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Collapse of crude prices heralds wave of oil industry consolidation

March 30, 2009

The oil industry is bracing itself for a wave of consolidation as cash-rich companies acquire more vulnerable rivals that are struggling after the collapse of the price of crude, analysts say.

Over the past ten days British-listed oil companies have been involved in a string of proposed deals worth a total of £1.2 billion. These include Premier Oil’s £347 million purchase of the North Sea assets of Oilexco, Centrica’s £239 million acquisition of a stake in Venture Production and an £87 million offer to buy BowLeven, an exploration and production company that focuses on Africa.

The deals have raised expectations that more may be in the pipeline, following a flurry of deals in the pharmaceutical industry. Richard Savage, the head of energy research for Mirabaud, the Swiss private bank, said that several factors were involved, not merely the $100 fall in the price of oil last autumn, difficulty accessing debt markets for some companies and sharply lower share prices.

“There are some fantastic opportunities out there,” Mr Savage said. “We are going to see a whole raft of mergers in the months ahead.” He suggested that the most vulnerable companies were those with good access to reserves but little or no current production and insufficient finance to develop projects because of the credit crunch.

A sense of increased stability in the crude price, which, after last year’s steep fall from a record $147 has been trading around $40 to $50 a barrel for the past three months, is also giving companies the confidence to do deals, according to Charlie Sharp, an oil and gas analyst with Matrix Group.

“I certainly think we will see more activity,” he said. “While the oil price was coming off, the stock prices were slashed. There is undoubtedly very good value out there. Now is the time, if you have the desire and the wherewithal.”

Abdul-Jaleel al-Khalifa, the chief executive of Dragon Oil, an AIM-listed oil producer that focuses on Turkmenistan, said: “Some of these companies have been stripped of cash. They made investment plans based on $80 to $100 oil, so the price fall has hit them very hard.”

Mr Sharp also expects that some of the larger, so-called supermajors, such as Shell and BP, could be drawn into the fray. He said: “With the really large majors struggling to rebuild their reserves base and grow production, they may now start to consider acquisitions, too.”

BP and Shell have been mentioned as possible buyers of Santos, an Australian gas group.

The Africa-focused Tullow Oil and Dana Petroleum have also been cited as potential bid targets.

As well as the Venture and Oilexco deals, BowLeven, which is based in Edinburgh, received a possible cash offer from an unnamed party this month and BG Group, the gas producer, bought Pure Energy, of Australia, for more than A$1 billion (£485 million).

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