19 November 2014 Dispatch from the Oil Council World Assembly #2 The Oil Council has grown exponentially and now holds almost monthly conferences around the globe. It has become the oil & gas conference series to attend amongst the hundreds of existing events. Day 2 of the World Assembly, in London, started in as lively a vein as it ended on Monday. Lord Browne kicked the day off and spent a large amount of time (perhaps too long?) promoting h is new book, The Glass Closet: not everyone’s cup of tea but each to their own. The menu for the day offered a choice of two dishes: Funding Oil and Gas, or Regional Insights from Kurdistan, the UK and North Africa. If it was funding you needed, our view, of course, was “just come and see VSA”! On the subject of the regions, we believe that the UK is actually very interesting, as we consider the government will have to do a lot more to encourage capital investment here, especially in shale gas. Tony Hayward followed Lord Browne (just as he did at BP) with a view on Genel Energy and Kurdistan; while North Africa has always been an area of interest. Our key takeaways from the regional discussions were as follows: Kurdistan The progress made over last year has been significant, with overall production now achieving half a million boed. At these levels, revenues flowing into the Kurdistan Regional Government (KRG) should allow it to reach budget equilibrium and start paying E&P companies. There is a real hope that the KRG will be able to finalise an agreement with the Iraqi government over its hydrocarbon sales. The key challenge remains establishing a regular payment scheme which would allow companies such as Genel to reinvest funds for the development of its assets and pay its contractors. The pipeline linking Iraqi Kurdistan to Turkey is operational and its capacity should be upgraded from the current 500kboed to 700kboed early next year , which will enable oil companies to increase their exports. Despite the region going through a rapid improvement of its hydrocarbon production, there remain major challenges which need to be tackled. Although the region is currently secure and IS forces have been pushed back by the Peshmergas, we think the risk has not been completely eliminated. Moreover, there is a growing humanitarian crisis, whereby almost half of the 4m people living in the region are now refugees and could suffer in the upcoming winter. We believe the region is becoming the hot spot in the Middle East and, as the whole region has already been licenced, we expect more consolidation over the coming years. The UK All stakeholders are fully aware of the importance of the oil industry for the British economy: 7% of UK GDP and approximately half of corporate tax receipts comes from the oil industry. However, the country has moved from being a net exporter in the early 2000s, to now having to import 50% of its gas. The overall sentiment was that the British government is not doing enough to support this industry, which has seen an important cost escalation and less exploration success, especially in the North Sea. The potential remains significant, however an improvement in the fiscal regime will be a key element to improve project economics. More cooperation between operators over existing infrastructure (pipelines, etc), with more transparency on tariffs, is also a requirement. To tackle these issues, the industry needs a stronger regulator and DECC is expected to increase its headcount by 2016, which bodes well for development of the industry. VSA Capital Limited is Authorised and Regulated by the Financial Conduct Authority © VSA Capital Limited, 2014, all rights reserved New Liverpool House, 15-17 Eldon Street, London EC2M 7LD | +44 (0)20 3005 5000 | www.vsacapital.com Registered in England: No. 02405923 VSA Capital Group plc is a member of the London Stock Exchange. North Africa Despite the Arab Spring, four years ago, North Africa still has a great deal of unexploited hydrocarbon resources in countries such as in Libya and Egypt, as well as frontier areas like offshore Morocco. The infrastructure is already in place, with indigenous service companies which would enable companies to bring their production to market much more quickly than in the East/West African frontier regions. In Egypt, the new oil ministry has taken the challenges faced by the gas industry very seriously. The Egyptian government has committed to the repayment of receivables to oil companies and reduced its gas subsidies , which represent a cost of approximately US$26bn/year. Companies are now allowed to sell gas to third parties, thus enjoying higher gas prices. We are also optimistic on the improvement of the security situation in Egypt and the government’s willingness to develop a more sustainable gas industry is clear. Unconventional resources could also be unlocked if there is a further improvement in gas prices. As a final anecdote, it is worth noting the comment from Keith Hill, CEO of Africa Oil: “Always listen and work with the locals. We had a farmer come to us one day to ask for help. We asked what we could do and he was very upset because every time he pumped water, all he got was oil. We were pretty keen to go help him!” In the evening VSA hosted a table at the packed gala awards and an interesting table it was , too, with guests from Vitol, the world’s largest independent energy trader; Milio, a smaller but very dynamic oil trader; Madagascar Oil (just in case our CEO got into trouble!); Egdon Resources, the UK’s leading conventional and unconventional onshore E&P; and Primeline Energy, partner to CNOOC in the south East China Sea. VSA is planning to attend the Asian Assembly in Singapore, the Canadian Assembly in Calgary and the African Assembly in Paris next year. Key Contact Details at VSA Capital Andrew Monk, Chief Executive Andrew Raca, Head of Corporate Finance Edward Hugo, Head of Research +44 (0)20 3005 5001 +44 (0)20 3005 5004 +44 (0)20 3617 5187 -2- amonk@vsacapital.com araca@vsacapital.com ehugo@vsacapital.com