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Oil prices stymie upstream deals

GLOBAL UPSTREAM mergers and acquisitions (M&A) almost halved in value in 2002 and analysts do not expect a speedy pick-up in 2003. John S Herold, the US-based energy consultancy, reports that the value of upstream M&A deals dropped to $46.1bn from $81.8bn in 2001, largely because of the absence of mega-mergers, such as the Conoco-Phillips deal of that year.

Increased M&A activity in the North Sea bucked the general trend, with 14 transactions totalling $9.1bn - double the 2001 total. BP's $1.3bn sale of its maturing Forties oilfield - historically a prime BP asset to Apache, a US independent, continues the trend into 2003. There's the potential that 2003 could be a very active year in the asset market, as there's a lot available for existing companies to grow, says Rhodri Thomas, an analyst at Wood Mackenzie.

BP and other supermajors are moving away from production targets as their primary focus and are looking at generating value for their portfolio. They've been building up to it by re-evaluating their portfolio and there's the potential for other deals being done, says Thomas.

Shell's $7bn purchase of the UK's Enterprise Oil last year could lead it to offload some assets acquired as part of the deal, which might generate further activity in the asset market this year.

But commodity price volatility means BP's North Sea sale may prove an isolated case. The likelihood of high oil prices continuing through 2003 means global M&A activity could be stunted as the majors opt to cling on to old assets. In a normal universe, large companies would sell assets that are declining in the face of the challenges of rising capital spending. But there's a marked reluctance to dispose of those assets, because oil and gas prices are so high, says Deutsche Bank analyst, JJ Traynor.

The BP-Apache deal will not necessarily spark a wave of asset sales. This is a BP-specific issue. It's wrong to extrapolate from this that everyone else is going to start selling tail-end operatorships, says Traynor.

M&A arteries are also being clogged up by slow growth in replacement provinces. Progress is being hampered by lengthy government approvals processes in non-OECD countries, as witnessed by the tortuous progress in the opening of the Saudi Arabian gas sector since it was first announced in 1998. If Chevron wanted to replace its Californian oil business with a growth business in another part of the world, it would find it difficult, says Traynor.

North American upstream M&A activity slowed noticeably in 2002, which analysts attribute mainly to the result of heightened oil-price volatility. US deal value fell to a five-year low in 2002, although activity in the mid-continent and onshore Gulf coast remained strong, John S Herold reports. North America's share of total worldwide deal value fell to 33%, from 43% in 2001.

Implied reserves values outside North America fell by 38%, to $1.67 a barrel of oil equivalent (boe) as a consequence of a number of deals involving underdeveloped assets in frontier areas. US implied reserves values slipped by $1.00 to $6.00/boe, although they remain at historically high levels.

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