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Editors Remarks

2012, Latin America, Members' Socials and the New D&D


Time flies seems as good a clich as any to begin the first issue of Drillers of Dealers in 2012 it was either that or the perennial What will 2012 hold?. I will leave the answer to that to our contributors this month (who most certainly do not speak in clichs) and instead include a sketch of our first activity in 2012. A few weeks ago, we were in Bogot, Colombia to host our first ever Assembly there on the business of oil and gas in Latin America. We were excited to do so, there being no shortage of intriguing plays emerging on the continent, each with its own set of risks, rewards and business models. Here are some takeaways from the Assembly. Colombia: There is something altogether Canadian about Colombia in terms of the makeup of the companies and nature of the market there over a hundred independent companies drill to find small to medium resource pools in prolific basins. For all the small companies, business is good, but with only six years of proven resources in place in the whole country and with the Government turning away from the smaller independents in favour of courting the supermajors how much long-term value can be counted on? Per: Per is widely thought to possess superior geology to Colombia, but also a more exhausting permitting process and more challenging social and operational challenges. Company bosses can spend years reassuring their investors about the prospectivity of their giant blocs while they obtain the necessary permits to begin to drill in Per. When the head of Perpetro, Dr Ochoa, announced that a task force had been set up by the Government and promised to slash the waiting time, the audience broke into a spontaneous applause. Argentina: Although no one doubts the theoretical potential of Argentinas shale play, which has attracted the big boys in 2011 ExxonMobil for example and which has been estimated as second only to the United States in terms of shale gas potential, there is the perennial question that refuses to go away: will the Government find a way of (how to put it) destroying value for its investors? Companies have rushed into Argentina, but one wonders how big the gold rush might be if the Government didnt have a track record of burning the fingers of its foreign direct investors. Nevertheless, the panel of CEOs discussing the issue predicted an improving fiscal regime and a continuation of M&A activity from NOCs and Supermajors. Equatorial Margin: Tullows Zaedyus discovery, whose partners CGX Energy spoke at the Assembly, was not just one of the biggest E&P stories of 2011 in Latin America, but in the world. Industry observers are familiar with the unzipping of Africa and South America and the analogues between the massive pre-salt basins in Brazil and West Africa. But while the hydrocarbons are most certainly in place, opportunities for new entrants offshore Guyana are not currently present and it is expensive to get involved in Brazils pre-salt development these days. Companies like Gran Tierra and Panoro (whos VP and CEO addressed the Assembly) have managed to get a foot in the door in Brazil and CGX Energy are a pure-play company offshore Guyana, surrounded by some very big neighbours. There was general agreement from the panel on New Frontiers that its only a matter of time before a company-making Jubileelike field is discovered in the offshore South American Equitorial margin. When that happens, itll be one of the most exciting news stories of the year. Cocktail Receptions: Canadian law firm and Oil Council Partners McCarthy Ttrault and Pacific Rubiales on consecutive nights of the Assembly hosted cocktail receptions where much of the real business of networking takes place. Around the swimming pool of the outdoor bar at the Hilton, Bogot, fund managers, private equity investors, and American and European E&P firms scouted out local O&G companies to forge new business contacts. These drinks receptions are always a great success. Weve added a few more into our calendar of events, which means that there is a cocktail reception coming soon to a city near you in 2012! Starting in Houston in February during NAPE week (fully booked), we will be hosting some highquality networking receptions we call Members Socials in April in London, New York in May, and Calgary in June. For more info on this and all our other activities, including a new African-focused Assembly in June in Paris. Finally a notice about Drillers and Dealers; Youll have gathered that this is by far the biggest Drillers and Dealers weve ever produced. In 2012 we will publish Drillers and Dealers bi-monthly but triple the content in each issue. And, starting from next month, we will have a brand new look to the magazine and a new website to boot as we continue to transform D&D from little more than a pdf of assorted market commentary one year ago, to a fully-fledged industry-insider magazine for the global O&G industry with a growing circulation that now stands over 55,000 people. I welcome feedback and comments on either the form or the content of the magazine as well as suggestions for features and articles. It is, after all, for the industry, by the industry. We hope you enjoy the current issue, and we look forward to seeing you this year in Houston, London, NYC, Calgary, Paris, Bogot, or any combination of the above. By Drake Lawhead, Editor

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::: February 2012 Edition

Welcome to Drillers and Dealers February 2012

Drillers & Dealers


Official Publication of The Oil Council (As of 1st March) Fulham Green, Bedford House, 69-79 Fulham High St, London, SW6 3JW, UK Editor Drake Lawhead Senior Vice President drake.lawhead@oilcouncil.com T: +44 (0) 20 7067 1873 Editor-at-Large and Media Enquires 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 7067 1877 Partnership Enquires Vikash Magdani EVP, Corporate Development vikash.magdani@oilcouncil.com T: +1 347 633 7734 Advertising Enquires Amir Shirkhan Vice President, Sales amir.shirkhan@oilcouncil.com T: +44 (0) 20 7067 1876 Laurent Lafont Vice President, Business Development laurent.lafont@oilcouncil.com T: +44 (0) 20 3287 3447 Graham Swanson Vice President, Business Development graham.swanson@oilcouncil.com T: +44 (0) 20 7067 1872 Craig Bennett Vice President, Business Development craig.bennett@oilcouncil.com T: +44 (0) 20 7370 8031 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

Contents
2012 Global Oil & Gas Survey Results Dragon Rising While West Waivers By Hugh Ebbutt, Senior Consultant CRA Marakon SPECIAL FOCUS: INDEPENDENT OIL & GAS The Case for E&Ps Combining Historical Outperformance and Attractive Valuations By Tracy Mackenzie (Director, Research) and Jack Allardyce (Analyst, Research), N+1 Brewin EXECUTIVE Q&A: AARON DESTE, AZIMUTH Stock Market View Lessons for 2012 By Simon Hawkins, MD, Omni Investment Research EXECUTIVE Q&A: TIM HEELEY, NIGHTHAWK ENERGY 2012 Independent Oil & Gas Outlook By Ian McLelland, Head, O&G, Edison Investment Research EXECUTIVE Q&A: ALEC ROBINSON, LION PETROLEUM Trends, Analysis and Outlook of AIM E&P & Oil Prices By Andrew Matharu, Head, Oil & Gas, Westhouse Securities Meet The Members (Part One) EXECUTIVE Q&A: ANDREW BENITZ, LONGREACH OIL & GAS ON THE SPOT: What issues are your Independent O&G Clients most concerned with in 2012; how can they overcome the challenges these issues present? By Partners and Members from across the world U.S. Natural Gas: A Buyers Market For How Much Longer? By Terry Newendorp, Chairman and CEO, Taylor-DeJongh Alberta: The Rising Global Energy Provider By Jeffrey Sundquist, Government of Alberta (UK Office) Oil Spikes, Iran and Sanctions By Nigel Kushner, CEO, Whale Rock Legal Overcoming Impediments to Shale Gas Development By James Green, Partner, K&L Gates LLP Meet The Members (Part Two)
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 ***

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2012 Global Oil & Gas Survey Results

2012 Global Oil & Gas Survey Summary

1836 responses to our 2012 Survey Over 100 O&G companies participated Uncertainty and bearishness over World Economy and Eurozone World Economy is the major influence over industry in 2012 Very positive outlook for Majors and Oilfield Services Companies Positive outlook for increased M&A and A&D activity More bearish outlook for availability of debt finance Availability of capital, volatility of world economy and human talent crunch named as three biggest challenges facing companies in 2012 East Africa, Kurdistan, West Africa, Argentina and Offshore Australia named as the most exciting oil and gas provinces for 2012 Bearishness and uncertainty on the future of The Falklands

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OILCOUNCIL

2012 Survey

Oil Council

2012 Global Oil & Gas Survey Results


What do you expect to see happen to the oil markets in 2012?
Progressive weakening / deterioration Slow, steady growth Stagnant performance with little movement up or down Volatility and uncertainty Other (please specify)

What do you expect to see happen to the gas markets in 2012?

Progressive weakening / deterioration Slow, steady growth Stagnant performance with little movement up or down Volatility and uncertainty Other

In 2012 are you bullish, bearish or uncertain about:


The World Economy The Eurozone Chinese NOCs Major Oil & Gas Cos. Natural Gas Focussed US Independents North Sea Focussed Independents North African Focussed Independents East African Focussed Independents Oilfield Services Companies European Shale Gale Argentinian Shale Gale Arctic Circle becoming a major O&G province Falklands becoming a major O&G province Libya recoverying to be a major O&G province Kurdistan becoming a major O&G province Bullish 16.9% 3.4% 61.0% 71.3% 38.3% 45.7% 47.5% 65.4% 73.2% 23.2% 30.4% 16.5% 11.3% 51.2% 46.9% Bearish 42.3% 77.6% 11.1% 12.3% 37.7% 22.0% 22.2% 13.0% 10.8% 41.6% 22.0% 42.9% 46.0% 20.2% 19.8% Uncertain 40.8% 19.0% 27.9% 16.4% 23.9% 32.3% 30.2% 21.6% 16.0% 35.2% 47.5% 40.7% 42.6% 28.5% 33.3%

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OILCOUNCIL

2012 Survey

Oil Council

Which three of the following qualities will be most important in determining the success of an Oilfield Services / Engineering company in 2012?
Ability to attract, retain and incentivise their human capital (workforce) Ability to win business in new markets Ability to cope with increasing demand for their services Strategic technology alliances with NOCs & IOCs Strong leadership and management team Good risk management: geopolitical, regulatory, environmental, financial, legislative Ability to access to new capital and investment Successfully managing their client relationships and delivering excellent service Value creation through acquisition of new products and services Sound corporate governance and boardroom practices Other Successfully managing their corporate image and industry / investor reputation

Which three of the following qualities will be most important in determining the success of an Oil & Gas company in 2012?
Ability to acquire / find attractive prospects / assets Ability to access to new capital and investment Ability to attract, retain and incentivise their human capital (workforce) Good risk management: geopolitical, regulatory, environmental, financial, legislative Strong leadership and management team Exploration / Drill-bit success Ability to utilise new technologies and innovative operational practices Increasing the efficiency and development of existing producing assets Ability to manage weak gas prices and volatile energy demand Cost control (internal, service costs, exploration) Successfully managing their corporate image and industry / investor reputation Sound corporate governance and boardroom practices

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OILCOUNCIL

2012 Survey

Oil Council

Who will be most influential in determining the landscape of the Oil & Gas industry in 2012?
The World Economy The Eurozone Governments, Policymakers and Regulators Investors Banks and Financiers Major Oil & Gas Companies National Oil & Gas Companies Independent Oil & Gas Companies Oilfield Services, Engineering and Technology Companies Chinese, Indian and Korean NOCs and SWFs

What type of company/organisation do you represent?


Energy Consultancy / Management Consultancy Equipment, IT / Technology Provider Financial Service Provider (Banker / Advisor / Broker / Insurance / Accountant) Government or Academia Law Firm Oilfield Services or Engineering Company Oil & Gas Company Other

In comparison to 2011 will the industry in 2012 see more, less, or the same volume, of:
Asset-level (A&D) deals Corporate-level (M&A) deals World-class exploration successes Consolidation amongst US independents Consolidation amongst non-US independents Disposing by majors and large-caps of non-core assets PE capital deployment NOCs and SWFs acquiring foreign assets Reserve Based Lending / Finance Debt defaults IPOs Secondary capital raisings Dual-listings De-listings More 57.0% 59.9% 19.8% 42.6% 47.2% 57.7% 24.5% 59.6% 17.8% 36.5% 23.8% 35.2% 21.6% 23.8% Less 9.3% 11.1% 31.2% 8.0% 6.2% 11.4% 21.0% 6.8% 34.0% 18.6% 33.2% 20.6% 15.0% 11.9% The Same 26.3% 24.4% 37.7% 29.0% 30.1% 25.6% 30.4% 27.3% 31.5% 23.8% 27.9% 27.1% 26.6% 27.5% Unsure 7.4% 4.6% 11.4% 20.4% 16.5% 5.2% 24.1% 6.2% 16.8% 21.1% 15.0% 17.1% 36.9% 36.9%

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Guest Article

Dragon Rising While West Waivers


Written by Hugh Ebbutt, Senior Consultant, CRA Marakon

Welcome to the Year of the Dragon! As its name suggests, the twelve months from Chinese New Year (on 23 January) are likely to be volatile and unpredictable, with plenty of challenges and risks, and probably some dramatic flare-ups. Already some key energy trends are emerging. As 2012 progresses, imbalances and emerging stresses, events and new ideas will make many things turn out quite otherwise than most now expect.

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Uncertain Demand and Risky Supplies


The developed worlds enormous debts sovereign, bank and private threaten a second recession. With confidence low and enforced austerity the prescription of choice, credit, investment and consumer spending, and so economic activity all remain stalled. Jobs are being cut. Structural disparities and national political pressures are constraining decisive action, particularly in the Eurozone. The US now looks better, but political initiatives will be all but paralysed for the rest of 2012, by polarised politics and a drawn out election. Despite rising stock markets, the situation seems likely to get worse before better . . . So energy demand is likely to stay flat or even fall, especially as energy efficiency improves with high fuel prices. Falls in the OECD will offset growth, at slightly lower rates, in developing regions. Refining margins once again look thin depending critically on location. Renewed or new oil supply, coming from Libya (initially faster than expected), Iraq, Brazil, Canadian oil sands, plus NGLs and increasingly oil from North American shales, and soon GoM, is likely to depress oil prices, and WTI rather more than Brent. This differential - already almost $18 - may rise more as new US and Canadian oil production grows (and can get to key markets). North American energy self-sufficiency may after all be on the cards perhaps in 8-10 years, if helped by more efficient use. But, rather sooner, oil may spike if Iran and the West fall out further (as the former has set its sights on going nuclear). This would impact supplies to southern Europe and potentially threaten the 15 mmb a day and key Europe and Asia-bound LNG cargoes from Qatar passing through the Straits of Hormuz. Other geopolitical events from the now partly sprung Arab world to Pakistan, Korea and perhaps Russia, China or Venezuela, and others, are likely to keep risk and volatility high. The Arab spring is turning stormy.

Power Shifting East


While much of the West is preoccupied with its own difficulties, Asian and other developing economies - and their populations - continue to grow, even if a little more slowly. Enormous flows of money continue to move from consumers to producers. With these, goes economic power. After 20 years of booming exports, China is now the worlds second largest economy and still growing at an astonishing rate over 8% a year. Chinese and other savers, funding others debts, may soon find better uses for their hard earned cash improving life at home. Chinese companies are likely to continue their resource mop-up, using their low cost capital to buy from those short of funds and credit. Other investors, such as Abu Dhabi or a newly assertive Qatar, enriched by the flood of petrodollars, may too look to buy more high profile western assets, gold or more useful scarce raw materials.

Gas Galore
With gas everywhere, prices in North America are likely to stay low. Under the enormous momentum of US gas shale drilling and production, they hit $2.3/mcf in January more than seven times cheaper than oil on an energy basis, and probably well below cash costs for many dry gas producers. US gas storage utilization is 20% higher than normal and demand is down, with several months of warmer weather in both the US and Europe (2011 was the second warmest year on record after 2006). Despite recent signals of cut-backs, over 700 rigs remain active with many E&Ps still committed to drilling natural gas; while 1200 rigs are now committed to oil plays. Rich gas and liquids wells can generate cash, but their associated gas adds to the surplus. This gas glut offers low cost feedstock for US industries. Perhaps we need more power from gas and real incentives for CNG vehicles and gas stations. In contrast, gas demand in Asia and other growing economies, is still growing strongly. Tight LNG supply in the near term - impacting particularly Japan (as it moves away from nuclear) means high prices look set to stay for now in the Far East (currently near the equivalent of $90/boe). But more gas in three or four years from the current wave of Australian LNG projects underway is likely to change this. US LNG exports and shale potential in places like China and Argentina, when realised, could have an impact on some of those big LNG projects. Chinas ability to throw human and financial resources at industrial challenges has been extraordinary and should not be underestimated.

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Guest Article

In Europe, pipeline investment uncertainties may lead to renewed security of supply concerns. The UK looks rather dependent on spot LNG from Qatar, some of which could get diverted, given the wide regional gas price divergence. Germany seems headed firmly in the direction of the Russian bears embrace. But Gazprom has a propensity to cut exports in cold snaps to meet higher domestic demand. Gas shale production in Europe offers new supply, but may progress slower than some expect and, for now, material volumes look some way off. Green concerns are now clearly playing second fiddle to near term economic worries. Many renewables are wobbling - as capital outlay and subsidies get too expensive and carbon targets are allowed to slide. Relatively cheap gas is also hurting investment in both wind and solar. But perhaps lower subsidies will stimulate a real fall in costs and the strongest technologies will before long rise from the ashes. Improved, safer nuclear reactors (perhaps not sited quite so near major tectonic fault lines) may also slowly come back into favour. Overall more effective, less wasteful use of energy makes both economic and environmental good sense.

Struggle to Grow Value


Oil production growth by some of the IOC group looks to remain rather sluggish, despite raised capital spending. Large legacy positions in declining mature production do not help. What growth there is - is in gas, often adding less value. More costs and delays of increasingly more difficult projects (such as the Arctic) require more funding and usually have lower margins. Exploration spending is also rising for most, but the largest finds remain concentrated in 5 or 6 key countries, mostly controlled by their NOCs. This suggests more dependence on upstream growth by M&A, just as the Chinese are already doing rather effectively, but at high cost. Those that do well will be those ready for the unexpected, able to recognise and respond fast and decisively to early signals and still able to deliver their major projects as planned. Well positioned, proactive and increasingly capable E&P independents look likely to do best. Some energy players need to develop and communicate more compelling strategies to attract the investment they need.

Making Choices
Well see elections, selections and referendums - of various sorts - in Russia, France, Egypt, Palestine, Pakistan, Kenya, Mexico, Venezuela, China and the US. These, with likely changes of leadership elsewhere, make for policy uncertainty. In the UK, apparently more English think Scotland should be independent than Scots do themselves. When and if that happens, Scottish legislators may be tempted to tax the still significant remaining oil a wee bit more at least until they, like their counterparts to the south, see how sensitive investment can be to uncertain returns. More broadly, as China, India and other growing economies stretch the worlds resources, we in the West need to decide how best to develop our own strengths to prosper as the world evolves and grows. We are in for a year full of energy, passion and surprises. Therell be lots of sport to watch in the UK and, perhaps a stronger incentive to get fitter and leaner: the costs of Greek holidays and retsina are likely to be distinctly lower by summer! As you progress your own plans in 2012, have an enjoyable, productive and rewarding year ahead.

Hugh is a London-based Senior Consultant with CRA Marakon, a distinctive corporate strategy firm with a strong track record of helping leadership teams add real value. Before becoming a VP with CRA International, he worked as a Partner in Arthur D. Littles Global Energy Practice, based originally in London and then in Houston, where he led and grew ADLs upstream business for six years. Hugh has over 30 years of global experience in the energy business. His main areas of expertise are upstream strategy, competitive analysis and portfolio growth options in oil and gas. Originally an explorer with BP in the UK, Egypt and San Francisco, his experience includes five years with Chevron, working in business planning, exploration and development, and with Hess, as it rapidly grew its upstream position in the North Sea. Hugh holds an M.B.A. from LBS and has published a number of articles on the outlook for energy companies, resources, and supply and demand drivers.
CRA Marakon is a high-end strategy and organisation management consulting boutique. Marakon, now part of CRA, brings uniquely tailored and integrated advice to its clients, backed by rigorous analysis, holistic thinking and strong industry experience. Our practice has evolved over 30 years and maintains a high degree of integrity, objectivity and focus. Marakon has been described by Fortune magazine as the best kept secret in consulting. We work with senior management teams of highly ambitious multinationals and mid-sized companies to help them deliver superior results and accelerated value growth. Many of our long-standing clients rank amongst the world's most respected companies. Please visit us: http://www.crai.com/

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Special Focus on Independent Oil & Gas

The Case for E&Ps Combining Historical Outperformance and Attractive Valuations
Written by Tracy Mackenzie (Director, Research) and Jack Allardyce (Analyst, Research), N+1 Brewin

As uncertainty continues to grip the financial markets and macroeconomic environment, shareholder registers and ratings have exhibited a flight to safety, with moves away from frontier explorers and inadequately financed companies (unsurprising given ongoing tightness in the debt markets). This has seen our selected listed E&Ps underperform the wider market across the last 12 months (-15% vs -2% for the FTSE All Share (ex. IT)), despite ongoing strength in the oil price. Does this then represent a buying opportunity, given historical sector outperformance (particularly in the wake of an economic recovery) and current ratings? We believe this to be the case, but first let us expand our view and look to the past for lessons.

Historical Outperformance
Across a reasonable time horizon, listed E&Ps have typically outperformed the wider market. The absolute performance of our basket of selected companies (which includes our coverage constituents along with four 1 larger mid-caps) is represented by the red line below. The constituents largely comprise established FTSE 250 E&Ps that have cash generative portfolios and a few more romantic constituents, which have more emphasis on exploration and appraisal (Borders, Bowleven and Nautical). The combination of more established producers (still with growth acreage) and the spice of the frontier explorers offers the potential for significant outperformance. The chart below quite clearly demonstrates how the FTSE O&G Index (which is dominated by Shell, BP & BG) tracks the broader FTSE All-share. In stark contrast our basket of E&Ps has diverged significantly. Over a 12 month period, on a relative basis, our E&P basket has underperformed the FTSE All-share by 13%. However, over a five year period the basket has outperformed by 124%, rising to 983% over ten years.
Comparative 10 Year Absolute Performance
1800 1600 1400 1200 1000 800 600 400 200 0 Feb-02

Feb-03

Feb-04

Feb-05 Brent

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

E&P Basket

FTSE All Share (ex. IT)

FTSE O&G Producers

Source: Thomson Reuters

We believe this evidences that identifying a sensible range of small and mid-cap. E&Ps and retaining holdings in successful players in the space can lead to very significant outperformance. However, we would caveat that our selected constituents largely comprise the winners and exclude some of the less successful constituents, as well those no longer listed due to take-overs or ultimate failure.

Afren, Borders & Southern, Bowleven, Cairn Energy*, EnQuest*, Heritage, JKX Oil & Gas, Melrose Resources, Nautical Petroleum, Premier Oil*, Salamander Energy, Soco International, Tullow Oil* and Valiant Petroleum. * = consensus NAV estimates.

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Special Focus on Independent Oil & Gas

The More Recent Past: Changing Fortunes


The aftermath of 2008s financial crisis proved somewhat of a renaissance for E&Ps, as the oil price gradually made up the ground it had so dramatically lost, and an appetite for frontier exploration gripped the market and drove ratings skyward. Indeed, with the long line of successes which included Rockhoppers Seal Lion discovery, the Catcher discovery re-invigorating interest in the North Sea and each new appraisal well in Kurdistan, prices and excitement surged past the expectations of analysts and fundamentals. Retail investors flooded bulletin boards with news of mobilisations, and scolded derampers. Whilst company specifics ought to tell the story of individual performance, the chart below does evidence the broad outperformance of the more exploration focused constituents in the aftermath of the crisis with the sector in vogue and risk appetites abound.
Absolute Performance: 01/01/09-31/12/10

Nautical (A) Bow leven (A) Afren Borders (A) Heritage Brent Premier Salamander Cairn Valiant (A) Tullow JKX (B) FTSE All Share (ex. IT) Soco Melrose (B) 0% 200% 400% 600% 800% 1000% 1200% 1400% 1600%

Source: Thomson Reuters

The subsequent slowing of growth and Eurozone debt crises have been unkind to the sector. The grim reality of progressing discoveries to developments or even staying afloat against a backdrop of difficult equity markets and cautious debt providers has largely pulled back valuations. Unsystematic issues have compounded poor performance, with the deepwater Macondo disaster almost seeming to set off a conveyor belt of negative news flow. Drilling successes in the Falklands turned to failures, Cairn kept missing in Greenland, EnCore Oils fortunes flipped after a single well and negotiations between the KRG and Baghdad seemed to go into reverse. In Heritages case, oil even turned into gas. Not all news was bad, with Anadarko, Eni and partners enjoying huge successes off East Africa. However, this merely broadened the divide between top and bottom, as those with recent failures at the drill-bit/poorer balance sheets (typically smaller players) were increasingly punished by investors. This has led to increased M&A activity, as larger players have used stronger equity to take over their smaller brethren. This is only likely to increase in the shorter term if a lack of liquidity in the markets and sovereign debt concerns continue to compress valuations. The absolute performance of our constituents from 2011 onwards (see chart below) betrays the disappointments and the markets aversion to risk, underperforming Brent and (largely) a broadly flat market. The exceptions have been Tullow, where the market affords significant goodwill given its exploration track record, and Borders, with first results imminent from its potentially transformational two well drilling programme.

Oil Prices Still Out Of Kilter With Everything Else


Both Brent and WTI have proven remarkably robust, with WTI currently trading around $97 and Brent at $116, despite economic concerns potentially placing downward pressure on demand. Brent in particular remains stubbornly high, possibly reflecting a European shortage of light sweet crude, which yields more middle

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Special Focus on Independent Oil & Gas

distillates . Crude prices can move markedly on account of certain products (clean middle distillates in particular), as witnessed during 07 and early 08 when crude prices surged due to a tightness in clean diesel supplies. With an estimated 50%+ of future demand growth expected to come from middle distillates, refinery outputs of these products may prove to be as important as OPEC quotas and/or upstream investment in determining market dynamics.
Absolute Performance: 01/01/11-current

Brent Tullow Borders (A) FTSE All Share (ex. IT) Afren Salamander Premier Soco Nautical (A) Valiant (A) Enquest Cairn Melrose (B) JKX (B) Heritage Bow leven (A) -100% -80% -60% -40% -20% 0% 20% 40%

Source: Thomson Reuters

Finding different levels: Brent vs FTSE All Share


400 350 300 250 200 150 100 50 0 Dec-08

Dec-09 Brent

Dec-10 FTSE All Share (ex. IT)

Dec-11

Source: Thomson Reuters

The IEA estimates an underlying call on OPEC crude and stock change averaging 30.4 million b/d throughout 2012, keeping levels broadly in line with recent highs. This should help fill inventories depleted by the supply disruptions in Libya, particularly in Europe.
2

Petroleum products are usually grouped into three categories: light distillates (LPG, gasoline, naphtha), middle distillates (kerosene, diesel), heavy distillates/residuum (heavy fuel oil, lubricating oils, wax, asphalt).

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Special Focus on Independent Oil & Gas

However, there are new supply concerns from tensions in Iran and the possible blockade of the Strait of Hormuz. The US also (uncommonly) avoided hurricane outages last year, meaning a reversal of fortunes and the combination of continued supply disruption from Libya, the aforementioned Iranian unrest and any prolonged non-OPEC supply disruptions could result in upward price pressure in the shorter term. Whilst we have recently revised our 2012 Brent price assumption up from $90/bbl to $100/bbl we have retained a 2013+ average of $90/bbl. Our rationale is that market ratings/valuations are not discounting the forward curve. In our view M&A activity within the industry has not supported net asset valuations on a $/bbl basis generated from $100+/bbl. Uncertainty remains over the ability of companies to finance and monetise reserves, while lending banks are issuing debt on more conservative price decks.

Wide Range Of Valuations, But Broadly At Lower Levels


Our valuations are based on a net asset valuation (NAV) methodology. This incorporates a companys full portfolio, from producing assets and balance sheet items (Core NAV or CNAV), to appraisal/development (Total NAV or TNAV) through to exploration prospects (Risked NAV or RNAV). Our subsequent price targets are set on a price-to-risked NAV (P/RNAV) basis, which attempts to provide a realistic 12-month view based on a benchmark of current market ratings within the peer group. Historically, trading ranges for more established E&Ps (outwith market shocks) have tended towards 0.71.1x on a P/RNAV basis. Despite ongoing strength in the oil price ratings largely remain close to historical trading lows, with share prices currently factoring in a more conservative range of 0.21.0x. The more liquid/larger constituents are now trading at an average FY12 P/RNAV of 0.7x, with Tullow, Cairn, EnQuest and Premier on the highest ratings at 0.81.0x (evidencing the attraction of a strong balance sheet). With a view to the historical outperformance of our constituent E&Ps, the current ratings would appear to represent an attractive value opportunity across the sector. In our view, those most likely to outperform in the short to medium term will have some or all of the following characteristics: be trading at a discount to or only a modest premium to the more conservative metric of TNAV (CNAV + Appraisal/Development) versus RNAV (on a sensible price deck), have a pipeline of catalysts (appraisal, development or exploration), have or be able to secure financing (longer dated maturities on debt or net cash positions), and/or own strategic assets which make them a potential bid target. We also expect the better capitalised mid-cap players to continue to acquire assets or corporates at attractive prices. The chart below benchmarks the current share prices against the breakdown of our NAV estimates by category (i.e. core/producing, + development, + exploration).
Current Price against NAV category

Exploration Development Core Current Price

SMDR

HOIL

PMO

MRS

BOR

BLVN

Source: N+1 Brewin

In conclusion, with history providing a strong motivation for owning a balanced E&P portfolio and current ratings at the less aggressive end of the historical range, we see value in the sector for those with a reasonable time horizon, who are able to hold their nerve. Its never a one way trajectory in the E&P world!

Drillers and Dealers :::

TLW

ENQ

AFR

CNE

VPP

NPE

JKX

SIA

::: February 2012 Edition

Special Focus on Independent Oil & Gas

About the Authors:

Tracy Mackenzie Director, Equity Research T: +44 (0) 131 529 0376 M: +44 (0) 7748 593 920 E: tracy.mackenzie@nplus1brewin.com Following a degree in Economics Tracy went on to do a Masters in Financial Economics, where she specialised in Financial Modelling and Research Methods in Economics and Finance. Tracy joined Bell Lawrie in March 2001 where she specialised in the small cap Oil & Gas Sector. She subsequently worked as an Oil & Gas research analyst at Arbuthnot Securities before joining Brewin Dolphin in January 2009. Tracy has been a consistently rated oil and gas analyst by the Extel survey.

Jack Allardyce Analyst, Equity Research T.: +44 (0) 131 529 0267 M: +44 (0) 7500 794 509 E: jack.allardyce@nplus1brewin.com Jack joined Brewin Dolphin in 2009 as an analyst focused on the Oil & Gas Sector. Following a degree in Chemical Engineering at Heriot-Watt University, he gained engineering experience in the upstream sector with two consultancies before moving to energy research house Wood Mackenzie. There he specialised in UK and pan-European assets and fiscal systems, cash flow modelling, upstream costs and unconventionals.

About N+1 Brewin

N+1 Brewin is a leading corporate and institutional stockbroking and advisory business focusing on listed UK small and mid-cap companies. We are part of the N+1 Group, an established pan European investment banking and asset management group focusing on mid-market clients. On 01/02/12 the whole of Brewin Dolphin Corporate Advisory and Broking became Nplus1 Brewin. We have a strong track record built over a period of over 20 years, underpinned by our focus on developing long term relationships with clients, a reputation for integrity, and offering independent advice. These core principles help us to sustain effective business relationships with our clients and are consistent with our aim - to be the advisor of choice in our specialist sectors. Applying these values helps our research recommendations and corporate propositions deliver the returns sought by City institutions, which in turn enables N+1 Brewins corporate clients to access the capital they require.

The information contained in this report represents an impartial assessment of the value or prospects of the subject matter. Performance data and the other information contained in this report has been taken from sources disclosed in the report and is believed to be reliable and accurate but, without further investigation, cannot be warranted as to accuracy or completeness. The opinions expressed in this document are not the views held throughout N+1 Brewin. No partner, representative or employee of N+1 Brewin accepts liability for any direct or consequential loss arising from the use of this document or its contents. The value of your investment or any income from it may fall and you may get back less than you invested. Past performance is not a guide to future performance. If you are in any doubt concerning the suitability of these investments then you should seek the advice of a qualified investment adviser. N+1 Brewin is the trading name of Nplus1Brewin LLP, a limited liability partnership, registered in England and Wales with registered number OC364131. Registered office: 150 Aldersgate Street, London EC1A 4AB. Nplus1Brewin LLP is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority, registered number 568323.

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Executive Q&A Independent Oil & Gas Focus

Executive Q&A with Aaron DEste, CEO, Azimuth By Drake Lawhead


Azimuth is a new E&P firm founded by Aaron DEste who stopped by for an exclusive interview with Drake Lawhead.

For those of us who dont know how would you describe Azimuth in a sentence or two to the market? Azimuth is a well-funded, rapidly-growing E&P firm with the technical capabilities of a mid-cap oil company. We acquire prospective exploration acreage worldwide and advance our assets without delay to produce drill-ready targets underpinned by robust analysis. Tell us a little about the genesis of Azimuth where did the idea come from to form the new E&P venture and what was is the thesis based on? Elements in PGS wholeheartedly believe that proper application of the industrys leading seismic technology (such as GeoStreamerGS, Prospect Scanner, etc) can significantly improve drilling success rates worldwide. Together, we established Azimuth, and its predecessor PGS Ventures, to invest in prospective oil and gas assets (and companies) worldwide using insight gleaned from PGS multi-client seismic data library. What is the competitive advantage Azimuth brings to the table? I believe that Azimuths competitive advantage is threefold. 1. Our ability to leverage PGS multi-client library and the 85 subsurface experts in PGS Reservoir gives us an un-matched, uniquely competitive advantage to identify and analyze exploration acreage quickly. A capability that we believe only the major independents can match. Our majority-owner, Seacrest Capital, is an active and supportive investor that understands the industry and the Azimuth business model and shares our objectives, providing us with the ability to draw capital rapidly. This leaves Azimuth very well positioned to take advantage of industry volatility and execute acquisitions without delay. Thirdly, we have a strong team, unburdened by obsolete methodologies and ready to deploy new business models and novel deal structures, essential for achieving a stellar performance.

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Being a private, fully-funded company obviously brings advantages in a period of volatile capital markets. What would you say the major constraints of being private are, and could your business model change in the future? As long as the key shareholders in a private company continue to strongly support the business, there are very few downsides to remaining private. Spreading the word and attracting deal flow can be more difficult, since fewer analysts and investment banks track your performance, but this is a manageable challenge. Your asset base so far consists of acreage offshore Italy, Benin, Ghana and Namibia. Is Azimuth to be an offshore specialist or do you have other areas of interest? Which parts of the globe do you see value in for a start-up E&P firm like yourself?

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Executive Q&A Independent Oil & Gas Focus

Staying true to our business model, Azimuth will predominantly target areas of the world where PGS multi-client seismic library is at its most dense. North Sea, Mediterranean and Africa are our highest priorities, but we are also looking to expand into South America, Gulf of Mexico and Asia Pacific over time. Success in certain regions requires a local presence and a level of understanding that few small companies can achieve. To help unlock value we have entered into strategic partnerships with Sahara Energy in Africa and Edgo in the Mediterranean. Both are leading indigenous companies with exceptional capabilities and relationships. With the right technical insight and the right partnerships, we believe that small E&P firms can get traction across the globe. Can you talk a bit more about the importance you place on possessing quality seismic to your company and to the exploration industry as a whole? Acquiring high-quality 3D seismic over a discrete prospect or block is essential for illuminating and understanding the reservoir(s) beneath. Utilisation of 3D seismic has grown year-on-year and it is now viewed as a pre-requisite to drilling by many oil companies. Access to high-quality regional seismic is arguably even more valuable for explorers. Interpreting a regional database helps identify trends and play types, it facilitates the latest reservoir characterization techniques, and helps explorers put discrete blocks into perspective. Acquiring oil acreage without regional seismic is like hiking in a minefield without a map. What are the companys goals over the next 2-5 years both financial and in exploration? Azimuth acquires exploration assets and then drives the de-risking program required to produce drillable prospects. Our goal for the next two years is to develop a robust portfolio of acreage packed with well-defined, exciting targets, ready for drilling in 2013-2014. Further funding and rapid growth to follow Which other E&P companies do you admire and why? I admire Cove Energy. From zero to hero in just over two years is a fantastic result. They eschewed the traditional model and immediately took a stake in frontier exploration assets where drilling was imminent. Eco Atlantic is another interesting company. They won Namibian assets in the middle of 2011 and have already taken material steps towards advancing their acreage. Their dynamism and ability to overcome market hesitation is impressive. San Leon Energy is another one to watch. The optionality in their portfolio is immense and their team had the insight to commit to several of the industry trends (oil shale, shale gas, etc) that have captivated the oil majors. I also admire the firm Cenkos. Their ability to understand E&P companies and ability to raise funds is unparallel in the UK market. Jon Fitzpatrick runs an excellent ship.

Finally, three questions we always ask: First, when youre away from work, how do you enjoy spending your spare time? I enjoy driving any available vehicle over any and all available terrain. Trying new activities from sushi making to fencing to bootcamps, its all good. And writing novels (under a pseudonym). Second, what do you enjoy most about working in the oil and gas industry? The oil industry, quite literally, underpins the worlds economy. Why work anywhere else? Finally, I cant let you go without asking our standard question. Youre on a desert island what three luxuries have you chosen to bring? (N.B. Raft Building for Dummies, satellite phone, teleportation device etc., not allowed) A Trident missile, the relevant arming codes, and a map pointing to the bloke who left me there

Before Azimuth, Aaron was a Managing Director of PGS Ventures; Segment President in Schlumberger; a Senior Manager in Booz Allen Hamilton and Co-Founder of the Simmons & Company PE Fund.

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Special Focus on Independent Oil & Gas

Stock Market View: Lessons for 2012


Written by Simon Hawkins, Managing Director, Omni Investment Research

2011 saw significant volatility in both commodity and stock markets resulting in a major dislocation between capital markets and fundamental drivers of the O&G industry. In this article Simon Hawkins, former Head of Energy Equity Research at MF Global, looks back at what happened in 2011 from a stock market viewpoint and draws out a number of practical lessons for 2012.

2011: Dislocated Markets


Last year AIM Oil & Gas stocks overall lost c30% of their value. At the same time Brent crude prices rose 5%. This dislocation of stock prices from industry fundamentals made 2011 an extraordinary year for equity analysts. We started the year with a degree of post-credit crunch relief before it quickly turned into a false dawn, after which sluggish markets slid increasingly fast. By summer all hell had broken loose. Trouble in Eurozone sparked extreme volatility, step-change stock prices and a sudden realization by traders and equity sales that most investors had virtually finished trading for the year by the middle of July. The drought in equity trading volumes continues to inflict damage today on both large and small investment banks resulting in the exit of weaker players, over-reliant on commissions as a revenue stream. From my perspective life was pretty difficult: me and my colleagues were launching coverage on companies with a combined market capitalization of around $800 billion with industry fundamentals suddenly ceasing to drive stocks, the notion of investing for the long-term was exchanged for short-term trading, every day my Bloomberg was painted red (thats a bad thing) and ultimately my employer, MF Global, went up in flames spectacularly on the back of ill-judged bets on Southern European sovereign debt.

Oil Prices
Although the key driver of the sector, crude oil prices, were volatile - especially over the summer Brent crude generally stayed strong within a band around $95-120/bbl. I see this as one of the most significant events of 2011 (alongside Tullows Zaedyus success) since there is now lot more confidence across the industry that oil prices are likely to stay strong for the medium term. I would suggest the way Big Oil has renewed its focus on frontier exploration and its strategic shift towards upstream is evidence that even these oil-tanker-like entities are buying into it.

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Special Focus on Independent Oil & Gas

Stock Prices
While AIM stocks sank alongside the broader market it was interesting that companies in our sector (AIM Oil & Gas) suffered more: AIM fell around 25% by the end of 2011 and Oil and Gas stocks hit a low in September having lost c40% of their value. Was this justified? At the time I rationalized this on the back of three factors: 1. The summer season is always characterized by thin trading as investment managers exchange trading screens in the Square Mile for iPads on the beaches of the Caribbean, Mediterranean or, maybe last year, Cornwall. In declining markets investors generally shy away from risk. AIM Oil & Gas not only had exploration risk but funding risk as the threat of a return to tight equity markets loomed. Debt markets wouldnt help since exploration and debt are always a tricky combination. Between April and June, it seemed equity investors were starting to price in a fall in crude prices that eventually came through in August and September. Just the threat of falling oil prices can be enough to spook the markets.

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2012 Two Tiers


On the face of it 2012 appears to have started out well, with AIM up 13% and AIM O&G up nearly 23% as I write. While Oil and Gas fundamentals are arguably the best they have been for many years the world around us still seems to be falling apart. Behind this two-tier economy there are a number of positives out there for the sector: After the declines in 2011 the sector is looking cheap with many companies trading at a significant discount to risker Net Asset Value. The increased realization that oil prices are more likely to stay north of $100/bbl has helped stabilize the sector. With Big Oil looking to focus on upstream you could argue that small-mid cap companies are looking vulnerable as potential M&A targets, especially companies with acreage or assets in the Far East (where a number of majors are under-represented), West Africa, East Africa and the Gulf of Mexico. Around 80% of companies in the sector now have net cash on their balance sheets, great news in the event of a credit re-crunch. Strong fundamentals are allowing companies to raise capital with several already having tapped the markets in 2012.

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Special Focus on Independent Oil & Gas

However, I believe its too early to get excited, since: Macro uncertainties in Eurozone continue to weigh heavily on capital markets and, just as in 2011, the oil and gas sector is not immune. With the US economy appearing to show signs of green shoots, there is every reason for investors in the sector to take money out of UK/European oil and gas stocks and put them into their US or Canadian counterparts to avoid Euro exposure. I have already seen signs of this at some institutions. Even though industry fundamentals are strong for the oil and gas sector, this is a stark contrast to whats playing out in the rest of the economy, which is already showing signs of double dip recession. Capital markets are still struggling with significant (tectonic) changes taking place among small-mid cap brokers and investment banks. At some point this could have an impact on the ability of companies in the sector to raise cash.

Id be surprised to see the kind of declines we saw in 2011 repeated in 2012. However until problems in Greece (and probably Italy and Portugal) are resolved I expect a fairly muted stock performance in the sector and continued volatility. But at that point the value in the sector should be in the spotlight.

What Does This Mean For Management?


The two-tier oil/non-oil economy creates a number of practical risks that I believe management teams should prepare for: 1. Be smart if your broker looks vulnerable dont wait too long to engage with another one but choose carefully. I have seen first-hand how a multi-billion dollar investment bank can go from solvent to insolvent in the space of just a week. Its shocking and a stark contrast to companies in our sector with hard assets producing a commodity product. But in financial services it is happening. Look for a broker with robust/defensive business model and a strong client base as there is generally safety in numbers. Protect your liquidity dont wait until you need capital before you raise it. When the markets were pricing in Armageddon towards the end of 2011 even the majors were raising money (mostly bonds) because they could, not because they needed it. This should be particularly relevant for smaller companies with capital-intensive funding needs coming up over the next 12-18 months. Be patient about your 2012 share price performance it is likely to take some time for the dislocation between fundamentals and share prices to work its way out of the system. Your broker will only be able to do so much for your share price. This has implications on how far you might want to use shares as currency to do deals versus cash. Be brave as long as you are not running your business as a lifestyle company the market will start to recognize the value you are now creating when conditions get back to normal. Be happy life outside the oil and gas industry is a lot tougher than life inside it. Oil & gas industry fundamentals have arguably never been stronger. This, together with new technology reducing risks associated with exploration and priority access to capital, we have much to be grateful for.

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Simon Hawkins is Managing Director of Omni Investment Research, an independent research house focusing exclusively on the global Oil and Gas sector. Previously, Simon held senior positions at UBS and Dresdner Kleinwort, having been ranked number one by Thomson Extel for his coverage of the European Gas sector, number two in European Oils and three in European Utilities. He is also former Head of O&G at Ambrian and Head of Energy Equity Research at MF Global. Prior to joining the City, Simon had eight years international experience with the Royal Dutch Shell Group of companies, working in economics and finance in Nigeria, The Netherlands, the Far East and the US. During his time with Shell he was recipient of the UK's 'Young Accountant of the Year' award. Omni Investment Research: With over 70% of the UK E&P sector now under coverage Omni Investment Research is the only independent research house that focuses exclusively on the global Oil and Gas sector, providing stock, company and asset research to investors, corporates and other asset holders. Omnis coverage extends from large cap stocks like Tullow Oil and Cairn Energy to quality smaller cap juniors. Omnis staff are oil and gas specialists, with senior management experience at top-tier companies together with access to a large network of technical and other professionals to support their research. Omnis corporate research service is tailored to guarantee the highest return on investment for clients.

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::: February 2012 Edition

Winning new oil and gas from established US basins


Nostra Terra Oil and Gas Company plc is a fast-growing exploration and production company focused on emerging plays within established hydrocarbon regions of the United States. During the last two years, Nostra Terra has acquired interests in Kansas, Texas, Colorado and Oklahoma. It is now looking to expand and upgrade its portfolio rapidly by identifying, screening and acquiring a diverse pipeline of upstream assets. Working interests in new acquisitions will vary, ranging up to 100% in some cases, and include both operated and non-operated projects. The key to Nostra Terras growth strategy is the use of state-of-the-art drilling technology, including horizontal drilling, combined with 3D seismic mapping, sophisticated log suites and multi-stage well completions to target and exploit compartmentalised reservoirs that were under-produced when the original vertical wells were drilled in these mature fields. Nostra Terra is publicly listed on the London Stock Exchanges AIM market. The company is debt-free and fully funded on its current projects, and has also entered into a standby equity distribution agreement (SEDA) that further enhances its financial resources and flexibility. For more information and contact details, please visit www.ntog.co.uk.

Executive Q&A Independent Oil & Gas Focus

Executive Q&A with Tim Heeley, Chairman, Nighthawk Production By Drake Lawhead
Tim, Nighthawk is a closely-watch stock on the AIM, but for our international audience, explain to us in a few sentences what your company is about. Nighthawk Energy is now the 75% working interest owner and operator of 410,000 gross acres we are engaged in developing an early stage but proven and producing shale oil play in the South Eastern DJ basin in Colorado. We are targeting the Cherokee Shales, these are Pennsylvanian age (Upper Carboniferous) formations around 6,500 7,000 ft in depth and have shown to produce not only on our acreage but on other licenses around us. We have established a number of key facts about the play to date and we now need to close the gap between our current valuation and the valuation seen in many transactions in the space currently. What kind of upside do you see the Jolly Ranch prospect possessing? Would its success have implications for other emerging shale oil plays? The upside in the project is very exciting and unlocking the potential is a process of demonstrating consistency and repeatability in the production from the existing wells plus drilling new ones to prove up the core area and the wider acreage. Undertaking this should close the value gap between us and other shale oil transactions that frequently are in the multiple thousand dollars per acre. New shale plays, especially oil, continue to be discovered in the United States, there is a mix in transactions at the minute of large majors acquiring proven and producing plays but also recently we are also seeing these large companies committing to largely undrilled unproven plays like the Tuscaloosa and Utica shale plays. All this serves to enhance the value of shale plays in general but increasingly oil and liquids rich plays. 2011 was a difficult one for the Jolly Ranch prospect, but youve managed to wrest operatorship of the asset from your partners whats the game plan now? We had a very clear game plan to acquire the operatorship and drive the development of the project, we had to appoint to certain key positions such as CFO and COO and we got excellent seasoned professionals for both in 2011. However the markets were the real issue and whilst we had a clear strategy the timing was not ideal. That being said we start 2012 as the operator and 75% working interest holder in the project and this means we can control the pace but also the development strategy. With a focused team being built in Denver we will have a tremendous amount of experienced field operations and scientific skills to call upon to turn around the perception and performance of the asset. In the first instance we are going to focus on what has been drilled already namely maximise the knowledge, and more importantly, the production from the existing wells. We will in parallel undertake new seismic reinterpretation and look to build some geological models to assist well placement and wider understanding of the Cherokee shale play. Off the back of this work later in the year we will commence the drilling of new wells; four vertical and one lateral step out. Where do you see Nighthawk in 3-5 years time? Will Jolly Ranch be enough to digest or do you have half an eye on other prospects? The key thing about the Jolly Ranch project is that there has been a huge amount of leasing around our land position in the last 12 months; Devon, Chesapeake and Newfield, amongst others, all have varying land positions. This has led to the take up of most of the available land and thus almost impossible for new entrants to replicate large, contiguous land packages.

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Executive Q&A Independent Oil & Gas Focus

The land position alone at Jolly, 410,000 gross an acre, which is similar to the area within the M25, and is more than adequate to keep the Company busy for the foreseeable future as there are many opportunities in the stratigraphy at Jolly Ranch and whilst the Cherokee is our primary focus there are multiple objectives to explore. For instance, our acreage has Niobrara present across it and this younger formation, which has not been tested to date in this part of the basin, is really heating up the Denver Basin to the North and West of our land position with both drilling activity and land acquisition, and. Is shale oil understood well enough by the market in your opinion? Is it an advantage for you or a disadvantage to be working on a play type that is still relatively new compared with shale gas and conventional oil and gas? Shale Oil began serious development around the turn of the 2000s, the Bakken, focused on North Dakota, being the key play. The relatively new focus on shale oil was clearly an advantage in accessing cheaper land for initial leasing however, in the early stages of the assets development, it was harder to communicate the potential in an emerging area of the oil industry. However the success of shale gas and the subsequent drop in gas prices has led many focused on that area to refocus their expertise and equipment on shale oil. This has led to further acreage building in new and established plays and also periods of intense M&A activity. With gas looking more than likely to drop below $2/mcf, coupled with a rise in oil prices; shale oil in the United States, where already in 2012 transactions dont seem to be letting up, is looking increasingly unconventional. What were the lessons of 2011 that you would incorporate into 2012s business planning, and that you would internalize as an O&G CEO in general? Have a plan B a plan C wouldnt go amiss either. As the Operator of the project now we have been designing operating and financial plans well ahead of the actual appointment and our focus on the business is now to deliver the value for the most optimal cost possible. What next bit of news flow should we look out for from Nighthawk? Were now focused on gearing up operationally and we will communicate our work over program in the next few weeks. The results of these will form part of our regular quarterly updates, which are a natural way of informing the market given the way shale assets are developed. Which other E&P companies do you admire and why? Ive always had great admiration for Faroe Petroleum. The business has been built with a very clear focus and in a very clever way. Excellent exploration focus but growing production base obtained through clever asset trades in the early days building an excellent asset base. Above all the executive teams always seem to enjoy what they are doing and communicate their objectives very clearly. I also have an eye on FOGL at present to see if the much more structurally defined Southern Falklands basin can replicate some of the success seen in the north. When youre away from work, how do you enjoy spending your spare time? Ive a young family so spending time with them is always rewarding, I enjoy spending time on boats and this is always relaxing, it also requires 100% attention so work does get forgotten about. Although the boots were hung up years ago I am an avid rugby fan and am eagerly awaiting the 6 Nations this year (albeit probably watching from behind the sofa). What do you enjoy most about working in the oil and gas industry? It is a hugely diverse industry and has implications from what microbes were doing millions of years ago to todays geopolitics a truly global industry and a very misconceived one. The people you meet in it are generally very good, friendly people which makes working all that easier. Youre on a desert island what three luxuries have you chosen to bring? (N.B. Raft Building for Dummies, satellite phone, teleportation device etc., not allowed) I spend too much time away from my family as it is so theyd have to be deserted too (it would be worth Hobbs and Joules opening a branch there however!) In addition I would like ownership of the continental shelf resources there would bound to be an oil company along in the near future and rescue may as well have some kind of royalty interest attached.oh and some decent malt whisky.

Drillers and Dealers :::

::: February 2012 Edition

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Special Focus on Independent Oil & Gas

2012 Independent Oil & Gas Outlook


Written by Ian McLelland, Director, Sector Head Oil & Gas, Edison Investment Research

2011 was undoubtedly a difficult year for independent oil and gas companies, with the junior sector in particular suffering in the wake of tough economic conditions. In hindsight, this was partly a necessary correction from the euphoria of 2010 when equities clearly disconnected from fundamentals, while uncertainty over commodity prices and access to capital heaped further pressure on the sector. However, moving into 2012 there are clear signs of renewed interest, with three key issues in play that we see pointing to a more promising year ahead.

Fundamental Disconnects Will Act As M&A Catalysts


Oil and gas stocks experienced almost continuous downward pressure during 2011, despite the robustness of crude prices. This was most in evidence in the junior sector, where high beta stocks were pilloried as risk-averse investors took flight from the sector, citing access to capital and an uncertain oil price outlook as key issues. As a result of this, when adjusted for crude prices, the AIM O&G Index at the end of 2011 traded at near-record lows. Asset values have never been cheaper. Entering 2012, this creates an interesting and healthy tension. Many companies that have struggled to get high-quality projects away are now looking over their shoulders at potential M&A vultures. Oil and gas resources do not just disappear into thin air, so when equity markets discount company values well below fundamentals it is only natural for more cash-rich third parties to move in. Premiers acquisition of Encore and Ophirs acquisition of Dominion were probably the two stand-out deals in the UK during 2011, and Ithaca may be next, having recently announced an acquisition discussions. However, we do not see M&A as the only reason for some upward share prices over the next 12 months.

More Stable Oil Outlook Easing Access To Capital


Oil prices remained resolutely high in 2011, as OECD demand concerns contrasted with supply issues in the wake of the Arab Spring. During 2012 we had expected a softening outlook as an anticipated supply surplus built on rapidly slowing demand growth coupled with firming production more likely to push down prices; however, EU sanctions on Iran and the knock-on threat to the Strait of Hormuz could well now flip things the other way. However, most critical for equities is a growing recognition from both lending banks and investors alike that a precipitous collapse in prices is unlikely in the near term and that price deck assumptions for investment and funding are significantly up on recent years. A recent survey of investment bank WTI price forecasts, excluding the Goldman Sachs hyper-bulls, indicated a consensus around $80-100/bbl in 2012, increasing to $90-120/bbl in 2013. Reserve-based lending price decks are also up as banks re-evaluate what they will lend on, although the halcyon days of 80-90% debt for developments are clearly behind us. Further out, BPs recently published Energy Outlook 2030 continues to predict growing oil demand as part of its primary energy demand growth forecast of 1.6% pa. Overall, the commodity price outlook is more stable and this can only be good news for oil and gas independents struggling to get their prized projects off the ground.

Temporary Delays Mean No Shortage Of Excellent Projects


While perhaps not quite the hedge that gold is, oil and gas assets in the ground do not simply lose their value when times are tough. Good projects will always be revisited and we expect this to be very much the case in 2012 as funding becomes more accessible. There are good news stories across the planet to look forward to. Elephant-hunting explorers are set to provide healthy newsflow, with drilling campaigns in the Falklands, Guyane and offshore Namibia all in the spotlight. The North Sea continues to confound sceptics with a surge of drilling and development activity that includes more wells in the Greater Catcher Area, the biggest discovery in the UKCS in the last 10 years. Sub-Saharan Africa probably remains the hottest ticket in town, with licence rounds likely to introduce us to new players in West Africa, ready to supplement the successful pioneers such as Tullow and Afren. Meanwhile, gas volume estimates offshore East Africa keep growing at an incredible rate making this area the global development story for the coming years. And the undoubted resource potential in Kurdistan also made significant strides towards commerciality in the wake of some high-profile corporate deals. Finally in this section, the rise of unconventional exploration and development activity is set to continue, with yet more shale gas, shale oil, oil shale and GTL projects set to make us rethink our estimates of global hydrocarbon resources. It remains early days, but 2012 appears set to offer up many interesting stories for both small and large players in the independent oil and gas sector. Coupled with a potentially M&A-fuelled equities market and encouraging noises around finance availability, the catalysts are certainly in place for companies to unlock the inherent value that undoubtedly exists within their portfolios. Contact Ian directly at: IMcLelland@edisoninvestmentresearch.co.uk

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::: February 2012 Edition

Executive Q&A Independent Oil & Gas Focus

Executive Q&A with Alec Robinson, CEO, Lion Petroleum Corp. By Drake Lawhead
Lion Petroleum is a privately owned company based in London with 9.7m acres in two blocks onshore Kenya. Alec Robinson, the CEO, talks to Drake Lawhead of The Oil Council.

There was a time not long ago where I might have started by asking why Kenya? But its no secret that East Africa is undergoing a boom in E&P. However, can you briefly describe for us the theory behind your focus on Kenya and what kind of opportunity youre pursuing there? As you say, the East African region has become an international hot spot for oil and gas exploration and the recent major gas discoveries offshore Mozambique and Tanzania have led to a significant increase in exploration activity. Kenya is clearly under-explored with only 28 exploration wells drilled onshore Kenya to date, one every 20,000 sq km on average, and only one well since 1992. Our team has long been involved in Kenya with our key success being the identification of the potential of Block 10BA in our Centric days which saw us, at the time, attracting Tullow as a partner. Now through Lion, we are currently engaged in moving our assets, Block 1 and Block 2B to the next exploration phase and evaluating other opportunities we have in the pipeline. Our blocks are in basins where there have been encouraging oil and gas shows, oil seeps, and where there are untested plays. We are very excited by the opportunities that we have. Can you briefly describe for us the business model Lion is based on? Is this Centric Energy - part two? Lions business model is to build and create shareholder value through leading exploration in Africa by leveraging our relationships and our first-mover advantage. The sale of Centric was a very good deal for our shareholders. We like to think that as a team, we draw on our networks and experience gained through Centric and aim to deliver the same success for our investors in the region. We already knew Lion Petroleum and its assets so when we were offered the opportunity to manage Lion and take it public, and grow the company, we were very pleased to accept. The intention is to complete the listing and then grow the company focusing on sub-Saharan Africa. How would you describe the risk environment of operating in Kenya is it mainly political, operational, environmental, or something else? How significant is risk planning in your business? Over the past few years, political risk in Kenya has seemed low. At the present time, however, with an election coming up sometime in the next 12 months, political sensitivities are increasing. As political parties seek to gain advantage over each other, the high profile of the oil exploration industry means that it is at risk of being a target. With regards to security, there is natural concern about the situation in light of the recent incursion of Kenyan armed forces into neighbouring areas of Somalia. Companies active in north-eastern Kenya are monitoring the security situation very closely. A number of countries, including the UK, USA and Canada, have posted warnings regarding the risks of travel in north-eastern Kenya. There are a lot of big companies in East Africa such as Shell, Total, ENI, Anadarko, Tullow, but also a lot of smaller players like Lion. Weve seen some M&A activity in 2011, what are your expectations for 2012? French multinational Total joined the jostle for opportunities recently in Kenya; that signals entrance of supermajors into the region. This is very exciting for companies like Lion, smaller players that can benefit from building rewarding partnerships with larger companies who have the operational resources to move things forward. I expect consolidation to continue driven by the need to access funds, the increasing rarity of prospective new acreage, and of course by successful exploration results.

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::: February 2012 Edition

Executive Q&A Independent Oil & Gas Focus

Would you consider an acquisition in the near future, whether asset-level or company-level, and if so, where do you currently see value? We are very keen to work with other companies on either level assetbased or at the corporate level. Firstly, however, we need to complete our listing. Whats the advantage of being a private company operating in East Africa, and are there any constraints? How will your move onto the Toronto Stock Exchange change business for you? There are pros and cons of each corporate structure. Being private means that there is less of the administrative paperwork, with its associated expense, that the stock exchange requires. For example, TSXV requires quarterly financial reporting. Also, the company is not subject to the vagaries of the equities markets, and can take a longerterm view of opportunities. Being listed, however, provides investors with increased liquidity and the ability to trade shares, and can provide improved access to the capital markets. What will be said about East African E&P at the end of 2012, will it be a story of M&A or drill-bit success? Therell likely be some exciting news from the onshore drilling, in Kenya and neighbouring countries. Of the upcoming onshore wells, Im particularly excited about the drilling in the Tertiary rift, where a well has just started on a play that is similar to the Tertiary play in our Block 2B; the planned well offsetting the 1972 El Kuran wells in Ethiopia just over the border from our Kenyan Block 1 which is in the same basin; and the planned well in Block 10A in the Anza Graben. Each of these is offsetting wells with very good indications of oil and are very exciting. Itll take additional drilling to define the sizes of any discoveries, and thatll likely not happen until 2013. Offshore, Ive no doubt that there will be further gas discoveries - the intrigue now is whether there will be an oil discovery. What next bit of news flow should we look out for from Lion? The seismic that is currently underway in Block 1 will almost certainly lead to drilling in that Block in 2013. Seismic will start in Block 2B once we have completed the listing. And also, once the listing is completed, we have some deals we are working on that we will then be able to complete. Which other E&P companies do you admire and why? Cove Energy has done very well as a result of acquiring an excellent portfolio of assets. Tullow over the years has successfully made the transition from a start-up E&P company to being a very strong mid-cap; that transition is difficult to do successfully. Afren is making the same transition now and from what I see is doing a very good job of it. Ophir had a risky strategy which has played-out well, culminating in their recent IPO. When youre away from work, how do you enjoy spending your spare time? Because I travel a lot, when I have spare time in the UK I greatly enjoy being with my wife. Together, we enjoy gardening, and we try to get to the gym five to six times a week, if my schedule allows; the hard exercise is destressing, and I consider that remaining physically fit is very important and greatly improves quality of life. Of course, we also take advantage of the cultural benefits of living near London and enjoy the opera when we can. What do you enjoy most about working in the oil and gas industry? The challenges, whether technical, political, legal or whatever, and the effort to overcome them, makes this industry really exciting. The intellectual effort to solve the exploration puzzle is unique. In addition, the international experiences that I have had have been amazing, working in places as diverse as the jungles of Irian Jaya, the deserts of Oman, Norway, Argentina, Colombia, and now Africa. It has been fascinating to experience and work in those different cultures, and to meet so many fine people. My nightmare scenario for a job would have been commuting to work 9-to-5 in London. Youre on a desert island what three luxuries have you chosen to bring? (N.B. Raft Building for Dummies, satellite phone, teleportation device etc., not allowed) 1. Pencils and paper, for keeping records, etc., 2. A mirror, to use the reflection of the sun for signalling, and lastly 3. Packets of vegetable seeds (hoping that there is fresh water on this island)
Maps available on request of Lion acreage areas. Contact Gayle Meikle, Investor Relations g.meikle@lionpetroleumcorp.com

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::: February 2012 Edition

Committed, not just involved.

Over 80 corporate clients Corporate finance & broking, equity trading, sales and research Research includes Mining, Oil & Gas, Investment Funds, Strategy, Media, Alternative Energy and Growth Companies Merger with Arbuthnot Securities completed in January 2012

www.westhousesecurities.com
Westhouse Securities is authorised and regulated by The Financial Services Authority and is a member of The London Stock Exchange. Registered Office: One Angel Court, London, EC2R 7HJ. Registered in England Number: 762818

Special Focus on Independent Oil & Gas

Trends, Analysis and Outlook for the AIM E&P Sector and Oil Prices
Written by Andrew Matharu, Head, Oil & Gas, Westhouse Securities

2011 AIM Oil & Gas Summary


2011 will be remembered as a bleak year for investors in the oil & gas sector with the AIM Oil & Gas sector underperforming by 36% on an absolute basis, despite support from the oil price, which averaged US$110 per bbl in the case of Brent, and some notable exploration successes. Risk aversion, the European debt crisis, capital outflows and liquidity all played a role during one of the most difficult years for the sector in recent times. However, towards the end of 2011 the UK oil & gas sector had a relatively stronger performance, buoyed by a marked improvement in corporate M&A activity, and increased by 14% versus a 1% increase in the AIM AllShare index during Q4 2011.

Corporate Activity Stepped Up


The final quarter of 2011 witnessed some high-profile consolidation within the sector, with the offers for Dominion Petroleum and EnCore Oil by Ophir Energy and Premier Oil, respectively, in the UK. Shale plays were again in focus in the US, with Statoils acquisition of Brigham Exploration. In our view, it is highly likely that the pace of M&A activity will step up during 2012, as a result of the opportunities offered via distressed corporate valuations and the high levels of free cash flow available to the sectors natural consolidators, from the high oil price. The first signs of additional consolidation have already appeared in 2012, with the announcement from Cove Energy that the company has put itself up for sale.

but Capital Markets Activity Slowed Down


Primary and secondary fund raising activity was particularly lacklustre during the final quarter of 2011, with only two material capital raisings, both by companies with management teams and investment themes that are well known to the investor community: Bowleven raised $120m to progress its recent discoveries and developments, offshore Cameroon and Rockhopper Exploration raised 45.6m to consolidate its position in the Sea Lion discovery and for further appraisal of the North Falklands Basin. In addition, and of note, Xcite Energy also raised 25.8m via private placement and established a 60m equity credit agreement in an effort to progress its flagship Bentley Field project - a rather expensive and dilutive form of project financing, due to the lack of available debt financing for heavy oil projects. Figure 1 highlights monies raised on AIM by oil & gas companies via primary and secondary issues from Q1 2010 to Q4 2011.
Figure 1: Monies raised on AIM by oil & gas explorers & producers Jan 2010 Dec 2011

Monies raised (m) 500 450 400 Secondary Placings

IPOs # IPOs (RHS)


3

350
300 250 200 150 100 50

0 1/10 3/10 5/10 7/10 9/10 11/10 1/11 3/11 5/11 7/11 9/11 11/11
SOURCE: AIM monthly statistics.

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Special Focus on Independent Oil & Gas

Sector Themes For 2012


In addition to consolidation, we have identified several key sectoral themes that we think will feature prominently through 2012 and beyond. In most cases, these are already starting to have a material impact on the landscape of the industry and in some cases, such as US shale gas, a material impact on short-term commodity pricing. US Shale Oil: Interest in US shale plays has been a key driver in US M&A activity within the oil & gas sector. Significant bid premiums have been paid by foreign players such as BHP Billiton, Sinopec, Total, Marubeni and Statoil, in an effort to secure a foothold and acreage positions in the key US shale basins. The industrys attention on, and development of, shale gas plays in the US - which has seen the US grow into the worlds largest producer of natural gas, and has in turn had a material impact on Henry Hub pricing has now turned to shale oil, where it is anticipated that the success can be repeated. Pre-Salt Basinal Plays: Given the exploration success and materiality of discoveries to date in the Brazilian pre-salt Santos and Campos basins, there are high expectations for the equivalent basins in West Africa (Gabon, Angola and Namibia), which are believed to mirror the geology of Brazil. There has already been some success this year, with an announcement by Maersk Oil that it has made its first pre-salt discovery in Block-23 of the Kwanza basin, offshore Angola. The well flowed 3,000bopd under a mini-DST. Ophir Energy will be looking to drill its pre-salt prospects offshore Gabon in late-2012, and several other companies, including Chariot Oil & Gas and Tower Resources, will be drilling in the pre-salt offshore Namibia. In addition, the pre-salt geology of Kazakhstan is being targeted by Max Petroleum, which recently spudded its first pre-salt exploration well on the Emba-B prospect. The results of this well are expected in spring 2012. LNG/GTL: Courtesy of the material exploration success experienced offshore Tanzania and Mozambique, resulting in multi-TCF gas discoveries by Cove Energy, Anadarko, BG Group, ENI and Ophir Energy, LNG will remain at the forefront of the sector in 2012. We expect to see a significant level of activity in the East African region, both at the drill-bit and at a commercial level. In addition, the development of shale gas, in both the US and other regions, could add materially to global LNG volumes. In parallel, Shells high-profile Pearl GTL project in Qatar has also raised industry awareness of the Gas-to-Liquids (GTL) process as a monetisation route for large, stranded gas resources, and may, in some cases, offer an alternative route to market other than LNG. Unconventional Gas/Coal Bed Methane (CBM) Resources: The development of tight gas reservoirs and CBM in the EU, India, China and Australia will play a growing role in the energy diets of these regions. In many cases, the key de-risking step in the development of company-making projects is a clear demonstration of the reservoir characterisation, resulting in operational competence in completion of development wells and/or fracture stimulation strategy.

Oil Price Outlook For 2012


Our view on the oil price, which is predicated by the visibility of several strong indicators for a risk premium to be applied to the oil price, is reflected in recently reported trading activity, which has seen oil traders taking fat tail event positions which point to an oil either significantly below or above US$100 per bbl.

Possible Price Positive Disruptive Scenarios


There are certainly significant risks to the upside, currently, mostly coming from the Middle East. We detail the main risks in Table 1, in order of their potential effect on the oil price. In addition to those listed in the table, there is always the risk of strikes, terrorist attacks and other short-term disruption in other exporting countries, such as Venezuela and Nigeria. For example, we note the national strike against petrol price increases in Nigeria, which started on 9 January 2011.

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::: February 2012 Edition

Special Focus on Independent Oil & Gas

Table 1: Likely Price Positive Scenarios In 2012

Issue Irans nuclear ambitions

Current situation Iran appears to be developing the capacity for nuclear weapons against international wishes

Disruptive scenario A military strike by Israel and/or the US against Iranian nuclear sites with Iranian retaliation

Impact on the oil price Iran would probably seek to close the Straits of Hormuz, stopping oil and gas exports through that route, sending oil prices sharply higher

Significant internal dissent in Saudi Arabia

There have apparently been low levels of internal dissent in Saudi Arabia, especially in minority Shia areas. There are a number of causes of potential internal dissent, most importantly economic conditions (especially inflation), and friction between religious leaders and the President

Levels of internal dissent increase and spread geographically, putting the operations of oil installations under threat

Saudi oil exports would probably drop and oil prices would likely be driven sharply upwards by higher risk premiums

Significant internal dissent in Iran

Economic conditions, and/or internal political ructions, and/or a spill-over from Syria, cause increased levels of internal dissent; operation of oil installations might come under threat

Iranian oil exports would probably drop and oil prices would likely be driven sharply upwards by higher risk premiums

Break-up of the Iraqi government

Following the US withdrawal, the Shia and Sunni factions within the Iraqi government appear to have split

De facto separation of the Shia areas of South and East Iraq from the Sunni areas in the North and West

Possible disruption of Iraqi exports through Turkey and Syria, or the danger of terrorist attacks on industry installations throughout the country

Continuing unrest in Syria

Violent protests against the Assad regime continue; there are reports of continuing desertions from the government military

Violent protests escalate into a de facto civil war, led by the Sunni majority

The Sunni-led revolt worries the Shia-led governments of Iraq and Iran, which try and bolster their own positions, increasing the risk premium in the oil price

Increased political pressure on Israel by Egypt and other Muslim nations

It appears that the future government of Egypt will be dominated by Islamic popularists; the new government will probably put pressure on Israel by various means

Egypt unilaterally abrogates its peace treaty with Israel; violence increases around Gaza and the West Bank.

Unless there is military action between Israel and a significant regional power (which we do not expect), it is unlikely that physical supply would be disrupted. However, oil prices would probably be driven upwards by higher risk premiums

Increased internal dissent in Russia, in reaction to the 2012 Presidential Election

Following the disputed Duma elections of December 2011, presidential elections are due to be held in March 2012

Political dissent causes a loss of political legitimacy for the newly-elected President Putin; inward and domestic investment slows due to uncertainty

Probably little disruption to oil and gas exports in 2012. However, oil prices are likely to be affected by higher risk premium. Lower production profile of oil and gas in the medium term

Source: Westhouse Securities

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::: February 2012 Edition

Special Focus on Independent Oil & Gas

Price Negative Scenarios


The key risk to the downside is European demand. The Eurozone debt crisis is leading to the introduction of austerity measures throughout Europe. Oil demand in the EU in 2010 was about 13.8mmbpd, or c15.8% of global demand. Over 78% of this is from countries in the Eurozone. However, over the last decade, oil demand in the EU in general has been declining, by about 0.7% per year, due to higher prices and increased substitution. In a full recession scenario, it is not inconceivable that we would see oil demand from the European Union falling by over 3.5% in 2012, or c500,000bpd. Oil demand in peripheral countries such as Russia and Turkey could also fall, as a result of knock-on effects of a recession in the European Union. The total effect of a deep European recession might be to reduce expected demand by as much as 750,000bpd. A hard landing to economic growth in China could also cause a reduction to demand forecasts. The effects of lower economic growth on oil demand are hard to quantify but could be large enough to materially affect global oil markets. There could also be other upside supply surprises, of which we set out the most likely ones below. A faster than expected recovery in Iraqi production The emergence of a modus vivendi between the Kurdistan Regional Government and the Iraqi central government, to allow increased exports from Kurdistan Faster than expected recovery in Libyan production.
Table 2: Maximum Disruptive Effects of the Scenarios Described Above

Disruptive scenario Blocking of the Straits of Hormuz Disruption of Saudi production Disruption of Iranian production Break-up of Iraqi government Civil war in Syria Increased Egypt/Israel tension Increased internal dissent in Russia Increased exports from Kurdistan Hard landing to economic growth in China Faster than expected recovery in Iraqi production Faster recovery in Libyan production Deeper recession in the Eurozone

Maximum effect 1 (mmbpd ) -15.5 -7.2 -2.4 -2.0 Higher risk premium Higher risk premium Higher risk premium
2

Source Average daily traffic level. US EIA 2010 net exports from BPSR 2010 net exports from BPSR WS estimate of 2010 net exports

+0.25 +0.25 +0.50

Westhouse Securities estimates Westhouse Securities estimates Westhouse Securities estimates

+0.50 +0.75

Westhouse Securities estimates Westhouse Securities estimates

NOTES: 1. Minus represents loss of crude availability. Plus represents increase in crude availability. 2. We do not expect increased internal dissent in Russia to affect oil exports, unless there is a very serious challenge to the governments authority. Exports in 2010 were around 7.1mmbpd (Source BPSR) SOURCES: As described above. BPSR =BP Statistical Review of World Energy June 2011.

Oil Price Risk Premium Likely To Remain


In the absence of major events, we consider that the Brent oil price should stay in the $100-120 per barrel range in which it has been trading since the end of April 2011. Although the fundamentals for a surprise free oil market are looking slightly weaker in 2012 compared to 2011, a significant risk premium in the oil price is likely to remain.

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Special Focus on Independent Oil & Gas

Overall, we consider that the probability of one of the four price positive scenarios which would cause physical disruption to oil supplies taking place (see Table 2), is significant, but lower than one in four. In the event that one of these price positive scenarios does occur, the oil price upside is likely to be considerable. By contrast, we are of the view that that the chance of one of the five price negative scenarios occurring is higher than one of the price positive scenarios but any absolute effect on the oil price will be lower, particularly if Saudi Arabia dampens the negative effect by lowering its production in response. Our central forecast is that oil will continue to trade in the $100-120 per barrel range. However, we consider the risk to this forecast to be on the upside, rather than the downside, and believe that the trading strategies which are likely to be more correct are those that concentrate on the upside.

Summary
Given a combination of distressed NAVs across the sector, coupled with our assumption of the Brent oil price continuing to trade between US$100 and US$120 per bbl, with upside risk and delivery from near-term high impact exploration in East Africa (Tanzania) and pre-salt basinal West Africa (Namibia, Angola and Gabon), we believe the potential exists for a positive re-rating of the sector in early 2012. However, in the absence of political clarity on the European debt crisis, investors aversion to risk may mean that they continue to shy away from the pure explorers that offer the exact quantum of upside they are seeking from the market, in favour of their cash-generative producing cousins.

About the Author Andrew joined Westhouse Securities in 2011 and has over 15 years experience in the O&G sector, commencing his career as a Petroleum Engineer with Chevron and KerrMcGee. Andrew went on to join Cazenove in Equity Research, covering the European integrated oil sector, before moving into Corporate Finance where he has held positions in a variety of firms including PwC, Bridgewell Securities and City Capital Corporation. Andrew is a Chartered Engineer, graduating from the University of Sheffield with a degree in Chemical Engineering and gaining a Ph.D in Chemical Engineering from Cambridge University. You can contact Andrew directly at: T: +44 (0)20 7601 6129 andrew.matharu@westhousesecurities.com About Westhouse Securities Westhouse Securities is a corporate and institutional stockbroking group with particular sectoral expertise in natural resources, investment funds, UK industrial and environmental technology. Regionally the Group's clients have significant exposure in Europe, Africa, Central Asia and China. Through its division Smith's Corporate Advisory, Westhouse has a strong focus on widening share ownership for quoted companies of all sizes. In January 2012 Westhouse acquired Arbuthnot Securities and the two businesses were fully integrated. The Company continues to exploit opportunities in overseas markets through its strategic alliance with Agile Partners, based in Beijing, and through close working relationships with a number of other advisory businesses worldwide. To learn more please visit: http://westhousesecurities.com/index.asp

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::: February 2012 Edition

Meet Our Members

Committee Member
Angelos Damaskos, CEO, Sector Investment Managers

Member
Stuart Cooper Vice President, Business Development, Oil & Gas, TAQA

How did you come to be in the oil industry? Having graduated with an engineering degree from University of Glasgow, i continued my education with an MBA from Sheffield University. Upon graduation i was offered a position in the natural resources M&A team of BHK-Bank where i specialised in energy financings.

How did you come to be in the oil industry? I was looking for an opportunity to live and work in Scotland as an in-house lawyer and was lucky enough to be invited to join Total in Aberdeen.

What is your proudest work-related achievement to date? The successful merger of Great Artesian Oil and Gas Limited into Undoubtedly setting up Sector Investment Managers as a start-up with initial assets of about 3.6m and seeing it grow to what it is today.

What is your proudest work-related achievement to date? The successful re-negotiation of six EPSA contracts in Libya for Petro-Canada although I was just a part of what was a real team effort!

Where do you see the greatest opportunity in todays oil and gas markets? Smaller, development-focused listed companies are today valued at historically low multiples. This is unlikely to continue for long so a re-rating is due.

Where do you see the greatest opportunity in todays oil and gas markets? For me, the greatest opportunity is working to build long-term energy supply with the emerging regimes in Africa and the Middle East. From a purely economic perspective, there is also huge potential in seeking arbitrage advantage from North American commodity pricing.

Where do you see the greatest challenge in todays oil and gas markets? Large indebtedness in developed economies will hamper global economic growth. We are in a situation that could last for several years as we slowly reduce debt.

Where do you see the greatest challenge in todays oil and gas markets? The greatest challenge for the industry as a whole is to change the pattern of global energy demand and consumption in order to ensure a sustainable and cleaner future for everyone.

What was the wisest advice you ever received from a mentor? Look for value and invest long-term. Trading is for computers.

What was the wisest advice you ever received from a mentor? Listen, and seek first to understand.

Drillers and Dealers :::

::: February 2012 Edition

Meet Our Members

Committee Member
Angelos Damaskos, CEO, Sector Investment Managers

Member
Stuart Cooper Vice President, Business Development, Oil & Gas, TAQA

What advice would you pass on to a graduate wishing to work in your line of business? Try to understand lasting, long-term value drivers in any investment model.

What advice would you pass on to a graduate wishing to work in your line of business? Make sure that you have mastered a core discipline and then grab your opportunities (wherever they may be) with both hands. Whats the one interesting fact about you that no one would suspect? I fence (foil). How do you prefer to spend your spare time? With family and friends. Favourite holiday destination? Cornwall for surfing and Ibiza to completely unwind.

Whats the one interesting fact about you that no one would suspect? I thrive in adrenalin outdoor sports! How do you prefer to spend your spare time? On horseback Favourite holiday destination? St. Moritz

All-time favourite book? Wolf of the Plains by Conn Iggulden

All-time favourite book? Neverwhere by Neil Gaiman it reveals a secret part of London that just might exist All-time favourite film? The Italian Job Hang on, lads; Ive got a great idea. What 3 things would you take to a desert island? Im a survivor (and a bit of a boy-scout), so Id take a big knife, a fire-steel and a proper first aid kit. That way I stand a good chance of staying alive, being rescued and getting home to see my wife and kids.

All-time favourite film? Gladiator

What 3 things would you take to a desert island? 1. A strong, large knife, 2. Metal match to light fire, 3. Nylon line and hooks for fishing

To be included in a future edition please contact iain.pitt@oilcouncil.com

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::: February 2012 Edition

Regester Larkin Energy is an international energy consultancy that advises companies operating and serving in the energy, extractive and related industries to earn, maintain and expand their license to operate.
Providing expert counsel in: Business intelligence and insight Strategy development Policy and positioning Strategic communications Crisis management and emergency response Assurance and assessment

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Executive Q&A Independent Oil & Gas Focus

Executive Q&A with Andrew Benitz, COO, Longreach Oil & Gas By Drake Lawhead
Andrew, how would you describe Longreach in a single sentence to an investor? Longreach is a fast growing oil and gas exploration company listed on Torontos TSX-V developing significant licence interests in offshore and onshore Morocco. Morocco isnt a well-known petroleum hotspot, but presumably youve seen something there you like. Can you explain the thesis behind the decision to focus exclusively there? Morocco is an underdeveloped exploration area and is also Africas second largest energy importer. They import 93% of their oil and 91% of their natural gas consumption. The country needs solutions to cut their dependence on energy imports, estimated at US$10.7 billion in 2011, while they face the challenge of a robust growth of energy demand: +54% over the past 10 years, and forecasts predict it could triple by 2030. For Longreach, Morocco is a growing economy and a stable political regime; the country offers an attractive fiscal environment for foreign investors with the state only taking a capped 25% interest in discoveries, with low royalties of 5% for gas and 10% for oil and there is the benefit of a 10 year corporate tax holiday on discovery which is hugely competitive compared to neighbouring areas. From a geological point of view, Morocco is surrounded by hydrocarbons in North Africa with Algeria, Libya and Egypt to the east, and East Canada to the west, which was part of the Moroccan Atlantic during the late Triassic. There is clearly potential yet the country remains under explored. Moroccos hydrocarbon potential is now beginning to be realised with recent discoveries being made and increased investment from foreign companies driving the industry. This is why we have committed our efforts on developing significant acreage positions which can be easily tied into the domestic market. Morocco avoided hitting the headlines last year as other North African states experienced major political turmoil. Can you talk about political risk in Morocco and how you find working with the authorities? Morocco is a constitutional monarchy ruled by King Mohammed VI sharing powers with a democratically elected parliament. The King set about modernising the constitution when he ascended to the throne in 1999. There have been a series of constitutional changes over the last decade at the Kings behest before the Arab Spring mobilisation in 2011. Since then there have been further constitutional amendments towards greater democracy. The country recently had legislative elections which resulted in a new coalition government. I can say confidently that the degree of political risk in Morocco is low. Weve great relationships with ONHYM, the state energy company and enjoy working with officials in Morocco who are eager to work alongside international E&P cos. What is/are the comparative advantage Morocco possesses over its more prolific neighbours? The topside advantages are clear; political and economic stability, phenomenal fiscal terms for oil and gas exploration and a very robust and growing domestic energy market, ensuring no discoveries in country will be stranded. Longreach was one of the first movers in Morocco when we started acquiring licence interests in 2007. We were able to build a substantial acreage position of some 13 million gross acres of meticulously handpicked land in which we are very confident hydrocarbons can be recovered. Looking elsewhere, what other parts of Africa do you find most interesting from an E&P perspective, and would you consider venturing into some of those?

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Executive Q&A Independent Oil & Gas Focus

Longreach is uniquely 100% Morocco focused. At this moment in time weve no plans to expand: we simply want to concentrate on achieving our goals within Morocco. However, with that being said, as with any company, once one set of goals are achieved we would always be looking for the next challenge, whatever that may be. What are the biggest challenges of operating in Morocco? The risks are within exploration as the country remains sparsely explored. Yet this is now changing. ONHYM was set up at the turn of the century with a defining remit to attract foreign investment into domestic hydrocarbon exploration. This strategy has been highly successful, in 1997 there were only 9 exploration permits and by 2011 this number had increased to 115, with operators such as Anadarko, Kosmos and Repsol now in country. What other E&P activities are happening in Morocco is it attracting more widespread interest or does it, and will it, remain a somewhat niche play for a handful of independents? Exploration is gaining momentum in Morocco. Every few weeks ONHYM announces new licence agreements with international E&P companies. It is true that so far Morocco has been a destination of choice for independent companies but the country is starting to tell the story of successful discoveries and production such as Circle Oil which is completing the construction of a gas pipeline from its Sebou licence to Kenitra in the north. Offshore Morocco is also gaining significant interest, most notably from Kosmos which has recently added two exploration licences to its existing acreage. Onshore there is growing interest in the shale gas potential of the country, with Anadarko exploring just to the north of our Zag licence and EOG Resources further north. What next bit of news flow should we look out for from Longreach? We are making excellent progress with the seismic interpretation on our operated Sidi Moktar licence and are working towards building a list of leads and prospects. This will be followed by new seismic acquisitions in order to rank prospects and identify possible drill targets and we expect this to be completed by mid-year. The licence is within the Essaouira basin, a proven hydrocarbon region in central Morocco, where ONHYM is currently producing gas and condensate. For our non-operated licences, on Tarfaya and Zag we have now completed 2D seismic acquisition and are busy processing this data. For the offshore licences we have now completed the G&G phase of the programme and have built an impressive resource estimate for identified prospects. The licence is probably the best explored offshore acreage in Morocco, with over 5,000km of excellent quality 3D seismic coverage. It is drill ready so together with our partners we are opening a data room to attract interest from large oil groups; so we are confident of some very positive news flow throughout the course of this year. Which other E&P companies do you admire and why? I like companies that have not spread themselves too thin, have a focused regional strategy and through good technical work have advanced licences through the exploration phase to successful commercialisation. Africa continues to have significant untapped resource potential, so junior companies with big resource potential and a clear route to development are interesting. The companies that have taken a big resource play and commercialised it, attract my admiration. When youre away from work, how do you enjoy spending your spare time? I have a young family, two girls below three; so much of my spare time is spent with them. Last weekend I was building a snowman I havent been able to do that since I was six years old, so having them allows me to relive all my childhood dreams without too much embarrassment! What do you enjoy most about working in the oil and gas industry? Its an incredibly dynamic and exciting industry, with a full spectrum of skill sets. Its also an industry that is often under appreciated. We are dealing with the most important commodity in the world, which accounts for c.40% of global commodity trading and supports the largest and most valuable companies in the world. And yet there is room for little companies like Longreach, who through sensible use of risk capital can build a business that fits into the industry dynamics. Exploration is not for the faint hearted but when done well the upside is without limit. Youre on a desert island what three luxuries have you chosen to bring? I think it would have to be my wife and two girlsand possibly another desert island!

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Special Focus on Independent Oil & Gas

Partners & Members On the Spot


What issues are your Independent O&G Clients most concerned with in 2012; and how can they overcome the challenges these issues present?
Andy Brogan, Global O&G Transactions Advisory Services Leader, Ernst & Young, and Jon Clark, UKI O&G Transactions Advisory Services Leader, Ernst & Young
Last year was marked by global turbulence, with political change, economic upheaval and natural disaster all playing a major part. Clarity has been hard to come by, yet it is clear that security of energy supply and reliance on the oil and gas sector are undiminished. This is reflected in oil prices that have remained robust despite an uncertain economic outlook and an upstream M&A market that, although lower than in recent years, has averaged approximately two to three transactions every day in 2011. A more worrying trend, however, can be seen on a quarterly basis, where deal volumes declined in the second half of 2011. This reflects growing economic uncertainty during the year, combined with tightening capital markets. Access to debt and equity funding, particularly for the independent sector, is now extremely challenging. The oil and gas sector cannot exist perpetually insulated from wider political and economic turmoil. These dynamics are driving considerable volatility in the capital markets, and this is likely to have a significant impact on capital intensive sectors such as oil and gas. Improved funding conditions at the start of 2011 were relatively shortlived and, although a window of opportunity is anticipated in mid2012, it is hard to see everyone being successful in securing the requisite debt or equity funding. Those with cash constraints are likely to trigger a wave of asset and corporate opportunities. Those at the larger end of the scale with stronger balance sheets may benefit from these. It is these circumstances that lead us to believe that the key issues for 2012 for the independent O&G sector will be around capital raising, capital preservation and capital management. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Russell Wells, Partner, Clifford Chance LLP


'Show me the money' will be the independents' cry for 2012. In a world of weak balance sheets, increasing regulation and general austerity, access to capital is the perpetual spectre at the door of the independent. Whilst the classic options, simply put, of raising equity for discoveries and debt for development, still remain, the sources of this capital, and their overall capacity to provide it, has been greatly diminished. The economic crisis has led to a much acknowledged decline in liquidity, severely constraining the banks' ability to lend. The crisis has forced banks to refocus their lending priorities, resulting in a reduced appetite for exposure to 'riskier assets' and, in some cases, a degree of retrenchment favouring markets closer to home. Much has also been made of additional regulatory restraints, born out of the crisis, which will increase the banks' capital requirements. Whilst this will undoubtedly have an impact on bank lending in the midterm, we would suggest that the Basel III legislation should not be blamed for the current restraint in providing debt finance to the oil and gas sector. Rather, the banks will continue to focus their available funds on the high end sponsors, who possess strong management teams, and who hold interests in proven reserves. Sadly equity capital markets are not an easy touch for making up the debt shortfall, with the IPO and private equity markets suffering from very similar concerns to those felt by their debt counterparts. There were only a limited number of IPOs in the sector during 2011 (with Valleres and Ophir Energy being the more notable exceptions), with many IPOs being pushed back - some indefinitely. The outlook for 2012 is no better. Private equity houses will however remain a strong force within the industry, although they too are affected by the liquidity squeeze. Against this background, liquidity will more likely be found in M&A activity. The current capital freeze often allows for the well-funded operator to purchase, and realise the potential of, the smaller independent's underfunded

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Special Focus on Independent Oil & Gas

assets. Aside from a total or partial sale, there is also the option of swapping discoveries for a slice of an already developed asset. The larger independents will also benefit from the increasing opportunities for linking up with national oil companies, with the two way partnership driven by a simple swap of technological know-how for cash. Accessing capital will therefore remain a key challenge for the independent in 2012. Like the resource itself though, if you look hard enough, and dig deep enough, it's there somewhere. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Rick Roberge, Partner, Transaction Services, PricewaterhouseCoopers


The number one issue for US independents heading into 2012 is the weakness in North American natural gas prices. Record drilling activity, resulting in record supply; combined with historic storage levels have resulted in prices falling below $3.00/mcf. As we enter the coldest 3 weeks of the year; it has been a mild winter, especially on the East Coast; resulting in a collapse of spot prices below $2.50 at time of writing. In fact the forward curve is in contango for the first time in January that I can remember. The development of the US natural gas shale plays have resulted in an oversupply of natural gas causing prices to decrease. While long-term this is a very good situation for the US; until demand increases; mainly other uses for natural gas in both the power and transportation sectors; prices will remain low in the foreseeable future. In fact LNG exporting has become a popular topic again. I think we will see some new trains in the next 2-3 years. As a result companies are moving their capex dollars to oily plays; but this takes time and money. Even oily plays can produce significant amounts of associated gas. Ultimately the natural gas business in North America is going to be a good business; but it will require patience and a strong balance sheet to ride out the storm. Independents don't have the luxury of patience; as Wall Street is quick to remind them with their investment choices. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Simon Tysoe, Partner, Herbert Smith LLP


For a number of smaller independents capital requirements for development remain a problem. There is still some capacity in the debt market for upstream projects, but the equity markets remain difficult. Companies looking for equity need to be ready to go to market as soon as possible when they reopen and meanwhile be pretty ruthless on prioritising their spend . In the meantime it may mean farming out or selling non-core assets. Over the last six months we have seen a number of independents commence sale or partnering programmes which have ended up with the company being put into play and this will continue this year. Changes to HSE legislation is a global phenomenon affecting all E&P companies but it particularly impacts independents as many of the proposed changed reduce or negate their ability to act as operators. For those independents whose philosophy is to always be the operators portfolio diversification has been one approach, with many US & Canadian independents re-engaging with frontier jurisdictions after regulatory changes in GoM. Pressure for an increased tax take by governments around the world has led to a number of "windfall" taxes on oil and gas producers, not least in the UK and this seems unlikely to stop in the near term. Tax increases often disproportionately affect independents operating in the more marginal fields especially if there is no marginal field regime. Companies that take the opportunities that arise to tax plan, such as Premier Oil did in 2009 when it acquired Oilexco and accessed its tax losses as well as its assets, will do best. In the UK, decommissioning security remains a huge issue and one which is killing many North Sea deals. The demands of sellers, co-venturers and the government mean that new entrants risk posting double security, usually in cash or letters or credit. The current industry initiative for certainty on the level of tax relief that will be given when decommissioning expenditure, will, if successful, reduce the amount of security required to a post-tax level, which will help. Engaging with industry on this initiative and also pushing forward the programme of field wide decommissioning security agreements to give comfort to sellers that adequate provision is being made will help. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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Special Focus on Independent Oil & Gas

Sarah Wharry, Head, Oil & Gas, finnCap


FinnCap is one of the leading brokers and advisers to small cap companies. Having established its oil and gas practice over the last two years it now advises 10 E&P companies with assets and operations around the globe. One of the key issues facing our clients in 2012 will be funding. Small cap E&Ps have been the worst hit in the sector in the recent market turmoil. The overall sector performance has been relatively strong since the market bottomed out in August 2011 and larger caps have made a better recovery in value terms than smaller caps, some of which are still trading at significant discounts to their NAVs. Our recent marketing suggests that institutional investors are regaining some appetite for risk and for smaller cap stocks, albeit on a more selective basis. If our clients can attract investors, their depressed valuation sometimes makes equity investment unpalatable from a dilution perspective. So the challenge will be trying to fund their projects in other ways either through innovative debt or convertible instruments or though farming down their assets to an industry player recognising the core value of the asset. With limited capex funds available, there will the added challenge of utilising available cash where it will have the biggest impact and this is a trade-off between riskier, more expensive, higher return projects or lower impact safe play strategies. Whilst valuations are low, there is also the danger of opportunistic M&A and therefore the challenge will be to demonstrate value through an appreciating share price in order that an approach will reflect a fair valuation for shareholders. Overcoming these challenges in the coming year will be a test of managements patience, hard work and flexibility, with regular and informative dialogue with institutional investors of paramount importance to ensure a supportive audience for future plans. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Kevin Fisher, Partner, Corporate, Paul Hastings LLP


Many of the key challenges we are working on for our independent oil and gas clients comes down to one thing money. In such a capital intensive industry, having reliable access to capital on a cost-effective basis is of paramount importance in driving the business forward. The challenges to raising and accessing capital can take many forms, including (i) market pricing, (ii) potential legislation that could impose new liability on operators, and (iii) potential regulatory reforms that could increase the cost of exploration and production activities. In connection with market pricing, lower natural gas prices produce lower cash flows and lower reserve values. This, in turn, limits the funding available to companies under the typical reserve-based lending facilities employed by banks. On the legislation and litigation front, several oil and gas companies in various state jurisdictions are seeing new efforts by royalty owners to impose fiduciary obligations on operators with draconian penalties for the operators failure to live up to these heightened obligations. Several companies have been sued in class actions that attempt to impose these duties and extreme penalties. Certain interest groups have even proposed legislation to impose these standards. On a much larger scale in the US, the debate about fracking continues. Some groups have even been proposing a complete moratorium on all fracking activities. Increased turmoil around fracking only roils the markets and does not do anything to help ensure that capital is available and that its cost remains low. All of these challenges have a direct impact on the bottom line and a companys access to, and cost of, capital. In a time when a company may need additional liquidity to withstand any reverses or setbacks, or a company may need new capital to obtain and secure new sources of oil and natural gas, or a company may see an opportunity to expand through acquisition, these challenges require careful attention.

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Special Focus on Independent Oil & Gas

Kirk Sherr, President and Managing Director, Regester Larkin Energy North America
As we look at recent trends in the principal emerging markets, we see three trends that every independent should have clearly in focus on their license to operate radar: environmental, social and human rights issues. Of course each market is different, and the capacity of the company to address the issues will depend in part on size, but they should at least be aware of the potential risks and have a plan in place to face them. First, environmental risks and issues will continue to grow in importance worldwide and they present one of the biggest challenges for independent oil and gas companies, particularly those that are heavily involved in waterintensive unconventional plays. Water handling, waste-water treatment, disposal/storage, and management will be in focus worldwide. Note that regardless of whether or not industry wins the international debate over the impact of hydraulic fracturing on groundwater, the priority should be to develop pre-emptive industry practices and safeguards against real water contamination accidents. Offshore drilling is another area where independents may face significant liabilities and exposure, particularly in emerging markets. As a recent incident in Brazil has demonstrated, regulators drawing lessons from BPs Gulf of Mexico debacle are increasingly likely to impose harsh fines and penalties on all operators and service companies with perceived or real responsibility for any accident. Same can be said for rapidly developing Artic drilling operations. Are independents, with such stretched personnel remits, truly prepared for similar circumstances in their far-flung operations? Social issues are a second big challenge facing Independents in 2012, as governments seek to impose great obligations on companies in their relationships with local communities, tribes and potentially impacted groups where operations are located. The boomtown syndrome from the influx of oil company money and workers leads many host communities to confront rapid social change, imported inflation, and strained capacity of public infrastructure and services. Man camps with 24 hour electricity and a high standard of living only inside the fence can call even more attention to dire local conditions. Independents are in danger of underestimating the medium to long term implications of their commitments to these communities. The internet and social media in opening societies will accelerate the risks independents face. Finally, human rights issues, broadly interpreted, will be a third challenge as they begin to appear in select markets. To date, this has not been an issue in developed markets like the UK, US and Canada because they have strong human rights governance. But, as 2012 develops, we expect human rights risks to become much more relevant in markets like Asia, Africa, and Latin America. Consider for example, the exposure independents may face for alleged human rights violations from security forces or even for aligning with the wrong side in countries where regime change has been accompanied by considerable violence. At minimum, independents will need to be well-prepared for heightened scrutiny from the international NGO community, in part emanating from the June 2011, adoption by the United Nations of the Guiding Principles on Business and Human Rights. The Guiding Principles dictate a general framework for the responsibility of business in protecting human rights. As a recent report from the Heinrich Boell Foundation highlights, there is a push for governments to mandate corporate adoption of the Guiding Principles, posing a potential threat to many independents license to operate. As experienced independents know only too well, the above-ground risks to their license to operate for international operations increase every year and 2012 will not be an exception. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Tanya Nash, Partner, Corporate, Ince & Co LLP


From the legal perspective I think the most interesting issues will come from the continuing judicial and regulatory fallout from the Macondo incident and earlier incidents such as Buncefield in the UK. The willingness of US and UK courts and regulators to look behind the contractual structures when issuing Incidents of Noncompliance, imposing penalties and liabilities and when developing new regulatory responsibilities alter the analysis of risk in the standard contractual arrangements. This applies both (i) as between operators and non-operators and (ii) as between operators and contractors. To meet these challenges industry participants need to adhere to the following:

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Special Focus on Independent Oil & Gas

Follow changes and proposed further changes in the regulatory landscape closely, getting involved in industry consultations and ensuring they are ready to meet more onerous requirements; Watch the case law develop in particular in relation to how gross negligence and willful misconduct get interpreted and be ready to revisit the indemnification and cash call provisions in JOAs and contracts accordingly; Stress-test their contractual arrangements review them case by case in the light of the specific liabilities and risks that apply and ensure they have a full understanding of applicable laws in the relevant jurisdiction(s) and where responsibility and liability (contractual, civil, regulatory, criminal) would fall in the event of an incident; Ensure that their contractual arrangements properly cover allocation of all relevant risks and liabilities and allocate reward proportionately to the risks (and if those arrangements cannot be changed, put in place all possible mechanisms to manage and mitigate those risks); Ensure their contractual arrangements include proper monitoring and communication provisions to ensure risks are managed right through the contractual chain; Ensure that their contractual arrangements contain workable incident management (as well as dispute resolution) mechanisms that quickly and clearly get the required processes in motion; Review where they are seconding in employees and their level of control over operational decisions as (certainly in the UK post Buncefield) this can potentially shift the legal risks and liabilities irrespective of contractual provisions; Review and regularly monitor the financial strength of parties they will depend on for contributions/indemnification, consider whether need to take further steps to secure those contributions. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Paul Watts, Partner and Head, Natural Resources, Baker Tilly


The general mood amongst our independent Oil & Gas clients is positive the long term economic fundamentals remain strong and there is still no immediate threat to their market share from alternative energy sources. The long term strategic nature of investment in oil and gas plays limits the impact of short or medium term shocks, such as the Eurozone crisis and companies in the sector believe that funding, both private and public, will continue to be available for the right projects in 2012. Not everything is positive however. We see that the key concern for independents is securing the right projects. There is pressure from a number of directions, notably increased competition from larger players and NOCs in growing economies, particularly China, looking to meet their own growing domestic demands and benefit financially from doing so. This has increased the number of bidders for exploration licenses and development contracts, which makes it more difficult to secure assets at a reasonable price. Some clients have started to experience host governments altering license terms and increasing license fees in response to increasing interest in their assets. As always, geography and politics are fundamental and there is a risk of a race to the bottom in developing countries as independents, multinationals and NOCs scramble to secure new assets for the future. We have been advising clients to overcome these challenges by ensuring they are best placed to secure the right projects. There is no quick fix and the solution requires independents to play to their strengths and demonstrate local knowledge, technological innovation and strong systems and controls. Independents need to be able to sell these strengths and offer a partnership-based approach to developing valuable oil and gas assets. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Mike Corley, President, Mercatus Energy Advisors


In 2012, we anticipate that the issues that most concern our clients will be regulatory uncertainty, the economic environment and, in North America, low natural gas prices. Regarding regulatory uncertainty, the list is obviously long but, as it relates to hedging and trading, the ultimate impact of Dodd-Frank (and similar regulations around the globe) is at the top of the list. Ultimately, the question is, will E&P companies be able to continue to hedge in the OTC markets as they have in the past, without facing significantly higher costs or capital requirements? The jury is still out and likely will be for quite some time. Were also from several clients that they are concerned about potential restrictions or bans related to fracking as this could clearly have a significant impact on many. As far as economic concerns, Europe clearly has a long way to go before we see some sort of stability and the

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U.S. is obviously still facing many challenges as well. On the other hand, the economic environment in both Latin America and Canada appears to be quite robust given the weak conditions in much of the world. Regarding North American natural gas prices, this is clearly presenting a challenge for all who arent well hedged and is likely to continue to do so for quite some time. While reducing drilling for gas and shutting in gas production as well as, in due time, exporting LNG could improve the situation, the increasing production of associated gas and the increase in global gas production are both likely to dampen the impact of reduced North American production and LNG exports. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

James Ward, Founder and Chairman, Whale Rock Professional Services Group
2012 is anticipated to be a year of activity in the O&G sector after depressed capital markets in 2011. It is our belief that the capital markets will continue to recover after a strong January 12 and that this should facilitate the raising of money for increased activity by Independents. We expect that the oil price will continue to rise driven by the Syrian and Iranian crisis and demand fuelled largely by China and Japans post Fukushima move away from nuclear power. We see the issues and challenges faced as including: Ability to access capital markets 2011 saw depressed capital markets and the Independents are likely to require funding in 2012 to deliver their plans and drive shareholder value. It will be interesting to see how many of the delayed IPOs succeed in raising finance in 2012. Oil price volatility and uncertainty impact commercial viability of exploration and appraisal programmes and the capital markets are likely to discount risk until price consensus emerges. Opening up of new exploration areas new areas include the Falklands, Azerbaijan and Eastern Mediterranean. Whilst there are political issues between Israel & Lebanon and UK & Argentina there are opportunities for Independents Renewal of fields and equipment in re-emerging producing areas Libya and Iraq in particular are geographical areas where Independents can access and partner with majors and NOCs. We expect Libya to be of particular focus towards the end of 2012. Threat to Independents resulting from the expansion of non-producing NOCs looking, with home Government support to secure long terms access to oil and gas. Regulatory conditions post BPs Macondo - all companies and governments are now awake to the corporate shareholder damage that environmental accidents can inflict Skills shortage -The industry has a general skills shortage and coupled with often hostile locations of operations this skills shortage needs to be addressed to secure long term resource of a sufficient calibre.

Independents with strong management and having refocused operating costs after a poor capital markets year in 2011 should be placed to access finance through enhanced confidence in 2012 to fund existing operations and to exploit the new and re-emerging exploration areas so long as they can attract appropriate personnel and maintain appropriate HSE controls. You can reach James directly at: james.ward@whalerock.co.uk ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Bruce Edgelow, Vice President, Energy, ATB


ATB Corporate Financial Services Energy Group is a market leading lender in the Canadian junior and intermediate oil and gas space. Given the overall volatility in this industry, a majority of our oil and gas clients will have to address certain key challenges in 2012. With most oil or liquids weighted clients performing well as a result of buoyant crude prices, the most challenging issues will be experienced by natural gas producers. Lower gas prices have two primary negative impacts on producers: lower cash flow and a decline in value of booked reserves. Lower cash flow means there are fewer funds available to replace reserves, while a lower valuation of existing reserves translates to less available borrowing base eligible lines of credit. Year-end gas weighted reserve evaluations will be dually impact by the year over year significant reduction in forecasted commodity prices. Not only will the NPV of the reserves be less, but certain reserve profiles will be deemed uneconomic at the current prices and removed from the total proved asset profile. The combined impact of lower cash flow and a reduction in available bank debt may result in the most challenged producers having outstanding debt that exceeds their current credit facility limit when their annual review is completed this spring/summer.

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Special Focus on Independent Oil & Gas

Reduced overall economics and net present values will result in less equity being available for gas weighted producers. Even if a company has assets with strong economics but is too highly levered, they may not have the liquidity to weather any operational setbacks or any further gas price degradation. To overcome this challenge, prudent management of the companys balance sheet is essential and the company must be able to differentiate themselves from their peer group to generate interest from equity investors. Strong resolve by management, directors, shareholders and providers of capital (lenders and equity firms) will be required to survive in this challenging natural gas market. Softness in the natural gas forward curve has made lofty oil/NGL prices even more attractive to producers. Many gas weighted companies are attempting to transition their operations to target oil or liquid rich gas reserves. Another option is to sell assets to increase corporate liquidity and allow management the ability to transition to higher netback projects. However, gas transactions would likely occur at depressed valuations as evidenced by the last four month softness in the existing merger and acquisition market. One challenge oil weighted entities operating in the western Canadian sedimentary basin will encounter is the ability to secure rigs, equipment and personnel to execute their scheduled drilling programs. This could be further impacted by a warmer than average winter, resulting in a shorter drilling season in some areas. Indifferent to play type, the higher cost of technologically driven plays has changed the landscape for junior O&G companies. Horizontal wells utilizing multi-stage fracturing are significantly more expensive than conventional horizontal wells. To fund these drilling programs many companies look to joint ventures, farm-outs, or the use of sub-debt in their capital structure. Alternatively, we have most recently seen sales of these assets by juniors to capture premiums being paid by larger or new foreign entrants in the WCSB who are looking to gain an entry into these new and promising play types. The challenges in this market, while significant, are not new to many management teams. Historically the majority have proven themselves to be very resilient; we expect 2012 will be no different. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Chris Walcot, Director, Progressive


Progressive are finding that clients are becoming increasingly concerned with difficulties in raising capital investment, especially for North Sea projects. This region is increasingly being hailed as yielding poor ROI on assets. Concerns over the maturity of the North Sea field and an increase in tax rates have made financiers wary of investing in a region that has traditionally presented attractive opportunities for independents. As a consequence, it is now more important than ever for independent Oil & Gas companies to demonstrate that they are an attractive proposition for investors; that they are in a strong position to provide ROI when opportunities do arise. The key is for independents to show they are prepared for growth. Streamlined and efficient financial processes and reporting capabilities are an excellent demonstration of this. Investing in fit-for-purpose financial systems will also allow you to concentrate on core business activities such as securing capital, without the frustrating distractions caused by an inadequate back-office set-up. Of course, youll also have more time to invest in identifying new opportunities; if a change in direction is required, focussing on the core business strategy will be far easier if there is confidence in a robust infrastructure that ensures the smooth running of operational processes. Getting suitable financial and procurement systems in place early on will be a far more straightforward process than trying to implement these procedures and controls down the line, when the business has grown in size and complexity. When the time comes, youll need to have the processes in place to meet the demands of stakeholders and the controls in place to occupy a position on the Main Market. Sophisticated finance and procurement systems will prepare a business for this progression. Whilst recent events - namely BPs significant development investment - have suggested that for now, the UK North Sea is still a viable opportunity, independents should capitalise on their agility by putting the infrastructure in place to ensure they are able to adapt and adjust to the fast changing conditions of the industry. We advise our clients to prepare themselves for growth, act like the company they want to be, and give investors the confidence to part with capital.

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Special Focus on Independent Oil & Gas

Chris Croom, President, Asset Risk Management


Most producers hedge a portion of their production to address cash-flow concerns or lock in opportunities. Basic hedging instruments such as fixed-price swaps and costless collars are popular tools for managing risk because they accomplish the intended goal at the time on implementation; they are liquid, transparent, and simplistic to communicate to a broad group of stakeholders. Hedging product offerings continue to expand to address location-based risk, the increased production of liquids, transport optimization, etc. yet many producers still are not getting optimal value from their portfolios given the typical passive approach to hedging. Producers who fail to dynamically manage their hedge portfolio in the current market environment are leaving entirely too much money on the table and accepting unnecessary risks. This dynamic approach not only mitigates price and liquidity risk but also maximizes upside participation which is of particular interest in the more recent crude oil price environment. The more traditional passive approach to hedging whereby the producer sells a swap and holds the position for the life of the transaction has significant limitations and inherent risks. The limitations include missed opportunities to more fully participate in favourable price moves. Fixed price swaps and price collars offer price stability, but also introduce limits on the upside that comes through price appreciation. In a period of rising prices, this upside constraint can drain liquidity and/or reduce access to capital. On day one, fixed price swaps maximize the borrowing base which is very attractive to growth oriented producers seeking to maximize debt capacity and in a falling price environment, these hedge positions can help maintain a higher borrowing base. However, the opposite is true in a rising price environment. Low-priced hedges can lead to a lower borrowing base in situations where existing hedges are priced below lender price decks. This is a real concern given that borrowing bases are typically re-determined every six months and oil and gas prices remain extremely volatile. Active hedge management seeks to minimize risk by continually analysing implied option volatility, option skew and time spreads for opportunities to de-risk the hedge portfolio using basic hedge instruments. In this price environment there are plenty of opportunities for producers to improve their risk profiles through active management of the portfolio. For instance, Calendar 2012 and 2013 WTI swaps are trading just under $100/bbl with the forward curve in slight contango through 2013 (i.e. priced above the expected spot price at maturity). These levels provide an opportunity to add new hedges to ensure ample price protection. If the producer employs a dynamic approach to their hedge portfolio, the markets inherent volatility both underlying prices and option value provide various opportunities to optimize these initial hedges in favour of the producer. These optimizations ultimately seek the best of both worlds, gaining upside participation while also ensuring or improving the protective aspects of the initial hedge. A dynamic approach to managing risk considers the dual objective of maximizing downside protection while derisking the upside constraint. At ARM we consider risk tolerance, asset mix, operating metrics, capital structure and market outlook to provide the most suitable hedging recommendations to our clients. The decision to hedge and how to hedge is not only about protecting realized revenue but these decisions have significant impact on operating cash flow, liquidity and access to capital. Actively managed, a hedge portfolio can create incremental enterprise value, operationally flexibility and access to liquidity.

Drillers and Dealers :::

::: February 2012 Edition

OIL

& GAS

UPSTREAM MIDSTREAM OILFIELD SERVICES POWER

30 Years as a Trusted Financial Advisor to the Energy Sector


Taylor-DeJongh, an independent investment banking firm, has successfully advised on the development, structuring, negotiations and financing of US$70 billion worth of debt and equity investments. 30 Years 560 Projects 100 Countries

The oil & gas practice includes:

A&D advisory of upstream properties.

Capital raising along the energy value chain.

Strategic, project finance and M&A advisory.

CORPORATE FINANCE PROJECT FINANCE MERGERS & ACQUISITIONS DIVESTITURES

#5 Global Financial Advisor* #1 Oil & Gas Financial Advisor**

www.taylor-dejo n gh.com
contactTDJ@taylor-dejongh.com +1 202 775 0899

WA S H I N G TO N L O N D O N PA R I S D U B A I
* PFI 2011 league table ranking by number of financial advisory mandates won, January 2012; 2nd consecutive year. **Infrastructure Journal H1 2011 league table ranking by total value of financial advisory mandates won, July 2011.

Special Guest Article

U.S. Natural Gas: A Buyers Market For How Much Longer?


Written by Terry Newendorp, Chairman and CEO, Taylor-DeJongh

The current low natural gas price environment serves as a catalyst for extensive debates on the viability of proposed shale gas to LNG schemes and additional uses of cheap natural gas. Wed like to consider whether such projects are as much a bow to producers as some commentators have suggested. First, it is easy to get excited when comparing a Henry Hub price of under USD 3/MMBTU to the liquids-linked price of USD1416/MMBTU paid by Asian consumers of LNG. This spread is obviously attractive, even after accounting for liquefaction and transportation costs from the Gulf of Mexico to Asia. Cheniere Energy estimates the (liquefaction and transportation) costs to be about USD6/MMBTU. At such a low Henry Hub price, even shipping LNG to Europe appears likely to be profitable, though the margins are thinner since the European cost threshold is much lower, given the ability of Europeans to switch to other sources of gas, or to use different fuels altogether. But investing in long-term liquefaction capacity and betting on low Henry Hub prices for the next 20 years, is a tough business proposition. It is possible that increased LNG exports from the U.S., coupled with LNG coming from the proposed Australian and East African LNG projects, could eventually arbitrage away much of the current price imbalance in the global gas markets. However, in domestic U.S., LNG exports will have to compete for natural gas feedstock with other industries vying for the same prize. Cheap natural gas already sparks enthusiasm among the petrochemical and fertilizer producers in the U.S. who see the low prices as a major opportunity to reignite domestic production. The reaction from power utilities has been more muted, given their recent historical ride on gas prices ranging from USD 4 to USD 12. But cheap gas will certainly drive increased investment in gas-fired power plants. The Energy Information Agency believes that increased demand for cheap natural gas either from petrochemical/utilities users or from LNG exporters, will likely lead to an increase in Henry Hub prices, thus reducing some of the projected profit margins of LNG producers. The current global natural gas glut cannot last forever. Natural gas producers with significant exposure to dry gas basins realize this and have taken appropriate measures to refocus on liquids production. Some companies can do nothing more than close some of their operations and move on to the next opportunity, as EQT Corp. plans to do with its shale gas drilling in Kentucky. Others have redirected their drilling programs to more liquidsprospective plays. Chesapeake Energy recently announced its decision to re-focus its capex spending away from dry gas. The move had been long expected, but was nonetheless surprising in its scale and boldness. Equally impactful was the action of some of Chesapeakes significant competitors within days ConocoPhillips, Continental and Consol announced similar cuts to their natural gas production and capex targets. Chesapeake, the largest natural gas producer in the U.S., is unequivocally stating its preference for liquids-rich plays, cutting rigs drilling for dry gas, curtailing dry gas production and pushing the completion of dry gas wells as far into the future as possible. Savings are being re-invested into liquids-rich plays. Chesapeake is reportedly even walking away from leases that do not offer attractive returns. ConocoPhillips announced its decision to shut-in some of its dry gas production, indicating that the firm expects the long-term Henry Hub price to get back to USD5/MMBTUUSD6/MMBTU as more producers cut down their spending in developing dry gas plays. The above-noted companies (and most others) will continue drilling for liquids-rich plays, producing substantial volumes of gas in the course of these operations, but the obvious intent to curtail unrestricted drilling for gas appears to be a serious move by U.S. independents to cope with todays low gas prices. Commodity markets took note of these companies press releases, and natural gas futures went up almost 8% the day Chesapeake announced the planned cuts. Prices crept further up in the few days that followed. A week, a few weeks, or even a few months does not make a long term trend. But U.S. gas producers are clearly redirecting their drilling programs to the century-old truism of the oil industry: find liquids and dispose of the associated gas for whatever marginal price you can get. The U.S. finds itself in a rather unusual situation of reasonable elasticity of supply in a vital energy resource with many industrial demands, only one of which is export LNG. Even though demand for gas continues to increase, it can be met with a readily produceable fuel supply and gas prices will face a slow but steady upward pressure in coming years.

Drillers and Dealers :::

::: February 2012 Edition

Guest Article

Alberta: The Rising Global Energy Provider


Written by Jeffrey Sundquist, Managing Director, Government of Alberta (UK Office)

Thoughts of Alberta, Canada may conjure up images of the majestic Rocky Mountains or wide open prairies, but its whats under the ground that has captured the attention of the world energy market. The Province of Alberta, located in Western Canada, holds significant energy reserves. With a landmass only slightly smaller than that of France, Alberta holds more than 169 billion barrels of recoverable oil and 36.4 trillion cubic feet of natural gas. While the reserves are significant, so are the opportunities for investment. Alberta welcomes international companies to help develop these resources in an environmentally responsible manner. With its business-friendly investment climate and plans for increased production, theres never been a better time to invest in Alberta.

Oil: Albertas energy resources will help Canada play a key leadership role in a world where energy demand is
expected to double over the next several decades. Only 21 per cent of the worlds proven oil reserves are accessible to private sector investment and of those, 53 per cent are in Albertas oil sands. Alberta will double its oil production to 3.7 million barrels per day in the next eight years. This increased production will help meet an increasing share of North Americas demand, including that of the United States, which currently imports 1.4 million barrels of Canadian oil a day. Canadas reputation as a stable, secure, reliable, and responsible partner is a key advantage in the global energy market. There are also proposals for new pipeline access to Canadas west coast which would open up new overseas markets. There are also many opportunities for downstream resource development in Alberta, as well as for technologies that improve efficiency and minimize environmental impacts of oil production.

Renewables: The renewable energy sector also has great potential. Alberta has clean energy initiatives
supporting wind, solar, and biofuels that have allowed it to increase its renewable energy output by more than 70 per cent since 1998. Alberta is the second largest producer of wind power in Canada with plans to grow this capacity substantively in the future.

Gas: Opportunities also abound in Albertas natural gas industry. Alberta accounts for nearly 75 per cent of the
natural gas produced in Canada. With 36 trillion cubic feet of conventional natural gas and the potential for an additional 500 trillion cubic feet of coal bed methane, the province is well equipped to supply the gas needs of North Americans for the foreseeable future. Another huge potential unconventional gas source is shale gas, which is still in the very early stages of development in Alberta.

Environmental Commitment: One of the defining features of Alberta as a world-scale energy producer is
its commitment to responsible development. In 2007, Alberta became the first jurisdiction in North America to regulate large industrial greenhouse gas emissions. Emitters were required to immediately reduce per unit greenhouse gas output by 12 per cent either by physically reducing emissions, purchasing accredited Alberta offsets, or paying $15 dollar/tonne towards a technology fund. As a result, 23.8 million tonnes of emissions have been avoided, $257 million has been collected into the Climate Change and Emissions Management Fund, and $126 million has so far been committed to 27 clean technology projects. Having created Canadas first environment ministry, Alberta has a proven track record of delivering a strong regulatory system that allows for development while protecting the air, land and water. The province is currently taking significant action to enhance its oil sands monitoring program for air, land, water and biodiversity and building a cumulative effects program that will set strict limits for industry. Albertas network of researchers, engineers and scientists are also focused on continued development of new technologies to improve environmental performance of the oil sands just as their expertise unlocked this resource in the first place.

Business-friendly Investment Climate: While Albertas abundant energy reserves and commitment to
responsible development are compelling reasons to invest; it is the provinces business-friendly investment climate and strong economic outlook that makes it even more attractive. Alberta has no net debt and a low corporate tax regime with one of the most competitive tax environments in North America. Alberta has been a leading economy in Canada for the past 20 years and the province is poised to lead Canada again in 2012. Energy investors have shown confidence in Albertas strong fiscal regime, setting a provincial record sale of $3.5 billion for mineral rights in 2011. Investors from around the world are finding Albertas royalty structure, regulatory certainty, and stable and democratic government extremely attractive. The province is also working towards a more streamlined regulatory system to enhance efficiency and speed up the approval process. Alberta is full of opportunity and eagerly seeks investors who share its vision for responsible development. For information about these opportunities contact Jeffrey directly: jeffrey.sundquist@international.gc.ca

Drillers and Dealers :::

::: February 2012 Edition

Range Resources: A diversified international oil and gas exploration, development and production company

n Trinidad
Exploration, Development and Production P1 reserves of 15.4mmbls (Range 100%)

n Texas
Development and Production P1 reserves of ~ 10m boe (Range ~ 20%)

n Puntland
Exploration First of two wells spud in Jan 2012 estimated recoverable reserves of 300-375 mmbls per well (Range 20%)

n Georgia
Exploration Estimated oil in place of 2 bl bbls (Range 40%)

www.rangeresources.com.au

ASX:RRS

AIM:RRL US-OTC:RYRYY

London Office Suite 1a, Princes House, 38 Jermyn Street, London SW1Y 6DN Telephone +44 207 025 7040

Australian Office Ground Floor, 1 Havelock Street, West Perth, Australia WA 6005 Telephone +61 8 9488 5220 Email admin@rangeresources.com.au Website www.rangeresources.com.au

Special Guest Article

Oil Spikes, Iran and Sanctions


Written by Nigel Kushner, CEO, Whale Rock Legal

With the onset of robust international sanctions against Iran we may well see oil th spikes over the coming months as tensions rise. Since 24 October 2010, the EU has banned the export of named oil and gas related products and technology rd to Iran. On January 23 2012, the EU announced a ban on the import, purchase and transport of Iranian crude oil and petroleum products, including related financing and insuring. In order to allow buyers of Iranian oil an opportunity to st make alternative arrangements, the ban will not kick until 1 July 2012. One school of thought says that by agreeing a 6 month lead in, the EU are doing no more than firing a shot across the bows of Iran in the hope that they will see sense. Another says that there was concern an immediate ban would result in Iran closing the Straits of Hormuz something which would cause an immediate oil crisis and possibly, military conflict. The EU could not stomach this prospect. Who currently buys Iranian oil? Estimates are as follows: China: 549,000 bpd / EU (Greece, Italy and Spain): 50,000 bpd / Japan: 341,000 bpd / India: 330,000 bpd / South Korea: 244,000 bpd / Turkey 182,000 bpd / South Africa: 98,000 bpd / Taiwan: 33,000 bpd / Sri Lanka: 39,000 bpd

The EU: The EU ban will be a blow to Iran if it comes into force in July although those EU entities who
currently receive Iranian oil in lieu of outstanding historic debts (for example, ENI of Italy) will benefit from an indefinite carve out.

US Pressure: The US has recently been doing the rounds trying to persuade other buyers of Iranian oil to
cease doing so. These buyers would be wise to listen carefully because the US has the right to sanction those entities (and their banks) and ultimately deprive them of their ability to access the US financial system. Japan and South Korea will likely reduce their purchases but China and India are showing no signs of relenting. The US has bigger fish to fry in its relationship with China and India and appear unable to force the issue. We believe the US will now shift its strategy and instead seek to persuade China, India and others to seek discounts from Iran. With fewer buyers in the market this should be eminently achievable and punishes the Iranian economy.

Impact on Iran: In its latest comprehensive assessment of the Iranian economy, the IMF estimated energy
exports would amount to $103 billion to the fiscal year end (March 20, 2012), some 78% of total exports. It has been mooted that Iran might have to sell its oil at a discount of 1015% to find buyers under sanctions. Assuming a 15% discount applied to all shipments and a further expected 10% cut in overall shipments, Iran's energy export earnings would shrink by around $24 billion. The difficulties in finding banks to pay Iran will result in the increased use of costly middlemen in Asia and neighbouring states which have not signed up to tough sanctions. We shall also see greater use of barter deals. Ultimately, we may see Iran enter into a recession. The IMF estimated Iran would post a budget surplus of about 2.8% of GDP this fiscal year; the fall in oil revenues, combined with an expected 10% cut in tax receipts due to a slower economy, could convert that into a deficit of over 2% of GDP next year. The Rial has fallen by some 40% against the Dollar in recent months and life is becoming harder for Iranians.

Oil Spike? The big worry is that domestic discontent could encourage Iran to up the tempo in its aggressive
attitude to the West in a desperate bid to unite the Iranian people. It is difficult to see Iran giving in and even more difficult to see the US standing by and allowing Iran to continue its nuclear development foray. This will be a critical factor in the price of oil in 2012. As a minimum, we expect the war of words resulting in occasional shortlived oil spikes. At its worst, a full blown conflict would see the oil price rocket. Nigel Kushner is CEO of Whale Rock Legal, a legal practice specialising in International trade and natural resources. You can contact Nigel directly using: nigel.kushner@whalerocklegal.com

Drillers and Dealers :::

::: February 2012 Edition

Rialto is an ASX listed West African focused oil and gas explorer with offices in Perth, London and Cte dIvoire. Rialto holds an 85% working interest in and is the Operator of Block CI-202, located offshore Cte dIvoire. Existing discoveries in Block CI-202 have been independently certified at 50 MMbbls (Mean Contingent Resource) for oil and condensate and 396 Bcf (Mean Contingent Resource) for gas and associated gas. Further, a Mean Prospective Oil and Condensate Resource of 511 MMbbls and 1.8 Tcf Mean Prospective Gas and associated Gas Resource has also been certified.

Block CI-202 contains the Gazelle Field which is to be the subject of a two well appraisal/development drilling campaign scheduled to commence in February 2012. Additionally, one exploration well will also be drilled as part of this programme.

Rialto Energy Limited Level 1, 34 Colin Street, West Perth WA 6005, Australia T: +61 8 9211 5000 | F: +61 8 9486 9362

Rialto Energy UK Limited 22 Long Acre, London WC2E 9LY, United Kingdom T: +44 20 7042 8500 | F: +44 20 7042 8501

admin@rialtoenergy.com | www.rialtoenergy.com

Special Focus on Independent Oil & Gas

What Are The Impediments To The Development Of The Shale Gas Industry In Europe And How Can These Be Overcome?
Written by James Green, Partner, EMEA Oil & Gas Group, K&L Gates LLP

The International Energy Agency (IEA) currently estimates unconventional-gas reserves in Europe including tight gas, shale gas and coalbed methane to be around 3500 trillion cubic feet. This would be sufficient to supply European gas demand for more than 60 years. However, there are some significant hurdles to be overcome if shale gas is to have as profound an effect on the energy market in Europe as it has had in the US. The industry faces several practical challenges. Drilling costs are higher in Europe. European shale gas deposits are generally deeper underground and harder to extract. The oil services industry is less developed than in the US, with a shortage of rigs and qualified personnel. Europe does not have the existing pipeline infrastructure that the US does. All of these factors will have gradually less impact as the industry develops, the understanding of the regions geography improves, advances in technology reduce costs and infrastructure is put in place. Higher European gas prices - around twice those in the US - will also help overcome many of these challenges. In addition, whilst in the US subsoil rights are generally in private ownership (and often held by the owner of the surface land), in most European countries subsoil rights are usually owned by the State, which is entitled to receive royalties in respect of gas that is generated. Local landowners in the US are therefore more likely to support shale gas operations, for financial reasons, than in Europe where there is not such an incentive. Conversely, the exploitation of shale gas reserves in Europe is likely to be a more politicized issue. These impediments may be offset, 'though, by the higher gas prices in Europe. Environmental issues are also a key concern. France has banned hydraulic fracturing -fracking - the process by which gas is extracted, based on concerns over the contamination of water sources. There are also concerns that fracking can cause minor earthquakes. In the UK, fracking in Lancashire was shown to have resulted in tremors, as a result of which test drilling was suspended. The industry will need to be carefully regulated and operators will have to implement high standards of practice if governments are to persuade the public that these are not causes for concern. On a wider scale, some climate-change campaigners see shale gas as preferable to other fossil fuels (which produce greater levels of carbon dioxide), whilst others consider that Europe should not be focusing on shale gas at all, but should be moving towards a truly low-carbon energy sector, based on renewable sources of energy. Governments' policies may also be influenced by certain factors that support the development of the industry in Europe. Energy security is a major political consideration for governments that are now, or are likely to become, increasingly dependent on gas imports from Russia. For them, shale gas offers an opportunity to reduce the extent of reliance on a single external source. In any event, it will be several years before we see serious shale gas production in Europe. Whether the industry fully realizes its potential, however, will depend upon how the major stakeholders - governments (including the EU), investors, developers, drilling companies and consumers - address these issues.

About the Author: James Greens practice covers a broad range of corporate areas, including fundraising and other transactions on the Official List and AIM (acting for both companies and nominated advisers/ brokers), mergers, acquisitions, joint ventures, group reorganisations and venture capital investments. James has experience in a range of sectors, but has a particular focus on oil and gas, mining and cleantech/ renewable energy.

Editors Note: This April we are very pleased to be working alongside K&L Gates, a leading international law firm to host our London Social. K&L Gates' international oil and gas practice spans across their network of more than 40 offices across 4 continents. For more information please visit: http://www.klgates.com/old-oil--gas-practices

Drillers and Dealers :::

::: February 2012 Edition

Meet Our Members

Member
Peter McAteer, Managing Director, Allomax

Member
Katya Zotova, Head, International A&D (Oil & Gas), Citigroup (outside of Americas)

How did you come to be in the oil industry? Following mining experience in South Africa, Germany and the UK I developed an avid interest in travel and looked for the most international business I could find. The demise of the UK coal industry was a timely and highly beneficial prompt. What is your proudest work-related achievement to date? Purchasing 40 producing fields as a member of the Talisman acquisitions team as they grew more quickly than any previous Operator in the UK. Where do you see the greatest opportunity in todays oil and gas markets? Deepwater in the Atlantic valley (West Africa or the South American equivalent).

How did you come to be in the oil industry? I wanted to learn from those who can transform the world

What is your proudest work-related achievement to date? Getting a few major projects off the ground in the GoM, Middle East and South America. It's never easy but few things beat that feeling in the end. Where do you see the greatest opportunity in todays oil and gas markets? I'm looking for the next landscape transformer. Watch the unconventionals space - there's more to come. Where do you see the greatest challenge in todays oil and gas markets? Political unrest affecting market confidence What was the wisest advice you ever received from a mentor? In the end nothing is impossible, if it feels impossible - it is not the end.

Where do you see the greatest challenge in todays oil and gas markets? National Oil Company partnerships. What was the wisest advice you ever received from a mentor? Focus on the economics - University Mentor and world expert in geostatistics.

Drillers and Dealers :::

::: February 2012 Edition

Meet Our Members

Member
Peter McAteer, Managing Director, Allomax

Member
Katya Zotova, Head, International A&D (Oil & Gas), Citigroup (outside of Americas)

What advice would you pass on to a graduate wishing to work in your line of business? Learn fast. There is a demographic timebomb about to knock out your competition.

What advice would you pass on to a graduate wishing to work in your line of business? Whether it is one transaction or a global partnership - always see the bigger picture and think long term. This is an elephant memory business.

Whats the one interesting fact about you that no one would suspect? I've been writing songs since I was a teenager. How do you prefer to spend your spare time? Climbing a mountain or walking around the estuary where I live. Favourite holiday destination? Anywhere I have never been.

Whats the one interesting fact about you that no one would suspect? I used to tame horses How do you prefer to spend your spare time? Explore new places and cook 5 course dinners for friends Favourite holiday destination? Italy, San Diego, New York and Asia

All-time favourite book? Bizarre it should be on TV as I write. Birdsong. I am ex Royal Engineers (TA) and fascinated by the bravery of the early sappers that this book so eloquently describes. All-time favourite film? Jungle Book. Why grow up? What 3 things would you take to a desert island? My wife, my memories and my imagination.

All-time favourite book? Salman Rushdie's Shalimar the Clown

All-time favourite film? The Thomas Crown Affair What 3 things would you take to a desert island? A chess set to keep me sane, a signaling mirror and a whistle

To be included in a future edition please contact iain.pitt@oilcouncil.com

Drillers and Dealers :::

::: February 2012 Edition

WHATS ON THE ROAD AHEAD?

www.control-risks.com

Managing Risk | Maximising Opportunity


Control Risks is an independent, global risk consultancy specialising in political, security and integrity risk. We help our clients to understand and manage the risks of operating in complex or hostile environments.

Quality reserves of legal experience


Clifford Chance brings international insight, local expertise and a long-term commitment to key oil and gas markets the world over. Whether you are contemplating an upstream investment in Asia, a downstream project in the Middle East or simply need help navigating your way through the complexity or diversity of handling a deal or dispute in Africa or Europe - we have the team and experience to assist you. Our expertise in M&A, finance, dispute resolution and environmental regulation is widely acknowledged in the oil and gas industry and this is reflected in our current Tier-1 ranking as an oil and gas firm by global legal directories.

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Visit www.cliffordchance.com/oilandgas to discover more about Clifford Chances oil and gas expertise.

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