Small Oil, Gas Companies Battle Norway Giants for Assetsadmin
An influx of small and medium sized oil and gas companies to the Norwegian Continental Shelf is upping the competition for acreage, rigs and personnel, industry figures say.
Oil prices at $60 a barrel have encouraged these new entrants even though some say the move is merely part of the boom and bust cycle that will lead to inevitable mergers should the price of oil
start to slide. Still, there are now more than 60 companies qualified or in the process of qualifying as partners on the NCS compared with 16 in 2001. Incumbents Statoil (STL.OS) and Norsk Hydro (NHY) operate 80% of the NCS assets, other oil majors 19%, leaving just a 1% share for other companies to lay claim to.
Small companies are characterized by their ability to take high risks, make decisions quickly and operate in niche sectors, helping maximize NCS oil and gas exploration and production.
“The NCS needs more players willing to take some risks where more established players don’t” said Lundin Norway’s (LUPE.SK) managing director Torstein Sannes.
Norway’s Ministry of Petroleum and Energy has recognized the need for these companies and by way of incentive has altered the tax regime on exploration costs and will shortly increase the cost of sitting on idle NCS acreage.
It introduced the so-called ‘awards in pre-defined areas,’ or APA, license round in 2003 to encourage larger players to relinquish idle acreage.
This year’s APAs will be announced late – in January rather than December – due to the record number of applicants.
New applicants are encouraged by the 78% tax rebate received if a dry well is drilled to encourage as many discoveries as possible in mature areas. “It’s easier now to take the risk,” said Johannes Kjode, a senior adviser at the Norwegian Petroleum Directorate.
One new entrant, Marathon Oil Corp (MRO), which entered Norway as an active participant in 2001, will bring its first field, Alvheim, as operator onstream in the first quarter of 2007. The oil and gas field will produce 120,000 barrels of oil equivalent/day at plateau. Marathon Norway’s managing director Roger Wilson says one of its targets is to be recognized as a leading operator on the NCS.
It’s a common refrain and reflects the ambitions of the range of smaller companies sending warning shots across the bow of Norway’s incumbents when it comes to securing acreage and field stakes.
Talisman (TLM) is another determined newcomer. It is the fourth largest acreage holder on the NCS, despite having only entered in 2003, but concedes that Norway is a challenging place to be because it’s difficult to grow through acquisitions.
“Norway is clearly more difficult (than the U.K.) because asset turnover is much lower. We’ve made a good start but we need organic growth going forward,” Talisman’s managing director John Vemmestad said.
Successful entrants such as Marathon and Talisman have strategic aims to capitalise on their assets in core areas, utilizing infrastructure and expertise in order to exhaust an area of its assets, often tieing-back to production to one key platform.
Marathon plans to maximize production in the Alvheim area through an extensive drilling program and a series of tie-ins to Alvheim. “We want to maximize all the potential prospects in the Alvheim area, keep the floating production and storage operations vessel full and use the infrastructure,” Wilson said.
Talisman, meanwhile, expects to have invested $1.8 billion in its U.K. and Norwegian assets in 2006.
The size of some new start-up ventures means one large find – or disappointment – can move share prices a sizable distance and provide the capital to inject into new projects.
Exploration firm Revus (REVUS.OS), which started up in 2002, has an expansive drilling program of 15 wells in the next two years but had a big drilling disappointment earlier this year at the Blamannen prospect, pushing share prices down around 15%. The stock has since recovered.
While expressing regret at the result, Revus CEO Harald Vabo said company’s “should be prepared for disappointments,” and recalled the number of wells it took to find the Ekofisk oil field in the late 1960s – around 60 before hydrocarbons were struck.
Revus admits it too would struggle to grow through acquisitions. Deputy CEO Tim Sullivan said: “Buying a production position is impossible, so we’re doing what we’re good at – exploration.”
The downside of soaring profits is fierce competition for rigs and personnel, although many small companies say they have adequate contingency plans.
A series of consortiums have formed to secure rig capacity over the next few years. Six companies, including Revus and DNO (DNO.OS) have formed a rig consortium for the Bredford Dolphin semi-submersible drilling rig. “So far the consortium has been very good,” said DNO’s managing director Roar Tessem.
DNO has secured one year of a three year contract, with three slots booked for 2007 and a fourth slot at the end of 2008. Revus’ Vabo said rig constraints were identified as a growth limitation for the company in July 2005, which prompted its to take a risk and join the consortium to be sure of having access.
Larger companies have also been hit by the brain drain of smaller firms. “The newcomers have attracted some of the best brains in the industry,” Roy Rusa, vice president of Petoro admitted, as they attempt to fulfil the criteria for qualification.
Statoil remains defiant in the face of the competition for more marginal developments, saying “small discoveries matter” as part of its wider drive to achieve NCS output of 1 million barrels of oil equivalent a day until 2015.
The rise of the small company on the NCS could nip that goal in the bud if the newcomers’ rapid growth is anything to go by. But a fall in oil prices, or unwillingness of incumbents to divest acreage in non-core areas is just as likely to check the ambitions of smaller players.
Copyright (c) 2006 Dow Jones & Company, Inc.