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‘Drillers and Dealers’
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Foreword
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„Drillers and Dealers‟ – July 2010 Edition
About The Oil Council and „Drillers and Dealers‟
The Fallacy of „Easy Oil‟ o By Robin Mills, Energy Economist and Author of 'The Myth of the Oil Crisis'
Waste to Energy – A Recyclable Hydrocarbon Footprint? o By Ennio Senese, Executive Partner, Resources, Accenture
Oil Council Assemblies
Shale Gas Comes To Europe – Another “Game Changer”? o By Doug Glass, Partner and Greg Hammond, Partner, Akin Gump Strauss
Hauer & Feld LLP
„On the Spot‟ with our Question of the Month (Part One) o “Do you except an increased wave, a stagnant lull or sporadic activity of new
M&A/A&D transactions in Q3 and Q4 of 2010?”
„On the Spot‟ with our Question of the Month (Part Two) o “How significant a role will unconventional oil (extra heavy oil, oil sands and
oil shale) and unconventional gas (CBM, shale gas, tight gas) play in tomorrow’s global energy mix? Are these unconventionals now in fact becoming conventional?”
“Wall Street Investor” (Column) – PE Investing: Setting the Record Straight o By Ziad Abdelnour, President & CEO, Blackhawk Partners, Inc.
“Golden Barrels” (Column) – The Market is The Market o By Simon Hawkins, Head, Oil & Gas Research, Ambrian
“The Oil Outlook” (Column) – Fears of Weaker Recovery Mire Crude Markets
o By Gianna Bern, President, Brookshire Advisory and Research
A Nightmare Well o By Elaine Reynolds, Oil Analyst, Edison Investment Research
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The Fallacy of ‘Easy Oil’
Written by Robin Mills, Energy Economist and Author of 'The Myth of the Oil Crisis'
There is one thing on which almost all pundits, industry veterans, forecasting agencies and members of the public seem to agree. Energy, particularly hydrocarbons, is going to get ever scarcer and more expensive. The „age of easy oil‟ is over. Former Shell CEO Jeroen van der Veer opined in April 2008 that, “Easy oil and easy gas...is simply depleted” and that December, his unlikely soul-mate, Russian Prime Minister Vladimir Putin, concurred: “The era of cheap energy, including cheap gas, is coming to an end”. Oil prices remain high by historic levels, and the continuing Macondo disaster in the Gulf of
Mexico seems to confirm the belief that the oil industry is venturing into ever more-challenging frontiers. Business plans and economic projections are founded on the belief in the end of easy oil. It predicts a rosy future for the Middle East and Russia, drives growth in renewable energy and alternative vehicles, and leads many to worry about „peak oil‟, resource wars and a collapse of industrial civilisation. But what if this belief is wrong? Resources in the ground are clearly abundant. Canadian Association of Petroleum Producers Vice President Greg Stringham, pointing to the 175 billion barrels recoverable from the Canadian oil sands, says, “It won't be a lack of resources that causes a shift away from oil. There's lots of oil.” The United States Geological Survey recently updated their estimates for recoverable oil from Venezuela‟s Orinoco Belt to 513 billion bbl. Compare this to BP‟s estimate of some 1200 billion bbl of global conventional oil reserves. Some shale formations, such as the US‟s Bakken and Eagle Ford, contain substantial amounts of oil and natural gas liquids too, a form of unconventional oil which has emerged from nowhere in the past few years. Traditional onshore light crude, though often inaccessible to the international oil companies, remains plentiful too. We might be sceptical of Iraq‟s plans to reach some 12 million barrels per day output by 2015, despite the assistance of Shell, Total, ExxonMobil, CNPC and others. The political, security and logistical challenges are clearly huge. But most industry observers agree that, in the longer term, the technical potential is there. Iraq‟s reserves are likely to increase substantially once the supermajors start work, not to mention the almost unbroken string of discoveries in the Kurdistan region. Next door, despite sanctions and mismanagement, exploration successes in Iran suggest substantial remaining potential: at least 21 billion bbl found since 1998 in four fields near the Iraqi border. Saudi Arabia has substantial spare capacity, while Kuwait and Abu Dhabi recently updated ambitious plans for production gains. Non-OPEC is not slacking either. Despite high taxation, maturing fields, often outdated technology and a capricious legal environment, Russian production continues to creep up. Kazakhstan‟s long-delayed Kashagan field will finally come onstream around 2013 and yield more than 1 million bbl per day. Brazil‟s enormous pre-salt play continues to deliver new discoveries and is now moving into early production. At the same time, frontier exploration is finally yielding fruit, with major finds in Ghana and Uganda, and promising signs in areas such as Mozambique, the Falklands Islands and Greenland. And we should not forget the potential of old fields. Global average recovery factors hover around 33%, but 50-60% is often achieved in the North Sea and onshore USA, indicating a vast, low-risk prize for better reservoir management and more systematic use of enhanced oil recovery. Mature areas such as Colombia, Egypt and Oman are rebounding impressively from some years of decline. Instead of fears that non-OPEC production had peaked, the IEA now sees output broadly flat to 2015. Admittedly, action following the Macondo blowout may hamper US deepwater production, but elsewhere in the world, higher safety standards are to be welcomed, and probably mean only moderately higher costs. During the decade to 2009, stimulated by high oil prices, reserves increased in every region and by 23% overall, even excluding the undeveloped portions of the Canadian oil sands. Production growth, running at 1.1% annually during the 1990s, accelerated under the stimulus of Asian demand to 1.4% per year from 2000 up to the onset of the economic crisis. As for gas, the success of US shales has demonstrated that fears earlier this decade of a shortage were wildly pessimistic. Led by technology, the industry was able to respond to high prices, and demonstrate that
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unconventional resources can be brought into play fast enough to make a difference. Europe, China, Australia, Indonesia, South Africa and India are now all looking seriously at shale gas and coal-bed methane. With no OPEC to cut production, gas prices remain well below oil on an energy-equivalent basis. Remaining global gas resources may be as much as 12400-20800 Tcf, plus a more speculative 6000 Tcf of unconventional gas outside North America. At the upper end, this equates to 250 years of current production. Add to this the enormous potential of coal gasification, the conversion of coal and gas to liquid petroleum, the significant if problematic role of biofuels, and the tantalising potential of gas hydrates and cooking oil from kerogen shales. How do we reconcile this abundance of resources with fears of declining production? The result is the appeal to „the end of easy oil‟. The argument goes that new petroleum supplies, though available, are more difficult and costly than before, requiring new technology, located in remote or unstable regions, or environmentally damaging. Hence at best, prices will continue to rise; at worst, some of these resources may be permanently inaccessible. Yet the idea of easy oil ignores history, and the advance of technology. There has never been an age of easy oil. Drillers in Persia in the early 1900s had to contend with smallpox, hostile tribes, corrosive water and misleading surface geology. North Sea roughnecks of the 1970s faced mountainous seas, blowouts and massive cost over-runs. Technology advances in line with our needs. Drilling in two kilometres of water was unthinkable in the 1990s; now, it is almost routine. Much of the run-up in industry costs this century is the result of inadequate investment in the previous decade, and a consequent shortage of engineers, geologists, rigs and steel. In the early 2000s, oil sands developments were thought to require an oil price around $30 per barrel; now $80 is often quoted. Yet the geology has not changed, while technology has advanced significantly. Given time, these bottlenecks can be remedied. Oil extraction costs are a constant battle between increasing depletion and advancing technology. Once we crack the secret of developing a large resource, such as shale gas or extra-heavy oil, costs fall over time as we gain experience. Yes, many unconventional plays have higher development costs and require special approaches, but they have no exploration risk, and are typically located onshore in stable countries. As some of the US gas shales are cheaper than traditional North American plays, unconventional resources are becoming conventional. Talking about the „end of easy oil‟ is an admission that we have failed as an industry. It gives entirely the wrong message. It tells countries lucky enough still to have some „easy oil‟ that there is no point opening up to international investment, and no risk of competition if they don‟t. It tells bright young people at university that petroleum is a sunset business and they should look elsewhere for a career. And it tells the general public that energy prices are only going to rise, and that society should make costly efforts to develop alternatives to oil and gas. These are dangerous trends, at a time that many people are already hostile to the petroleum industry on environmental grounds. Instead, the message should be that we are developing the technology and business models to turn difficult petroleum into easy and environmentally acceptable energy. That is how international oil companies can keep themselves useful and relevant to the leading oil nations, and to the globe‟s energy consumers.
By Robin Mills Robin M. Mills is a Dubai-based energy economist, and author of ‘The Myth of the Oil Crisis’ You can contact Robin directly at: [email protected] The Myth of the Oil Crisis’ explores myths surrounding the global consumption of oil.With oil prices rising, drivers wince whenever they pull into the petrol station and businesses watch their bottom lines shrink. Predictions suggest that the situation will only get worse as oil dries up. It's a plausible argument, especially considering the rate at which countries like China and India are now using oil. Even more worrisome, the world's largest oil fields sit in unstable, geopolitical hotspots like Iran and Iraq. More information on his book can be found at: www.oilcrisismyth.com
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Waste to Energy – A Recyclable Hydrocarbon Footprint?
Written by Ennio Senese, Executive Partner, Resources, Accenture Volatility, Uncertainty and Interdependence These are the buzz-indicators of today’s world and as recent events show, the world is more interconnected and unpredictable than ever before. The recent fall outs in the economy and environment have exposed us to enormous challenges and provide evidence how nations are really interdependent. In Europe for example, Greece is clearly not alone facing the economic financial crisis, and environmental disasters, whether natural (Iceland) or by likely human error, (Gulf of Mexico) are also confronting us with our duty to define the kind of global economy and environment we want for tomorrow. Governments, although often blindfolded by national sentiments and interests, leaning on the mandate given by their electorate, seem to understand that it is their responsibility to devise sound policies for a stronger and more sustainable economy and environment. Clean and affordable energy, including renewable and sustainable forms of energy, should be a central element of these efforts. Arguably Sustainability leans on two E-pillars: Economy and Environment.
The increase in global energy demand and the decrease of easy oil and natural gas is driving the market towards alternative energy sources. This issue cannot be neglected. The IEA projects that between 2005 and 2030 global demand for energy will increase by over
50%. Assuming that in 2030 oil provides the same percentage of global energy that it did in 2005. This energy demand increase will cause an additional 30 billion barrels of oil to be consumed annually. A key-factor behind the astonishing increase in energy demand is the growing economies of the emerging markets. As countries industrialize, more energy is required for economic growth and to increase standards of living. Strong per capita income growth, rapid industrialization, and rapid population growth are all contributing factors to the increase in global energy demand. With urbanization and improvement in standards of living, the demand for energy increases. The increasing demand for energy is limited by irreplaceable and ultimately ending petroleum reserves. According to the EPA, domestic oil field production in the U.S. has become increasingly expensive, as easy-oil has already been exploited. Some experts speculate that global oil production has reached a maximum and that production will soon enter a terminal state of decline. Alternative technologies will be needed to supply increasingly precious oil to the global economy. My thought on this, is that Peak Oil will never be reached as at one point in time the economics of difficult oil exploration in combination with the ever increasing environmental impact of growing conventional consumption of Hydrocarbons, will push the sense of urgency to come with alternatives, of which we had a preview already in 2009 when new energy ballooned everywhere, with a cost indicator about half of the $/bbl in that year. Despite the temporary decline in crude oil prices during the current global economic downturn, a $170 per barrel by 2020 is not unthinkable and will trigger the effect described before. When we speak $/bbl, we tend to think in terms of fuel. The question is what the effect will ultimately have on the petrochemical industry, the mother of all plastics.
“Despite the temporary decline in crude oil prices during the current global
economic downturn, a $170 per barrel by 2020 is
not unthinkable”
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Today, society is highly dependent on plastics, almost as an incorporated addiction.
At a micro level it keeps the foods we eat fresh, the medicines we take secure, and the homes we live in safe. On macro level, the industrial applications are too many to tell, from ship cabins to biscuit-factories, plastic is omnipresent. As a result, consumption is increasing at a rapid pace. In fact, the global culture of consumerism relies upon plastic for its very existence. The overall plastic market is growing at a rate of more than 7% per year. In 2005, over 230 million metric tons (over 500 billion pounds) of plastic was produced globally. Just to illustrate the scale of the waste as a consequence, I want to focus on just one dimension of it – waste plastic, which is responsible for around 7% of the waste content of the average UK dustbin. According to general consensus, the amount of plastic waste today in the world is estimated at 100 million tons per year and growing – but only a small amount of this plastic is actually recycled. For example, the UK uses over 5 million tonnes of plastic each year of which an estimated 25% is currently being recovered or recycled. Germany recycles 44% of its plastics. In other parts of the world, the figure is much lower. It is commonly known fact there exists this terrible mass of plastic waste floating around the in the North Pacific Ocean known as the Great Pacific Garbage Patch. Shockingly, this Garbage Patch is twice the size in area of France and it is growing rapidly. 90% of this Garbage Patch is made up of plastic. Around 10% of all the plastic in the world eventually makes it into the world’s oceans. Today there are four ways to dispose of waste plastic: Recycling, landfill, Incineration, and Dumping. Unfortunately these come with severe drawbacks and limitations. Incineration, landfill, and dumping present harmful environmental impacts and recycling has not yet generally overcome the barriers of cost and efficiency. It seems we are running out of time and options, putting pressure on society to come with new solutions.
There are a number of reasons why only a small percentage of plastic get recycled, one is consumer awareness and public opinion, another one is technical; there are many different types of plastics, which makes it difficult and costly to separate. Particularly those which make up items like televisions, mixers, and even mobile phones are almost impossible to recycle. However, there is another recycling process for plastics which is gaining interest, since it is becoming more economic, has good demand growth potential and more importantly, it is more sustainable. It is the transfer of waste plastic back into its original state – i.e. back to oil. According to the British Plastics Federation, there has been significant growth in the recycling of waste plastic including plastics into oil over the past few years for several reasons: Plastics are one of the most sustainable uses
of oil since it “borrows” fossil hydrocarbons and returns them afterwards into the fuel cycle. In short plastics start as oil and we can recycle them back into oil,
Used plastics can be recycled up to six times,
making them much more cost effective than other forms of recycling,
If it doesn’t make economic or environmental
sense to recycle plastics, then their energy content can be recovered through Energy from Waste incineration. Used plastics have a higher calorific value than coal and at a time of high energy prices, unrecyclable materials can, through Energy from Waste provide a much needed local energy supply.
So how viable is this recycling process of waste plastic to oil?
There are numerous examples of plants around the world, which are able to melt down most types of plastic and convert them into oil which can be used to make either fuel oil or higher value oil products like gasoline, diesel, and jet fuel. The economics of such plants vary, with some companies operating plants that work at low as $10/bbl. The trouble with most of the plants currently operational is that they are all small; typically producing between 20-50,000 barrels of oil per year. Some are using unique technologies, which
“This energy demand increase will cause an additional 30 billion barrels of oil to be
consumed annually.”
“It seems we are running out of time and options,
putting pressure on society to come with
new solutions.”
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require less energy intensity and do not require the plastics to be separated. At the moment, companies are finding it hard to scale up such plants, which is due to fact that many of the technologies in use are new and are still being proven. Also, depending on the location of the plant, they can be subject to competition from increasing regulation around fuel production and fuel specifications, competition from other fuels and uncertain economics due to fuel subsidies for example. Finally most waste projects tend to depend on expensive and complex supply chains, which can often make the project uneconomic. So with the fundamental looking good, how can we scale up the case for plastics to oil recycling? We are in an age where we know that demand for oil is continuing to increase, as is the amount of plastic which is being wasted, and we also know that there is a shortage of sustainable plastic waste projects. Our perspective is that there are several areas of focus which could mean a transformation for this business. Firstly we need to see much more collaboration between government, local authorities and industry to resolve the problem of waste plastic, which means more financial support for new and existing projects, higher investment in the technologies around this process. Following on from this we would need to see an acceleration of policies to support the spread and adoption of the waste plastics to oil process and its associated technologies. In addition, since refinery margins seem to be staying under pressure for a long period, an opportunity to create additional value could be identifying those new plastic-to-fuel-conversion-technologies allowing cohabitation with traditional
refining technology, and add traditional-renewable to the refinery portfolio.
Finally, we need spread more awareness of the oil solutions for waste plastic. This innovative process and the projects associated with it, should serve as a role model to showcase these waste plastic to oil recycling technologies. Together, we should be aiming to transform the vision of plastic as a waste material to one where plastic is seen as a valuable feedstock and resource. Such a transformation could mean in this increasingly unstable and urban world, waste plastic could actually help to directly solve the world’s waste problem. To this we can also add that pressure has to be increased on businesses and governments to realize the opportunity in front of us, rather than thinking in terms of un unpopular political and business theme which is a seems a threat to business and politics as usual. In order to allow future generations the chance to live in a world which is prosperous, clean and green, we need to come to grips with the new reality and identify the new opportunities. Clean and affordable energy, including renewable and sustainable forms of energy, are centres of gravity in this new direction. Finally, we need courage to leave the old paradigms and build a new one based the two E-pillars: the Environment and the Economy.
Written by Ennio Senese, Executive Partner, Resources, Accenture, with thanks to Julie Adams, Senior Manager, Accenture
The Accenture Energy industry group serves the oil and gas sector including upstream, downstream and oil service companies. http://www.accenture.com/Global/Services/By_Industry/Energy/default.htm
“We need courage to leave the old paradigms and
build a new one based two E-pillars: the Environment
and the Economy.”
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Shale Gas Comes To Europe – Another “Game Changer”?
Written by Doug Glass, Partner and Greg Hammond, Partner, Akin Gump Strauss Hauer & Feld LLP Even though the presence of natural gas in shale seams has been known to oil companies for decades (the first commercial gas well drilled in the US in 1821 was a shale gas well), gas from shale seams has historically been dismissed as too difficult to extract and too expensive. However, recent increases in energy prices have incentivised and driven the development of new technologies, with the result that shale gas is currently causing a revolution in the gas fields of North America. The US Department of Energy has estimated that there is enough shale gas to supply North America for the next 90 years. The economic success of certain shale gas fields, such as the Barnett Shale play in Texas, indicate the widespread potential of shale gas as a sustainable and relatively clean energy source. Method of Extraction
In the past, shale has been disregarded for the purposes of gas production due to its insufficient permeability (which did not allow significant gas flow to a well bore thereby making gas extraction uneconomic). However, modern technological advances in horizontal drilling techniques and in hydraulic fracturing have meant that flow rates and recoverability have significantly improved - resulting in highly profitable operations. The process of extraction begins with the well casing being cracked open by explosive charges to create a series of perforations along a horizontal well bore drilled through the shale seam thousands of feet below the surface. Water, sand and chemicals are then pumped into the well at high pressure through the openings in the pipes, “fracturing” the surrounding rock which allows the gas to flow freely to (and through) the well bore. Impact on Global Gas Supply and Demand
The impact of the shale gas revolution is already being felt around the world, and its influence on global gas supply and demand is currently changing the shape of the industry. One result is that the proliferation of shale gas has had a major impact on LNG imports into America. The Sabine Pass LNG terminal on the Texas-Louisiana border was built at a cost of US$1.5 billion as a vital component of the US energy infrastructure for the next generation. Tankers from Qatar and other LNG producing countries were expected to dock at the on-site receiving terminal in order to supply LNG straight into the US domestic gas network. Although the Sabine
Pass LNG terminal has the capacity to receive one shipment per day, in the space of two years only 10 ships have docked. The remaining eight LNG import terminals in the US have been similarly affected by the shale gas revolution and are running at only 10% of capacity. Environmental Impact
Although natural gas is the cleanest burning of the fossil fuels, environmental concerns have been raised surrounding the method of extraction of shale gas, particularly the possible environmental impact of hydraulic-fracturing on fresh water supplies. The US Environmental Protection Agency has begun an extensive examination of hydraulic-fracturing. Since the technique uses considerable quantities of chemicals mixed with water, this often requires the chemical/water mix to be held in ponds at ground level until removed by tanker or re-injected into the earth. Some hold the view that the fracking mixture, once injected, can seep into the fresh water table underground. Environmentalists allege that this may in turn have an impact on ground and surface water quality, threatening the environment and human health. The environmental impact of hydraulic-fracturing is currently being debated within the US Senate’s climate and energy bill. According to recent reports, the latest draft of the bill seeks to exclude regulation of this technique by the EPA. A further discussion draft proposed by BP and two other energy companies provides that regulation would be the responsibility of the individual states. This discussion draft also recommends against publication of the chemicals used in the fracturing fluid as this would comprise disclosure of “trade secret information”. Even though similar methods of extraction have been used for decades in the US, historically there were few concerns surrounding the environmental impact, since the sites had been situated in unpopulated areas. However, as sites have moved closer to the denser population groupings, environmentalists have been prompted to argue that occupiers of land alongside drill sites and above the horizontal penetration paths have a right to know what potential contaminants could affect their nearby ground water supplies. In response to the environmental lobbyists, one can expect that nations within Europe which have historically been forced to rely on neighbouring states for their energy supplies will fight
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long and hard to secure their own domestic energy supplies. Equally relevant will be the lessons to be learned in due course from the recent oil spill at the Macondo well in the Gulf of Mexico which will no doubt conclude that (i) no development of hydrocarbons is without risk; and (ii) problems incurred on-shore are generally easier to remedy than those off-shore. Specific European Issues
Not surprisingly, the explosion in North American shale gas development has triggered interest all over Europe. Even though the potential for shale gas in Europe remains uncertain, the major gas companies are keen not to make the same key mistake which they made in the US. By being too slow off the mark in the US, they had to spend billions of dollars buying assets from independent explorers. It is believed that at least 40 companies are currently looking for shale gas in Europe with all the major oil companies, except BP, being present in the market. Licences to explore for shale gas in Sweden, Poland, Germany, France, Hungary and Austria are being snapped up by the majors. Exxon-Mobil is believed to have shale gas areas in Germany and Hungary and to have applied for permits in Poland. Shell has acquired licences in Sweden. ConocoPhillips recently drilled the first European shale gas well under an exploration agreement with Lane Energy in a shale formation in Poland. More recently, Akin Gump has also been working on a possible shale project in Russia. There are several issues which are specific to Europe. Firstly, no two shale rock formations are ever the same. Consequently, the geological expertise built up in North America may prove not to be applicable to Europe, since the Texan and Pennsylvanian plains (for example) are geologically very different to the mountains of Central and Eastern Europe. Similarly, a variety of legal issues arise in Europe relating to land. In the US, the holder of the mineral rights generally has the right to use the surface of the land under which the minerals lie, with only an obligation to compensate the surface owner for any damage. However, the real estate and land use laws in Europe are very different, more diverse, more complicated and largely untested in the shale gas context. Generally, in
Europe mineral rights must be acquired to develop the subsoil - but a separate agreement must then be made with the holder of the surface rights before any drilling can start. In addition, due to the greater dissipation of land interests and the more dense development and usage of the land, numerous such surface-right agreements are often required as a pre-condition to the commencement of operations. In addition to this, a major issue facing oil companies in Europe is the greater concentration of inhabitants. Drilling shale gas requires multiple wells, which is comparatively easy in the wide open spaces of North America but will have a greater effect on the denser population groupings in Europe in terms of health and safety and sheer practicality. Another stark logistical consideration is that, in contrast with North America, Europe currently has a far more limited supply of drilling rigs. Finally, the concerns relating to possible environmental contamination, which are currently being debated in the US, will no doubt also be strongly voiced in Europe, especially given Europe’s greater and closer population groupings. Whilst there are many factors in the US shale gas industry which will be different to the European industry, one can probably assume that many similar arguments will be echoed in great detail in Europe, particularly as to whether there should be pan-European regulation of hydraulic fracturing. The Future
There are undoubtedly hurdles which need to be overcome before Europe’s shale deposits can be exploited to the full. Although many issues are similar to those in the US, the different geographic, demographic and regulatory landscapes in Europe are presenting different challenges. However, as in the US, the enormous potential advantages to be gained from this new gas resource simply cannot be ignored and, if found to be commercially viable, European shale gas may have the ability to transform the energy industry in Europe for decades to come. Undoubtedly, one can expect that the “first movers” and the most experienced players having the best strategy, skills, technology and advisers will prevail. 7 July 2010 – Copyright: Akin Gump Strauss Hauer & Feld LLP - www.akingump.com
Doug Glass and Greg Hammond are partners in the London Office of Akin Gump Strauss Hauer & Feld. Since its foundation in Texas, Akin Gump Strauss Hauer & Feld has been one of the leading international oil and gas law firms - advising clients at every stage of the hydrocarbons value chain. In addition to the more traditional oil & gas transactions, in recent years Akin Gump has been increasingly active in the area of "unconventional" hydrocarbons and in the last six months alone has advised on the following:
Anadarko – in its US$1.4 billion carry-to-earn Marcellus Shale gas joint venture with Mitsui;
Consol Energy - in its acquisition of the Appalachian shale gas and other properties of Dominion Resources for US$3.48bn; and
Enterprise Products – in its acquisition of a Haynesville shale gas gathering system for US$1.2bn.
In Europe, Akin Gump in London is currently advising on two shale gas projects in Poland and one in Russia.
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‘On the Spot’ with our Question of the Month (Part One)
“Do you except an increased wave, a stagnant lull or sporadic activity of new
M&A/A&D transactions in Q3 and Q4 of 2010?”
“Whilst there has been a limited amount of very large corporate transactions in the first half of 2010 there has been a steady flow of smaller opportunities in the marketplace. The larger transactions are driven by a need to focus capital on core projects such as shale gas (in the US) and other capital-intensive ventures. Whilst the rationale for smaller deals are also driven by capital discipline and a need to focus many are on offer due to a complete lack of capital by the seller. With respect to the next 6 months Stellar sees very little change (and certainly no downturn) in the sub- USD100mm market where capital for developments, exploration etc. will remain very
tight indeed. This will ensure that projects that require investment (particularly those that involve some reservoir or political risk) will continue to come into the market in a fairly steady flow. In the mid-sized part of the market we see much more enthusiasm and willingness for companies to consider mergers. In particular, many those with market capitalisation of less than USD500million are actively looking at the acquisition or merger with other companies that would benefit from being part of a larger entity. Stellar expects continuing deal flow and news on the back of this model with the mergers of Bridge and Silverstone, Norse and Pan Petroleum and Afren‟s acquisition of Black Marlin as just a few examples. In the larger sector of the market we expect the market to be dominated by BP sales which will draw in funds from many of the larger oil and gas Majors and large Independents. This will inevitably impact the availability of finance for other deals and may precipitate some of the buyers of BP‟s assets to sell their non-core assets to raise capital for the purchases. We also feel that the pace of overseas growth of some National Oil Companies will slow and several may retrench back to home markets as projects compete for precious capital. From Stellar‟s perspective, after 11 years of working as an independent advisor in the upstream M&A/A&D market, we are currently experiencing our highest ever level of deal-flow through our business and see no evidence of things slowing down.”
... Dave Fassom, Director, Stellar Energy Advisors Limited (Oil Council Member) “Increase. Buyers are able to hedge the higher commodity prices and sellers are starting to come around to valuations they feel compensate them for taking the exploration or development risk. Increased regulations offshore will drive buyers onshore looking for lower risk Bakken, West Texas and Colorado oil that is now being developed using proven drilling techniques that provide a payback on wells within the first two years. After payback, these wells can produce 500 barrels per day for years providing the buyer a consistent return on investment while the seller gets a premium for the exploration risk.” ... Steve Crower, Energy Investment Banker, Starlight Investments LLC (Oil Council Member) “Despite earlier improvements in credit and equity markets and corporate balance sheets, U.S. M&A activity remained sluggish in the first half of 2010. Unforeseen economic events in the last two months triggered a global ripple effect reviving sentiments of uncertainty – setting the stage for a challenging M&A environment for large cap transactions in the second half, according to the Transaction Services practice at PwC. However, PwC contends that the middle market may be a different story.
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“Going into the second half, record dry powder in the private equity space and unprecedented cash
levels on the balance sheets of corporate America will combine with the desire of family held businesses and private equity backed management teams to sell prior to looming tax increases” Bob Filek, Partner, PricewaterhouseCoopers’ Transaction Services.
U.S. M&A activity was down three percent compared with the same period in 2009. The number of closed deals in the first half of 2010 represents the lowest deal volume this decade, according to PwC. For the first five months of 2010, there were 2,969 closed deals representing $317 billion, compared with 3,065 deals valued at $323 billion in the same period of 2009. While deal value and volume are down, willing lenders and open credits markets are available for transactions, according to PwC.
“Banks and institutions are providing capital to execute deals. They are lending more conservatively, but credit is available from a variety of sources and in a variety of types – including traditional leveraged loans. Companies are taking advantage of depressed valuations – looking for deals to grow and diversify at discounted prices. Even with the uncertainty in Europe, a hesitant consumer and volatile markets, it‟s still an attractive time to buy. While there is still ambition to complete mega deals, the „hit rate‟ will be low. The sweet spot for deals will be one to five billion dollars and below, with a mega deal or two sprinkled in. Private equity players will also remain active in the distressed area, using their debt, hedge and distressed funds to find deals in untraditional ways. While there are concerns about stricter regulation for certain alternative investment classes, private equity is a resilient and innovative business run by sophisticated investors who will still get deals done, regardless of what transpires in Washington.” Greg Peterson, Partner, PricewaterhouseCoopers’ Transaction Services
Corporate buyers continue to employ strategic deal making, pursing attractively valued companies and seeking out „mergers of productivity‟ as a means to capture benefits of scale and cost savings. The median deal size in the first half was $107 million, indicating that smaller, middle market deals have become the new „normal.‟
PwC expects divestitures, carve-outs and spin-offs to continue to contribute to deal activity as companies separate certain assets and operations no longer seen as core to the business. The likely candidates to acquire these assets are private equity players who have strong relationships with large corporations that may be interested in selling certain assets. Business units within the industrial products and technology sectors are among the industries where PwC expects to see increased divestiture activity. The current private equity overhang at nearly $850 billion (three and a half times the overhang in 2000) represents 54% of all capital commitments made between 2004 and 2009. Over 85% of the $850 billion is in funds larger than $1 billion, including 48% in funds larger than $5 billion, according to Cambridge Associates.
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Declining values of the Euro and Pound are also providing a strong backdrop for cross-border deals, particularly in Europe. “Typically, during U.S. downturns, European companies take advantage of a poor U.S. economy, but this time, foreign buyers have to deal with issues at home, including a challenging financing market, reduced demand and declining currency values,” according to PwC‟s Filek. “As a result, we expect the inverse to occur. U.S. corporates are going to see good opportunities to acquire high quality franchises and brands in Europe.” Sectors ripe for consolidation include:
Financial Services – Until the impact of U.S. financial regulation is fully realized, uncertainty will be cause for continued stagnation of deals in the sector, other than some continuing interest in FDIC supported takeovers. However, opportunities exist for companies to divest non-core assets and consider capital raising alternatives such as debt or equity raises. Consolidation in the property and casualty insurance is still expected in light of continued soft premium pricing and desire to maximize scale, while life insurance consolidations will likely continue to be a less active space given returning investment portfolio valuations and focus on product redesign.
Oil & Gas – Oil & gas commodity price differential will drive companies to increase their oil positions
through acquisitions. Equipment and service companies will expand their product and geographic footprint through transactions. The offshore drilling moratorium will be an obstacle for those highly levered to Gulf of Mexico E&P projects but will likely not dampen the growing level of transactions in the sector.
Power & Utilities – Despite uncertainty surrounding energy policy and regulatory changes, M&A activity
in the sector has been a pleasant surprise, as significant regulated and merchant company transactions have been announced in the first two quarters of 2010. PwC expects this trend to continue, with a cautious eye towards regulatory approvals of the announced transactions. IOUs continue to shed non-core assets and M&A activity remains strong in the renewable space. Expect to see continued sales of merchant power plants, particularly driven by the current and projected commodity prices.
According to PwC, the wild card in the second half will be just how much incentive looming tax increases give buyers to sell. “The economics could be compelling enough to drive a rush to exit by December 31, which could mean a busy holiday season for deal makers,” says Filek. By PricewaterhouseCoopers’ US Transaction Services Team
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‘On the Spot’ with our Question of the Month (Part Two)
“How significant a role will unconventional oil (extra heavy oil, oil sands and oil shale) and unconventional
gas (CBM, shale gas, tight gas) play in tomorrow’s global energy mix? Are these unconventionals now in
fact becoming conventional?”
“Significant. As high quality middle east imported crude declines or is consumed by developing countries closer to the area, unconventional oil will play a big part in contributing to supply the US and European markets. Alberta oil sands are 95% of all of Canadian oil reserves and 13% of global oil reserves with 173 billion barrels of recoverable oil in place. The bitumen in place is low quality but with additional refining, Canada can produce approximately 1.5 million barrels per day from Steam Assisted Gravity Drainage (SAGD) projects that have only been commercial in the past 15 years. Production should increase to 2.0 million barrels per day due to advances in engineering and design.
Oil shale (similar to what is in western Colorado) is a few years away, but if commodity prices stay in the current range there are some techniques using portable nuclear heating elements that may be proven soon and could be used to make oil shale production economical. These low quality crude plays are the bottom of the barrel when comparing reserves, but they are on soil that is politically stable and can be managed for the long term.” ... Steve Crower, Energy Investment Banker, Starlight Investments LLC (Oil Council Member) “Most major upstream exploration companies are moving into unconventional resources such as coal seam gas and shale gas. Super-major exploration companies predict that as much as 16% of production this year will be from unconventional resources. Around 20% of upstream global mergers and acquisitions deals in 2008 were in coal seam gas and a high percentage in recent times were in shale gas, with some extraordinary prices paid, e.g. the $41B XTO deal. Over the past 5 years coal seam gas investment was the number one oil and gas strategy; for every $1 invested in 2004 coal seam gas returned $4.4 Global coal seam gas production has increased rapidly, nowhere more so than in Australia, where coal seam gas now comprises 30% of proven and probable (2P) gas reserves and is still rising. The rise of gas as a cleaner fuel and the increasing "liquidity" of LNG markets, especially from abundant shale gas and coal seam gas will see more being paid for unconventional fields. I believe that we are approaching the tipping point fast”
... Chris McKeown, Commercial & Business Development Manager, L&M Energy (Oil Council Member)
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“There is no question that at some point, unconventional oil will play a significant role in our energy economy, especially oil shale. The oil locked in shale in the Piceance Basin of my home State of Colorado are larger than all the known deposits in the world - so there is little doubt that resource is part of our future. Moreover, the Shell technology has essentially broken the century-old technological barrier, so oil there can now be produced at marketable prices. So we are left with a problem of political will more than anything else. With a State Governor who opposes the production of any new fossil fuels (and who has imposed an onerous and difficult new regulatory process on O&G), and with a federal Administration unfriendly to oil shale, most companies are simply waiting for a better business climate. I frequently tell clients these are battles they'll eventually win, but many companies are just waiting for a better political window. It is unfortunate that politics, not economics, is the primary driver of energy policy - but of course that has always been the case.” ... Greg Walcher, Energy and Natural Resources Consultant [Managing Director, Global Energy & Natural Resources at LeaderBridge] – (Oil Council Member) “I think we should perhaps start distinguishing between 'conventional unconventionals' like oil sands, extra-heavy oil and shale gas, which are commercial today, and the remaining unconventionals like oil shale and gas hydrates, which still await technological and commercial breakthroughs. To extend the debate further, there is also oil and gas in difficult places - ultradeep water, ultradeep reservoirs, the Arctic - and conventional oil extracted via tertiary recovery/EOR. These can be comparably expensive to unconventional oil, as can 'stripper wells'. Then we have liquid hydrocarbons derived from coal, gas and biomass/biofuels, and natural gas made from coal or landfill waste. These are not traditional oil/gas extraction technologies at all, but the end product can be indistinguishable to the consumer from traditional fuels. I agree the Shell technique for oil shale is very promising, along with some other new ideas, which get round the old problems of waste rock, high water use, land degradation, etc. We need, though a new term. It's getting too confusing distinguishing between the oil shale deposits in places like Colorado, and the shale oil reservoirs like the Bakken. I'd suggest that the Bakken and its like be called shale oil, as with 'shale gas' which everyone is familiar with now, and the oil derived by transformation of immature source rocks like the Green River Formation could be called kerogen oil (and to make it even more confusing, the Shell process produces natural gas as well as oil!) The potential volumes of kerogen oil are enormous, amounting to trillions of barrels (as against the ~1 trillion barrels of conventional oil produced to date). It's not just confined to Colorado etc, there are big high-quality kerogen-shale deposits in Jordan, Morocco, Australia, Brazil and other places. Maybe the process will have to get started there and overcome the environmental hurdles before it really emerges in the US. The big question for me is whether kerogen oil can be economically competitive as vehicle fuel, or whether all-electric vehicles (electricity from natural gas, nuclear, renewables or whatever) will win out.”
... Robin Mills, Energy Economist and Author of 'The Myth of the Oil Crisis' (Oil Council Member)
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Wall Street Investor – PE Investing: Setting the Record Straight
Written by Ziad Abdelnour, President and CEO, Blackhawk Partners Inc We at Blackhawk meet on the average over 500 entrepreneurs a year; and the question that keeps recurring at all times by every one of our entrepreneurs seeking funding is: Why is every private equity fund we meet trying to take advantage of us? We are much more comfortable in dealing with family offices such as Blackhawk; could you please help us? Our view in this regard is very simple: As venture capital and private equity continue to make news headlines, entrepreneurs may find it challenging to distinguish fact from fiction.
1. Do investors win at the expense of entrepreneurs? 2. Are investors out to wrest control from management? 3. Is an investor's sole focus on the final liquidity event?
Without question, misperceptions can prevent an entrepreneur from making rational, fact-based decisions. During my 20 years as an investor, I have come to identify what I call "The Five Myths of Private Equity." Let's closely examine these five myths, one by one: Myth #1: Private equity is a win-lose game -- investors win, entrepreneurs lose. According to this myth, private investors somehow make off with the value of your company -- perhaps buying at a too-low price and cutting you out of the eventual rewards that you'd earn from going public or selling to another company. Remember, though, that private equity investors only make money if the value of your company appreciates -- and, in most cases, the entrepreneur retains a substantial interest in the business. After all, it's in their best interest to help you grow your company and increase its value. Almost by definition, if the investor wins, the entrepreneur wins. Moreover, a private equity investment provides entrepreneurs with the opportunity to diversify their assets. You receive cash for part of your share in the company, which you can spend or invest as you see fit. As a result, you immediately reduce your exposure to events at a single company, in a single industry -- and can access cash that you may need for retirement, college tuition, or major purchases. Myth #2: Valuations are the only consideration when you're shopping the deal. Valuation is certainly an important consideration since you want to get a fair price when you sell your company. However, it's equally important to partner with an investor who shares your goals and who will work with you to
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achieve them. When you focus exclusively on valuation, you risk ending up with a partner who doesn't understand your company, your growth strategies, or your industry. Let's say, for example, that you sell your company to an investor whose expectations for your business are unrealistically high. You may obtain a good price for your company, but that relationship is likely to sour as the business fails to meet the investor's expectations. On the other hand, an investor with a more nuanced understanding of your company would work with you to increase its value in a realistic and sustainable way. Myth #3: Private equity investors don't add value because they haven't been in an operating role. Most entrepreneurs have ample experience with operating issues. In fact, that's one of the main reasons private equity investors should not try to micromanage portfolio companies. However, they can add value by challenging management to think outside the box. Investors who have backed many different companies at rapid growth stages can recognize patterns that may not be obvious to the management team. They may have a network of relationships that can also assist companies in recruiting talent at the board and management level. They can often help companies explore strategic partnerships with other firms. Myth #4: Taking venture capital/private equity money means you lose control of your company. If you take on a minority investment, you can continue to control your company -- making all operating decisions and having the ultimate say over strategic issues. Selling less than half of your company leaves you in charge, while providing liquidity to you and other early shareholders. Myth #5: Private equity investors are only interested in your exit strategy. When a private equity firm invests in your company, they do expect to exit their investment within the next five to seven years. Since the firm has limited partners who expect liquidity at some point, they can't hold their investment forever. However, this doesn't mean that your company will have to sell your company or take it public. Alternatives might include recapping the company with bank debt, swapping out one investor with a new private equity investor, or raising capital from a strategic partner. In any event, your private equity partner has a vested interest in growing your company over the next several years up to the exit event. Their goal during this period is the same as yours: to increase the value of your company by expanding the business. Bottom Line: Focus on what's important, put the myths to rest Whether to take on private equity is a complex decision, requiring in-depth analysis of your personal and business goals, the market environment, and the financing options available. Focusing on these important considerations -- rather than on common misperceptions -- will help you make the right decision. It's time to put the myths to rest. Looking forward to doing business with you and to continue being your resource for deals, capital, relationships and advice. Your feedback as always is greatly appreciated. Ziad K. Abdelnour, President and CEO, Blackhawk Partners, Inc [email protected]
About Ziad K. Abdelnour: Once referred to by the New York Times as one of the 100 most creative and fiercest investment bankers on Wall Street, Ziad K. Abdelnour is a dealmaker, trader and financier with over 20 year experience in merchant banking, private equity, alternative investments and physical commodities trading. Since 1985, Mr. Abdelnour has been involved in over 125 transactions totaling over $30 billion in the investment banking, high yield bond and distressed debt markets and has been widely recognized for playing an integral role in those three key market sectors. He founded Blackhawk Partners, Inc., in 2004; a New York based private equity ”family office” that focuses on originating, structuring and acting as equity investor in management-led buyouts, strategic minority equity investments, equity private placements, consolidations, buildups, and growth capital financing. For more information please visit: http://blackhawkpartners.com
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Golden Barrels: The Market is the Market By Simon Hawkins, Head, Oil & Gas Research, Ambrian
One of the best pieces of advice I was given when I started in the City is “the market is the market”. At first it sounded silly and obvious but having lived with the idea for more than a few years now the message has a timeless truth about it. The idea is that no matter who we think we are, what organisation we think we represent, what insight we think we have on a stock or a sector, whatever opportunity we think we’re highlighting to investors, the market will respond in a way that is sometimes predictable and sometimes not. It will be influenced by things we know about and sometimes by things we don’t. It has its own ebbs and flows, high tides and low tides, sometimes gets whipped up by a storm that can devastate us. And sometimes, in the calm of the day, it allows us to jump into a small boat, potter out a mile or two on the turn of a gentle tide so we can fish for our lunch. Over the last three months we have seen the market wipe around £90bn off the value of the UK Oil and Gas sector, leaving it valued at around £250bn. The loss of £90bn is equal to the combined market capitalisation of 119 out of the 122 stocks that make up the sector: everything up to and including BG Group. Yet, while BP has plummeted and pulled down its Big Oil peers, the explorers have been enjoying a renaissance on the back of exploration success in the Falklands, the North Sea and elsewhere. Rockhopper, one of the best performers, is now the 18th largest company in the sector without having
produced a drop of oil. This is by all accounts an extraordinary time.
So what would be our advice to companies looking to brave the elements to raise cash at this tempestuous time? The good news is that there is still an appetite for a good story but investors are understandably picky. If you have a good story resulting in strong, transparent cash flows, a robust cash position after the fund raise, reasonable scale and a liquidity in the stock for investors to exit if they need to you will be off to a good start. IPOs require all of that plus a little more courage. To be successful, not only does the investment case have to be good on an absolute basis, but it has to be better than its listed peer group. If it isn’t the market is likely to put capital into stock that it knows, trusts, has a track record with and can punish if things go wrong. But that’s just my view. After all, the market is the market
Let me know your views at: [email protected]
About Simon: Previously, Simon was founder of Omni Investment Research, and held senior positions at UBS and Dresdner Kleinwort, having been ranked number one by
Thomson Extel for his coverage of the European Gas sector, number two in European Oils and three in European Utilities. Prior to joining the City, Simon had eight years international experience with the Shell, working in economics and finance in Nigeria, The Netherlands, the Far East and the US. He is now Head of O&G Research at Ambrian, a specialist energy and resources investment bank. Ambrian provides full service investment banking to a broad range of institutional and corporate clients, including Corporate Finance, Corporate Broking and Equities. Ambrian is focused on three key sectors, Oil and Gas, Mining and Cleantech/Alternative Energy, where it has developed in-depth expertise and relationships. www.ambrian.com
“The good news is that there is still an appetite
for a good story”
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The Oil Outlook
June 2010: Fears of Weaker Recovery Mire Crude Markets
By Gianna Bern, President, Brookshire Advisory and Research
Crude markets have retrenched on continued fears that a weaker-than-expected global recovery will take place in the second half of 2010. Crude oil prices have plunged to near $71 per barrel as projected economic growth begins to slow in the US, Europe, and China. While economic growth was never projected to be robust, a modest recovery now hangs in the balance. Fears of a double dip recession plague U.S. equity markets while anticipated spending cuts weigh on U.K. equity markets. All told, crude oil prices are not projected to flirt with $90 per barrel levels any time soon. Over the near term, we don't expect crude oil prices to advance much above the $80 per barrel mark. Robust Crude Supplies To compound matters, crude supplies on both sides of the Atlantic are plentiful. U.S. crude supplies, currently at 363 million barrels, are near 2009 levels when crude prices were considerably weaker than our current $72 per barrel. With northern hemisphere summer drive season near the half way mark, we anticipate that gasoline demand will remain sluggish for the remaining two months of the peak summer drive season. This situation is not helping ample crude supplies. At mid-summer, gasoline supplies are also plentiful placing further downward pressure on gasoline prices. Gasoline demand is simply not materializing. Sovereign Scares Continue Once we consider continued Eurozone sovereign debt concerns, global equity markets remain jittery at best. Commodity markets, including crude oil
prices, have taken big hits in the last few weeks on sovereign debt fears.
Global markets await results of European bank stress tests and indications of debt reduction throughout many countries. As the year progresses, we expect this sentiment to proliferate. Sovereigns will try to implement debt reduction plans and mitigate potential ratings downgrades. We will continue to see sovereign ratings downgrades and several countries placed on Outlook Negative or Evolving -- rating agency speak for potential future downgrade coming unless swift action is taken typically within the year. Emerging Market Strength Emerging markets of China, India, and Brazil continue to carry the day as GDP growth is expected to vary from 5% to upwards of 6% or 7% in Brazil. These economies are growing as indicated by buoyant corporate bond issuances amid a weak corporate lending environment. Emerging markets have also exhibit continued commodity demand albeit slower-than-expected GDP growth. At this rate, we expect developed markets in Europe and the U.S. will remain lackluster for much of 2011. Barring any geopolitical events, crude oil prices will continue to trade beneath the $80 per barrel mark for the near term.
About Gianna: Gianna Bern is a registered investment advisor and President of Brookshire Advisory and Research, Inc. About Brookshire: Brookshire is an investment advisory firm focused on energy investment research, risk management, and credit portfolio management with clients in Europe, Latin America & the U.S: www.brookshireadvisoryandresearch.com
“Barring any geopolitical events, crude oil prices will continue to trade beneath
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A Nightmare Well
Written by Elaine Reynolds, Oil Analyst, Edison Investment Research
Many years ago, when I began working as an engineer in the oil industry, I was sent on my first trip offshore to a semi-submersible that was drilling an exploration well for my company in the North Sea. This was no ordinary well however, but an HPHT well, with a pressure of around 14,000 psi and a temperature of 3500C. It was the 1980s, in the infancy of HPHT technology, and it was not clear how we would develop any discovery. In the process of drilling the well, we encountered a high pressure zone that had not been predicted from offset well data, and by the time I arrived, the well was being held under control on a knife-edge, with an increase in mud weight resulting in losses, and a decrease causing an influx.
As a young and green engineer, I was only there to observe and learn, but I can still clearly recall the tension and anxiety of those days. A great deal of thought and debate went into every action that was taken on the well, with every precaution taken, right down to us being restricted to eating only uncooked food to ensure that there were no ignition sources on the rig.
I write about those days now, because they come to my mind as I see all the speculation in the media regarding what went wrong on BP’s Macondo well, especially when it was reported that the BP engineers referred to it as a ‘nightmare’ well in internal memos. ‘Halliburton recommended 21 centralisers on the liner’, the press reports, ‘but BP only ran 6’ implying that clearly BP was cutting back, but this may not necessarily be so. Halliburton is recommending the ideal number of centralisers in order to maximize the chances of a good cement job. BP wants this, but is also looking at the implications of each additional centraliser increasing the risk of getting stuck in the hole, or of increasing the surge effect into the formation, thereby increasing losses and exacerbating a complex well that was difficult to control. My point is that, until we know the full facts, we really don’t know what the thinking behind each step was, and we cannot say what really went wrong. We need to allow for due process and wait for the results of the investigation before jumping to conclusions. I only hope that the engineers have fully documented the risk assessments of all their decisions, and that they were allowed to do their job by management. And that well in the North Sea? We achieved our objective safely, and the field began production in 1997, continuing to this day.
About Elaine Reynolds: Elaine is an oil analyst at Edison Investment Research. Prior to joining Edison she had fourteen years experience as a petroleum engineer with Texaco in the North Sea and Shell in Oman and The Netherlands. Edison is Europe’s leading independent investment research company. It has won industry recognition, with awards in both the UK and internationally. The team of more than 50 includes over 30 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 250 companies across every sector and works directly with corporates, investment banks, brokers and fund managers. Edison’s research is read by every major institutional investor in the UK, as well as by the private client broker and international investor communities: www.edisoninvestmentresearch.co.uk
“We need to allow for due process and wait for
the results of the investigation before
jumping to conclusions.”
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