Drilling on the stock exchange

Feb. 25, 2002
Europe is currently seeing the re-emergence of stock exchange prospectors who see it more economic to acquire producing assets rather than step up their own exploration programs. In the 1980s, Britain's small exploration companies were snapped up, and now those that are left, such as Enterprise Oil PLC, are rumored to be takeover targets.

Europe is currently seeing the re-emergence of stock exchange prospectors who see it more economic to acquire producing assets rather than step up their own exploration programs. In the 1980s, Britain's small exploration companies were snapped up, and now those that are left, such as Enterprise Oil PLC, are rumored to be takeover targets.

But size is no longer any protection, and even large companies are aware that Royal Dutch/Shell Group has $11 billion on tap to finance possible takeovers.

However, it could be that the real threat is going to come from the Far East, where both China and Japan are preparing to replace imports with production from their own assets in the west.

Chinese buyers

China's state-owned oil companies are said to be preparing to increase their holdings in companies with interest in production in Azerbaijan, Tunisia, and Persian Gulf states with the government 's encouragement. Beijing predicts demand will grow at 4%/year while domestic production remains static.

China Petroleum & Chemical Corp. (Sinopec) has already agreed to pay $215 million for Atlantis ASA, a unit of Petroleum Geo Services ASA, that held stakes in Isis oil field off Tunisia and in gas fields in the Persian Gulf (OGJ, Jan. 28, 2002, p. 42). Sinopec has agreed to sell 50% of its interest to Sinochem, the associated state-owned refiner.

Atlantis has 500 bcf of gas reserves in the Persian Gulf and 20 million bbl of oil off Tunisia and in the Persian Gulf fields. Production from the assets is to begin in 2003.

The deal between the two companies requires approval by the Chinese cabinet, but provided they don't start a spiraling bidding war, the Chinese government is happy to see its upstream and downstream companies acquiring western production.

Hong Kong-listed China National Offshore Oil Co. (CNOOC), the operating arm of China's third-largest state oil company, has also recently paid Repsol-YPF SA $585 million for Indonesian oil and gas fields. In addition, China National Petroleum Corp. (CNPC), the country's largest oil company, operating as Petrochina, has paid the European Bank for Reconstruction & Development (EBRD) $52 million for a stake in an oil field in Azerbaijan.

India, Japan

India is also on the acquisition trail and is planning to use the state-run Indian Oil & Natural Gas Corp. and the Gas Authority of India Ltd. to buy a 30% stake in a Myanmar natural gas venture from Daewoo International Corp., according to the South Korean company.

However, the strongest challenge to China's ambitions will come from Japan, which is trying to make up for the loss of its biggest overseas production venture following Saudi Arabia's refusal to renew a 40-year drilling contract in the Neutral Zone between Saudi Arabia and Kuwait.

Therefore, if a bidding war does develop over Enterprise, which is presently working on its defense strategy in anticipation of a bid from Italy's ENI SPA, we could witness the emergence of several new players on the western stock exchanges.