The recently announced Forties deal between BP and Apache is exciting enough on its surface, but if analysts are correct, this could be the start of something really big.
Under the deal announced last month, BP will be shedding its fifth largest UK asset, together with some Gulf of Mexico Shelf properties, for $1.3 billion, giving Apache Corp. access to a major new core area. At 2.8 Bbbl of recoverable oil, Forties is the largest oil field discovered on the UK continental shelf. Output has declined from a high of 500,000 b/d in 1978 to the present 55,000 b/d, but even at this level, the field will be a significant asset for Apache.
Derek Butter, an analyst with Wood MacKenzie, said the motivation behind the deal is potentially more exciting than the deal itself. According to Butter, this is the first in what he believes is a coming trend among the supermajor operators. For some time now, these companies have been saddled with meeting production targets. Any short-falls in these numbers were reflected severely in the company's stock price. As a result, the majors were unable to make bold moves to shed some of their non-core assets. With the series of mergers and acquisitions this market has seen over the past few years, an unprecedented number of non-core assets has piled up. Rather than refocusing their portfolios, the supermajors were busy working every field they held to ensure they met production targets.
Butter said the Forties sale marks the end of this period. BP is clearly shedding a major producing property to free up people and capital to pursue future projects.
This is a stark turn from the idea of maintaining production from existing fields. Forties is a dramatic sale, but all of the supermajors hold hundreds of assets that can be considered non-core to their portfolios. Rather than put people and money into squeezing every drop of oil and cubic foot of gas out of these aging fields, the supermajors are looking for "the Next Big Thing." In BP's case, this would clearly be assets such as the Thunder Horse field in the deepwater Gulf of Mexico, the company's most valuable upstream asset. The company will also look to new regions where there could still be very large undiscovered reserves.
If Wood MacKenzie is right in thinking this to be a trend, it should bode well for the mid-cap independents. These companies, such as Apache, will benefit from a broad shedding of existing developments. Due to the higher relative importance within the smaller companies' portfolios, such assets are likely to be worked harder, exploiting the full remaining reserve potential of such fields while developing smaller, satellite projects nearby and tying these back into the existing infrastructure.
In addition to shedding non-core assets, Butter predicts there will be an upturn in the level of swap activity among the supermajors, especially in the mature North Sea area. The goal here would be to trade properties in an effort to geographically consolidate a company's holdings around major hubs. This will add further efficiencies for the supermajors, freeing up more capital and people to expand the company's reach into frontier areas.
Assuming this scenario plays itself out, the question becomes one of where next? Butter is quick to point out that in their search for new prospects, the supermajors will continue to operate in the deepwater basins where they have seen recent success. There are no plans to pull out of the deepwater Gulf of Mexico or West Africa, for example.
The areas to watch for future growth, among the supermajors, are Russia and the Middle East.
While there are obviously political forces at work that make the Middle East less attractive than it otherwise would be, the fact remains that most of these companies have historic relationships with the Middle Eastern governments. Once the conflicts of this region are settled and the area is considered stable enough, there should be an influx of supermajors interested in exploiting the region's low recovery costs and potential for large finds.
The other large area of interest, and the more immediate candidate for the supermajor's attention, is Russia. Butter said his company predicts there will be a major deal struck in Russia by a supermajor before the end of 2003. The country's vast potential in areas such as Siberia would offer a good target for the considerable financial and technical strengths of a supermajor. In general terms, this should be the trend of the future, Butter said. The supermajors are going to concentrate their financial muscle into strategic areas where smaller companies cannot compete and where there is a strong upside potential for new, major discoveries and large capital-intensive projects exploiting existing reserves.
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