Independents drill deep to strike rich seams: A new generation of smaller oil companies is emerging;
a group that has discovered how to be competitive
Financial Times, May 14
By DAVID BUCHAN
The UK's listed small oil companies may have dwindled in number. But they can rightly say, echoing Mark Twain's words, that reports of their collective demise are exaggerated.
Indeed, many in the UK-based exploration and production companies, dubbed "independents" in the sense of being untied to any refining and marketing, believe they have more of a role than when their kind first started operating in the North Sea 30 years ago.
After the takeovers in recent years of Lasmo, Monument and British Borneo, there may only be about a dozen significant UK-based "independents" left. Yet they amount to virtually the entire European E&P sector: the only significant exception being Lundin Oil of Sweden.
Many of the UK independents began life as local partners of US companies in the 1970s when the Labour government of the period gave preference to consortia with a local flavour.
But this rationale disappeared when the Thatcher government took a more free-for-all approach to letting anyone develop the North Sea - though at the same time it did create the biggest UK independent by floating off British Gas' oil interests as Enterprise Oil. Enterprise is the only UK independent that is more than a niche or regional player. As such its E&P assets would be a significant addition to an oil major, hence the persistently rumoured interest in taking it over.
As the North Sea became more competitive and difficult, some of the UK-based independents began to look elsewhere. "Unlike US independents which have always tended to be less interested in drilling outside North America, those in the UK have always tended to be more sympathetic to exotic parts of the world", says Mark Redway of Teather and Greenwood.
Unfortunately, the obvious exotic new province that happened to open up in the early 1990s was the former Soviet Union. One company, Ramco Energy, dipped in and out very successfully, recently selling its 2 per cent stake in the Azerbaijan International Oil Consortium for Dollars 150m (Pounds 104.8m).
Other UK independents - Aminex, Soco and Dana Petroleum - ventured into Russia and got stuck. While Aminex finds it hard to downplay Russia (because it has little elsewhere), Soco these days stresses its Mongolia and Vietnam operations. Another UK independent, JKX Oil & Gas, went into Ukraine, a country notorious for non-payment of energy bills. With diplomatic help from Tony Blair, the prime minister, JKX has just survived a legal attempt to rob it of its Ukraine assets.
Two other independents have sunk more fruitful roots in Asia. "Cairn Energy now has as big a stake in Bangladesh's gas production as Shell, and it would be left, if Enron (the US energy company) were to quit India, as the biggest foreign player in India," says Iain Reid of UBS Warburg. Premier Oil is now a substantial Asian gas company, with production in Burma, Indonesia and Pakistan and long term contracts in Thailand and Singapore.
But there are risks in these Asian ties. The obvious political one concerns Burma. Last year the UK government asked Premier to quit Burma because its presence was helping the military regime. Premier refused, and said it would carry on.
The other risk, according to Mr Redway, is economic and it applies also to Cairn. Because there is no real world market for gas, Cairn and Premier are "very dependent on the strength of the local economies". But then, Mr Redway is an analyst who believes that independents' competitive edge lies in exploration rather than production. He therefore rates Fusion Oil & Gas highly as "the purest exploration investment opportunity in the E&P sector".
Dana similarly vaunts its exploration expertise, but to a different end. Its goal, according to Tom Cross, chief executive, is to find oil and then swap exploration for production assets. "This avoids the expensive development stage of building platforms and pipelines and so on". Then at the other end of the spectrum are production-focused companies, such as Paladin, Tullow Oil or Venture Production. Roy Franklin, Paladin's chief executive, makes no bones about his company's scavenger strategy, spotting rich pickings overlooked by the majors.
The majors are not always ready to sell, particularly recently when the oil price rise has widened the gap in price expectations between buyers and sellers.
But Paladin was last year able to buy PetroCanada's assets in Norway, and is this year interested in bidding for some of what the Norwegian state is selling off.
As its name suggests, Venture Production, a private Aberdeen-based company with North Sea and Trinidad operations, is focused on extraction, not exploration. And so are other private companies such as Intrepid, Consort Energy and Highland Energy, formed in the past three or four years. This new generation of company tends to be more cautious than the older one. "Exploration has probably been the best way to destroy shareholder value," says one executive.
The other risk the new oilmen want to avoid is the vagaries of the stock market. "By focusing on production, the new companies are more predictable in terms of cash flow and earnings," says Mike Wagstaff, Venture's finance director. |
