‘Drillers and Dealers’

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The Oil Council

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Foreword

‘Drillers and Dealers’ is our pioneering free monthly e-magazine for the upstream industry. It is entirely focused on sharing insight, analysis, intelligence and thought leadership across the E&P sector. We hope you enjoy reading the articles our guest authors have so kindly contributed.

Ross Stewart Campbell Chief Executive Officer, The Oil Council T: +44 (0) 20 7067 1877 ross.campbell@oilcouncil.com

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INVESTMENT BANKING – GLOBAL FINANCE – GLOBAL MARKETS

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Société Générale is a credit institution and an investment services provider (entitled to perform any banking activity and/or to provide any investment service except the operation of Multilateral Trading Facilities) authorised and regulated by the French Autorité de Contrôle Prudentiel “ACP” (the French Prudential Control Authority) and the Autorité des Marchés Financiers “AMF”. Société Générale is subject to limited regulation by the Financial Services Authority “FSA” for the conduct of its business in the UK. Details of the extent of its regulation by the Financial Services Authority are available from us on request. Société Générale benefits from the EC passport authorizing the provision of investment services within the EEA. This material has been prepared solely for information purposes and does not constitute an offer from Société Générale to buy or sell or a solicitation of an offer to buy or sell any security or financial instrument, or participate in any trading strategy. Not all financial instruments offered by Société Générale are available in all jurisdictions. This communication is not intended for or directed at retail customers. It is for professional investors only. Please contact your local office for any further information. © 2010 Société Générale Group and its affiliates.

“Société Générale Corporate & Investment Banking is a recognised world leader in project fi nance, upstream oil & gas fi nance, commodities trading, mining, infrastructure and structured commodities fi nance. Through our global network, the bank has a long track record in the oil and gas business in most parts of the world, in particular in Russia and the CIS as well as Africa where the bank has strong local retail networks. When it comes to Exploration & Production (E&P) independents, SG CIB is proud to be one of the very few banks to offer a global platform with dedicated Reserve Based Finance bankers and engineers in Calgary, Houston and London. We understand the oil and gas industry and use our technical and banking skills to grow trusted partnerships with our clients. We enter our relationships early to support our clients from inception, accompanying them and providing solutions across the E&P life cycle from their initial equity raising through to their fi rst loan. SG CIB provides a wide range of products and services in M&A, acquisition fi nance, equity capital markets, project fi nance advisory, debt capital markets as well as commodity, currency and interest rate hedging.International experience coupled with local knowledge and technical expertise is what we bring to help clients growing their business in the truly global market of upstream fi nance.” Robin Baker, Global Head of Energy Project Finance.

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„Drillers and Dealers‟ – November 2010 Edition

In Defense Of The Status Quo: One Banker's Perspective On The Future Of The Global Energy Markets

o By Andrew Moorfield, Global Head, Oil & Gas, Lloyds Banking Group

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

Changes: The Emergence of Singapore as an Oil Centre o Al Troner, President, Asia Pacific Energy Consulting

Why Blaming China On Our Economic Woes Is A Cover Up That Is Foolish And That Will Not Stand

o By Ziad Abdelnour, President & CEO, Blackhawk Partners

PWC‟s Q3 Analysis – US Oil & Gas Sector Deals o With comments from Michael Collier, Partner, Transaction Services,

PricewaterhouseCoopers

Credit Suisse Analyst Note – November – E&P Outlook

“Golden Barrels” (Column) – The Vortex o By Simon Hawkins, Head, Oil & Gas Research, Ambrian

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

o By Gianna Bern, President, Brookshire Advisory and Research

“Diary of a Commodity Trader” (Column) – The Energy Policy of „No‟ o By Kevin Kerr, President and CEO, Kerr Trading International

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

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“Those who now suggest peak oil is imminent, and that it brings with it a period of terminal decline for the global

economy, are no less myopic than Malthus.”

In Defense Of The Status Quo

- One banker's perspective on the future of the global energy markets

Written by Andrew Moorfield, Global Head, Oil & Gas, Lloyds Banking Group Bankers are currently unpopular, including unfortunately those from the oil and gas world. As financiers, there is a certain amount of commonality in the products we offer; term loans, reserved based lending, trade finance, and working capital facilities are all (to some extent, at least) interchangeable in the eyes of our customers. The same level of flexibility cannot be said to exist amongst the sources of global energy supply: hydrocarbons, renewables, nuclear, and hydro-electric power are not direct substitutes. Oil and gas remain the dominant players and the world's most important source of energy. Despite some exaggerated publicity over recent years and an increasing social trend to look to them as a comprehensive alternative, renewable energy is still nowhere near to becoming a scalable and viable substitute for hydrocarbons. I do not say this merely to defend my oil & gas turf, but because it is imperative to acknowledge both the continued importance of oil and gas and the numerous challenges to the alternatives others put toward if we are to have a reasoned debate about our energy future. The most cursory glance at the IEA's latest World Energy Statistics will reveal a startling gap between the supply of energy from renewables and the supply from oil and gas. Last year, renewable energy (including hydroelectric power) supplied c.84 million tonnes of oil equivalent (mtoe) towards our global energy requirement. This figure may initially sound impressive, but it is dwarfed by the 6,600 mtoe that was contributed from oil and gas sources. A decade into the 21st Century, and despite all the hype (and considerable government support) renewable energy still only accounts for c. 0.7% of global supply. Simple maths reveals that to bridge this energy gap, wind, geothermal, solar and tidal sources will need to boost their supply over 7,750% to replace our

use of hydrocarbons. This arithmetic assumes that energy demand will remain constant – a nonsensical notion as non-OECD countries attempt to drive up standards of living for their citizens. Therefore, the IEA's World Energy Outlook suggests that over the next 20 years fossil fuels will remain the premier source of energy worldwide and they are projected to account for 77% of the energy demand increase by 2030. Oil demand alone is expected to rise from 2008's 85 million barrels per day to 105 mb/d in 2030, a sizeable 24% uplift. Demand for natural gas is projected to increase even more impressively; up 42% over the next 20 years. Is this a problem? Simply put, no. The more ardent campaigners for a 'switch to renewables' (as if there is a button that simply can be pressed) argue that 'peak oil', the point after which production enters terminal decline, is near or even here. However, as many economists will tell you, peak oil is an irrelevance. In the early 1800s, the Reverend Thomas Malthus put forward his theory that, because populations at the time were growing exponentially, food supplies would soon run out. The result would be that society would rapidly collapse into a spiral of "misery and vice". He was of course wrong. Those who now suggest peak oil is imminent, and that it brings with it a period of terminal decline for the global economy, are no less myopic than Malthus. Their kind of thinking ignores the power of the markets and turns a blind eye to mankind's ability to push technological boundaries. Ever since 1956, when Hubbert first predicted that US oil production would peak before 1970, the anticipated turning point in global oil production has been pushed further and further back - largely by improvements in E&P technology.

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“However, hydrocarbons are still king owing to one key difference: North Sea oil and gas makes money;

wind power loses it.”

Even today, more than half a century after the idea was first articulated; there is little agreement about when the peak will occur. Markets play a key role in this and price signals incentivise consumers to use supplies more efficiently and encourage companies to both take more exploration risk and maximise recovery rates from fields. Just because the doomsday advocates of peak oil lack the imagination and technical knowhow to search and find new sources of hydrocarbons does not mean that they do not exist and that they will not one day become commercial reserves. If the remaining global hydrocarbon reserves begin to dwindle (which seems by no means certain when, according to the IEA, the world's remaining resources of natural gas appear to be able to cover any conceivable increase in demand well beyond 2030) then free market theory suggests that commercial alternatives, be they nuclear-based or from renewable sources, will become available as economically competitive alternatives. However, this day appears a long way off. With this in mind, let us look at the example of the UK. Here, on this blustery outcrop on the edge of the Northern Atlantic, wind power has long been touted as the future for the nation's energy supply and the heir in waiting to North Sea Oil and Gas. However, hydrocarbons are still king owing to one key difference between these energy sources: North Sea oil and gas makes money; wind power loses it. Nevertheless, the UK has committed to targeting that 15% of all energy is generated from renewables by 2020 (the bulk of which is expected to come from increased use of renewables for electricity generation). Even with ten years left on the clock, this target has already been described as "very challenging" by the government, and in far less favourable terms by many more independent commentators. A UK Parliamentary Committee has estimated that the total annual cost of increasing the share of renewables in electricity generation from 6% to 36% (the level required to meet the UK's overall 15% renewables target) would be £6.8bn.

This would be a sizeable figure at the best of times, but its significance is further highlighted when one considers that the UK's recent spending review (the deepest and most swingeing cuts to government spending since 1945) has highlighted the need to cut £81bn from the budget over the next 4 years. Wind power, like all renewables, is a long way from stacking up commercially and subsidies are inevitably required (in the UK, this is provided via the Renewables Obligation that has been estimated to add £90 to the normal £50 cost of a megawatt hour of electricity). In austere times the price of renewables looks hard to swallow but, even if this was not a concern, serious technical issues with wind power remain. Many of these have yet to be widely acknowledged, let alone satisfactorily addressed. Perhaps, the most significant point to make is that the supply from wind power (like most renewable sources) is intermittent and unreliable. Owing to the considerable difference between the capacity of wind farms and the load factor (i.e. the amount of electricity they actually produced – usually assumed to be just 30% of capacity) standby forms of electricity generation will still always be required. Given the costs associated with nuclear fuels, this is most likely to take the form of gas power plants. In short, even if the renewables capacity could be scaled to meet national demand, the cost, reliability and flexibility of hydrocarbons makes them difficult to replace. In the UK the problems are further complicated by an anticipated shortfall in overall energy supply. Ageing power stations up are due to be

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decommissioned and this expected to put considerable strain on UK energy generation capacity. If some 30 GW of additional renewable capacity is required in the UK to meet the EU’s 2020 target, a further 14-19 GW of fossil fuel or nuclear capacity will still be required to replace old plants and meet new demand. Any renewable investment will have to be in addition to the hydrocarbon (or nuclear) technology required to replace those old power plants going off line before 2020.

Therefore, even in the most optimistic scenario, in a country that enjoys considerable natural advantages when it comes to onshore and offshore wind power, hydrocarbons will remain by the most vital energy source for the foreseeable future. Perhaps, given the fiscal challenges that lie ahead in the UK, this is fortunate. According to Oil and Gas UK in 2009-2010 (despite low oil prices) the industry contributed £6.4bn in corporation tax, which represents some 20% of the total corporation tax received. For the fiscal year ending in April 2011, this figure is anticipated to increase by 45% to £9.4bn. The vital economic contribution does not stop with bolstered government tax revenues. Last year the UK Oil and Gas industry improved the nation's balance of trade by £27bn, a figure which acted to halve the nation's entire trade deficit. The industry also provides much needed, and often well-paid, employment to 450,000 people up and down

the country. Oil and Gas in the UK, as it does in so many countries, remains a stalwart of the nation's economy. The economic benefits of oil & gas are not the only reason for their continued popularity. The technological and efficiency breakthroughs

that have been made over the past years have been staggering.

Costs of conventional drilling have fallen and

new hydrocarbon frontiers have opened up. Intrepid exploration companies are exploring off

Greenland, the Falklands, and in the deepwaters offshore Brazil – to name just a few places.

Shale gas and LNG technology have

revolutionised the gas markets and new downstream technologies have drastically changed the face of refining.

Furthermore, hydrocarbons are becoming ever cleaner and rates of efficiency, across the industry, have reached remarkable levels – with more improvements happening all the time. Let us celebrate then the contribution that the oil and gas industry makes. It has become very easy to knock hydrocarbons in recent times, but as yet few viable alternatives exist. Oil and gas will remain the fuel that will heat our homes, power our industry, transport us, and drive economic development and well-being for the foreseeable future. Bankers may remain unpopular for some years to come; the people who work in the industry so vital to improving our standards of living should not.

- Andrew Moorfield,

Global Head, Oil & Gas, Lloyds Banking Group Andrew is Managing Director and Head of Oil & Gas at Lloyds Banking Group. Prior to joining Lloyds Banking Group in 2006, he was Managing Director and Co-Head of General Industrials at Bank of America EMEA with responsibility for the Basic Materials sector. He joined Bank of America in 2001 after working at Citibank and Diageo plc in Europe and Asia. Andrew has an Economics Degree (Hons) from the University of Melbourne and an MBA from the Wharton School. About Lloyds Bank Oil & Gas: The Oil and Gas team manages relationships across a spectrum of industry disciplines, ranging from Majors to Independents, Service Providers and Traders, as well as financing refineries and pipeline projects. The team is based in London and Edinburgh. Our unparalleled track record of delivering tailored financing solutions to our clients is made possible by our team of industry professionals, including reservoir engineers and experienced bankers. We are also one of the few players to have maintained a constant presence in the sector through all economic cycles, helping secure our reputation as the leading provider of financing to Oil & Gas companies.

“Last year the UK Oil and Gas industry improved the nation's balance of trade by £27bn, a figure which

acted to halve the nation's entire trade deficit.”

Andrew will be speaking at The Oil Council’s ‘World Assembly’ on the

25th November in London. We hope you can join us there and meet

Andrew and other members of the Lloyds Oil & Gas Banking team.

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Insights from The Oil Council’s Americas Assembly

Pre-Assembly Press Conference (Courtesy of Platts)

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

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

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

New York, New York: Shalesman, Yeomans, Analysts & Pundits Council In The Big Apple (Courtesy of PLS)

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

Date: 26-28 October

2010

Location: Eventi Hotel

New York, NY, USA

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If variety is the spice of life, then this was one hot event. Day two stood alone from recent conferences with its primary focus on oil and scarce mention of natural gas. The break in themes was welcome for anyone suffering from natural gas fatigue. But that changed on day three when natural gas and shale gas in particular, became the subtext of a lively intra-conference discussion from an eclectic mélange of skeptics and proponents who mirrored the larger debate about shale gas in the current industry. The Oil Council Assembly, which alternates a couple times annually between Europe and North America, is notable for its international orientation and features a smorgasbord of global accents and viewpoints. Of value is a format that mixes a handful of formal presentations with panels open to interaction with delegates, creating a dynamic, unrehearsed forum that keeps attendees talking at the social networking mixer at the end of the day and on into dinners – and beyond since New York bars don’t close until 4 a.m.. or so we’ve been told.

Key Takeaways Diversity leads to consensus in unexpected ways. While commodities experts disagreed on the reasons surrounding the puzzling post-2004 decoupling in oil prices from supply/demand fundamentals, those who interpreted historical events differently—as well as future demand—converged when it came time for a 2011 oil price forecast. With one exception, everyone—whether bull or bear—picked the same per barrel number: $85. The lone dissident, Alange Energy CEO Luis Giusti (former CEO of PDVSA) foresaw a price closer to $75, reflecting his view that the lower figure was, in fact, the number targeted by OPEC and specifically Saudi Arabia. While shale plays have become a disruptive, transformative event in the U.S. over the last half decade, the shale revolution is likely to unfold at a slower pace overseas, according to PFC Senior Director Raoul LeBlanc and Schlumberger’s Dale Logan. To paraphrase, it is not a matter of resources; rather, it’s a function of regional idiosyncrasies in the oil and gas business. In the U.S., dozens of companies scramble to develop shales. As LeBlanc explained, it’s a market that conducts 30,000 discrete experiments each year (gas wells), all invariably under $10 million and each specifically tweaking one component or the next with knowledge spreading quickly industry-wide through service companies. In contrast, international shale plays feature one or two companies in a play drilling one well per quarter. Absent the creative ferment in the U.S. market place, knowledge will unfold more slowly because the ingredients of success in each shale play are based on multiple efforts employing different combinations over hundreds of wells. Are the shale plays for real? If the question is about resource potential, the answer is a definite yes. If the question is about economics and profitability, the answer is: it depends. Can companies make money in shale plays at low gas prices? Again, the answer is yes, if they have joint venture partners. Individual plays may not make specific economic success at sub-$4 gas, but the operator is buoyed by investment capital from abroad. However, the fact that breakeven prices involve widely divergent price levels for JV investors and operators may in fact increase geopolitical friction, one of the themes cited by NGP Energy Capital Management CEO Ken Hersh. By the way, said one speaker- those disparate price decks can be as much as $5.00 per Mcf higher for the JV partner than for the JV operator.

To B or not to B factor

Shale plays remain economically challenging economic ventures that provide a modest rate of return of about 7% over the long term for the right companies in the right locations, according to the analysis of Jason Ambrose, CEO of Palantir Solutions. Ambrose looked at a variety of variables in shale well economics, including royalty or severance tax regimes, production volume, natural gas pricing, decline curves, EURs etc. Plugging those variables into a sensitivity analysis led Ambrose to conclude that shale plays can be a good business for some companies in a mid-level price environment, but entail significant risk in a poor price environment. “Definitely this is an investment that can make money,” Ambrose said. “The question is what investor wants to make an investment with a 7% return, given the risks and uncertainties involved?” Ambrose proffered a technical discussion of shale well type curves—the most frequently cited metric in the industry today for attendees at the final session of the Assembly. As it turns out, type curves are a theoretical construct that forecasts hydrocarbon recovery as EURs. The industry’s mathematics for creating type curves is based on conventional gas well decline data. Shale plays are still early in their evolution without a large base of well histories so it is not clear that conventional well decline curves can be extrapolated to shale wells. However, the data that exists suggests reasonable alterations of the mathematics behind the decline curve, notably how one figures the B-Factor component in the equation, produce alternative EURs well below some of the commonly discussed numbers extent in the industry. In other words, the industry is using highly optimistic assumptions to forecast long-term recoveries rather than a range of potential outcomes.

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Herman Franssen opens the discussion with a focussed

session on today’s macroeconomic environment

Jim Wicklund from Carlson Capital and Theodore Helms

from Petrobras watch on

“The Oil Council’s forum was refreshingly different from the usual trade events that sometimes become predictable sales pitches.

Instead the impression was more of an impressive group of high-level insiders comparing notes and sharing insights among peers, in a

relaxed atmosphere of thoughtful conversation. It was a pleasure taking part.”

Antoine Halff, First Vice President and Deputy Head of Research, Newedge

Luis Giusti discussed the emergence of Latin America as the

next big play for independent oil and gas companies

Atlas Energy’s Chairman Ed Cohen is one of many guests to

be in the audience and network with attendees

"Spectacular event!! Thoroughly enjoyed it and would love to do it again, and stay longer. Excellent across the board."

James Wicklund, Principal and Portfolio Manager, Carlson Capital LLC

Ian Fay from Odin Advisors poses some tough questions to

the panellists about the availability of capital

Jose Arrata, President of Pacific Rubiales was another

special guest at the Assembly

“Extremely instructive conference where high level executives share their hands-on experience and views of the industry”

Alberto Maria Finali, CEO, Symposium Capital Management LLC

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Terry Newendorp (Taylor-DeJongh), Tom Petrie (BAML)

and Lance Crist (IFC) explore the future of energy banking

Jim Wicklund, Mark Warner (UTIMCO) and John

D’Agostino (SecondMarket) share a joke

“Not the everyday oil and gas conference.

World class panellists and current energy topics made this assembly one of my top industry events for 2010.”

Jaime Gualy, Managing Partner, 1859 Partners LLC

Robert Harvey (Harvest Petroleum) and Bob Szczuczko

(Quetzal Energy) deep in conversation

Bobby Tudor (Tudor, Pickering & Holt) and Lance Crist

listen to Andrew Moorfield (Lloyds Banking Group)

“Congratulations to all for such an outstanding event.

I've not seen a conference with this impressive roster of participants in a long time.”

Eliecer Palacios, CEO, Energy Sector Specialist, Maxim Group

Marc Helsinger and Grant Darnell in high spirits

Steve Bell from Remora answers questions from floor

“I was very impressed with the presenters and general attendance. Networking opportunities were ample – your group clearly went

out of their way to encourage attendees to meet one another. Can’t wait for the next event…”

Ari Fuchs, Senior Vice President, Midtown Partners & Co., LLC

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Economic experts Lawrence Eagles (JP Morgan) and Mark

Findlay (BP) debate current commodity prices

John Schiller from Energy XXI shares his thoughts on the

future of the Gulf of Mexico

“The Oil Council is truly becoming the ultimate authority on geopolitical and geo-economic trends regarding the oil industry”

Ziad Abdelnour, President & CEO, Blackhawk Partners

Shawn Reynolds from Van Eck Global asks a question

through a crowded conference hall

Jan Stuart from Macquarie explains his thoughts on future

demand and supply dynamics in oil and gas

“You are to be congratulated not only for having the foresight to conceive an industry organization that is The Oil Council, but

especially for sponsoring your America’s Assembly. In my opinion your America’s Assembly unquestionably epitomized the Oil

Council’s mission of promoting knowledge and thought-leadership across the E&P industry. Expect to see me at next year’s event.” James 'JW' Vitalone, Senior Vice President, Oberon Securities

Attendees relax at one of the many networking receptions

across the Assembly

Kelly Plato from NPG Capital Resources Company before

sharing his thoughts on the future of mezz capital

"It was a great event for oil and gas executives to network with key colleagues from the financial side of the industry."

Brian Spector, Managing Director, Structured Products, BP Corp North America Inc.

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Changes: The Emergence of Singapore as an Oil Centre

Written by Al Troner, President, Asia Pacific Energy Consulting (APEC) The Asia Pacific Petroleum Conference (APPEC) completed its 26th gathering this year in Singapore in October. I attended for the first time in some years and the conference made me consider what has changed there over the course of a quarter century. I left Europe to work in Singapore in 1983 and I was fortunate enough to arrive in Singapore Back in the Earlies, as an English friend used to call these times – it was just as Asia Pacific‟s energy sector began to take off. APPEC 2010 underscored for me just how different Asia Pacific was back then and, what has changed in Singapore, in the region and in global energy, over the past quarter century. Firstly the place. Leaving Italy to work in Singapore in the early 1980s kept on reminding me of Alice in Wonderland and I found myself muttering “Rabbit down the hole, rabbit down the hole…”. Singapore then was shop-houses and go-downs, people living on the river in bumboats, a fabulous mélange of all things Chinese, Malay and Indian. This was the first time I had seen the fabled East. The industry was shifting into modern times as Singapore overtook Tokyo as the regional trading center. Singapore was a major refiner in 1983 with capacity less only than Japan, China and India. By 1990, products trade shifted mainly to the Island Republic, with crude following shortly after. Gas trade did not yet exist and gas development and sales were a peripheral activity in the sector. While Singapore was already a center for oil shipping, insurance and trade support, banks kept strictly to the issuing of commercial credit, exploration activity was minimal and the Island Republic just began to produce petrochemicals. The most important changes include:

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

Singapore at the time was a low-rise, large-scale „kampong‟ (Malay for village), with a small number of companies actively trading oil products and crude. It was a sort of club, a small closely knit community that could allow a newcomer the chance to see every company and most people trading oil within 6 months of arrival. The wet barrel was king – basic daily tools included reading the shipping fixtures and viewing through a spyglass all the tankers in the Inner and Outer Roads. Paper trading and hedging were just beginning to percolate through the global trading companies, most of all the large independent traders, many of which now gone – Trans-World, Marc Rich, Phibro and Coastal. In 1984, some 50 companies traded crude and products; by 2010 the number of energy companies registered for Singapore tax breaks totaled more than 150 firms. However the majors dominated trade, sales and blending based on their substantial refining and huge tank farms in this pivotal trading point. Shell operated one of the largest refineries in Asia and even after mothballing two of its five distillation towers, operated a refinery with greater capacity than a half dozen Asian markets at that time. Caltex, the joint venture of Chevron and Texaco, held smaller refining assets, but was by far the undisputed leader of Asia-Pacific product sales. Singapore cargoes moved to the Mediterranean, East Africa, the Mideast Gulf, North Asia, Australasia and the US West coast, as well as, supplying local markets. BP and Mobil both used their refineries as pivots to leverage out trade volumes far beyond their ability to process oil. Japanese trading houses (Sogo Shosha) – the most active Mitsubishi, Mitsui, Itochu (then C. Itoh & Co.) and Sumitomo - served as middlemen for Japanese refiners, as well as, sellers into smaller Asia-Pacific markets. South Korea just was beginning to trade internationally but the biggest players of 2010 were still missing (i) China, which only began in 1984 to process crude in Singapore, and (ii) India which mainly purchased crude through tenders. It was an informal, but intensely personal, world. Deals were concluded on a handshake, often negotiated over many beers. At lunch appointments you asked the waiter to sit you far away from other tables, as it was probable

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you would bump into other traders. Secrets, even trade secrets, had a very short shelf life. Suits were worn only for a visit to the Prime Minister and to Japanese cocktail parties. If lunch proved to be too liquid, there was always a welcoming office couch and time to wake up for the London opening. Singapore in 2010 is a very different place, with many more players working on a 24- hour trade clock and never shutting off their hand phones. It is not unusual to see many oil executives in full suits, even if their jacket immediately goes upon a hanger once they get to work and no one, from the smallest firm to the largest major, can afford to take a half hour nap – certainly the volume of alcohol consumed at lunch has dwindled to near nil, as it has in the West. The oil trade has changed in Singapore – profoundly, consistently and across the board. A number of factors have caused the shift, far more players, far more trade in paper (both formal and in swaps), the emergence of bank and financial-based oil trade and the emergence of the Island Republic as the vital third leg in international trade. But in the end we believe it has been technology that has accelerated this trend and that far better communications, electronic trading, computer generated trade and near instantaneous changes of price assessments have all fuelled greater activity – if not profits. In the world of wet barrel trade in the early 1980s the fax was considered a great leap forward in communications, particularly for companies using languages with non-Latin letters. Most traders knew how to operate a telex; a few remembered using telegraph. While Singapore‟s telephone system was better than most, traders would dread having to call India, Saudi Arabia, China or Indonesia. Certain places one would never dream of telephoning, such as Vietnam, Myanmar or Bangladesh. Like most traders I developed strong wrists from constantly re-dialling the rotary telephone – and when the monsoon rains came down hard, one would not even think of using the telephone. Personal computers were just beginning to impact trading operations. Typewriters remained an office staple and lists were often handwritten. The personal computer, with the parallel developments of Internet and the Excel sheets, made it possible to collect, collate and keep large amounts of statistics. By the 1990s, computer-initiated trading programs emerged and began to shape trade on the formal paper exchanges such as NYMEX and the IPE. My small consulting company Asia Pacific Energy Consulting (APEC) would not be able to operate with colleagues many locations across the globe, without these technical advances. And this has impacted price assessment services, as Platts, Argus and Reuters have moved to real-time pricing information and quotes. The Platts window in late afternoon Singapore time has become as important as the opening of the London market. And the tremendous growth of non-formal paper – derivatives loosely describes the many trading tools currently used in Singapore as much as London or New York – would not be possible without the computer, the internet and the hand phone. Finally, a big shift has been the emergence of Asia Pacific as the world‟s fastest growing oil consumption region – poised to overtake North America in 2011 as it did Europe in the 1990s. China‟s oil use in 2009 was about 45% of the US; in 1984, it was roughly 15% of American consumption. Asia Pacific will remain the epicentre of oil demand growth for the foreseeable future. In the 17th century cartographers labelled the vast empty spaces unknown to Europe as Terra Incognita, i.e. Unknown or Unrecognized territory. In 1983, few recognized that Asia Pacific would emerge as the top energy growth region worldwide. I made my move to Singapore, like most major moves in life, half on luck and half on calculation. Who knows – perhaps Shanghai will replace Singapore as the region‟s oil and gas trading centre – possibly the top global energy trading centre – by 2035? But for now that is simply Terra Incognita.

About Al Troner: Al is President of APEC. Since 1984, Al has worked in Asia’s energy sector, establishing Dow Jones/Telerate's regional energy services that year. He returned to Singapore in 1989 to found and then direct PIW’s Asia-Pacific bureau. He won the International Association of Energy Economics award for Energy Journalism in 1994, retiring from journalism the following year to co-found APEC. Al has published studies on China, Vietnam, Singapore, Asia-Pacific Product Quality, Asia-Pacific and Global LNG, Pipeline Gas Development, East of Suez Condensate, World Crude Survey and on Global Acidic Crude Trade and Markets. He has worked in the energy industry in the U.S., Europe, North Africa and Mideast, as well as in Asia Pacific. Please contact Al directly on apenergy@apecconsulting.com +1 281 759 4440

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Wall Street Investor – Why blaming China on our economic woes is a cover up that is foolish and that will not stand

Written by Ziad Abdelnour, President and CEO, Blackhawk Partners Inc

There is clearly a tendency today for countries all over the world to “beggar thy neighbour” (just as happened during the 1930s) and gain a leg up for their exports by cheapening their currencies. “Beggar thy neighbour” for those who are not familiar with the term or “beggar-my-neighbour”, is an expression in economics describing policy that seeks benefits for one country at the expense of others. Such policies attempt to remedy the economic problems in one country by means which tend to worsen the problems of other countries. The term was originally devised to characterize policies of trying to cure domestic depression and unemployment by shifting effective demand away from imports onto domestically produced goods, either through tariffs and quotas on imports or by competitive devaluation. The policy can be associated with mercantilism and the resultant barriers to pan-national single markets.. "Beggar thy neighbour" policies were widely adopted by major economies during the Great Depression of the 1930s and proved ruinous for the global economy then. Is the world setting off down the same slippery slope again? Let‟s hope not. If you recall, the House recently passed legislation saying China is a currency manipulator and has to raise the value of the Yuan. The rationale being that the Chinese Yuan is undervalued by 25%, which makes Chinese exports artificially competitive. Hence, the U.S. Congress is

trying to blame China's undervalued currency for America's bad economy and unemployment woes. But the former U.S. trade representative, Susan Schwab, says that - while there's a very real problem in terms of China artificially keeping the renminbi low - this isn't the way to solve anything. Schwab calls it "a signal-sending exercise during an election season". She says that the bill won't really do anything, even if the Senate passes it and it is signed into law. Schwab says it "makes no sense", won't solve any problems, will escalate tensions, and will only divert attention from the real trade problems between the U.S. and China. Schwab further warns that other countries might decide that the U.S. bill means that it‟s open season for addressing currency manipulation, and that other countries believe that the U.S. is manipulating our currency. She says there could be a "boomerang effect" from the legislation. Ironically, an anti-sourcing bill - the kind of legislation which might actually keep jobs in the country - was defeated in the same week that the toothless China bill passed. To put things into perspective China is currently in the middle of revaluing its currency and I frankly believe it has nothing to do with America's economic woes. There is indeed a direct line between China, its currency, its exports of lower-cost goods to the United States, and the erosion of middle-class life and now soaring unemployment. But U.S. manufacturing has been bleeding jobs for decades.

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What's more, the recent loss of millions of jobs since 2008 has everything to do with the collapse of the construction and housing industries along with the near-death of the Big Three American auto makers than with any competitive challenge from China. China has become a large car market for General Motors, but not for export to the United States: for sale in China. It would take a massive leap unsupported by any fact to lay the demise of the U.S. auto industry at the feet of China, or for that matter hold China responsible for the sub-prime and derivative debacles. Those are the cause of recent job loss. Furthermore, China has been revaluing its currency, nearly 20% between 2005 and 2008 and now nearly 3% since June when the government resumed that policy having shelved it during the midst of the global financial crisis. It is in the domestic interest of the Chinese government to raise the value of their currency because they are focused on building up on internal, domestic consumption market. They have no wish to be dependent long-term of the vagaries and whims of American consumers, and higher purchasing power for Chinese consumers is the answer. They are not revaluing quickly enough to suit an America stuck in second gear and looking for someone to blame, but revaluing they are. I believe the real problem is global weakness in demand, and China is understandably trying to avoid what happened to Japan's ramped-up currency, which led to the Lost Decade. Further, it is not hard to see China‟s point of view: it is desperate to avoid what it views as the dire fate of Japan after the Plaza accord. With export competitiveness damaged by its soaring currency and pressured by the US to reduce its current account surplus, Japan chose not the needed structural reforms, but a huge monetary expansion, instead. The consequent bubble helped deliver the “lost decade” of the 1990s. Once a world-beater, Japan fell into the doldrums. For China, self-evidently, any such outcome would be a catastrophe. To be perfectly candid, I believe that the trouble with today's capitalism is that there is little honest capital left in it. It has been drained away by quackery, debt and fraud. Real capitalism requires solid capital - money you can trust. But real money disappeared nearly 40 years ago. That was when the last traces of gold were removed. Since then, all currencies have been "managed." No longer fixed measures of real wealth, they have become tools...supposedly used by the authorities to promote full employment and growth...but in fact little more than monetary felonies. From the end of the Napoleonic wars until the beginning of World Wars of the 20th century, the world's money system was backed by gold. You

couldn't "manage" it. You couldn't devalue it. You couldn't talk it up or talk it down. You couldn't “beggar thy neighbour” by cheapening it or enrich him by making it more dear. It was what it was. The new experimental money system began in the Year of Richard Nixon, 1971. Thereafter, the supply of money could increase much faster than the supply of goods and services. US money supply (M2) rose 1,314% between 1970 and 2008, from $624 billion to $8.2 trillion. What did all this new money do? First it flattered...then it corrupted...and finally, it robbed. America's working stiffs were the first to get whacked. Inflation made them feel like they were earning more; but they haven't had a real, hourly raise since the system was put in place 4 decades ago. And now, America is struggling to make sure they get none in the future either. Lowering the dollar against the renminbi increases the cost of probably 90% of the goods in Wal-Mart and Costco - where the working classes shop. But this has been going on ever since the managers began taking liberties with the dollar. In the 1960s, the working man - 90% of the population - got 60% of the income gains of the period. By the end of the bubble years - 2001- 2007 - he got just 11%. This has resulted in a "record income gap". Half the nation's income goes to the top 20% of the population, nearly twice as much, compared to the bottom 20%, as in 1967; it's the biggest gap since they began keeping track. Consumer prices rose 5 times over the last 40 years. The stock market went up 15 times - from 800 in January 1970 to over 12,000 in 2008 - roughly in line with the increase in the money supply. But the phony money betrayed the rich too. Investors were misled. Capitalists erred. Trillions of dollars went down rat-holes. Consumers were spent out, but the capitalists kept building shopping malls. Now, stock market prices have gone nowhere for more than a decade. And household net worth - most of it in the hands of the wealthy - has declined $12.3 trillion from the peak. When the mistakes are finally flushed out, they could be down another $12 trillion. The horns have sounded and bells have been rung. It is 1939 in the currency war - just the beginning. When it is over, every managed currency in the world will be dead or wounded. But we will be wiser, too. When the new managed dollar was introduced in the "Nixon Shock" of August, 1971, nobody knew what it was worth. When the end comes, everyone will know. Using a weak dollar to create American jobs is foolish, for two reasons. First, no other country wants to lose jobs because its currency becomes too high relative to the dollar. So a weak dollar policy invites currency wars. Everyone loses.

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Second, even if we succeed, a weak dollar makes us poorer. Imports are around 18 percent of the US economy, so a dropping dollar is exactly like an extra tax on 18 percent of what we buy. It's no big accomplishment to create jobs by getting poorer. You want to know how to cut unemployment by half tomorrow? Get rid of the minimum wage and unemployment insurance, and make everyone who needs a job work for a dollar a day. The goal isn't just more jobs. Its more jobs that pay enough to improve our living standards. Hence, using a weakening dollar to create more jobs doesn't get us where we want to be. With the dollar as the world's reserve currency - every county, including China, must devalue their currencies just to stabilize their economies: It is traditional for our politicians to blame foreigners for problems that their own policies have caused. And in today‟s zero-sum economies, it seems that if America is losing leadership position, other nations must be the beneficiaries. Inasmuch as China has avoided the financial overhead that has painted other economies into a corner, nationalistic U.S. politicians and journalists are blaming it for America‟s declining economic power. In fact, accusations that Japan, South Korea and Taiwan are “making their currencies cheaper” by recycling their dollar inflows into U.S. Treasury securities simply means that they are trying to maintain their currencies at a stable level. It is how most central banks throughout the world are responding to the global dollar glut. They are increasing their international reserves by the amount of surplus free credit” dollars that the U.S. payments deficit is pumping out. To pretend that China is “manipulating its currency” by doing what central banks have done for over a century is utterly false. Back in the early 1970s, U.S. officials told OPEC governments that if they did not do this, it would be deemed an act of war. And Congress has refused to let China buy U.S. companies – so China can only recycle its dollar inflows by buying Treasury securities, thereby financing the U.S. federal budget deficit. To pretend that exchange rates are determined mainly by international trade is “Junk Economics”. International currency speculation and investment is much larger than the volume of commodity trade. The typical currency bet lasts less than a minute, often being computer-driven by arbitrage swap models. This financial fibrillation has dislodged exchange rates from purchasing-power parity or prices for export and imports. The largest payments imbalances have little to do with “market forces” for imports and exports. They are what economists call price-inelastic – money spent without regard for price. This is true above all for military spending and maintenance of America‟s

vast network of foreign bases and political manoeuvrings to control foreign countries. During the 1960s and „70s U.S. military spending accounted for the entire balance-of-payments deficit, as private sector trade and investment remained in balance. Escalation of America‟s oil war in the Near East and the hundreds of billions of dollars spent to prop up America-friendly regimes, end up in central banks – whose main option is to send them back to the United States in the form of purchases of U.S. Treasury bills – to finance further federal deficit spending! None of this can be blamed on China. U.S. strategists would not mind seeing China‟s economy similarly untracked by letting global speculators bid up the renminbi‟s exchange rate – by enough to let Wall Street speculators make hundreds of billions of dollars betting on the run-up. “Free capital markets” and “open financial markets” are euphemisms for setting the renminbi‟s exchange rate by U.S. and European currency arbitrage and capital flight. The U.S. balance-of-payments outflow would increase rather than shrink, thanks to the ability of American banks to create nearly “free” credit on their keyboards to convert into Chinese or other currencies, gold or other speculative vehicles that look to rise against the dollar. “An undervalued currency always promotes trade surpluses,” Prof. Krugman explains. But this is only true if trade is “price-elastic,” with other countries able to produce similar goods of their own at only marginally different prices. This is less and less the case as the United States and Europe de-industrializes and as their capital investment shrinks as a result of their expanding financial overhead ends in a wave of negative equity. Congress is increasing the drumbeat of accusations that China is violating international trade rules by protecting itself from financialization. “Democrats in Congress are threatening to slap huge tariffs on Chinese goods to undermine the advantages Beijing has enjoyed from a currency, the renminbi, that experts say is artificially weakened by 20 to 25 percent.” The aim is to make China “lift the strict controls on its currency, which keep Chinese exports competitive and more factory workers employed.” But such legislation is illegal under world trade rules. This kind of propaganda does not see the United States as guilty of “managing the dollar” by its quantitative easing that depresses the exchange rate below what would be normal for any other economy suffering so gigantic and chronic s payments deficit. What makes this situation inherently unfair is that while the Washington Consensus directs other countries to impose austerity plans, raise their taxes on consumers and cut vital spending, the Bush-Obama administration blames China, not the U.S. financial system or post-Cold War military expansionism.

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The cover story is that foreign exchange controls and purchase of U.S. securities keep the renminbi‟s exchange rate low, artificially spurring its exports. The reality is that these controls protect China from U.S. banks creating free “keyboard credit” to buy out its companies or load down its economy with loans to be paid off in renminbi whose value will rise against the deficit-prone dollar. It‟s the arbitrage opportunity of the century that lobbyists are pressing for, not the welfare of workers. Paul Krugman and Robin Wells blame China for Wall Street‟s junk mortgage binge. Instead of pointing to criminal behaviour by the banks, brokerage companies, bond rating agencies and deceptive underwriters, they take the financial sector off the hook: “Just as global imbalances – the savings glut created by surpluses in China and other countries – played an important part in creating the great real estate bubble, they have an important role in blocking recovery now that the bubble has burst.” This sounds more like what one would hear from a Wall Street lobbyist than from a liberal Democrat. It is as if the real estate bubble didn‟t stem from financial fraud, junk mortgages, NINJA loans or the Federal Reserve flooding the U.S. economy with credit to inflate the real estate bubbles and sending electronic dollars abroad to glut the global economy. It‟s China‟s fault for running large trade surpluses “at the rest of the world‟s expense.” Wall Street‟s idea of “equilibrium” is for foreign countries to financialize themselves along the lines that the United States is doing, then global equilibrium could be restored. Such suggestions are a cover story for America‟s own financial mismanagement. The U.S. idea for global equilibrium is to demand that that the rest of the world follow suit in adopting the short-term time frame typical of banks and hedge funds whose business plan is to make money purely from financial manoeuvring, not long-term capital investment. Debt creation and the shift of economic planning to Wall Street and similar global financial centres are confused with “wealth creation,” as if it were what Adam Smith was talking about. China is trying to help by voluntarily cutting back its rare earth exports. It has almost a monopoly, accounting for 97% of global trade in these 17

metallic elements. These exports are “price inelastic.” There is little known replacement cost once existing deposits are depleted. Yet China charges only for the cost of digging these rare metals out of the ground and refining them. They are used in military and other high-technology applications, from guided missile steering systems and computer hard drives to hybrid electric automobile batteries. This has prompted China to recently cut back its exports to save its land from environmental pollution and, incidentally, to build up its own stockpile for future use. So I have a modest suggestion. If and when China starts re-exporting these metals, raise their price from a few dollars a pound to a few hundred dollars. According to theory put forth by Mr. Krugman and the U.S. Congress, this price increase should slow demand for Chinese exports. It also would help promote world peace and demilitarization, because these rare metals are key elements in missile guidance systems. China should build up its national security stockpile of these key minerals for the future – say, the next prospective five years of production. Let this be a test of the junk paradigms at work. After all, there is a trade imbalance with China which needs to be addressed over some reasonable time-frame. But it cannot be done overnight. By now nearly everyone recognizes that raising the value of the renminbi is a necessary part of the process of raising the real value of household income and improving the balance between producers and consumers, but if the currency rises too quickly and so leads to rising unemployment, it will actually cause household income (and with it household consumption) to decline as unemployment rises. The imbalance will still improve, but it will improve in the “wrong” way, in the form of production declining faster than consumption. In the meantime, America has not addressed its own fundamental problems (such as rampant speculation and fraud) which led to our financial crisis. And as former trade representative Susan Schwab notes, the Congressional bill is nothing but political theatre which might boomerang on all of us.

- Ziad K. Abdelnour, President and CEO, Blackhawk Partners, Inc

ziad@blackhawkpartners.com

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PWC’s Q3 Analysis – US Oil & Gas Sector Deals

Despite ongoing uncertainties about future business in the Gulf and cautious and uneven equity markets, merger and acquisition (M&A) activity in the U.S. Oil & Gas sector overcame challenges to surpass 2009 levels in the third quarter of 2010. According to PwC US, the increase in oil and gas deal activity is attributed to companies' ongoing effort to reorder their portfolios, continuing interest by non-U.S. oil companies in shale plays, and the expansion of product lines and markets served by equipment and service companies. According to PwC, for the three month period ending September 30, there were 39 deals with reported value greater than $50 million (totaling $17.6 billion in deal value) representing an increase of 19.7 percent from the same period last year. In terms of volume, the third quarter of 2009 saw nine fewer deals (30) over $50 million with total deal value of $14.7 billion. "The oil and gas sector continues to see a strong level of activity, despite lingering uncertainty regarding equity markets, relatively low commodity prices (particularly gas), and uncertainty surrounding relative currency values," said Michael Collier, U.S. leader of the energy M&A practice at PwC. "Not only are we seeing steady deal flow among corporates in the space, financial sponsors are starting to emerge again and we expect they will be major players this year and next. We're optimistic for the remainder of 2010 and 2011, and the significant backlog of deals in the pipeline is generating a lot of activity." A continuing theme from the previous quarter, upstream asset-focused deals dominated deal activity, comprising 71 percent of deal volume and 57 percent of value in the third quarter of 2010. According to PwC, the relatively large volume of asset sales reflects the size of major upstream transactions, particularly in the shale plays. "There is a healthy level of deal volume around divesting of non-core assets as companies look to maximize their return on capital deployed and raise funds to continue their development efforts, particularly in the shale plays," continued PwC's Collier. "As for the Gulf, players are in the process of deciding whether they will be in or out, and while the moratorium was technically lifted recently, there is still a de-facto moratorium as permits remain difficult to secure. Drilling activity in the Gulf will take time to fill in, and we're seeing capital budgets being set for 2011 that assume very low activity. Companies are actively working on the decision to either leave the Gulf or ride out the storm." Of the $17.6 billion in value, 25.7 percent involved shale gas plays, as companies looked to secure their position for the longer term and have access to newly developing technology, according to PwC. "Shales with higher liquid content like the Eagle Ford have been particularly attractive acquisition targets as companies look to take advantage of what many perceive to be a sustained period of low gas prices," Collier stated. In the third quarter of 2010, the average value of deals over $50 million fell to $450 million from an average of $490 million in the same period of 2009, demonstrating oil and gas companies' ongoing focus on optimizing their portfolios. "While we're seeing an increase in larger deals, the average deal value is not rising; in fact, it declined slightly. This alone doesn't represent a significant trend, except that it's relatively strong for the third quarter, which is historically a seasonally slow time for deals," added PwC's Collier. For the first nine months of 2010, there were 141 deals, with reported value greater than $50 million, representing $100.4 billion versus 70 deals with $34.9 billion in the first three quarters of 2009 -- a 101 percent increase in volume and a 187 increase in value. "Despite the possibility of tax increases in 2011, we aren't seeing many deals rush to close before year-end," continued PwC's Collier. "Dealmakers remain conservative and are focused on creating value and avoiding costly mistakes. They are taking their time to make sure the value in the deal is protected, through careful diligence and thorough preparation before signing and close. We're also seeing more attention paid to post-deal performance particularly in the first 100 days. As companies emerge from the financial crisis, it is clear they are very focused on operational excellence. The same seems to characterize M&A activities. As we head into the next energy M&A upcycle, it feels as though the bar has been set very high in terms of deal execution excellence." About the PwC U.S. Energy Practice: We focus on customizing three things- assurance, tax and advisory services- to meet the unique challenges of energy companies. How we use the knowledge and experience we've gained from serving the largest and most complex energy companies to the entrepreneurial start-ups depends on our clients' goals and culture: www.pwc.com

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Analyst Notes - E&P Outlook

The European Mid Cap E&P sub-sector outperformed the broader sector in 3Q10, with stock prices up 29% on average for our universe versus the average achieved by the Service companies (+21%), Integrateds (+11%) and Brent crude (+3%). The third quarter was marked by a number of catalytic events, such as KNOC’s approach for Dana Petroleum (announced 2 July), the completion of Heritage’s Ugandan asset sale to Tullow (27 July) and the results of Cairn’s first wildcat exploration well in Greenland (24 August). Although much has been made of the success of the small cap explorers (e.g. Cove Energy, Rockhopper, EnCore) in the first half of the year, we highlight the approach for Dana as the main catalyst for the Mid Cap sub-sector re-rating over the past three months. The bid by KNOC pointed to the nascent value of the Mid Cap E+P universe within a global context of resource scarcity and the scramble for reserves and production by energy-hungry nations in Asia. With the market in a relatively bullish mood and value more difficult to find amongst the Mid Caps, we continue to favour what we view as reasonably priced exploration programmes that are either well diversified across numerous prospects or that do not have success priced in yet. However, drilling success and redistribution of the Dana Petroleum returns have seen two of its previously under-appreciated peers, Premier and Lundin, achieve top quartile share price appreciation in the third quarter.

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

Source: Thomson Reuters DataStream

What holds for 4Q10? The results of several ongoing drilling programmes will help to feed the flames in the E&P sector, which attracted considerable positive sentiment in 2010 for the first time since early 2008. But this should not come as a surprise; part of the E&Ps’ investment proposition is their ability to create significant value through exploration over and above the absolute returns of a bullish global economy. With the oil spot price trading above $80/bbl, there are few signs of this attraction waning just yet. We continue our conservative stance with regard to exploration drilling. In general terms, 1 in 5 exploration wells are normally commercially successful, but in frontier terms this decreases to 1 in 10. We advise investors to pick their stocks carefully and be aware that as more of the potential ‘ups’ are already priced in, so the investor should become much more wary of the potential ‘downs’ should a well come in dry. Geologists dreams are like rainbows, chasing them are more likely to get you wet feet than a pot of gold.

- Credit Suisse

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“When companies are caught up in The Vortex, you can see faster growth

in value for a smaller rise in institutional relevance.”

Golden Barrels: The Vortex By Simon Hawkins, Head, Oil & Gas Research, Ambrian

I like meeting companies. I’m happy to go to see them and I’m even happier when they come in to see me. My record is five companies in one day: two results presentations in the morning, two corporate presentations after lunch and a sales presentation later on in the afternoon with a nice cup of tea. I’m happy to see every shape and size, whatever region or corner of the globe they come from. The good thing about staring at a picture is that after a while you start to see patterns. And this goes for the companies in our sector too. One of the patterns that started to appear is what I call ‘The Vortex’. I'm looking forward to explaining a little more about this at The Oil Council World Assembly next week.

It all started with looking at the sector in a different way: plotting market capitalization (the Y axis) against institutional relevance (the X axis). Market capitalization is straightforward to measure, right off Bloomberg. Institutional relevance is a little more tricky but, the way I define it, it’s the percentage of a company’s shareholders made up of blue chip, premier division institutional shareholders such as Blackrock, Schroders, JP Morgan, Jupiter etc. If you imagine those axes in front of you there are two extremes: 1) Bottom left of the graph, where

companies have both low value and a low institutional relevance, and 2) Top right, where companies have a high value and a high institutional relevance. I’m happy to see companies from all quadrants, but if a CEO walks in wanting to move their company from bottom left to top right he will almost certainly get more of my attention. This is because there is a chance he may well run into The Vortex. The Vortex is when a company gets so interesting that it quickly gets even more interesting to more investors. In other words, it reaches a stage when the story starts to catch fire or build a momentum, which makes it very difficult to ignore by the rest of the market. When companies are caught up in The Vortex, you can see faster growth in value for a smaller rise in institutional relevance. We’ve seen this with a number of stocks this year including those involved in the Falklands, other frontier explorers and even companies operating in the North Sea. Companies that are masters at riding The Vortex for a long time would include some of the mid-large cap E&Ps we recently initiated on, such as Cairn Energy, SOCO International and of course the company with a to-die-for shareholder register, Premier Oil. The big question is this: if you are down in the bottom left quadrant, how do you start to tag the outer limits of The Vortex in order to get sucked in and enjoy an accelerated ride upwards and onwards? Well, for that you’ll have to come along next week and let me explain. Email me your views at: info@goldenbarrels.co.uk

About Simon: Previously, Simon was founder of Omni Investment Research, and held senior positions at UBS and Dresdner Kleinwort, having been ranked number one by

Thomson Extel for his coverage of the European Gas sector, number two in European Oils and three in European Utilities. Prior to joining the City, Simon had eight years international experience with the Shell, working in economics and finance. He is now Head of O&G Research at Ambrian, a specialist energy and resources investment bank. Ambrian provides full service investment banking to a broad range of institutional and corporate clients, including Corporate Finance, Corporate Broking and Equities. Ambrian is focused on three key sectors, Oil and Gas, Mining and Cleantech/Alternative Energy, where it has developed in-depth expertise and relationships. www.ambrian.com

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“Entering 2011, we anticipate that diesel

and gasoil demand will also remain robust

concurrent with global demand recovery.” “India and China expect

GDP growth in 2011 to be north of 7% – far outpacing OECD countries which are

projecting a mere 2.5% growth in GDP.”

The Oil Outlook

November 2010: Quantitative Easing Sends Commodity Prices Higher

By Gianna Bern, President, Brookshire Advisory and Research

Crude Oil Prices Increase Over the last three weeks, the energy complex has obtained renewed vigour with crude prices flirting with $88 per barrel. Will this last? Or, is this upswing to be short-lived? We believe this run up in the energy complex has staying power.

Global commodity prices in the metals and agricultural commodities are also experiencing similar gains as a result of modest global recovery and potential inflationary concerns. For 2011, crude prices in the $90 to $95 per barrel range are definitely in the range of possibilities. Gasoline prices have also followed suit with a market upswing as inventories on both sides of the Atlantic begin to be chiselled downward. Better late than never. Entering 2011, we anticipate that diesel and gasoil demand will also remain robust concurrent with global demand recovery. Both commodities are trading near the upper bounds of their trading range. Currently, December heating oil crack spread is near $15 per barrel and the December gasoline crack spread is approximately $8.50 per barrel. Both of these spreads highlight the current bullish environment for refined products. The December 321 crack spread is in the $10.00 per barrel range providing a relatively stable price environment for refiners and producers.

Demand Uptick

Global energy organisations, such as OPEC and the International Energy Agency are both forecasting modest growth in 2011 among the 33-nation membership of the Organization for Economic Co-operation and Development (OECD). Given the robust economic growth in emerging markets, such as India and China, this is further evidence that crude oil prices will maintain their upward momentum throughout 2011. India and China expect GDP growth in 2011 to be north of 7% – far outpacing OECD countries which are projecting a mere 2.5% growth in GDP. Both markets are still supportive of crude oil prices.

Currencies Quantitative easing by the U.S. government invariably will have upward pressure on commodities as a weaker U.S. dollar emerges. The global markets are already witnessing the potential inflationary effects of such a policy. While the merits of such a policy can be debated, the effects are fairly evident. Going into 2011, a weaker U.S. dollar will result in a bullish environment for the energy complex.

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

www.oilcouncil.com

Diary of a Commodity Trader

The Energy

Policy of ‘No’

By Kevin Kerr, President and CEO, Kerr Trading International

As the World tries to claw itself out of the economic abyss, oil prices keep climbing. Actually, regardless of what Fed Chairman Bernanke says from his helicopter,

inflation is here and it’s getting worse. Consumers around the globe are getting hit from all sides; prices are surging for everything from food and textiles to electronics and soft commodities. Far and away though, energy prices are leading the pack higher. Crude prices are approaching $90 and heating oil prices this winter could skyrocket if we have an above average number of heating degree days this year, as predicted. Already beaten up consumers and manufacturers are going to have to make tough choices into 2011. And yet there is still really no clear energy policy in the US or abroad.

Every sunken ship had a chart!

OPEC seems satisfied with prices at the current level but is also voicing continued concerns over pervasive dollar weakness and continuing to mull the idea of trading oil in something other than $. Say it isn’t so! The denial of inflation by Mr. Bernanke will do little to fix the real problem, the endless printing of money and the loose fiscal policies of the US. We now have real negative interest rates and billions in easing which is adding even more pressure on the greenback, making it less and less attractive. So as oil prices rise the move higher is being fueled by an ever falling dollar. On top of all this bad news the US still has no real clear energy policy going forward. Drilling offshore and finding more domestic resources has all but dried up as the economy imploded, and on top of that the Gulf oil disaster set things back even further. All the talk of a green energy revolution is also faced with many obstacles: the weak economy, lack of the rare earth metals, and tepid investment. The elections in the US this month drove a big nail in the Obama administration’s coffin, as gridlock is likely to be the major activity for at least the next two years.

The elections removed the mandate of the Democrats and now uncertainty about future energy policy looms large. The election losses were mainly due to disappointment by voters over Mr. Obama’s performance. One of Obama’s biggest failures involves his attempt to reduce greenhouse gas emissions by about 17% by 2020, as he had announced during the Copenhagen Summit. Now, Obama is expected to rely more on the Environmental Protection Agency (EPA) to enforce relevant laws in a more stringent manner than before. This means that the opposition will focus its attacks and criticisms against this government agency, and will also attempt to shrink its budget as much as possible in order cripple its ability to act effectively. The Obama administration has succeeded in increasing the quantity of biofuels blended with conventional gasoline and diesel, and also took the initiative when it comes to improving fuel efficiency in vehicles, enabling them to travel longer distances with less fuel. It is expected that the administration will continue these attempts to reduce reliance on conventional fuels, or to use them in a more economic manner, through the laws that have been enacted but that are yet to be implemented. Now with Republicans taking over Congress, the uncertainty returns. Such attempts are significant for the global oil industry, given the fact that the use of fuel in transportation in the United States accounts for about 25 % of total global consumption. This is not to mention the significance of the U.S. laws pertaining to the quality of newly manufactured cars that are in force and their implication in general in what regards the quality of vehicles produces globally. The fact remains that without a concise and clear energy policy in the US the long-term implications are grim. Consumers will have to get used to $100 plus crude oil and much higher gasoline and heating fuel prices at a time when they can least afford it.

*** Look out for Kevin’s regular monthly column. ***

Kevin Kerr is a TV and radio investment advisor, his unparalleled expertise in futures and commodities has made him a regular

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

www.kerrtrade.com & www.kerrcommoditieswatch.com

RegesterLarkin

Reputation Strategy and Management

Regester Larkin helps IOCs, NOCs, Independents and utilities – both upstream and downstream - to protect and capitalise on their reputation. For 15 years, we have been pioneering reputation management in the oil industry. Our expertise has been honed by helping energy companies maintain their license to operate in the aftermath of many of the UK’s most high-profile oil industry incidents (eg: Sea Empress, Braer, Buncefield). We have also helped many of the world’s largest energy companies proactively to manage both short and long-term threats to their hard-won global reputations. Our specialists work with energy companies on a local, national and international basis, providing in-depth analysis, independent advice and tailored coaching and training.

Whether you want to protect your reputation in the face of local concerns, global issues or full-blown crises, or capitalise on your reputation to achieve your business goals, we have a comprehensive range of services to assist you, including:

Reputation risk audits

Evaluating emerging issues

Industry benchmark studies

Special advisers to top management

Deploying reputation for business growth

Crisis leadership coaching

Crisis spokesperson training

Media and family response training

Crisis exercises and simulations

Examples of our recent work in the energy sector

Crisis management:Advising a supermajor on its external communications when an oil tanker ran aground in ecologically sensitive waters.

Designing and facilitating crisis exercises at country, divisional and group level for worldscale energy companies.

Conducting a two-year programme to enhance crisis preparedness at one of the world’s largest gas companies.

Issues management:Helping an IOC consider its external engagement and media strategy related to a major potential project in Iraq.

Advising an oil and gas transportation company on its position during industry discussions on proposed new shipping emissions regulations

Helping an IOC develop and implement its issues management strategy around a product legacy land contamination issue.

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Air Products BG Group

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www.oilcouncil.com

Asian Takeover?

Written by Elaine Reynolds, Oil Analyst, Edison Investment Research

So farewell then Dana Petroleum. Despite the protracted takeover process involved, the buyout of one of the UK’s largest independent oil companies by the Korean National Oil Company (KNOC) went through without any of the political soul searching that often occurs in the media when a British company is targeted in this way. Indeed the response is in total contrast to the furore that erupted in the United States five years ago when the Chinese National Offshore Oil Corporation (CNOOC) attempted an $18.5bn takeover of US company Unocal. Living in Houston, as I was at the time, it was clear that there was a great deal of fear and suspicion in the US generally regarding the growing economic power of China, but nothing could have prepared the Chinese for the political firestorm that followed. The affair came to symbolise the trade and political tensions between the US and China, and CNOOC finally pulled out when it looked likely that Congress would pass legislation to block the deal. Ironically, CNOOC had originally chosen Unocal as a takeover target because it wanted to diversify its asset base into more countries with low political risk, but, in attempting to achieve this, it stirred up more adverse political fuss than it cared to have to deal with. In an unexpected outcome, CNOOC found it was easier to do business with the developing world than with the US. These days, the Chinese are moving into America in a more low key way, for example with CNOOC’S recent $2bn deal to purchase a third of Chesapeake Energy’s oil and gas assets in a south Texas shale deposit. But, if it did try to take over a Unocal or similar today, would the reaction be as toxic as it was in 2005?

During the recent crisis in the Gulf of Mexico, the Chinese were regularly touted alongside Exxon as a potential candidate to take over a stricken BP, without any of the rancour evident five years ago.

Of course, as President Obama did not hesitate to remind us, BP is perceived to be very British by the Americans, possibly colouring their indifference to such a deal, but clearly the company holds substantial US assets. A more realistic reaction would likely be the one playing out right now in Canada over BHP Billiton’s hostile bid for Potash Corporation. When it became known that Sinochem might make a counter-bid for Potash, Andrew Ross Sorkin, financial columnist in The New York Times and author of Too Big To Fail, asked in an article if America really wants the Chinese to control the company that has the largest capacity to produce fertiliser, thereby potentially affecting US food production. So attitudes seem to be ingrained, but whatever the future holds for Asian oil companies in the United States, one thing is very clear. They will continue to buy up oil and gas assets all around the world to feed their enormous domestic demand for energy. The only question is where they will go next.

About Elaine Reynolds: Elaine is an oil analyst at Edison Investment Research. Prior to joining Edison she had fourteen years experience as a petroleum engineer with Texaco in the North Sea and Shell in Oman and The Netherlands. Edison is Europe’s leading independent investment research company. It has won industry recognition, with awards in both the UK and internationally. The team of more than 50 includes over 30 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 250 companies across every sector and works directly with corporates, investment banks, brokers and fund managers. Edison’s research is read by every major institutional investor in the UK, as well as by the private client broker and international investor communities: www.edisoninvestmentresearch.co.uk

“They will continue to buy up oil and gas assets all

around the world to feed their enormous domestic

demand for energy.”

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Ross Stewart CampbellCEO T: +44 (0) 207 067 1877 E: ross.campbell@oilcouncil.com

Vikash MagdaniExecutive Vice President, Corporate DevelopmentT: +44 (0) 207 067 1872 | M: +44 7540 765 293 | +1 347 633 7734E: vikash.magdani@oilcouncil.com

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