Oil majors must count on Merger & Acquisition to replenish reserves


Major oil producers will rely on acquisitions for about half their reserve replacement in the future after cutting exploration budgets to weather the crudeprice collapse, according to Wood Mackenzie Ltd.

Big oil companies are no longer trying to replace all their production through conventional exploration, the energy consulting company said in a report published on Tuesday 20 September.

“Now their reserves replacement will also require inorganic, brownfield or shale investments”, Andrew Latham, vicepresident of exploration research at Edinburgh-based WoodMac, said in an interview. “Exploration has become incremental”.

Investors often use the reservereplacement ratio – the proportion of oil and gas production offset by new resources – to value companies since it forms the basis for future output. Among seven oil majors, only three added more oil than they pumped last year. Exploration spending dropped by half from a year earlier to US$7-billion, according to WoodMac, which sees the industry slashing US$1-trillion from exploration and development until the end of the decade.

Acquisitions push:

“The need for M&A in exploration is likely to be here for a considerable time”, Latham said. The focus “will be on assets rather than on taking over companies”.

Woodside Petroleum Ltd. is among those snapping up exploration assets. The Australian company agreed to buy ConocoPhillips’ interests off Senegal for US$350-million in July. The purchase included the deep-water SNE discovery, which operator Cairn Energy Plc estimates has 473-million barrels in resources.

ExxonMobil Corporation was also said to be in talks with Anadarko for a stake in a natural-gas discovery off Mozambique, and in advanced discussions with ENI SpA over a stake in another prospect in the same area. Lower oil prices have taken a toll on majors’ reserves, with some of them – such as Royal Dutch Shell Plc – forced to write down as much as 200-million barrels. Shell had the worst reservereplacement ratio last year at minus 20%, the lowest in 12 years, it said in February.

The companies are also disposing of costly assets as oil prices below US$50 a barrel curb revenue. The Hague-based Shell aims to raise US$30-billion from asset sales in three years following its US$54-billion acquisition of BG Group in 2015. Among the assets it may sell are aging North Sea fields.

Source: Bloomberg

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