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Monday February 6, 3:02 PM

INTERVIEW: Soaring Energy Prices Will Fuel Oil & Gas M&A



By Keri Geiger



HONG KONG (Dow Jones)--Oil and gas merger and acquisition activity in Asia should rise sharply this year as Asian energy companies continue to compete aggressively for additional reserves, says the head of energy investment banking at JP Morgan & Chase (JPM) in Hong Kong.




"With US$60 to US$70 oil prices, M&A transaction values will continue to be large and given the substantial cash reserves and strong share performance of Asian companies, they will not be deterred from competing against their U.S. and European counterparts for international assets," said Ivor Orchard, head of energy investment banking at JP Morgan in Hong Kong.


He said while the global volume for oil and gas M&A set a new record in 2005, so did the prices paid for assets. The average price for oil and gas assets increased to around US$10 per barrel, more than double the price paid per barrel of proved reserves in 2004.


"But that masks the fact that the average price was over US$15 in the U.S. and over US$20 in Canada".


He said that buyers are willing to pay higher prices because of the need to replace reserves and meet production growth targets, as well as the ability to use a very liquid oil futures market to hedge against falling prices.


In 2005, oil and gas M&A deals totaled US$14 billion, compared with US$5.3 billion in 2004, according to Dealogic PLC (DL.LN) a capital markets data provider. Orchard said he expects the level of activity both in Asia and globally to keep rising.


China's and India's hunger for energy resources to fuel their fast-growing economies is an obvious driver behind this, but it is too simplistic to see the increasing level of activity just in these terms, said Orchard.


"In both countries, individual companies have grown to the point where they are now looking to compete on the world stage. By virtue of strong financial performance, and share market support, they have the capital to do so," said Orchard.


"Just look at the capitalization of companies such as PetroChina Co. (PTR), which is around US$170 billion - larger than Chevron Corp. (CVX). These companies have the capability to successfully undertake multibillion dollar transactions."


Orchard, who is a former executive at Royal Dutch Shell PLC (RDSB) and has recently advised Chinese oil giants such as CNOOC Ltd. (CEO), China National Petroleum Corp. (CNPC.YY) and China Petroleum & Chemical Corp. (SNP), or Sinopec, said that until the last twelve months Asian companies had relatively little success in acquiring overseas energy assets.


The most glaring example of this was Chinese offshore oil producer CNOOC's failed US$18.5 billion takeover of U.S. oil company Unocal Corp. The acquisition attempt crumbled under U.S. Congressional opposition.


Orchard, who advised CNOOC on the Unocal deal, said that, although CNOOC was ultimately unsuccessful in acquiring Unocal, the example which it set in competing directly against Chevron has fundamentally changed the landscape for future Asian oil and gas M&A. Now, he said, these companies have become increasingly sophisticated in their analysis of potential targets, as well as simply more aggressive.


"Companies in the region will no longer be deterred from doing large corporate transactions, even if the United States may not be their first port of call. CNPC's acquisition of PetroKazakhstan is a case in point," said Orchard.


CNPC paid US$4.18 billion for Petrokazakhstan, a Canadian oil company with operations in Kazakhstan.


In 2005, China-related completed oil and gas M&A topped US$5.5 billion. And this year looks likely to surpass that. Earlier this month, CNOOC disclosed a $2.27 billion acquisition of a stake in a Nigerian oil field and is considering a US$2 billion bid for Canada-based energy company Nations Energy, which owns an oil field in Kazakhstan. This is a sharp rose over the last two years, when CNOOC spent just US$825.5 million on completed acquisitions, according to Dealogic.


Orchard added that this year, big spenders such as CNOOC and CNPC will be looking at Russia for assets.


"Russia will continue to be an important focus for Asian as well as U.S. and European companies this year. The sale of assets out of the TNK-BP Holding (TNBP.RS) portfolio is already attracting interest out of Asia," said Orchard.


TNK-BP is the holding company that incorporates BP PLC's (BP) operations in Russia.


"CNPC has been the most active player to date in looking for opportunities in Russia, and is likely to be joined by companies such as ONGC of India."


Competing Giants


Orchard also explained that while China is busy looking for energy reserves, India isn't far behind and often competing with the Chinese during the bidding process.


"In 2005, the Chinese and Indians were frequently in competition with each other, for assets in Nigeria, Kazakhstan and Ecuador. However, the recent successful joint bid by ONGC and CNPC for Petro-Canada's (PCZ) assets in Syria may be a sign that cooperation will be an increasing feature of future transactions," said Orchard.


In December, a joint venture between India's Oil & Natural Gas Corp. (500312.BY) and China's state-run CNPC successfully bid for a stake held by Petro-Canada in an oil field in Syria.


Getting Deals Done


While cash rich countries and companies in Asia are busy scouring the globe for energy reserves, investment banks in the region are busy trying to put these M&A deals together, which can pay lucrative fees.


Orchard said that, aside from M&A advisory services, large oil and gas acquisitions also tap other investment banking products such as commodity hedging and debt and equity financing.


But Orchard said that deals involving energy assets, while potentially more lucrative, reach far beyond simple M&A when it comes to the negotiating table.


In 2001, Orchard advised Shell on its attempted takeover of Woodside Petroleum Ltd. (WPL.AU), one of the largest listed oil and gas companies in Australia and operator of the North West Shelf LNG project. The Australian government blocked the transaction, viewing it to be against national interests because of Shell's ownership of competing LNG projects in the region, said Orchard.


Like the CNOOC failure, the Woodside deal also highlighted the political complexities surrounding oil and gas M&A. "Oil and gas is by nature geopolitically sensitive and it is inevitable that from time to time external events will affect the outcome of what would otherwise be straightforward M&A transactions."


-By Keri Geiger, Dow Jones Newswires; 852-2802-7002; keri.geiger@dowjones.com


-Edited by David Riordan


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Commodity Strategists: Oil May Reach $96 a Barrel (Update2)

Feb. 7 (Bloomberg) -- Oil may rise to a record $96 a barrel in August, when hurricanes typically cut U.S. output, said Mitsui & Co., Japan's second-largest trading company.


Crude oil prices, which have tripled since 2001, may gain 50 percent this year as storms add to supply concerns amid rising global demand, said Tetsu Emori, 39, a commodities strategist at Tokyo-based Mitsui. Oil, which traded at $64.90 today, may average $74 a barrel in New York in 2006, he said.


Oil reached a record $70.85 on Aug. 30 the day after Hurricane Katrina made landfall on the U.S. Gulf Coast, wrecking oil platforms, pipelines and refineries, and cutting production in the world's largest energy market. Global oil demand may rise 2.2 percent this year, almost twice as fast as in 2005, the Paris-based International Agency said last month.


``Oil may peak during the hurricane season in August or September,'' Emori said in a telephone interview yesterday. ``Economic growth will add to tightness in supply.''


Global growth, led by China and the U.S., will quicken to about 4.5 percent in 2006, the International Monetary Fund's Managing Director Rodrigo de Rato said on Jan. 30.


Oil on the New York Mercantile Exchange has risen 6.2 percent this year after Iran, the world's fourth-largest producer, pressed ahead with its nuclear research program, defying the U.S. and European Union. Rebel attacks on oil facilities in Nigeria cut shipments from Africa's top exporter.


Oil in New York averaged $56.70 a barrel in 2005. It traded 21 cents lower at $64.90 a barrel at 3:54 p.m. in Singapore.


Iran Dispute


Traders are concerned that the Iranian dispute may escalate, prompting the Middle East nation to cut its 2.5 million barrels a day of oil shipments, said Emori, who works at Mitsui Bussan Futures Ltd., the trading company's commodities futures unit. That equals almost 3 percent of daily global production.


``It's geopolitical risk that's sustaining the market at these prices,'' said Emori, who started at Mitsui in 2000 and previously worked at Sumitomo Corp., Japan's third-largest trading house, and German commodity trader Metallgesellschaft AG. ``As long as the Iran issue is unresolved, it's hard for traders to sell,'' he said.


Katrina, one of 26 named storms in the worst Atlantic Hurricane season on record, closed almost every production platform in the U.S. Gulf, where about 30 percent of the country's oil is produced. Hurricane Rita, almost a month later, did the same thing.


On Jan. 26, a quarter of production, or 373,407 barrels a day, remained shut because of storm damage, the U.S. Energy Department said.


Atlantic storms are becoming stronger and more frequent because ocean temperatures are rising, the Miami-based National Hurricane Center said last year. The hurricane season starts on June 1 and ends on Nov. 30.


Rising Supply


Not all analysts agree prices will increase. Rising supply may cause oil to fall this year, the Royal Bank of Scotland, the U.K.'s second-largest lender, said last month. Oil in New York may average $52.50 this year as global output increases, it said.


``While traders and investors have focused on strong demand growth, sizable additions to supply have largely been ignored,'' Thorsten Fischer, a senior economic adviser at the Edinburgh- based bank said in a research note published on Jan. 13.


U.S. oil inventories are 11 percent higher than their five- year average, according to the energy department.


Still, concern about global supply is supporting investment in oil futures. Last week, hedge-fund managers and other large speculators increased their net-long positions in New York oil futures to the highest since September, according to U.S. Commodity Futures Trading Commission data.


``Technical problems in Iraqi oilfields and ongoing concerns over production in Nigeria remain,'' said analysts led by Kevin Norrish at London-based Barclays Capital in a note to clients yesterday. ``Oil market participants will be extremely reluctant of being short crude oil.''


Barclays Capital, a unit of the U.K.'s third-largest bank, expects crude oil prices to average $68 this year. Norrish and his colleague Paul Horsnell were the most accurate forecasters of prices among analysts surveyed by Bloomberg last year.


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on todays inventory report..... I've noticed that crude oil stocks have risen, however, i've also noticed that the SPR is continuing to be drawn from. I thought that it would just be used around the time of the hurricanes. Either it is still being used or there is a pretty big lag in the data. It could be either. If we adjust for movements in the SPR then crude stocks have not risen so much. gasoline stocks did rise substantially though, with distillates (heating oil and diesel) slightly down.
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Caught between a rock and a hard place....


Japan the sushi in sandwich between the US and Tehran
Peter Alford
February 08, 2006

JAPAN is in a bad jam over Iran and if, as now seems likely, the international campaign against Tehran's nuclear program progresses to economic sanctions, the Japanese will find themselves uniquely under pressure from both sides.

The hinge of their problem is southern Azadegan, a massive oil project in western Khuzestan province in which Japan's semi-government petroleum company Inpex Corp is investing $US2 billion ($2.7 billion) for access to a potential 260,000 barrels per day (bpd).

The Americans want their ally out of Azadegan while the Japanese fear China - their bitter rival in the global search for secure energy supplies - will pounce on any opportunity they let go.

Azadegan is the biggest untapped oilfield in the Gulf region, containing an estimated 26 billion barrels, though only 7 billion barrels is thought to be commercially recoverable.

Two years ago, against strong American urging, Inpex agreed to develop the southern section of the Azadegan field, with 75 per cent equity. The northern contract is yet to be let, though Tehran is said to favour China's state oil company Sinopec.

Japan imports about 4.2 million barrels of oil daily, of which Japanese companies control only 450,000 bpd. Azadegan and other possible large-scale investment in Iran offer significant relief for Japan's acute external energy dependency.

Whatever its position in the vanguard of anti-nuclear proliferation efforts, Japan is loathe to drop Azadegan or, as a Foreign Ministry official put it, "punch Iran in the face".

More than 13 per cent of Japan's oil already comes from Iran, but supply isn't the pressing issue in the looming sanctions campaign.....
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In reply to: theflasherman on Wednesday 08/02/06 03:12am



The experience of Ivan was that a bunch of oil and gas production just never came back.


It's quite possible that the SPR is still being used to compensate for lower GoM production.


Of course, this isnt exactly what I'd do, but right now with supply as close to daily demand as it is, they might keep doing it till winter's over.


Ian Whitchurch

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Seems a little over the top....


Ready for $262/barrel oil?
Two of the world's most successful investors say oil will be in short supply in the coming months.
Fortune Magazine
By Nelson Schwartz, FORTUNE senior writer
January 27, 2006: 4:40 PM EST

DAVOS, Switzerland (FORTUNE) - Be afraid. Be very afraid.

That's the message from two of the world's most successful investors on the topic of high oil prices. One of them, Hermitage Capital's Bill Browder, has outlined six scenarios that could take oil up to a downright terrifying $262 a barrel.

The other, billionaire investor George Soros, wouldn't make any specific predictions about prices. But as a legendary commodities player, it's worth paying heed to the words of the man who once took on the Bank of England -- and won. "I'm very worried about the supply-demand balance, which is very tight," Soros says......
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