OGJ Newsletter

Low oil prices and Russia's escalating economic crisis are bringing the country's boom in oil mergers and acquisitions to a screeching halt. The $2.1 billion sale of a controlling stake in Rosneft, Russia's last great oil property still in state hands, has ended in failure because not a single bid was received by the May 26 deadline. State gas giant Gazprom was reportedly being pressured by the Kremlin to bid for Rosneft, contrary to expectations that this was to be a competitive

June 1, 1998

9 min read

Low oil prices and Russia's escalating economic crisis are bringing the country's boom in oil mergers and acquisitions to a screeching halt.

The $2.1 billion sale of a controlling stake in Rosneft, Russia's last great oil property still in state hands, has ended in failure because not a single bid was received by the May 26 deadline. State gas giant Gazprom was reportedly being pressured by the Kremlin to bid for Rosneft, contrary to expectations that this was to be a competitive auction with a number of bidders.

Foreign observers have long held the view that, if Gazprom wanted Rosneft, it would get it. Now it appears that it had to be "persuaded" to buy it-and that the persuasion failed. Low oil prices and economic instability in Russia appear, for now at least, to have dissuaded all potential bidders.

The government was probably less concerned with achieving a fair and transparent auction at this stage than just wanting someone to bid-it has, after all, built the Rosneft sale revenues into its 1998 budget. However, the failed first attempt at a sale means that the $2.1 billion starting price will come down through a series of trade-offs involving the company's tax debts to the government.

Meanwhile, the Russian megamerger of Yukos and Sibneft that would have created one of the world's biggest oil companies, Yuksi, has collapsed.

The merger, in which Yukos would have had 60% and Sibneft 40%, tottered because Sibneft's financial standing appears to be worse than Yukos expected. Sibneft is unable to pay current taxes, and its back taxes are increasing ($35 million as of Mar. 1). Wages in arrears to Noyabrskneftegaz employees total $65 million; the employees, who have not been paid for nearly 4 months, had threatened to strike unless they were paid by the end of May.

In addition, Sibneft's future operations could be hampered by the company's deteriorating relations with local authorities in regions where its subsidiaries operate. Yukos, on the other hand, is in good shape in terms of tax payments and employee and community relations.

As the potential merger developed, Yukos tried to impose its management principles on Yuksi but met resistance from several Sibneft shareholders who feared losing control of Yuksi. Sibneft shareholders also blocked the possibility of Yukos shareholders later increasing their stake in Yuksi.

It was unclear at presstime how the failed merger would affect a proposed strategic alliance between Elf and Yuksi to undertake joint projects initially in Russia and later outside (OGJ, Apr. 13, 1998, p. 34).

Texaco, Shell, and Saudi Aramco have received all needed approvals for their second U.S. downstream joint venture (OGJ, Dec. 29, 1997, p. 24).

The new firm, Motiva Enterprises LLC, will include the firms' eastern U.S. and Gulf Coast assets and will market refined products under the Texaco and Shell brand names. The Houston-based firm will be owned 35% by Shell and 32.5% each by Texaco and Aramco. It is expected to start operating this month, with former Texaco R&M Pres. L. Wilson Berry as president and CEO.

The partners formed a similar JV this year, Equilon Enterprises, combining Midwestern and western U.S. downstream assets (OGJ, Jan. 26, 1998, p. 55).

Some U.S. Congressmen are urging the Clinton administration to extend an executive order prohibiting oil and gas leasing off the West Coast, Florida, and Atlantic Coast. President Bush issued the order in June 1990, excluding leasing until "after the year 2000 and then only if studies show that development can be pursued in an environmentally safe manner."

North America's natural gas industry is poised for rapid expansion in the next 15 years, having spent the past 10 recapturing market share, restructuring, and deregulating.

According to a joint study by Arthur Andersen and Cambridge Energy Research Associates (CERA), if the North American gas industry takes advantage of current opportunities, it could expand by 30% over the period.

"The gas industry now faces an unprecedented window of opportunity to rapidly increase end-use consumption," said CERA's Tom Robinson. "But with this opportunity comes the challenge of developing adequate gas supply resources and infrastructure to meet what could grow to be a 25 or even 30 tcf market in the U.S. over the next decade."

News of falling oil prices and of well shut-ins has bolstered British Columbia actions to cut royalty rates and develop other measures aimed at doubling the province's oil and gas production over the next 10 years.

Measures include royalty cuts of 20-40% on new wells and a new British Columbia Oil and Gas Commission to streamline industry regulations. Companies have complained it can take up to 6 months to get a drilling permit because of regulatory delays.

The province hopes to trigger $25 billion (Canadian) in investment over the next 10 years and double oil and gas production.

The industry has invested on average $1.7 billion/year in the province over the past 5 years.

Canadian oil producers with a portfolio weighted toward heavy oil have taken a hard hit on first quarter earnings; integrated firms and pipelines fared a little better.

A comparison of 1998 and 1997 first quarter earnings for a sample of companies follows, with 1998 results listed first, in millions of Canadian dollars, and losses in parentheses: Ocelot Energy 0.858 vs. 3.639; Place Resources 144 vs. 347; Shell Canada 115 vs. 152; Imperial Oil 113 vs. 191; Westcoast Energy 103 vs. 122; NOVA 82 vs. 124; PanCanadian 45 vs. 135; Petro-Canada 36 vs. 104; Canadian Natural Resources 8.351 vs. 38.01; Talisman 5.9 vs. 45.5; Magin Energy 0.76 vs. 0.955; Amber Energy 0.512 vs. 5.79; Denbury Resources (0.68) vs. 5.215 (U.S. $); Canadian Cabre Exploration (0.8) vs. 5; CanOxy (4) vs. 73; Ranger Oil (4) vs. 26.7; Crestar Energy (16.3) vs. 18.6; and Gulf Canada (47) vs. 12.

Although first quarter earnings were lackluster for most E&P companies, Houston-based Offshore Data Services reports that 1997 was "a breakout year for worldwide offshore pipeline construction" with more than 5,000 miles of infield and export pipe, both rigid and flexible, laid under the world's seas last year-more than was laid in the preceding 10 years.

Better news follows: 5,300 miles of offshore pipeline projects are anticipated worldwide in 1998, not including 450 miles already installed.

While growth is not uniform across regions, 1998 projects are due primarily to expansion into deep water, particularly in the Gulf of Mexico, long export pipelines tying into existing infrastructure, and more subsea satellite tie-backs in addition to increased exploration activity in general.

Will U.S. petroleum companies also be frozen out of the Indian subcontinent-as they are in other sanctions-targeted nations-after more U.S. sanctions are enacted in response to proliferating nuclear weapons tests in that region?

It was too early to tell what will happen in response to Pakistan's detonation of two nuclear devices at presstime last week, but its neighbor and rival India isn't wasting time in sweetening incentives to foreign oil investors.

India's oil ministry, at a meeting last week, unveiled a policy package to attract private sector investment in its oil sector following the country's nuclear bomb test.

India may open up the country's producing oil fields to the private sector and extend duty-free imports of capital goods for crude storage projects and pipeline projects and reconfigure duty charges on condensate to an equal basis with naphtha. Officials also are studying tariff rationalization and increases in LPG and kerosine prices. During the meeting, government officials proposed awarding the lucrative Ratna-R series fields to Bombay firm Essar Oil Ltd. as well as 11 small fields to foreign firms to help boost the country's lagging oil output.

India is expected to increase its demand for petroleum products by 560,000 b/d in the next 4 years.

LNG export demand coupled with a rising shortage of electrical power in Qatar is leading to expanded development of the country's North field.

Qatar General Petroleum Corp. (QGPC) has earmarked new acreage in the supergiant field for further E&D to boost North gas output to meet increased demand for power generation and LPG production, according to local news reports.

Qatar's ministry of electricity and water reports that the country faces a 33% shortfall in power generation in 2000. Officials say demand will reach 4,000 MW in 2010, compared with 1,500 in 1995.

Gas from the field is currently used as feedstock for LNG plants there. QGPC reckons that 11 tcf will be needed by QatarGas and 18 tcf by Ras Laffan Liquefied Natural Gas Co. An additional 7 tcf of natural gas will have to be extracted by 2001 for power generation, QGPC estimates.

An LNG project based on production from Bayu-Undan gas field in the Timor Sea in an area jointly administered by Australia and Indonesia is stalled in part because of Asian economic woes.

Phillips Petroleum says plans to start up a Bayu-Undan LNG project by 2003 were extended another 2-3 years. Phillips also faults a dispute between it and BHP over whether to build the LNG plant at Darwin or near the offshore gas field (OGJ, Apr. 13, 1998, Newsletter).

Despite Asia's economic problems, the $4 billion development of Singapore's Jurong Island into an integrated hub for the petrochemical industry is progressing on schedule, says the country's Economic Development Board.

The reclamation phase begins in August and will nearly triple the size of Jurong to about 2,800 hectares. A $140 million causeway linking the island to the mainland is under construction and should be completed by October.

Some reports indicate a new nationalist majority in Hungary will slow attempts to further privatize energy companies or investment in what has been Eastern Europe's fastest modernizing former communist country. Hungarian voters gave right-wing parties a parliamentary majority during the May 24 national elections.

Pro-market socialists occupy the second-largest segment of parliament, led by 35-year-old Viktor Orban, head of the Fidesz-Hungarian-Civic Party. However, the number of seats they occupy is a far cry from forming a coalition government. Fidesz has maintained a moderate stance by cautiously endorsing market reforms and European Union membership on one hand while claiming that the previous government too quickly adopted open-market reforms.

The ultra-conservative Hungarian Justice and Life Party (HJLP) surprised many by winning 14 parliamentary seats. The HJLP unsuccessfully tried to get a referendum before the parliament during 1994-98 to block attempts to privatize the country's energy sector. It is expected to continue efforts to keep energy resources under state control and denounce increases in consumer heating bills.