Summary
A new type of investor is taking over oil and gas fields owned by major oil companies. These companies that dominated the region since the 1960s with large scale production are leaving. European utilities and companies backed by sovereign wealth funds have begun buying these assets. All of the new buyers have good cash flow and need to secure reserves. Centrica, Britain's largest gas retailer, paid $2 billion for Venture production. EDF acquired gas assets in 2008. E.On bids for Norway acreage.
Analysis
Once oil and gas fields decline to the point where they no longer generate cash that meets the minimum economic standards (25% actuarial rate of return) of a major oil and gas company, such assets are reviewed in detail to ascertain that no further reserves can be found. Then they are put up for sale. All of the large internationals including ExxonMobil, Chevron, Royal Dutch Shell and BP have drastically reduced their holdings or exited. Oil production in the United Kingdom sector of the North Sea peaked in 1999 at 2.9 million bbl/day. Today production has declined to 1.38 million bbl/day. In Norwegian waters, production peaked in 2001 at 3.41 million bbl/day and today 1.85 million bbl/day. The major offshore activity now is decommissioning of abandoned platforms and production facilities. Several contracts to remove such equipment have been let for the Ekofisk field and its several satellites. Some idle platforms are being used to drill extended reach wells to tiny structures with fewer than 50 million barrels of reserves. But capital and operating expenses continue to rise and at today's price for crude oil, most are no longer economic. Still many of the older fields still have remaining reserves and with the investment sunk, will generate profits for some years yet. These are the assets that have become interesting to utilities and other investors.
Michael Lynch consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
