Drillers and Dealers November 2011

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Welcome to Drillers and Dealers November 2011

Drillers and Dealers ::: ::: November 2011 Edition

Contents

Editors ForewordDrake Lawhead, The Oil Council

Executive Q&A Julian Small, UK Industry Leader Energy & Resources,Deloitte

What is the Size of the Global E&P Spending

Market?Erik Wold, Senior Partner, and Jan Norstrm, Vice

President, Rystad Energy

How Political Risk Hits the Bottom LineHannah Koep, Head, Africa Analysis, Control Risks

SPECIAL CFO FOCUS

5

8

10

13

ON THE SPOT PART ONE THE CFOWhat are the three things that, as a CFO, are keeping

you up at night?

17

Perspectives from CFOs Across the Globe

ON THE SPOT PART TWO THE BANKER / THE

ADVISORWhat are the three main challenges that energy-

focused CFOs face in todays markets?

21

Perspectives from Financial Advisors Across the Globe

THE LEGAL CORNERFrom a legal perspective, what challenges do you

foresee lying ahead for The energy focused CFO in

tomorrows business environment?

25

Perspectives from Legal Partners Across the Globe

Meet The Members 33

Copyright, Commentary and IP Disclaimer: *** Any content within thispublication cannot be reproduced without the express permission of The OilCouncil and the respective contributing authors. Permission can be sought bycontacting the authors directly or by contacting Iain Pitt at the above contactdetails. All comments within this magazine are the views of the authorsthemselves unless otherwise attributed to their company / organisation. They

are not associated with, or reflective of, any official capacity, or any otherperson in their company / organisation unless so attributed ***

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Editors Remarks


The Spectre of Scarcity

Today, the seven-billionth resident ofplanet Earth will be born; more likely inAngola than Andorra. With suchpassing milestones (which arrive moreand more frequently it took tens of

thousands of years to get to the first billion, sometimearound the 1830s), a perennial spectre appears.

Scarcity is the driving force of most conflict in humansociety. Everything, except possibly Oxygen, is scarce.There isnt enough money, there isnt enough fresh water,cheap oil, political power, affordable housing, time to dowhat you want to do, etc, etc, etc. Politics is the businessof deciding who gets what how to distribute scarceresources, or at least, how to decide how scarceresources will be negotiated for.

"The power of population is indefinitely greater than thepower in the earth to produce subsistence for man"wrote

Thomas Malthus in 1798. Writing at a time when thepopulation of the world was roughly equivalent to just two-thirds of modern China, Malthus believed that there wouldsimply not be enough food to sustain the worldspopulation past the 19

thCentury.

Malthus had so drastically underestimated the ingenuity ofmankind to improve agricultural techniques that the termMathusian is now a pejorative, derisory label pinned ondoomsayers and Chicken Littles.

Depending on who you speak to, the concept of Peak Oilis passing into the realm of Malthusian prophecies. PeterTertzakian, speaking at The Oil Councils AmericasAssembly in New York last month spoke of the shift fromthe concept of peak oil to peak cheap oil.

There are probably enough hydrocarbons in the ground tosee the human race through well past the time when otherdoomsday scenarios become more likely (asteroids, alieninvasion, disease, nuclear war, death of the sun). Theanswer to how much oil is left in the world is simply aquestion of how much do you want to pay?

And yet, it would be foolish to disregard Malthus. The factis that the worlds population has doubled since theSummer of Love in 1967 when All You Need is Love andWhiter Shade of Pale were on the radio waves and tripledsince World War II. In order to avoid the Malthusiannightmare, human ingenuity that is, technology hashad to keep pace with the demands of increasing scarcity.But the history of the progress of technology has been

astonishingly uneven.

In the film Apollo 13, there is a scene where Tom Hankscharacter is forced to make a series of complex

calculations on board the doomed capsule. He pulls out aslide rule, pencil, and paper. In 1967, we sent man to themoon before the pocket calculator had been invented.Now, we carry around computer chips in our pockets sopowerful they would have been considered super-computers with export restrictions placed on them in the1960s. Mechanical technology was far ahead ofcomputing technology.

How evenly has technological ingenuity been applied inthe energy industry? The thermal power plant is still thedominant form of power-production today. China buildstwo coal power stations a week. The internal combustionengine of the automobile hasnt fundamentally beenreplaced since the car was invented in the late 19

th

century. The technology used to extract oil and gas fromthe earth is among the most advanced in the world andthe oil industry utilizes NASA-grade, state of the art,technology that was unimaginable even twenty years ago .

But the use of that oil and gas has not kept pace throughthe Industrial Revolution, the Factory Age, the Space Age,the Digital Age, and at the advent of the NanotechnologyAge, we are still digging up dead dinosaur material fromthe ground and setting fire to it in order to keep the cogs ofthe world spinning.

If Alexander Graham Bell were alive today, what would hemake of our iPhones and BlackBerries? What wouldCharles Babbage make of the PC? They might call for anexorcist. If Thomas Edison, or Malthus were to walkaround our world today, on the other hand, they wouldboth recognize and understand our power plants, thermalturbines, and electricity grid they havent changed allthat much.

It may be that the technological revolution that has openedup access to unconventional fossil fuel sources haspushed the Mad Max, Malthusian energy-catastrophescenario far enough into the future to make Peak Oil seemlike an ever-elusive mirage on the horizon.

The oil industry can take the credit for responding to thatthreat. How will other industries power, water, mining,agriculture evolve to sustain the planet at 7 billion, or 10billion, before the global resource deficit forces thecollective ingenuity of humankind to tackle their ownMalthusian breaking points?

By Drake Lawhead, Editor

p.s. I look forward to meeting some of our readers on thenight of Thursday 17th Nov at our Annual Awards Dinner.


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Executive Q&A CFO Focus


Executive Q&A with Julian Small,

UK Industry Leader Energy & Resources, Deloitte

Drake Lawhead interviews Julian Small, November 2011

Q: What in your opinion are the corporate priorities of CFOs in the oil and gas sector over the next 12months?

Concerns over the outlook for the oil price will affect the corporate priorities of oil and gas CFOs. Whilst the oilprice is north of US$100 per barrel all is well, but should there be a significant downward movement then cost

control will quickly rise up the list of priorities. Having said that, it is unlikely the oil price will plummet to the levelsseen during the financial crisis towards the end of 2008 and start of 2009. With that in mind, access to capital iscurrently the main priority, in particular when considering the current opportunities to acquire assets atreasonable prices. More generally, there is a focus on corporate governance and risk management, dependingon the nature of the companys operations.

Q: Would you say CFOs in the oil and gas sector are more or less optimistic about their financialprospects in the year ahead?

With oil prices remaining quite buoyant, financial prospects look good, with companies continuing to invest, forexample, exploration. However, financial uncertainty continues and therefore the effect on debt and equitymarkets mean that available finance for larger development projects is likely to become more difficult to secure,especially for smaller companies. This combined with the general financial uncertainty, is tending to make peopleless optimistic. Nonetheless, we still see many CFOs of private companies preparing to IPO for when market

conditions improve, hopefully in early 2012.

Q: Is it a good or a badtime for CFOs to take greater risk onto their companys balance sheet?

Within the oil and gas industry risks are often high, but there is an expectation that these need to be taken, forexample, in exploration. So the primary thoughts of CFOs are not whether to take greater risks onto theircompanys balance sheet, but how to manage the risks they must take. Current market conditions mean thatthere are a number of opportunities to add value. Some companies will be bolder and take advantage of this. Forexample, Premier Oil brought Oilexco at the beginning of 2009, managing to raise both debt and equity at a verydifficult time, and then experiencing success with the subsequent Catcher discovery.

Q: Where do you see CFOs investing in significantly, over the next 12 months?

I think CFOs within oil and gas companies will continue to invest in significant projects over the next 12 months,ranging from exploration to development activities. For example, companies who are jostling to acquire a strongposition in Iraq and larger oil and gas companies enthusiastic in respect of Russian Arctic exploration. Similarly,despite UK North Sea tax changes, we have seen a number of recent announcements in regards to UK oil and


10/36

Executive Q&A CFO Focus


gas investment. Most recently, BP and partners have declared an investment of 10bn into the UK oil and gasindustry over the next five years.

Q: What about corporate hiring and capital spending up or down?

I suspect that oil and gas companies will be feeling more cautious, but nonetheless think the trend is still upward,but this could still change. However, overall I think the mood in the sector is positive compared to other industries

where there is much more doom and gloom, and sentiment in the sector is one of cautious optimism.

Q: In what ways are you seeing oil and gas companies trying to diversify themselves?

Oil and gas companies will likely continue to diversify their asset portfolio by entering new regions. For example,Tullow who originally saw success in the UK, have since taken that success and replicated it in Africa throughbold acquisitions and further exploration - and most recently through an exploration discovery offshore in FrenchGuiana in South America.

Q: Thinking further ahead than the next couple of years, what are the main energy challenges faced bygovernments around the world? Care to offer some thoughts towards a solution?

It wont come as a surprise to anyone when I say security of supply. That is, securing reserves from politicallyunstable parts of the world to meet the current demand, along with meeting climate change objectives through

the development of renewable technologies and safe nuclear facilities. Gas is pretty abundant, particularly shalegas in the US and now Europe, so governments outside these regions could assist in developing this newsource. Ultimately, a balanced portfolio of energy sources that can meet an ever increasing demand, as well asour climate change objectives, is top in the minds of all governments.

Q: If you had David Cameron and George Osbornes ears, what advice would you give them in order tosupport the UKs oil and gas industry?

We should endeavour to ensure we extract as much of our own resources as possible. The current level oftaxation in the UK is a disincentive to maximising this recovery, with many viewing projects in the UK as lesseconomic than international alternatives. We are still seeing investment in new projects, but this will not bemaximised unless we can find a path towards reducing the tax burden on the North Sea. Dealing with the taxissues and complexities around decommissioning, will allow smaller oil and gas companies to acquire theseassets and maximise their economic life in a way the super-majors wouldnt. Preserving the North Seainfrastructure is also of importance, as once this is gone it is gone forever and it could be used as a hub for futuresmaller discoveries.

Q: Tell us what you enjoy most about working in the oil and gas industry?

Its the opportunity to work in very different parts of the world and experience various cultures. Also, the scale ofprojects and the technological developments/engineering feats that occur constantly.

Q: When youre not at work, how do you enjoy spending your free time (assuming there is any)?

Family time, I have two young boys who enjoy various sports including cycling.

Q: Finally, I cant let you go without askingour standard question. Youre on a desert island what threeluxuries have you chosen to bring? (N.B. Raft Building for Dummies, satellite phone, teleportationdevice etc., not allowed)

Sun cream and an iPad with solar charger for entertainment.

About Julian Small: Julian Small was recently appointed UK Industry Leader forEnergy & Resources at Deloitte. This follows Carl Hughes appointment to GlobalIndustry Leader for Energy & Resources at Deloitte. Julian is a senior tax partner inLondon who has led the Energy & Resources tax group for many years. He is alsothe Global Oil and Gas Tax Leader. During his 23 year career with Andersen andDeloitte, he has worked with oil and gas, mining, energy trading, power and watercompanies. In addition, he has been a member of the UK Oil Industry TaxationCommittee for more than 15 years, and has advised the UK Government on its oiland gas policy. Julian originally joined Arthur Andersen in 1988. In 1996 he joinedHardy Oil & Gas as group tax manager and part of the companys seniormanagement team. He re-joined Andersen in 1999, became a partner in 2000, and joined Deloitte as a partner in August 2002. He has a degree in economics fromSouthampton University and is qualified as a chartered accountant.
http://www.deloitte.com/view/en_GB/uk/index.htmhttp://www.deloitte.com/view/en_GB/uk/index.htmhttp://www.deloitte.com/view/en_GB/uk/index.htm


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Guest Article


What is the Size of the Global E&P Spending Market?

Written by Erik Wold, Senior Partner, and Jan Norstrm, Vice President, Rystad Energy

Many oilfield services (OFS) companies want to know how large their market is and how it will develop in thefuture. To substantiate reliable market size numbers for the next years is a difficult task with major uncertainties.In addition there seems to be different definitions of what the market is. The good news is: The market is likelylarger than widely assumed.

Defining E&P Market Spend

We have analyzed the E&P and OFS businesses extensively. In Norway there is transparent and high qualityreporting of investment data via Statistics Norway (SSB) and the Norwegian Petroleum Directorate (NPD). Basedon our research the Norwegian OFS market (for 2009) can be broken down as shown in Figure 1.

Figure 1: Breakdown of operators spending in Norway in 2009. A=Investment budget; B= total operator purchases. 25% of purchases are over the opex budget.

Investments (capex) include all investments by operators in licenses, fields, pipelines, onshore terminals andoffices in Norway. 5% of the capex budget is actually internal cost within operators, and not part of the market.Anyway, project costs tend to increase, and the investment budget (A in Figure 1) is a good estimate for theexploration and development spend.

The operating costs (opex) in Norway amount to NOK 81 b. Opex includes all costs related to operating the field,such as salaries, tariffs, maintenance and other services and products. It is interesting to note that out of the NOK

81 b budget, 44 b is purchases from suppliers. Thus 25% of the Norwegian oilfield service market is over theopex budget. We have seen arguments that opex purchases should not be included in the oilfield servicemarkets. Oilfield service companies we have worked with couldnt care less about which budget funds theirservices. Rather on the contrary, we have noted that capex-focused companies may miss out on businessopportunities in the operational phase leaving to others to harvest in their natural aftermarket. Thus in ouropinion the operators total purchases (B in Figure 1) should be the basis for estimating the market, and theoilfield service companies should keep a field lifecycle view on their market, rather than align to the E&Pcompanies budget practice. One should also note a third definition of the market. If we sum the revenues for theoilfield service companies it will exceed the contract value (B) by 15%. This is because when contractorsubcontracts part of his contract both companies will report the revenue.

Example: Global E&P Spending Analysis

At Simmons & Company Conference 2011, Schlumberger CEO Paal Kibsgaard presented the global E&P market

in Figure 2. The analysis is from the best practice Barclays Capitals Global Capital Spending Update, publishedJune 2011. Barclays Capital uses the term Global E&P spend, but specifies this market to be the sum ofdevelopment and exploration capex.


13/36

Guest Article


Figure 2: The global E&P spend. Sources given by Schlumberger are Barclays Capital, IEA and more.

In Figure 3 below we compare the 2010 numbers in Figure 2 with Rystad Energy estimated market sizes.Barclays estimates the market for 2010 to $458 billion, while we estimate $548 billion (A in Figure 3), which is

20% higher. In B) we have included estimated opex purchases which gives a total market of $675 billion. In ouropinion this is the best market estimate.

Figure 3: The 2010 global E&P spending market by Barclays Capital compared to Rystad Energy estimates.

The main reason why our capex numbers are higher is better coverage. Barclays analysis is based on top 400E&P companies, while our data include 3200 companies.

Forecasting Future Market Trends

More interesting than scaling the current market is to forecast the market going forward, taking into account theaging of existing fields, new discoveries to be developed, consequences of trends like increasing unconventionaland deep-water production, etc. In this respect operator budgets are of little value. Operators have a limitedplanning horizon, and budgets will only include short term investments. Forecasts based on budgets consistentlyshow a short term increase and then drop off, despite all the facts pointing to a continuous activity level.

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14/36

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Guest Article


How Political Risk Hits the Bottom Line

Written by Hannah Koep, Head, Africa Analysis, Control Risks

Investors are increasingly looking to emerging markets as once stable economies in the developed world bendunder the pressure of the global financial crisis, unsustainable debt burdens and a widening crisis in theEurozone. As uncertainty overshadows parts of the world traditionally viewed as financially and politically stable,investment into Africa is booming. A global commodity super-cycle and consistently high oil prices underpin thisinvestment drive. With its abundance of hydrocarbon and base-metal reserves, Africa is producing what Chinaand India, among others, require to sustain their economic miracles.

Beneath this overarching narrative, investors are seeing new opportunities in African projects that offersignificantly higher rates of return than those in more mature markets. Opportunities range from classicextractives, such as oil, gas and mining, to telecommunications and consumer-goods products catering for anemerging middle class. In the infrastructure sector alone, World Bank figures suggest that the continent requires$93bn each year in new investment. However, political risks continue to feature prominently and are not going togo away. Their impacts on operators and investors are manifold, ranging from the loss of assets during a violentregime change to the more subtle renegotiation of local-content stipulations, which affect workforce relations and

potentially the profitability of a project.

The Obvious Ones

The obvious political risks in Africa are those hitting the headlines of international news outlets: violent regimechange, coup dtats, wars and rebellions. Turbulent times in Cte dIvoire and Libya this year have shown thatunder certain conditions the oldest and most convulsive of political risksrevolution and civil war remain in play.

Cte dIvoire was considered politically unstable for the better part of a decade, but by 2010 operators hadgrown complacent, believing that the country would pull through elections when they were eventually called aftermore than five years of delay. That confidence proved misplaced. Although the oil industry experienced fewerlosses from the ensuing conflict than industries with a stronger onshore footprint, several operators declaredforce majeureand experienced severe operational disruption.

A similar complacency was detectable among operators in Libya, which collapsed into civil war in February 2011.The veneer of political stability soon cracked, causing many operators to declare force majeure and creatingcontinuing operational disruption. With the dust yet to settle, the blowback faced by international investors interms of their specific reputational and political exposure remains to be determined.

More Subtle Political Risks Gaining Traction

Although headline-hitting political risks often affect large investment projects and the sunk costs ininfrastructure required to bring oil-sector projects to production make the industry particularly susceptible recentexperience has shown that more subtle political risks are also gaining traction, making life for foreign investorsand operators increasingly difficult.

Change of government

Although a transfer of power through the ballot box generally signals a positive development on a continentwhere leaders too often overstay their welcome, the introduction of a new government can bring about unsettlingchanges for long-term foreign investors. Institutions are often weak, meaning that government support for large-scale investment projects in many cases hinges on securing buy-in from key players within an administration.

A change of government and total reshuffle of key individuals at state oil companies and regulatory commissionscan result in a loss of political insight and influence that can take years for investors and operators to rebuild. Inaddition to key personnel changes, the shifting priorities of a new administration can see former high-priorityprojects placed on the backburner, resulting at best in a lack of momentum or, at worst, a wholesale review of theproject and its licence.

In Ghana, the democratic change of government in 2008 was another positive step for multi-party politics,reflecting the maturity of the political system. However, a government move to block Kosmos Energys attemptedsale of its stake in Ghanas famous first oil find the Jubilee field to ExxonMobil fuelled investor anxiety aboutpolitical interference. The timing of corruption allegations against Kosmos Energy amid an attempted bid byGhanaian national oil company GNPC for the Kosmos Energy stake fuelled speculation of a high-level politicalwitch-hunt against the former ruling New Patriotic Party. Although the issue has now been resolved, and Kosmos


16/36

Guest Article


Energy has since increased its investment in Ghana, the case highlights how large-scale oil investments canbecome caught in the crossfire of political points-scoring that characterises young democracies such as Ghana.

Resource nationalism

The consolidation of democracy in some African countries has also accelerated the rise of resource nationalism.Elected governments are more dependent on popular support, and have been quick to make vote-winning

promises to increase government revenue from lucrative oil and mineral sectors. Given the high commodityprices of much of the last decade, contract renegotiation in the extractives sector has not been a uniquely Africanphenomenon established markets such as Australia have also tried to alter contractual terms.

However, in Africa, renegotiation processes have often become politically charged. Congo (DRC) in 2008notched up record negative headlines with its highly politicised and opaque mining-contract review. Even whenreview processes set out with positive intentions, a lack of capacity and high levels of opacity have often led toback-door dealings, turning renegotiation processes into purely rent-seeking exercises.

The stalled Petroleum Industry Bill in Nigeria, which has been stuck on the floor of the Nigerian legislature since2008, is a prime example of regulatory uncertainty. Investors are severely worried about two issues: first, thechanges proposed in various drafts of the bill, some of which international oil companies allege would underminethe financial viability of oil projects in Nigeria; and secondly uncertainty over the timing of the passage of such aradical overhaul to the sectors legal framework, which has left them feeling paralysed. Ministers in Abuja have

been promising the imminent passage of the bill since 2009. In the meantime, billions of dollars of investmentremain on hold.

Regulatory changes

Contract renegotiations are the more extreme end of a process that is continuing in most jurisdictions acrossAfrica in one form or another. Instead of a wholesale review of the petroleum code, many countries with strongextractives industries are making more subtle regulatory changes, often by changing local-content stipulations orfiscal terms.

The Gabonese government has for years been under pressure from powerful oil-sector unions to gabonise jobsin the sector. However, with only limited investment by oil companies in training and skills-transfer programmes,and weak government leadership on the issue, not enough progress has been made. The administration ofPresident Ali Bongo is now under huge pressure ahead of legislative polls in December. Union threats of strikeaction have led to erratic government action as it tries to expedite the review of local-content regulation. Heavy-handed checks, searches of company facilities and even the short-term detention of expatriate employees haveset oil companies, the government and unions on a collision course. If the government demands fullimplementation of higher local-content quotas, this will affect the bottom line of many oil projects in Gabon; atleast in the interim, companies will simply have to employ more Gabonese personnel to fulfil quotas, despite thefact that skills levels among local workers are not yet sufficient to replace foreigners.

In Congo (Brazzaville), demanding commercial terms have begun to hamper the development of deepwateracreage. Totals deepwater Moho Bilondo field came on stream in 2008, but oil companies have otherwisestruggled to make deepwater projects commercially viable given high development costs and tough fiscal terms.Congos hydrocarbons legislation includes a super profit-sharing mechanism, where the contractor is required tosplit oil profits 65:35 in the governments favour when oil is trading above $32.95 per barrel (at 2010 prices).Given surging oil prices since the 1990s, when the legislation was conceived, the mechanism has functioned asan additional royalty and undermined profitability, particularly for expensive deepwater projects. Faced with theprospect of declining production levels from 2012, and increasing pressure from its private partners, the

government is reluctantly considering reviewing the legislation to offer more attractive commercial terms.However, only time will tell.

Geopolitics and the Commercial Environment

Although the increasing activities of emerging markets such as China and India have put significant pressure onthe major mainly Western players that have long dominated mining sectors across the continent, thesecountries have traditionally been less direct competitors in Africas oil industries. Traditional oil ma rkets have for along time been dominated by established Western multinationals with strong government and diplomatic ties. Inthe Gulf of Guinea in particular, much exploration activity takes place offshore, where emerging players struggleto compete with established Western operators in terms of technology. Very few deep offshore fields are in thehands of Chinese parastatals, and the Chinese appear to be largely avoiding direct competition with establishedWestern operators in mature oil markets. However, frontier oil markets such as Sudan,Ghana and East Africahave seen much stronger involvement by BRIC investors seeking to get in before Western majors snap up the

acreage from juniors that make commercially viable finds. Chinas CNOOC is looking to develop the substantialLake Albert oil reserves discovered by Tullow in Uganda, and has been engaged in onshore exploration in


17/36

Guest Article


Kenya. Brazils Petrobras is exploring Tanzanias offshore potential and has recently teamed up with Shell toshare its acreage.

The impact of these new players on the commercial playing field is mixed. On the one hand, Africa needs strongcommitment from China when it comes to building basic infrastructure on a vast scale. On the other hand, theflexibility with which some of the new investors operate when it comes to extending favours and building barteringrelationships with host governments puts Western companies small and large at a disadvantage, given that

they lack such full-blooded state support and have to observe much stricter compliance regulations.

Having It All Sudan

All these issues come together in Sudan. The countrys oilfields have been the scene of armed conflict andrebellion with a real risk of significant escalation in the near term. With partition and southern independence in2011, the regulatory environment could undergo major change and companies have to deal with new politicalelites with diverging interests.

Most Western companies holding rights or operating in the oil sector left the country from the late 1990s becauseof Western divestment campaigns and insecurity in oil-producing areas. However, both state-owned and privateAsian and Middle Eastern companies have proved resilient in the face of security, political and reputational risks.The GNPOC consortium, which straddles the border with South Sudan, operates two blocks in South Kordofanstate and Abyei. CNPC's Block 6 straddles South Kordofan and South Darfur states.

Following southern secession in July 2011, sovereignty over 75% of the oil-producing concessions has beentransferred to South Sudan, causing a significant loss of oil revenues for Sudan. But to reach deepwater ports onthe Red Sea, the oil must transit the north. President Omar al-Bashir's National Congress Party is trying to exploitSouth Sudans dependence on northern oil-export infrastructure to safeguard its interests, and has threatened toclose the pipeline if the south refuses to share revenues and pay transit fees.

How the two Sudans deal with these issues will be a test case for the rest of the continent. Theinterdependencies thrust on north and south by the logic of petroleum production could provide the glue neededfor a mutually beneficial pact, not least because the south has few alternatives the new government in Jubarelies on oil for a massive 90% of its revenues. Alternatively, mistrust and disagreement over production levelsand complex wealth-sharing arrangements could fuel renewed tensions or even conflict between the two oldantagonists.

With perhaps half a dozen post-conflict African states set to become new oil-producers over the coming decade,this kind of conundrum is likely to recur. The lesson is that in fragile states the impact of oil-sector investmentgoes well beyond purely economic considerations. For better or worse, oil companies can find themselves at theheart of political upheaval in many different ways.

Ablut the Author: Hannah is responsible for Control Risks analysis on Africa as a whole and provides analysis of political,security and reputational risks to clients investing and operating in West and Central Africa. Hannah travels regularly in theregion and has extensive experience in on-the-ground project risk assessments for extractives companies involving fieldresearch, site visits and risk workshops. She also works on forward-looking scenario analysis and comparative political andsecurity risks studies for companies looking to invest in Africa. Before joining Control Risks, Hannah worked for theInternational Crisis Group in Dakar (Senegal). Hannah has journalistic experience, having worked during her studies withDeutsche Welle TV, Tagesspiegel Berlin and Berliner Zeitung (all in Germany). She has a first-class undergraduate degree inPolitical Science from Freie Universitt Berlin and a Masters Degree in Development Studies from the LSE.

Copyright Control Risks 2011.All rights reserved.Reproduction in whole or in part (unless for internal purposes) prohibited without the prior consent of theCompany.Advice given and recommendations made do not constitute a warranty of future results by any company in the Control Risks group of cos (Control Risks) nor anassurance against risk.Recommendations made are based on information provided by the client and other information available at the time of writing.No express or implied

warranty is given in respect of any judgment made or to changes or any unforeseen escalation of any factors affecting any such judgment.Documents are for the benefit of

the client only and may not be disclosed to any third parties without the prior written consent of Control Risks;such consent not to be withheld unreasonably.The clientagrees to indemnify Control Risks against any claims and any resulting damages that may be caused by any unauthorised disclosure of such documents. Control Risks

standard terms of business for the relevant service applyas attached or otherwise available on request.
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18/36

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19/36

Special CFO Feature


On The Spot The CFO

What are the three things that, as a CFO, are keeping you up at night?

The things that keep me awake at night are more than three, but my top ones are:

Politically Driven Economics in the UK

Whether it is windfall taxes on North Sea oil producers or 52% marginal rates ofincome tax, headline grabbing as a basis of economic decision-making is very, veryworrying. At times like these, you would expect the powers-that-be to want tostimulate economic activity that is likely to employ people and maximise disposableincome. In my view the solution is not to: discourage investment, remove spendingpower and breed scepticism and uncertainty about what might happen next so thatcompanies and individuals cut back even further.

Where is the Oil Price Heading?

Brent may be sitting at over $100/bbl, but WTI is nearly 25% below that. My concernis that the fundamentals of risk / reward will start looking negative for E&Pcompanies and lead to even more of an exodus of capital from the explorationsector, leaving it devoid of liquidity.

Will the European Crisis Result in Financial Markets MovingPermanently East?

This is a further worry I have about the UK. If we make so much from financialservices (and precious little else) it is because the table is tilted our way. We havesystems, people, integrity all of which exert a significant pulling power to bringbusiness to our markets. But, above all, it is the access to capital that makes Londonpre-eminent. Nevertheless, in reality, it is also custom and inertia that keep thebusiness here. At this time of crisis, with general disarray, only tiny amounts ofcapital available and floatations being pulled, it is only a matter of time before peoplestart to have a trickle of success in Singapore, or Mumbai where London had beentheir original first choice. And then the table could really start to tip the other way.

My linked concern is that particularly smaller companies who will need to raisecapital know very little about whos who in the eastern markets and they know verylittle about the London-centric SME environment. If a get to know you programmehad to start, it would be a very cold start.

Martin Groak, CFO, Chariot Oil & Gas

Not Having Enough Cash

In recent years we have transformed the balance sheet and cash flow. We havecompleted two equity raises totalling 125m, and refinanced our bank facilities toapprox. $425m. We acquired 18% of a UK oil field, which helps utilise our UK taxlosses. We also swapped a Norwegian discovery for Norwegian producing assets,providing cash flow and avoiding development expenditure. We now have over80m of cash, tax-efficient cash flows, and largely unutilised bank facilities which willfund the next few years of exploration.

Low Commodity Prices

As a producer of oil and gas we are exposed to commodity prices. We have ahedging policy whereby we can hedge up to 75% of production for up to three years.We get comfortable with production reliability, assess commodity prices, likelytrends, and what hedges to use. Our philosophy is to use vanilla derivatives (mainlyputs, swaps, or collars and caps).


20/36

Special CFO Feature


Costs Out Of Control

The first step here is to make sure we dont invest too much in any one well weadopt a portfolio approach. We aim to drill five exploration wells a year. We considerthe attraction of each well, what percentage we wish to hold, and how we canreduce our after-tax cost (through Norwegian tax rebate or farm-out and carry). Wehave also put in place a robust planning and budgeting process. Our aim is to have

a good handle on costs, in an industry which drills in difficult conditions. We havehad five discoveries out of our last seven wells. We need to ensure we have enoughcash to continue this exciting programme. The key is to have the cash and controlsso that you are not kept up at night.

Iain Lanaghan, CFO, Faroe Petroleum

Fortunately the company where I am serving as the CFO is in a pretty good place atpresent. Over the last year, the company has close to tripled its resource base, themarket capitalisation has close to quadrupled, and with a net cash position on thebalance sheet the company has established a solid platform to grow from. Earlierthis year the Company participated in what is believed to be the worlds largestoffshore discovery made this year in the Aldous/Avaldsnes discovery offshoreNorway with an estimated gross resource of 1.7 3.3 billion barrels of recoverableoil. With this as the backdrop to answering the question on what is keeping meawake during the night it is a relatively stress-free exercise given the recentexcellent exploration results. With an after tax finding cost of less than $0.5/boe for2011 the decision making from here on in would have to be pretty spectacularly poorin order for Det norske not to succeed to become a self-financing oil and gascompany in a few years from now.

Size Matters

Clearly not all oil and gas fields are of the size of Aldous/Avaldsnes; in fact thegeneral trend in the industry is that the fields are becoming increasingly small andincreasingly technically challenging. These smaller and technically difficultdevelopments sometimes leave very little margin for error in terms of reservoirperformance and capital investment costs. Such smaller developments, if not

managed properly, can therefore become a liability for the company, not an asset.An additional risk associated with the smaller developments is that the lead timefrom the investment decision to cessation of production is relatively short andtherefore a small field development is exposed to entering the business cycle at thewrong point with the investment occurring at the peak of the business cycle (i.e. highcapex) whilst the resource is being produced at the bottom of the cycle (i.e. low oilprices). Bigger fields are less sensitive to the business cycle as these fields aretypically in production for 20 years or more and therefore the highs and lows of thebusiness cycle will cancel out.

Cost and Access to Credit

The turmoil in the financial markets from time to time can leave companies withfocus on organic growth exposed to prohibitively expensive funding or, worse still,

no funding at all. Therefore it is important to fund the organic growth incrementally tosmoothen out the peaks and troughs of the markets. It is equally important to basethe capital structure on more than just one funding instrument to mitigate the risk ofcertain capital markets being disproportionately impacted in a financial crisis.

Many of the smaller E&P companies are also relying on the M&A markets forsecuring funding through asset sales. Because the majors not being reliant on thecapital markets they are always in a position to pay for an asset put up for sale by asmaller E&P player; this type of funding is essentially always open. What has oftenproven to be the a problem in pursuing this funding avenue is that the smaller E&Pcompanies are often carrying unrealistically high valuation expectations of theirassets and the majors are often unable, or unwilling, to meet such valuations.

Human Capital

Access to people is a prerequisite for implementation of any business plan.Therefore retention and acquisition of human capital is continually on the critical


21/36

Special CFO Feature


path at every level of the business and at any time of a companys life cycle. Withinfinite accessibility to market information people have near enough perfectknowledge of the value of their output and are perfectly willing to gravitate towardsthe company which is willing to recognise that value - almost irrespective of location.The remuneration policy is therefore key to a successful business and has toaddress two key functions; namely to attract the right people into the organisationand to retain these people beyond the next phone call from the head-hunter. Having

the right people is particularly important in industries where intellectual property iskey; which certainly is the case for an oil and gas company for example thegeological knowledge of a certain basin. A case in point is the recentAldous/Avaldsnes discovery where a plethora of different operators have previouslyheld the Aldous/Avaldsnes block but without identifying this huge oil field.

Teitur Poulson, CFO, Det Norske

As the President of Rock Energy Inc., a Canadian public oil and gas company, myresponsibilities include the development of long term corporate strategies andleadership that enhance growth in shareholder value. Furthermore, as the CFO ofthe company, my primary responsibility is to establish an appropriate financingstrategy to meet the organizations long term goals. The three things that arekeeping me up at night include the following:

Necessary People and Their Capabilities

As an organization, we need to look to our human capital as necessary and valuableresources that are our key to success and sustained growth. As these resourcesdiminish as the population ages, it is becoming even more critical to attract andretain employees. As leaders, we need to provide opportunities to our employees,including exposure to various operations throughout the organization, in order tofulfil their expectations.

Ongoing Quality of Resource Asset Base

As the Canadian oil and gas industry is evolving, the quality of resource assets isdiminishing. As the senior financial officer in our organization, critiquing the nature of

the assets on which we deploy our available capital is a critical task. Capitaldeployed by any oil and gas entity should be evaluated by all the key leaders withinthe organization, not just the technically qualified experts.

Market Credibility with Consistent Performance

Finally, as a publicly traded oil and gas company, it is very important to deliverresults that are consistent and meet the expectations of all interested parties. Failureto meet these expectations jeopardizes credibility in the public marketplace anddetracts from the primary focus of a successful executive team on shareholder valuecreation. Similarly, any overreaction to current short term global parameters,including oil and gas commodity prices, should be minimized as a sustained andfocused strategy is the key to long term success.

In conclusion, I believe that if an organization has the right people working to attaincredible and consistent results on the right assets, financing sources for long termgrowth for our shareholders are extensively available.

John Van de Pol, President and CFO, Rock Energy

1. That I am focusing on the wrong three things.2. That I'm not spending enough time on training and development of staff, rather

looking at short term "today" issues and not planning my staffing needs longterm.

3. Staying aligned with Business Development, and what new challenges for theFinance function will be coming our way due to the activities of businessdevelopment.

Edward Voelcker, Interim CFO, Nigeria, Septa Energy
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22/36

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23/36

Special CFO Feature


On The Spot The Banker/Advisor

What are the three main challenges that energy-focused CFOs face in todays markets?

Those of us who have worked in and close to the energy sector realise we havealways lived with uncertainty. Historically, the volatility of commodity prices hasupset the most careful planning, more recently macroeconomic uncertainties haveaffected access to and cost of capital. Finally fiscal uncertainty adds to the volatilemix making financial planning more art than science for todays energy CFO.

Commodity price volatility has always been with us. It is the single biggest variablein forecasting EBIT and there is no sign of that changing. Hedging using derivativescan dampen the impact on earnings and is a staple tool for North American CFOsbut its use outside North America is often muted by Investor sentiment and fiscalcomplications.

Since 2008, the worlds financial markets have remained in flux. The globaleconomy remains sluggish and the crisis in Europe is impacting capital markets. Theimpact for Energy CFOs particularly outside North America will be an increase in thecost of debt and a reduction in the depth of markets and availability of credit.Financial institutions will focus resources on core clients and pursue only the mostattractive opportunities. For the CFO with no historical bank relationships and achallenging project, access to capital is going to remain reduced, should theEuropean crisis continue it will ultimately permeate the North American Markets.

Fiscal uncertainty adds to the collage of challenges, perception of political risk inemerging markets is often high but the reality is that fiscal terms are oftensurprisingly stable and established in Production Sharing Contracts with stabilityclauses backed by recourse to international arbitration. Contrasting this is thevolatility seen in more mature, ostensibly stable markets, for example the relentlessupward increase in tax for the UK upstream ring fence.

Today the energy focused CFO has more challenges than any time in history butregardless of these, the innovation of our Energy and Financial industries meansthat these challenges can and will continue to be met.

Kevin Price, Managing Director and

Head of Reserve Based Finance, Socit Gnrale CIB

Ability to Utilise the Capital Spectrum

Volatile equity markets are a key challenge to any CFO who is trying to ensure thedevelopment plan is fully funded with an optimum capital structure for the company.Across the various oil and gas companies, few CFOs have successfully been ableto utilise the broader spectrum of capital funding. This has led to over reliance onequity or bank debt / capital market bonds without being able to utilise all sources offinance available particularly mezzanine finance resulting in magnified fundingchallenges in difficult times.

Cost Control

Prior to 2004, oil price was relatively stable around the $20-40 bbl range. Howeversince that time it has become harder to manage and this has proved to be asignificant challenge for CFOs. Hedging out the oil price risk using collar structuresduring a rising oil price resulted in companies being accused of giving away theupside. This perhaps has led to some CFOs being slow to lock in the downside riskwe see today. In addition, service costs have been equally volatile, which has led tochallenges in managing profitability. It is therefore imperative that costs are

managed carefully and commitments prioritised.


24/36

Special CFO Feature


Managing the Investor Community

There are significant challenges with the constant need to put information flow intothe market and managing investor expectations, particularly in difficult times.Investors finding the need to either de-risk their portfolios, or in the case of funds,the multitude of redemptions combined with the emergence of market manipulators -the dreaded short sellers, has put pressure on CFOs spending too many hours

focused on investor fire fighting rather than on their day job.

Roger Brown, Head, Oil and Gas (EMEA), Standard Bank

Changes in the industry landscape are presenting several unique challenges totodays CFOs. The general economic uncertainty in the market is only intensifyingthese challenges further. Current CFOs will confirm there is a long list of risks fromwhich to choose, but three areas of particular challenge include:

Obtaining Finance

The appetite for risk remains low at financial institutions as it relates to debt

financing, and when lending does occur, the interest rates reflect this. Equityfinancing is equally challenging due to existing price volatility and general marketuncertainty.

Regulatory Burden

The scope of accountability is widening through new regulations such as the UKBribery Act, where management must demonstrate that its anti-fraud measuresextend to suppliers and other third parties.

Further, more stringent environmental requirements, such as the recentdecommissioning legislation in the Gulf of Mexico result in increased compliancecosts. Additionally, as the energy industry looks to new territories and non-conventional methods to acquire non-renewable energy sources, the social licenseto operate is at the forefront due to environmental concerns.

Managing Third Party Risk

CFOs are reconsidering the scope and structure of arrangements with third partiesin light of recent industry events. This is true of third parties such as contractors andcustomers, as well as joint venture partners.

Companies must ensure that contractual arrangements are structured to minimiseexposure to risks introduced by others, such pre-existing obligations of partners,acts of negligence by venture operators, or exposure to non-performance or creditrisk from suppliers and customers.

Andy Brogan, Global Oil & Gas

Transaction Advisory Leader, Ernst & Young

"Banker, Can You Spare a Dime?"

The challenges of raising finance in today's risk off debt and equity markets are aconcern for most CFO's particularly those managing smaller E&P companies. Inthe bank market, liquidity is available for the right deals, but there is increasing riskaversion so, for instance, a single asset financing in a high risk country is going tohave a limited pool of potential lenders and on-going funding issues for certainbanks. Looking to the future, the Basel III regulatory changes will make longer tenorfinancing (such as project financing and reserve based lending) far less attractive.

Oil and Gas remains a core sector for most banks, but we expect a retrenchment

into core geographies and key relationships (for the latter, read: banks will be moredemanding on ancillary business!) as capital becomes increasingly scarce.


25/36

Special CFO Feature


We believe bond markets will play an increasing role in the coming years and areexploring this with some of our E&P clients.

Managing the external perception of the financing position is also key. Equityinvestors are paying even more attention to the financing position of companies andcertain shares have been disproportionately sold off on funding concerns. At RBS,we draw on our strength in both debt and equity raising to the sector to ensure we

deliver the best advice and execution to our clients.

Mind the Gap?

Given the global economic outlook, we see more risk to the downside on current oilprices. We are analysing the potential risks with a number of our clientsand discussing potential strategies in terms of capital structuring, hedging anddivestments.

A Bigger Bang for your Buck?

For those companies who have significant cash balances, there is the qualityproblem of the best use of that cash. In particular, a key topic for many of ourclients is whether the disparity between market value and fundamental value makes

the case for corporate acquisitions compelling.

Jonathan Ross, Executive Director, Oil and Gas

Sector Advisory, RBS Global Banking & Markets

Access to Capital

The oil and gas industry is the most capital intensive in the world. For companieswithout cash-flow or a large balance sheet, continued access to the capital marketsis crucial. The AIM market is dominated by small caps with exploration anddevelopment portfolios but little production. These companies finance principally bytapping equity markets. The recent market correction has made equity financingdifficult. On the buy side, fund managers are suffering from redemption requests,

reducing the size and liquidity of their funds.

In a falling market they will not buy stock today when it is cheaper tomorrow. Theissuers themselves do not want to issue equity at steep discounts to the last equityissue, which for many is where their stocks are currently trading.

For companies without proven reserves, access to debt is not an option and forthose with bankable reserves debt financing is constrained due to the condition ofthe European banking sector. The French banks in particular which have been bigreserve based lenders to the industry, have a much higher cost of capital for dollardenominated loans, which has temporarily removed them from the market.

Risk Management

Due to the scarcity of available capital, managing risks which can impact thebalance sheet is critical. This includes analysis to ensure the company is notfinancially or operationally over-leveraged, oil price hedging to mitigate pricevolatility and balancing of work programmes to ensure license obligations aresatisfied if investments have to be deferred.

Managing Investor Expectations

In constrained equity markets effective communication with investors is critical toensure continued access to capital. Guaranteeing a constantly increasing shareprice is impossible but investors really dislike being surprised by bad news andmanagement teams that only visit fund managers when they require money.

Majid Shafiq, Managing Director,

Corporate Finance, FirstEnergy Capital


26/36

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Africa or Europe - we have the team and experience to assist you. Our expertise in M&A, finance, dispute

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27/36

Special CFO Feature


The Legal Corner

From a legal perspective, what challenges do you foresee lying ahead for

the energyfocused CFO in tomorrows business environment?

Oil and Gas Prices

Difficult to predict where these will go in the short/medium term. Given how muchlead time is needed to plan major projects (and their financing) unpredictability is areal bte noir. Especially on the gas side and the low prices/high supply scenariospresently overhanging the market (especially true in Russia/CIS).

Political Uncertainty

This clearly links into the first point but is an added challenge in the context of whereto invest and the risks associated therewith. Libya is the present cause clbre how will the new regime shape up and how will it address itself to rebuilding the

country on the back of oil revenues? Syria is another regional uncertainty and therecent death of the Crown Prince of Saudi adds another element of uncertainty intothe mix. And we always have Iran.

Does all this mean that companies seeking to invest in the sector will shy away fromthe heart of the world's oil and gas producing region and focus on other regions suchas Africa - which is of course not itself isolated from political risk and uncertainty?

Demand for Oil and Gas

Can one continue to rely on a 'guaranteed' growth in the Chinese/East Asianmarkets? Or may this slow down and with it regional demand? With a correspondingimpact on prices (point 1).

Bleddyn Phillips, Global Head, Oil & Gas, Clifford Chance

Uncertainty

At the top of the list of what keeps a CFO awake at night in the waning months of2011 is more than likely uncertainty. Generally speaking, an energy company CFOalways deals with the uncertainty of commodity prices, interest rates and theavailability of capital markets.

Today, those uncertainties are exacerbated by a new and aggressive environmentof regulatory controls, looming changes to the federal tax code and extreme volatilityin capital markets caused by our domestic economic struggles and the financialcrisis in Europe.

Compliance Costs

The costs of regulatory compliance are escalating, perhaps at a rate higher thanexisting in the years after the enactment of Sarbanes Oxley. Although all of theregulations to be imposed by Dodd Frank have not yet been sorted out, theindication is that compliance is going to be expensive.

For example, compliance programs related to whistle-blower rules, reporting ofpayments made to US and foreign governments and conflict mineral activities willneed to be refined or instituted and other proposed rules relating to compensationcommittees and the determination of director independence will lead to morecomplex disclosure to investors. Public companies are already seeing aggressivepositions from the SEC around disclosure of risks associated with an energy

companys operations, whether growing out of the Macondo incident or concernsover hydraulic fracturing.


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These concerns will affect not just the preparation of SEC reports and registrationstatements, but will increase the costs and complexity of insurance coverage, makeconditions and indemnity provisions in M&A agreements and in contracts amongpartners and service providers more restrictive and bring about new scrutiny andregulation by federal and state environmental agencies.

Enhanced disclosure of these risks may cause lenders to view them as contingent

liabilities and a CFO can expect at least an expansion of reporting and covenantcompliance in borrowing facilities, if not also an increase in borrowing costs andrestrictions on credit availability.

Uncertain Tax Regimes

Finally, expectations of the federal tax environment post 2012 are all over the board,ranging from lower personal income tax rates, limitations on deductions andelimination of the corporate income tax to higher rates on capital gains and anelimination of energy industry tax incentives and capital gain treatment for carriedinterest income.

Any significant changes in these areas may have an adverse impact, directly andindirectly, on a companys cost of capital.

Mark Zvonkovic, Partner, Akin Gump Strauss Hauer & Feld

Some of the key legal challenges facing CFOs are how to be successful in M&Aauctions and secondly the availability of debt finance to fund deals and/or developand monetise projects.

M&A Auctions

M&A auctions are increasingly competitive and bridging the price gap betweensellers and buyers and pricing in the cost of decommissioning liability areincreasingly important factors.

In terms of bridging the price gap, there has been a recent move towards morecontingent consideration-based structures (whether based on levels of production orreserves) or some form of on-going royalty stream for a seller. For the CFO on thebuy-side, the likely financial implications of any contingency arising needs to becarefully factored in.

Decommissioning liabilities have a significant bearing on the economics of deals inthe UKCS: for many buyers, the potential liabilities are too expensive (and putting upletters of credit to secure decommissioning liabilities too onerous). LCsdevour borrowing capacity so hamper the ability of smaller players to meet theseller's price expectations.

The UK government recognises this as a major issue so we can hope for somesteps to be taken to ameliorate, if not entirely solve, the problem.

Debt Market Turmoil

On the debt finance side, a small number of debt financings are still being closed,and the good news for E&P companies with strong projects is that so long as the oilprice remains high it should be possible for them to find some way to monetise theirreserves.

The turmoil in debt markets is making it challenging for small to medium sized E&Pcompanies to raise financing at the moment. The high yield bond market iseffectively closed, there is only limited appetite for convertible bonds and the thirdtraditional source of debt financing, reserve based lending (RBL), is strugglingsomewhat with a diminished pool of potential lenders who have become increasinglychoosy about which companies and projects to back.

RBL came out of the 2008 financial crisis in relatively good health as the


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conservative lending structure meant that loan losses for most banks were verysmall. The UK banks narrowed their focus but have operated with a strong mandatefrom the UK government to lend to businesses with a UK link, and the French bankscontinued to bid aggressively for business.

With the Eurozone crisis hitting hard and the curtailment of US dollar funding by USmoney market funds for some European banks, the French banks are much less

hungry. Companies find that they need to seek out pools of liquidity wherever theycontinue to exist -including amongst North American, Australian and local banks, forinstance Scandinavian banks for the Norwegian deals.

Other factors weighing on the debt market include the prospect of the introduction ofthe new Basle III liquidity and capital adequacy rules, which are likely to make itsignificantly more expensive for banks to lend long term. RBL maturities werecreeping out to 7 years but banks are now keen to limit maturities to 5 years.That should not be overly problematic for borrowers given that RBLs are typicallyrefinanced after 2/3 years anyway.

CFOs need to be increasingly nimble on both the M&A and debt finance side inorder to position themselves to make the most of the opportunities available.

Nick Williamson, Partner, Ashurst, andHuw Thomas, Partner, Ashurst

Too far in the future to be an issue for now

As political pressure in relation to environmental issues increases, the naturalresources sector will see the responsibility for the preservation of the environmentincreasingly shift from the State to the Contractor. In particular, the sector willincreasingly face the situation where the responsibility for such matters will remainwith a Contractor even after the end of the contract (license, permit, lease,production sharing contract, or whatever).

One of the challenges this new paradigm is going to raise for the CFO is how toaccount for the liability that flows from this continuation of responsibility and whatsteps can be taken to reduce such liability. This issue is already being tussled with inrelation to the contamination of land sites and there are an increasing number ofattempts to come to grips with the issue in the area of decommissioning andabandonment.

In many respects, because of the existing legislation in the UK dealing withdecommissioning and abandonment, there is a greater awareness of this issue inthe UK. Outside of the UK we do not see anywhere near the same level ofawareness.

For many, whether it be the State or the Contractor, it is all too far in the future. Weare currently advising a group of Contractors resisting the introduction of a newnational petroleum law. The new law will impose on Contractors greater

responsibility for environmental and decommissioning and abandonment issues andwill continue that responsibility beyond the termination of the contract.

In one-on-one discussions with the members of the group not one member tookissue with introduction of the greater responsibility, in many cases taking the positionthat such matters were too far in the future to worry about now.

When asked how they would provide for and account for such future liability andissues such as the cost recovery of any expenditure and/or the tax treatment ofproviding for or incurring such expenditure and/or the deductibility of anyexpenditure there was little more than a shrug of the shoulders and a feeling thatthere were more important matters in the proposed new legislation to worry about.

From what we saw of the members economic models there was little, if any,

consideration given to potential future liability for such matters. However, the eventsover the past-24 months, and in particular the Macondo incident in the Gulf ofMexico, warn us that the State is going to be under increasing political pressure to


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ensure that the industry becomes more conscious of, and responsible for, theenvironment, both during operations and post-operations. The continuing of suchresponsibility beyond the life of the contract, how to mitigate it and how to accountfor it we see as a material challenge for the CFO going forward.

Ken Mildwaters, Founding Partner, Mildwaters Consulting

Regulation, Tax, and the Fallout of Macondo

The Macondo well oil spill has dramatically changed the industry includingincreasing environmental regulatory burdens and insurance costs. Stakeholderresponse includes the Subsea Well Response Project and a debate about the needfor a new insurance regime based on group insurance with multiple insurers and re-insurers or a mutually owned insurance mechanism akin to the nuclear industry.

Standards of performance (e.g. reasonable and prudent operator) are likely to nowimpose higher obligations requiring careful cost management. Finally, establishedcontractual risk allocations are being revisited; likely to lead to premium risk pricing,revisiting accepted insurance practices and increased costs to complete andmanage contracts.

Continually evolving regulatory developments (including those relating to climatechange) require constant refinement of business processes and compliance withvariable standards. This requires on-going investment in strong compliancedepartments to ensure they stay up to date and comply with the requirements fortheir various operations worldwide.

The proposed 2012 US budget looks set to reduce tax breaks benefitting the oil andgas sector. In the UK, an increased levy in North Sea offshore fields wiped almost 2billion off the value of North Sea operators and there are concerns that smaller fieldoperators could become economically unviable.

This results in continually evolving tax strategies including corporate structures thatallow the tax burden to be managed efficiently, taking legislation and various tax

authorities into account.

Human Resources

It is increasingly a challenge for the oil and gas industry to attract and retain the rightskills. In some jurisdictions there is a real shortage of recently trained employees inskills of a specialised nature, which means that the operators in the industry arebecoming reliant on a workforce that cannot be easily replaced. The skills shortagemeans those operators may be vulnerable to employee solicitation.

Increasingly there is a focus on putting in place preventive measures such as posttermination restrictive covenants and strong confidentiality provisions, as well asusing the more traditional method of incentivising valued employees to remain.

An increasingly mobile workforce such as that which exists in the oil and gasindustry gives rise to a number of legal issues surrounding employee contracts, taxand immigration, and this has become a substantial issue for many organisations.

Shifting Sands

An uncertain and dynamic market requires stakeholders to safeguard against risksand adapt. Likely trends include increased cooperation between stakeholders tomitigate risks, and structures to more effectively share liabilities and improvedadaptability. Another trend is a potential wave of M&A between (inter)nationalproducers and government utilities and smaller producers and downstreamproviders who may have useful portfolios but cash f low/capital shortages.

Matt Bonass, Partner, Bird and Bird, and

Michael Rudd, Partner, Bird & Bird


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