The great oil rush of 2005

THE TIMES: The great oil rush of 2005

Posted 26 May 2005

 

By Rhys Blakely, Times Online

 

Cairn Energy is moving one step closer to unlocking the riches it discovered under a plot of Indian desert bought at a knock-down price from the hapless Shell. If only the rest of the oil sector could put in such a slick performance.

 

The Scottish minnow turned FTSE 100 oil giant is likely to receive approval from the Indian government to develop its three key onshore fields in western Rajasthan, Platts, the commodities news service, reported this morning.

 

The Edinburgh-based company has submitted plans to invest $1.33 billion in its Indian fields, following its buy out of Shell’s 50 per cent stake for $7.25 million in 2002. The shares were up 4p today at 1162p, some way down from their peak of more than 1500p in November last year – but you have to remember that the Rajasthan find was responsible for pushing the shares up from a low of just 400p.

 

So far, so good. But the Cairn effect looks to have been responsible for a rash of would-be Rockefellers rushing to the bourses. Eight oil and gas companies joined the Alternative Investment Market last year, raising £232.3 million, some way up on the five firms who raised just £17.82 million in 2003.

 

Record-high oil prices, on the back of a booming China, plus the “Cairn effect” have stoked sentiment and contributed to the oil and equity rush. As did the relative ease with which companies could be set up on the AIM market. It was John Doran who sold Cairn the business it used as a launchpad for discovering oil in India. When he launched the Sydney-based Roc Oil, he said: “AIM has made it so easy. Two years ago it would have cost an arm and a leg. Under the fast track procedure, it’s cost us chips.”

 

But oil can be a messy industry and oil companies are forced to work in countries — Russia, Nigeria, Venezuela to name but three — where your average multi-national might fear to tread. AIM’s revamped rules may have made setting up a shell company inexpensive and quick, but uninitiated investors who rush in are taking large risks.

 

The case in point was made last week when £220 million was wiped off the market value of Regal Petroleum after its share price collapsed following the disclosure that one of the firm’s key wells was “uncommercial”.

 

That news came on top of reports that the London Stock Exchange is to investigate why the sale of nearly a quarter of the shares in the troubled oil was not disclosed. As the Sunday Times reported yesterday, offshore investors — who owned more than 20 per cent of Regal when it floated in 2002 — appear to have secretly sold their holdings in the firm. Shareholders who control a stake of more than 3 per cent must notify companies “without delay” if they sell or buy shares.

 

And this morning shares in White Nile, the AIM-based oil exploration outfit, tumbled 25 per cent to 102p in early deals as they resumed trading after a three-month suspension. In their first week of listing, back in February, White Nile shares had rocketed on anticipation the company would strike a deal for hydrocarbon exploration rights with the government in southern Sudan.

 

However, when details of the deal were released, they prompted serious doubt over the former rebel government’s authority to broker such a deal. The Sudanese civil war has lasted for all but ten years since the country gained independence in 1956, leaving the economy in a state of “chronic instability”, according to the CIA World Factbook. Adding to the confusion, other parties, including France’s Total, expressed a belief that they also held a legitimate claim to drilling rights in the area.

 

The shares never sank below 100p, stayed off the 60p level predicted by the bearish spread betting markets, and staged a recovery by early afternoon. But their volatile trajectory showed that the oil business, especially when it comes down to the smaller players, is no place for the faint hearted.

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