Special Focus on Independent Oil & Gas
assets. Aside from a total or partial sale, there is also the option of swapping discoveries for a slice of an already developed asset. The larger independents will also benefit from the increasing opportunities for linking up with national oil companies, with the two way partnership driven by a simple swap of technological know-how for cash. Accessing capital will therefore remain a key challenge for the independent in 2012. Like the resource itself though, if you look hard enough, and dig deep enough, it's there somewhere.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Rick Roberge, Partner, Transaction Services, PricewaterhouseCoopers
The number one issue for US independents heading into 2012 is the weakness in North American natural gas prices. Record drilling activity, resulting in record supply; combined with historic storage levels have resulted in prices falling below $3.00/mcf. As we enter the coldest 3 weeks of the year; it has been a mild winter, especially on the East Coast; resulting in a collapse of spot prices below $2.50 at time of writing.
In fact the forward curve is in contango for the first time in January that I can remember. The development of the US natural gas shale plays have resulted in an oversupply of natural gas causing prices to decrease. While long-term this is a very good situation for the US; until demand increases; mainly other uses for natural gas in both the power and transportation sectors; prices will remain low in the foreseeable future. In fact LNG exporting has become a popular topic again. I think we will see some new trains in the next 2-3 years.
As a result companies are moving their capex dollars to oily plays; but this takes time and money. Even oily plays can produce significant amounts of associated gas. Ultimately the natural gas business in North America is going to be a good business; but it will require patience and a strong balance sheet to ride out the storm. Independents don't have the luxury of patience; as Wall Street is quick to remind them with their investment choices.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Simon Tysoe, Partner, Herbert Smith LLP
For a number of smaller independents capital requirements for development remain a problem. There is still some capacity in the debt market for upstream projects, but the equity markets remain difficult. Companies looking for equity need to be ready to go to market as soon as possible when they reopen and meanwhile be pretty ruthless on prioritising their spend .
In the meantime it may mean farming out or selling non-core assets. Over the last
six months we have seen a number of independents commence sale or partnering programmes which have ended up with the company being put into play and this will continue this year.
Changes to HSE legislation is a global phenomenon affecting all E&P companies but it particularly impacts independents as many of the proposed changed reduce or negate their ability to act as operators. For those independents whose philosophy is to always be the operators portfolio diversification has been one approach, with many US & Canadian independents re-engaging with frontier jurisdictions after regulatory changes in GoM.
Pressure for an increased tax take by governments around the world has led to a number of "windfall" taxes on oil and gas producers, not least in the UK and this seems unlikely to stop in the near term. Tax increases often disproportionately affect independents operating in the more marginal fields especially if there is no marginal field regime. Companies that take the opportunities that arise to tax plan, such as Premier Oil did in 2009 when it acquired Oilexco and accessed its tax losses as well as its assets, will do best.
In the UK, decommissioning security remains a huge issue and one which is killing many North Sea deals. The demands of sellers, co-venturers and the government mean that new entrants risk posting double security, usually in cash or letters or credit.
The current industry initiative for certainty on the level of tax relief that will be given when decommissioning expenditure, will, if successful, reduce the amount of security required to a post-tax level, which will help. Engaging with industry on this initiative and also pushing forward the programme of field wide decommissioning security agreements to give comfort to sellers that adequate provision is being made will help.
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Drillers and Dealers :::
::: February 2012 Edition
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