development
This expertise and experience, now bred deep within Hurricane, is incredibly valuable. How open are you to sharing such knowledge with the wider oil and gas industry and in working with other oil and gas companies?
Our corporate strategy is to retain 100% of our acreage through exploration and the appraisal stage. Currently we have little commercial requirement to share knowledge with the wider oil and gas industry. Part of this rationale is that our human capital is valuable and we have developed a number of proprietary techniques for analysing the data. We are not mindful to put that on public display. However, we have shared some of our experiences and technical approaches to the industry including PETEX, the Oil Finders Lunch in Aberdeen and at various international conferences. In fact we have two papers that are to be published as part of the highly regarded Geological Society of Londons Special Publications series. Hurricane will continue to communicate some of its experiences, as we find that doing so always generates interesting discussions, and sometimes opportunities. If we were to have a partner then of course we would need to share knowledge but we have our recipe and we are not going to give it away.
Hurricane has two more basement prospects to drill. Typhoon, with a P50 of around 150 million barrels, and Lincoln, also with a P50 of 150 million barrels. However, as in our existing discoveries, it is the as yet unquantified upside that drives Hurricane as the potential prize could be of great value. Take Typhoon as an example: previous drilling results have identified a potential oil column height in excess of 1km. Data such as this supports the potential for more than a billion barrels of recoverable oil on the structure. So I think it is safe to say there are plenty more golden nuggets left in the Hurricane portfolio.
How important to you is operatorship? Is the Hurricane philosophy to have 100% operator interest in all licences you have?
UKCS discoveries are often claimed successful with finds of more than 50 million barrels. You not only discovered 200 million barrels of oil but have done so twice in recent years. Are there more golden nuggets in your exploration pipeline, or has the story run its course?
Operatorship during the exploration and appraisal phase is very important to Hurricane. The rationale behind this is simply that we want to ensure that we capture the upside potential before doing an industry deal. We are very focused on ensuring the correct data is acquired and that we have our own personnel at the well site. Operating our exploration and appraisal wells ensures that this is met.
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October 2012
EXECUTIVE Q&A II
On the flip side, Hurricane is not interested in operating our assets as producing fields, that is not our strength. Our business model is therefore to find the oil, de-risk the recoverable volumes through appraisal drilling and then attract a suitable partner to take the field through to field development. In such a scenario our strategy would be to have a significant influence on subsurface issues such as well placement, surveillance and offtake rates.
The net asset value of Hurricane currently stands at a little more than 1bn. A true success story, Robert, yet why have so few people heard of Hurricane? Are you the best oil company no one has ever heard of and what are you doing to remedy that?
These assets will be of increasing strategic importance to large oil and gas companies operating in the UKCS. Do you see yourself as a possible takeover target?
Our low profile has been for strategic reasons. First, we have kept our story quiet whilst procuring what we consider to be prime acreage. Second, we have always intended to stay in full control of articulating the Hurricane story, and make some noise at the optimum time.
As we further de-risk our assets Hurricane could well be an attractive takeover target. Our competent persons report (CPR), with its 2C contingent resource base of around 450 million barrels, has already attracted significant industry attention. And so it should. In 2009 and 2010 the average discovery in the UKCS was 20-23 million barrels. In the same period we discovered over 200 million barrels, twice. I barely need to say more. The West of Shetlands is an area of growing industry interest and focus. As projects advance to production, Hurricanes assets can only become more attractive and of national significance.
You did secure some funding earlier this year. Can you explain briefly the method of the funding and how you are currently putting that capital to work?
We went for another round of private fundraising. We were pleased that our existing institutional shareholders followed their existing investment with new capital and we also brought in some new investors too. The capital we raised is being deployed across a number of activities including procurement of long-lead items and consultancy regarding field development options, as well as acquiring seismic on our 26thround acreage. >
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EXECUTIVE Q&A II
Enterprise was a real success case, some of my happiest times in the industry were there. The reason I rate Enterprise was that people were treated as individuals, and given the opportunity to test the technical envelope. It rewarded good people something we take care of in Hurricane. Companies I admire are those that have a niche technical vision, play type, geographic area and go for it. Companies like Cairn, Rockhopper, Agora, Revus and Tullow. I also very much admire Faroe, which has not only remained true to its West of Shetland focus but has also built a broader portfolio in the UK and Norway. A really friendly company with very good people.
What other interesting news and developments will we see coming from Hurricane in 2013, what should our readers be looking out for?
If all goes well with our current funding plans we hope to be seeing some drilling action in 2013 and also the initial findings from our seismic over our 26th round acreage.
In one sentence, how would you explain the Hurricane investment story to new investors?
Hurricane is a new generation of oil company, innovative, pioneering, creative, with niche expertise that has successfully found oil where others have passed it by.
As is evident in the DNA of Hurricane, you greatly value the application of science and technical process in your work. How can we as an industry better foster scientific and technical innovation? Who needs to take the responsibility and where in particular do our efforts need to be redoubled?
You are enjoying a successful more-than-25-year career in E&P. If you were to start again and work on more exotic prospects and basins internationally, where would you like to build the sequel to Hurricane?
Well Hurricane 2.0 is at least conceptually in the pipeline and we have an active interest in looking at what else is out there. We have clear ideas of where we would like to go and apply our expertise next. Norway would be a logical next step, as would several areas in the Far East.
Industries of all kinds go through changes and upheaval and the incumbents resist until they no longer can. Our industry needs to change and part of that should be to enable the scientific and other technical people the freedom to be creative and innovative and not be constrained by corporate bureaucracies. Responsibility is at the top and it needs strong decisive leadership to enable culture change. I dont expect it will happen quickly, but for those that arent prepared to change, we know what happens to them they become moribund.
In these 25 years youve been involved with companies large, medium and small, among them Enterprise Oil and Shell. What other oil and gas companies public and private do you admire most and why?
Finally, a question we always ask, what three luxury items would you take to a desert island? (NB: You may NOT choose a boat, satellite phone, Practical Raft-building for Dummies, etc!)
Solar-powered humidor stocked with the finest cigars; crate of selected Islay whiskies; snorkel and mask (so I can have some R&R watching the sea life).
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October 2012
Hurricane is probably the best oil company youve never heard of.
On the UKCS the average discovery in 2009 and 2010 was 20-23 million barrels. Hurricane discovered over 200 million barrels, twice. Now we have 2C Contingent Resources of around 450 million barrels, owned 100%.
Now you've heard of us, you'll be hearing about us again.
Hurricane. The New Generation.
www.hex-plc.com
EXECUTIVE Q&A III
From its office in Houston (1), Bookouts team has partnered operations in plays such as: Marcellus (2), Eagle Ford (3), Bakken (4) and Permian (5)
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EXECUTIVE Q&A III
KKRs BOOK VALUE

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John F. Bookout, KKRs managing director of energy and infrastructure, discusses what makes a successful private equity partnership
John, for the uninitiated, briefly tell us what sort of footprint KKR already has as a private equity investor in the O&G sector. How much is upstream, midstream and downstream?
Though it may be a surprise to some, KKR has been an active participant in the sector for many years. Our founders made the firms first oil and gas investment in 1985 through the acquisition of a 50% interest in Union Texas Petroleum a long-held and successful investment for the firm, which we fully exited in 1999. And while we were active participants in the energy markets thereafter, we focused our efforts in the utilities and power sectors throughout the early and mid2000s. However, more recently one might say that we have returned to our roots, shifting our focus to oil and gas to capitalise on the tremendous developments and opportunities that we see across the oil and gas value chain. In 2008, we opened our Houston office and since that time we have dramatically expanded our team. This involved not only adding to our deep bench of financial executives, but also complementing these executives by hiring a number of folks with backgrounds in industry. Importantly, we have since been among the most active private investment participants in the oil and gas space, and today we believe that we are positioned uniquely. We now have more than 30 professionals across energy and infrastructure, and most of them are actively focused on oil and gas. We also have several exclusively dedicated oil and gas technical teams that add to the depth and breadth of our reach and experience across the oil and gas sector. Collectively these technical teams deploy more than 100 professionals in North America today. We are also ramping up our staffing and focus in certain international markets. We continually monitor all aspects of the value chain, but we are focused in particular on upstream and midstream oil and gas. Since 2008, we have been one of the most active private investment participants in the sector, having announced or completed 16 upstream, three midstream and one services and equipment > investments in North America and, to a lesser extent, abroad.
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Credits: m glasgow, marathon oil, zorin09, helge hansen/statoil
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October 2012
EXECUTIVE Q&A III
Notably, we were an early mover in identifying a substantial market opportunity to invest in the North American unconventional resource plays. Early on, we successfully invested in both the Marcellus Shale via East Resources and the Eagle Ford Shale via Hilcorp Resources. We have since continued to build on these prior experiences, making numerous unconventional oil and gas upstream and midstream investments across our private equity and asset-level platforms. And we expect to continue to be active across the key areas over the coming years.
What sorts of investments are you making in O&G? Assets, corporations, royalty interests? Is there a KKR investment style or are you opportunistic?
Were actually focused on making investments across each of those areas today. We like to think that were positioned differently from many of our peers in that we are not focused on one particular approach. Rather, we are seeking to position ourselves as a solutions provider by approaching the market with a variety of tools for partnering with, providing capital to, and/or acting as a strategic partner to the industry. The beauty of this approach is that it enables us to be active participants across each of the market opportunities that you mention and to provide solutions that best meet the (evolving) needs of the industry. And we are able to do so because we have raised generalist and dedicated pools of capital across a variety of energy and infrastructure asset classes. As an example, we are actively pursuing a number of investment alternatives today, spanning traditional private equity buyouts, minority equity investments, joint ventures and various asset-level and structured investments. In terms of investment styles, we are fundamental value investors across each of the asset classes that we are investing behind. We apply a topdown approach to identifying attractive industry themes and focusing our efforts across the value chain. In private equity, we are seeking to continue our core business of investing behind emerging or established industryleading businesses with attractively positioned or differentiated assets, and exposure to strong industry and macro fundamentals. At the asset level, we are seeking to structure win-win opportunities to partner with industry producers, often by farming into oil and gas working interests and providing capital to support low-cost development plays. We are also seeking to acquire working interests, minerals and overriding royalty interests outright in areas of the market that we view as attractively priced or underserved, such as mature oil and gas and undeveloped minerals. Outside these areas, we are seeking to make structured investments and to provide capital to the industry across a variety of opportunities, spanning oil and gas mezzanine and other investment opportunity sets.
We were an early mover in identifying a substantial market opportunity to invest in the North American unconventional resource plays. We expect to continue to be active across the key areas over the coming years
the requisite relationships and technical capabilities necessary to provide win-win solutions to industry. In many circumstances, this entails investing behind unconventional oil and gas upstream development opportunities, upstream minerals or midstream-related opportunities by pursuing businesses or assets positioned in or servicing the cores of low-cost development plays. Were seeing these opportunities in the Bakken, Eagle Ford, Marcellus, Midcon, Texas and Oklahoma Panhandle, Permian and Utica development plays. In other circumstances, this entails expanding our focus on upstream opportunities to newer, emerging basins by focusing on areas with historical vertical production where horizontal technology hasnt yet been commercialised. Were also increasing our efforts in the international markets where we see attractive opportunities, particularly in the upstream and equipment and services markets. We have a substantial set of initiatives under way in Europe covering the rapidly developing and highly attractive Norwegian sector, the more mature but still prospective UK Outer Continental Shelf, and the onshore European market. Finally, we are increasing our focus on onshore Brazil and China. Both represent areas that we believe will present attractive longer-term opportunities for private equity. That said, in all cases we believe that the key to fully leveraging the opportunity set is approaching each opportunity with the right pool of capital and the skills required for success. We see highly attractive risk-adjusted returns across each of the core areas that I mentioned.
On a related note, what plays/basins/geographies interest you the most? Where do you see the big potential for investment returns?
Consistent with our recent efforts, in North America were focused predominantly on unconventional upstream and midstream oil and gas as we continue to see a tidal wave of opportunities facing the industry and a number of constraints on capital availability. We think this dynamic presents a unique opportunity for flexible capital providers who have both
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We certainly hope so, but were clearly in a very different environment today and a different phase of the shale revolution. As the shale business continues to mature and as additional capital flows into the industry from a variety of sources, were seeing an increasingly competitive marketplace at the corporate investment level. At the same time, the industrys understanding of the resource base today is continuing to improve greatly relative to its understanding only three years ago looking back at the reservoir engineering, drilling and completion evolution across the North American resource plays, the advancements are quite astonishing. Both of these changes highlight the challenge today of identifying value where others may have missed it. Therefore, recognising that transformational value creation opportunities will be fewer and further between moving forward, we believe that differentiation in terms of relationships, technical capabilities, pattern recognition and approach will be increasingly important to success.
LNG exports (opposite) offer additional promise of extensions to terminals such as Sabine Pass
However, the operative words are risk adjusted. If youre looking for extremely high returns today, youll have to stretch further out on the risk spectrum to areas like international upstream, offshore Gulf of Mexico, early-stage and emerging unconventionals and other key areas. Although, as mentioned, we are seeing opportunities there as well, they present a very different set of risks for the investor.
What opportunities do you see for investing in oilfield service companies?
How important is private equity now in funding O&G in the US? How has this relationship evolved and how do you expect it to continue?
Given the growing number of oil and gas technology advancements weve witnessed in North America, there is no surprise that we are seeing tremendous increases in demand for services. This demand growth spans the services and equipment value chain and has created positive tailwinds for many of the better-positioned participants. As youd expect, private equity has taken notice. Over the past few years, private equity has been active and, in a number of cases, quite successful in capitalising on this opportunity set by funding new entrants and existing service providers in order to take advantage of this tremendous increase in demand. Historically, we have had difficulty finding opportunities with the right fit, given that many of these services beneficiaries participate on the commoditised end of the oilfield services market, which we tend to shy away from. Where weve really focused our time is on searching for companies with cost or technology differentiation that would allow us to earn an attractive return on capital across cycles. And those opportunities are hard to come by. However, we are quite excited about our recent investment in Acteon, a key equipment supplier to the deepwater offshore oil and gas market. We believe that the deep water development plays represent some of the lowest-cost development opportunities and, therefore, we believe that the related demand for services and equipment in this area will be robust even under lower oil and gas prices. Overall, Acteon is an excellent example of our focus on matching our capital to the industrys needs and calibrating risk-return across the whole sector when making investment decisions. The end result is an investment in a differentiated business in the oilfield services space.
We think its quite important and we only see private equitys role increasing over time. Looking back at the unconventional resource boom over the past three to four years, private equity has actually played a fairly important role in providing early-stage capital to industry producers focused on finding, delineating and de-risking these new plays. And, as you well know, private equitys role extends much further back in funding new entrants and industry start-ups. We believe that private equity will continue to have a meaningful role, but that it will be forced to adapt to meet the markets evolving needs. Looking forward, we see a tremendous amount of capital required to develop the existing resource plays, both in the upstream and midstream arenas. And we see an important role for private equity to play as these plays transition to full development. But we believe that a distinct set of skills and capabilities will be required to pursue and effectively capitalise on this opportunity set. It will take more than just capital. We believe that the ability to develop trust-based relationships, partner at the asset level to achieve flexible solutions for large and small companies alike, and structure win-win solutions will be increasingly important. And further, when you compare todays opportunities to those of recent past, capital must be appropriately priced relative to the evolving, decreasing risk.
Credits: shell, roy.luCk
What do you consider to be the biggest investment risks for private equity in O&G right now?
KKR has been involved in some very high-profile deals, notably buying Marcellus acreage from East Resources for $350m and flipping it less than a year later to Shell for $4.7bn in 2010. Are those sorts of deals still out there? And if so, where?
Clearly, as we look back and catalogue poor investments, we often find that such investments were acquired in very high commodity price environments or acquired using too much leverage, which constrains degrees of freedom with respect to optimising performance. We are strong believers in investing behind businesses and assets in a manner that provides sufficient financial flexibility to weather periods of poor
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mercury and air toxics standards (MATS) regulations, which further challenge the economics of coal-fired generation in the US. Experts estimate that we could see 3-6 bcf/d of permanent coal-to-gas switching across key markets by 2017 because of these retirements. LNG exports offer additional promise with Sabine Pass, Corpus Christi, Cove Point and Kitimat terminals potentially adding another 2-4 bcf/d of 2016+ demand. And of course, while transportation driven fuel-substitution is more long-term, well likely continue to see additional demand creation coming from the commercial transportation sector and potentially even the retail automotive sector, should price levels remain disproportionately low relative to crude.
Industrial demand for processes such as ethylene cracking is increasing to previously unthinkable levels
Given all of those drivers, we think its hard not to be bullish on the long-term demand for natural gas in North America. Fundamentally, the case for demand growth in North America is compelling across most key end-markets and this promise bodes well for the industry and the North American macro-economy.
commodity prices. We also strongly believe that its a lot more likely that well earn an attractive return when we invest behind the right businesses or buy the right assets at the outset. Although commodity fundamentals, operating risk and valuation considerations are all critical, we believe that in many circumstances the quality of the underlying business or asset position has the potential to overwhelm these variables. For these reasons, we believe that investors must focus on both the macro and the micro when successfully investing in the industry, and that investors must be prepared to capitalise their investments with sufficient flexibility to best position themselves for success. More generally, we believe that a significant risk facing private equity overall may ultimately prove to be an under investment in the oil and gas sector. Technology is improving the performance of reservoirs and what looks like a mediocre return today may well become a much higher return over time. Put simply, optionality has been proven time and time again to work toward the benefit of investors in the oil and gas space. In addition, offshore markets have low break-even development costs, and onshore markets outside the US may well have equally attractive risk/return profiles when compared with the onshore US. Having the skills and reach to invest internationally may be an important factor for investors success.
In an election year, what are your hopes or expectations for an energy policy in the US? What is the most critical issue to address?
The US has an extraordinary opportunity at hand in the development of unconventional resources. As I said before, there may very well be international unconventional opportunities that are attractive over time, but we know with certainty that there are compelling resource opportunities in this country today. When we think about opportunities to dramatically accelerate economic growth in the US, we believe that fully embracing prudent development of this energy resource should be at the very top of the list. We are hopeful that an energy policy that includes the development of unconventional resources will emerge in the very near term. Increased support for development on federal lands and a streamlined permitting process to do so would be an easy first step. Support for critical fueling infrastructure to begin the migration from oil-based transportation fuels to natural gas-based fuels is another important policy opportunity. As part of this policy, regardless of what shape it takes, we firmly believe that best practices must be employed to ensure that the full environmental benefits of clean burning natural gas are captured and that the environment is fully protected at each stage of development and for the long term. The good news is that such practices are already well understood and are already common practice for some operators.
Where do you see the demand for natural gas heading (in the US)? Are you bullish or bearish on the integration of natural gas as an energy source in the economy?
Were bullish on demand creation but over a multiyear horizon. There are a number of factors that make the near-term demand picture less certain. In particular, we note that we are seeing almost unprecedented levels of priceinduced coal-to-gas substitution across the power sector today anywhere between 4-8 bcf/d depending upon the season and pricing and therefore much of this demand from the power sector will be heavily dependent upon low natural gas prices for the next couple of years. However, long term we believe that many of the demand drivers are compelling. Were seeing industrial demand increasing to a degree previously unthinkable, particularly from the petrochemical sector. Experts estimate that build-out of new ethylene crackers, ammonia processing facilities and other industrial uses could add 1-2 bcf/d of demand by 2017. Similarly, coal plant retirements and conversions to natural gas are increasingly likely, particularly in light of the US Environmental Protection Agencys
What companies do you admire, and why?
I should start by saying that I have a tremendous amount of admiration for the industry as a whole. The level of technology development that has been pioneered by the industry over the past 10 years is unparalleled, both with respect to unconventionals and deep water. The industrys current and future impact on the macro-economic environment in North America, US energy independence and foreign policy is enormous. That said, if I had to pick individual companies, Id highlight those that have led the development of new technology, those that have been outspoken about the potential of the North American energy base to meeting our domestic challenges and those that have truly focused on best-in-class operations and environmental standards.
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Credit: shell
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A DV E R T I S I N G F E AT U R E
How Independent Oil & Gas Companies Can Make Themselves A More Attractive Investment Proposition
INTERVIEW WITH
Chris Walcot, Director

Progressive
Angelos Damaskos, Chief Executive Officer

Sector Investment Managers Ltd
What do investors look for in an investment opportunity?

AD: The first and foremost factor that investors are looking for is sizeable resources, either proven, probable or possible. And that is always in relation to the market value of the company. If you are looking at a company with proven reserves, ideally you want to buy them at the most attractive price. The market cap of the company should be low in relation to its proven reserves and that would make the company very desirable for investors who share the belief that oil prices are on a rising trend. The second consideration is the management team, their expertise, their track record, not only in the industry, but more specifically in the areas of operation of the company. And, in addition to that, their development plans, the activity of the company going forward; if its a high impact exploration programme, if its a lower risk development programme or a pure enhancement. So these three elements are risked in different ways by investors to assess the likely addition to reserves and the upside in valuation that can be offered in due course, of course assuming the project is a success. This is how the professional analysts work to establish a valuation of the company as well as a potential target valuation if everything goes to plan and turns out as expected. These are the three layers that make an oil company a desirable investment. There are different classes of investors. There are some investors who look to pure exposure to the oil price, these are upstream companies, companies that are focussed on identifying resources, developing them and bringing them to the market. And there are others who might have a more balanced approach, vertically integrated - the likes of BP, Shell and the international super majors, that have a mix in their portfolio of not
only upstream operations, but also other assets such as storage, transportation, refining, chemical processing, etc. In these operations, there is also the benefit of dividend income. In terms of the more speculative investors who are looking for the biggest possible exposure to oil prices / the markets - they will be focussing on the earlier stage, either pure exploration or early stage development companies, who are dealing with the more risky wells with high prospectivity but also much higher risk of success. If the company hits the target and finds very large volumes of oil and gas its market valuation could potentially multiply several times over, but if they miss the target and drill a dry hole that puts a great big hole in the balance sheet because these wells tend to be very expensive, therefore the market value of the company collapses. Most of the sensible exploration stage companies who act as developers of new licence areas or potentially very large targets spend the initial money to do the seismic survey and interpretation of the target in order to define where the well should be drilled. Once this has been clarified and defined they put it out to tender to the larger middle-cap companies or the majors and invite them to join them in a joint venture arrangement, whereby the larger company pays for all, or most, of the exploration expenditure and in some cases including the back costs of the developer, in order to gain a significant percentage if the exploration results are successful. So, if BP comes in and farms into the licence areas of a small exploration company and they pay the $50-$60m required to drill a fairly deepwater well, if they strike oil, theyd probably expect to have 75 to 80% of the final oil to be extracted as they provided most of the financing. A smaller company might achieve a very high impact result because 20% of a very large discovery, at no extra cost to them, could be many times over the current market value. That also works
for the larger companies as they employ the smaller companies ability in identifying frontier licence areas and new targets and then leverage this expertise on their balance sheet but not having to invest in the human resources to go in risky countries and assess a large number of projects. CW: That partly depends on the investor and what market theyre interested in and how much risk they are happy to carry. A couple of key considerations for oil investors are a strong team leading the company with credibility and a good track record who can turn an opportunity into fruition. But, as well as that, they need a thorough plan with demonstrable robustness and one the company can deliver on.
Does it matter whether an independent has a finance system?

CW: Absolutely. Having a finance system in place demonstrates that a company is serious. Theyve laid the foundations for a company that is aiming to grow, the tools are in place that demonstrate that theyve got the financial rigors in place that the modern market and an astute investor requires. Small oil and gas companies often become very dependent on spreadsheets that have become very complicated. They often get to a stage where the management of the spreadsheet is a dark-art requiring the touch of an in-house magician to keep them functioning. Robust finance systems implemented by oil and gas experts allows a management team to have a clear, up-to-date and precise snapshot of the companys current financial situation - Whats come in, whats gone out and critically, what the company is committed to spending. This information allows a company to manage everyones expectations and their financial position, with no surprises for them or their investors. Modeling is also a key benefit of a finance system. Capturing and analysing the data from current and past projects in a robust manner, allows companies to produce more effective plans and accurate forecasts. It also enables companies to demonstrate to investors that a company has delivered against past models, adding to a companys credibility. An investor has to be confident that a company is going to look after their money and use it effectively. By having good systems and processes in place, companies can demonstrate to the investor that systems can support and enforce financial controls as well as giving companies the ability to respond quickly and confidently to any auditing queries. Responding quickly and concisely makes a significant difference - hesitate and eyebrows are raised and questions are asked.
AD: It does matter of course. You want to see a certain transparency. You want to see competency at the helm, with management that are able to account for every item and investors that dont throw money down a dark hole leaving it to management to distribute without any proper accounting procedures. The reports of the company need to account for the capital expenditure items and general administrative expenses, so that ultimately, when investors view the annual reports and accounts they get a fairly clear picture of where the money went. So that is absolutely necessary. The systems have to be more sophisticated the larger the operation grows, you need to account for the existing production and the cash flow generated from that, you need to clearly show what money goes into the future investment programme and the capital expenditure to add to the reserves and add to production in years to come or to attract joint-venture farming partners. It is very important to show full transparency and very important for corporate governance. Corporate governance is one of the first things investors look at. If we have a feeling that the accounts are wishy washy and dont show a true picture of the operations we wont invest in it. The company has no accountability to shareholders to show exactly where the money goes. Regardless of how small or large, a company should have a very transparent accounting system, and audited accounts by auditors who give a true and fair view of the company. Thats absolutely the minimum requirement. As the company grows larger the systems have to become more sophisticated and more descriptive so investors can see how the operations breakdown - what comes from production and what goes into future development.
Do you think a company can be investment ready without a system?

CW: Good systems that are well implemented add credibility to an organisation. An investor is going to be looking for a good return on their investment. Everyone recognises that oil and gas is not a risk-free investment, so the potential returns have to be high. You might be attracting funding today, but part of the longer term strategy might be to go to IPO to raise more money and for each stage a company will require greater robustness. If, on day-one a company implements the robustness of systems and processes that would normally be expected at a later stage of development, that company has the opportunity to lift their head above the competition. Oil and gas is a highly competitive market in every aspect. Companies are competing for the best senior staff, they are competing for the best geologists and they are
competing for the investment. Its a challenging marketplace and companies have to demonstrate to investors that theyre more worthy of investment than the competition for the same pot of cash. Part of that is demonstrating that theyve got the team in place, as well as the systems and processes to be the company they aspire to be in three or five years time. Investors want to see that companies have a thorough understanding of an opportunity and how much its going to actually cost. One way to demonstrate this thorough understanding is to show that its been done before, although that alone is not enough - investors need to see details that prove its been done before and what the associated costs were. When a company runs a campaign they capture all the actual costs and can analyse and understand them. From these actuals companies can produce an economic model for future projects and demonstrate a true understanding of the costs at the various stages.
partner might not be responsible for any of the costs at all and that can be entirely different at another stage of the project. Off-the-shelf accounting packages cant handle those types of situations. In the early days small companies often build a complicated spreadsheet, which quickly becomes unmanageable. Sometimes companies move away from off-the-shelf packages in favour of an accounting solution aimed at more complex organisations, but although being more robust, they still dont handle all of the intricacies of oil and gas, like joint venture accounting or the complexity of multi-currency. For example a companys head office might be operating in one currency, services might be procured locally in another currency and they may need to report in dollars - meaning every transaction might need to hold three different currencies to ensure the delivery of the accounting requirements. Often a system implementation is recommended by the companys auditors, having recognised some issues around their accounting procedures, which they believe a fit-for-purpose oil and gas implementation would make a real difference to that company. Perhaps it would help them manage their growth, manage their compliance or perhaps it would demonstrate to investors that theyre robust enough to actually receive the investment theyre looking for.
How does a finance system help a small independent?

CW: Ideally independents will show that they have a team with a track record of success and they are focussed on adding value to the company. Senior management need to be focussed on growing the company, show that they have connections and they can make deals happen. To demonstrate effectiveness they need to have a good back office in place so that they dont get sucked into administration tasks and looking after the day-to-day back office function. A system can take that burden away from staff, so that the management can really focus on making deals happen.
What would turn an investor off?

AD: Very large contingencies that are not accounted for. Very large provisions for working capital and general administrative expenses for a small company that should be running a very tight budget. These elements indicate that there could be a lot of wasted money along the lines. They have not tightened the budget enough or focussed on budget items enough to have a clear expectation of the costs to come. I want to see exactly what goes into the ground and what goes into cash-burn which is the overhead - the staff that are involved in pursuing operations. Of course, you do expect cash-burn because without the key people and the technical expertise the projects will never materialise, but the costs expended on that expertise and the personnel have to be reasonable and in context of international practice. So if I see a small company paying extraordinary bonuses and share options to its executives before they have any success I would never buy their shares. Investors like companies that run a very tight budget because it means their executives are happy to invest their time and effort for little remuneration for the prospect of greater reward down the line when they actually find what theyre looking for.
Why do small independents implement systems? What are their main drivers?
CW: When they start up, they think they just need basic accounting and they buy an off the shelf package, but oil and gas companies quickly recognise that these accounting packages really dont cut the mustard. There are key characteristics to oil and gas accounting that are unique. The joint venture arrangements are complicated legal agreements. At various stages throughout the project theyll have different partner shares and different costs that can be charged to partners. At some stage in the project one
CW: A company that cant demonstrate they are in control - or even worse, a company showing that they are out of control. All aspects of the oil and gas business are fiercely competitive. A company must be able to put a pitch to an investor that is better than anyone elses, one that offers a better return. Having a system in place ensures the management team have up-to-date information at their fingertips, giving them the ability to make informed decisions quickly and effectively, based on facts rather than assumptions.
everything is in place, investors can take a decision fairly quickly, but if things are not in place we simply say that we need this and that and the other and until you have provided us with that information we cant make any decisions. Sometimes it can take years for companies to come back with revised plans.
If an opportunity was presented that wasnt quite up to standard, would you work with that company and provide feedback?
CW: Investors invest in companies that have thought through their plans and have robust financial models that they can be confident in. Theyre not business coaches, theyre not looking to improve people, they want the best people in place from day one. Second chances dont often come along. Accounting processes must be implemented before approaching an investor. IT and finance systems are a key enabler to delivering sound financials and sound economic models that will get buy in from investors. AD: First of all we are very selective when were looking at projects because thats the risky end of the spectrum - thats when things mostly go wrong. If we see any warning lights, well simply walk away. As prospective investors, its not really our place to question management. We might raise the question, but its not our place to put pressure on the management to change their ways. But generally these warning lights would turn us off, because it shows from the outset that the management do not have the understanding of how to run a business and how to make it a success and how to attract investors into participating in the capital. If the management doesnt have the experience to run a tight ship then we dont want to be with them. We will not try to change their ways in order to bring them in, even if theres an attractive asset, because if the management is not right the asset can be destroyed very quickly.
CW: If you can put an attractive proposition to the investor that theyre convinced by, they will want to act quickly. Investors will not want to lose a good opportunity to another investor. Its important to put a good business case to them and to have robust systems and processes in place, so if investors do have queries a company can immediately respond and close the deal. Taking time is not an option, oil and gas companies need to be able to act quickly.
What type of reports would you expect to see and with what frequency?
CW: Capturing data at source, automating financial processes and being able to deliver that information in a presentable format is paramount. Hesitation leads to doubt. Having good financials in place speeds up monthly closing, allowing the management team to focus on the bigger picture. Automating financial controls means a company can respond, addressing any concerns an investor might have quickly. AD: The financial accounts so that one can see the financial position of the company, in terms of the balance sheet and profitability, if any. And then probably equally important is the reserves report. If a company doesnt have a report on the reserves it should have at least an internationally acceptable consultant who has been engaged by the company. These reports form the basis of the initial business, to see, in discussion with the management team, if the company has the necessary foundations to qualify for an investment. Youd then proceed to more detailed due-diligence to see the economic viability. These Reports should at least be updated annually. With regards to reserves reports, these should be updated as soon as the necessary drilling has been completed and the results have been validated. At that stage youll be able to update the picture on the nature of the reserves and the likely value of them.
How long does investment take? Can it be quick?

AD: It depends how sufficiently defined the business plan and the vision of the company are. If theyve done their homework it should be a fairly quick process and we can place an investment within a week. If we need to engage our petroleum engineer to visit a site and view technical reports, it doesnt take longer than a week or perhaps ten days. If
Are there any reports that are requested with more regular frequency?
AD: Typically companies provide a management update every three months to investors and shareholders to report progress and delivery on objectives. On certain occasions where there are significant events that have happened to the company the
management should report immediately to investors on the likely impact of these events. So there are no hard and fast rules on the frequency of reports, but at least Id expect a quarterly report on progress and more detailed reports on financial performance and the technical side of the company on an annual basis.
CW: In oil and gas the unexpected can happen and often does happen. The management team should always have a core set of financial reports that they can run at any point to enable a timely response to any situation.
AD: The more detail the companies can present to the investor the better. The ones that present very generalistic plans without any stated objectives or without any specific targets are unlikely to attract the attention of serious investors. Investors want to see a very thought through and detailed action plan of the company going forward. Not only in terms of the cost of the programme, but most importantly what is the cost benefit - For the amount of money that is intended to be spent, what is the likely success, what is the likely return? I think this is what some smaller companies fail to deliver.
What financial controls would you expect to see in place?

CW: The best companies dont really need to think about their controls on a daily basis. The key financial controls are supported, controlled, enforced and recorded by their financial systems. An example is the delegation of authorities, where enabling the right people to spend money in the right way, against approved budgets has a massive impact on the efficiency of the operation. Not wading management down in unnecessary paperwork. Staff arent attracted to oil and gas companies for the administration - they join a company to explore and develop oil production. Systems and controls are important for making people more satisfied and better at their jobs, as well as having the potential to increase an investors returns. AD: I dont think youd look to apply what is necessary with industrial companies or consumer goods companies. Its not as if you want them to maintain certain solvency ratios or service thresholds. The financial controls have to be set in the context of adhering to the stated objectives and delivering the intended programme within budgets. The financial controls are the regular reporting of management to investors, then its up to investors to verify that the targets have been met.
Other than the obvious, what other benefits do investors offer to small independents?
AD: It depends on the investor and it depends on the interest they intend to take in the company. In running our retail portfolios we are effectively passive investors in the companies we invest in and therefore do not take a close interest in managing the company. We may suggest things in periodic meetings with the management and then see in subsequent reports or meetings how the management has performed. But, we are unlikely to become dynamically involved in the management of the company. Whereas if we were to become involved as a significant minority shareholder in a smaller company, which occasionally we do through other structures, then we would seek to have a presentation with the board and be much more actively involved in the management of the company and steer its direction. So there are different approaches and it depends on the nature of the investment and the size of the investment. If you have a tiny percent of the company, you cant expect to direct the management in how to run the company. Very often though, even as passive investors because we see the management teams of many companies we get a thorough view of the market and how perhaps the market conditions might affect the programme of one particular company, we offer suggestions or an indication of how their approach might redevelop.
Is there anything that independent oil and gas companies arent doing or could do better?
CW: The key thing is realism. Companies need to ensure they can pull a plan together with robust systems in place. Models should be challenged before going to investors. Companies also need to be able to act fast and complete exploration and development in the most efficient and fast manner possible. Having an effective system in place will enable management to focus on what they need to do.
How should an independent present themselves for investment?

AD: They have to present the value of their assets in a very realistic and sensible way and not overestimate the likely success of their programme or the likely size of their reserves. Theres always the tendency and inclination by smaller companies to over-blow the size of their licence area or size of their reserves. They always claim they could potentially have an elephant in the field. Then this is
more likely to disappoint down the line, than exceed the expectations. Its always better to be realistic and sensible when presenting the valuation of the assets and the way they might be approached. Then going back to the planning of the company - it has to be as detailed as possible, to show that they are not shooting a blank shot without thinking it through. They have engaged reasonable studies, engaged professional people who have experience, not only in the industry, but more specifically in the location and the licence area and they have received at least preliminary cost estimates for the elements of expenditure. And thats the best way to give comfort to investors that plans will be met and that the actual target might be bigger than everyone thinks. Every investor wants to buy something that appears to be undervalued and is likely to exceed expectations. Thats the mantra of most investors. CW: One of the most important things about being independent is that its not about what the company is today, youre presenting the company that youre aspiring to be in the future. To do that you need to show that you can add real value to the organisation over the coming years. You need to have a strong team behind you, both a management team, and if youre doing exploration, an operations team who can analyse the seismic data. Companies need to present themselves as the company they intend to be, whilst also being realistic. Small companies need to invest early in an efficient and scalable system, reducing the administrative overhead longer term, which would be better spent on exploration.
AD: In the oil and gas sector we are much keener to see that the company has competent interpretation of the studies they conduct, whether its seismic surveys or results from drilling programmes. We want to see that they have competent engineers and geologists that can read these maps and steer the company the right way to the right location with the right approach for the project. There is a technical aspect to it and there are some computer based technological systems to interpret the seismic survey, interpret the mapping and interpret the physical location of the assets. But I dont know if you can classify this as Information Technologies, its more to do with the competence of the person whos using the software and interpreting the information coming out of it.
Are investors interested in a companys IT plans?

CW: Having a robust finance system that has been implemented specifically for oil and gas, ticks one of the boxes in the requirements list and forms a very good foundation. Auditors are increasingly recommending systems be put in place to enable companies to present themselves to the marketplace effectively and to make sure accounting practices are robust. A good finance system and robust processes address the specific key requirements and complexities of oil and gas. This can be the difference between an effective system that helps to grow the business and make it more effective, and one that is simply a data repository and doesnt support the core business. Investors should certainly be interested in well implemented systems.
Tel: +44 (0) 20 7642 0228 www.progressive-tsl.com
EXPERTS INSIGHT
James Green K&L Gates
A trend towards transparency combating corruption in oil and gas
ecent months have brought two important developments in the global trend towards transparency and accountability in the oil and gas sector. This article reviews two pieces of legislation in the United States and the European Union both of which reflect growing international moves to increase disclosure obligations for companies in extractive industries, including the oil and gas sector, in an attempt to prevent bribery and corruption. On 22 August, the US Securities and Exchange Commission (SEC) adopted new rules relating to disclosure of payments to governments by resource extraction issuers pursuant to Section 1504 of the Dodd Frank Wall Street Reform and Consumer Protection Act the final rules1.
Reporting obligations
The final rules provide that any payment that is equal to or exceeding $100,000 made by a resource extraction issuer to a foreign government or the US Federal Government must be reported. Payment means any transaction that is carried out to further the commercial development of oil, natural gas or minerals, such as taxes, royalties, fees including licence fees, production entitlements, bonuses, dividends and payments for infrastructure improvements. The term foreign government refers to a foreign national government as well as a foreign subnational government, such as a state, province, county, district, municipality or territory under a foreign national government. Notably, however, the final rules do not require disclosure of payments made to subnational governments in the US, such as states and municipalities, which should reduce the reporting burden for resource extraction issuers that primarily conduct operations in the US. Importantly, the final rules do not provide any exceptions from the reporting requirements, even for situations in which foreign law or confidentiality agreements prohibit such disclosure.
On 18 September, the European parliaments committee on legal affairs voted in favour of proposed EU legislation to impose disclosure obligations on large companies involved in extracting oil, gas and minerals and logging2. It is anticipated that the draft EU legislation will be submitted to MEPs for a European parliament plenary vote later this year.
A functional board is one that engages, debates and decides in a constructive, amicable and engaging manner and where
The final rules: section 1504 of the Dodd-Frank Act
The final rules require resource extraction issuers to include in an annual report information relating to any payment made by the issuer (including by any subsidiary or entity controlled by the issuer) equal to or exceeding $100,000 in any fiscal year to a foreign government or the US Federal Government for the purpose of commercial development of oil, natural gas or minerals.
Form of report
Companies affected by the final rules
1 See Exchange Act Release No. 67717 (August 22, 2012), available at http://www.sec.gov/rules/ final/2012/34-67717.pdf 2 JURI/7/07694 and JURI/7/07698.
The final rules apply to all businesses that are reporting companies, both foreign and domestic, under the Securities Exchange Act of 1934, as amended, that are engaged in the commercial development of oil, natural gas or minerals resource extraction issuers. The commercial development of oil, natural gas or minerals includes the activities of exploration, extraction, processing and export and the acquisition of licences for any of those activities, but excludes ancillary businesses, such as the manufacturing of equipment used in the commercial development of oil, natural gas or minerals.
The final rules require resource extraction issuers to make disclosures on form SD no less than 150 days after the end of their most recent fiscal year. Form SD requires disclosure of the following with respect to payments made to a foreign government or the US Federal Government: the total amounts of payments, by category; the currency used to make the payments; the financial period in which the payments were made; the business segment of the resource extraction issuer that made the payments; the government that received the payments; and the project to which the payments relate.
When the final rules take effect
Under the final rules, a resource extraction issuer must comply with the reporting requirements of the final rules and form SD for fiscal years ending after 30 September 2013.
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EXPERTS INSIGHT
The American Petroleum Institute and other industry bodies lobbied strongly against various provisions of the final rules. However, the SEC strongly rejected such arguments
The draft EU legislation
The draft EU legislation aims to require companies involved in the exploration, discovery, development and extraction of oil, natural gas and minerals and in the logging of primary forests to publish, on an annual basis, full information on their payments to national governments on both a project-by-project and countryby-country basis.
The committee deleted a provision in the proposals that would have excluded from the reporting obligation payments made in a country where public disclosure is clearly prohibited by criminal legislation. It also deleted an exemption from reporting information not material to the recipient government. The amount of each individual payment made to each level of government must be disclosed. Payments in kind must be reported in value and volume.
Companies potentially affected by the legislation
The legislation applies to all EU large3 companies (whether public or private), to all companies and EU public-interest entities (national public enterprises) whose securities are admitted to trading on a regulated EU market and to all banks and insurance undertakings that are active in the extractive industry (exploration, prospection, discovery, development and extraction of oil, natural gas and minerals), logging of primary forests, banking, construction and telecommunications.
Implementation of the legislation
Reporting obligations
The legislation requires disclosure of payments to any government (including any federal, regional or local authority), including any member state government, although payments need not be disclosed if a single payment or multiple related payments do not exceed 80,000. Any fines for violations of environmental and remediation laws must also by disclosed, by country.
The draft EU legislation will now be negotiated between the committee and the Council of the EU, comprising representatives of all 27 member states. Assuming these two arms of the EU legislature agree a final version of the legislation, it will be submitted to all MEPs for a European parliament plenary vote later this year and, in parallel, adopted by the council. The committee regards the approved version as giving it a strong negotiating mandate. However, given the difference in approach between the parliament and the council (in particular regarding the inclusion of the logging sector, project-by-project reporting and payments to member state governments and the derogation where publication would be a criminal offence in the country concerned), agreement on a version including all the above amendments may prove unattainable.
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3 Exceeding at their balance sheet two of the following criteria: (i) balance sheet total 20m; net turnover 40m; average of 250 employees during the financial year.
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EXPERTS INSIGHT
The Hong Kong Stock Exchange listing rules for mineral companies include a similar requirement to disclose payments made to host country governments
Credit: heyCreation
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Conclusion
There was already some existing regulation in this area before the introduction of this legislation for example, the rules of the Alternative Investment Market (AIM) of the London Stock Exchange already require resource companies to disclose any payments aggregating over 10,000 made to any government or regulatory authority or similar body in relation to the acquisition or maintenance of its assets as part of the listing process. The Hong Kong Stock Exchange listing rules for mineral companies, meanwhile, include a similar requirement for a mineral company to disclose payments made to host country governments on a country-by-country basis. However, the final rules and the draft EU legislation go further than such rules in particular by introducing an ongoing reporting requirement, rather than just an obligation to make disclosure at the time of listing. Opinions on both the final rules and the legislation are strongly divided. In the US, organisations such as the American Petroleum Institute and other industry bodies lobbied strongly against various provisions of the final rules, arguing for less detailed reporting requirements, a higher de minimis threshold and the application of various exemptions, such as circumstances in which the disclosure of payments is prohibited by local law. However, the SEC strongly rejected such arguments. At the other end of the spectrum, groups such as
Transparency International have welcomed the final rules, which it believes set an international benchmark for transparency and mark an important step in the fight against corruption in extractive industries. The draft EU legislation has faced similar controversy from campaigners and industry bodies in Europe. It remains to be seen whether the legislation will be approved later this year in its present form, which reflects several aspects of the final rules in the US, or whether it will be modified to remove certain of its key provisions and weaken its overall impact. In practical terms, companies to which either of these pieces of legislation apply will need to implement new systems and financial reporting procedures, if they have not done so already, to enable them to capture the information required in order to meet their reporting obligations. These changes should also be seen as part of a global trend. As noted above, although there was previously some similar regulation, it is likely that there will be more to come in the future from other governments, regulators and stock exchanges around the world among them Australia, Norway and South Korea, where similar legislation is currently under review. James Green is partner, EMEA Oil & Gas Group, at K&L Gates
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Insight changes everything

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EXPERTS INSIGHT
Alan Lewis Whale Rock
How to make forecasting more of an exact science
n uncertain global markets, where multiple economic and fiscal factors are highly volatile and subject to material change, it is increasingly difficult for E&P companies to reliably forecast the short- to mediumterm future of their activities. For smaller companies, both public and private, the ability to forecast effectively can mean the difference between success and failure, because cash management is the key to survival. This is not just an accounting issue, but a key strategic and operational problem, because the timing of the availability of short-term cash directly impacts a companys ability to carry out its plans.
due to their versatility and the ability to tailor them to the specific needs of the business. However, as everyone knows, spreadsheets can be dangerous beasts and when left in the wrong hands, can rapidly lead to erroneous outputs that cannot be relied upon. A well designed and built forecasting model, though, is a powerful tool around which an entire businesss operations can be controlled.
A sensitive disposition
Bean counters no more
Accountants tended to be seen by operational teams such as engineers and geologists as either a bureaucratic back office function, necessary for compliance purposes, or backwards looking in terms of reporting on historical financial information. But increasingly accounting teams are leading the way in creating clearer strategies and keeping companies moving in the right direction, by being forward looking, working directly with the operational management to create forecasts that are more reliable and more able to predict the squeeze points that might otherwise bring a company to its knees. Despite there being a growing number of bespoke software solutions on the market for forecasting, spreadsheets are still the favoured approach by accountants, economists and analysts alike, probably
The most useful element of a forecasting model is the ability to sensitise and stress test the key inputs. The what if scenario analysis is vital in trying to prevent future situations, whereby the actual results of the business fail to meet recent forecast expectations, thereby throwing out strategic plans and necessitating emergency action. We are all aware that despite the best efforts of economists, the forward-curve price of oil changes as much and as often as the price of oil itself over time. An oil price of $100 in six months time might be fine for an E&P company to continue its current activities while fulfilling, for instance, a committed exploration programme during the period. However, a drop to $90 may prevent there being available cash to carry out such a programme. The ability to model this and determine these factors can lead to contingency plans being coordinated in advance, whereby new sources of finance are prepared or rig schedules are changed to allow for this situation to happen, without bankrupting the company.
Credit: atlken77
As everyone knows, spreadsheets can be dangerous beasts and when left in the wrong hands, can rapidly lead to erroneous outputs
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EXPERTS INSIGHT
Decision-makers must consider whether threats and strategies have been considered that go beyond routine thinking, what the primary risks are and whether all the important constraints have been considered
Size matters
Credible E&P forecasts begin with an effective description of a given project. This simply means asking the right questions that will help identify the important value drivers, risks and upside opportunities. Asking these questions allows for encompassing previously unconsidered facts and variables. Ignoring this process can have a highly detrimental impact on the financial projections. Decision-makers must consider whether threats and have been considered that go beyond routine thinking, what the primary risks and value drivers for this project are and whether all of the important constraints have been considered.
Short-term models for small E&P companies should be relatively simple because there are so few inputs. There are production profiles, capital commitments, lending covenants, oil or gas price decks and cost estimates. However, with only a few variables but potential large numbers, the overall sensitivity to the bottom-line cash can and does become huge. Without the comfort blanket that goes with being a supermajor, diversified over numerous geographical territories with concessions at multiple levels of development, it is easy to understand the risk that fluctuations in such variables might have on an E&P junior with significantly fewer eggs in its basket.
Accountable to almost everyone
Accountability is not a new concept. E&P companies, like businesses in other industries, are under increasing pressure to deliver accurate, credible forecasts for capital expenditure, production levels, costs and timing, which lead to revenue, profit and cashflow forecasts. E&P companies are now imposing internal performance contracts based on the reliability of these forecasts. Large construction project contracts may include performance and penalty elements that require realistic forecasts. Moreover, investors and other stakeholders are holding management accountable for their predictions. These pressures are compounded by the fact that many oil and gas projects are becoming more and more complex, requiring the integration of multiple variables with greater technical uncertainty, combined with the persistent political risk that comes in operating in this industry. With effective dialogue about projects and employing the right tools, E&P financial managers and decision-makers can interact with their project evaluation teams, asking the questions that lead to more accountability and better forecasting.
Correcting for bias
Bias naturally creeps into planning and forecasting because it is basic human nature. A common example of bias is a forecasters view of perceived facts at a single point in time. This is often thought of as overconfidence bias. Accurate forecasting in all industries and businesses requires recognising and intentionally correcting for bias. Overconfidence bias in the oil and gas business is caused by failure to account sufficiently for all the uncertainties associated with forecast parameters, such as reserves, costs, and prices. Since the price of oil is influenced by factors beyond our control, it tends to be fixed for evaluation consistency, even though it is usually the single largest value driver for an E&P project. Testing the impact of uncertainties is a way to make a forecast robust and to identify project elements that should be tested for bias. Sensitivity analysis, or Monte Carlo simulation techniques (computational algorithms that rely on repeated random sampling to compute their results) can be applied, depending on the situation and company culture. Key questions could include: Is the project still profitable on the downside and are there sufficient facilities to accommodate drilling and production on the upside? Using this technique, projects can be made modular or phased with pilots to take advantage of upside opportunities and mitigate downside risks. >
Removing the blinkers
Experience shows that businesses tend to overlook several ambiguous variables in their particular market environment, as well as the magnitude of these uncertainties and the complexity of the relationships among them.
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EXPERTS INSIGHT
John Maynard Keynes When the facts change, I change my mind. What do you do sir?
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Analysis paralysis occurs when a team of analysts become overly fixated and so overwhelmed in the data and the complexity of the computational models that rational insight and basic common sense is lost. This is often described as the refinement of unimportant details. Getting caught in the analysis paralysis trap can result in a loss of focus on the important issues and possibly a lack of insight into the project being evaluated. This can occur when a team is hurried into the analysis of a problem or unrealistic reporting deadlines are set. Better to avoid analysis paralysis at the outset rather than trying to correct later on.
Analysis paralysis
Conclusion
Success in the pursuit of more accurate, credible and dependable forecasts, particularly in todays uncertain economic times and in the context of a complex upstream oil and gas environment, depends on asking the right questions and implementing a successful decision and risk analysis. Such processes should also be subjected to a healthy dose of professional scepticism as to the viability of your assumptions and this can often be achieved through the use of a professional independent adviser, who can either build the model on your behalf or audit your output. Sensitivity analysis is an invaluable tool and when used intelligently can provide a priceless insight into the impact of unmanageable variables, such as the oil price on your future metrics, not to mention more immediately controllable variables such as the timing of developmental capital expenditure. Alan Lewis is chief executive of Whale Rock Accounting. Additional research by associate director Gareth Jones
Managing interpendencies
In oil and gas terms, project integration is a relationship between a large number of factors and variables, for instance reservoir description, well performance, drilling sequence, rig availability, facility capacity, schedule timing and critical linkages, commercial terms and spending limitations. Each of these factors influence the other and therefore interdependency is a key element to any financial forecasting project. Rigidity and blind faith in financial models that have worked in the past can also be a problem. In the words of John Maynard Keynes When the facts change, I change my mind. What do you do sir? If evidence points to the key driver in your forecasts altering, then better to re-examine the structural content of your forecasts, rather than trying to re-shape an existing financial model to do something that it was not built to do effectively.
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EXPERTS INSIGHT
Sony Gill and Paul Blyschak McCarthy Ttrault
Risk management in the era of anti-corruption law
isk management in respect of anti-corruption law, enforcement and prosecution has quickly become a main priority for British and Canadian companies with international operations or assets, including, in particular, oil and gas companies. The Passage of the UK Bribery Act and the revitalisation of the long-dormant Canadian Corruption of Foreign Public Officials Act (CFPOA), have prompted a rapid evolution in the corporate culture of British and Canadian companies previously unaccustomed to conducting business in the shadow of vigorously enforced anti-corruption legislation. The result is a new era in foreign investment and operations that necessitates a re-evaluation of the compliance and due diligence strategies employed by explorers, producers, prospective acquirers and joint venturers, as well as their advisers, financial, legal and accounting. In this regard, although the specifics of these two anti-corruption statutes differ, optimum compliance and due diligence strategies in respect of each are, at their root, essentially identical.
The practice of (i) swiftly responding to, and investigating reports of, anti-corruption noncompliance, and (ii) taking appropriate action, including disciplinary procedures for identified violations of anti-corruption laws and policies The institution of due diligence and compliance requirements regarding the engagement, retention and oversight of agents and business partners, including the documentation of such initial and continuing due diligence, as well as all appropriate contractual representations, warranties, covenants and other rights addressing anti-corruption risk, compliance and oversight. Explorers, producers and operators will need to institute, maintain and enforce such policies and procedures immediately where they have not already done so. Prospective acquirers, joint venture partners and financiers need to thoroughly due diligence prospective targets, partners, issuers and borrowers to ensure that such policies and procedures have been in place and have been strictly complied with.
Company-specific risk assessment
Anti-corruption policies and procedures
The next step is to conduct a review of the companys operations and circumstances to customise these otherwise general policies and procedures accordingly. This is an important exercise. Anti-corruption policies and procedures not tailored to specific risks identified pursuant to a comprehensive, company-wide risk assessment will be of limited assistance and in some cases may be harmful to a company: the adoption of boilerplate anti-corruption policies threatens to engender a false sense of compliance confidence while simultaneously overlooking key risk exposure. An assortment of interrelated questions should be closely considered, including: Where does the company stand now? What current controls, due diligence and training programs are in place? Are they being taken seriously? Do employees follow these procedures? What is the level of engagement of senior management and executives? What is the companys history of compliance in this area? Where are the companys operations located? How are those countries ranked on indices, such as Transparency Internationals Corruption Perceptions Index? What is the level of political stability and democracy in these locations? Is the company vulnerable to risk of regime change? In addition to the Bribery Act
The first step is to adopt a rigorous anti-corruption compliance code designed to detect and deter violations of the Bribery Act and CFPOA. This will include, at a minimum: A system of internal financial and accounting controls and procedures designed to ensure fair and accurate books and records and to guard against manipulation towards corrupt ends The assignment of anti-corruption compliance responsibility to senior corporate officer(s) or executive(s) with direct reporting to independent monitoring bodies, such as internal audit committees, ethics committees or the board of directors The periodic reviewing, testing and updating of anti-corruption policies and procedures at least annually The periodic training and annual certification of directors, office employees, agents and business partners The institution of systems for providing anticorruption guidance and advice, both within the company as well as to business partners and thirdparty agents, including confidential reporting of possible contraventions and protection against retaliation for whistleblowers
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Sony Gill and Paul Blyschak McCarthy Ttrault
EXPERTS INSIGHT
Perhaps most importantly, corrupt practices can also undermine the rights and benefits to which a company is entitled in a foreign jurisdiction
Again, explorers, producers and operators will need to ensure that their anti-corruption policies and procedures
Contact Sony at: sgill@mccarthy.ca +1 403 206 5529, and Paul at: pblyschak@mccarthy.ca +1 403-260 3659
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credit: katerkate
and/or CFPOA, how do other potentially aggressive anti-bribery regimes, such as the United States Foreign Corrupt Practices Act apply to the companys activities? Where and how does the company interact with government officials? What are the companys government touchpoints through all stages of its business operations? What permits and licenses does the company require? Does the company also deal with state-owned or state-controlled entities? How and with whom are the companys concession or royalty agreements negotiated? Does the company import goods, equipment or heavy machinery for its operations and how does it deal with customs authorities during that process? Which positions within the company are most exposed? Which executives or employees have responsibilities for dealing with government officials or authorizing related expenditures? How are they compensated? What financial incentives may exist for individuals within the company to engage in the bribery of government officials? What incentives regarding anti-corruption compliance exist? How does the company use third parties in its business operations? What kind of agents and consultants are retained to assist in foreign business development? Do these representatives interact with government officials on the companys behalf? How about lawyers, customs brokers and joint venture partners? How does the company screen, approve, retain, pay and then monitor these third parties?
have been tailored to anticipate and mitigate these company-specific risks. Prospective acquirers, joint venture partners and financiers, on the other hand, need to verify that such a company-specific risk assessment has informed the anti-corruption policies and procedures adopted and enforced by the company.
The consequences of corrupt practices
Non-compliance with statutes such as the Bribery Act and the CFPOA can result in a myriad of negative consequences. These include not only severe criminal penalties and sentences, but also significant reputational costs and decreases in share value, civil liability to investors, and shareholder derivative claims. Perhaps most importantly, corrupt practices can also undermine the rights and benefits to which a company is entitled in a foreign jurisdiction. That said, where a company adopts and enforces robust anti-corruption policies and procedures tailored to its specific circumstances it will have done well to address and mitigate its anti-corruption risk exposure. Sony Gill is a partner in the corporate, finance and mergers and acquisitions group, and Paul Blyschak is an associate in the oil and gas group at McCarthy Ttrault
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... and the right legal team
From our offices across Canada and in London, U.K., we align our national and international capabilities related to the oil and gas sector including mergers and acquisitions, capital markets, project financing and joint ventures, in order to provide you with the responsiveness, creativity and efficiency necessary to achieve your business goals. Our dynamic Capital Markets, M&A and Oil & Gas groups regularly act for producers, transporters and service providers in jurisdictions across the globe and have advised on some of the most significant oil- and gas-related projects in Canada and around the world. By leveraging our experience with strong client, industry and partner relationships, we deliver results.
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ON THE SPOT
What are the three main challenges energyfocused CFOs face in todays markets and how can they overcome these? p40 What practices and processes must energyfocused CFOs/FDs apply when looking to increase the resilience of their business during turbulent and uncertain times? p45
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ON THE SPOT I
Q What are the three main challenges energy-focused CFOs face in

Andrew Moorfield EMEA Energy Origination, Scotiabank Richard Crichton director, Peel Hunt
Although the challenges faced by energy-focused CFOs in todays markets are mostly unchanged from previous years, the environment for solving those challenges has certainly changed. The three big challenges remain: Access to debt financing The traditional RBL (reserved-based lending) market has remained robust and, although some traditional European RBL providers have lessened their exposure to the sector, new financial entrants such as Scotia are filling that gap. The basic underlying parameters are unchanged debt is lent against producing and developing fields subject to NPV (net present value) coverage tests. However, subordinated, mezzanine or quasi-equity solutions are no longer provided by banks. Exploration now must be funded by equity and there is a very clear divide between debt and equity providers. The blurry divide of previous years is history. Access to equity financing This year has seen a number of sale agreements by smaller oil & gas explorers some of which is driven by soft equity markets being less receptive to value smaller players with the, ahem, enthusiasm of prior years. Raising equity is tough on management time and can be perceived as dilutive by existing shareholders. Yet there is no alternative. Those companies that have been successful in the equity markets have had strong management teams with a compelling growth story. The depth and breadth of management and persuasiveness of the growth story are even more heightened in todays environment. Where is the new resource? One has to have sympathy for the sector. Shale gas has transformed the dynamics of the sector in an astonishingly short period, while the North Sea has proven itself still capable of large discoveries. The UK governments taxation and decommissioning made the North Sea unattractive and then attractive in an astonishingly short period. The CFO task of strategic planning is therefore complicated by industry trends, new discoveries and inconsistent government policies. These have always been in existence, but arguably the speed of movement of such factors, I would argue, is now the biggest challenge for todays CFO.
From the point of view of our client base of listed small and midcap E&P companies, the main challenge relates to access to growth capital. Small-to-mid-cap E&P companies are rarely self-financing and are often at a stage where the debt markets are closed. Financing, therefore, is usually still predominantly equity based either at the PLC level or the asset level. Given the current low level of institutional risk appetite, this often leaves farming out asset-level equity as the least dilutive financing option. The challenge, therefore, is to achieve full value in these transactions by developing competitive tension and ensuring that the process is initiated well ahead of any financing commitments. Obviously, an additional subset to this challenge will be ensuring that the farm-in partners are suitable, well financed and have the expertise, profile and operational capabilities which will bring more to the company than just cash. Another key challenge for mid-cap E&P companies is the ability to anticipate, understand and apply changes to tax legislation or fiscal regimes. This could be a surprise retrospective tax on an asset transactions, or perhaps an unexpected budget announcement. As has been seen, it is unlikely that any CFO could completely overcome this challenge, so actions are going to reduce the risks rather than remove them. In the developed world, it is important to ensure that the industrys concerns are heard and understood at the government level, such that any changes made are in full knowledge of the impact they might have on all parts of the industry. In developing countries the challenge is to develop relationships with key decision makers at the relevant ministries to ensure that any political motivations are understood and likely policy actions can be anticipated. Last, for CFOs of acquisitive E&P companies, a further challenge in light of the bribery act is to ensure that the due diligence undertaken fully covers the history of the assets. As well as the usual commercial and financial due diligence, the work undertaken needs to provide comfort over the provenance of an asset or licence to ensure that at no time in its history there was any activity which could call into question the way in which an asset changed hands. This work is often time consuming and finding all of the relevant information can be a challenge in itself.
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n todays markets and how can they overcome these?
ON THE SPOT I
Jack Kellet managing director and Andy Hariman, head of commodity structuring, Carlingford
Market valuation to resource NAV (net asset value) is too low, so dilution is too expensive. Post-merger orgy, there is an excess of assets for sale, so mandates are dead on their feet! Market structure, how to exploit the forward curve; spot prices for many commodities are at deep discounts to the forward markets. Press reports indicate a wall of cash seeking higher yields, corporate lending is exploding! In reality, we see great development and early production companies fail to raise funds at reasonable rates. We see limited private equity appetite as institutions cycle away from natural resources and back to mature sector equities. Equity prices are, in some cases, indicating a valuation of up to 80% discount on the discounted NPV of producing assets. If only we could delist, is a constant refrain in boardrooms. In our view, finally banks and new lending institutions have a role to play in the development and full exploitation of our natural resources. Keep focused With this valuation shift, there will be lots of opportunities for independent and medium-sized companies to acquire and develop these assets. They must stay true to their values of investment, including
geography, technical character, grade of product, or client type. However, medium-sized independent companies continue to struggle with identifying the right financing to acquire and develop these assets. Route to market Cashflows and prompt realisation of resources, even at the smallest level is the new test of character! Businesses are finding ways to bootstrap into production while exploiting every resource available, trading houses and energy marketing companies have seen their role here and taken a strong lead with their balance sheets and a commercial attitude. A strong off-taker opens access to enhanced reserve valuation while locking in higher forward prices. Finance Identifying the right lender and when to seek finance is more difficult than ever. Banks are still reeling but they are not shut. Candour, preparedness, and an execution strategy give lenders a chance to gauge if the risk profile is right for them. Asset managers are increasingly seeking to finance field development if this leads to commercial growth. Private equity and trading houses are sensitive of the value in existing management teams, local insight and engineering capabilities. Recent years have brought dramatic changes to the financial industry, including market consolidation, restructuring and changes in regulatory environment. Faced with these changes, financial and investment institutions are differentiating their appetite and resources available. CFOs will need to present a thoughtful funding structure to secure debt. The key ingredients to success remain good assets, a good management team and a route-to-market story.
Philip Wolfe head of EMEA Oil & Gas, UBS
If a company has access to RBL this can be the least dilutive source of capital, as proven by Tullow, which has used this source to great effect. Farming out to a well financed and technically strong partner often solves the capital problem. UBS helped Galp solve its funding gap by selling a 30% stake in Petrogal Brasil to Sinopec for about $5bn, achieving a much higher value than the equity markets and retaining control. Although not a typical asset farm-out, this solution worked very well for Galp. The third solution is most fundamental and is either the ultimate endgame for the successful E&P company, or the last resort for the one that runs out of money. Cove Energy put itself up for sale as it felt it had created significant value and a larger strategic partner was needed to take on the massive development capital expenditure of Mozambique LNG. Its timing was perfect and the company had significant appeal to both IOCs and NOCs, with UBS client PTTEP seeing the most strategic value in a hard-fought contest. This contrasts with Oilexco, which was sold more out of necessity (because of funding challenges) rather than choice. In short, a CFOs primary responsibility is to never run out of money and manage financial risk by toggling between the above three sources of capital as best as possible.
Funding and managing capital expenditure commitments and financial risk/returns is the key task. The solution to this challenge is balancing the alternative capital sources: New equity (or debt if producing in short term) Farm outs Selling an entire asset or business to a strategic buyer Equity markets are particularly difficult at the moment, pricing assets and companies at a significant discount to risked NAV (often 30%-60%). There is a greater appetite for higher-impact exploration opportunities rather than pure development or enhanced oil recovery situations. It is certainly easier to do an add-on equity raise than an initial public offering (IPO) in todays market. Management is the key success factor in any event.
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ON THE SPOT I
Q What are the three main challenges energy-focused CFOs face in
Colin Butcher managing director, oil and gas, Lloyds Bank
has been strong through 2012 and this looks set to continue. Lloyds Bank has a track record of successfully taking customers to these markets to diversify sources of funding and extend tenor. On the face of it, the latest effort by the UK government to stimulate lending the Funding for Lending Scheme (FLS) looks like it could have a limited impact on the O&G sector with US dollar funding needs. However, for UK businesses with UK assets, Lloyds Bank can structure deals to enable customers to take advantage of the scheme. Counterparty risk Corporates are spending more and more time assessing the stability of their banks. Bank credit ratings have fallen across the board and some O&G companies now have higher ratings than the banks funding them. A systematic approach to measure counterparty risk is necessary to evaluate potential funding or bank service issues. This approach should not only take ratings into consideration, but also systematic importance, shareholder structure and funding base. The eurozone debt crisis continues to rumble on and banks exposure to this region should be a consideration as well. Lloyds can offer its clients analysis of their counterparty risks and advice on how to implement a systematic evaluation framework. Cost inflation The costs of both building and operating upstream oil and gas facilities continue to rise significantly - roughly in line with longer term oil price movements. These cost increases have an impact on budgeting, cash management and contingency planning. It is important to ensure that flexibility is built into financing packages to allow cost increases to be managed by the business. At Lloyds, we can offer a variety of ideas and products to help mitigate price movements of some of the components through hedging structures.
The biggest challenges facing companies in the oil & gas sector over the short to medium term are funding, counter-party risk and cost inflation. Funding Capital is more constrained because banks need to hold higher levels ahead of stricter requirements being implemented in the form of Basel III and domestic bank capital adequacy rules. This has increased the cost of capital. Funding for O&G companies in the bank market has held up well, but equally pricing is going up. Liquidity for the O&G sector remains adequate, which includes liquidity in the RBL market. Debt capital markets are being seen as an alternative funding source for those companies that have access. As government bond yields in safe haven countries such as the US, Germany and the UK hit record lows, investors are looking to the US private placement and public bond markets for a pick-up in return while still maintaining an acceptable level of risk. Demand in the sterling and dollar markets
Roland Hinterkoerner head of corporate advisory, Asia-Pacific Raghu Narain head of sector advisory, Asia Arnaud Teissier director, corporate advisory, Asia The Royal Bank of Scotland
On average, every calorie of food we consume uses five calories of fossil fuel energy, from pumping water, fertilising, harvesting, processing, transportation and distribution energy is the bloodline of our modern economy. But financing its production can be a complex path. It has now been four years since the burst of the global financial crisis and were still painfully learning how to deal in the worlds new paradigms. The energy sector has been among the most active in terms of shifts and transitions, having to adapt to new or forgotten challenges. Picking only three is no easy task but the following should certainly be on top of CFOs agendas. Continuous uncertainty, driven by macroeconomic volatility and geopolitical mini-shocks, has made strategic planning a challenging task, especially when it comes to deciding transformational changes, whether
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n todays markets and how can they overcome these?
ON THE SPOT I
Christian Coulter managing director, metals and energy capital, Macquarie Bank
Energy-focused CFOs, especially those working for listed companies, face challenges in the current market that are exacerbated when the availability of capital is markedly constrained. A CFOs role is hard enough, but such an environment can act to magnify a companys relative underperformance in three key areas: cash and funding management, capital budgeting, and investor and market communications. The old adage that cash is king has likely resonated through the boardrooms of all energy-focused companies at some point over the last year. Those companies who have preserved or generated cash resources, or who have the ability to raise debt or equity funding, are finding themselves in an especially advantageous position of strength relative to their peers. While a CFO can only do so much to promote cash generation, a concurrent focus on cash preservation achieved through expense reduction and expense avoidance whenever possible can be especially beneficial in trying times. Since funding windows through the capital markets come and go, a CFO will find it beneficial to treat cash as a precious resource in both good times and bad.
In our role as a lender and principal investor in the junior energyfocused space, we often find that companies commonly go off track due to a poor capital budgeting process. The energy industry is often unpredictable by nature, but as the CFO is commonly the author or chief guardian of any capital budget which is produced, they have duty of care to ensure that realistic assumptions are incorporated into any forecasting or planning efforts. A realistic budget leads to a more accurate decision-making process with respect to cash preservation, expense generation, and the timing and need for capital raising efforts. CFOs can do their part to manage the process by scrutinising budgetary inputs. Are the production estimates realistic? Are forecasted operating expenditures based on actual expenditures incurred in the field? Have capital expenditure estimates been based on the results of a tender process and do they include an element of contingency? Moderate degrees of optimism on every line of a capital budget can often compound and lead to poor decision making down the road exacerbating the effects of a difficult market environment. Last, a focus on capital preservation and realistic forecasting can lead to the mitigation of a third challenge facing CFOs: accurate communication with investors and other stakeholders. If the capital markets are judged today to be fickle, then they are certainly more so vis--vis companies who have any history, even if brief, of overpromising and under-delivering. This is a difficult balancing act, as investors still need to be enticed by a story. But signs of a good CFO, however, can often be seen when it is clear that a range of outcomes has been carefully considered and incorporated into the planning process. If this is communicated properly, such evidence will lead to potential capital providers having greater confidence in a companys forward plans, thus helping to mitigate the effects of a challenging market environment.
its investing in a new field, acquiring another company, or divesting a non-profitable division which is a legacy of past cycles. Avoiding procrastination is key and calls need to be made as early as reasonable. Operations of companies in the energy sector tend to span across several countries, leading to a high level of complexity when it comes to financial efficiency. Significant savings (in time and money) can be achieved though identifying optimal subsidiary funding, adopting a local, regional or global approach to bank relationships and through the centralisation of operations and investment management. Access to bank capital has become scarcer some global sectors have seen the number of active banks supporting them dwindle from more than 50 to barely a dozen and upcoming regulations will reduce appetite for longer tenors and likely lead to increased pricing. At the same time, debt capital markets are seeing record issuance volumes supported by close to all-time low yields. Diversification of funding sources and proactive capital management are critical to creating a low-cost, low-risk, sustainable capital structure designed to provide with strategic flexibility.
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ON THE SPOT II
Q What practices and processes must energy-focused CFOs /FDs apply when looking to increase the resilience of their business during turbulent and uncertain times?
doubled in a very short time. Proper planning, sometimes by liaising with partners to tag on to existing drilling schedules, can reduce mobilisation and demobilisation costs while ensuring time to raise capital. Recruiting local people with relevant knowledge can often mitigate surprises, such as custom delays, currency controls and tax matters. This is particularly true in the former CIS, for example. A thorough, up-front understanding of environmental matters and the development of plans to accommodate sensitive issues will often give an edge to new entrants over their competitors, particularly when presented to local government authorities before being asked. Never short-cut on receiving quality advice from reputable advisers. A local lawyer, for example, can often give far more support than on legal drafting alone, as they often know the lay of the land in country and the individual personalities in local government agencies and legislatures. Partnerships are becoming increasingly more important as entry into new areas raises the risk level. Scout groups are already common with technical staff, but joining similar networks for financial and legal groups is strongly recommended. Sharing financial risk through farm-outs not only reduces capital exposure, but manages such risk through a portfolio effect. It can also be tax efficient, particularly when combined with producing assets. In summary, good, documented systems, cherry-picking of ideas through networks, consistent and credible investment strategy, sound management and adoption of upper-quartile practices should reduce an E&P companys overall risk in what is an increasingly risky hydrocarbon exploration world.
Robert Wilde, finance director, Impact Oil & Gas

For smaller E&P companies, the priority is to secure adequate capital for exploration. This can only be done by hiring a quality management team with proven track record and a good, rational and consistent investment story for stakeholders. A convincing understanding of the risks is essential and the need to maintain a frank and consistent dialogue with these investors is essential to develop trust, especially if further capital is to be called upon. Sound, professional processes to ensure compliance with anti-bribery and corruption laws are becoming increasingly important. Such practice must be pressed upon regional management teams with checks and balances to ensure genuine compliance. Long-term planning is difficult, as any exploration programme is an evolving process. Nevertheless, the medium-term plan is generally quantifiable, with adequate contingency, and a regular practice of looking just beyond must be adopted to ensure no funding surprises. The largest cost is often the rig hire, especially in frontier areas. Following success in Mozambique, rig rates for offshore drilling in Africa have
Paul Weisner, CFO, Emerald Oil

Turbulent and uncertain times demand a strategy grounded upon financial and operational flexibility. The former is achieved by maintaining a low percentage of debt relative to the borrowing capacity of the company, locking this in with hedging and avoiding long-term contracts for capital expenditures. Operational flexibility is achieved for an E&P company by protecting leasehold positions with options to extend and also avoiding long-term agreements unless the company can take advantage of them in boom-and bust-cycles. A company that is heavily levered in uncertain times is almost guaranteed to stumble. And once it defaults, it has effectively painted itself in a corner that is all but impossible to recover from unless prices quickly recover. Hedging commodity prices out as much as three years provides significant protection of the borrowing base as well as protecting the cashflow needed
to service the debt and projected capital expenditures. However, hedging is not the cure-all and a prudent level of debt should be maintained. A portfolio of short-term leases that must be drilled to maintain ownership does not allow the flexibility to scale down development. A proactive land department ought to protect the companys leasehold position with options to extend the leases if possible. The land department should work with the development team to identify those positions most likely to be delayed in tough economic times and take steps to protect them. Locking in long-term contracts for capex should also be closely examined in uncertain times, as it can be as effective as hedging commodity prices. However, if the company does not have the capital to proceed, long-term contracts can be deadly. Before entering a long-term contract, prudent CFOs should analyse whether an adverse financial shock to the system will place the company in a position where it is forced to buy out a contract or allocate capital to a project that it would not otherwise pursue. In conclusion, CFOs that follow these steps not only protect their companys financial position, but may be positioning their company to take advantage of opportunities from the miss-steps of others.
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For further information contact Drake Lawhead SVP, Americas T: +44 207 384 8061 | E: drake.lawhead@oilcouncil.com
2012 Speakers
Vikash Magdani Glenn Corrie MD Americas & EVP Director of Energy Investments, Temasek Tel: +1 212 813 2954 | +1 347 633 7734 | E: vikash.magdani@oilcouncil.com
LATIN AMERICA ASSEMBLY
OIL
OIL COUNCIL COUNCIL

LATIN AMERICA ASSEMBLY
Ali Moshiri President, Africa and Latin America Exploration and Production, Chevron
Antonio Vincentelli CEO, PetroNova
The Latin America Assembly
Aurelio Ochoa President, Perupetro
Charle Gamba CEO, Canacol
30 31 January 2013 Bogot, Colombia

A Forum for Latin Americas Oil & Gas Business Leaders
IOC INVESTMENT PLANS: The strategies and impact of international majors in Latin America. LATIN AMERICAN NOCs: Their national and international growth strategies. LEADERSHIP AND GROWTH STRATEGIES: Independent E&P CEOs discuss obstacles and opportunities to growth and shareholder value. FRONTIERS, HOTSPOTS, & UNCONVENTIONALS: What are the new plays and challenges opening up for Latin American-focused E&P firms? FINANCING LATIN AMERICAN O&G 1: Accessing local and International Capital Markets FINANCING LATIN AMERICAN O&G 2: The Investor Perspective Latin American E&P from the fund Managers point of view; Private Equity appetite and size; local vs international investment pools. JVs and M&A: Corporate development strategies and insights into the Latin American M&A, A&D, JV, PSA, and Farm-in Landscape.
Lead partners:
James Park CEO, GeoPark Holdings
Frank Holmes CEO and CIO, US Global Funds
Javier Gutirrez Pemberthy President, Ecopetrol
Manolo Zuniga CEO, BPZ Energy
Ronald Pantin CEO, Pacific Rubiales
Partners:
Richard Walls CEO, C&C Energia
Associate partners:
Steve Crowell CEO, Pluspetrol
www.oilcouncil.com/event/latam
in association with
SUPPORTING GROWTH IN THE OIL & GAS SECTOR

At Lloyds Bank Wholesale Banking & Markets, we have been supporting the Oil & Gas sector for over 30 years. With a global presence, we provide a range of solutions and offer support to the full spectrum of Oil & Gas companies from Junior E&Ps to Supermajors. Our market insight, in-depth sector expertise and dedication to relationship management means we can deliver innovative lending and capital markets solutions to support our clients. To find out how we can support your business, please contact: London: Edinburgh: Houston: Sydney: Colin Butcher, colin.butcher@lloydsbanking.com Jason Skelton, jason.skelton@lloydsbanking.com Chris Hasty, christopher.hasty@lbusa.com Dave Chapman, dchapman@bos.com.au
FDs Excellence Awards in association with the ICAEW and supported by the CBI & Real Business. MC0924/1012
MEET THE MEMBERS
Eduardo Lopez Lead oil market analyst, BG Group

How did you come to be in the oil industry?
I had always been interested by international affairs, business and economics. Energy in general, and oil in particular, combines these three dimensions. An eminently geopolitical commodity, it is closely related to global economic conditions, and by its very nature poses fascinating business challenges. Moreover, over the past two decades I have been fortunate to look at the industry from different angles, ranging from oil & gas companies to consultancies, financial institutions and international organisations. This has given me a broad perspective, and yet I marvel every day by how much more there is to learn about oil.
What was the wisest advice you ever received from a mentor?
Be curious, be exhaustive, be humble and be prepared to constantly confront your opinions, since the oil industry is in constant flux.
What advice would you pass on to a recent graduate wishing to work in your line of business?
The same one I got, as it has served me well over the years.
Whats the one interesting fact about you that no one would suspect?
Perhaps the fact that I am a devoted collector of contemporary art.
What is your proudest work-related achievement to date?
How do you prefer to spend your spare time?
I am proud to have established a solid reputation as an international oil market analyst, notably during my period as a one of the lead authors of the IEAs benchmark Oil Market Report. Since the oil market is extremely complex, I find it very rewarding to be solicited by my peers, to give my views on current and future market developments.
I like to practice sports and read literature, as I am fluent in three languages. When I have more time, I like travel to new destinations, explore local art scenes and taste local gastronomy.
Favourite holiday destination?
Where do you see the greatest opportunity in todays oil and gas markets?
All the places I havent yet visited. I must admit, though, that I tend to prefer warmer climates.
The shift of the markets demand centre of gravity to nonOECD countries, particularly Asia and the Middle East, will arguably have a profound effect in the years ahead, notably on the refining, logistics and shipping industries. On the supply side, meanwhile, US tight oil, Iraq, Latin America and some areas in Africa will probably offer the greatest growth opportunities, provided that prevailing political, geological and other obstacles are overcome.
All-time favourite book?
I cannot honestly single out a single book. Depending on the time and circumstances, a particular book can have a deep and long-lasting influence. Currently, for example, I live in the UK, and this has allowed me to discover several excellent British authors, both old and new.
All-time favourite film?
Where do you see the greatest challenge?

The industrys greatest challenge will increasingly be the availability of reliable and comprehensive data. As the influence of non-OECD countries upon global market dynamics rises, deciphering fundamentals may become much more difficult, given existing data limitations. This could further exacerbate oil price volatility, complicating business planning and decision-making. The Joint Oil Data Initiative is a welcome step towards addressing data quality issues, but there is still much to be done.
The same can be said about films. I am particularly fond, though, of There Will Be Blood (below), a story of a turn-of-the-century oil prospector a fascinating and perhaps unique blend of oil and art.
Nothing that would require external energy sources, while being useful and entertaining: a Swiss knife, a good waterproof wristwatch and golf clubs.
What three luxury items would you take to a desert island?
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October 2012
Offering solutions 2 value
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Offices: Perth, Australia London, United Kingdom Contact E info@s2vconsulting. com www.s2vconsulting.com
MEET THE MEMBERS
Ken McKellar Partner and Middle East energy & resources leader, Deloitte
I was seconded to Total Oil Marine in Aberdeen while doing my CA (chartered accountant) training.
I have Swiss as well as British citizenship. I have been told that Scottish/Swiss parentage makes the ideal saver.
Re-establishing Deloittes relationship with Saudi Aramco, where I am global client service partner.
I love outdoor swimming and scuba diving we have the weather for it here in the Middle East
From a Middle East perspective, definitely in petrochemicals, where Middle Eastern NOCs have several competitive advantages as well as a need to create end user markets for them.

Switzerland.
The King James version of the Bible a visionary, timeless rendering of the greatest book, beautifully written.
Again, from a Middle East perspective, obtaining sufficient supplies of natural gas to meet the massive forecast increases in power demand.
The Shawshank Redemption (below).
If you try to make an impression, that is the impression you will make.
A leather-bound version of the King James version of the Bible, a dynamo torch and a luxury shaving set.
Pay attention to developing your interpersonal skills and your network of contacts, rather than your technical ability. The former two areas will be increasingly important for you as you rise through the ranks.
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On the movein Houston and around the world

The energy industry keeps growing and so do we. Paul Hastings offers one of the worlds premier energy practices, with a market-leading presence in major energy, commercial, financial, and regulatory centers around the worldincluding our newest office in Houston, Americas energy capital. Our highly respected team of transactional, energy-focused partners in Houston greatly enhances our global energy capabilities and further demonstrates our commitment to clients in this burgeoning industry.
Paul Hastings is a leading global law firm with offices throughout Asia, Europe, and the United States.
Paul Hastings LLP I www.paulhastings.com
MEET THE MEMBERS
Matthew Rawlings Managing director, S2V Consulting

I went to Sydney for a job interview in the power and process industry in 1991 and then, out of interest made a few applications elsewhere. I was interviewed by John Grill, who was head of Worley at the time, who called me personally while I was staying at a backpackers hotel in Bondi. Three weeks later after returning back home one Sunday evening in the UK, I received a phone call offering me a job. Two weeks later I was in Melbourne starting my new career as a mechanical engineer working on a project in the Bass Strait for Esso Australia, one week later I was told I was to be a father for the first time. A great time in my life!
Choose your wife carefully and choose those who you do business with even more carefully.
Certainly in the engineering fraternity the oil and gas industry is rapidly maturing, so focus on differentiation and how you can specialise in an area that will be in demand for years to come.
I love ancient music, Gregorian and Baroque!
My proudest moment has to be split into two areas: technically, after successful handover and commissioning of a plant being involved from project inception and then, from a business point of view, in achieving the first 12-month milestone as a start-up company with a very dynamic growth profile.
My favourite pastimes are using my hands either in the garden or in building. Other hobbies include keeping fit, rugby and fishing.
Has to be Africa, a land of amazing contrast and diversity.
I see many opportunities worldwide as the industry is ever changing, for a consulting company helping smaller operators get up the curve. Playing a role in the foundation of success provides great opportunities for us, and for our consultants this represents an incredibly rewarding and satisfying experience.
Lord of the Rings for its imagination, poetry and depth.
Avatar, for the visual effects far beyond my imagination and representation of what is for me a new genre.
The challenge, as always, is in finding and creating value in an environment where costs are ever escalating and hydrocarbon resources are located in increasingly challenging locations.
Assuming there is a power generator/solar panel there, then there has to be an iPod for music, an expensive bed for quality sleep (something you appreciate when you travel so much) and a juicer, to make eating easier for my sensitive stomach.
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October 2012
BUILDING EXCEPTIONAL BUSINESSES, SIDE BY SIDE, EVERY DAY
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At Lime Rock Partners, we want to be investment partners with great oil and gas entrepreneurs, and we know that great entrepreneurs can choose whom they work with. Lime Rock Partners is a creative private equity investment partner in building exceptional oil and gas businesses, side by side, with entrepreneurs every day. Since 1998 we have helped build differentiated, high-growth E&P, service, manufacturing, and technology companies worldwide. From five offices on three continents, we bring our specialist finance and operating expertise, global presence, technology leadership, people-centered strategies, and patient hard work to help our investors and portfolio company partners profit from operational growth. With nearly $4 billion under management, we are flexible partners, who work withand supportcompanies through evolving markets. We know that your company is the most important thing to you and seek ways to add value and help accelerate growth over many years.
For more information, please visit www.lrpartners.com or contact Jeffrey Scofield at +44 (0) 207 514 3920.
MEET THE MEMBERS
Rob Sherwin managing director, Regester Larkin Middle East & North Africa
Having grown-up as an expat brat with a father in the downstream oil industry, when I came to consider careers I was primarily seeking a route to a life lived largely overseas. Apart from the diplomatic corps and I have worked at the Foreign Office, so have tried that too there are still few better guarantees of a truly international career than joining the energy business. So I joined Shell straight out of university. I then discovered it is probably the worlds most vitally important industry, and absolutely fascinating.
Earning and sustaining the trust required from governments, customers, partners, host communities and employees that gives a company its daily license to operate in a potentially high-risk industry with enormous impacts on society and the environment.
Laugh at yourself before others laugh at you. Then theyre laughing with you.
There were many achievements I was proud of during my time in Big Oil and in government. But few of them am I able to claim as completely for myself as the achievement of building a Middle East and Africa consultancy practice for Regester Larkin. To the firms traditional base of IOC clients, I have added in the MENA region many key NOCs and complex joint ventures between IOCs and NOCs, as well as leading service companies. And I am most proud of having recruited and developed an outstanding, diverse and intellectually curious team of energy consultants.
Join the biggest company you can straight out of university, but ignore those who tell you that youre mad to walk away from the long-term opportunities (and pension) when you then decide to leave to get a more entrepreneurial exposure somewhere smaller.
15 years ago I co-founded Londons weekly rollerblade streetskate which is still running (or rolling).
From my MENA-based view of the industry, the greatest opportunities flow to those companies whether IOCs or service companies that are best able to mould their business around the needs of their NOC partners and their host governments. The companies that win the best prizes seem to do so through a combination of humility acknowledging that a different approach may be required from how theyve done things before and honest, experienced advice. I still see private companies, both large and small, wasting vast amounts of time and money pursuing projects that suit them, but dont truly fit the needs and capabilities of the resource-holding government. Those companies who listen more than they talk seem to be the partners most trusted for the long term.

Being entertained by my two young children.
Pre-children, Beirut. Now, with children, an English farm.
A Fine Balance by Rohinton Mistry.

Cry Freedom.

A snorkel, a mask and an underwater camera.
CRediT: ThRioL
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October 2012
OUR ENERGY IS FOCUSED ON GROWTH

- our growth is focused on energy
Today we are exploring for oil & gas in Faroese waters, the UK North Sea and the Celtic Sea using the latest technology to identify opportunities. Our aim is to find and develop new energy supplies without any adverse impact on the environment. We are building on a solid base of strong near term oil & gas production and cashflow to secure growth in the longer term. We have the resources and ideas to achieve our goal of becoming a leading Northern European E&P company. Atlantic Petroleum is listed on NASDAQ OMX on Iceland and in Copenhagen. www.petroleum.fo
sansir.fo - Photo by the Faroese diver/photographer Ingi Srensen
MEET THE MEMBERS
Scott Kerr CEO, Sevan Drilling

How did you come to be in the oil and gas industry? I was raised in Wyoming, which is a large oil and gas producing state and my father was an engineer working for the state on shale oil research, so my choice to become a petroleum engineer was natural.
To never lose the desire to learn and always place yourself in a position where you are open to new experiences. This business can provide so much opportunity if you are open to it.

In 2005 I left BP and took a chance at starting an independent oil and gas company in Norway. Today that company has approximately 70 employees and is listed on the Oslo exchange. I am very proud of what we accomplished with Noreco
I was on the University of Wyoming rodeo team.
I enjoy running and spend my time with my family hiking or skiing (depends on the season) in the mountains.
The integration of technology into our business has always been critical to our success as an industry and I believe that technology remains the biggest opportunity for us to extract more from existing areas and to expand our search for oil and gas.
We enjoy active vacations so I would say hiking in the Alps or the Rocky Mountains.
War and Peace I read it in high school and I enjoyed the sweep and majesty of the story.
To renew our business and most importantly our workforce. We need fresh thoughts to take on the many challenges we have today and I want people with new ideas working in our industry, not against it.
2001 A Space odyssey really made a strong impression on me.
Careers are long but life is short, so you have to work at what you enjoy and find what makes you passionate.
Family photo(s), flint and steel to start a fire and a tarp. My definition of luxury would be to be warm under shelter with my family near, or at least their pictures.
CRediT: FLAiLinginge
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October 2012
Still burning the midnight oil?

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in this edition

CFOs challenges and best practice

Volume 3 | Issue 5 | October 2012

K&L Gates, Whale Rock and McCarthy Ttrault

Ian Taylor President and CEO, Vitol Group

Charles Chuck Davidson Chairman and CEO, Noble Energy

John Knight EVP, Global Strategy and Business Development, Statoil

Greg Guidry Executive Vice President, Europe, Shell

26 27 November 2012 Old Billingsgate, London, UK

John Bookout Managing Director KKR

Angus McCoss Exploration Director, Tullow Oil

Dr Mike Watts Deputy CEO, Cairn Energy

Ashley Heppenstall President and CEO, Lundin Petroleum Partners:

Julian Metherell CFO, Genel Energy

Toronto Stock Exchange

TSX Venture Exchange

Toronto Stock Exchange

TSX Venture Exchange

Toronto Stock Exchange

TSX Venture Exchange

Bourse de Croissance TSX

Bourse de Croissance TSX

Bourse de Croissance TSX

October 2012 + THE CFO ISSUE

4 6-9 10-15 16-20 28-30 32-35 36-38 39-45

In this issue: a Scots/Swiss, a Greogrian chanter, a rollerblader and a rodeo star

MEEt thE MEMbErs

Drillers & Dealers

to find the best, talk to the best.

Drillers & Dealers

Drillers & Dealers

HERE COMES THE STORY OF HURRICANE

Drillers & Dealers

Drillers & Dealers

Drillers & Dealers

Drillers & Dealers

Drillers & Dealers

Hurricane. The New Generation.

EXECUTIVE Q&A III

EXECUTIVE Q&A III

KKRs BOOK VALUE

EXECUTIVE Q&A III

Drillers & Dealers

EXECUTIVE Q&A III

What opportunities do you see for investing in oilfield service companies?

Credits: shell, roy.luCk

Drillers & Dealers

EXECUTIVE Q&A III

What companies do you admire, and why?

Drillers & Dealers

+44 (0) 20 7642 0228

Chris Walcot, Director

Angelos Damaskos, Chief Executive Officer

What do investors look for in an investment opportunity?

Does it matter whether an independent has a finance system?

Do you think a company can be investment ready without a system?

How does a finance system help a small independent?

What would turn an investor off?

How long does investment take? Can it be quick?

What financial controls would you expect to see in place?

How should an independent present themselves for investment?

Are investors interested in a companys IT plans?

Tel: +44 (0) 20 7642 0228 www.progressive-tsl.com