North Sea Asset Deals Lag, Amid Strong Cash Flow

LONDON, Jun 7, 2007 (Dow Jones Newswires)

Consolidation of North Sea oil and gas assets is grinding to a halt as rising oil prices boost sellers' expectations and scare off buyers, according to analysts at Wood Mackenzie energy consultancy.

"If you need to buy assets in the North Sea, you need to pay a lot for them compared to years gone by," Rhodri Thomas, Wood Mackenzie's manager of European upstream energy research told Dow Jones Newswires.

Soaring asset valuations in the North Sea, pushed up by higher oil prices, are stemming the flurry of asset deals seen in recent years.

Analysts say the world's top ten oil companies, which hold 80% of northwest Europe's oil and gas reserves, are now far less likely to sell their fully-valued energy assets in the region, especially those linked to the production of oil and gas.

The cash-rich oil majors are hanging on to assets which can bolster their hydrocarbon reserves or production targets.

"There are no real drivers for the larger companies to sell production...the sellers are not there, and the buyers are becoming more cautious," Thomas said.

Some sellers have even pulled assets off the market because the prices were too low, he added.

The slowdown in deals marks a dramatic change in pace from last year's trend of consolidation, driven by oil majors shaking out their portfolios and new companies entering the North Sea, particularly in the U.K.

Many deals were driven by the sale of 'marginal' assets, where the extraction of oil and gas from aging fields had become more technically challenging and expensive.

Last year, several oil majors divested stakes in North Sea oil projects to smaller companies. ConocoPhillips (COP) sold its equity interests in the Armada and Everest fields to BG Group PLC (BRG), while Royal Dutch Shell PLC (RDSA) and BP PLC (BP) also sold some of their North Sea holdings. Exxon Mobil Corp. (XOM) also said it was looking to offload 3% of its U.K. and Norwegian North Sea assets.

According to Thomas, further asset deals will also be hampered by concerns over decommissioning, as it remains uncertain which companies would shoulder the costs and liabilities of abandoning old fields.

Wood Mackenzie forecasts that decommissioning expenditure in the North Sea sector will reach GBP11 billion in real 2007 terms, revised up from its GBP9 billion estimate last year because of a 20% "hyper-inflation" of costs.

The level of North Sea decomissioning expenditure is likely to plateau at around GBP400 to 500 million per annum from 2015 to 2031, with the bulk to be spent in Norway, at 48%, and the U.K., at 40%, according to Wood Mackenzie's research.

For the moment, the cushion of hefty cash flows is dissuading owners of North Sea oil assets from selling. But in the long run, it is buyers who may slow the pace of deals, scared off by the costs of retiring old oil and gas fields.

Copyright (c) 2007 Dow Jones & Company, Inc.

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