Octavio Molmenti Head of Energy Latin America January 2012

Transcription

1 Lessons Learned from the US Experience: Creating the Right Shale Joint Ventures Octavio Molmenti Head of Energy Latin America January 2012

2 One of the World s Largest Unconventional Potentials No.2 USA 862 Tcf No.4 Mexico 681 Tcf No.1 China 1,275 Tcf No.3 Argentina 774 Tcf Countries with technically recoverable shale gas Tcf 1,400 1,200 1, , No.5 South Africa 485 Tcf Top Unconventional Resource Holders Argentina combines an attractive proposition of openness, potential and valuation.

3 Attractive Framework Prospective, high potential geology Stable democracy Growing economy Established gas market / infrastructure / demand Increasing liberalization need for it given price of imports Attractive unconventional gas pricing, 2x 3x of HH Nascent stage of Gold Rush, valuations still attractive Ability to leverage on US experience & benchmarks Wide menu of opportunities from large-caps to small caps Local talent pool Financeability Citi highly supportive and willing to help 2

4 US Experience: Benchmark & Proxy for Potential Argentine Future Petrochina / Encana ($5.4bn) Shell / Duvernay ($5.9 bn) Kogas / Encana ($1.1 bn) CNOOC / CHK ($1.3 bn) Marubeni / MRO ($0.3 bn) XOM / XTO Acquisition ($40.5 bn) BP / CHK ($1.8 bn) Sinopec / ConocoPhillips ($4.7 bn) PetroChina / Athabasca ($1.7 bn) Total / UTS ($0.7 bn) Total / Syneco ($0.7 bn) BP / Husky ($1.1 bn) Statoil / NAOSC ($2.0 bn) Shell / BlackRock ($2.1 bn) Total / Deer Creek ($1.3 bn) Oil Sands Western Canada Gas Chevron / Atlas ($4.3 bn) Sumitomo / Rex ($0.1 bn) Reliance / Carrizo ($0.3 bn) Shell / East ($4.7 bn) Reliance / Atlas ($1.7 bn) Statoil / CHK ($3.4 bn) Consol / Dominion ($3.5 bn) Mitsui / Anadarko ($1.4 bn) BG / EXCO ($0.9 bn) Williams / Alta ($0.5 bn) Exxon / Phillips ($1.7 bn) Noble / Consol ($3.4 bn) Repsol / SD ($1.0 bn) Atinum / SD ($0.3 bn) Bakken Niobrara Statoil / Brigham ($4.8 bn) Hess / Tracker ($1.1 bn) Oxy / Anschutz ($1.4 bn) Marcellus Utica Total / CHK ($2.3 bn) Hess / Consol ($0.6 bn) BHP / CHK ($4.8 bn) BP / CHK ($1.9 bn) XOM / HK ($0.7 bn) Total / CHK ($2.2 bn) ENI / Quicksilver ($0.3 bn) Sumitomo / CRZO ($15.7 mm) Buyer / Seller MS Lime Fayetteville Woodford Barnett Haynesville Eagle Ford BG / EXCO / Common ($0.4 bn) BG / EXCO ($1.1 bn) PXP / CHK ($3.2 bn) MRO / Hilcorp ($3.5 bn) KNOC / APC ($1.7 bn) Reliance / Pioneer ($1.1 bn) KKR / Hilcorp ($0.4 bn) BP / Lewis Energy ($0.2 bn) Talisman / Common ($0.4 bn) Shell / Harrison ($1.0 bn) CNOOC / Chesapeake ($2.2 bn) Talisman, Statoil / Enduring ($1.3 bn) Mitsui / SM Energy ($0.7 bn) 3 Onshore US activity has gone from declining production / small to mid-cap domain to world s most active, multi-national, onshore play.

5 Structures, Operatorship and Carrys Reliance/Atlas Transaction BG/Exco Haynesville Transaction Plains/Chesapeake Transaction Structure of Agreement Working Interest Acquired (%) 40.0 Upfront Payment ($mm) 339 Carry Payment ($mm) 1,358 Total Consideration ($mm) 1,697 Working Interest Acquired (%) 50.0 Upfront Payment ($mm) 655 Carry Payment ($mm) 400 Total Consideration ($mm) 1,055 Working Interest Acquired (%) 20.0 Upfront Payment ($mm) 1,650 Carry Payment ($mm) 1,650 Total Consideration ($mm) 3,300 Percent of Costs Carried (%) 75 Percent of Costs Carried (%) 75 Percent of Costs Carried (%) 50 Net Acreage Acquired (000 s) 120 Net Acreage Acquired (000 s) 42 Net Acreage Acquired (000 s) 110 Implied Headline $/acre 14,101 Implied Headline $/acre 25,119 Implied Headline $/acre 30,000 Other Assets Acquired Other Assets Acquired Other Assets Acquired Reserves (Bcfe) NA Reserves (Bcfe) Reserves (Bcfe) NA Production (mmcfe/d) NA Production (mmcfe/d) 77.5 Production (mmcfe/d) NA Carry Period 5.5 years + 2 year option N/A 5 years or when carry is extinguished + 2 year option Article III Drilling Carry Program Breach of Carry Payment Seller draws under from the LC / guarantee Undivided unpaid carry interest Undivided unpaid carry interest 100% of Buyers leasehold interest in well Article IV Joint Operating Agreements and Operators Operatorship Seller = Operator Seller = Operator Seller = Operator Buyer will be able to operate in certain areas over time When, and if Buyer operates, costs need to be comparable to those of Seller Buyer will be able to operate after a specific time frame and in agreed upon areas Operator may be removed if unanimous vote from minorities, change of control or good cause Agreement on areas of mutual interest, future operating rights Determining the carry structure and tenure is key to align incentives. 4

6 Boards, Budgets and Drilling Commitments Meetings/ Budget Reliance/Atlas Transaction BG/Exco Haynesville Transaction Plains/Chesapeake Transaction Advisory capacity only, Seller maintains majority 5 year plan designed to extinguish carry Monthly meetings Seller provides annual updates of work plan and budgets Pre-determined maximum number of wells Operating committee = align daily operations with the established work plan &budget Meet at least 1, but not more than 3 per quarter Multi-year development plan agreed by both parties Operating committee = align daily operations with the established work plan & budget Meet once a quarter Operator notifies partner if effective budget is coming higher than 20% of forecast Article V Joint Development Committee Meetings, Budget Drilling Curtailment An excess cost event can lead to drilling curtailment Any proposal to reduce the quantity of work under the Development Work Program during the Carry Period must be approved by Operator None Post Drilling Carry Period Two year development plans prepared by Operator and approved by both parties In 2nd year, if parties don t agree, then follow 2nd year of prior year plan If parties can t agree on two year plan, then the JV will drill 300 wells Two year development plans prepared by Operator and approved by both parties In 2nd year, if parties don t agree, then follow 2nd year of prior year plan NA 5 Need for utmost clarity in development decision-making process.

7 AMI and Preferential Rights AMI Acquisitions Reliance/Atlas Transaction BG/Exco Haynesville Transaction Plains/Chesapeake Transaction Operator to act as the leasing agent Specific to all depths in named counties Buyer has the right to purchase its pro rata interest in the acreage that Operator leases Both parties can separately acquire other companies/assets in AMI so long as those leases represent less than 50% of the value AMI falls away in Change of Control Article VI Area of Mutual Interest and Additional Acreage Overhead Charges Preferential Rights First 50,000 acres (20,000 net to RIL) $0/acre Next 50,000 acres (20,000 net to RIL) $750/acre Thereafter $1,500/acre (11% of headline price) Atlas has 280,000 net acres not in the JV RIL has 180 day ROFO on any sale by Atlas of greater than a 5% interest in acreage not within the JV Atlas required to accept an offer by RIL of $8,000 per acre Both parties may lease, if within AMI, must offer the other party its participating interest AM! does not apply to acquisitions of interests if the AMI assets make up less than 25% of the total cash value of the transaction Operator is the lead leasing agent, but does not have exclusive rights Partner is not prohibited from acquiring assets in the AMI None Acquisitions with lease costs <$12,500/acre $7,500/acre Acquisitions with lease costs > $12,500/acre $5,000/acre Each party has a right of first refusal on a transfer of interests If PXP acquires acreage, they must offer to CHK under the same scale, but subtract overhead CHK has a right of first refusal on a transfer of interests CHK has a right to purchase the others interest in the event of a Change of Control Transfer Rights No assignment by either party within the carry period without written consent Transfers permitted after carry period to qualified transferees only No party can transfer within three years of the Effective Date Neither party may transfer unless Transferee agrees in writing to assume the terms of the contract Tax partnership isn t altered 6 AMI and preferential rights are critical for the partnership s potential longevity.

8 Title Reliance/Atlas Transaction BG/Exco Haynesville Transaction Plains/Chesapeake Transaction Title Title review period:18 months Cure period: 6 18 months Individual threshold: $25,000 Deductible $20mm -!% of upfront + carry Cap: Total consideration Title review period:12 months Cure period: 1 year Individual threshold: $75,000 Deductible: $10.6mm -!% of upfront + carry Cap: None Title review period:30 months Cure period: 60 days Individual threshold: None Deductible: None Cap: None Article Xl of PSA Title Matters; Transfer Restrictions Title Remedy Optional remedies Reduce cash payment and drilling carry Provide substitute acreage, subject to 30,000 gross cap and within geographic requirements Optional remedies Make a payment from Seller to Buyer Have buyer reassign to Seller Have Seller indemnify Buyer If parties do not agree, then alternative (A) shall be deemed to have been elected Optional remedies Assign substitute acreage Within 10 days, remove the affected portion of such leases and refund the Buyer a cash amount equal to $15,000 per affected acre Article XII of PSA Indemnification Indemnity Total deductible: 2% of upfront payment Indemnity Cap: 37% of upfront payment Total deductible: 2% of upfront payment Indemnity Cap: 56% of upfront payment Total deductible: 1 % of upfront payment Indemnity Cap: None Security Package Seller: parent guarantee Buyer: Parent guaranty at signing of PSA obligations (terminates at closing) Post-closing, parent guaranty for carry obligations (capped) Letter of Credit Seller: required to maintain value by keeping $500mm of consideration in the entity Buyer: Holding company gave payment guarantee obligations Seller parent guarantee Buyer: No guaranty or security 7 Clarity on guarantees, remedies and indemnities.

9 Summary Joint Venture Considerations Operational Scope of operations and AMI Operatorship (current / future) Depth / formation rights Due diligence Valuation approach / determination Development plan and future drilling commitments Carry amount and term, costs covered and cost cap/ceiling Midstream operations and marketing arrangements Management fee, G&A reimbursement and service agreements Intellectual property (gained through operations) Procedures for evaluating and sharing future acquisitions Governance / Management Corporate structure (LLC, LP, C-corp) Board members Board of managers versus operating committee Separate decision making bodies Annual budgeting process and approvals Voting rights / veto rights Secondment of personnel (number, scope of access, duration) Conflict resolution procedures (3 rd party arbitration, etc.) Legal / Documentation Title transfer Purchase and sale agreement Representations and warranties Joint development agreement (typically covers AMI, exploration, development plan, etc.) Midstream and gathering agreements Marketing agreements Services and administrative agreements Health, safety and regulatory Indemnifications Exit and Other Provisions Non-performance risk mitigants Counterparty / insolvency protections Parent guarantee and letters of credit Exit mechanisms (may drive structure) Restrictions on transferability Change of control provisions (tag along, Operator preference or veto, ROFR / ROFO, etc.) Break-up fees and liquidated damages 8 Global experience in structuring agreements has generated vast amounts of lessons learned and best practices.

10 Citi s Committed to the Development of Argentina s Potential 9