Drillers and Dealers August 2012

in this edition Featuring
Herbert Smith, RusPetro, Edge Resources and GDF Suez
Executive interviews
Expert insight An
Drillers Dealers
SJ Berwin, Control Risks and more
publication
+
Event report On the spot
Oilfield Services Assembly Three pressing points for our panel
Volume 3 | Issue 4 | August 2012
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Ashley Heppenstall President and CEO, Lundin Petroleum
Charles Chuck Davidson Chairman and CEO, Noble Energy
John Knight EVP, Global Strategy and Business Development, Statoil
26 27 November 2012 Old Billingsgate, London, UK

Europes largest O&G business meeting with 1,200 senior executives Global participation from international O&G companies, investors and financiers Delegations attending from NOCs, IOCs, small-cap, mid-cap and large cap independents Direct access to energy focussed debt providers, equity capital, private equity and strategic investors Focuses on E&P funding, corporate development strategies, joint ventures, deepwater, the future of the North Sea and NCS, the new MENA landscape and the new regulatory environment
Dr Mike Watts Deputy CEO, Cairn Energy
Ian Henderson Senior Advisor, J.P Morgan Asset Management
Ian Taylor President and CEO, Vitol Group
Lead Partners:
Julian Metherell CFO, Genel Energy
Partners:
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At the Intersection of Energy, Finance and Investment
John Bookout Managing Director KKR
Tom Chambers EVP and CFO Apache Corporation
Janet Clark CFO, Marathon Oil
Alan Crain SVP and General Counsel, Baker Hughes
Chuck Davidson Chairman and CEO Noble Energy
Mark Ellis Chairman, President, and CEO LINN Energy
October 9 10, 2012 Four Seasons Hotel, Houston, TX

Where North Americas oil & gas leaders meet international investors and financiers
The Oil Councils North America Assembly is a leading international conference and networking forum for senior oil and gas executives, and the finance and investment communities. We bring together thought leaders from the US and Canadian energy industries, international investors and financiers to discuss industry-critical issues in lively, interactive panel discussions: The future of North American O&G supply and demand Leadership and growth strategies for O&G firms US Energy policies after the election: The new regulatory environment The CFO wishlist: Needs & expectations NOCs and Forgein players The American opportunity M&A and A&D: Who, where, how? Independants abroad: International E&P strategies Investment insights: Debt vs equity financing Institutional investment Private equity
John Manzoni President and CEO, Talisman Energy
Brian Maxted President and CEO, Kosmos Energy
Tim Murray Managing Director Blackstone GSO Capital
Sam Oh Partner, Apollo Management
Hon. Pete Olson US Representative Texas 22nd
John Schiller Chairman and CEO Energy XXI
Lead partners:
Tom Ward Founder and CEO, SandRidge Energy
Tony Weber Managing Director and Chief Investment Coordinator Natural Gas Partners
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Drillers Dealers
Official Publication of The Oil Council Bedford House 69-71 Fulham High Street London SW6 3JW UK Editor Drake Lawhead Senior vice-president, Americas drake.lawhead@oilcouncil.com T: +44 (0)20 7384 8061 Editor-at-Large and Media Enquiries Iain Pitt COO iain.pitt@oilcouncil.com T: +27 (0)21 700 3551 Publisher Ross Stewart Campbell CEO ross.campbell@oilcouncil.com T: +44 (0)20 7384 8063 Partnership Enquires Vikash Magdani Executive vice-president, corporate development vikash.magdani@oilcouncil.com T: +1 212 813 2954 Advertising Enquires T: +44 (0)20 7384 8061 North American Media Enquiries Jay Morakis Partner JMR Worldwide jmorakis@jmrworldwide.com T: +1 212 786 6037 To be added to distribution list, Email: info@oilcouncil.com More information at www.oilcouncil.com Design by Andy Plowman Email: andyjplowman@yahoo.co.uk Copyright, Commentary and IP Disclaimer *** Any content within this publication cannot be reproduced without the express permission of The Oil Council and the respective contributing authors. Permission can be sought by contacting the authors directly or by contacting Iain Pitt at the above contact details. All comments within this magazine are the views of the authors themselves unless otherwise attributed to their company / organisation. They are not associated with, or reflective of, any official capacity, or any other person in their company / organisation unless so attributed ***
August 2012 + LEGAL, CORPORATE GOVERNANCE & HR

The Editor
6 10 16 20 22 24
EXECUTIVE Q&A
Herbert Smiths global energy team Brad Nichol, president and CEO, Edge Resources Don Wolcott, CEO, RusPetro Jean-Claude Perdigues, CEO, GDF Suez E&P UK Peter Veenhof, managing director, Dyas
10-14 16-19 20-21 22-23 24-25 28-30
EXPERTS INSIGHT
John Skoulding SJ Berwin Capital gains tax
Dominic Schofield Korn/Ferry International Corporate governance: the boardroom blitz
32-34
drake.lawhead@oilcouncil.com
John Bray Control Risks No shortage of deals to be done
36-38
Chris Walcot Progressive Lowering procurement barriers
40-41
EVENT REPORT ON THE SPOT
44-47
I What new challenges are our clients currently facing and seeking advice on? II What must be done, and by whom, to solve the industrys ever-widening talent crunch? III What are the three things keeping you awake at night in your profession?
52-54 56-59 60-62 65-69
In this issue: a Welsh patriot, a Malcolm Gladwell fan and a golf nut
MEET THE MEMBERS
THE EDITOR
Drake Lawhead
How much does an Olympic medal cost?
here is something highly arbitrary about the Olympics medals table. While the winner of an individual event will presumably possess some superior combination of fitness, training, preparedness, technique, and a little luck, what does a ranking of countries by medal haul tell us? Its not as if the world is divided into 200 equal-sized countries of equal GDPs, all equally populated with racially homogenous inhabitants. Rather, the rankings of the medal table reflect a number of factors about that country, chiefly: population and money spent on sports, which is a combination of wealth and culture. Team GB has had its most successful Olympics of all time far surpassing anyones predictions at the outset of the competition. But such a success does not come from nowhere. Great Britain spent 264m on their 2012 programme, for a total of 65 medals, or 4.1m per medal. Compare that with the 60m spent on the Olympic programme for Sydney, which yielded 28 medals, or 2.1m per medal. In terms of population, there is roughly one medal for every million people in Great Britain. But on the island nation of Grenada, theres a gold medal winner walking around for every 109,000 people his name is Kirani James. I dont know how much the Grenadian government spent on their Olympics programme, but probably not 4.1m which would be 6% of annual spending of the countrys ministry of education and human resources. Across both Summer and Winter Olympics since 1896, by far the most successful sporting nation weighted for their population is Finland whose inhabitants are able to share an Olympic medal between every 18,116 of them. Two-thirds of those come from track, wrestling, and Nordic skiing.
The problem of the worldwide talent crunch in O&G is not new and the proposed solutions rely on a combination of investment in higher education and a willingness to globally source talent from non-traditional countries
Developing into a sporting powerhouse and training a sufficiently adequate, educated O&G workforce is easier for more-or-less centrally planned states such as China. If China wanted to be a global provider of engineers for the O&G industry, it would designate a hundred square acres and build Hydrocarbon City, which would be a training factory producing qualified, English-speaking graduates in Chinese-sized batches, faster than you can say Office for Budget and Responsibility. India is producing a generation of technocrats also, but the impetus is bottom up;. The Indian populace is generally far more interested in developing their comparative advantage at IT and communications (for example) than they are at sports. At least that explains how a country of 1.2 billion can only manage six medals (none gold) compared with equally-populated Chinas 87. The invisible hand is the favoured instrument for addressing job-market imbalances in the United States. Its a sluggish tool with long lead-times, but it does produce opportunities. Every day, kids from around the US arrive by the truckload in North Dakota, landing jobs paying $80,000 a year, their only required qualification being the ability to tie their bootstrings. Thats not a bad wage for a 20-year old to cut their teeth on in the world of oil and gas. While the North Dakotan winters may not be part of the sales pitch, how about this: find a career in oil and gas a global industry with high wages, intelligent people, interesting entrepreneurs, and the potential for worldwide travel. Sells itself, doesnt it?
Hydrocarbon City, China vs Watford City, North Dakota
The problem of the worldwide talent crunch in O&G is not new, and the proposed solutions (On the Spot question 2, p56) rely on a combination of investment in (domestic) higher education by industry and the government, and a willingness to globally source talent from non-traditional countries something not usually available to a national Olympics committee, although it would be amusing to imagine how many golds the Saudis might win if they diverted some Ghawar money to recruit the services of the British track cycling team.
Drillers & Dealers
August 2012
lifetime Achievement Award
Andrew Gould, Chairman of BG Group, has been chosen as the 2012 Winner of The Oil Councils Lifetime Achievement Award.
Andrew will receive the award in front of 900 energy, finance and investment executives at our 2012 Annual Awards of Excellence.
A chartered accountant, Andrew initially joined Schlumberger in 1975 where he held various senior management positions before being appointed Chairman and CEO from 2003 to 2011, when he retired as CEO. He was appointed a Non-Executive Director of BG Group in 2011 and became Chairman in 2012. Andrew is simply one of the most respected and recognised executives in todays global oil and gas markets. His career is inspirational and his industry achievements are admired the world over. We are honoured to have Andrew join us in November to receive this industry award, which has been judged by over 50 business leaders commented Ross Campbell, Chief Executive of The Oil Council.
We are proud to bring you our 2012 Judging Panel

Anders Marvik, Vice President, Corporate Strategy and BD, Statoil Andrew Moorfield, Managing Director and Head, EMEA Energy, Scotiabank Angelos Damaskos, CEO, Sector Investment Managers Ben Monaghan, Managing Director and Head, Oil & Gas EMEA, J.P Morgan Billy Clegg, Managing Director, FTI Consulting Brian Kinane, Managing Director, Yorkville Advisors Carl Hughes, Global Head - Energy & Resources, Deloitte Colin Butcher, Managing Director, Natural Resources, lloyds Bank Danielle Beggs, Partner, SNR Denton David Lewis, Partner, Clifford Chance David Phillips, Co-Head, Global Oil and Gas Research, HSBC Doug Glass, Partner, Akin Gump Strauss Hauer & Feld Francis Gugen, Chairman, PGS, IGas Energy and Chrysaor Frank Pluta, Global Co-Head, Oil & Gas Corporate Finance, Standard Chartered Bank Gavin Graham, Executive Vice President, Business Development, IES, Petrofac Hugh Sanderson, Managing Director, Corporate Finance, FirstEnergy Capital llP Hurbinder Mudan, Head of Energy, Metals & Infrastructure Finance, Bank of America Merrill lynch Iain Manson, Senior Client Partner and Head, Energy (EMEA), Korn/Ferry International Ian McLelland, Director and Head, Oil & Gas, Edison Investment Research Jan Konstanty, Head, Upsteam M&A, Wintershall Janan Paskaran, Partner, Torys llP Jason Fox, Partner and Head, Energy and Infrastructure Finance, Herbert Smith John Hamilton, Managing Director, levine Capital Management Advisors John Pothecary, Managing Director - Europe, Africa and Middle East, RPS Energy Jon Clark, Director and Head, UK Oil & Gas Transactions, Ernst & Young Jonathan Verlander, Head, Oil & Gas (Europe), Commonwealth Bank of Australia Katya Zotova, Head, International Acquisitions and Divestments, Energy, Citi Keith Myers, Managing Partner, Richmond Energy Partners Kevin Price, Global Head, Reserve Based Finance, Societe Generale Corporate & Investment Banking Linda Beal, Partner, Energy & Utilities, PwC Malcolm Graham - Wood, Senior Advisor, vSA Capital Martin Copeland, Managing Director, Evercore Partners Mathew Kidwell, Parter, K&l Gates Meb Somani, Head, Oil and Gas Investments, Barclays Natural Resource Investments Neil Hartley, Managing Director, First Reserve Pascal Nicodeme, Head, Upstream Oil & Gas, Crdit Agricole Corporate & Investment Bank Peter Nicol, Director, Eco oil & Gas Rob Arnott, Chairman, Petroceltic International Simon Ashby-Rudd, Global Head, Oil & Gas, Standard Bank Stuart Joyner, Global Head, Oil & Gas Research, Investec Tal Lomnitzer, Portfolio Manager, Global Resources, First State Investments Terry Newendorp, Chairman and CEO, TaylorDeJongh Tim Chapman, Managing Director and Head, International Energy, RBC Capital Markets Xavier Venereau, Global Head, Upstream Oil & Gas, BNP Paribas Galib Virani, Associate Director, Afren
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EXECUTIVE Q&A I
FANTASTIC
FOUR
Herbert Smiths global energy team share their viewpoints on todays energy markets, emerging legal challenges, the current legal landscape and key steps companies must make to adapt successfully to the new norm of market uncertainty
For those that are unaware of the current Herbert Smith global energy team, can you share with us some insight on the size of the team and who carries what remit?
Stephen Murray Herbert Smith has always had a very strong energy focus and the energy team is the largest sector-based group in the firm, accounting for around 25% of the its turnover. There are more than 75 partners across our network. There is a large representation from our three core divisions corporate, finance and dispute resolution as well as specialists from other practice areas such as competition and regulation, environment, tax, construction, IT and IP, pensions and employment. Mark Newbery is the global head of the energy team and is also responsible for our power practice, while I am responsible for our oil and gas practice. There are several household names in the oil and gas industry, such as senior litigator Ted Greeno and finance partner Jason Fox who are both contributors to this discussion Stephane Brabant, who runs our Africa practice; Neil Brimson, who runs our Middle East practice; Anna Howell, who leads our Asia practice; and Paula Hodges, who heads our international arbitration practice. There are also a number of rising stars. However, it is very much a team effort. There is an incredible commitment to and enthusiasm for the sector from everyone involved in the group as well as our central management.
Youve recently announced a merger with Australian law firm Freehills. What was the ethos behind the deal and what benefits will the new entity bring to your energy and banking clients?
SM Freehills is a leading firm in energy, mining and banking in Australia, which, given its natural resources, is a key jurisdiction for the oil and gas industry in Asia-Pacific and globally. The focus of our merger is on providing an integrated service to clients across our 20 offices offering them a top-tier, end-to-end capability across a single global platform with a distinctive focus on industry sectors such as oil and gas. Both firms share a strong belief that over the next few years the market for premium legal services will become increasingly dominated by a small number of truly global firms, and this merger will therefore put us in a strong position to provide clients with the single global offering they increasingly demand. The merger will also give Herbert Smith Freehills the platform to become the leading global law firm across Asia-Pacific, a region likely to see continued substantial growth and to become an increasingly important part of the global legal services market.
There has been a lot of movement of energy lawyers between firms. Are energy-based legal services coming to saturation point and do you foresee further consolidation across law firms?
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EXECUTIVE Q&A I
Stephen Murray There is still a relatively small number of firms that have real strength and depth across the sector, which is something that we are strongly committed to
SM I dont think that the industry is anywhere near the point of saturation. The energy sector is huge, complex, highly regulated and never stands still. There is plenty of room for more competition. Despite the movement to which you refer, there is still a relatively small number of firms that have real strength and depth across the sector, which is something that we are strongly committed to. There is a certainly an appetite among firms on the margins of the sector to boost their energy teams. This always happens in a downturn. The energy sector is seen as a safe haven. The issues are whether they will have the staying power once the recovery takes hold and whether energy clients who are highly sophisticated purchasers of legal services will view them as having sufficient bench strength to be credible.
Weve witnessed a shake-up of the old guard in debt capital markets, with new players coming into play, particularly from Australia, Scandinavia and Africa, to fund oil and gas development. How are these banks and sponsors influencing the market and your clients decisions on securing debt capital? What are the possible legal ramifications of these new players?
What new challenges are your clients currently facing and seeking your advice on to avoid being left behind?
Jason Fox One of the key issues that has become more prevalent is the increased activity of debt transactions in very challenging emerging markets. Country knowledge has become an increasingly important factor for international legal counsel. Being in a position to advise on how best to mitigate legal, political and commercial risks in difficult emerging markets in which none of the major international law firms are present is one of the key things clients look for. What we have found, ironically, is that there is probably much more bad lending and poor structuring in the easier markets than there is in the more challenging ones where people take greater care in structuring and execution. We help our clients better protect themselves when lending in these difficult markets in a variety of ways, such as early-stage advice on the structuring of transactions, advising on investment treaties and advising on the selection of the best dispute resolution and enforcement procedures.
JF The oil and gas sector is probably the brightest area of the bank lending market at the moment. We are seeing an unprecedented number of deals in the independent sector, in particular reserves-based lending (RBL). Although some of the traditional leading players are more balance sheet constrained, they have been quite effective in recycling their capital by selling loans in the secondary market, freeing up their balance sheets for new transactions. We have also seen several new financial institutions not previously active in this sector or at least not previously active in the Europe, Middle East and Africa (EMEA) market moving in and other institutions who have been here for a while, perhaps more on the sidelines, increasing their activity. Debt in the exploration and production (E&P) sector is in rude health. Undoubtedly the smaller end of the independent sector is having a more difficult time in sourcing debt than the larger independents, but we have seen some novel or challenging deals successfully financed even at the smaller end of the sector. The strongest players are finding their debt raisings heavily oversubscribed. The arrival of these new players is adding liquidity and vibrancy to the market but not introducing new legal ramifications. >
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EXECUTIVE Q&A I
Weve also noticed recent consolidation across the North Sea and African O&G markets, to name two of examples. Do you believe well see more corporate-level transactions in the near future, a rise in asset-level transactions or, most promisingly, both?
< SM We are seeing an increased interest in both. There will always be plenty of M&A opportunities in an environment where there is intense competition for new resources, as well as severe constraints on raising capital in a capital intensive industry. The more challenging question is how many of the opportunities being investigated or brought to market will actually be realised, given the current economic climate.
Looking now at market drivers, are the energy security objectives of emerging-market national oil companies (NOCs) and governments still the biggest influence on current deal flow, or are other key market factors and participants now equally important, if not more so?
How quickly, in your opinions, are deals getting pushed through? What are the stalling points behind getting them over the line?
SM Good question, and not an easy one to answer. The energy security objectives of emerging-market NOCs are still a key influence on current deal flow, but there are many other market factors such as the restructuring by oil majors and the larger independents of their upstream portfolios in order to focus on high-margin assets and streamline operations, the need for independents to raise cash to fund capital investment, and opportunistic acquisitions by cash-rich companies.
SM The economic downturn makes buyers cautious. They are also conscious that raising capital in the current market is not easy. Recent events, such as the Macondo disaster, have made buyers much more focused on risk, which has created a greater emphasis on due diligence and on detailed negotiations around risk allocation issues, including material adverse change (MAC) clauses. Some stalling points are jurisdiction specific. For example, in the North Sea, the decommissioning liability regime means that many transactions are getting bogged down in negotiations over the provision of decommissioning security.
Resource nationalism reared its head again recently with YPF Repsol in Argentina. Can a company working in politically volatile country truly protect itself against often quick and uncompromising government actions? What steps, if any, can be taken to mitigate such risk?
Craig Tevendale There can never be absolute protection against resource nationalism. It will always be legally permissible for host states to expropriate assets on their sovereign territory provided that prompt, fair and adequate compensation is given to the investor, which is usually the point upon which the investor and the state disagree.
Jason Fox Oil and gas is probably the brightest area of the bank lending market at the moment. We are seeing an unprecedented number of deals in the independent sector
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EXECUTIVE Q&A I
Craig Tevendale We have seen more disputes work. The economic climate means some parties are less forgiving, while others simply do not have the means to perform their obligations fully
That said, there are certainly effective ways of mitigating investment risk, starting with proper, informal due diligence pre-investment. The investment should then be structured in a way which attracts the best treaty protection. The place of incorporation of a special-purpose vehicle (SPV), often driven by tax reasons, is sure to have ramifications for an investors future ability to rely upon investment treaties if something goes wrong. Finally, and at the risk of talking up the role of advisers, obtain specialist advice early in the event of potential disputes. It is easy to waive your right to rely upon potentially significant defences or remedies by decisions taken long before formal proceedings are underway. Ted Greeno The orthodox way of protecting an investment is to have a stabilisation clause in the host state agreement. Such clauses can take different forms, and some of them are more effective than others. An investors rights under a stabilisation clause can be enforced through the relevant dispute resolution mechanism, which is usually arbitration in a neutral country. If there is no stabilisation clause or if the stabilisation clause is not sufficiently robust, there could be the alternative of bringing an investor-state arbitration claim under a bilateral investment treaty, which is a treaty made between two sovereign states under which they agree not to expropriate the investment of entities based in the other state, to afford them fair and equitable treatment, not to discriminate against them and not to deny them justice in relation to their investment.
The reality is that many investors are reluctant to bring arbitration under stabilisation clauses or bilateral investment treaties because of concerns as to whether this would expose their investment to greater risk, or other investments of theirs to greater risk, in that country. If a host state is acting improperly, it is likely to be provoked by an arbitration claim into continuing to act improperly, or worse, in relation to that or other investments. When pushed too far, however, some companies will take the view that they should withdraw from a country and take their case to arbitration as a matter of principle, so as to demonstrate to other host states that they are willing to enforce their rights if pushed too far.
Normally in periods of financial uncertainly and cost cutting, we see a rise in the amount of disputes and arbitration as companies seek to protect their assets and their bottom lines. Have you noticed such an increase or is it still business as usual for your litigation teams in oil and gas?
CT Yes, we have seen more disputes work, both at the pre-action stage and in formal proceedings. The economic climate means that some parties are less forgiving, while others simply do not have the means to perform their obligations fully. In addition, the cost of materials and resources has impacted upon development budgets. We have also seen a lot of sanctions-related work, including more contentious declarations of force majeure. It has also been a busy time for price reopener disputes, so there has certainly been a lot of disputes activity across the board.
>
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EXECUTIVE Q&A I
Ted Greeno Changes in market circumstance, and in particular price volatility, are the main cause of an increase in disputes in the industry
< TG Changes in market circumstances, and in particular price volatility, are the main cause of an increase in disputes in the oil and gas industry. By its nature, the industry depends on a structure of long-term contracts. These are necessarily entered into against a given set of market conditions and assumptions and, over time, these conditions change and the assumptions become out of date in a way that wasnt anticipated when the contract was made. The resulting change in the economic balance between the parties leads to one of them having greater incentive to litigate or arbitrate disputes in order to protect value. Another consequence of rising oil prices in long-term contracts is resource nationalism, where states have negotiated contracts against assumptions as to future oil prices which turn out to be more favourable to the contractors than was anticipated. Oil price rises can also prompt parties to try to retrieve lost positions. Other types of dispute will tend to arise as the economic cycle changes. For example, when oil price rises trigger a wave of new exploration and development, disputes arising out of drilling, engineering and construction contracts inevitably follow there are a lot of these around at the moment.
SM What has always fascinated me about the industry is its unpredictability and its ingenuity and resilience in responding to change. A recent example is the shale oil and gas revolution in the US and I am very interested to see how that plays out globally, both in terms of its impact on the liquefied natural gas (LNG) market and the extent to which shale oil and gas becomes a major primary energy source in other countries. Im also excited about the possibility of other transformational technological innovations e.g. the talk about huge potential of methane hydrates. Interestingly, my newspaper this morning carries a story about an engineer who claims he can run a car on water. There is apparently much scepticism about this particular claim, but it shows that the industry is never short of big ideas.
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!)
CT A football and two nets. TG A piano, a sand wedge and a golf ball. I need the practice. JF A guitar, a cocktail shaker and some sun cream. SM Diving gear, iTunes and a mosquito net.
Leaving this interview on an optimistic note, what excites you most about the future oil and gas industry?
CT It is pleasing to see the development of new oil and gas jurisdictions in Africa.
Stephen Murray heads Herbert Smiths global oil and gas practice and has more than 20 years experience in the energy industry Jason Fox specialises in financing oil and gas companies. He has advised on more than 50 RBL transactions Ted Greeno is a senior litigation partner based in the London office Craig Tevendale is a partner in the international arbitration group.
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EXECUTIVE Q&A II
COMPETITIVE EDGE
Drake Lawhead talks to Brad Nichol, president and CEO of Canadian E&P company Edge Resources
Edge Resources is an AIM-listed oil and gas exploration, development and production company with a 100% focus on shallow, conventional, low-risk, low-cost formations in Alberta and West Saskatchewan, Canada. The companys strategy is to aggressively seek to add to its land and reserves base when the cost of such additions are extremely favourable. Edge is the controlling operator and majority working interest holder in all of its properties, with an average working interest of 92% across all its assets.
Of the hundreds of Canadian juniors, what sets Edge apart?
Congratulations on your AIM listing earlier in July, Brad. Why was it important or necessary for you to list in London what does it give your company?
I could talk for days about this but I will try to narrow it down to just the highlights. We have an incredible shareholder base. Those shareholders have been patient while we executed a countercyclical natural gas strategy while natural gas prices plummeted. The result being that weve built a massive asset that will offer immediate worldclass economic returns when gas prices recover. Also, that same shareholder base stepped up over a weekend and loaned us money on extraordinary terms so that we could acquire a 100% working interest in an amazing oil-focused property. Second, we have assembled a dedicated, talented, fully accountable team of experts of a quality more akin to a company many times our size, to manage the capital bestowed upon us to create value for our shareholders. Were currently producing about 800 boe/day and with this same team, we could easily be producing 10,000 boe/day without any significant increase in general and administrative expense (G&A). Last, we are a junior, small-cap, public company that has established a cornerstone capital partner who is willing and able to assist and participate in the rapid growth of the company. Just as operational and technical experts are critical to our success, having access to capital in our capital-intensive industry cannot be understated. Just take a look around our industry today and try to keep up with the small-cap companies that are throwing in the towel because they cant raise money to grow or even maintain the assets they currently have.
The AIM listing was completed for several reasons, not least of which was to support and provide better liquidity to our existing shareholder base, 50% of which are UK or European-based. Second, although were not actively looking to raise capital today, if we were, that capital is more readily available in the UK especially with our partner Henderson Global Investors influence. Thats critically important to me, as in todays market with a plethora of M&A opportunities coming on to the market and even more expected in the coming months we need to know we have that valuable and rare access to quick capital to pounce on a deal. This was the case with Primate, where we raised about $8m over a weekend to close the deal. Third, if we were to raise capital, our cost of and time to raise that capital is less in the UK than it would be in North America.
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EXECUTIVE Q&A II
This is where we are looking to step in and take full advantage of our technical, operational and capital team to create significant value for our shareholders. This is one of our competitive advantages that few others can boast about.
Are you able to compare the capital markets in London and Calgary/Toronto? Do you perceive a difference in investor sentiment, risk appetite, knowledge, or ease of access to capital with respects to Canadian E&P ventures?
By the way, our focus today is 100% on oil, not natural gas. We accumulated a wonderful natural gas asset that will have its day, but now the commodity of focus is oil and the superior economics and cashflows that it has to offer. Our corporate strategy has never wavered, however, no matter what commodity were focused on.
What are the challenges youve encountered in building an E&P firm from the ground up?
One of the things that I really like about my career is that I spent 10 years in the industry, and then left for four years as I gained valuable, differing perspectives from world-class experiences across a wide spectrum of industries. Then, when I returned to oil and gas, I returned with a very distinct view on the ingredients required for success, namely:
Capital today is scarce, at best. In Canada it has all but vanished. In London, it is difficult to find, as it is reserved for only the best of the best. I cant speak directly for Henderson, but they looked in depth at our team and our assets and took a large stake with the intention of investing further as we grow. Most investors in todays market are looking for liquidity and value. The AIM listing helps our existing and future shareholders with liquidity and we are determined to provide the value. I lived in the UK for almost six years and one of my takeaways was that the London markets generally have a more long-term, more comprehensive approach to oil and gas risks and investment, probably from years of dealing with several additional levels and types of risks to which Canadians are rarely exposed, for example geographic, political, security, foreign exchange, transportation and market risks, just to name a few. We started the company as a micro-cap junior with a countercyclical strategy we knew we werent going to get much support from the general capital markets that tend to follow the latest trends and not go against the grain. With 50% of our shareholders based in Europe, we have generally seen a longer-term view and more favourable response from their capital markets, rather than from our domestic investor base.
Partner with superstars. Geologists, engineers, geophysicists, operators, lawyers and accountants abound, but finding and signing the best of the best the top 10% of the top 10% was key. Assets are everywhere and undifferentiated and getting the right assets is important, but to maximise shareholder value, you need an awesome team to evaluate, design, fund and execute on those assets. This is a no-brainer for me its all about the team. >
London markets generally have a more long-term approach to oil and gas risks and investment, probably from years of dealing with risks to which Canadians are rarely exposed
Economist Peter Tertzakian recently wrote that Canadian natural gas producers are facing a Darwinian cleansing, where only the fittest producers with access to the best assets, technologies and markets are able to survive the cash flow famine. Do you agree, and how will that affect you as a natural gas producer?
Im a Tertzakian fan I often post links to his articles on my website and I think he nailed it on the head in that article. The industry is marred with sloppiness I think as a result of high profitability for an extended period of time. However, its an incredibly complex industry with many, many factors that we simply cannot control on a day-to-day basis. Cost is NOT one of these exogenous factors. Its one that we can control. We started this company with a focus on a particular commodity that was out of popular favour, and its price was falling as we purposely jumped in. That meant one thing we needed to keep our costs incredibly low in order to survive. And thats exactly what we did. We created this company from day one with a laser-like focus on low-cost leadership, and that remains true today as we focus on a different commodity: oil. But we wont let todays superior oil economics dull our sword. Not just cost, but value (value = revenue cost) is at the heart of most of our internal conversations. We dont ever take our eye off that ball.
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August 2012
EXECUTIVE Q&A II
A unique, entrepreneurial, flat structure is required to motivate, incentivise and retain those superstars. Superstars require freedom, not supervision; risk-taking, not status-quo; accountability not bureaucracy. Most importantly, true superstars insist on being surrounded by other superstars they do not allow themselves to play with B players. My favourite recruiting philosophy from a former employer: As hire As, Bs hire Cs. Establish trusted capital partnerships from day one. This is a capital intensive industry. The companies that succeed are the ones that can access the capital they need in downturns, not upturns. Anyone can raise capital when the markets are booming my measure of success is how well someone can raise money when the markets are terrible, like they are today. Those were my key considerations from the get-go. I would be lying if I said its been nothing but success from the start but I can say, with certainty, that the team, structure and partnerships we have today are better than any other E&P company Im aware of.
Our stated corporate strategy has always been to focus on shallow, vertical, and conventional plays in which we could acquire and operate and as close to a 100% working interest as possible, pursuing only those plays with the potential to become exceptionally large. With our capital partnerships, internal team of superstars and history of making two to three exceptional acquisitions per year, were eager to pounce on the best deals. So the questions that keep me awake at night are: Will I be able to continue to access and close these deals in a non-competitive manner as I have done in the past? And, since the best deals dont often come wrapped up neatly with beautiful wrapping paper and a nice bow, Will my team be able to continue to find the hidden value in assets that others have missed?
Where do you hope to be in five years time as a company? Whats the value proposition for a prospective AIM investor?
What are the biggest lessons youve learned specifically with Edge and in general, in your past jobs, with regards to leading a junior O&G firm?
The answer is simply a corollary to your previous question. However, I would say that the two biggest lessons for me were: to relentlessly seek the best partners; and I will always make mistakes but those experiences need to be beneficial, not wasted challenges to an ego. Even a mediocre partner or colleague can set you back and leave you stuck in the mud. Lessons can sometimes be painful, but they are also very informative. If people are careful not to let their egos get the best of them, they will see and learn from lessons every day. The best companies benefit from the education gleaned from their mistakes.
I get a real buzz out of passing along some of the lessons I have received. If someone with 20 years experience had come back to tell me how hard it was but theres light at the end of the tunnel, that would have made a big difference
Following our corporate strategy to the letter has brought us to a point today where were sitting on an asset base with exceptionally large reserves in place. We have the knowledge and ability to extract those reserves better than most and, therefore, just on our existing assets alone we can see a value-creation platform that extends for years and to hundreds of successful wells. As is the case with many juniors, they hope to be taken over by an intermediate or major after they have assembled a large asset base and proved the reserves to some degree. Were not completely different from them other than we have an acute understanding of the entire value potential and associated developmental plan for the assets we currently control. If someone came along and was willing to pay us that entire value, risk-free in todays dollars, we might find that interesting. Notwithstanding, our plan A is to employ the superstars, partnerships and assets we have to continually create shareholder value.
What are the three biggest threats to the Canadian oil industry that keep you awake at night, if any?
There are the usual industry-focused worries, such as: Will my wells produce as much as I expect? Have I managed and mitigated my risks appropriately? and Will commodity prices drop in the future? But the one thing that keeps me awake at night isnt a threat, but nervous excitement. Im excited about what I see playing out in the Canadian oil and gas industry over the next two to three years. Canadian capital is evacuating the illiquid, junior E&P companies for the large, somewhat repeatable, capital intense, resource plays that are wrapped up by the intermediates and majors. The larger players are focusing their efforts on these very expensive deep, horizontal, multi-stage-fracd, unconventional plays and are starting to divest their old-school, non-core conventional assets. This plays right into our hands.
Which other companies do you currently admire, and why?
Im a big fan of Peyto Exploration because it does things differently its not afraid of turning things on their head to create value. Darren Gee, its president and CEO is a University of Alberta mechanical engineering alumni, as am I. They are the undisputed low-cost leaders in the Canadian intermediate E&P space and that gets me excited. However, I also have to mention Aroway Energy. Chris Cooper at Aroway has done things very differently than how Ive done them and Im not afraid to say how great I think that is. He barely has a team instead he has an amazing joint-venture partnership with a group that brings the team, the expertise and the infrastructure. Chris brings the capital and the whole thing runs seamlessly. Aroway has created massive shareholder value in a very short period of time, starting with next to nothing. Thats why I agreed to sit on its board hopefully I can learn a thing or two!
Drillers & Dealers
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August 2012
EXECUTIVE Q&A II
When youre away from work, how do you enjoy spending your spare time?
Its difficult to imagine the concept of spare time but on the rare occasions I am able, I do enjoy in the simple pleasure of observing natures many complexities. When Im not around the office I like to be in the Rocky Mountains. Maybe Im a closet geological nerd its more about gawking at the breathtaking bends, folds and faults in the massive rocks and imagining how they were formed millions of years ago than it is about trying to replace one of my geological superstars they have NO worries about me robbing them of their positions! I do love to ski, water-ski and play golf but spare time isnt the same as it used to be when I was in my teens with no kids and a part-time bartending job at a cool club! I also get a real buzz out of passing along some of the lessons Ive been so lucky to have received in my relatively short career. I try to give some of my time to the University of Alberta mechanical engineering department. Its great to sit and chat with the kids, especially the ones that are filled with excitement albeit often trepidatious excitement about their futures. I remember barely passing some of those courses wondering if Id ever be able to do anything with my life if I ever managed to pass and get a degree. If I would have had someone with 20 years experience come back, swallow a bit of their pride and tell me how hard it was but that there is a light at the end of the tunnel, that would have made a big difference for me. Thats what I try to do. Selfishly, Im sure I get more out of it than they do!
School. I was surrounded by the smartest, most motivated, entrepreneurial, diverse set of superstars in the world from more than 60 nations. It was humbling and eye-opening and it is only possible to achieve that in London, despite what the recruiting departments of other business schools will tell you!
Edges sole focus is on shallow, conventional, low-risk, low-cost formations in Alberta and West Saskatchewan in Canada
What do you love most about London, Brad?
Having spent almost six years in the UK, theres a long list and I think its best described by what I miss most. I miss the things that are foreign to untraveled Canadians like deciding on a Friday afternoon to go and watch the running of the bulls in Pamplona, or walking down Oxford Street hearing 10 different languages being spoken, or playing frisbee in Regents Park knowing that youve found peace in the middle of one of the busiest cities in the world. I also miss the level of sophistication and professional excellence that can only be attracted by a city like London. Its a big pond filled with big fish a lot of superstars. I was lucky enough to have received an MBA in 2003 from the worlds best business school, London Business
Im sure youve had some awesome answers to this one and I am going to disappoint you for sure. My wife and I are not into stuff anyone who has seen the junker I drive knows that we enjoy intangible experiences more than we do tangible stuff . But, if I must if I was surrounded by water, I suppose I would love to have my ski and a boat, and a driver but a full set of fishing kit is probably much more practical. I think an endless supply of paper and pens would be handy to record all the thoughts I would have with all that spare time on my hands. Maybe, arrogantly, I would hope those thoughts would be found and used by someone someday probably my kids. Finally, Id follow in Tom Hanks footsteps and want one of the best Wilson volleyballs that a few coconuts could buy, just to keep me from going crazy!
Drillers & Dealers
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August 2012
EXECUTIVE Q&A III
MEET THE DON

RusPetros CEO Don Wolcott talks to Drake Lawhead
Don, for those who may not be familiar, can you describe what kind of company RusPetro is to a potential investor?
RusPetro is an independent oil and gas company we listed on the London Stock Exchange in January this year. All our assets are located in Russia, in Western Siberia in one large field consisting of three license blocks. TNK-BP, Gazpromneft and Lukoil have neighboring blocks with substantial reserves. We are an unusual play for the London market we are entirely focused on development and production. With more than 1.5 billion barrels of oil in our proved and probable reserves, we dont carry any exploration risk. But we place ourselves firmly in the UK E&P space we have a premium listing, are part of the FTSE 250 index and comply fully with the City Code of Corporate Governance. Our story is a production growth story. We have all the infrastructure in place for this, which is a great advantage in Russia. The federal, all-season highway runs through our field and we have our own metering point on the Transneft pipeline the national pipeline and we produce highquality oil up to 51 API, which offers us the potential upside in realised price. All this makes us pretty unique as an E&P stock on the LSE. At RusPetro, we are now able to use this experience and expertise to deliver production growth through better efficiency our aim is to increase recovery rates from 15% to 28% by introducing the latest drilling, water-flooding and fracturing techniques.
What are the main challenges for an independent E&P firm operating in Russia?
Challenges around operating in Russia exist, as anywhere in the world, particularly in our industry, but they are often exaggerated. Its all a question of how you address these challenges. Of course, some risks are outside of our control, such as political or regulatory changes that could affect E&P companies alongside RusPetro, and not just in Russia. But the government has recently expressed support for the industry and seems willing to encourage its growth. Currently, there are ongoing government discussions around Russias tax which should provide a boost to the economics of oil production in Russia. We are a fully independent business politically neutral, with no controlling shareholders so we feel pretty positive about operating in Russia. Its true that in the past, some E&P companies have suffered setbacks, due to delays, a lack of infrastructure or financial difficulties, as well as management teams that lacked control of their operations in the field. In RusPetros case, most of the above, which are within the companys control, do not apply as we have substantial experience operating in Russia with extensive geological knowledge of our fields. Our business is set up to eliminate these risks, with an experienced operational team who have a track record in Russia and a knowledge of how to apply the latest recovery techniques. We manage the field ourselves, which gives us control of operations Im in Siberia most of the time!
You worked for several years at Yukos. How has your experience there helped you now with the running of RusPetro? What key business lessons did you take from your previous role into the new business?
When I joined Yukos it was facing steeply declining production and was considering investing billions into drilling a very large number of wells to keep it going. Joe Mach also on RusPetros board and I were working for Schlumberger at that time and suggest an alternative approach. We believed that drilling more wells at great expense wasnt the right strategy. Instead, we convinced Yukos that they should enhance existing wells, and produce more efficiently. As a result, we managed to double production, significantly grow reserves and reduce lifting costs.
How significant are corporate governance, risk, and legal issues for you in Russia, and does that have an effect on investor sentiment or capital-raising ability?
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August 2012
EXECUTIVE Q&A III
For an LSE-listed company, we have a substantial proved and probable reserves base of more than 1.5 billion barrels. This has increased by 8% since August last year. These reserves are certified by an internationally recognised competent person, De Golyer and MacNaughton. Its a big field and a big enough reserve base to grow production significantly.. We will also continue to grow our proved reserves by increasing the recovery factor that is applied to those reserves and proving up our probable reserves.
Russia is still a young market, and the industry is currently dominated by the major Russian vertically integrated oil companies. But the independent E&P sector is growing and Im sure, with further incentives and support from the Russian government, it will continue to grow, hopefully encouraged by RusPetros sucess.
RusPetros assets are all in one large, well connected field in Western Siberia
Why do you think are there not more Western-based independent E&P firms operating in Russia, given its potential?
We are fully compliant with international corporate governance standards and are committed to full disclosure. We are financially and politically independent, which is very important to us and our investors. Corporate governance is at the heart of our business we fully comply with the City Code of Corporate Governance. Clearly, the political and regulatory risk is a factor in any market in which a company operates. To date, we have had no serious issues to deal with and we are able to safely navigate the environment thanks to our experience and knowledge. We have no controlling shareholders and a competent board. In addition, the Russian government has placed a strong emphasis on reducing public sector corruption and intervention. In terms of capital raising ability, we were the first IPO on LSE this year, accessing a premium listing and entering the FTSE 250 index. This speaks for itself, especially in this environment.
Our aim is to be one of Russias leading independent low-cost oil and gas producers. We want to be recognised as a market leader which is both operationally successful and an attractive stock. Seeing the full development of our proved and probable reserve base is a long-term project, we will likely have grown our production substantially by then!
What do you hope RusPetro will look like in five to 10 years?
We will be announcing our half-year results on 29 August, which will be the next major announcement to the market. We are on track to achieve our target 10,400 bpd exit rate for 2012 and have made strong progress since the beginning of this year in terms of development of infrastructure, production and drilling.
Whats the next piece of news to look out for from RusPetro?
Which other companies do you admire currently, and can you explain why?
Apache they have an aggressive management approach, focused on maximising production and keeping costs low.
I have a home in the Wrangell-St. Elias National Park in Alaska. I spend time there when I can.
I read that RusPetros 2P reserves are greater than the total combined reserves of all other public exploration and production companies in Russia. Does that mean RusPetro is a ten-bagger?
A knife, a rope, a canteen.
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August 2012
EXECUTIVE Q&A IV
Jean-Claude Perdigues, managing director of GDF Suez E&P UK, talks to Drake Lawhead
NORTHERN STARS
There are still plenty of opportunities that can benefit from existing and new infrastructure, provided that the right incentives are in place for new investments. There will be challenges with high pressure/high temperature (HPHT), smaller finds or fields requiring proper access to existing infrastructure but these all bring opportunities for GDF SUEZ. There is also a requirement to focus on having access to, and attracting, the right skills pool.
Jean-Claude, whats been taking up your time in the last six to 12 months what have you been working on?
It has been an exciting time for us as we make great strides with our development programme. Much of this activity has been focused around our Cygnus and Juliet fields. Juliet in the southern area of the North Sea has received project sanction, which is a significant milestone. It incorporates new and existing infrastructure and plans are well advanced to deliver first gas by the end of 2013. The development is in line with our strategy to increase our reserves and production through organic growth in our core regions and peak production is expected to reach 80 mmscfd. We are also progressing with Cygnus, which is an extremely significant project both for the company and the UK gas industry, with estimated reserves of 720 billion cubic feet. It is the largest gas discovery in the southern gas basin in the last 25 years and if sanction happens in the near future, it would meet about 5% of total UK gas demand in 2016. It will produce enough gas at plateau to satisfy the supply requirements of 1.4 million households annually in the UK and up to 4,000 direct and indirect jobs will be created at the peak of construction and around 120 offshore operational jobs thereafter. However, the project has got its challenges, as costs have been increasing throughout the industry and Cygnus is a large, shallow-water field that requires multiple platforms and wells. As well as these two flagship projects, we have also been focusing on other UK operated projects, such as Jacqui in the Central North Sea, where we have appraisal drilling being carried out this year. Orca in the Southern North Sea is a UK/Netherlands cross-border gas field, which is expected to be on stream in 2014.
Has recent acquisition activity, such as Centricas large acquisition from ConocoPhilips and the sale of Agora and Nautical to Cairn influenced how you view BD opportunities in the region? Are there good deals to be done?
Recent activity demonstrates that there are good deals to be done. One advantage of the North Sea is that it is a buoyant market for asset activity. We are actively looking at opportunities but will continue to be selective.
Decommissioning in the North Sea has always been a factor that has waylaid some long-term investment in the region. How much of a factor is it in your future investment plans? Does this remain the biggest deal-breaker in todays marketplace?
We welcome the governments budget announcement this year, as certainty in decommissioning is an important factor for investment. The main prize, however, would be to extend the lifetime of existing infrastructure. This would require more efficient commercial access as well as the right incentives to invest both in greenfield and brownfield projects. We would also support a more dynamic policy to incentivise companies to explore more, as the money spent in exploration today paves the way for mid-term and long-term activities and revenues that will benefit both companies and UK plc.
Most discussions about the North Sea inevitably include a question about how much longer E&P has left to run there. What are your longer-term plans in the North Sea and what are your thoughts on its ability to yield future significant finds?
We firmly believe in the potential of the UK North Sea and have made a strong commitment to try and extract more reserves as there is still a lot to achieve. In the Southern North Sea, we have our major operated projects and believe in the potential of this mature area. For example, Cygnus as a possible new hub could unlock more potential and currently stranded resources. In the Central North Sea, we have a high-profile portfolio of exploration prospects and discoveries. We are also targeting high impact gas plays West of Shetland.
We are actively participating in the industrys efforts, especially through our involvement in Oil and Gas UK and workgroups with the authorities, to further improve the competitiveness of UKCS (continental shelf ) as a place to invest in E&P.
Most of GDF SUEZ E&Ps operations are in the UK, Norway, Germany and the Netherlands, but you are in some more exotic places, too Caspian, West Africa, Indonesia, for example. Can you explain a bit more about your strategy there and how important these non-core areas are to GDF SUEZs growth?
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August 2012
EXECUTIVE Q&A IV
Left: Jean-Claude Perdigues Right: UK Energy and Climate Change secretary Ed Davey with Jean-Marie Dauger, executive vice-president, GDF SUEZ
GDF SUEZ has a geographically balanced oil and gas reserves and production capacity. Currently most of our production comes from European affiliates, but at the same time GDF SUEZ is also developing activities in areas with high potential such as North Africa, the Middle East, the Caspian Sea and Asia-Pacific region. As part of a large international group, we are also keen, whenever this is adding value, to develop integrated projects, for example with our colleagues from LNG and International Power.
such as technical skill set or market access. Its also important that there is a shared working culture and business objectives. As an E&P company that is part of one of the worldwide leaders in energy and environment, we put safety, the health of our people and protection of the environment first. We are focused on delivering short- and long-term value to our shareholders and to the wider group of stakeholders, especially through our ability to deliver projects on time, quality and budget. We put a lot of emphasis on human resources as a core asset of the company through developing a pipeline of exciting projects, we want to attract and retain the best teams and offer career development opportunities.
What are the most exciting frontier gas plays in the world?
There are a lot of exciting frontier gas plays but the most exciting for an explorer may still be the next to come! We are continually keeping a close watch on new frontier regions and have already taken action to enter some of those, where we think we can add value.
What are the main obstacles for monetising those plays and what needs to be done to overcome them?
We firmly believe in the North Sea. For example, Cygnus as a possible new hub could unlock more potential and currently stranded resources
Which other companies do you admire currently, and can you explain why?
Theres no denying the success of Google. A global company that has really been able to tackle new challenges, demonstrate the best in innovation, keep ahead of its competitors and instil admirable brand loyalty.
The big issue is around risk management. By their nature, attractive plays tend to be deeper or harsher, which automatically means that there will be more technical challenges that the industry needs to tackle, while applying the highest health, safety and environment standards. It is thus important to build up the right partnerships to share risks and gather relevant expertise and that the right regulatory, economic and financial framework will be in place to ensure the long term viability of those projects.
I enjoy spending time with my family, I have three grown-up children and its great when we all get together. I also love to travel and Im passionate about music and theatre.
For those companies interested in working with GDF SUEZ E&P UK, what partnership or joint venture opportunities are currently emerging or opening up in the near future?
Im working on the assumption that Id have a CD and DVD player, so would say the complete works of Verdi and of Orson Welles, as well as La Comdie Humaine by French author Honor de Balzac.
We are always open to working with the right partners, as the operator or as a stakeholder, as long as both parties bring something to the table
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August 2012
EXECUTIVE Q&A V
Ross Campbell talks to Peter Veenhof, managing director of Dyas, about the Dutch companys joint ventures
NETHER
For those of our readers who might not know about Dyas, Peter, can you share with us briefly some information about your company?
Dyas is an active partner, as non-operator, in oil and gas exploration, development and production joint ventures with most assets in the UK and Dutch North Sea. We are owned by SHV, a multinational corporation and the largest privately owned company in the Netherlands.
BETTER
Our non-operating investment model has its origin almost 50 years ago. Dyas started partnering in Dutch gas exploration in 1963 because, at that time, gas from the giant Groningen field started to replace the coal supplied and sold by our shareholder for domestic use since 1896. The formula has worked well since and family owned companies often have a long-term view. No particular reasons have arisen to change this strategy.
With a small team we manage a portfolio with developed reserves well above 60 million boe. Daily production in the UK and Netherlands is in the 20,000-25,000 boed range, split 75%/25% between oil and gas. The Dyas strategy is to grow its reserves base through active participation in the joint ventures that were in, as well as acquire new assets through negotiated deals and auctions, preferably in the pre-development project stage. Dyas is opportunistic towards other business opportunities, and we recognise that we have to diversify our reserves base outside the North Sea.
Your equity investments range from between 2% and 50%. Is there a preferred equity stake that you are comfortable with and like to secure?
That really depends on the quality of the asset and build-up of our portfolio. With our current portfolio, we prefer interests to be in the 10%-30% range, depending on the risk and size of in the investment. We like our portfolio to have some degree of internal hedging, which means that subsurface risk as well as the dependency on a single operator, country or commodity should ideally be mitigating overall portfolio risk. Of course, commodity prices and currency risks remain important factors outside our control. We also realise that, as non-operating investors, we cant always get what we ideally want.
Your strategy on being an active partner but non-operator has proven very successful. Why did you opt for this strategy, what was and still is the thinking behind this decision?
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August 2012
EXECUTIVE Q&A V
For us that is a key point. Of course technical capability and financial robustness are important. But again, I emphasise that an oil and gas investment always boils down to something in the ground with a bunch of people on top of it. Dyas, staffed with seasoned E&P professionals with 20-plus years operating experience each, shares the risk developing the something in the ground. However, the key to unlocking value is often in the personal relationship, where mutual core values of trust, integrity and transparency play a dominant role.
The key to unlocking value is often in the personal relationship, where mutual core values of trust, integrity and transparency play a dominant role
Looking at the North Sea and the Netherlands, how do you view the current investment landscape in these regions? Is there enough opportunity still around? Are you actively looking for more opportunities here and, if so, what are you looking for in new prospects?
Relative to the scale of Dyas, the North Sea continues to offer sufficient opportunities for the near future. However, we are actively looking for diversification outside the North Sea on an opportunistic basis.
Were now seeing, in the wake of global and financial uncertainty, a lot of public companies struggle with share price volatility and market confidence. What are the benefits of being a privately owned company and do you ever see that changing?
The list of companies you partner with is very impressive. Majors such as Chevron and Total, national energy companies like TAQA and independents like Nexen and Ithaca an enviable list indeed. Is there a preferred type of partner in terms of size and structure?
We strive to have a variety of operators ranging from big to small. The key criteria we look for, apart from the quality of the asset, is financial robustness, technical capability and project drive of the operator. At the end of the day it is really down to people, so we also look at the track record of the individuals involved. We spend a lot of time building an active, trusting relationship with the people involved because we tend to invest in the pre-development stage, i.e. the resource has been found but needs to be developed. Our industry is more and more constrained by non-availability of key people that stand out from the crowd. Hence this aspect receives more attention than before.
A privately owned and well-funded company such as Dyas is much less dependent on the day-to-day ups and down in the market and can continue to take a long-term view. For example, during the 2008/2009 credit crunch, Dyas could undertake significant acquisitions of assets from Oranje-Nassau and Ithaca Energy. When oil prices climbed to their recent relatively stable level, we divested a number of assets that were better placed in other hands. We seek to invest again in the years to come.
You have worked for companies large, medium and small. What other oil and gas companies public and private do you admire most and why?
Without mentioning any of our operators, partners or competitors, I admire companies the same goes for people who actually do what they say. Thats difficult enough in our industry.
What interesting news and developments will we see coming from Dyas in 2012, what should our readers be looking out for?
We do not often sound our trumpet before us because we are privately owned. But I would say, after a period of portfolio realignment, we should see Dyas making fresh investments again.
Successful and dynamic partnerships are key to unlocking value in our industry. Is there a proven formula for making joint ventures work effectively for all parties concerned? Reflecting on the good, the bad and the ugly, what lessons have you learned that you would pass on to others?
Finally Peter, the question we ask all executives, a little off key but what three luxury items would you take to a desert island?
I guess I also cannot take my wife to whom Ive been married 27 years, she would turn the island into a place where one would not want to leave. I would take a supply of cigars, the New Testament in the translation of William Tyndale and a picture of my wife and five children. Boring, isnt it?
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August 2012
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EXPERTS INSIGHT
John Skoulding SJ Berwin
Capital gains tax the new resource nationalism?
he traditional method by which governments take advantage of the natural resource exploration and production activities carried out by international companies in their region is both to charge a licence fee for the right to explore and produce within a particular area, and to collect royalties, corporate taxes or customs duties from those companies based on the amount produced. However, a growing trend has emerged whereby governments in natural resource-rich countries have another potential weapon in an effort to capture revenue. Many are now seeking to impose a capital gains tax on profits realised by international (non-resident) companies from non-resident or overseas transactions, where the value is derived from assets based within their jurisdiction other than real estate, which has traditionally been captured under international double tax treaties, many being based on Article 13(1) of the Organisation for Economic Co-operation and Development (OECD) Model Treaty. Mozambique is one such government in the news of late as seeking to implement these changes.
By way of contrast, in February Mozambique received nearly A$72m (46m) in capital gains tax from the Australian Talbot Group, following its divestiture of its shares in Minas de Revubo, the Mozambican coal exploration company. This amount represented a rate of 40% capital gains tax on the amount realised by the Talbot Group. The Cove sale is now proceeding, although initially it was not clear who the buyer would be. Royal Dutch Shell initially beat off competition from Thai company PTT Exploration and Production by increasing its $1.8bn offer to include a promise to pay Coves capital gains tax, stating that this additional liability would add a further $200m to the bill for the acquisition, a significant sum that took the total price to be paid for Cove to approximately $2bn. PTT is now the preferred bidder as a result of its higher offer of $1.9bn plus a similar commitment to paying the resulting capital gains tax. Shell is effectively now out of the running, having not increased its bid in time. The capital gains tax regime must be distinguished from the corporate tax and royalties regimes. Bias announcement on capital gains tax reinforces her pledge in November 2011 that Mozambique would not be following in the footsteps of Zambia and Ghana, who raised royalties and corporate taxes respectively on mining companies last year. This was confirmed again in February 2012, when she stated that the raft of new mining laws being introduced will relate solely to operational efficiencies and the imposition of rules on energy companies requiring them to develop local communities where mines are based.
Mozambique: the Cove Energy takeover
There has been intense pressure on the Mozambican state to increase its portion of any revenues achieved from natural resources within the territory, particularly in light of the recent failure of the state to collect any taxes from the sale of Riversdale Mining to Rio Tinto for $3.9bn. This pressure presumably led to minerals minister Esperanca Bias announcing in March this year that Mozambique plans to impose capital gains tax on the proposed public takeover of Cove Energy, the UK-listed oil and gas exploration and production company with a 8.5% stake in an large offshore gas field in the Rovuma basin. This will involve the creation of a new law that imposes capital gains tax on the sale of non-Mozambican companies who have assets within the region. It had originally been expected that Cove, as a foreign company, would avoid having to pay the tax as it was not selling the Mozambican assets direct.
CREDIT: FORTBRIDGE
Following Bias announcement, there was a dip in Coves share price amid uncertainties over the level of tax to be applied. This recovered somewhat on 10 April, when the government confirmed that the effective rate of tax would be 12.8%, far less than had been anticipated.
Mozambiques minerals minister, Esperanca Bias, has announced new capital gains tax plans following takeover of Cove Energy
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Her rationale for this is that existing taxation rates are already set at a level similar to other African nations and because exploration and production activity is inherently risky, it would not be just to increase royalties or corporate taxes further. The implication is that Bias and the Mozambican government are aware of the need to ensure the country remains an attractive prospect for foreign investment and this clear commitment on royalties should give investors some comfort on the costs of doing business in Mozambique. This is a positive step, since the country is benefiting from recent discoveries of large gas fields offshore and a coking coal mine in the Tete province.
The experiences in Uganda puts into sharp focus the necessity of communication between a host government and inwardly investing companies to avoid lengthy legal battles post completion
Heritage, on the other hand, is arguing that the payment made to the government was a political payment rather than a tax and that Tullow should bear the consequences of its decision to complete the purchase from Heritage, prior to receiving final government sign-off of the deal. There is now also a further dispute in the Ugandan Tax Appeals Tribunal between Tullow and the URA over the amount of capital gains tax to be paid by Tullow in respect of its farm down of its interests to the Chinese CNOOC and Total. In this case, Tullow, while not challenging the principle that capital gains tax is payable on the transaction, is challenging the amount to be paid. The experiences of these companies in Uganda has put into sharp focus the necessity of communication between the host government and inwardly investing companies before agreeing such deals to avoid lengthy legal battles post completion.
Uganda: disputes between Heritage, Tullow and Uganda Revenue Authority
In respect of the Cove takeover, the Mozambican government took a clear stance on what they expected in terms of capital gains taxation before signing the deal. By contrast, there was no such clarity in relation to the raft of ongoing capital gains tax disputes between Heritage Oil, Tullow Oil and the Uganda Revenue Authority (URA). The first of these disputes involves Heritages contention that it is not liable to pay any capital gains tax on its sale of Ugandan oil fields to Tullow for $1.45bn because the transaction was not executed in Uganda. The Ugandan Tax Tribunal disagreed, stating that it was the location of the assets that formed the subject matter of the sale that was the pertinent issue, rather than the jurisdiction in which the sale took place, and ordered Heritage to pay the $404m bill plus the governments costs. This dispute is now subject to arbitration in London and Heritage has paid $121m to the Ugandan government by way of a deposit pending resolution of the case. The second dispute, although related to the first, is a little less straightforward. Following the sale of Heritages Ugandan assets to Tullow in 2010, Tullow was left in the position of having paid $1.45bn for assets it could not use without the governments approval. The Ugandan government, in a surprising move, then demanded Tullow, concurrent to the arbitration proceedings between URA and Heritage, pay the balance of $313m due on the earlier sale by Heritage. Tullow, desperate to obtain the necessary approval and the rights under production sharing agreements, paid up. It is now embroiled in a legal wrangle with Heritage, after instituting proceedings in the commercial court in London to recover this $313m. Its claim is based on an indemnity clause in the sale documents, pursuant to which Heritage is obliged to reimburse it for any tax liabilities arising from the sale.
India: proposed retrospective changes to capital gains tax assessment
Perhaps the most concerning instance of capital gains tax as a new means of resource nationalism is Indias recent response to the outcome of the high profile Vodafone case. In January this year the Indian Supreme Court gave its ruling on the case confirming that Vodafone was not liable for $2.9bn purportedly owed to the Indian Revenue in respect of its 2007 purchase of interests in Cayman-registered Hutchison Essar. The Indian Revenue had argued that, despite neither the buyer nor seller being registered in India and the transaction taking place outside India, the fact that Hutchison held assets within India gave it jurisdiction to tax the gain. Had the Indian Revenue won on this point it would have meant Vodafone, as the buyer, paying the tax under the withholding provisions. India is now amending its tax code, giving the government the retrospective power to tax transactions involving significant Indian assets that took place as far back 1962, as announced in the budget speech on 16 March. >
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In January the Indian Supreme Court ruled that Vodafone was not liable for $2.9bn purportedly owed to the Indian Revenue from its 2007 purchase of interests in Caymanregistered Hutchison Essar
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Unsurprisingly, these plans have resulted in much criticism internationally. The Financial Times reported in April that seven business associations, led by the US Business Round Table and representing the views of businesses in the UK, US, Canada, Japan and Hong Kong, had written an open letter to Indian prime minister Manmohan Singh to express their concern over the 2012 Finance Bill. They warned Singh that such retrospective changes would lead to international investors shunning India and stated that some of their member companies have already begun re-evaluating their investments in India as a result of the uncertainty caused by the proposed new rules. Faced with such opposition the Indian government has pushed back the implementation of these measures for a year. President Pranab Mukherjee has attempted to allay investor fears by confirming that taxes would not be applied retrospectively to deals where tax assessment was properly carried out and that the new laws will not affect the operation of any double taxation avoidance agreements already in place. However, the Finance Bill has been passed and with it comes the introduction of a general anti-avoidance rule effective from 1 April 2013 but with retrospective effect starting 1 April 2012. This may have far-reaching repercussions for international structures with entities that have no substantial commercial purpose. Although guidance is awaited on the meaning of this phrase there is real concern about offshore structures, for example, involving Mauritius intermediate holding companies. This illustrates that the extension of the capital gains tax rules is not the only weapon governments have to increase their tax revenues. Such structures should be reviewed now with the benefit of detailed advice.
Conclusion
Perhaps the lesson to be learned from these transactions is that international companies need to be constantly aware of the possibility of change within the fiscal regimes of the countries in which they operate, particularly in respect of emerging market economies where the legal regime is often left behind the fast paced business environment. Bidders are increasingly required to include potential tax costs in their offer prices. Governments also need to think carefully about the package they are offering for foreign direct investors into their country. The central issue here is one of clarity. International investors need to be able to estimate what the cost of doing business will be in their chosen investment jurisdiction and this inevitably includes determinations as to potential tax liabilities on exit. If there is too much uncertainty surrounding this point they may well decide that the risk of doing business in the country is too great and take their desperately needed foreign direct investment elsewhere. Although some countries such as Mozambique seem to be taking care to mitigate the effects of the new developments in capital gains taxation by applying relatively low rates and engaging in dialogue with investors, others appear to be pushing ahead with reforms with little concern for the potential negative impact they might have on future investment. It will be interesting to see how these differing attitudes affect cross-border structures and the global spread of investment activity over the next few years. John Skoulding is a tax partner at SJ Berwin
CREDIT:S: GSURYA, TWOTEC9S, JORR
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Dominic Schofield Korn/Ferry International
Corporate governance a rising tide
ypically the subject of corporate governance has a soporific effect on most executives and entrepreneurs. I can already hear some of you sighing uggh. But bear with me. I am by no means a governance-wallah, more a practitioner in the field of board recruitment and consultancy. I see, close up, the growing governance pressures and demands facing companies. If the recent so-called Shareholder Spring is anything to go by, these pressures and demands will, if anything, intensify. The best companies should seek to take advantage of these trends and this article gives some pointers as to how.
wrong, the levels of corporate governance and scrutiny will only increase. The capital-intensive nature of the oil and gas sector, the health, safety and ecological implications of upstream operations and the geographies in which the sector increasingly operates, all point towards stronger corporate governance pressures from regulators and investors alike. In the mining sector, investor concerns surrounding corporate governance of FTSE100-listed Kazakh miner Eurasian Natural Resources Corporation (despite robust financial performance) has led to its share price and market value being heavily discounted. The wildly over optimistic (and ultimately inaccurate) predictions of oil and gas finds made by Regal Petroleum in 2004-06 have had the effect of increasing investor scrutiny of pronouncements and the people running other oil and gas and natural resources companies listed on AIM. Across all listing exchanges, reputations of board members matter and will influence the views and judgements of investors.
20 years on from Cadbury
Who remembers Polly Peck and Asil Nadir? Most UK-based executives will. It was the corporate scandal that shook UK Plc in the early 1990s, and led to the appointment of Sir Adrian Cadbury by the then Major Government to review Britains corporate governance. The result was the adoption of the Combined Code firm guidelines on good corporate governance, which UK-listed companies were expected to comply with or explain why not. The previous culture of gentlemens rules was deemed no longer fit for purpose and was replaced by a regulatory framework that has been built upon and adapted further over the subsequent 20 years. Since 1992, there have been a further 14 reviews in the UK, which have led to the tightening and deepening of governance guidelines. In the US and Continental Europe, similar trends and patterns can be seen. Most recently in 2010, the UKs code of governance was amended for the fourth time. This new combined code, a new stewardship code (also published by the governance authorities in 2010 to guide institutional investors on better stewardship of their investments) and more recently the EUs Green Paper on corporate governance are just three takes on best practice recommendations for corporate governance. These changes have come partly in answer to corporate scandals and corporate failures such as Enron and Madoff, Marconi and Independent Insurance and, latterly, in response to the global financial crisis. Executives outside the world of financial services, particularly in the energy sector, may argue that this increased level of regulatory intervention has not necessarily led to a great deal of practical improvement or increased value to shareholders. Whether right or
Shareholders flex their muscles
In the first half of this year in the UK, we have witnessed an increased level of scrutiny on company boardrooms, not least in the complex and sensitive area of executive pay and its links to company performance. The so-called Shareholder Spring
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The so-called Shareholder Spring demonstrated the increased focus and growing influence of investors on the accountability and responsibility of the board
in May caused the departure of three CEOs: at insurance giant Aviva, pharmaceutical major Astra Zeneca and troubled media group Trinity Mirror. This demonstrated the increased focus and growing influence of investors on the accountability and responsibility of the board in relation to the performance and, in some cases, corporate behaviour of the companies in their charge. We are seeing an increasing trend for investors, such as pension funds and fund management groups, asking for more evidence of good corporate governance from investee companies and it is not just about pay and performance. For instance, in December 2011 Legal & General Investment Management (one of Europes largest institutional investors) announced a policy of investing in companies with a proven approach to diversity in the boardroom driven by a belief that greater diversity means better decisions and a better-run company.
Avivas Andrew Moss, Astra Zenecas David Brennan and Trinity Mirrors Sly Bailey all bowed to shareholder pressure
For UK and European listed boards, gender diversity will continue to attract attention as boards attempt to achieve targets set by Lord Davies in his review of February 2011 (or in the case of Norwegian, French, Spanish or Italian companies mandatory quotas set by national parliaments). Boards and investors need to approach the subject of diversity with thought and care and where they are not legally obliged by quotas be sure that greater diversity can add value to the business. Boards, particularly in the energy sector, need to take a broader approach to diversity, going beyond gender to look at geographical and cultural diversity, and be sure that around the board table they have the range of skills, experience and perspective in order to avoid group think, to steward the company effectively and to reassure the companys investors that their investments are in safe hands. The next half of this year could see many boards conducting reviews of their risk management processes. The recent woes of News International, for example, may well lead to many more companies extending their risk management insight to include corporate culture and reputation, for example, rather than just on operational concerns. Risk management has always been a high priority in the energy sector, but post-Macondo will increase further. The Bribery Act (like the Foreign Corrupt Standards Act in the US) will make boards of companies with operations and activities in places such as Africa, Russia and the former Soviet states and Asia, more concerned and cautious that at every level the company is operating to high standards of probity. This is now very much a boardroom issue. Do companies have effective monitoring systems in place? Do they have the cultures in which a potential whistleblower feels confident to reveal malpractice at the coalface to senior management or the board? These issues and more will be firmly on the checklists of effective board members. If they are not, and error, accident or malpractice is exposed externally, then the reputation of the board and its stewardship of the company will be damaged severely. Whatever the specific issues which may vary by sector and scale of business it is clear that corporate governance is higher on the agenda for all stakeholders today than it was 20 years ago. This needs to be reflected by the boardrooms of todays companies. PLCs large and small must adopt a more progressive approach to corporate governance, achieving the right balance and culture in the boardroom and improving risk >
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CREDITS: WORLD ECONOMIC FORUM, AOP
EXPERTS INSIGHT
CREDIT: RAPPAPORTCENTER
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management as the centrepiece of good corporate governance. Companies coming to market via IPO (initial public offerings) will be scrutinised closely for their commitment to, and standards of, corporate governance and value and interest are likely to be increased if they are deemed to be progressive. Expect investors of all stripes to become more active. Companies need to be not only well-governed and operate at the highest standards of corporate governance, but they need to make it a clear and public virtue that that is what they do.
Eight things company boards can do to ensure good governance
A functional board is one that engages, debates and decides in a constructive, amicable and engaging manner and where overly dominant characters are kept in check
and distinctiveness of the company and is a living statement about what the company stands for and how it wishes to be known to all its stakeholders. 5 Ensure that board and senior executive succession are regular board agenda items. Effective succession management is regarded as best practice by investors, regulators and top business schools alike. Be seen to adopt best practice in this crucial area. 6 Annually, the chairman of the board or company should review the performance of individual board members as well as seek candid feedback on his or her own performance. 7 Be open to diversity gender, geographic and professional. Boards with similar social and career backgrounds may leave themselves open to the charge of groupthink. 8 Do not have all board meetings at the company headquarters where possible consider rotating to different geographies or operations of the company. Dominic Schofield is senior client partner at Korn/Ferry International
1 Take time to select and recruit prospective company directors. Ensure that not only do they bring varied and specific competencies finance, technical expertise or geographic insight, for example but that their behaviours, characters and values are taken into account and will chime and work well with existing or other new directors being recruited. A functional board is one that engages, debates and decides in a constructive, amicable and engaging manner and where overly dominant characters are kept in check. It is one where directors enjoy their role and the time spent on board activities of the company. 2 Assemble a robust and rigorous induction programme for new directors that gives them access to senior executive management and enables them to get a good feel for the operations of the company. 3 Enable and facilitate contact and relations between the non-executives and executive management, often with a mentoring objective. 4 Consider developing a board mandate as suggested by corporate governance thinktank Tomorrows Company1, which captures the essence of the character
1 Tomorrows Corporate Governance, Tomorrows Company, www.tomorrowscorporategovernance.com
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EXPERTS INSIGHT
John Bray Control Risks
Facing up to extortion in international bribery
ribery in international business typically works in two ways. It may be the company who initiates the bribe in order to win business, or it may be a corrupt official who demands payment against a threat to inflict some kind of harm. In the first case, companies have a choice: they do not need to do business in that way, and in fact the law forbids them to do so. In the second case, there are no pain-free solutions. Potential scenarios, which are all too common in upstream oil markets, include: Scenario A A tax official finds that company A has failed to pay its dues three years running. He has the power to shut down the business right now. Of course there is another way out and, in return for a private consultancy fee he might be able to help. Scenario B In two weeks time company B is launching a new branch office. Guests have been invited. But now an official says the building does not meet fire safety standards. As he explains: It will take six months to sort things out. Unless youd like to come to a special arrangement... Scenario C A manager working for company C has been imprisoned on trumped-up charges. A local adviser says that his colleagues have to pay a bribe to get him out: Thats the way that things work in this country. What should executives do in these situations? There are no formulaic answers but there are common principles. It is all the more important to apply them at a time when laws such as the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act are being enforced more tightly than ever. Here Control Risks draws on years of experience to share four key lessons.
2 Assess the nature of the threat
If the company faces a sustained threat, it needs to make the best use of whatever time is available to assess the situation and draw up an effective counterstrategy. These are the questions it needs to ask: Who is making the demand? It is important to judge whether the official is acting on his own, or as part of a parallel hierarchy. If the person demanding is a lone opportunist, it may be easy to counter him by appealing to a more senior officer. On what basis? The demand for back taxes faced by company A may have some legal basis. If the company has done everything correctly, then the demand has no power. If it has infringed some regulation, it needs to take steps to put things right. Who are your friends? Think broadly rather than narrowly about the companys friends, as well as its potential enemies. If the company is a significant employer, or provides essential services, it may be able draw on the formal or informal support of wellconnected allies. In one case known to Control Risks, a strategically placed services company was able to deflect a bribery demand by pointing out that an entire petroleum industry would break down if it had to leave the country. Diplomatic assistance might be useful, as long as it is applied sparingly. Officials often resent being put under pressure by foreign governments.
3 Develop a resistance strategy
1 Play for time if you can
An effective strategy has to be specific to each situation, and may include one or a combination of the following approaches: Seek expert advice Expert advice could be engaging the services of accountants and lawyers who in the case of tax demands or breaches of safety regulations can explain whether the company really has broken the rules, and what options are open to it. As a businessman based in an oil-producing country in West Africa explains, lawyers can also play a key role in standing up to police extortion: Police extortion is a recurrent theme in this country. Examples include many stories where crime victims have reported an offence, only to find themselves being accused and detained on account of the same crime.
Time is your friend and the extortionists enemy. For a corrupt official, as for a military commander, it is best to win a quick victory following an overwhelming show of force. Having secured a downpayment, he can either blackmail the victim into paying more, or else move on to another prey. By contrast, if the would-be victim has time to think, and to call on external support, they may be able to secure a different outcome. The first advice is therefore to stay calm and to look for a polite means of procrastination, for example by explaining that it is necessary to seek instructions from head office.
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cooperating with the authorities as necessary. Often this is all that is needed. The office head of an international company operating in the Middle East explains what happened when his tax returns were filed incorrectly: A tax official threatened us with a large fine but at the same time told us that he could sort out the problem in return for a certain sum. We refused and made the tax authorities aware that we had been approached. The official denied having made the demand. The company had made its point and was able to sort out its tax affairs through official channels without making illicit payments. Insist on transparency Transparency can be a resistance strategy in itself. The country manager of an international oil company was able to resist a substantial bribery demand when renewing a license by pointing out that the company would need to register all such payments in its official accounts. If it had to pull out of a major project, it would need to give an explanation to shareholders. The minister who made the demand exploded with rage, but eventually renewed the license without any need for an illicit payment. Look for an alternative solution Are there ways of lifting the pressure? Company B, which wants to launch its new office, obviously would like the celebrations to take place in the building itself. A lastminute change of plan could be embarrassing. Nevertheless, is it a possibility? Could it stage its launch somewhere else? If it can remove the time pressure, the safety officials demand loses much of its force. Take the pain For company A, taking the pain might mean paying a fine for a tax irregularity, even if the mistake was made in good faith and the rules are contradictory. Similarly, company B might do better to postpone its launch. A bribe in these cases would be no more than a temporary solution because it would increase the risk of future demands. The same principle applies even to the imprisoned executive: a quick payment wont necessarily get him out. It may lead the police to hold on to him while they work out ways of extorting more money. Stay safe Physical safety is, in all circumstances, the overriding consideration. It is common to speak in metaphorical terms of a gun to ones head. If the gun is real, and there is no realistic chance of resisting, then there is no dilemma. You pay. Examples could include a demand from ill-disciplined soldiers at a checkpoint in an insurgency-affected area. >
CREDIT: POI PHOTOGRAPHY
There have been many stories where crime victims have reported an offence, only to find themselves being accused and detained on account of the same crime
In such circumstances, a good lawyer can be extremely valuable. The strategy is to press the police to lay formal charges against detainees if they cant do so, the victim should be released. If they do, there is at least a legal process with set rules. For example, the victim may be able to apply for bail. Bribing the police to get someone out of jail would be an extremely risky strategy. If company C goes down that route, it will make itself vulnerable to blackmail, while the victim continues to languish in jail. Appeal to higher authority Companies need to establish that they are determined to follow the rules,
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The UK Ministry of Justices guidance recognises that there are circumstances in which individuals are left with no alternative but to make payments to protect against loss of life, limb or liberty
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This point is well understood by most law enforcement authorities. For example, the UK Ministry of Justices guidance on the Bribery Act recognises that there are circumstances in which individuals are left with no alternative but to make payments in order to protect against loss of life, limb or liberty, and it adds that the common law defence of duress is very likely to be available in such circumstances. However, even in cases of physical duress, repeat payments could be seen as problematic. The authorities might reasonably ask why the company is putting itself in harms way, and whether there is some kind of collusion with the bribe recipients. If company employees are forced to pay bribes to ensure their physical safety, they must in all circumstances report the incident to senior management as soon as possible. Senior managers, in turn, have both a duty of care and a legal requirement to take all possible steps to prevent the same scenario from being repeated.
modifications. By drawing up an alternative plan, the company strengthened its negotiating position the launch party would have gone ahead regardless of the officials decision. The manager of company C spent three nights in jail, and it was a grim experience. Eventually, the companys lawyer got him out on bail. When his case came to trial it was dismissed within two hours. These more or less happy outcomes are not or should not be the end of the story. Once the immediate dramas are over, companies have an obligation to review their defences to make it less likely that similar crises will recur. The key principles include: Risk assessment and due diligence What aspects of the companys business could make it vulnerable to extortion demands? For example, are there particular transactions that are especially time-sensitive? What can they do to anticipate the risk of demands from dishonest officials? Leadership, policy and training Does the company communicate a clear anti-bribery policy both internally and externally? Do potential extortionists regard it as an easy target with lax procedures? Crisis management Does the company have contingency plans to help it face up to potential demands? Companies that abide by these principles are better placed to withstand crises, and to prevent them occurring in the first place. John Bray is director (analysis) at Control Risks
4 Be better prepared next time
The crises outlined in our opening scenarios all proved to be manageable, although not entirely painless: Company A called in its chief financial officer. It turned out that the company had been poorly advised by its accountants. Once it became clear what had happened, the company was able to negotiate a settlement that both sides regarded as fair. Company B drew up contingency plans to hold its launch party in a leading hotel. In the end this turned out not to be necessary. The safety official agreed to take a second look, accompanied by an architect, and he was able to sign off the buildings safety arrangements with minimal
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EXPERTS INSIGHT
Chris Walcot Progressive
Empowering people by lowering procurement barriers
ith the resource pool of experts so concentrated, competition for the top talent becomes fiercer and demand for efficient resourcing gets ever greater. Maintaining tight control of human capital is critical to the uninterrupted and effective operation of all oil & gas companies. Unable to support the weight of under-utilised resources, independents that commission specialist contractors must still remain agile, able to deploy expertise and mobilise resources upon demand. This can only be achieved by being in full control of contractors. As well as improving efficiencies and controlling costs, can procurement systems and well-defined procurement processes offer independent O&G companies a competitive advantage in managing contractors, attracting the best talent and ensuring operational continuity? Suppliers might perceive formalised procurement to be unwelcome bureaucracy designed to give buyers total control. On the flip side, well-implemented procurement can improve supplier engagement, speed up the buying cycle and highlight potentially costly errors, all of which have obvious commercial benefits for both parties.
System implementation
The implementation of a procurement system speeds up the entire process and reduces the risk of overlooking small, yet significant, details. Having immediate access to budgets, commitments, authorities, approval chains and being able to view requisitions, approve purchases, place orders, all within a single portal, puts users firmly in control. Multiple users of the same system extends the reach of procurement beyond the finance department. Operational managers in the field or directors away from their desk can remain connected, and combined with automated email notifications and one-click responses, the procurement process becomes almost effortless. Larger O&G companies would welcome the opportunity to standardise their procurement, but are often burdened by legacy systems or no system at all obtained in acquisitions. Smaller companies have a clear advantage, being able to implement a single system early in their development. They have flexibility to expand the systems capabilities in parallel with the companys growth, and the ability to respond quickly to the everchanging demands of oil and gas. During exploration it is feasible just to operate without a system in place. As soon as a company moves into development, a procurement system becomes imperative.
Defining a process
The procurement process begins with a clear understanding of budgets how much items cost, who needs to buy what and when. Once budgets are approved, authorities for purchase approvals can be delegated in a hierarchal chain, ultimately reaching director level. By knowing what is in the budget, who is authorised to order what, and who needs to approve such purchases, process is defined. Many O&G companies overcomplicate procurement with unnecessarily convoluted approval processes, resulting in delays to payments for receipted goods or services. Contractor relationships are key to maintaining productive operations in the field. Delaying payments or forcing suppliers to wade through treacle are quick ways to lose preference. By pre-approving budgets and front-loading the approval process, contractors can be confident that once a purchase order has been raised, the budget has been internally approved, invoices will not be quibbled and payment will be received on time. This might seem like basic supplier management, but it is a fundamental factor in the breakdown of supplier relationships.
Demand for the same contractors is most acute at sites in remote locations such as the Falklands
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Chris Walcot Progressive
EXPERTS INSIGHT
Procurement systems identify problems before they become operational issues, flagging problems early and discovering potential bottlenecks
Operational benefits
With the generation gap and the average age of experience rising, expertise in oil and gas is an increasingly scarce commodity. Contractors have choices and good ones will stay loyal to companies that treat them well. Their motives are very simple: they want to get on with doing what they do, do it well and get paid accordingly. They do not want to be encumbered by unnecessary processes that they do not understand or have no connection with. Outsourced contractors are the lifeblood of the independent. Opening up the procurement process, while maintaining internal control, is empowering for outsourced contractors. The delegation of authority determines the purchasing capacities of operational managers, field managers, as well as contractors. These capacities are sometimes set nervously low, resulting in over-control. Pre-approval of budgets, combined with invoice matching, monitoring and reporting, should give the confidence to allocate purchasing capacities appropriately for each individuals requirements. Empowering individuals with sensible capacities enables them to get things done, saving wasted time and ultimately ensuring operations are productive. Keeping a site operational requires a long list of parts and materials, many of which are critical to operational continuity. Knowing what is in stock, whats required and the expected lifecycle of such items gives companies an immediate snapshot of their inventory. Integrating asset management with procurement gives individuals in the field a level of control with the added benefit of day-to-day operational detail. Empowered individuals, satisfied that they are able to order the required resources to perform their role, also take comfort in the knowledge that budgets are preapproved. If they need items or materials, they simply raise a requisition. If it is in stock it will be delivered, if it is not and there is a budget agreed, it will be ordered. If a field manager needs a site survey they can go ahead and raise the order. If the procurement process is understood and there is not an approved budget, individuals can push for approval, monitor progress and feel engaged in the process, removing the frustration from procurement.
O&G companies always have at least one operational individual that can raise an emergency order for items that would affect operational continuity or health and safety. With oil and gas fields operating in varying timezones around the clock, it is important that orders can be raised at any time without emails getting lost or orders being missed. The authority to raise emergency orders can save a site from wasting thousands of dollars in downtime or help prevent avoidable risks. Orchestrating contractors to deliver long lead items, short lead items, materials and services exactly when and where they are required is not only difficult, but critical. One kink in the supply chain and operations can be shut down or drilling delayed. Procurement systems identify problems before they become operational issues, flagging problems early, discovering potential bottlenecks and highlighting when it might be necessary to find an alternative supplier. No contractor wants their resources to be incapacitated due to anothers failure to deliver. Topically, with sites being developed in remote locations such as the Falklands, O&G companies are likely to commission the same contractors and queue for resource availability. Failing to manage procurement and ensuring delivery of every critical component can be the difference between contractors getting on with the task or moving on to the next company waiting for its services. High volumes of transactions are typical in oil and gas. Companies that integrate their procurement and accounting systems can also benefit from improved efficiencies in accounts administration, reducing manual processing and the risk of potentially costly human error. Managing procurement becomes perpetually easier. Once a company has successfully implemented and operated a procurement system, planning budgets for subsequent campaigns becomes less a guessing game and more a calculated science based upon reports of previous actuals. Knowing how much items actually cost and where delays are likely to crop up enables a company to plan with a greater level of accuracy. Building a track record for accurate planning, consistent delivery, effective management and ultimately bringing campaigns in on budget, not only pays dividends, but develops a positive reputation. In the close-knit world of oil and gas, a positive reputation goes a long way and will help to attract and maintain the best talent. All suppliers want to be associated with successful companies. There is no doubt that well-implemented procurement gives independent oil and gas companies an increased chance of successful delivery time and time again. Chris Walcot is CEO of Progressive
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Requirements Assessment Software Selection Optimising IT Architecture Software Supplier Negotiations Project Management Data Migration Systems Integration Accurate & Efficient Reporting End User Training & Knowledge Transfer Financial Systems & Controls Remote Monitoring & Instant Response Your IT infrastructure can be monitored, supported, or hosted remotely, giving you the peace of mind that theres always an expert working behind the scenes to resolve any IT issues before they affect your business. IT Security & Disaster Recovery Planning When dealing with highly valuable data, you need to be confident that your files are secure. Progressive provide a hosted IT solution in a secure datacentre with robust back-up and disaster recovery procedures. Alternatively, we can advise on the necessary security, back-up and disaster recovery precautions for your own equipment. Financial Systems Support Were on-hand at the end of every project to provide ongoing support, to a level that suits your business requirements. Our specialist team can provide regular onsite assistance with routine accounting tasks, or step in to provide support during challenging times.
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EVENT REPORT
SERVICE GAINS
The Oilfield Services and Engineering Assembly took place over 27-28 June and united more than 250 of the most senior executives from across the oil and gas and finance and investment communities. Session topics revolved around partnership models and investment trends, as well as human capital challenges and global rig demand
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EVENT REPORT
Session 1 Partnership models

of Nomura moderates a discussion with Andy Inglis, chief executive of integrated energy services at Petrofac, Tim Probert, president of strategy and corporate development at Halliburton, and David Morrison, chairman of Wood Mackenzie. KEY CONCLUSIONS The OFS/operator partnership model works, albeit only in certain jurisdictions. Technology partnerships and increasing service capabilities are expected to drive the growth of OFS companies in the medium term. Moreover, as the ownership of global offshore assets shifts towards national oil companies, service companies agreed that the key to sustainable growth lies in building key partnerships and local content. Petrofacs Inglis argued that, to be successful, oil service partnerships will require an appropriate organisational structure, commercial innovation, a creative approach to partnering and addressing long-term needs of the operator, such as training NOC staff. In the Q&A that followed, the panel debated whether there was a potential for tensions to arise between the service companies, IOCs and NOCs in their partnerships and concluded that OFS companies would sometimes need to be careful about the contracts and regions on which they bid, so as not to tread on the toes of their IOC clients. PANELLISTS (above, from left) Christyan Malek
Session 2 Offshore drilling

PANELLISTS Jaleel Al Khalifa, CEO of Dragon Oil, Don Jacobsen, senior vice-president of Noble Drilling, Scott Kerr, CEO of Sevan Drilling, and Robin Macmillan, senior vice-president of National Oilwell Varco. KEY CONCLUSIONS Resource capacity and innovation is a key differentiator. The offshore drilling sector remains a challenging, exciting area to be in, from both a technical and regulatory perspective. Global energy demand forecasts and undeveloped offshore resource estimates highly supportive of attractive growth. > But the complex challenges faced have gone beyond merely
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EVENT REPORT
factory operations; and better reservoir evaluation. Innovations aiming to increase productivity through innovations include pad and zipper frac techniques, while meeting environmental concerns and tightening regulations relating to emissions, water management, well integrity, for example, remain of high importance. The panel agreed that understanding of oil shales described as extremely subtle and complex remains very limited. Greater geochemical expertise and better visualisation technology are required to improve what are currently very low average recovery rates typically just 4% as well as reduce exploration risk. F&D costs have already been falling dramatically through use of newer techniques. Horizontal drilling lengths have continued to increase, from 3,000 ft in 2007 to 4,000 ft today. Break-even costs for gas fields have fallen from $4-5/mcf to $2-3/mcf.
Session 4 Subsea systems

PANELLISTS Simon Crowe, CFO of Subsea 7; Allen Leatt, senior vice-president, engineering at Subsea 7; David Lamont, CEO of Proserv; Adil Toubia, CEO, Oil & Gas team at Siemens; and Neil Saunders, senior vice-president, subsea systems products & projects at GE Oil & Gas. KEY CONCLUSIONS The majority of subsea companies will continue to serve only up to 80-90% of the market (by depth) and only a few players will move into the niche area. The key constraint is capital, given that it will be will more expensive to enter this market. Subsea 7 cited that the focus on technology has diminished somewhat and that the companies that stand out will be those that can innovate and provide cost effective solutions for their clients. Once again, the challenges posed by the scarcity of talented labour and local content requirements were raised. As was the divergence between the minority of companies targeting the more technically challenging, capitalintensive complex activities and those aiming for simplification and lower cost operations in more benign environments.
technical and economic and are now heavily influenced by regulatory and environmental pressures. Meeting these challenges looks set to maintain upward pressure on drilling costs, which from a drilling company perspective means higher day rates but not necessarily better margins. The speakers focused on different aspects of those challenges, perhaps reflecting the varied positioning of their companies. While Dragon and Sevan championed simplicity and low cost innovation, Noble and NOV chose to highlight technical expertise and the need to attract and train the brightest talents: We need to compete for people that want to go to work for Facebook or Google.
Session 3 Onshore drilling

KEYNOTE SPEAKER Keith Cochrane, CEO of Weir Group. The Weir Group CEOs presentation began by acknowledging how shale production is transforming the energy mix of the US. Cochrane went on to reiterate that in the near term, onshore drilling will be largely limited to North America, but how the industry meets the challenges posed there will determine the scope for international growth over time. The industry is meeting operating cost challenges, deriving from the high costs of fracking (including proppants, labour and the costs associated with remote, harsher operating environments) through predictive maintenance; increased wear life;
Session 5 Leadership, management and corporate strategy
PANELLISTS Darrell Howard, president, integrated operations at Baker Hughes; Dave Connor, head of PSCM Upstream at BP; Neil Campbell, managing director of Senergy Aligned Services; and Pascal Bartette, CEO of Reservoir Group
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EVENT REPORT
Session 7 Frontier E&P

Following the close of the first day of the assembly, the Oil Council hosted its summer dinner at Londons Mandarin Oriental hotel. It was certainly a memorable night, with a guest address from Lindsay Hilsum, author and international affairs editor at Channel 4 News (UK), and impromptu entertainment from our singing waiters, culminating in a conga line no pictures though, you had to be there!
PANELLISTS Chris Casias, head of projects and project services at Maersk FPSO; Peter Clutterbuck, CEO of 3 Legs Resources; and Sarah Kunz, petroleum engineering marketing manager at Schlumberger Software SIS KEY CONCLUSIONS With a combination of innovative technology, vision and solid partnerships, frontier exploration in conventional and unconventional markets can and will continue to yield high returns.
Session 8 Finance and investment

PANELLISTS Neil Hartley, managing director of First Reserve; David Phillips, global head of Oil & Gas equity research, global markets at HSBC; Tim Chapman, managing director, Oil & Gas at Royal Bank of Canada; Malcolm Graham Wood, senior adviser at VSA Capital; and Derek Henderson, senior partner at Deloitte (moderator). The closing session provided an opportunity to hear from some of the leading authorities from the finance and investment sector, and frame the previous sessions in an investor friendly light. KEY CONCLUSIONS The panellists were confident and cited the consistently positive messages regarding many of the aspects of the OFS sector technical, operational and in terms of leadership that had been discussed over the two days of the assembly. However, the caveat they put on this assertion was that the oil and gas market can never be divorced from larger, macro issues such as the eurozone crisis, gloomy warnings from the Bank of England, uncertainty around global growth trends and geopolitical risk in numerous places. Financial markets and commodity prices are volatile, but fundamentally the energy market grows every year, and that capital, although more expensive now, continues to flow to the best, most liquid opportunities. The overall conclusion from the assembly is that the long-term fundamentals for the OFS sector are robust, despite short term macro/ oil price risks. In short, keep investing!
KEY CONCLUSIONS The industry needs to change to meet changing risk management needs, including greater standardisation, and a more systematic approach to competency requirements. BPs Connor cited the fact that service companies manage 80% of operators activity, and that bridging multiple management systems service companies and operators at the workplace is often complex and creates risks. He also outlined how lessons learned from studying other industries have informed BPs revised contracting strategy, which includes using fewer contractors in deeper and longer-life relationships. He conceded that the industrys previous efforts in this respect were not real or sustained. Baker Hughes Howard reiterated the assertion that much of the risk associated with projects is now being transferred to the service sector through bundled service contracts, which are forcing OFS companies to review their business models especially with NOCs. He ended by focusing on the importance of relationships, concluding that it is not about how quickly you drill a well, but how you manage an asset for an operator and demonstrate you are working in its best interests. He suggested that one way to build sustainable relationships is to hire people from an operating company background.
Session 6 Global EPC

PANELLISTS: Kris Nielsen, chairman of Pegasus-Global; Christian Brown, CEO of Kentz; Angus Hindley, research director at Middle East Economic Digest; and Nigel Pollard, director of engineering excellence at Wood Group KEY CONCLUSIONS Centred around developments in the Middle East. This financial year should see a gradual recovery from last years depressed levels aside from 2008, the lowest in seven years. The timing of Iraqi developments will be key to driving growth beyond that time frame. Margins will remain under intense pressure, due to increasing competition from Korean contractors, who now comprise the top three and three of the top five contractors in Saudi Arabia Saipem now rank 4th, Technip 6th. The panel also discussed how the rise of certain NOCs, for example, Saudi Aramco, Petrochina subsidiary HKCEC and Essar, are changing the landscape. In the Q&A session there was a lively discussion about trends in EPC business models with most but not all panel members seeing a further rise in lump sum, especially for giga-project awards and especially in the Middle East, putting an even greater premium on risk management and execution skills.
Audience breakdown
Legal O&G executives Investors OFS executives Financiers Consultants Other
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Clifford Chance brings international insight, local expertise and a long-term commitment to key oil and gas markets the world over. We advise clients on their most critical and complex instructions, in an industry where experience matters more than ever before. For instance, the team has recently worked on three of the sectors most prominent award-winning projects: Europes flagship project for energy security in the 21stcentury we advised the ECAs and commercial lenders on the US$7.2 billion multilateral financing of the Nord Stream Pipeline Project, which is now in phase II (Project Finance Deal of the Year, IFLR Europe Awards 2011). Glencore IPO - we advised the joint global co-ordinators and the rest of the underwriting syndicate of banks on the US$10 billion dual listing of Glencore International on the London and Hong Kong Stock Exchanges (Equity Deal of the Year, ILFR Europe Awards 2011). KCA Deutag restructuring - we advised KCA Deutag (formerly Abbot Group) on its complex financial restructuring which saw Pamploma Capital and the groups junior creditors injecting USD 550m of new money to strengthen the groups capital structure and ensure the long term financial stability of the business (Restructuring Deal of the Year, IFLR Europe Awards 2011). Visit www.cliffordchance.com/oilandgas to discover more about Clifford Chances oil and gas expertise.
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ON THE SPOT
What new challenges are our clients currently facing and seeking advice on? p52 What must be done, and by whom, to solve the industrys ever-widening talent crunch? p56 What are the three things keeping you awake at night in your profession? p60
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ON THE SPOT I
Q What new challenges are our clients currently facing and seeking
James Dingley senior associate, Clifford Chance Kim Wood partner, Vinson & Elkins
In this post-Lehman, post-Macondo world we live and do business in, it has become almost clich to talk about the new challenges or difficulties we face. Many of the issues we find ourselves changed and buyers and sellers still
Currently, we are seeing a lot of natural resources companies looking to grow their reserves through strategic M&A (mergers and acquisitions) including more and more strategic partnerships these days. There are opportunities out there but many are in emerging, high-growth markets, which means that those opportunities come with their own attendant risks. So we are seeing an increasing number of clients asking about how they can protect themselves against those risks when entering new markets. You cannot eradicate those risks completely but there are certainly several steps you can take to protect against them. The issue of resource nationalism is perhaps the most extreme example of the economic and political risks that clients in the natural resources sector face when entering a new market. It is certainly not a new phenomenon, but it is on the rise again Argentinas recent nationalisation of Repsols stake in YPF being a case in point and we are seeing it manifest itself in increasingly diverse and subtle ways, for example, the renegotiation of fiscal regimes or applicable royalties as opposed to outright nationalisations. Investor returns are drastically impacted by occurrences of resource nationalism, yet long-term concessions with flat royalty and tax rates characteristic of investments in the natural resources sector are not very well designed to smoothly accommodate sudden political or economic shifts. This means that such concessions can, unfortunately, be easy targets for challenge during the life of a long-term investment, especially in jurisdictions that are overly-dependent on natural resources but which have under-developed extractive industry codes in place. The use of bilateral investment treaties (BITs) and political risk insurance can help mitigate that risk, but both need to be considered early when structuring a deal to gain maximum benefit from the protections available. Political risk insurance policies should be bespoke for the individual investment in question. Clients should not assume, simply because their home country of incorporation has entered into many BITs, that their investment will be protected. The host country may only have entered into only a handful not all of which may be in force. Deployed correctly, clients can secure effective, extra-contractual protections for themselves and avoid the uncertainties involved in seeking to resolve disputes before the local courts of a jurisdiction they are not familiar with. That all said, finding and engaging fully with a strategic or local partner can often offer the best practical solution.
negotiating every day have not materially navigate along a well-trodden path of
issues including conditions precedent,
interim period covenants, warranty claims and limitations. However,
notwithstanding this, new challenges, or perhaps old challenges with renewed emphasis, have been presenting themselves to us and our clients and which provoking and dynamic. These challenges or questions we face include: How best do you monetise an interest in an asset in light of increased continue to reinforce my belief that the oil and gas industry is both thought-
government participation, especially with respect to taxation on transfers
and exercise of pre-emption rights? The use by governments of tax claims, the risk of government intervention and to achieve certainty of closing is
real or perceived, appears to be increasing. Adopting techniques to mitigate therefore a critical feature of oil and gas transactions in the current climate. As a seller, how do you protect yourself against future decommissioning or environmental liability claims? Reliance on indemnities is a good place to start, but sellers now need to consider additional security should the indemnifying company become insolvent.
With tightening of the financial markets and access to funds, how do you
protect yourself against a buyer who is unable to complete after months of work? Nonrefundable deposits and parent company guarantees are being for due diligence. demanded with increased frequency. However, this does not obviate the need
Access to funds has become not only a limiting factor with respect to the
buying and selling of assets but also their development. With many players co-venturers with insufficient access to capital is a significant driver for a large portion of M&A activity.
not willing to take on significant exploration risk, developments for sale by
How best can we protect ourselves from, or otherwise deal with, the continued state of flux of the energy policies in many key parts of the world? While this risk is inherent in operating in certain parts of the world, due diligence and asset spread can go some of the way to dealing with it.
With increased regulation in areas such as health and safety and compliance, how can companies comply with such regulations while still being able to conduct their business profitably? We are being asked with increased
frequency about companys regulatory obligations and the key to providing how our clients operate and being mindful that just telling them what the rules are is not always very helpful.
not only accurate but meaningful advice in this regard rests in understanding
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g advice on?
Geoffrey Picton-Turbervill partner, Ashurst
The availability of funding for field development projects
ON THE SPOT I
Traditionally, oil and gas companies have relied on the debt and equity markets for this, but the impact of the financial crisis with more stringent standards for debt funding and the challenge of raising equity capital are having a significant effect, meaning that development projects are having to be deferred or partners brought in to enable projects to be commercialised. As a result we are seeing a lot of M&A activity, with asset divestments and farm-ins to raise cash.
Completion risk on deals
and political environment means there is much greater risk of material changes occurring between signing and closing deals, which may lead to one or other party no longer wishing, or being able, to go ahead. This is leading to a much greater focus on the impact and use of condition precedents and material adverse change provisions to try to ensure the appropriate balance of interests for both buyer and seller.
Regulatory uncertainty
A significant effect of the current environment is to make the period between signing and closing M&A deals, which can often be a period of many months while regulatory and partner approvals are obtained, much more unpredictable and uncertain. Gone are the days when a deal once signed was 99% certain to close. Todays volatile economic
Not by any means a new phenomenon, but it certainly continues to be a challenge for oil and gas companies committing to invest very large sums of money to explore for oil and gas and develop projects. It has historically been seen as a greater risk in developing economies, but over the last few years the UK has seen significant tax changes for oil and gas companies as well as other legal and regulatory changes. Stability and predictability are key factors in attracting investment at the right price, and a continually changing fiscal, legal and regulatory framework creates significant challenges for clients in structuring and documenting new investments.
Tanya Nash partner, Ince & Co
Tom Nicholls partner, Lawrence Graham
Where our oil and gas industry clients are entering into new joint ventures or other long-term contractual arrangements, they are seeking assistance with anti-bribery and corruption and international sanctions compliance investigations into their prospective business partners and advice on contractual mechanisms to deal with on-going compliance. The question of whether investigations and compliance procedures are truly adequate become more difficult with some high risk jurisdictions. As parties seek to ensure they are complying with the UK Bribery Act 2010 and other similar legislation we are also seeing a degree of battle of the forms between different parties ethical/compliance codes, which can create practical issues for clients who might have to police different business arrangements to slightly different standards and/or using slightly different procedures.
At the moment we are continuing to see an uptick in M&A activity among our mid-cap clients, the flip side to what continues to be extremely suppressed conditions on the equity capital markets. Although we continue to see some very credible junior E&P companies, only a very few have come through to IPO (initial public offering), with many seeking alternative funding arrangements. A handful have come to market raising either
greatly reduced levels of funding or, in some cases, by way of a straight on the markets improve.
introduction so as to be well positioned as and when the funding landscape
In respect of M&A, we have obviously been kept busy advising our client Cove Energy on its takeover, although this appears to have now entered its final stages. We have also been advising The Parkmead Group on its recommended takeover of DEO Petroleum. Elsewhere, we have seen a number of clients farming out interests in their assets to other E&P
companies. As far as regional geographies go, there is quite a mixed bag to be of considerable interest and activity levels reflect this.
but, in so far as one can detect or highlight any trend, East Africa continues
>
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ON THE SPOT I
Q What new challenges are our clients currently facing and seeking advice on?
Janan Paskaran, partner, Torys
The biggest challenge facing the majority of our clients is the availability of funding. The equity markets have been very quiet this year, and the continued instability in Europe has made it difficult for many issuers to access capital. While companies with production may be able to access debt markets, exploration companies are struggling to find sources of funding. Private equity capital is available, though it is being selectively deployed, and issuers have to accept the terms they are getting for this type of funding. Many issuers feel, and perhaps rightfully so, that their implied valuation is low in relation to their net asset value, and the thought of securing funding at these levels is unpalatable. However, they may need to face the reality that they have no choice but to secure funding at these levels, as there are relatively few viable alternatives.
Nigel Barnett and Humphrey Douglas, SNR Denton
Overcapacity in the refining industry is a cause for concern. Refiners are seeking to review and, where possible, renegotiate their banking facilities. Financiers are reviewing the banking covenants and security in place in existing facilities. In the case of independent refiners, lenders may be undertaking contingency planning with or without the knowledge of their borrower in case formal insolvency procedures prove unavoidable. In any industry as highly regulated as oil and gas, a restructuring, whether in court or out of court, presents challenges that few will have encountered. SNR Denton are currently advising the UK Petroplus administrators on the administration and disposal of the Coryton Refinery. The failure of such a business is politically significant for the UK and a reflection on the European refinery market. The Coryton administration has given rise to a range of complex issues that have never previously been addressed. How does one deal with road transport fuel obligations, compulsory stock obligations and carbon emissions compliance upon handover or later shut-down? How does a refiner continue to operate in the short term when working capital facilities are limited or non existent? How are health and safety issues managed? Will potential administrators be prepared to act given the risks they will assume? Lenders and investors may draw great comfort at the outset from the security that they have been given for their financial support. The realisable value of such security may be a different matter. In the future, the Petroplus administration may prove to be a touchstone for refiners, regulators and financiers faced with a refining business in financial distress. However, it should not be forgotten that the financial misfortunes of one business may prove to be an opportunity for another. Sophisticated purchasers will be well advised to undertake some contingency planning surrounding the challenges of acquiring some complex businesses. In a distressed sale, a well-thought-out bid supported by strong legal and financial advice will always trump the last minute reactive offer.
Jeremy Sheldon, partner, Stephenson Harwood

While historical challenges like country/ political risks remain in the sector, the challenges, particularly a worldwide current economic climate presents other hardening of credit availability. As a markets are more risk averse. For
result, traditional lenders and capital example, we have experienced reluctance from investors to provide funding for assets with proven reserves that may previously have been in production.
A company seeking to finance an asset with only probable or possible reserves more expensive for all types of assets. Naturally, this has affected smaller and mid-cap companies more than those with expansive balance sheets.
will face even more of a challenge. The overall outcome is that debt has become
Clients often continue to face challenges to execution timetables in the form of the lengthy approval process to M&A and project transactions in the sector in industry the protracted period of time to procure necessary approvals can be very problematic in the context of related funding timetables particularly in current markets. certain jurisdictions. Although not unusual in the oil and gas/natural resources
Clients are facing an increasing requirement for local content in projects. Although the concept is generally supported by sponsors and funders, it nonetheless often poses practical (and financial) issues in circumstances where there is a mismatch between local capability and the requirements of a given is core in many cases to productivity and, where, increasingly, the E&P know-how, for example ultra-deepwater assets. project. This is particularly relevant in the oil and gas sector, where technology technology required for an asset are at the extremity of international industry
>
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ON THE SPOT II
Q What must be done, and by whom, to solve the industrys ever-w
Introduction Iain Manson

Is the next generation crew change capable of leading the industry into the future? What has to be done, and by whom, to solve the ever-widening talent crunch? As a search consultant working exclusively in the oil and gas markets for almost 20 years, I have had the privilege of meeting and interviewing senior, middle and junior leaders from right across the industry. One of the most important issues, highlighted through thousands of these interviews, is a significant talent shortage within the upstream oil and gas sector. By way of a brief introduction to the critical question above, I will relay some observations from the many interviews that I have conducted. Old and male. The preponderance of leaders in the sector are male and approaching or even past their sell-by-date! You have no idea how unusual it is to meet a female leader. This must change. International but essentially Western. Our sector is global and people tend to travel well. However, the ethnic balance is wrong for today and for the future. If you want to look at the oil company of the future, look at the diversity of the leaders at Schlumberger. What is the market like? This is the question every executive asks their favourite or not so favourite search consultant. And just to clarify, they want to know what the oil and gas job market is like. My answer, which I have perfected now through ups and downs of the oil price, is perhaps relevant to our theme. I have always stressed the fundamental demographics of the oil and gas sector, with the Western baby-boomer generation dropping out of the workforce, not being replaced by an equivalently sized new generation from the west and the growth in bright and technical talent in developing markets. Supply is short or may be in the wrong place. On the demand side, I have to say that the story is very positive for our sector, unlike many others. In my view, the demand for talent within the oil and gas industry is strong and the fundamental drivers of the sector mean that it is likely to remain so for a number of years. Demand is, and will remain, greater than supply. My passion for executive search stems from an interest in and enjoyment for meeting people, and I believe that some of the most interesting people work in oil and gas. I love the industry, it is essential to our economies and lives and has a strong future. I believe we have a duty to ensure that there is the right talent in the right place to move this critical industry forward. What do you think? Iain Manson is head of energy for Europe, the Middle East and Africa at Korn/Ferry International
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August 2012
widening talent crunch?

Bill French, head of Oil & Gas practice, Odgers Berndtson
When we in the energy sector hear of and witness the ongoing problems related to the US and global unemployment issues it just does not compute or make any sense to us. For the past 10 years, we have heard the deafening cry related to the shortage of qualified people for the energy sector. At first, the shortage was related to the baby boomers leaving the workforce, then it was the void in the workforce caused by the down periods of no new hiring during the seven-year cycles our industry used to experience. Finally it was that dead period from 1988-1998 when it seemed no one was entering the industry due to the high-tech and dot. com eras. We are now faced with a new challenge the shale gas boom! But none of these shortages ended with a long-term solution, although some may have been addressed. The previously attempted solutions tended to be short term and more of a band aid than a remedy. Retirees were enticed back to theworkforce and this continues to be the case. It was an easy, as well as viable solution to the shortage. Actually, many of the early retirees that had planned their retirement on a (US retirement savings account) 401(k) were forced back into the market to make up for the stock market losses of a couple years ago. This approach does not solve the problem, it only highlights the current needs once they are gone. In recent years, the energy industry has become a more favourable place to work for graduates from university. Many petroleum engineering programs that were dropped or downsized are up and at full strength and are in demand. With energy being one of the most popular discussion points young people are much more inquisitive about the sector. So what is being done or could be put into place to remedy this never ending issue? There are certain areas that can be addressed that are not being fully utilised.
ON THE SPOT II
When a retiree is brought back to work, an in-depth mentoring program should be in place whereby the knowledge and experience does not walk out the door the next time he retires. This should be accomplished in two ways. With the new hires, attach them to the hip. However, an area which has not be fully exploited is to recruit experienced engineers and crosstrain these highly qualified people. It will take some time and there will be an additional cost in the near term, but the overall benefit of bringing a highly qualified person into the industry will be well worth it. It may be a hard sell to senior management, but HR has to be committed and passionate about this issue. Remember, this is an industry that will spend hundreds of millions of dollars on a prospect that may be commercially not viable or a dry hole. All senior managers will continue to say our most valuable asset is our people. Now it is time for them to show some forward thinking and spend some money to meet the needs of the future. It is amazing that the world we live in does not fully understand the breadth and depth of positions in the energy sector. This is where the industry needs to do a better job of educating the public on the many types of very attractive positions that are available. Expansion of campus recruiting to schools outside old boy networks is needed, especially with the ever-changing needs within the sector. The industry stands right up there with space agency as a sector that does a very bad job of self promotion and education. It needs to start at the high school level and let everyone know, especially teachers, the opportunities that are available. In terms of labour shortage, the most visible today is the shale gas boom. Thousands of new jobs are being created in many parts of the world. The skills required, although not new, are in high demand. Whether it be in Pennsylvania, south Texas, Arkansas or the Dakotas or even the Ukraine, the boom is on. Interestingly, many of the skills are related to those acquired through trade schools. These recently neglected institutions now are back in focus. The industry should be working with the administrators at community colleges and trade schools to let them know the skill sets required in todays marketplace. Not everyone needs a college degree! The critical needs for this sector will be more on the technician side and hourly employee. Again, education will be the key not what we in the industry can learn, but what we can teach to the general public in terms of the needs and opportunitiesin the sector now and in the future
Jamie Ferguson, vice-president, business development, Maxwell Drummond

The industry must be more proactive in marketing itself to the younger generation. The negative perception so many young people possess about the O&G industry could be remedied if the industry better communicated the vast opportunities available to those entering the workforce and countered claims of environmentally unsound practices. Students should also be educated on the investment made in research and development, the opportunity to work in diverse geographic locations and the technical advances they could be at the forefront of. Partnering with universities may not be enough students should be reached before entering university to plant the idea of the opportunities available early on.
Companies must turn their attention to the talents of international personnel and cultivate global sourcing. Creating an internationally mobile workforce is ideal for the short term and implementing this strategy into long-term talent development and acquisition plans will be crucial in driving future industry growth. Utilising talent will unlock business opportunities on an international scale and give companies access to the talent they need to overcome the current deficits. In addition, it will be critical that companies put a solid strategy in place to steer their organisations through the imminent transitions in corporate leadership and senior management. Succession planning and knowledge transfer are key components to ensure there will not be any gap or shortage of qualified leadership in the industry. >
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ON THE SPOT II
Q What must be done, and by whom, to solve the industrys ever-w
Christophe Mille, consultant, Oil & Gas, Industrial, Futurestep a Korn/Ferry company
that some 60% of senior executives across US independents recognised a need for more staff and about one-third believed higher compensation should be offered to technical staff. Just two years later, more than 90% of executives were looking for more staff (a rise of 50%) and nearly 80% (more than twice as many as before) were prepared to raise compensation for technical staff. The NOC community faces an even more extreme challenge. At present, although considerable effort is put into knowledge and technology transfer to local nationals, much of the know-how still lies with the IOC expatriate workforce. Yet 40% of this workforce is due to retire within the next five to 10 years. The large influx of new hires resulting from current local content drives in many countries means that companies will be left with a rapidly expanded, albeit relatively unskilled workforce to maintain and develop operations.
Senior oil and gas executives routinely express to us their concerns around the widening gap between the skill and experience levels needed in the industry and those available. Certainly in recent years we have witnessed the punitive effects that the oil and gas talent crunch has had across the industry at a time when the burgeoning BRIC (Brazil, Russia, India and China) economies are driving exponentially higher investment from both IOCs (international oil companies) and NOCs (national oil companies). Increasingly, projects are fraught with delays and contracts have to be re-negotiated. Many producers face growing difficulty in meeting their schedules and it is not always sufficient to simply pay higher salaries to secure enough qualified personnel. A retrospective review of recruitment trends in oil and gas companies over the past 10 years reveals a disconnect with company strategies. Between 2002 and 2005, there was an ongoing head count reduction, amounting to about 10% across the industry in the space of these four years. Meanwhile, in 2004, many companies were beginning to ramp up their spending in other areas, to capitalise on rising commodity prices; 2004-2007 saw a 20% increase in capital expenditure among the major IOCs. Over this period, a fundamental shift took place in industry perceptions of the human resources challenge. In 2004, research found
Recent years have shown that efforts to increase efficiency and effectiveness in oil and gas companies through remote automation, process, improvement, outsourcing etc are beneficial, but not nearly sufficient to close the talent gap. The current labour shortage cannot be solved with a single line of attack. An effective strategy combines the following non-mutually exclusive tenets:
Assessing talent needs correctly
Organisational design must always be crafted to a companys particular business circumstances and cultural texture. However, whatever the precise organisational path taken, it seems clear to us that the centralisation of technical functions, and the ability to pool technical support, project staff and R&D (research and development) teams together into a single division, improves the ability to balance and plan future resource needs and to allocate resources where they create most value. Increasingly, a pool of technical staff also creates more flexibility in resource allocation by overcoming issues of geographical dispersion to assets. With a degree of centralization we see better staff rotation, deployment planning and more efficient temporary allocation to projects.
Sherree Young, head of practice, Oil & Gas, Harvey Nash

It is widely acknowledged that oil human capital as a top strategic concern. Despite high and gas executives rank managing
management is no longer confined to the companys country of
operation, the search to find skilled and critical talent has gone global.
This issue is particularly heightened in the oil and gas sector because of their knowledge is lost when they retire or leave the industry.
the ageing expert population. As oil workers get older, but not replaced,
Technology has a role to play in harnessing that knowledge, keeping it and reapplying it through the automation of processes, databases and so on. However, the fact of the matter is that the industry has too few endemic problem.
unemployment across the globe, a looming talent shortage exists in many fields within the industry
people. Good people are hard to find and are difficult to retain its an
particularly in operations. Talent
This skills gap is the result of the boom/bust cycle inherent in the oil and gas sector. Very few new workers were hired in the late 1980s.
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widening talent crunch?
ON THE SPOT II
Likewise, good workforce planning models will take account of the full range of factors involved. They will allow for the fact that the staff numbers needed in a given function as well as the most appropriate balance of national and expatriate staff is likely to vary from one company to another, and within the same company from one asset to another. Given the urgency and severity of labour shortages, it is vital that oil companies are able to define the resources they need on the basis of objective criteria such as total production, number of sites, life cycle phase, and complexity index (encompassing factors such as location environment, geology, hydrocarbon type, development well type, technology, etc.)
Developing national resources
staff with a career path that encourages retention and a one company culture, while taking into account specific features of each local culture; and reduce pressure on expatriate resources, so that they can be deployed across several locations. The second key factor is a nationalisation plan that breaks down, by function, competence and year, the future needs to be satisfied through internal growth and hiring. Such a plan needs to be structured in layers, providing progressively detailed information. The plan should include a description of the process for filling each position, individual assessments and development plans, a detailed schedule of recruitment and training activities, and reports and key performance indicators to track the progress of the plans implementation.
Improving the bench-strength of talent at supervisor level
IOCs are investing significant sums of money and energy in training and developing local staff as part of their drive to fulfil license agreement obligations, or to position themselves favourably for future rounds. However, this investment has not, in all cases, been followed when local trainees get back to the office or field by similar attention to their development and mentoring. Expatriate staff can lack the necessary skills of coaching and engagement that will empower local staff to applying what they have learned quickly and productively. The disconnect between the classroom and the field reflects a disconnect that often exists between HR departments and line management. New training tools and techniques are required, and new key performance indicators, if NOCs and IOCs are both to reap the full benefit of the training investment. An effective local content development initiative will be underpinned by two key factors with precise objectives. One factor is the international career development of national resources, designed to: guarantee homogeneous development of competences throughout all the companys assets; provide national
The current trend in most IOC managerial training is to myopically focus on the top 20% of staff resources. This leaves the development needs of the next marzipan layer of leaders, for example, at supervisor level unsatisfied. This supervisor group will be instrumental for the success of any asset management moving forward as it drives the company. Focusing efforts on this population will pay off in the long term. Creating a best-in-class leadership development programme, linking classroom learning to work assignments, is needed more than ever. Therefore, by increasing investment at this level, companies can more readily: engender a one company vision and increase employee loyalty and retention; foster collaboration and networking; increase asset interoperability; improve the leverage on the development of nationals and their transformation into a global expatriate pool; and share best practice throughout the firm In only a few instances do we see oil and gas companies who have successfully refocused their investments at the front end of the talent curve, where retention and development is most critical.
As more-experienced personnel retire, the sector is left with a lessskilled workforce, which lacks the knowledge and depth of understanding to undertake new projects. All of this is taking place as the sector runs at full capacity and the world demands more oil and gas from technically challenging sources such as shale-rock
designed for generation X and generation Y could unlock a previously
untapped talent resource females. At NOCs, female ratios rose to 27%
from 19% in geosciences and to 17% from 15% in petroleum engineering. and providing training programs for a wide variety of areas, this could improve and diversify a companys talent pool. By acknowledging and may be possible.
By expanding and diversifying recruiting methods, such as volume hiring
formations and ultra-deepwater wells. It is clear that the talent void in the oil and gas industry has transformed from an organisational challenge into a critical business issue.
customising culturally appropriate approaches, higher retention of talent
The lack of key talent could potentially impact corporate growth,
financial performance, safety and reputation. All of this should raise a red flag to leadership that immediate and innovative solutions are necessary. The industry needs to focus on the next generation and look beyond baby boomers. Recruiting and retention strategies
Oil and gas is a global industry with a global workforce and a one-sizeknowledge and being creative in retirement arrangements, oil and gas is desperately needed.
fits-all approach does not work. Finally, by leveraging retiring workers companies would be able to retain much more intellectual capital that
>
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ON THE SPOT III
Q What are the three things keeping you awake at night in your pro
Peter Wilson general counsel, Bowleven
How do we access to capital in an ever changing economic climate?
Farm-out If weve got a commercial development, why not look for a partner who shares our views and will fund our share of development costs? But how to extract maximum value for our assets given our current low market cap and the associated risk of triggering an opportunist takeover offer, which has happened twice to us in the past three years.
Managing internal resources efficiently and or even while delivering an effective legal service
I joined Bowleven as a director, company secretary and general counsel on April Fools day 2005, having previously been Bowlevens external legal counsel. I was employee number six. The share price was 3.43. In my time, the share price has reached a high of 8.00; and a low of 25p. As I write this is it is hovering around 60p. We are a UK-based, AIMlisted E&P company. Well, I say E&P but actually its just E. We have no production, yet. No debt either mind you. And some $155m in the bank. We are about to embark on an appraisal drilling programme offshore Cameroon which, fingers crossed, should prove up sufficient recoverable resources to support a decision to proceed with the development and all that that entails. But that then leaves the small matter of raising funding. Wasnt it Kevin Costner who said, if you build it, they will come? He wasnt talking about a pipeline and an onshore processing facility, because they need to come before you can build it. Theres the small matter of an awfully big number to finance. How to do that? Ah, choices, choices: Bank debt But what about the macro economic problems, especially the euro crisis and the current risk aversion of mainstream banks? Add in the need to fund our equity share of the project development costs. Go to our shareholders/stock market What about our exceptionally volatile share price? When do you go? Our largest shareholders are supportive of management but what about the potential impact on retail shareholders who would not be able to participate in a placing. Go for a rights issue instead? What about the time, cost and uncertainty.
We have around 80 employees in two offices: Edinburgh, Scotland and Douala, Cameroon. I am a director, general counsel, company secretary, compliance officer (following implementation of UK Bribery Act), interim risk officer (the incumbent is on maternity leave) and, as of yesterday, head of HR. It is a trite comment that there are a number of competing demands on my time. I do, however, have a very efficient and very effective support network to make sure that my time is focused on the most important issues, as they arise. We have recruited, and then trained, very bright, hard working people with whom it is a pleasure and privilege to spent so many of my waking hours. We do have fun as well, which is important when you spend so much time in the office, but the support of good people, who feel valued and able to contribute, is the cornerstone of being able to function at your optimum performance day in day out.
Oh, yes, and did I mention the UK Bribery Act ...
It doesnt keep me awake at night, but it is omnipresent in my thoughts. We have in place what I hope are adequate procedures for the purposes of the UK Bribery Act, and we already had in place anti-bribery procedures and carried out background checks on suppliers etc, but keeping up to date to the standard now required under the Act requires regular staff training sessions, awareness and vigilance. Time flies and it seems only six months ago that I gave the last training session. It is a constant merry-go round of training, reviewing gift and hospitality registers, carrying out background checks and issuing circulars highlighting recent cases/convictions to reinforce the nil-tolerance message. And, at the end of the day, would it be enough......
Jonathan Marsh, general counsel, Vitol

Im tempted to answer this question with the words regulation, regulation and regulation The .
impact not just financial institutions, but also other participants in the derivatives markets, such as energy traders, even though the activities of such traders create little or no systemic risk of the type posed by
casino banking The upshot is that energy companies that participate in . the derivatives markets are being forced to deal with a tide of regulation often inappropriate and disproportionate. aimed primarily at financial institutions and which, as a consequence, is
aftermath of the economic crisis regulatory focus on the banking and derivatives sectors. Clearly, regulatory failure was a
has seen unprecedented levels of
The economic crisis is also the source of another cause of general counsel insomnia in that it has led to a significantly increased risk of counterparty default and therefore an increased focus on the quality of
contracts in place with counterparties with a view to ensuring that they
contributory factor to the economic crisis and it is right that
mitigate the effects of counterparty default to the fullest possible extent. A final link between the economic crisis and sleeplessness is that it corner. What better reason for sleeplessness than worrying about unknown unknowns!
governments seek to remedy this failure. However, any regulatory
response should be proportionate and focus on those areas that pose the the sweeping nature of the regulatory response has led to proposals that
greatest risk to the stability of the global economic system. Unfortunately,
provides yet another reminder that you never know whats around the
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August 2012
ofession?
Daniel Martin, general counsel, San Leon Energy
Given the state of the world, it three items. A difficult
ON THE SPOT III
Greece to sort out their debt. Whether the euro can be saved as a viable with European operations, although less so on those with a US or an
currency is also an issue. All of these factors impact greatly on companies Asian focus. I lose less sleep worrying about San Leon, specifically, as we have reasonable expectations of several transformational events in the coming months, but things would be so much better, and easier, if the macroeconomics were different.
is hard to narrow the list to just macroeconomic situation is
Government regulation
creating pressure on governments to do something, anything. As a result, regulations are either
Financial pressure from the worldwide recession has made voters worried and governments mean. The oil and gas industry is a big, easy target, and an outcry that something must be done! One would think that if profit were immoral, losing money would be virtuous, but shareholders tell us otherwise. The problem is that governments feel they must take action: every time an IOG releases a multi-billion dollar profit statement there is
being put in place or in advanced stages of adoption that could impair the ability of oil and gas companies to carry out exploration and production an already risky industry. The result could be that exploration activities energy price that could impair a financial recovery. activities. There is a sense of uncertainty that is adding additional risk to are delayed or curtailed, and the overall effect could be an increase in the
when there is a Macondo they must implement an offshore drilling ban, a new tax, as the UK government did in the North Sea; when there is
as the Italians did; when there is a large profit made they must implement health scare hysteria as there was with Gaslands then there must be a , ban put in place on exploration activities, as the French did with their fracking ban.
My company, San Leon Energy, has a broad mix of exploration prospects as a shale gas company because of our activities in Poland. By acreage, San Leon is now the largest shale gas company in Europe, and we are
in Morocco, Ireland, Spain, and Albania but we are principally known
There is an old phrase in the law that hard cases make bad law It could . is the lack of expert and industry consultation, and the speed at which these regulations are adopted. The oil and gas industry is one of long lead times, where taxes and other regulations have an impact on the commercial case for exploration. Ill-advised regulation impairs of the finished product.
sensitive to regulations aimed at the shale gas industry, such as taxes or good thing.
also be said that knee-jerk reactions make bad legislation. The problem
fracking bans. Environmental regulations do not concern us they are a
The European Debt Crisis
Trying to escape the European debt crisis is like trying to escape a
commerciality, increases costs and risk, and ultimately raises the price
saturation bombing raid you cant, all you can do is hunker down.
Publicly listed companies, such as ours, are seeing massive amounts underlying business. San Leon, for instance, have over the last 18 months raised around $100m from the likes of George Soros and
of value wiped off their shares regardless of the performance of their
A Polish hydrocarbon tax
As a specific example of regulation that causes concern, there is the
proposed Polish hydrocarbon tax. Companies such as San Leon and
Blackrock, completed an acquisition of Canadian-listed explorer Realm Energy that brought us new prospects in Spain, France and Germany, while substantially increasing our shale gas acreage in Poland.
our partner Talisman, as well as Three Legs, Conoco Phillips and others,
have spent tens of millions in Poland already on the Polish gas shale play. the complexity of that specific play. Poland benefits greatly from the efforts of foreign companies from the perspective of energy security alone. Ernst & Young characterises the Polish tax law in this area as
More money will have to be spent and we have still not come to grips with
Elsewhere, we have conducted seismic campaigns, and worked-up our assets across the board. We have also been putting the drill bit in the ground and are drilling two wells in Poland. During this period our share performance has placed us consistently in the top quartile of our peer E&P companies and as a result of all our efforts our share price has
under regulated to date the only government charge specific to the
oil and gas business is a 1% royalty. Clearly this will have to change, but are creating the golden goose. Representatives of San Leon have
it is in everyones best interest to obtain the input of the companies that consulted with Polish government officials and have been told not to be mislead by political rhetoric the ultimate solution may be a tax, or it could be a government back-in, as in Morocco. A precipitate solution investment that will be necessary to take the Polish gas shale play to full-scale commerciality.
dropped 75%! It is enough to make you cry sometimes. Funds are being in the prospects of the companies in which they are invested. E&P feel-good factor .
hit by redemption demands and must sell shares, regardless of their faith companies tend to attract the tail end of investment and need a general
will serve no ones interest and could have a freezing effect on the foreign
It does not seem that there will be any definite solution in the near term
to the European debt crisis, and until there is a solution, investors will be Europe is in a financial purgatory that looks likely to continue for years, because it will take years for countries like Spain, Portugal, Italy and
jittery and there will be limited confidence in equities. For the time being
Those are the things keeping me up, but I remain optimistic about the long-term prospects for both the oil and gas industry and San Leon to soothe my fears and send me to the Land of Nod. Energy in particular. It should take no more than a glass of warm milk
>
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ON THE SPOT III
Q What are the three things keeping you awake at night in your profession?
Shirin Johri general counsel, Afren
the market in London as soon as possible. However, pre-approval of such press releases by local regulatory agencies can add significant delays as they will not be rushed. In addition to being unmoved by our time pressures, such regional agencies may not always agree with the level/ details of information we are required to disclose.
Crisis management
We have been fortunate not to have experienced any dramatic occurrence that has damaged the reputation of Afren. We have established an effective crisis management plan from the outset, which complements our corporate EHSS (environment, health, safety, security) policies and procedures. But given the industry and the areas of our current operations, we remain exposed to the possibility of these incidents. As general counsel of Afren, I believe that a competent legal team and sound policies and procedures can help alleviate professional insomnia. However, there are certain issues that can potentially cause sleepless nights, three of which are highlighted below:
Cross-border regulatory compliance Compliance with anti-bribery laws
Subtle differences in the regional and UK regulatory framework often puts us at odds with local regulatory agencies. For example, Afren, as a UK-listed company is required to disclose price-sensitive information to
Being part of the extractive industries and operating in high-risk jurisdictions such as Kurdistan, Nigeria and Cote dIvoire makes the compliance process that much more critical. We have implemented rigorous procedures throughout the company but we need to continue to be vigilant. We need to ensure that policies and procedures address all areas of risk and we continue to review these policies to ensure that they remain robust and effective.
Charles Morgan, general counsel, Salamander Energy
of the risk profile of our industry accounting for 20% of corruptionrelated prosecutions in the UK during the last four years and some of the regions in which the industry operates. Meanwhile, the legislative context continues to evolve, not only in the UK witness but also abroad, for example, the issue earlier this year of new
the recent consultation paper on deferred prosecution agreements reporting requirements for government contracts by the National has operations.
Anti-Corruption Commission of Thailand, an area where Salamander
In general, an increasing assertiveness by some fiscal authorities of difficult to manage. In Indonesia, for example, the Indonesian
late and other regulatory uncertainty have made various risks more Sleepless nights I suspect are deal-specific, or provoked by events, dear boy Nevertheless, there are some things of more general . counsel in the energy sector. application that are these days demanding the attention of in-house Petroleum Association filed a petition last year with the Supreme Court requesting a review of a recently introduced measure regulating cost recovery and income tax treatment in the E&P sector on the grounds was denied, but the basis for the decision is not yet known.
that it contravened numerous provisions of various laws. The petition
The recent LIBOR-fixing revelations have highlighted the importance of corporate governance. For those of us responsible for ethics and compliance, the implementation and monitoring of compliance
And last, the effects of the Macondo disaster are still being felt in the
programmes introduced or supplemented as a result of the UK Bribery Act 2010 continues to be an important focus of activity. This by virtue
contractual relationships between the E&P companies on the one hand the allocation of risk.
and, on the other, rig contractors and service companies with respect to
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to find the best, talk to the best.

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MEET THE MEMBERS
Andrew Osborne chief financial officer, Chrysaor

How did you come to be in the oil industry?
I joined a broking house Strauss Turnbull in 1994, which was owned by the French bank Socit Gnrale. The firm was involved in raising equity and advising several small at the time E&P companies, among them Cairn Energy and Premier Oil. My principal focus has been on the oil industry ever since.
What was the wisest advice you ever received from a mentor?
What is your proudest work-related achievement to date?
Vision, focus, edge. Have a clear vision about where you want to take the company. Focus on material positions that will be attractive to others and will provide bargaining chips in the future. Finally, you have to have a technical edge. Back your technical team to have a better subsurface understanding than others.
While I was in banking, I was lucky enough to advise Cairn Energy and Tullow Oil on all of their major transactions since they were $7m and $100m market cap companies respectively. It has been immensely satisfying to have been involved with two of the most successful independent E&P companies that have made world-class discoveries and taken them full cycle to first oil.
What advice would you pass on to a recent graduate wishing to work in your line of business?
As a recent convert, I think there are many more exciting long-term opportunities in industry today rather than in banking and finance.
Whats the one interesting fact about you that no one would suspect?
Where do you see the greatest opportunity in todays oil and gas markets?
In spite of my fiercely guarded Welsh heritage, my father traced our family history and we are of Prussian descent!
Given my current position, I am going to stay close to home. There is still significant value to be extracted from the North Sea, which has been highlighted by the interest we have seen recently from both Korean and Chinese national oil companies and the level of applications in the recent 27th licensing round. However, in terms of under-explored areas, offshore Ireland presents a great opportunity for us and the industry. Providence has led the charge over the last few years and we are very excited about the potential in Quad 35 off the west coast of Ireland, which includes the Spanish Point gas and condensate discovery. We are in the process of taking over as operator and currently intend to drill our first appraisal well next summer.
How do you prefer to spend your spare time?
I really enjoy coaching my local mini-rugby team and have been taking various coaching and refereeing courses. Another great feature of this industry is that many of its participants play golf any excuse for a golf day and I am there. I learnt from the master you will need to guess who that is and he is a pretty successful role model!
One of the best holidays I have ever had was horse riding in the Okovango Delta, Botswana on my honeymoon. I also really enjoy skiing ... anywhere.
Favourite holiday destination?
All-time favourite book?
Where do you see the greatest challenge?

CREDITS: ANDRIES3, NATIONAL ASSEMBLY FOR WALES
Managing political risk. As governments around the world struggle to manage their own balance sheets, the oil industry is an easy target.
Nobody Beats Us: The Inside Story of the 1970s Wales Rugby Team
Star Wars to clarify, Episode IV, which came out in 1977.
All-time favourite film?
iPad, download of Welsh rugby Grand Slams and a keg of Double Dragon beer!
What three luxury items would you take to a desert island?
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August 2012
Houston: 2925 Briarpark, Suite 1111, Houston, TX 77042 Tel: +1 713 266 2600 David Preng +1 713 256 3138 dpreng@preng.com London: 42 Brook Street, Mayfair, London W1K 5DB Tel: +44 (0)20 7958 9445 David Lloyd +44 (0)7971 470262 dlloyd@preng.com or visit www.preng.com
We are Preng & Associates, and for more than three decades, weve earned a reputation as the worlds most accomplished executive search firm specializing in meeting the unique management leadership requirements of the energy and natural resources industries. Working from offices in Houston, London and Moscow we have successfully conducted over 3,000 searches for numerous clients in 60 countries. Our consultants possess global search expertise, comprehensive industry knowledge and experience, a commitment to service and a dedication to deliver consistently exceptional executive recruiting results. Our success is based on the premise that the search process is most effective when conducted by professionals with significant energy industry experience. We have earned a reputation for combining professional search disciplines with an in-depth industry and market understanding and have succeeded in some of the industrys most challenging and high-profile searches. Our international reach allows us to effectively conduct global engagements; and as a member of the Association of Executive Search Consultants, we practice and promote its high standards of conduct and professionalism. We invite you to explore the depth of our executive search experience, the diversity of our engagement portfolio and the results weve delivered to clients.
MEET THE MEMBERS
Patrick Kennedy chairman, Nautical Petroleum and CEO, PK Group

I was a director of an AIM shell company that was used as the vehicle for listing Nautical in 2005.Although I have advised companies in many different industries, I had no specific experience of the oil industry previously. I have enjoyed working with my fellow directors throughout the period and was honoured to become chairman of the board in 2010.
I enjoy building businesses and leveraging on my experience in complex and demanding commercial environments. Working on Nauticals strategy with an excellent team in a turbulent environment and delivering shareholder value has been a great experience.
That there are great careers for them in the oil and gas industry! The economics of oil is complex and hydrocarbons will continue to serve societys needs for a long time. Technologies continue to evolve as the industry strives to operate more safely and in more challenging environments. The geopolitical factors facing the market are unpredictable and the landscape likely to change in the coming decade. The industry offers global opportunities to graduates from diverse backgrounds who will be the next generation of skilled engineers, geologists and corporate leaders.
I was born in India and am fluent in Hindi.
Technological development and globalisation mean better recovery rates, improved economic viability and growth opportunities in developing economies. This new environment is creating new opportunities for acquisitions and strategic alliances between businesses with complementary assets, skills and capabilities. These factors should serve to help balance portfolios, facilitate risk management, augment growth opportunities and align resources with strategy.

Reading, exercise and meditation.

Florence.
Outliers, by Malcolm Gladwell.

The Godfather.
Managing risk, people and performance under uncertain market conditions is challenging.
Control the controllables.
Thats a difficult one, almost anything I take would be a luxury, so Id opt for a good supply of tinned food, bottled water and a knife.
CREDITS: DJ LEIN, ALH1
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August 2012
Oil & Gas Spoken Globally

The unique vocabulary of the oil and gas industry requires fluent lawyers. K&L Gates offers clients innovative and reliable counsel on the most challenging legal issues affecting the oil and gas industry across the world. Our lawyers span more than 40 fully integrated offices in the U.S., Europe, the Middle East, Asia and South America. Our clients operate in every sector of the oil and gas industry, from capital markets participants to exploration and production to midstream transmission and storage to refining and transportation. From the routine to the complex, from equity funding to project development to mergers and acquisitions and all points in between; the oil and gas lawyers of K&L Gates draw on decades of experience in the worlds main oil and natural gas-producing regions. At K&L Gates, we are fluent in the language of the oil and gas business. K&L Gates LLP. Global legal counsel on four continents. Learn more at klgates.com.
MEET THE MEMBERS
Tony Peart Legal and commercial director, Gulf Keystone Petroleum

I arrived in London from South Africa via Belgium and France in the summer of 1979 as a jobless lawyer looking for work in the booming North Sea oil industry. I attended the first oil and gas law course at the University of Dundee and was hooked. It took me another six months to find that oil lawyer job and then have somehow managed to stay employed for over 32 years.
After acquiring advanced seamanship skills, I represented the Navy in golf and quiz contests while on national service in South Africa.
As much tennis , golf and opera as I can possibly fit in.
In a previous employment, ensured shareholders received a handsome return on their investment in a company takeover that may have been contested due to legal challenges. And currently, being fortunate to be part of a management team that has taken a small exploration company with a market cap of less than 20m to a market cap of nearly 2bn in three years.
Any Scottish links golf course and the Tzitsikamma National Park in the Western Cape.
All of Nadine Gordimers for opening my eyes.
Dead heat between Dr Zhivago and Out of Africa.
It lies in combining creative risk-taking management, constantly developing new technology and financial resources to ensure that no hydrocarbon basin remains unexplored. That is an exciting opportunity.
Ganaches, Boekenhoutsklof Chocolate Block red wine and all the Puccini and Verdi operas on my iPod, and a putter for the practice.
Persuading host governments and resource owners to understand the investment case and finding simpler legal structures to record their agreements.
One of my bosses told me dont be fuzzy, be the master of your subject and I like Gary Players aphorism the harder you practice, the luckier you get, which probably applies to the oil industry as it does to golf!
Go to where the oil and gas is, in other words, go to the country, meet the people, understand the politics and assets and learn the local language or any foreign language for that matter to broaden your horizons.
Drillers & Dealers
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August 2012
We need energy to power our future and Wintershall is working hard to find and develop new oil and gas deposits all over the world. We have both state-of-the-art technology and strong partners at our disposal as well as unrivalled regional and technical expertise particularly in Europe, North Africa, South America, Russia and the Caspian Sea region. We are also expanding our activities in the Middle East. As the largest Germanbased producer of crude oil and natural gas, we are helping to secure the energy supply, both now and in the future. www.wintershall.com
Shaping the future.

Drillers and Dealers August 2012

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in this edition Featuring

Herbert Smith, RusPetro, Edge Resources and GDF Suez

SJ Berwin, Control Risks and more

Event report On the spot

Oilfield Services Assembly Three pressing points for our panel

Volume 3 | Issue 4 | August 2012

Angus McCoss Exploration Director, Tullow Oil

Ashley Heppenstall President and CEO, Lundin Petroleum

Charles Chuck Davidson Chairman and CEO, Noble Energy

John Knight EVP, Global Strategy and Business Development, Statoil

26 27 November 2012 Old Billingsgate, London, UK

Dr Mike Watts Deputy CEO, Cairn Energy

Ian Henderson Senior Advisor, J.P Morgan Asset Management

Ian Taylor President and CEO, Vitol Group

Julian Metherell CFO, Genel Energy

Ronald Pantin CEO, Pacific Rubiales

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

NORTH AMERICA ASSEMBLY

John Bookout Managing Director KKR

Tom Chambers EVP and CFO Apache Corporation

Janet Clark CFO, Marathon Oil

Alan Crain SVP and General Counsel, Baker Hughes

Chuck Davidson Chairman and CEO Noble Energy

Mark Ellis Chairman, President, and CEO LINN Energy

October 9 10, 2012 Four Seasons Hotel, Houston, TX

John Manzoni President and CEO, Talisman Energy

Brian Maxted President and CEO, Kosmos Energy

Tim Murray Managing Director Blackstone GSO Capital

Sam Oh Partner, Apollo Management

Hon. Pete Olson US Representative Texas 22nd

John Schiller Chairman and CEO Energy XXI

Tom Ward Founder and CEO, SandRidge Energy

Sponsorship Enquiries: vikash.magdani@oilcouncil.com | Tel: +1 347 633 7734

August 2012 + LEGAL, CORPORATE GOVERNANCE & HR

10-14 16-19 20-21 22-23 24-25 28-30

John Skoulding SJ Berwin Capital gains tax

Dominic Schofield Korn/Ferry International Corporate governance: the boardroom blitz

John Bray Control Risks No shortage of deals to be done

Chris Walcot Progressive Lowering procurement barriers

EVENT REPORT ON THE SPOT

52-54 56-59 60-62 65-69

MEET THE MEMBERS

How much does an Olympic medal cost?

Hydrocarbon City, China vs Watford City, North Dakota

Drillers & Dealers

lifetime Achievement Award

We are proud to bring you our 2012 Judging Panel

+44 (0) 207 384 8060

+27 (0) 21 700 3551

SUppORTIng gROWTh, LOCALLY

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Of the hundreds of Canadian juniors, what sets Edge apart?