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Reuters: Oil price fails to spark merger activity

By Ed Crooks in London
Published: March 11 2008 22:13 | Last updated: March 11 2008 22:13

The soaring oil price did little to stimulate mergers and acquisitions activity in the oil and gas industry last year, according to the leading study of deals in the sector, to be published on Wednesday.

The survey from John S. Herold, a research firm, and Standard Chartered, a bank, also found that the prices paid for oil and gas reserves were little changed from 2006 levels, even though oil on the commodities markets rose 55 per cent during the year.

Gas is key to future growth of oil groups – Mar-02Vacuuming up small assets in south-east Asia – Feb-26Oil continued its ascent, reaching a record $109.72 a barrel, although it fell back later.

The global value of oil and gas M&A, including corporate and asset deals, was $154bn last year, down slightly from 2006, with a 40 per cent rise in asset deals offsetting a decline in corporate activity.

The average price paid for oil and gas in proved and probable reserves also declined slightly, to $4.67 a barrel equivalent from $5.18 in 2006.

Rodney Schmidt of Standard Chartered said: “While the commodity was going to $100 a barrel, costs were rising and the government take was rising, and people have factored that into deal values.”

Costs in the upstream oil and gas industry have almost doubled since 2005, according to IHS, the consultancy that owns John S. Herold.

The biggest buyer last year was Rosneft, the state-controlled Russian oil company, which spent $22bn in the auction of assets formerly owned by the collapsed oil group Yukos.

The most active western buyer in 2007 was Eni, which spent $13bn.

Sovereign wealth funds and national oil companies accounted for a smaller share of activity than in 2006, with Chinese buyers disappearing, although Herold said it expected that absence from the market to be only temporary.

Middle-eastern buyers were much more active than in 2006, led by Taqa of Abu Dhabi, which bought PrimeWest Energy Trust in Canada for $5.1bn.

Towards the end of the year, the credit squeeze might have started to affect M&A activity, according to Andrew Bartlett, Standard Chartered’s global head of oil & gas corporate advisory.

“If you are a supermajor looking to finance a $10bn project, it will affect you much less than it would an Aim-listed exploration company,” he said.

“But even if a company is in effect AAA rated, it is going to find finance a touch more expensive and a touch more difficult to raise than a year ago.”

Copyright The Financial Times Limited 2008

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