Exxon May Have Deepwater Choices after Ending Ghana Deal

HOUSTON (Dow Jones Newswires), Aug. 20, 2010

ExxonMobil's withdrawal from a controversial $4 billion agreement to buy a stake in a vast oilfield off Ghana's coast may indicate the oil giant is seeing cheaper deepwater opportunities elsewhere after the Deepwater Horizon oil spill.

ExxonMobil, the largest U.S. oil company by market value, declined to elaborate on its decision, announced Wednesday, to walk out of a deal with Kosmos Energy, the owner of a 31% stake in the huge Jubilee field. The deal had been fiercely opposed by Ghana's government.

While Ghana's resistance must have helped erode ExxonMobil's patience, analysts say the company also pulled out because the strategic value of the stake has faded somewhat and new purchase opportunities are likely to appear in such areas as the Gulf of Mexico or West Africa. That's because small companies may get squeezed out of their deepwater leases because of tougher drilling rules or higher costs.

"Jubilee became less and less attractive for Exxon," said Richard Gordon, president of Gordon Energy Solutions, a consulting firm that provides forward-looking analysis to the energy industry.

A flourishing of new deepwater opportunities for big oil majors could be one of the first global impacts of the Deepwater Horizon spill on the oil industry's business environment. It would represent a major break for oil majors engaged in a pitched battle with Asian competitors and national governments for access to rare resources. The spill was unleashed by a blowout at a deepwater well in the Gulf of Mexico in April.

When the Exxon-Kosmos agreement had been made public in October, ExxonMobil was seen as uncharacteristically agreeing to pay a premium price to enter West Africa, one of the few areas in the world where international oil companies still have access to massive oil reserves.

But the stake in Jubilee may have lost some of its luster as new regulations, expected to follow the massive Gulf spill, are likely to increase the cost structure of doing business in deep water around the world, pushing out several smaller companies that would have to sell assets at a bargain price, said Phil Weiss, analyst at Argus Research. Strong, capital-rich companies like Exxon, which can keep exploring in deep water despite higher liability caps and reduced tax credits, will be more than happy to step in, Weiss said.

While ExxonMobil is expected to scour the globe for opportunities, analysts believe the company will pay more attention to the Gulf of Mexico, where it operates far fewer large projects than some peers, such as BP, Royal Dutch Shell or Chevron.

ExxonMobil has hinted that the oil spill could give the company the opportunity to become the operator on many Gulf projects on advantageous terms that will add value to the company through larger equity stakes in exchange for handling operations, said Fadel Gheit, analyst at Oppenheimer & Co., in a note to clients after a meeting with Exxon's management in July.

ExxonMobil is not the only oil major eyeing deepwater acquisition targets. ConocoPhillips is planning to set aside about $2 billion to take advantage of any opportunities in the Gulf of Mexico or elsewhere, Chief Executive Jim Mulva said during a July conference call.

Some of the benefits of shifting ExxonMobil's focus to the Gulf of Mexico instead of other offshore areas could be that the U.S. still offers more political stability and an attractive tax regime compared to other countries, Weiss said.

In the Gulf, it's also less likely that Exxon will face tough competition from Chinese oil companies, which are also scouring the globe for resources and have deep pockets. Chinese oil companies are expected to get a stake in the Jubilee field in a joint venture with state-run Ghana National Petroleum Corp, according to The Wall Street Journal.

Exxon has also increased its exploratory efforts in new frontier oil areas, including Madagascar, the Black Sea, the Philippines, Tanzania and Greenland, said Pavel Molchanov, an analyst at Raymond James.

"For a company such as Exxon there are obviously plenty of opportunities around the world out of Ghana," Molchanov said.

Copyright (c) 2010 Dow Jones & Company, Inc.