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The Wall Street Journal: New Money, Old Assets

Asian energy companies are looking for diversification in an unlikely place: U.S. oil fields that are often nearly tapped out

November 12, 2007

European energy companies have grabbed the headlines recently with mega-deals for Gulf of Mexico oil and gas projects, but Asian energy companies are quietly expanding their presence in the U.S. The deals may be smaller, but carry an outsized importance for resource-starved countries like Japan and Korea, which are picking up mostly older oil and gas fields to anchor a new global strategy that includes riskier pursuits in Africa and the Middle East.

The European oil majors have long dominated in the Gulf, with Netherlands-based Royal Dutch Shell PLC pioneering offshore exploration in the 1960s, and the U.K.’s BP PLC leading the pack in recent years with a series of ultra-deepwater finds. Since 2005 those giants have been joined by smaller European majors, with Norway’s StatoilHydro, Spain’s Repsol-YPF and Italy’s Eni all massively increasing their U.S. holdings.

In a series of predominantly under-the-radar deals over the past 18 months, Japanese and Korean oil companies have gained a toehold in the U.S. The total amount spent on acquisitions — more than $3.4 billion — is less than Eni’s April deal for a U.S. company’s Gulf assets. But for companies that long have been bit players outside Asia, the smaller deals are no less significant. They look to the U.S. as a steady source of both energy and cash as they seek to broaden the sources of oil and gas for Japan and Korea, which have outgrown their traditional suppliers.

“In the past, our core activity was in Southeast Asia and Australia. We’re looking for diversification,” says Haruo Kumo, head of the U.S. energy operations of Japanese industrial conglomerate Mitsui & Co.

The new foreign entrants are stepping in just as many of the biggest producers in the U.S. are pulling out of older fields. The big producers for the most part don’t want to invest the ever-increasing amounts needed to prolong the life of reservoirs that in some cases are nearly tapped dry. The Asian newcomers are small players in the exploration and production worlds, but they are some of the world’s largest companies, with financial resources to match. While most deals are in territory ignored by the bigger Western companies, some Japanese firms have shown a willingness to act as financiers for larger projects led by U.S. and European companies.

Dealmakers and industry experts are split, however, on how much of a future there is for Asian investment in U.S. production. Oil and gas fields are more expensive to buy in the U.S. than almost anywhere else and provide lower profit margins. And the group of Asian buyers most likely to pursue deals on Eni’s scale, the Chinese oil companies, remain wary after political pressure in the U.S. sank a 2005 deal.

Getting Started

Mr. Kumo won’t say much about Mitsui’s future in the U.S., a year after his company bought a 50% stake in natural-gas fields off the Texas and Louisiana coasts. “We’re not shrinking” is all he offers.

Neither are at least nine other Asian energy companies. They range from the state-owned Korea National Oil Corp. to diversified Japanese conglomerates like Mitsui and Mitsubishi Corp. Deals range from relatively small purchases in the shallows of the Gulf of Mexico and in Texas to a $1.2 billion stake in a major deepwater oil project. Most of the new entrants say they’re just getting started — Itochu Corp., a Tokyo-based conglomerate, has spent only 20% of the $860 million it plans to spend on U.S. gas fields through 2009.

The acquisitions have mostly been in shallow-water gas fields off the Gulf Coast, territory that most major energy companies have been leaving over the past five years. The wells there are running down, with production dropping 44% between 2002 and 2006, albeit to a still substantial 4.9 billion cubic feet of gas a day, according to the U.S. Minerals Management Service. But those fields should still be yielding four billion cubic feet of gas a day in 2015, almost entirely from wells that have yet to be drilled, says Bill Gwozd, vice president of gas services at Ziff Energy Group, a Calgary, Alberta-based consulting firm. “The companies that are buying are not buying yesterday’s production,” he says. “They’re buying potential for tomorrow.”

Even new wells in the shallows produce about one-third the amount of gas that a well yields in the deeper, less extensively mined waters of the Gulf. Prospects farther from the coast, while far more expensive to exploit, also have the potential for a rich payoff in oil. While gas prices topped out in late 2005, oil prices have continued to rise. BP sold the last of its shallow-water holdings in 2006, while a Repsol unit is currently marketing leases in 3,000 feet of water in order to focus on newer fields in waters twice as deep.

For Asian producers, the shallows represent what Sojitz Corp., an early Japanese arrival in the Gulf, once called “blue-chip blocks” — sites that yield low margins on steady production. That sort of predictable cash can then be put toward financing projects in Libya, for example, a rapidly growing but riskier focus of Japanese exploration.

The Japanese government, meanwhile, is helping private companies finance expensive projects in the U.S., as part of its effort to guarantee a continued steady flow of oil and gas imports. Mitsui, for example, is a partner with the government in a gas field in the Gulf that is difficult and costly to tap. In return for financing, the government can, during a severe energy shortage, require Mitsui to send gas or oil to Japan from one of its more established assets elsewhere in the world.

Such efforts are designed in part to help offset setbacks Japan suffered last year when it lost major supply contracts in Iran and Russia. Around that time, the Japanese government, and to a lesser extent South Korea, started to more aggressively push private companies to look beyond traditional suppliers.

The Japanese companies have “had some bad experiences,” says Adrian Goodisman, the Houston-based managing director of Scotia Waterous, a Calgary investment-banking firm that advised sellers in two deals involving Japanese buyers in the Gulf of Mexico earlier this year. “A lot picked up exploration projects,” he says, but “some of these got delayed, and they’re looking for existing producing volumes.”

But the Asians also appear set to branch out from their ultraconservative initial purchases. Four Asian companies spent a combined $46.2 million in the government sale of Gulf of Mexico exploration rights in October, up from a single $442,000 high bid from an Asian company in a similar auction last year. In September, Sojitz became the first Japanese company to move onshore, with an $82 million purchase of technologically challenging gas fields in Texas. Mitsui is also looking onshore, Mr. Kumo says, and other companies have put out feelers, says Mr. Goodisman.

“We think we have a great future in this market,” says Toshiyuki Yamaguchi, a spokesman in Tokyo for Sojitz, which spent $40 million on stakes in three Gulf of Mexico oil fields in October.

Some industry observers see limits for Asian companies in the U.S., though. While production has been falling, drilling and servicing costs have jumped over the past five years. Although substantial reserves remain beneath the Gulf shallows, even companies that haven’t sold their assets there increasingly see them as too expensive to exploit. “The cost structure is the highest, production is the lowest — it doesn’t sound as rosy as earlier,” say Ziff Energy Group’s Mr. Gwozd.

The number of rigs drilling in the shallow-water Gulf has fallen to 47 from 84 a year ago, according to Baker Hughes Inc., a services company that conducts rig counts.

Onshore production is steady, but only through a massive spending effort by producers, which, like their peers offshore, have seen margins squeezed by rising service costs. Technologically challenging gas fields like the ones Sojitz bought in September are seen in the industry as the last hope for new large-scale production in the continental U.S., and that means little prime acreage is available to newcomers.

“Most of the good acreage in these plays…is leased to the larger [U.S.-based] independents,” says Scott Mitchell, a U.S. oil and gas specialist with the consulting firm Wood Mackenzie in Houston. “It’s tough to see any big competitive advantage for a foreign entrant.”

But big, quick profits rarely are the goal for the Asian companies, which stress the wider strategic value of owning production in the U.S. Sojitz’s Mr. Yamaguchi describes his company’s purchases as part of a global effort to exploit unconventional gas reserves. Mr. Kumo of Mitsui says a presence in the U.S. helps the company establish connections in the energy industry that can lead to lucrative partnerships.

The landscape could change dramatically if Chinese energy companies enter the mix. China’s state-owned giants were among the first to move aggressively outside Asia, and have entered countries through multibillion-dollar deals where Korean and Japanese companies have inched their way in.

But where Mitsui or Itochu might see minimal political risk in the U.S. to balance high-tension operations in the Middle East or West Africa, the equation was reversed for the Chinese by Cnooc Ltd.’s failed acquisition of Unocal Corp. in 2005.

“It’s easier to make money in the Middle East and Africa,” says Peter Huang, who represents China Offshore Oil Engineering Corp., Cnooc’s oilfield-services subsidiary, in Houston.

Had the $18.5 billion deal for California-based Unocal gone through, Cnooc would have become one of the largest owners of acreage in the Gulf of Mexico. Instead, a political backlash from the U.S. Congress over energy-security concerns led to Chevron Corp. acquiring Unocal. Chinese energy companies have been skittish about acquiring an American company or assets ever since, though interest never completely vanished.

“We’ve had Chinese companies bid unsuccessfully on U.S. opportunities post-Unocal,” says Mr. Goodisman, with Scotia Waterous, who adds that the country’s tilt toward megadeals limits opportunities in the U.S.

Mr. Huang agrees that Chinese companies still want a stronger presence in the U.S., and that an acquisition for under $2 billion would have a better chance of success than an Unocal-size purchase.

“Chinese national oil companies should…understand what kind of role size plays in the political game,” Mr. Huang says. “In a smaller [deal], it’s harder for politicians to play.” and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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