OGJ Newsletter

The recent flurry of merger and acquisition activity and the softening of reserves values are indicators of a transition from a seller's market to a buyers' market, says Cornerstone Ventures (see story, p. 22).

Illustrating this transition is the $385 million (Canadian) acquisition of Barrington Petroleum by Sunoma Energy (OGJ, Sept. 7, 1998, p. 42).

Barrington was searching for a "white knight" to foil the Sunoma bid but failed to garner any alternative offers. It has now given up its fight against the takeover, apparently realizing that Sunoma's offer accurately reflects current market conditions and Barrington's poor second quarter results. The firm's net earnings, cash flow, and production were all down for the period.

Barrington said it would withdraw a poison pill put in place in August and work for an orderly transition of its assets and operations to Sunoma. Sunoma's offer includes assumption of $163 million of Barrington debt.

The heads of Total and Elf-firms considered by many to be possible merger candidates-have downplayed their interest in the current merger mania while refusing to close the door on the possibility of European refining and marketing ventures.

Elf's Philippe Jaffré said, "Acquisitions are not a path of roses." He cites a London Business School study indicating that half of all mergers and acquisitions fail to create value (see related story, p. 21). The rate of failures climbs to 66% in the case of megamergers worth more than $20 billion.

Jaffré quashed rumors of Elf's possible acquisition of Conoco in exchange for, among other things, Elf's Sanofi health and beauty unit (OGJ, Aug. 24, 1998, p. 32). He said Elf relies on its four legs-E&P, R&M, chemicals, and health-to bolster its resistance to an "adverse environment." He did, however, express a wish to "remain a major actor in Europe's (refining) industry" and said a "well-conducted" alliance there could improve Elf's position.

Total's Thierry Desmarest says he also believes in being cautious when it comes to acquisitions but is not adverse to taking part in a European refining-sector alliance, providing the right partner, or partners, are found.

Shell has not stopped at a proposed European R&M merger with Texaco (see story, p. 30) in its quest for European downstream partners.

Shell Europe Oil Products signed a memorandum of understanding with Petrofina to acquire Petrofina's four terminals and 182 retail outlets in Norway in exchange for an undisclosed number of Shell's 780 retail sites in the Netherlands. The deal will reportedly enable Shell to reduce the number of distribution points it operates in the Netherlands in order to facilitate implementation of its proposed JV with Texaco.

Russian Energy Minister Sergei Generalov has asked the finance ministry to cut taxes for Russia's battered oil industry (see related stories, pp. 36, 37) and abolish the production tax altogether on Jan. 1, 1999, in favor of a tax on profits. His plan includes an immediate tax cut from the current 55 rubles/metric ton of oil produced to 25 rubles/ton. He also wants to ease refineries' burden by transferring a tax on them to fuels and lubes retailers.

Without such measures, he warned, Russia's oil output could fall a further 70-80 million tons in 1999, to about 221 million tons, and four refineries could close, reducing processing by 30 million tons for the year. These changes could put 180,000 Russians out of work, said Generalov.

Russia's production declined by 4.4 million tons in the second quarter from the same period in 1997. In addition, salaries were cut by 17%, capital investments fell 25%, and the oil industry's losses totaled 34 billion rubles.

This week, the U.K. government quietly let die a much-derided plan to meddle with the petroleum tax regime (see Editorial, p. 19).

U.K. Offshore Operators Association said, "While the uncertainty caused by the extended review has been of concern, the industry believes that the process of consultation, introduced by this government, has been crucial to a thorough understanding of the issues that underpin today's (Sept. 7) announcement. The 18th offshore licensing round, due to close Sept. 11, can now proceed with greater certainty."

Data released last week by the U.S. Department of Energy reveal that proved oil reserves in the U.S. increased in 1997 for the first time in a decade, while natural gas reserves were up for the fourth year running. Oil reserves were up 2.4% to 22.546 billion bbl, and gas reserves rose 0.4% to 167.223 tcf. NGL reserves increased by 1.9% to 7.973 billion bbl.

"Surprisingly large revisions in some of California's old and heavy oil fields provided over half the oil increase," said DOE. "Oil and gas discoveries in the federal offshore-several in deep water-also played a major role in theellipsereserves increase(s)."

India's Oil & Natural Gas Corp. (ONGC) has invited 17 leading international oil companies to consider taking farm-outs in three deepwater exploration blocks given to it on a nomination basis. The companies include Shell, Mobil, Chevron, Occidental, Petrobras, Total, Statoil, Amoco, and Unocal.

The multinationals have been invited to have a look at the data on the three blocks in the Cauvery, Krishna-Godavari, and Kerala-Konkan basins.

Earlier, ONGC had planned to go it alone in these blocks. But it now feels that, without help from foreign companies, it will not have access to the requisite technology for deepwater exploration-an area alien to it. Moreover, the participation of a foreign partner will help it handle the massive risk capital required for carrying out deepwater exploration.

Unocal is apparently looking to expand its already big presence in Asia by seeking India's permission to pick up a 26% equity stake in Hindustan Oil Exploration Co. (HOEC) for 800 million rupees ($18.2 million). HOEC would use the funds for its current expansion and development projects.

The move is not expected to be affected by limited U.S. economic sanctions against India, imposed in response to the country's nuclear test program.

The Clinton administration says Congress should give it more flexibility in administering international economic sanctions and should limit future sanctions laws.

Stuart Eizenstadt, undersecretary of state, told a special Senate committee on sanctions, "We believe that flexibility, accompanied by national-interest waiver authority in all legislation, is the single most essential element if we want to make sanctions work." He said Congress should allow the administration to waive all existing and future sanctions. If this were to happen, he said President Clinton would sign an executive order ending sanctions after a fixed time and exempting existing contracts.

Norway's Saga Petroleum has taken pole position in the race to secure oil projects in Iran with the signing of a joint study agreement with National Iranian Oil Co.

The Iranian state firm recently offered 24 oil and gas development projects and 17 exploration blocks to international petroleum firms under buy-back contracts (OGJ, July 13, 1998, p. 32). Saga secured a deal with NIOC that will give it nonexclusive access to seismic data for attractive oil projects. The company plans to spend about 20 million kroner ($2.5 million) assessing the data, likely making a decision next year on whether to invest in Iran's oil sector.

Middle East Economic Survey said it believes the deal gives Saga access to the "coveted" Dara block.

Meanwhile, Shell and Lasmo are believed to be pursuing a study agreement for Iranian territory near the Caspian Sea.

Total is looking to increase its participation in Iran's oil industry. One desirable path to this goal is expansion of its contract in the Sirri oil fields by increasing its participation to the entire Sirri area, rather than just Sirri A and E fields, says Total's vice-president of Middle East affairs, Christophe de Margerie. First oil from Sirri A field is slated for November, at a rate of 20,000 b/d, and Sirri E is due on stream early next year. Sirri E is expected to produce 100,000 b/d.

De Margerie said Total would also like to have onshore operations, referring to projects being offered under NIOC's latest series of buy-backs. Expansion of its participation in South Pars gas field is another option.

Petrobras continues to reach out to other major oil companies for partnerships involving, among other things, an exchange of technology.

Petobras and Italy's state-owned ENI last week signed an agreement for exchange of advanced E&P technologies. ENI would make available to Petrobras its know-how on high-pressure/high-temperature wells, advanced reservoir modeling, improved well productivity, and integrated well information systems-with a special emphasis on very deep wells; Petrobras will make available to ENI its deepwater technology related to FPSOs, flowlines/risers, pipelines, and subsea production systems.

This follows a comparable accord Petrobras recently entered into with Shell, as the Brazilian state firm seeks to become more competitive in the wake of losing its 43-year monopoly in Brazil (see related story, p. 33).

Brazil's petroleum consumption continues to increase, which explains rising interest in the country's newly liberated oil industry (see related story, p. 33). In July, the Brazilian market consumed 1,798,000 b/d of refined products, compared with 1,731,000 b/d in July 1997. Jet fuel showed the largest consumption hike-a 17.18% increase, with the market absorbing 79,100 b/d of jet fuel in July 1998, compared with 67,500 b/d in July 1997. Diesel oil use was up 8.05%, to 629,300 b/d, compared with July 1997.

Fuel oil use declined about 1% to 254,300 b/d from 256,800 b/d in July 1997. Naphtha consumption decreased 2.69% to 202,200 b/d.

Meanwhile, the latest natural gas demand figures confirm the growing importance of this commodity in Brazil's energy mix. In July, gas use was up 7.14% from July 1997. This translates into consumption of 18 million cu m/day vs. 16.8 million cu m/day in July 1997.

Foreign companies operating in Ecuador are getting more signs of long-awaited reforms on key petroleum issues (OGJ, Aug., 31, 1998, Newsletter). After years of impasse caused by political wrangling, progress is finally at hand on an expansion of Ecuador's pipeline capacity.

The new government has welcomed plans by five companies developing low-gravity oil in Ecuador's Oriente jungle to build a pipeline to move their 16-22° gravity crudes to market. Lack of pipeline export capacity has crimped output growth in Ecuador by ARCO, City Investing, Occidental, Oryx, and YPF. Arthur D. Little is to conduct a feasibility study of, among other things, route, capacity, and economics, with a preliminary target of work start-up in second quarter 1999.

For years, Ecuador has grappled with the question of whether to expand the Lago Agrio-Balao trunk export line to accommodate the increasing volumes of heavy crude-which would have resulted in a pipeline blend of 24.5° gravity vs. the current 28.5° average-or to let the foreign operators build their own line.

This impasse has stymied Ecuador's efforts to boost production to more than 500,000 b/d from the 300,000-385,000 b/d level where it has languished for more than a decade.

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