MARCH 2015THE EXECUTIVE PUBLICATION FOR THE OIL AND GAS INDUSTRYSPECIAL REPORT:ENERGY BANKINGE&P IMPAIRMENTS BAKKEN BOOM BUSTED?RESERVE-BASED LENDING MACQUARIE SEESOPPORTUNITIESIN DOWN MARKET1503ogfj_C1 1 3/3/15 3:41 PMA RECORD OF STRENGTHStrength is the result of years of work, and is forged out of conviction and perseverance. Through strategic planning, an innovative team, and the organic growth of low-cost reserves, we have built a powerful foundation. Through continued determination and a focus on execution,our company can only grow stronger. To learn more, visit: rangeresources.com1503ogfj_C2 2 3/3/15 3:41 PMLINN acquires, develops and maximizes cash flow from a growing portfolio of long-life oil and natural gas assets. Since inception, LINN continues to be one of the industrys most successful MLPs. Thanks to our people, strategy and assets we remain a leader in the industry.Visit www.linnenergy.com or call 281.840.4000 to learn more about LINN.1503ogfj_1 1 3/3/15 3:39 PM2WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015CONTENTSFEATURESTHE EXECUTIVE PUBLICATIONFOR THE OIL AND GAS INDUSTRYOil&GasFinancialJournal(ISSN:1555-4082)ispublished12timesperyear,monthlybyPennWell,1421S.SheridanRd.,Tulsa,OK74112.PeriodicalsPostagePaidatTulsa,OK,andaddi-tionalmailingoffices.POSTMASTER:sendaddresschangestoOil&GasFinancialJournal,P.O.Box3264,Northbrook,IL60065.Changeofaddressnoticesshouldbesentpromptlywith oldaswellasnewaddressandwithZIPorpostalcode.Allow30daysforchangeofaddress.Copyright2015byPennWell.(RegisteredinUSPatent&TrademarkOffice.)Allrightsreserved. Permission,however,isgrantedforlibrariesandothersregisteredwiththeCopyrightClearanceCenterInc.(CCC),222RosewoodDrive,Danvers,MA01923,Phone(978)750-8400,Fax (978)646-8600,tophotocopyarticlesforabasefeeof$1percopyofthearticle,plus35centsperpage.PaymentshouldbesentdirectlytotheCCC.Federalcopyrightlawprohibitsunau-thorizedreproductionbyanymeansandimposesfinesupto$25,000forviolations.RequestsforbulkordersshouldbesentdirectlytotheEditor.Backissuesareavailableuponrequest.V12/NO.3|MARCH201550282464DEPARTMENTS06EDITORS COMMENT08CAPITAL PERSPECTIVES10UPSTREAM NEWS12MIDSTREAM NEWS56DEAL MONITOR58INDUSTRY BRIEFS60ENERGY PLAYERS64BEYOND THE WELL16 COVER STORYMACQUARIE BANKHeadquartered in Sydney, Macquarie is Australias largest investment bank. OGFJ recently spoke with senior officials Nick OKane, Head of Energy Markets; Paul Beck, Head of Upstream Capital; Nick Butcher, Head of Americas Infrastructure and US Energy; and Nicholas Gole, Head of Energy and Infrastructure Financing. The four executives came together in Houston to talk with OGFJ about Macquarie and its place in the energy sector.14IMPACT OF OIL PRICES ON INVESTORS24E&P IMPAIRMENTS28BAKKEN BOOM TO GO BUST?ND players feel squeeze of weak oil prices, safety regulations32ANADARKO STACKED PLAYS35ENERGY BANKING SECTION38RESERVE BASED LENDING42PROJECT FINANCEON THE COVERFrom left: Nick OKane, Paul Beck, Nick Butcher, and Nicholas Gole.Photo bySylvester Garza50OIL AND GAS SECURITYHow standardization and continuity improve decision making, create cost savings53OIL AND GAS DISCLOSURE RULESPart two of a three-part series1503ogfj_2 2 3/3/15 3:39 PMSKILLED.BOLD.VISIONARY.For over 26 years NGP has been helping entrepreneurs transform ideas into reality.Supporting those that are...Robert A. Edwards is Heading NGPs Houston Ofce.If you have a compelling energy-related project or business plan,we invite you to get in touch with Bob today!5 HOUSTON CENTER 1401 MCKINNEY, SUITE 1025 HOUSTON, TEXAS 77010(713) 579-5700IRVI NG HOUSTON SANTA FE STAMFORDwww.ngpenergycapital.com1503ogfj_3 3 3/3/15 3:39 PM4WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015OGFJ.comPennWell Corporation1455 West Loop South, Suite 400, Houston, TX 77027USA Tel: (713) 621-9720 Fax: (713) 963-6285www.ogfj.comVice President andGroup PublisherMark Petersmarkp@pennwell.comAssociate PublisherMitch Duffy (713) 963-6286mitchd@pennwell.comEditorDon Stowersdons@pennwell.com Senior Associate EditorMikaila Adamsmikaila@pennwell.comEditorial Creative DirectorJason T. Blair Contributing EditorsLaura Bell, Paula Dittrick, Larry Hickey, Brian Lidsky,Debbie Markley, Per Magnus Nysveen, Tammer Qaddumi,Nick Snow, Imre Szilgyi, Don Warlick, John WhiteEditorial Advisory BoardE. Russell Rusty Braziel, RBN Energy LLCMichael A. Cinelli, Locke Lord LLP Mickey Coats, BOK FinancialAdrian Goodisman, Scotia Waterous (USA) Inc Cleve Hogarth, Quorum Business SolutionsBradley Holmes, Investor Relations ConsultantMaynard Holt, Tudor, Pickering, Holt & Co.Carole Minor, Encore CommunicationsJaryl Strong, BHP BillitonAndy Taurins, Lantana Energy AdvisorsJohn M. White, Roth Capital PartnersRon Whitmire, EnerVest Ltd.RegionalSales ManagerRobert McGarr (713) 963-6256rmcgarr@pennwell.comReprint SalesRhonda Brown (866) 879-9144 ext 194Fax: 219.561.2023 rhondab@fosterprinting.comSubscriber ServiceTo start or renew yoursubscription visitwww.ogfjsubscribe.com.To change your addressemail ogfj@halldata.comor call 847-763-9540.Circulation ManagerRon Kalusharonk@pennwell.comCustom PublishingRoy Markumroym@pennwell.comOfficial PublicationCORP. HEADQUARTERS1421 S. Sheridan Rd., Tulsa, OK 74112USAP. C. Lauinger, 1900 1988Chairman Frank T. LauingerPresident/Chief Executive Officer Robert F. BiolchiniChief Financial Officer/Senior Vice President Mark C. WilmothFEATURED CONTENT Getup-to-datenewsandfeaturedcontentonOGFJ.com daily.Despiteabriefuptick,depressedoilpricescontinueto makewavesthroughouttheindustry.Throughprojectdelays, employee layoffs and other measures, companies press on. US landrigcountinJanuarydroppedbynearly200rigsandthe count is expected to decline through Q2 2015, said analysts with WoodMackenzierecently.Readmoreanalysisandthoughts aboutwhenwemightseeaturnaround.WhileonOGFJ.com, checkoutourPhotooftheDayslideshow,ourEnergyPlayers slideshow, and much more. NEWSLETTERSOGFJsnewestoffering,theOGFJWeekly,providesquick access to trending content from OGFJ. Spanning the previous seven days, OGFJ Weekly content is compiled from OGFJ.com, Oil & Gas Financial Journal, and OGFJ newsletters. Access the weeks top content, as well as any breaking news, with this recent addition to the OGFJ newsletter lineup. Sign up to receive the OGFJWeekly,oranyofourexistingnewsletters,freeatogfj.com/newsletters.GET SOCIAL ThankyouforhelpingOGFJreachthe20KTwitterfollower milestone!Ifyouhaventyet,pleasejoinourgrowingsocial community! Find us on Twitter (@OGFJ) and Facebook and join the Oil & Gas Financial Journal group on LinkedIn. Follow along withotherpetroleumindustryexecutives,managers,analysts, and investors looking for credible, useful information about oil and gas industry developments and join the discussion today. COUNTRY REPORTSSpanning oil & gas industries of Norway, Scotland, South Africa, Mexico, and many more, OGFJs Country Reports page hosts a diverse selection of reports containing exclusive interviews with oil and gas leaders from around the world, offering an insiders view on whats hot in various markets.1503ogfj_4 4 3/3/15 3:39 PM1503ogfj_5 5 3/3/15 3:39 PM6WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015EDITORS COMMENTDON STOWERSEDITOR OGFJState of the oil marketIN LAST MONTHS COLUMN, we talked about the history of oil prices and the ex-tremevolatilitythathascharacterized global oil prices since the 1970s. We went fromaflat-linegraphfrom1946to1973, andfromthentothepresentday,prices have tended to ascend and descend rapid-ly, based mainly on simple supply-and-de-mand economics. Oilpricesandforecastsaboutfuture pricing are the focus of nine out of ten con-ferences and meetings Ive attended the past six months, or at the leasttheyretheelephantintheroom.Therefore,letsdelveinto that issue a little more this month. Conventional wisdom about the oil price downturn is that what went down quickly will recover just as fast. The most common sce-nario I hear these days is that prices will remain somewhat stag-nantuntilmid-yearwhentheywillstarttorecover,andthatoil prices will be in the $65 to $70 range by year-end. However, I sel-dom hear a convincing explanation as to why that is going to hap-pen. As this is being written, the WTI price has dipped below $50 again, and Brent has dropped below $60. Rusty Braziel, head of RBN Energy and a member of OGFJs Edi-torial Advisory Board, recently delivered a compelling analysis on US natural gas and oil production during a Genscape webinar in February. He predicts that we could see WTI prices return to the $80 per barrel range by 2017, assuming the market responds cor-rectly to energy demands. On the other hand, if resilient production by US operators keeps volumes growing while demand does not respond, we could see WTI prices trading in the $50 to $60 range or lower through 2020.Thelatterscenariowouldnotbegoodfortheoilindustryin North America shale producers, in particular. Although oil eco-nomics vary considerably from play to play and even within plays, thewidelyacceptedbreak-evenpriceonamacroscaleisabout $65/bbl. If prices remain below $65 for the next five years, there will be a shake-out in the industry like weve never seen before. Brazielsaysthatifproducerspullbackondrillingandfocus their existing rigs on their highest yield sweet spots, we will see enough resiliency and efficiency to avoid harsh impacts on produc-tion growth.Ole Hansen, head of commodity strategy at Saxo Bank, recently noted that there are some positive drivers that may help oil prices recover this year. Among them:a sharp reduction in the US rig count to a three-year low;major oil companies reducing future investment plans;a US refinery strike that has (temporarily, at least) given prod-ucts a lift;shorts covering after short positions have doubled in the past month;a weaker US dollar;reduced supplies from Libya as fighting there intensifies; andinvestors piling $2.4 billion into energy exchange-traded funds (ETFs) since January 1.Hansen said, These are all relevant factors, and if maintained, they will help reduce the current supply glut. The major problem withasharprallyatthisrelativelyearlystageisthefactthatUS shale oil producers have been handed an olive branch in terms of being able to forward-hedge their production.In its 2015 crude oil outlook report, Morgan Stanley noted that thecurrentlow-priceenvironmentisaself-inflictedcrisis.Al-thoughanalystsatthefirmsaythatoilpricesfacetheirgreatest threat since 2009, they expect a volatile 2015 rather than a one-way trade. Without intervention, physical markets and prices will face se-rious pressure with the second quarter of 2015 likely marking the peak period of dislocation, says the outlook report, which added that the coming oversupply is grossly exaggerated and that only a modest fix is required.MorganStanleyaddedthatthefirmseesseveralfactorsthat could contribute to a recovery, potentially as early as the second half of this year.Inanextremescenario,saidtheanalysts,shut-ineconomics could be required. The risk of material oversupply is high by 2Q15, they said, even though dislocations are unlikely to match prior cri-ses. The only true floor in an oversupplied market, they said, is cash cost (estimated at $35/bbl to $40/bbl). The outlook concludes that the analysts expect OPEC intervention or lost production will pre-vent this, but the lagged fundamental impact and sentiment could push prices to these levels for a brief period. Yikes! On the one hand, they say that the oversupply situation is grossly exaggerated and that only a modest fix is required. But on the other hand, they say shut-in economics may be required and that prices could fall as low as $35/bbl, albeit for brief periods.With that kind of optimism, I would hate to read a pessimistic scenario for 2015 and beyond. The main point I agree with is that this is largely a self-inflicted crisis. Although producers and vendors in the United States and Can-ada are feeling the brunt of low oil prices currently, this pales with what is happening in Mexico. That is the gist of a Feb. 4 discussion attheWoodrowWilsonInternationalCenterforScholars,asre-ported by Nick Snow, Oil & Gas Journals Washington editor:Mexico is a perfect storm a serious production decline and a low oil price, said Duncan Wood, who directs the centers Mexico Institute. It instituted modest energy reforms that look more like service agreements than production-sharing contracts. This might explainwhyonlyseven[internationalcompanies]haveaskedto seedataroomsforthe14offeredcontracts.Theresaperception that the program has failed.Continued low prices could force Mexicos government to make movestomaketheprogrammoreattractivetoinvestors,said Wood.Well, at least that would be one good thing to come out of the current down market. 1503ogfj_6 6 3/3/15 3:39 PM1503ogfj_7 7 3/3/15 3:39 PM8WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015CAPITAL PERSPECTIVESCommodity trading house challenges MAINTAINING STRATEGIC AGILITY DURING SEISMIC FINANCIAL REGULATORY SHIFTS ALEXANDRA DOBRA, KINETIC PARTNERS, LONDONASFINANCIALREGULATORYandcompliancerequire-ments (i.e.: EMIR, Dodd-Frank Act, REMIT, MiFID II, MAD/MARII,etc.)havebecomeatopchallengeforcommodity tradinghouses,andgivenalsothewidermarketmove-ments,howcancommoditytradinghousessecuretheir strategic agility by maintaining their reputation, remaining competitive,reducingrisks,protectingfranchisevalueand capturing market opportunities? STATE-OF-THE-ART COMPLIANCE STRATEGYThe very fact that financial regulation has been identified as atopagendaconcernfortheC-Suitefor2014reinforces that most companies have silo-based approach for respond-ing to financial regulation, characterized by a reactive exe-cutionthatleadstocontinuouslyincreasingcompliance costs and compliance risks. In addition, with the increasing expansion and increasing complexity of commodity trading houses,throughacquisitionsandinternalgrowth,asilo-basedcompliancefunctionprovestobeevenmoreinade-quate. On the other hand, a holistic regulatory compliance functionistheonlysolutionformanagingtheever-chang-ingfinancialregulatorylandscape.Suchafunctionunifies fragmentedstructures,systemsandprocesses.Itcanre-ducecostsbyidentifyingandeliminatingoverlappingand redundantassessments,controls,reportsandtests,ensure resiliencebyaligningrisksandcontrolseffectivelyand adaptingtheseasthebusinesschanges,increaseagilityby supporting operating model changes and foster a proactive approach towards financial regulation. In addition, a holistic compliance function must be effec-tiveandresultinoptimizationandcostssavingsthrough supportfrom:(i)arobustfinancialregulatoryprogram management;(ii)anintegratedITlandscape;and(iii)the promotion of an ethical culture. An integrated IT landscape aimstoconsolidatethesystemslandscape,optimizedata usage,reducemanualworkarounds,andreducecosts.An integrated IT landscape can save up to 35% of the cost per tradebasisandcanincreaseintra-grouphomogeneityby establishingconsistentdatataxonomy.Theimportanceof having strategic IT investments is further reinforced by the factthatcommoditytradinghousesoftenhavelegacysys-temsrequiringconstantmanualworkaroundsthatreduce cost efficiency and increase risks. Furthermore, an integrat-ed IT landscape should be supported by IT investments fo-cusedonimplementingtradingsurveillancesystemsand data analytics to ensure data quality and integrity and allow sophisticatedrisksmodelling.Lastly,promotinganethical culture is aimed at resulting on the medium-term to bring a culturalshiftintheapproachtowardsfinancialregulation and it therefore can reduce the risks of non-compliance. REDEFINING THE BUSINESS STRATEGY Commoditytradinghouseswillneedtore-evaluatetheir currentbusinessmodelsbasedonsophisticatedscenario-selectionandsensitivitiesdefinitiontools(thatwouldas-sess the impact of various regulations) and build on the op-erational focus and geographic footprint of the organization. As such, commodity trading houses can decrease both their flexibilityintermsoftradedcontractsandtheirfootprints in certain geographic areas to reduce cost-structures and to decreasetheleveloftheirexposuresinheavily-regulated hubs by restructuring some of their core operating entities. However,asregulatoryagenciesareactivelytacklingthe caseofregulatoryarbitrage,suchamovemightentailad-vantages on the short term only. Lastly, commodity trading houses through the implementation of new methodologies and metrics can improve their risk exposure and their per-formancemanagementfunctioninordertoimprovethe cost to income ratio. As access to capital and to sources of funding is becom-ing scarcer and more expensive, commodity trading houses will need to optimize access to capital and funding. One ba-sic measure is to calculate the profit velocity and allocation ofcapitalbytradingbooksandprioritizethosewiththe strongestpotentialforincreasedprofitmargins.Indepen-dentcommoditytradinghouseswillalsocontinuetoin-creasetheirinvestmentsinupstreamassets,howeverthis will make them more vulnerable to resource nationalism. In addition,commoditytradinghousesmovingtowardsa moreintegratedbusinessmodelwillneedtobalancethe short-term-terminvestmentcapitalwiththelong-termin-vestment capital approach. Finally, as investment banks are deleveraging their commodity trading practices, commodi-tytradinghousescouldfindanopportunityfortacking these over and therefore optimizing their access to capital. However,turningthisintoamarket-makingopportunity will depend on the balance sheets of the commodity trading houses. Another market-making opportunity can also arise with the development of alternative energy sources and the related financial market that will grow in both volume and scope. Anotheroptionistooptimizefundingthroughsecuriti-zationandnewassetclasses,suchasthesecuritization commoditytradeloansofferedbyBNP-Paribassince2013 1503ogfj_8 8 3/3/15 3:39 PMMARCH 2015 OIL & GAS FINANCIAL JOURNAL|WWW.OGFJ.COM9CAPITAL PERSPECTIVESAholisticregulatorycompliancefunctionistheonlysolutionfor managingtheever-changingfinancialregulatorylandscape.Sucha funtion unifies fragmented structures, systems, and processes. or to access funding through investors suchassovereignwealthfunds (SWFs).AsSWFsarelookingtocapi-talize on the expected long-term com-modityprices,theyplayanincreas-inglyimportantroleindrivingM&As andalongsideofferthepossibilityto commoditytradinghousetosellmi-noritystakes.Examplesoftheroleof SWFs include the Qatari Wealth Fund whichboughtpositionsinTotaland hasalsoacceleratedthetakeoverof Xstrata, in which its stakes were above 10%,PlcbyGlencoreInternational Plc.SWFshavealsoplayedapivotal roleintheacquisitionbySinopecof AddaxPetroleumandtheinvestment inTeckResourcesbyChinaInvest-ment Corp. Commodity trading hous-escanalsoboosttheiraccesstose-cured funding with low beta exposure throughsettingupindependently managedcommoditytradingfunds (i.e.: Black River for Cargill). ABOUT THE AUTHORAlexandraDobraisase-niorassociateatKinetic Partners, a division of Duff &Phelps,workingonfi-nancialregulationand risk.Herexperienceisin financialregulatorystrategy,riskand research(quantitativeandqualita-tive).Previously,DobraworkedatAc-centureinLondonintheInstitutefor HighPerformanceandintheCom-modity Trading and Risk Management practice. She was also part of the FIA-ISDAMiFIDII/Rworkinggroupon commodities, which acts as an indus-tryresponsegrouptotheEuropean SecuritiesandMarketAuthority.She has interned with Ellington Technolo-gyGroup,wheresheadvisedona post-IPOexpansionstrategyandat theEuropeanParliamentwhereshe advisedoneconomicpolicy.Dobrais arecognizedthoughtleaderandhas beenselectedin30under30by Forbes.SheobtainedherMPhilinIn-ternationalAffairsfromCambridge and her BA(Hons) from York.Citibank In Shanghai Adaa | Dreamstime.com1503ogfj_9 9 3/3/15 3:39 PMUPSTREAM NEWS10WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015B R I E F SIRAQ SECOND-LEADING CONTRIBUTOR TO GLOBAL OIL SUPPLY GROWTH IN 2014Despite some supply disruptions and secu-rity threats, Iraq was the second-leading contribu-tor to global oil supply growth in 2014, behind only the United States. Iraq accounted for al-most 60% of production growth among the Orga-nization of the Petroleum Exporting Countries (OPEC), although this growth was more than offset by production declines in other OPEC countries. Iraqs crude oil production, which aver-aged almost 3.4 million barrels per day (bbl/d) in 2014, was 330,000 bbl/d above 2013 levels, despite the heightened security threat from the Islamic State of Iraq and the Levant (ISIL) and disrupted production in northern Iraq.EIAHISTORIC GAINS IN US OIL PRODUCTIONMAY COME TO A HALT IN 2015 IHS Stunning growth in US oil production may come to a halt by mid-2015 as low oil prices begin to constrain US tight oil production, which has been the dominant engine of world oil supply gains in recent years, according to a new report by infor-mation and analytics provider HIS. Growth is still expectedintheearlymonthsof2015butthat momentum will level off in the latter half of the yearamidstpricesatlowsnotseensincethe 2008-09 Great Recession.Thenewreport,basedonanIHSstudyof 39,000 wells, points to the possibility of month-to-month US oil production growth coming to a halt in the latter half of 2015, assuming that West TexasIntermediate(WTI)pricesremainbelow $60.The study identified a wide spectrum of break-even prices for US crude oil production. About a quarter of new wells in 2014 had a breakeven WTI priceof$40orless.Justlessthanhalfofnew wells in 2014 had a breakeven price of $60 or less. At the opposite end of the spectrum, nearly 30% ofnewwellshadbreakevenpricesof$81or higher.Thebreak-evenlevelistheWTIprice needed to cover capital and operating costs and generate a 10% return.Hedging programs, finishing work on uncom-pleted wells, contractual obligations and further drilling of the most economic tight oil plays mean that many new wells will still be drilled in 2015. But adverse economics and lower spending will lead to fewer wells drilled than in 2014, the report says.Monthly average US production at the close of2015isprojectedtobeabouthalfamillion barrels per day above the January 2015 average, but nearly all of that growth will come in the first half of the year. By December 2015, US oil produc-tion growth will have been flat for several months, the report says. US oil production has been the main engine of global supply growth in recent years, said Jim Burkhard, vice president, IHS Energy. And mo-mentum from strong growth in the second half of 2014 means the impact of lower prices will not immediately drive production lower. But the reality of lower oil prices and less spending on new wells will affect production as 2015 progresses.The fate of US oil production growth past 2015 and into 2016 will be shaped by global economic conditions, geopolitics and changes in industry costs, all of which are in a state of flux, according to Raoul LeBlanc, IHS energy senior director, fi-nancial markets and report co-author.Somuchcanhappenoverthecourseofa year, LeBlanc said. If oil prices remain weak and confidence in future prices remains shaken, US production in 2016 could possibly flatten or even decline. But there is plenty that could happena recovery in oil prices, lower upstream costs and improved well productivitythat would quickly changethecalculusofdrillingnewwellsand reinvigorate US production growth.WILLIAMS AND DPM ACHIEVE FIRST GASFROM ULTRA-DEEPWATER GOM Williams, through its general partner ownership of Williams Partners, with DCP Midstream Partners LP, has achieved first gas from an ultra-deepwater area of the Gulf of Mexico, as the new extended Discovery natural gas gathering pipeline system is now flowing natural gas. The Keathley Canyon Connectordeepwatergasgatheringpipeline system and the South Timbalier Block 283 junc-tion platform are serving producers in the central ultra-deepwater Gulf of Mexico. The 20-inch, 209-mile Keathley Canyon Con-nector, which is capable of gathering more than 400 million cubic feet per day (MMcf/d) of natural gas,originatesinthesoutheastportionofthe Keathley Canyon protraction area and terminates intoDiscoverys30-inch-diametermainlineat Discoverys new junction platform. The pipeline was constructed in depths of up to 7,200 feet of water. Williams owns the controlling interest in, and is the general partner of, Williams Partners LP, which owns 60% of the Discovery system and operates it. DCP Midstream Partners LP owns the remaining 40% of the Discovery system. The Keathley Canyon Connector extension is supportedbylong-termagreementswiththe Lucius and Hadrian South owners, as well as the Heidelberg and Hadrian North owners, for natural gasgathering,transportationandprocessing services for production from those fields. In ad-dition to the offshore gathering system, the Dis-covery system includes the 600 MMcf/d Larose naturalgasprocessingplantprovidingmarket outlets to six interstate/intrastate gas pipelines and the 35,000 b/d Paradis fractionation facility. MARATHON FURTHER REDUCESDRILLING BUDGETAfter reporting an operating loss in the final quar-ter of 2014, Marathon Oil Corp. plans to further reduceitsdrillingbudget.Thecompanynow 1503ogfj_10 10 3/3/15 3:39 PMUPSTREAM NEWSMARCH 2015OIL & GAS FINANCIAL JOURNAL|WWW.OGFJ.COM11B R I E F SSTATOIL, PARTNERS SUBMIT DEVELOPMENT PLAN FOR JOHAN SVERDRUPStatoil and its partners have submitted the plan for development and operation for Johan Sverdrup, Phase 1, to the Norwegian Ministry of Petroleum and Energy. Capital expenditures for Phase 1 are estimated at NOK 117 billion (2015 value) and the expected recoverable resources are projected at between 1.42.4 boe. The devel-opment in Phase 1 has a production capacity in the range of 315,000380,000 b/d and first oil is planned for late 2019.plans to spend $3.5 billion on oil and gas drilling in 2015, down from a budget of about $5.9 billion intotalcapital,investment,andexploration spending in 2014. The number is down 20% from theguidanceinDecemberof$4.3-4.5billion. More than $1.4 billion in earmarked for the Eagle Ford, where rig count is expected to drop from 18 in late 2014 to 10 by the end of the second quarter. Included in Eagle Ford spending is ap-proximately$1.0billionfordrillingand completions.The company plans to spend $760 million in the Bakken in North Dakota. Drilling activity will bereducedtotworigsbytheendofthefirst quarter, down from seven rigs at the end of 2014. Bakkenspendingincludesapproximately$550 millionfordrilling,completionsand recompletions.GCA: OIL PRICE CRASH COULDHAVE 2MMBPD IMPACT IN USBy the end of 2016 US production could be some two million barrels per day lower than where it would have been without the oil price crash, ac-cordingtoanalysisbyGaffney,Cline& Associates. Based on GCAs review of EIA and public data fromtheBakken,iftheoilpricecrashhadnot happened and rig count had stayed steady, then that play would probably have added a further 500,000 to 600,000 b/d by the end of 2016. Cut-tingtherigcountsignificantlytakesawaythis growth but doesnt cause production to fall like a stone, said GCA executive director and senior strategic advisor Bob George. In its January 2015 forecast, the EIA has US oil production continuing to rise steadily to one million barrels per day above its 2014 year end level,bytheend2016.Theresultsofourwork suggest that despite the expected sharp drop in capital expenditures and rig count, under most scenarios production over the next two years is notexpectedtodropfromcurrentlevels,and mayevencontinuetoincrease,addedGCA petroleum economist Cecilia Jing Cui. However, this does reflect a sharp fall from where it might otherwise have been.Extrapolat-ing the Bakken production analysis to all US un-conventional production would result in a differ-ence of some 1.5 million to two million barrels of oil per day from what might have been.GCA senior geologist Neil Abdalla also point-ed to another factor that could impact forecasts, baseduponsomerecentoperatorcomments: There is also a storage scenario which involves drilling but not completing wells straight away. This seeks to defer flush production in the hope of capturing a price recovery or spike. It is some-what analogous to players who are renting tankers to buy crude today, store it and then release it back into the market when prices are higher. The scenario may also explain in whole or part, the sharpriseinoilpriceasplayersspeculatingin the market also seek to drive up the futures market and lock in early profits.MEXICOS PEMEX WILL HALT SOMEDEEPWATER EXPLORATION PROJECTSThe head of Mexicos state-run oil company Pe-mexsaidFeb.18thatthecompanywilldelay starting some much-anticipated deepwater ex-ploration projects due to the decline in worldwide crude oil prices.Pemex managing director Emilio Lozoya said thecompanyplanspersonnelcutbacksinthe comingweeks,althoughnospecificnumbers were provided. Recently, the company noted it would reduce 2015expendituresbyabout$4.2billion.The Mexican government has opened up bidding on Round 1 of projects open to outside investment, andLozoyasaiditwillgoaheadthisyearas planned.According to Mexican officials, approximately 24 outside companies, including US majors Exx-onMobil and Chevron, have expressed interest in 14 shallow-water blocks available in Round 1.FIRST OIL FLOWS AT UAESOFFSHORE NASR FIELDThrough its wholly-owned subsidiary Japan Oil Development Co. Ltd. (JODCO), Japans Inpex Corp. has commenced oil production from the NasrOilFieldoffshoreAbuDhabi,theUnited Arab Emirates in late January. TheNasrOilFieldislocatedapproximately 81 miles northwest of Abu Dhabi City. Inpex has jointlydevelopedtheNasrOilFieldwithAbu Dhabi National Oil Company (ADNOC), BP, and Total.In the first development phase, Inpex has com-menced oil production from the Nasr Oil Field byutilizingexistingfacilitiesoftheAbuAlBu-koosh (ABK) and Umm Shaif Oil Fields, located adjacent to the Nasr Oil Field. Full field develop-ment of the Nasr Oil Field is currently in progress, andaftercompletion,thefieldisexpectedto produce oil at a peak rate of 65,000 b/d. 1503ogfj_11 11 3/3/15 3:39 PM12WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015MIDSTREAM NEWSB R I E F SVENTURE GLOBAL LNG RAISES$125M IN EQUITY FINANCING Venture Global LNG Inc. has closed two rounds of equity investment bringing Venture Global to an aggregate of $125 million in new capital.The proceeds from the equity investments will fund the development of LNG export facilities in the US, including Venture Globals Calcasieu Pass project in Cameron Par-ish, Louisiana.WILLIAMS PARTNERS, CRESTWOOD COMMISSION NIOBRARA PLANTWilliams Partners LP and Crestwood Midstream Partners LP have com-missioned the Bucking Horse gas processing facility in Converse County, Wyoming, adding 120 MMcf/d of processing capacity in the Powder River Basin Niobrara shale play. The Bucking Horse plant, along with the Jackalope Gas Gathering System, is owned through a 50/50 joint venture between Williams Partners and Crestwood Midstream Partners. PHILLIPS 66 PARTNERS TO ACQUIRE $1B EQUITY INTERESTS IN PIPELINE SYSTEMS Phillips 66 Partners LP has reached an agreement with Phillips 66 to acquire Phillips 66s interests in three pipeline systems.The acquisition includes one-third equity in-terests in the limited liability companies that re-spectively own the Sand Hills and Southern Hills natural gas liquids (NGL) pipeline systems, and a 19.46% equity interest in Explorer Pipeline Co., the owner of the Explorer refined products pipe-line system. In exchange, Phillips 66 will receive total consideration of $1.01 billion consisting of $880 million in cash and 1,726,914 newly issued PSXPunits,tobeallocatedbetweencommon unitsandgeneralpartnerunitsinaproportion allowing the general partner to maintain its 2% general partner interest.The total transaction value, including approxi-mately $65 million of proportional non-consoli-dated debt of Explorer Pipeline Co., reflects an approximate 9.5 times multiple of the forecasted full-year2015earningsbeforeinterest,taxes, depreciation, and amortization (EBITDA) of $115 million attributable to these equity interests.ThetransactionincludesPhillips66sequity interestsinentitiesholdingthefollowing assets:Sand Hills NGL Pipeline System: A 720-mile NGLpipelinesystemthatprovidestakeaway servicefromDCPMidstreamandthird-party plants in the Permian and the Eagle Ford basins tofractionationfacilitiesalongtheTexasGulf Coast and the Mont Belvieu, Texas, market hub. The system has a capacity of 200,000 b/d and is expandableupto350,000b/dwithadditional pumping stations.Southern Hills NGL Pipeline System:An 800-mile NGL pipeline system that provides takeaway servicefromDCPMidstreamandthird-party plants in the Midcontinent to fractionation facili-tiesalongtheTexasGulfCoastandtheMont Belvieu,Texas,markethub.Thesystemhasa capacity of 175,000 b/d. A 1,830-mile refined products pipeline system that provides connectivity to refineries and market centers from the Gulf Coast to the Midwest. The system has a capacity of 660,000 b/d.The transaction is expected to be immediately accretive to the Partnership and its unitholders, andisanticipatedtocloseinearlyMarch.The Conflicts Committee engaged Evercore Partners to act as its financial advisor and Vinson & Elkins LLP to act as its legal counsel.KINDER MORGAN TO BUY TERMINALS,UNDEVELOPED SITE FOR $158MKinder Morgan Inc. plans to purchase three terminals and one undeveloped site from Royal Vopak for $158 million.The acquisition covers a 36-acre, 1,069,500-barrel storage complex at Galena Park, Texas, that handles base oils, biodiesel and crude oil, immediately adjacent to Kinder Morgans Galena Park terminal complex; two Vopak terminals in North CarolinaincludingaterminalinNorthWilmingtonthat handles chemicals and black oil, and another ter-minal in South Wilmington that is not currently operating; and an undeveloped site at Perth Amboy, New Jersey, with waterfront access that can be developed.The transaction is expected to close during the first quarter of 2015.CANYON MIDSTREAM BEGINS JAMES LAKE SYSTEM OPERATIONS IN PERMIANCanyon Midstream Partners LLC has began com-mercial operations of its James Lake Midstream System in the Permian Basin. Phase I of the James Lake system consists of a 105-MMcf/d cryogenic gas processing plant in Ector County, Texas, and six field compressor stations; 60 miles of 12-inch trunkline; and 20 miles of low-pressure gathering lines in Ector and Andrews coun-ties, Texas.Phase II of the James Lake system will add a second cryogenic gas processing plant, with a ca-pacity of 100 MMcf/d, in Andrews County, and additional trunkline to expand the systems service territory into Lea County, New Mexico, and Martin and Howard counties, Texas. Canyon expects Phase II to begin operations in the first half of 2016. ENLINK ACQUIRES CORONADOMIDSTREAM FOR $600MThe EnLink Midstream companies, EnLink Mid-stream Partners LP (the partnership) and EnLink Midstream LLC (the general partner), have agreed to acquire Coronado Midstream Holdings LLC, which owns natural gas gathering and processing facilities in the Permian Basin, for approximately $600 million, subject to certain adjustments. The acquisition includes natural-gas gathering and processing facilities in the Permian Basin and will expand Enlinks presence in West Texas. Under the deal, Coronados owners will receive $240 million in cash, $180 million of EnLink Midstream Partners common units and $180 million of a new class of EnLink Midstream Partners common units.1503ogfj_12 12 3/3/15 3:39 PMMARCH 2015OIL & GAS FINANCIAL JOURNAL|WWW.OGFJ.COM13MIDSTREAM NEWSB R I E F SDCP MIDSTREAM REDUCESWORKFORCE BY 20%Denver, CO-based DCP Midstream has reduced its workforce by approximately 20%. In a statement, the com-pany called the move a corporate restructuring resulting in the closing of the companys Oklahoma City regional office, as well as a headcount reduction in the Tulsa and Midland offices. Functions of those loca-tions would be moved primarily to its Denver headquarters and Hous-ton regional office. NISOURCE FILES FOR CPG SEPARATIONNiSource Inc. has filed an initial Form 10 registra-tion statement with the US Securities and Exchange Commission (SEC) in connection with the companys plan to separate its natural gas pipeline and related businesses into a stand-alone publicly traded company, known as Columbia Pipeline Group (CPG), in mid-2015. Coronado operates three cryogenic gas process-ing plants and a gas gathering system in the North Midland Basin including 270 miles of gathering pipelines, 175 MMcf/d of processing capacity, and 35,000 horsepower of compression. Construction of an additional 100 MMcf/d of processing capacity and gathering system expansions of the Coronado system are under way. The system has current inlet volumes of 100 MMcf/d. EnLink plans to connect the Coronado system with its Bearkat system to create a multi-county rich-gas gathering and pro-cessing system.Baker Botts provided counsel to EnLink Mid-stream Partners in connection with the acquisition. Sidley Austin LLP provided counsel to Coronado Midstream Holdings LLC. PAA TO CONSTRUCT TWO NEWDELAWARE BASIN PIPELINESPlains All American Pipeline LP plans to construct two new Delaware Basin pipelines and related gath-ering systems, to expand its existing Blacktip station and to construct a 20-inch loop line from Blacktip station to Wink, Texas.These new infrastructure builds in West Texas and New Mexico will support PAAs 24-inch Basin Pipeline loop from Wink to Midland, Texas, and new 12-inch pipeline from Monahans, Texas, to Crane, Texas. The new Delaware Basin pipelines, Avalon Extension and State Line, are backed by producer commitments.The 32-mile, 12-inch Avalon Extension pipeline will extend the Avalon pipeline, which runs from the PAA Avalon station in northwest Loving County to its Blacktip station in southeast Loving County, Texas, into Culberson County, Texas, and is capable of transporting up to 100,000 barrels per day (bpd) of crude oil from northern Loving and Culberson counties. The line and two new truck unloading facilities at Orla, Texas, and at Highway 285 are expected to be brought into service in phases be-ginning in July, with total system completion, includ-ing the associated gathering system, scheduled for September.The 60-mile, 16-inch State Line pipeline will con-nect Culberson County to Wink, running along the TexasNew Mexico state line. The State Line pipe-linewillconnectDelawareBasinproductionin southern Eddy and Lea counties in New Mexico and in northern Loving, Reeves, and Culberson counties in Texas to the existing network of PAA Permian Basin assets. The pipeline will be able to transport up to 150,000 bpd of batched crude oil and condensate. The State Line pipeline is expected to be brought into service in phases beginning in early 2016 and concluding in mid-2016, with comple-tion of the associated gathering system anticipated by early 2016.The Blacktip station expansion and pipeline loop will include building 200,000 barrels of new opera-tional tankage and associated pumping to provide an additional 200,000 bpd of pipeline capacity from the Blacktip station to Wink. The Blacktip station expansion and loop pipeline are expected to be completed in August.NGL TO UPSIZE GRAND MESA SYSTEMNGL Energy Partners LPhas decided to increase the size of its 100% owned Grand Mesa Pipeline system to a higher-capacity 20-inch design.The decision to expand was based on initial ship-per commitments and additional volumes committed to Rimrock Midstream LLCs 150-mile Denver-Jules-burg Basin gathering system that is under develop-ment and will tie into Grand Mesa Pipeline system at Lucerne, Colorado. The larger pipeline provides area producers an option out of the basin capable of transporting over 200,000 barrels per day.The Grand Mesa Pipeline system will include over 550 miles of new crude oil transportation pipe-line, multiple truck injection bays, over one million barrels of operational storage, and at least two origination points located near Lucerne and Kersey (Riverside Station) in Weld County, Colorado.The system is scheduled to begin service in the fourth quarter of 2016. Rimrock will construct and operate the pipeline system. SANTA FE MIDSTREAM PARTNERS WITH ENERGY SPECTRUM CAPITAL Santa Fe Midstream LLC has formed a partnership with Energy Spectrum Capital to initially invest up to $150 million of equity to pursue midstream op-portunities across the US. The Santa Fe Midstream management team includes Greg Kegin, CEO; Amer Rathore, founder; Clay Gordon, vice president commercial; and Paul Dolan, vice president engineering.Prior to Santa Fes formation in late 2014, Kegin served as director of business development for Chesapeake Midstream and Access Midstream. Rathore is one of four founding partners of Santa Fe Midstream. He has over 30 years of experience in both the power and natural gas industries. Gordon most recently served as manager of business de-velopment at Chesapeake Midstream and Access Midstream. Dolan most recently served as director of infrastructure services for WPX Energy. 1503ogfj_13 13 3/3/15 3:39 PM14WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015IN THE FEBRUARY ISSUE OF OGFJ, we examined the impact of $70/bbl oil prices to the production and investment levels for North American unconventional activ-ity. Since then, the WTI oil price has fluctu-ated from $60/bbl in December to around $40/bbl in January and back to $50/bbl in February. In the current uncertain environ-ment, price forecasts are hard to estimate, therefore it is important to analyze the sensitivity of investment and production levels at different price levels.Compared to other sources of invest-ments, shale activity is particularly flexible. At lower prices, operators can focus on core areas and decrease rig counts. BHP Billiton, for example, plans to decrease its 2015 on-shore US rig count by 40% and drill mainly in its Eagle Ford acreage. This level of flex-ibility is not available for other types of projects, especially offshore, where project start-up has a long lead time.On the macro level, rig activity was at a peak of over 2,000 rigs in October 2014 and has since dropped to ~1,500 as of the last week of January. In addition to decreasing rig counts, operators also have the option to delay completions until prices increase. Antero Resources reported in January that it plans to defer completions during the second and third quarters of 2015. This action reduces the capital spending during times of strained cash flow and allows for quick response in production once prices increase.Figure 1 shows the shale investments going forward split by different wellhead break-even categories. The wellhead break-even price is the wellhead oil price used to obtain an NPV of zero. In the previous edi-tion of the article, we assumed an oil price of $70/bbl going forward. This led to a ~15% drop in activity levels year over year from 2014 to 2015. If we assume a lower oil price of ~$50/bbl, the decrease in spending is then ~30%.Whileinvestmentlevelsshowvery strong reactions to the market, the resulting Impact of oil prices on investorsANALYZING THE SENSITIVITY OF INVESTMENT AND PRODUCTION LEVELS AT DIFFERENT PRICESF1: TOTAL NORTH AMERICAN SHALE INVESTMENTS100180160140120100806040200USD billions20102011 2012 2013 2014 2015 2016Gas wells HistoricalSource: Rystad Energy NASCubeF2: PRODUCTION FOR THE TOP FOUR PLAYSMMboe/dSource: Rystad Energy NAS WellData4.543.532.521.510.50Note: Forecasted values based on 30% rig reduction since December 2014, figures do not accountfor possible delays in completion. Eagle Ford Bakken PermianNiobraraJan-14Feb-14Mar-14Apr-14May-14Jun-14July-14Aug-14Sept-14Oct-14Nov-14Dec-14Jan-15Feb-15Mar-15Apr-15May-15Jun-15July-15Aug-15Sept-15Oct-15Nov-15Dec-15effect on production is limited.Figure 2 shows the total production from the four largest shale plays: the Eagle Ford, Bakken, Permian, and Niobrara. The historical values are based on officially reported well data, and the forecasted values are based on assuming a further 20% to 30% rig reduction compared to December 2014.In 2014, production volumes increased 19% and 16% during the first and second half PER MAGNUS NYSVEEN AND LESLIE WEI, RYSTAD ENERGY1503ogfj_14 14 3/3/15 3:40 PMMARCH 2015OIL & GAS FINANCIAL JOURNAL|WWW.OGFJ.COM15While investment levels show very strong reactions to the market, the resulting effect on production is limited.of the year, respectively. In 2015, it is estimated that the production will continue to increase 9% during the first half of the year and taper off to 3% during the second half of the year.The robust nature of the production can be attributed to the fact that companies will pull out of their less prospective areas first and maintain or even increase rigs in their most prospective areas. In addition, vertical rigs have experienced the largest decrease in rig counts, with nearly a 50% reduction since October 2014.Since vertical wells are less productive than horizontal wells, the overall effect of dropping a vertical rig is smaller than dropping a horizontal rig. Lastly, there is also an average four- to six-month delay between drilling and completion. Therefore, wells that were drilled during the second half of 2014 will come online in 2015, and the effect of fewer wells being drilled will be more obvious in 2016.The profitability of shale activity varies between different areas in a play depending on the combination of geologic factors (depth, thickness, thermal maturity). Hence, the economics of the wells also vary from less than $40/bbl to more than $100/bbl. With lower oil prices, activity will be concentrated in the best areas, and the rig count in less prospective areas will decrease. Even if rigs decreased an additional 30% compared to December U.S. ENERGYDevelopment CorporationWe Will Work With You! Call Us Today:800.636.7606 x 238 www.usedc.comWe are currently looking to acquire oil and natural gas assets in the following areas:We are also seeking additional leasing opportunities in Texas and Oklahoma(ground hoor or targeted acquisitions). Anadarko Basin Fort Worth Basin AppaIachian Basin Permian Basin WiIIiston BasinCurrentIy Acquiring OiI & NaturaI Gas Assets!Contact: Prospects@usedc.comTrusted Operator & Capital Providerfor over 30 Years2014 levels, production will remain steady through the remainder of the year. ABOUT THE AUTHORSPer Magnus Nysveen is senior partner and head of analysis for Rystad Energy. He joined the company in 2004. He is responsible for valuation analysis of unconventionalactivitiesandisinchargeofthe NorthAmericanShaleAnalysis.Nysveenhasde-velopedcomprehensivemodelsforproduction profile estimations and financial modeling for oil and gas fields. He has 20 years of experience within risk management and fi-nancial analysis, primarily from DNV. He holds an MSc degree from the Norwegian University of Science and Technology and an MBA from INSEAD in France.Leslie Wei is an analyst at Rystad Energy. Her main responsibility is analysis of unconventional activi-ties in North America. She holds an MA in Econom-ics from the UC Santa Barbara and a BA in Econom-ics from the Pennsylvania State University. 1503ogfj_15 15 3/3/15 3:40 PM16WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015AN INTERVIEW WITH MACQUARIEOIL & GAS FINANCIAL JOURNAL:Thank you all for taking the time to speak with us. First, let me ask you how the cur-rent low price environment has affected Macquaries energy business. Have some groups been affected negatively while others are actually seeing a bump in activity? NICK OKANE: Shifts in market environments create opportu-nities for our business. The shale gas revolution in North Amer-ica, for example, dramatically shifted the landscape for the US natural gas market. We were able to identify early that exporting LNG would be attractive as a result of these changes, and were abletoworkwithFreeportLNGtotakeadvantageofthis opportunity.The lower oil price environment has already begun to alter the supply and demand dynamics in that market. Some produc-ers are becoming stressed, increasing the need for structured financing solutions. Other projects are becoming more attrac-tive, which results in new customers looking for the products and services which we provide. Our business is well positioned tocapitalizeonopportunitiessuchastheseasthemarket continues to change.PAUL BECK: Without a doubt, the precipitous drop in oil prices and lets not forget gas prices are off quite a bit of late too hasresultedinmostdevelopmentdrillingintheUSbeing marginally economic at best. This has put a damper on our traditional project finance prospects. On the other hand, there has been a huge flight of public markets capital away from the industry of late. This has presented us with numerous refinance and second lien/stretch debt opportunities.Webelieve,oncepricessettledownabit,companieswill start transacting again and there should be quite a bit of M&A activity that will lead to attractive finance opportunities. Ad-ditionally, we are already seeing some relief in capital costs that should result in more drilling activity soon.Macquarie experts scrutinize industryFIRM SEES OPPORTUNITIES IN CURRENT LOW-PRICE ENVIRONMENTDON STOWERS, EDITOR OGFJ ALL PHOTOS BY SYLVESTER GARZA As a large international bank that is in multiple indus-tries around the globe, is Macquarie better insulated against a down market than certain regional banks that focus mainly on oil and gas?NICKBUTCHER:Asadiversifiedfinancialinstitution,our breadth of expertise is very broad, including investment bank-ing, advisory and capital markets, trading and hedging, funds management, asset finance, financing, securities, and research. Intheinvestmentbankinadditiontotheglobalenergyand commodities sectors, we have a range of sector specializations that include infrastructure, utilities and renewables, industrial companies, financial institutions, real estate, telecommunica-tions, media and technology and gaming We are also diversified by geography weve 28 offices around the world and the diversity of our operations, combined with a strong capital position and robust risk management frame-work, have contributed to our firms 45-year record of unbroken profitability.OKANE:Fromanenergymarketsperspective,weareinthe business of providing a range of products and services to cus-tomers with exposure to energy commodities rather than taking large directional bets on price movements. In a volatile environ-ment,theseproductsbecomeevenmoreimportanttoour customersbecausetheyallowthemtomeetneedssuchas managing their risks and financing their businesses. Historically, we have been able to benefit from periods of volatility and grow our business, either organically or via acquisition.Macquariesenergytradingoperationisimpressive. You are ranked as the third largest trader of natural gas in NorthAmerica,behindonlyBPandShell.Couldyougive our readers a brief overview of what Macquarie trades and how many traders you have? Is this your only energy trading floor, or is energy trading activity going on elsewhere as well?OKANE: The firm participates in markets covering all major energy commodities, including oil and refined products, natural gas, and power. We have more than 275 front-office employees, manyofwhomhavespecializedexpertiseinareassuchas meteorology, engineering, and logistics. We have a global pres-ence, spanning 10 offices with major hubs in Houston, London, and Singapore. This business is obviously seeing a lot of activity and changes in the energy landscape, due in part to the develop-EDITORS NOTE:Headquartered in Sydney, Macquarie is Aus-tralias largest investment bank. OGFJ recently spoke with four senior officials with Macquarie Nick OKane, Head of Energy Markets;PaulBeck,HeadofUpstreamCapital;NickButcher, Head of Americas Infrastructure and US Energy; and Nicholas Gole,HeadofEnergyandInfrastructureFinancing.Wewere able to get the four busy executives together in Houston for a group photo and to talk with us about Macquarie and its place in the energy sector.1503ogfj_16 16 3/3/15 3:40 PMMARCH 2015OIL & GAS FINANCIAL JOURNAL|WWW.OGFJ.COM17AN INTERVIEW WITH MACQUARIEIn an uncertain price environment, adequate risk management can make or break a project, or even a company. Our product offerings allow clients to protect themselves from risks inherent in these industries, and our physical capability allows us to structure solutions in unique ways that are ideal for energy-exposed clients. Nick OKaneInthecurrentpriceenvironment,thefinancings that we find are good fits for us may include a whole orpartialrefinancingofcorporatedebtcoupled with a commitment for further drilling. Or it may be a simple development drilling project with a compa-nythathasotherwisebecomecapitalconstrained. This may be funded through a project debt or equity structure. Paul BeckPrice downturns can create compelling consolida-tion opportunities for well-positioned players. Op-erators with strong balance sheets, ample liquidity, and hedged production are positioned to emerge from the downturn with enhanced scale, improved operating cost structure and higher-quality assets. Conversely, highly levered companies with inad-equate liquidity will struggle to survive. Nick ButcherWe worked side by side with Freeport LNG to help provide a comprehensive solution for the companys $11 billion terminal located in Quintana Island [south of Houston in Brazoria County, Texas]. Construction has begun on this project, and it is expected to be in commercial operation in 2018. Nicholas Gole1503ogfj_17 17 3/3/15 3:40 PM18WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015AN INTERVIEW WITH MACQUARIEment of new drilling technologies and completion techniques in tight oil and gas plays. Oil and gas markets are known for their volatility. What does this mean for clients and manag-ing their risk?OKANE:Inanuncertainpriceenvironment,adequaterisk management can make or break a project, or even a company. Our product offerings allow clients to protect themselves from risks inherent in these industries, and our physical capability allows us to structure solutions in unique ways that are ideal for energy exposed clients.BECK: We hedge as much of the price risk as we can in most of our project finance and stretch debt transactions. That has hugely benefitted our clients of late.Paul, you are responsible for the firms balance sheet with respect to its upstream capital activities. Your group, EnergyCapital,isaproviderofdebtandequitycapitalto energy and resources firms globally. Talk to us a little about what you do in the E&P sector and how this has changed in thelastsixmonthsorsoduetothesteepdeclineinoil prices.BECK: We provide capital up and down oil and gas companies balancesheetsfromtraditionalseniorreserve-baseloansto bothpublicandprivateequity.Thefoundationofoureffort comesfromourtechnicalstaffwith16petroleumreservoir engineers, geologists, and techs in our worldwide group (offices in Houston, Calgary, London, Sydney, and Singapore). This gives us the ability and confidence to fund capital into riskier projects than most banks would not find attractive from a risk-reward perspective basically, projects that have a high dependency on development drilling. In the current price environment, the financings that we find are good fits for us may include a whole or partial refinancing of corporate debt coupled with a com-mitment for further drilling. Or it may be a simple development drillingprojectwithacompanythathasotherwisebecome capital constrained. This may be funded through a project debt or equity structure. Are the global capital markets significantly different than those in the US, and to what extent are they are impacted by the general economy?BUTCHER: The recent commodity price volatility has shifted thementalityofbothissuersandinvestorsintheUScapital markets. Last year we saw many E&P IPOs at valuations reflect-ing the then commodity price outlook while others accessed high yield debt markets to fund acquisitions and exploration activity. However, E&P operators have been cautious in the recent commoditypriceenvironment,reducingcapexbudgetsto matchoperatingcashflowsandselectivelyaccessingcapital markets to enhance liquidity and balance sheet availability. With a range of views on valuation, the sector remains volatile but active. Moving forward, we anticipate operators to oppor-tunistically access capital markets with clear use of proceeds toselectivelyenhanceliquidity,pre-fund2015drillingcapex needs and provide acquisition financing. In general, how would you describe credit availability atthistime?Havethequalificationstightened significantly?BECK: I believe credit availability has decreased, but not neces-sarily due to a tightening of qualifications, but more a result of lowcommoditypricesfeedingintothefinancingequation. Most credit providers are looking for coverage and return both negatively affected by low oil and gas prices. Offsetting this to some extent will be lower costs. Additionally, during this low price period, some capital providers may be willing to bet some of their return on a price recovery, but I wouldnt expect anyone will assume a price recovery is necessary to get their principal investment back.Isthemidstreamsectorsomewhatimmunetothe difficulties caused by low commodity prices? After all, pro-ductioninNorthAmericacontinuestoincreaseevenas prices decline, so midstream operations must still be going full bore building pipelines, gathering lines, processing plants, etc.NICHOLAS GOLE: Midstream investors are somewhat insulated from swings in commodity prices. However, in recent years we have seen a shift towards acreage dedication contracts, rather than minimum volume commitments, so investors are exposed to production levels in the region. As a result, midstream invest-ment in core producing areas with existing volumes should be fairly insulated from the current commodity price environment, whereas midstream players that have recently invested in build-outstrategiesformoremarginalplayswillbemoreheavily impacted. In light of activity in the midstream sector, has the firm increased its resourcing in this space?BUTCHER: Midstream is a key practice area for us on the in-vestment banking side, and we continue to invest in the business. Weve a broad offering including M&A, project finance advisory, capital markets, and principal capital. Market activity remains high in the sector and our team is very active across a number of deals.GOLE: Despite the recent decline in commodity prices, we con-tinue to expand in the energy infrastructure sector as demon-strated through our continued hiring efforts as well as my own recent relocation from New York to Houston. The goal here has 1503ogfj_18 18 3/3/15 3:40 PMYou get good at doingThere is a process to everything we do and it starts with identifying the right questions and the important place to begin. Knowing where to start and what to ask comes from experience and discipline of thought. This is just the beginning of what we provide to our clients.Through our global network of firms with more than 195,000 people in 157 countries, we provide quality assurance, tax and advisory services to many of the worlds most successful companies. Tell us what challenges you are facing or find out more by visiting us at www.pwc.com 2014 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professionaladvisors.1503ogfj_19 19 3/3/15 3:40 PM20WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015AN INTERVIEW WITH MACQUARIEbeen to increase our focus on the energy infrastructure space. In particular, our success in the Freeport LNG transaction has led to transaction activity on a number of other LNG projects. What is the role of private investment in midstream in todays low-price environment?BUTCHER:Therearesignificantamountsofprivatecapital looking to deploy in the midstream and energy infrastructure space. We have deep relationships with many pension funds, insurancecompanies,andinfrastructurefundsglobally,and we are actively working with them to evaluate the best invest-ment opportunities available in the current environment.One interesting trend were seeing increasingly is upstream E&P companies looking to bring private infrastructure capital into their midstream assets for liquidity or to fund expansion capex. Were working on a number of situations like this at the moment. Does Macquarie provide any other forms of financing to industry participants?GOLE: Macquarie has a merchant-banking model, in that we can provide a very flexible range of financing solutions to clients to help facilitate transactions. For example, various parts of the firm can provide equity, mezzanine, or senior financing to help clients in a range of situations. But importantly, we can also provide development capital to support clients taking on new projects.OKANE:Macquariesrangeofcapabilitiesalsoallowsusto provide less traditional sources of structured financing to cus-tomers. For example, our ability to trade in physical commodities markets allow us to do things such as financing crude inventories for a refinery, or financing gas in a pipeline until such time as it is needed by a utility.Naturalgasproducershavebeenlookingforwarda long while to the prospect of being able to export gas in the form of LNG in order to take advantage of higher commodity pricesoutsideNorthAmerica.Canyoutalkalittleabout MacquariesinvolvementinLNGexportprojectsandthe timetable for exports to commence? On the regulatory side, is permitting still too slow? Any sign this will improve?OKANE: We identified early that exporting LNG would be at-tractiveasaresultofthechangingmarketlandscapewhere supply and demand regions have dramatically shifted as a result of shale gas. Our longstanding relationship with Freeport LNG is one example of where we were able to help a client take ad-vantage of this opportunity.GOLE:WeworkedsidebysidewithFreeportLNGtohelp provide a comprehensive solution for the companys $11 billion terminal located in Quintana Island [south of Houston in Bra-zoria County, Texas]. Construction has begun on this project, and it is expected to be in commercial operation in 2018. In addition to the terminals under construction, there are a number of LNG export projects being discussed. But we antici-pate only a handful of these will commence construction in the next few years. The outcome will be largely based on the ability of projects to obtain commercial agreements to support financ-ing, as opposed to any fundamental regulatory hurdles. OneoftheseprojectsisJordanCoveLNG,whichweare advising on the development of an LNG export terminal in Coos Bay, Oregon. Fromamacroperspective,whowillbethewinners andlosersfromthecurrentdownturn?Whattrendsin M&D&D do you expect to see?BUTCHER: While commodity price downturns are a headwind toE&Pearnings,theycancreatecompellingconsolidation opportunities for well-positioned players. Operators with strong balancesheets,ampleliquidity,andhedgedproductionare positioned to emerge from the downturn with enhanced scale, improved operating cost structure and higher-quality assets.Conversely, highly levered companies with inadequate liquid-ity will struggle to survive in a persistently low commodity price environment. E&P producers that have recently accessed debt capital to fund largely undeveloped acquisitions may struggle to meet obligations and honor drilling commitments, and ul-timatelymaynotbeabletoholdnewlyacquiredpositions, which would drive motivated divestiture activity. For the short term, we expect A&D transaction volume to decrease significantly given the near-term uncertainty in com-modity prices. The bid/ask between buyers and sellers will likely remain wide until commodity prices stabilize. If prices stay down through the second quarter, we expect to see transaction activity pick up as companies look to adjust to lower borrowing bases. If low prices continue through 2015 and beyond, how do you expect the overall composite of operators and par-ticipantstoevolve?Willweseeamajorshake-outinthe industry? Please describe the scenario you envision.BUTCHER: We expect to see accelerated consolidation within the industry as small/mid cap names seek an exit via corporate M&A.Consolidationwilllikelyincludestock-for-stockdeals, as well-capitalized mid/large caps opportunistically consolidate small/mid cap names seeking production and reserve growth, costsavings,andhigh-gradeddrillingactivityviaenhanced scale. We anticipate private equity sponsors to opportunistically target over-levered or non-core asset divestitures by strategics, providingaconstructiveoutletforfundsraisedbyfinancial sponsors over the previous few years.Additionally, we see a continuing change in the buyer land-scape. The amount of private capital available in the oil and gas industry has continued to increase in recent years, becoming a significant portion of the market for assets. At the same time, 1503ogfj_20 20 3/3/15 3:40 PMMARCH 2015OIL & GAS FINANCIAL JOURNAL|WWW.OGFJ.COM21AN INTERVIEW WITH MACQUARIElow commodity prices will put pressure on public companies and MLPs ability to finance acquisitions. Ultimately, the land-scape of the industry is highly contingent on where commodity prices stabilize. However, we believe a small number of well-capitalized operators are clear winners and are well poised to act as consolidators in the industry. OKANE: In the refinery sector specifically, increasing capacity in Asia is already shifting demand centers for crude.A continued low price environment would result in a fundamental shift in productionregions,furtheralteringtheglobalflowof products. How is Macquarie positioning itself across the value chain as a result of the market volatility?OKANE: Our capabilities allow us to provide financial, physical, andstructuredfinancingsolutionscustomizedtoeachcus-tomers needs, whether they are in distress or looking to take advantage of the current market conditions. Our global coverage is critical to our being able to capitalize on opportunities across markets and geographies as they arise.Canyoucompareandcontrastthecurrentmarket conditions including M&A&D activity to the low-price environment in 2008-2009?BUTCHER: Both 2008 and 2014 were record years of US onshore E&P M&A activity followed by dramatic declines in commodity prices. Currently, there is a very low level of activity, which is similar to what happened in the first quarter of 2009. The key difference that we are seeing currently is that demand for assets is much higher than early 2009. The rapid rebound of oil prices in the second half of 2009 made acquisitions during that time very lucra-tive, and there are many buyers, both strategic and private equity, looking to capitalize on what they see as a similar situation.Doesthismean2015likelywillseeanincreasein M&A&D activity?OKANE: Increased activity is likely in 2015, as distressed market participants seek out structured financing or pursue asset sales. Other participants that hedged before prices fell may be looking to monetize those positions and reposition themselves for the current environment, potentially through deleveraging or mak-ing strategic acquisitions.Macquaries Paul Beck (right) confers with Janet Dietrich and Ozzie Pagan in the Houston office.1503ogfj_21 21 3/3/15 3:40 PM22WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015AN INTERVIEW WITH MACQUARIEBUTCHER:Aspricesstabilize,M&Aactivitywillincrease though they will probably still be down on 2014 activity. Were goingtoseeactionarounddistressedoperatorsaswellas consolidation plays, and private capital looking to take advan-tage of the dislocation. Which plays do you think will see the greatest level of M&A&D activity? Drilling and completion costs are higher in the Bakken, for example, than in some other shale plays. Doesthantranslatetomoreactivitywithsmallerplayers and over-leveraged participants forced to sell assets?BECK: It really comes down to the economics of the specific areasofeachplay.Webelievethecoreareasofmostthese shale plays still provide decent economics while areas outside the cores are currently not economic at these prices. I wouldnt think there will be much A&D activity in non-core areas for the time being. And some over-leveraged companies may be forced to sell their core acreage and production.BUTCHER: Outside of core plays, capex reductions will focus on lower performing assets.The focus is moving to improving efficiencies and reducing costs in core areas. Pure play compa-nies have been hit the hardest in the Bakken and Eagle Ford, but its unlikely theyll sell off core assets unless forced. The first wave of activity is going to be non-core assets that distressed companies can monetize while retaining their core focus areas for reserve growth and replacement. Ultimately, what will happen in a prolonged commodity downturn environment?OKANE: Lower prices persisting over the longer term would ultimately lead to fundamental shifts to the flow of crude oil andproductsaroundtheglobe,leadingtodeclinesinsome areas and increasing the need for new infrastructure and invest-ment in others. At a macro level, lower prices could be an enabler tofutureeconomicgrowth,butcouldalsoleadtounrestin countriesfacingsignificantcutbacksasaresultoflower prices.BECK:Itshardformetobelievecommoditypriceswillstay lowforaprolongedperiodoftime.Nevertheless,theUShas drilled for and produced a lot of oil and gas at prices much lower than what we are experiencing now, and I have to believe that wont change going forward.Macquarie trading floor in Houston1503ogfj_22 22 3/3/15 3:40 PMMARCH 2015OIL & GAS FINANCIAL JOURNAL|WWW.OGFJ.COM23AN INTERVIEW WITH MACQUARIEFinally,oneyearfromnow,whatdoyouthinkthe NYMEX WTI crude oil price will be? What do you think the NYMEX Henry Hub natural gas price will be?VIKAS DWIVEDI (Oil & Gas Strategist, Macquarie Securities): We believe the balance of this year will be extremely volatile with periods of sharp price rallies and equally rapid price de-clines. By year-end, we expect WTI prices to be approximately $70 per barrel. We expect US crude oil inventory builds to aver-age between 0.5 and 1.0 million barrels per day through at least the middle of 2015. As the year progresses, annualized crude oil production should slow from its recent 1.0 million barrels per day rate. We expect US production growth to finally stop growingin2H15,andoverallproductionmayevendecline slightly by YE15. In the process, the significant global and do-mestic oversupply will be reduced to a more manageable level allowing a price recovery back to the $70 range. A higher price than$70wouldbepossibleifnotforthelargedomesticand global inventory overhang that will persist into late 2015 and even into 2016.By YE2015, we expect the 12-month forward curve for NYMEX natural gas to be at $3.25 per MMBTU. Our modeling indicates thatthebalanceof2015willbecharacterizedbypersistent oversupply resulting from continued production growth that has not been slowed by low prices, slow demand growth, and evenlogisticalconstraints.Whilewedoexpectsignificant demand growth, beginning in 2016, there is very limited demand growth in 2015 as a result of new projects startup schedules. In fact, by the end of summer 2015, the US natural gas industry maybefacingasignificantinventoryproblem.Ifnaturalgas storagereachesthemaximumcapacityofapproximately4.2 trillion cubic feet, it will create an overhang for 2016 forward prices that could take at least several months to work off. Our $3.25 price expectation is anchored by our view that demand growth in 2016 will be a source of optimism. Additionally, for-ward prices may be buoyed by the potential for the first decel-eration of gas production growth in five years as a result of lower wet gas drilling and lower associated gas production growth.OKANE: It is worth reiterating that our business is not dependent on directional moves in prices. We are a client-centric business, and while our clients needs may change as a result of market conditions, our range of capabilities allows us to provide valuable products and services regardless of where prices are at.

Thank you all very much for your time.1503ogfj_23 23 3/3/15 3:40 PM24WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015AFTER AN UNPRECEDENTED NUMBER of initial public offerings and acquisitions in2014,theoilandgasindustryisnow reelingfromthesubsequentdeclinein commodity prices. As of Jan. 9, 2015, spot crude oil and natural gas prices have re-spectively decreased 54% and 33% since June2014andhavedecreased47%and 28%,respectively,sincethestartofthe fourth quarter of 2014. The industry last saw such pricing changes in 2008. Withthesignificantdeclineincom-modity prices, its not just E&P companies operations, finance and treasury functions thatfindthemselveshavingtorethink their 2015 capital, leverage and liquidity plansaccountingteamsmustalsore-fresh their understanding of the rules sur-roundingimpairmentcalculationsand reportingreserves.Therecentprice changes are likely to result in significant accounting and financial reporting impli-cations for the industry as of Dec. 31, 2014 and for each quarter in 2015. KEY FINANCIAL REPORTING CON-SIDERATIONS: IMPAIRMENTSSuccessful EffortsForcompaniesfollowingtheSuccessful Effortsmethodofaccounting,therules governingimpairmentarespecifiedin ASC 932-360 and ASC 360-10. Note that theserulesareverydifferentfromall depletion calculations and the Full Cost ceiling-test.1 The Successful Efforts impairment cal-culation is a two-part test requiring further evaluation if reserves undiscounted cash flows are less than book value (Step 1), in which case, an impairment is calculated by comparing the reserves book value to theirfairvalue(Step2,discountedcash flows).Unlikeadepletioncalculation,a SuccessfulEffortsimpairmenttestre-quirescashflowstobevaluedusinga E&P Impairments loomingLOWER COMMODITY PRICES WILL IMPACT INDUSTRY THROUGHOUT 2015JOSH SHERMAN, WADE STUBBLEFIELD, STEPHEN PATTON OPPORTUNE, HOUSTONforward market strip price curve and a companys credit-adjusted market discount rate as of the measurement date (e.g., quarter- or year-end).The cash flows should consider proved reserves as well as risk-adjusted probable and possible reserves based on the companys development plans. The estimates and development plans utilized in such determination should be reasonable in rela-tion to the assumptions used by the entity for other purposes (e.g., internal budgets, projections regarding the realization of deferred tax assets, and information com-municated to the companys board of directors). Under Successful Efforts, hedge-adjusted prices are not considered. Also note that unevaluated properties should be assessed on a property-by-property basis, and if not practical, companies should assess in the aggregate or by groups. Aiksing | Dreamstime.com - Imminent Economic Crisis Photo1503ogfj_24 24 3/3/15 3:40 PMMember FINRA. Investments in oil and gas properties involve substantial risk including the possible loss of principal. These risks include commodity price uctuations and unforeseen events that may afect oil and gas property values.CONTINUOUS ONLINE AUCTION RAPID-CYCLE SEALED BID SALES NEGOTIATED SALES STATE LEASE SALESThe Marketplace is ready when you are.www.energynet.com877-351-4488DiscoverThe MarketplaceEnergyNet helps people sell oil and gas properties. We provide a steady stream of opportunities for buyers to evaluate.We specialize in the sale of producing elds, operated working interests, non-operated working interests, overrides, royalty interests, non-producing minerals, non-producing leasehold, and state leases.We facilitate sealed bid, negotiated, private and auction transactions, and specialize in deals valued from $100K up to $50MM.EnergyNets advantages are:1.our broad and frequent access to buyers in the market 18,000 buyers and growing,2. our high 84% sales close rate, and3. our speedy sales process.We have a platform and marketing process that consistently works. Visit www.energynet.com or call 877-351-4488. Contact us today, and come discover The Marketplace!1503ogfj_25 25 3/3/15 3:40 PM26WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015WTI-CRUDE OILOil $/bbl1601401201008060402001 2 3 4 5 6 7 8 910 11 12 13 14 15 16 17 18 19 20 21 22 23 246/30/2008Two year price strip1/9/2015 1/9/2009 6/30/2014 Companies may be forced to reassess the classification of certain reserves sooner than expected as commodity pric-es change well economics and drilling plans. While compa-nies have considerable latitude in what wells are included in their capital plans, expect the SEC and independent au-ditors to closely monitor and question the five-year life of PUDs and companies ability to finance such drilling.Full CostFor companies following the Full Cost method ofaccounting,theceilingtestunderRule 4-10ofSECRegulationS-Xspecifiesthat evaluatedpropertiescapitalizedcosts,less accumulatedamortizationandrelatedde-ferredincometaxes(theFullCostPool), should be compared to a formulaic limitation (the Ceiling) each quarter. The Ceiling is equal to the following: present value of proved reserves estimated future net revenues; plus, lowercostorestimatedfairvalueofun-provenpropertiesincludedinthecosts beingamortized;andcostofproperties not being amortized;less,thebook-taxdifferencesrelatedto, andanyNOLsgeneratedby,oilandgas properties currently included in the com-panys depletion calculation.The reserve pricing utilized in calculating theCeilingisthearithmeticaverageofthe trailing12monthsfirst-of-monthpricing (SEC Pricing), which will potentially delay impairments until prices from early 2014 roll-out of the 12-month average and are replaced with lower pricing from 2015. Cash flows must be discounted at 10% (PV10). Hedge-adjust-ed pricing is only available to Full Cost com-panies if the derivatives were formally desig-natedascashflowhedgesforaccounting purposes. If the companys Full Cost Pool exceeds the Ceiling,animpairmentmustberecorded. Unevaluatedpropertiesareassessedona property-by-property basis, and if not practi-cal, companies should assess in the aggregate or by groups. REPORTING CONSIDERATIONSAll other factors being equal, using forward strip pricing rather than a historical average mayresultinSuccessfulEffortscompanies reporting impairments sooner than Full Cost companies. Of course, not all factors are equal and additional nuances exist within industry reporting requirements. Industry stakeholders should also consider the effects such differ-ences may have on footnotes, borrowing base determinations and managements discussion and analysis. Oil and natural gas reserves ASC932stipulatespublicly-tradedcompaniesapplyastandardmeasurefor supplementallydisclosingoilandgasreservevolumesandpresentvalue(the Standardized Measure). Although the Standardized Measure requirements are intended to provide a common reporting framework by which to compare all public oil and gas companies, confusion may still exist among financial statement preparers and users.The commodity price (SEC Pricing) and discounting methodologies (PV10) used in the Standardized Measure mirror those applied by Full Cost companies; therefore, Successful Efforts companies may record impairments that may not be apparent in SEC disclosures. The passing of the SEC Modernization of Oil & Gas Reporting, effective Jan. 1, 2010 and applied for fiscal years ending or after Dec. 31, 2009 (the SEC Modernization), also means that some current Standard-ized Measure rules were not in effect during the industrys previous commodity price crisis in 2008. In addition to SEC Pricing changing from the companys realized price as of the balance sheet date (as compared to the arithmetic 12-month average in use today), the SEC Modernization now requires that proved undeveloped (PUD) reserves include only those wells that the company plans and has the financial ability to drill within five years of the balance sheet date. Companiesmaybeforcedtoreassesstheclassificationofcertainreserves sooner than expected as commodity prices change well economics and drilling plans. While companies have considerable latitude in what wells are included in their capital plans, expect the SEC and independent auditors to closely moni-1503ogfj_26 26 3/3/15 3:40 PMMARCH 2015OIL & GAS FINANCIAL JOURNAL|WWW.OGFJ.COM27torandquestionthefive-yearlifeofPUDsandcompanies ability to finance such drilling. Income tax ramifications In most cases, tax law does not follow GAAP in allowing a cur-rent year tax deduction for impairments due to more stringent rulesforlosses.Assuch,theimpairmentexpenseisoften treated as an unfavorable temporary difference in the period recorded.Thechangeinthedeferredtaxliabilityfromthis unfavorable temporary difference should be recorded using the marginal tax rate applicable to the book-tax basis difference in properties(andnottheestimatedannualeffectivetaxrate). While this in and of itself does not have a direct impact on an entitys effective tax rate, preparers of financial statements must consider the need to record a valuation allowance at that time if the impairment causes the (impaired) book carrying value of the properties to exceed their (unimpaired) tax bases. The SEC staff tends to interpret the ASC 740 literature rather conserva-tively in this area. The presence of a valuation allowance would reducetheexpectedtaxbenefittorecordatthetimeofthe impairment. Borrowing base determinations There are no common rules applied across all lenders and, as default risk increases along with commodity price decreases, it should be expected that the borrowing base inputs employed by lenders may not be consistent from period-to-period. The valuationinputsandmethodologyusedinareserve-based borrowingbasedeterminationaremorecloselyalignedwith the fair value metrics used in a Successful Efforts impairment calculation, but all companies may experience downward bor-rowing base revisions that were not apparent from their impair-ment calculations and Standardized Measure disclosures. The discount rate used by banks is almost always 9%. In addition, the price curve used by banks is typically fairly flat and below the current spot price. Although lenders give companies credit for hedge pricing, note that cross-default provisions may result in a liquidity covenant default terminating the same derivative instruments designed to protect the company. Managements discussion & analysis: Market & liquidity risk disclosures The current price environment will continue to have significant disclosure impacts on the oil and gas industry throughout 2015 and at least the 2nd quarter of 2016, but the proper understand-ing, consideration and expanded disclosure of the accounting ruleswillassistineliminatingreportingandliquidity surprises. Consider including risk disclosures within MD&A based on anassumptionthatcurrentpricespersistthrough2015.We suggest describing the potential amount, timing, and probability of the following events occurring in future periods, as well as managements plans to remedy any liquidity or going concern issues: ceiling-test write-downs, particularly as higher prices roll-out of the average used to calculate SEC Prices; material revisions to the volumes and PV10 disclosed in the Standardized Measure; covenant defaults and/or borrowing base adjustments; cash flow and production risks associated with non-operated properties; lossofvalueincarriedinterestsorotherjointventurear-rangements when there is a limited time to execute on prop-erties not held by production; and changes in time to realize a reversion in net profits or over-riding royalty interests, or to repay volume-based or dollar-denominated variable production payments. NOTE: This article does not discuss the costs that may be capi-talizedundertheSuccessfulEffortsvs.FullCostmethodsof accounting.ABOUT OPPORTUNE OpportuneLLPisaninternationalenergyconsultingfirm specializing in assisting clients across the energy industry, in-cluding upstream, midstream, downstream, power, commodities trading, and oilfield services. Opportunes service lines include: complex financial reporting, corporate finance, dispute resolu-tion, enterprise risk, outsourcing, petroleum engineering and geosciences, process and technology, process engineering, re-structuring, strategy and organization, and tax. ABOUT THE AUTHORSJosh Sherman is the partner in charge of Oppor-tunes complex financial reporting group. He has morethan16yearsexperienceprovidingclients across the energy spectrum with technical research, capitalmarkets,andSECreportingassistance. Sherman specializes in IPOs, variable interest enti-ties, purchase price allocations, energy trading, and derivatives, stock-based compensation and oil and gas disclosures. WadeStubblefieldisamanagingdirectorinthe corporate finance and complex financial reporting practices of Opportune. He has 25 years experience in corporate finance and technical accounting with experience across the energy spectrum (upstream, midstream, downstream and wholesale and retail energytradingandmarketing).Stubblefieldhasservedina number of industry roles from CFO to CAO and controller.Stephen Patton is a director in Opportunes complex financialreportinggroup.Hehasmorethan12 yearsexperience,includingfinancialstatement and internal control audits, technical accounting, and SEC regulations. Prior to joining Opportune, Patton was a senior manager in the audit and en-terprise risk services department at Deloitte & Touche.1503ogfj_27 27 3/3/15 3:40 PM28WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015DECLINING US OIL PRICES and new environmental and rail-car safety regulations are expected to dampen North Dakota Bakken Shale production in 2015, while narrow crude-by-rail arbitrage margins may limit spot market destinations for the crude that has become less economic for some refiners. The Bakken shale oil boom in North Dakota produced over 1.1million barrels of oil per day by the end of 2014, according to the North Dakota Department of Mineral Resources. But by September 2015, Bakken rig counts are expected to decline to anall-timelowof81,downfromahighof181inSeptember 2014dueinparttoweakerglobalcrudeprices,accordingto Genscape. In late January 2015, the Bakken rig countstood at 154. In addition, rig counts nationwide are poised to decrease by more than 600 to 735 by September 2015.Spot Bakken prices at North Dakota crude-by-rail terminals decreased nearly $56/bbl to $36.10/bbl between January 2014 and January 2015. Bakken crude prices declined alongside major Will the Bakken boom go bust?NORTH DAKOTA SHALE PLAYERS FEELING THE SQUEEZEFROM WEAK OIL PRICES AND SAFETY REGULATIONSBRIDGET HUNSUCKER, GENSCAPE, HOUSTONHILLARY STEVENSON, GENSCAPE, LOUISVILLE, KYweakness in the global crude complex in 2014. Following OPECs November 2014 meeting, crude prices fell tolessthan$50/bblandsetnewsix-yearlowsforbothWTI andBrent.CitingthethreatofUSshaleoilasajustification, OPEC decided to maintain output levels to retain market share. In turn, supply and demand economics pulled down the price of crude, which may push some US shale oil plays underwater in the long term. The most recent International Energy Agency estimatesshowthatshaleproducerswillbreakevenat$42/bbl.Break-evencostsforoperationalrigsinNorthDakotaare near $15/bbl, and tax exemptions may be enacted if crude costs continuetoremaindepressedinordertoincentivizecapital investment, the North Dakota Department of Mineral Resources said in December 2014.North Dakota has two tiers of tax incentives. One is for new horizontal wells completed in a month following a month where 1503ogfj_28 28 3/3/15 3:40 PM1503ogfj_29 29 3/3/15 3:40 PM30WWW.OGFJ.COM|OIL & GAS FINANCIAL JOURNALMARCH 2015F1: BAKKEN TRANSPORTATION FLOWS YEAR OVER YEAR1 3 5 7 911 13 15 17 1921 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 bpd700,000600,000500,000400,000300,000200,000100,0000Weeks2013 Genscape monitored rail 2013 Genscape monitored pipeline2014 Genscape monitored rail2014 Genscape monitored pipeline2015 Genscape monitored rail 2015 Genscape monitored pipelineWith Brent trading very close to WTI, Cushing (Okla.) seems like the best market for Bakken crude now. It would be better to send it there by pipeline than rail, but if you have a bunch of rail-cars and a termi-nal, then I guess it makes sense. Sandy Fielden, RBN Energy analystthe average price of West Texas Interme-diate falls below $57.50/bbl. The second, broadertiertaxincentivewouldtake effect if the average price of WTI remains at or below $55.09/bbl for five consecutive monthsandappliestoallwellsforthe first24monthsinproduction.Should bothofthesepricethresholdsbemet, NorthDakotacouldfacetaxrevenue losses near $100 million a month.NORTH DAKOTA RAIL,PIPELINE FACE OFFLike Bakken prices, North Dakota crude-by-railloadingvolumeshavealsode-clined,asthebenchmarkpricespread between Brent and WTI crudes, a leading indicatorofUScrude-by-railvolumes, narrowed. The spread tightened over $8/bbl from January 2014 to January 2015 to $3.73/bbl with January average rail load-ingsat506,000bpd,55,000bpdlower than average rail loading volumes in Janu-ary 2014, according to Genscape. Rail volumes have decreased in part withani