Smaller groups get to know the drill Shrinking natural gas reserves in the US and mergers between larger companies are helping to drive a new wave of consolidation
Financial Times, Sep 28, 2001 By SHEILA MCNULTY As Texaco prepares to merge next month into the history books - its 100-year history swallowed up by Chevron - the smaller and less well-known companies in the US oil and gas industry are moving rapidly to fill the void. Analysts say this next phase of consolidation is being driven by falling natural gas reserves in the US and a recognition that when it comes to securing new resources, size counts. Recent deals, involving companies such as Conoco and Devon Energy, have seen US groups buying into Canadian companies, gaining access to the relatively unexplored fields north of the US's lower 48 states. Canada's frontier regions are believed to contain some of North America's largest remaining undeveloped oil and gas deposits. "We are desperately short of natural gas in North America during the next five-year period," says Archie Dunham, Conoco's chief executive officer. "In the history of our industry, we have drilled 3.5m oil and natural gas wells in the world - 3m of these were drilled in the lower 48 states. The US is a very mature province." In July, Conoco completed its Dollars 6.3bn acquisition of Gulf Canada Resources in the largest oil and gas deal in Canadian history - immediately increasing its North American natural gas production and proved natural gas reserves by 50 per cent, and worldwide total reserves (of oil, natural gas and Syncrude) by 40 per cent. Since then there have been a series of deals, including Devon Energy's agreement to acquire Calgary-based Anderson Exploration for Dollars 3.4bn to become North America's biggest independent producer of natural gas. Devon has more than doubled its size through acquisitions in recent years. The Anderson acquisition was the second big deal for Devon in a matter of weeks, following the acquisition of Mitchell Energy and Development for Dollars 3.1bn. "Canada is much less explored than the US," says J Larry Nichols, Devon's chairman, president and chief executive officer. That is, in turn, setting the stage for a variety of deals in other parts of the industry. On September 20, for example, Irving Oil and Chevron Canada Resources announced plans to construct a Dollars 350m terminal in Canada to unload natural gas in a liquid form and then convert it to a gaseous state for use in the region. The same day, Duke Energy, the third-biggest US electricity utility, agreed to buy Canada's Westcoast Energy in an Dollars 8.5bn deal to expand its natural gas pipeline network. Edward Weatherly, petroleum group terminals manager at Industrialinfo.com, which analyses the industry, says there is a growing demand for natural gas caused by regional growth, gas-fired electrical generation and a gradual shift to natural gas as the fuel of choice. Gas prices have fallen from highs last winter, but analysts say they are still 50-70 per cent higher than three years ago, and compa nies know growth in gas demand will only increase. However, the amount of money needed to explore and develop new sources is increasingly significant. "So it gets to be a business of scale and scope," says Gerald Keenan, an energy strategy partner at PwC. "The prices in the market make it cheaper to buy reserves on the stock market than to go look for them." He and other analysts expect the deals to continue until there is a solid core of about 10 companies in the second tier of the oil and gas industry. "The raw economic realities of being in the energy business require fewer, larger entities," says Curt Launer, of Credit Suisse First Boston. That was also what drove the top tier to unite and create global "super-majors", such as ExxonMobil, the biggest US-based company. Stedman Garber Jr, chief executive officer of Santa Fe International, cited the creation of ExxonMobil and ChevronTexaco as the reason for the Texas drilling company's September 3 decision to merge with Global Marine to form the world's second biggest offshore drilling contractor. "All our major customers are merging or have merged, so they're increasingly looking for one company to serve them worldwide in all of the major markets." As the consolidation continues, so will the search for new resources. US companies are keen to move as aggressively into Alaska as they have been into Canada. But concerns about destroying the environment have restricted their movements. The terrorist attacks on the US this month might, however, mark a turning point. They might lead to widespread public support for measures to reduce US dependence on foreign energy sources. Legislation to open the Arctic National Wildlife Refuge to drilling was recently approved by the House of Representatives, but - before the attacks - analysts had suspected it would get no further, citing resistance in the Senate. Now, Michael Mayer, analyst at Prudential Securities Research, says there is likely to be less partisanship about the issue amid increased awareness of the need to heighten the nation's energy infrastructure and develop more domestic sources of oil and natural gas. "This probably increases the chance of opening a small portion of Alaska," he says. "The fact is that we are short of natural gas," says Conoco's Mr Dunham. The US can choose to open Alaska further, he says, or rely increasingly on imports Full article at: http://globalarchive.ft.com/globalarchive/articles.html?print=true&id=01 0928001213 Michael Keaney Mercuria Business School Martinlaaksontie 36 01620 Vantaa Finland [EMAIL PROTECTED]
