NW Europe Faces Middle-Age Angst

But Areas' Charms Attracting a New Crowd

When boiled down to a summary model, London-based Paras Consulting identifies a general growth model for Northwest Europe:

Growing reserves and production significantly, but through acquisitions and mergers rather than organic growth. This is true for firms deepening their existing position or establishing the region as a new core area.

Modest growth through organic means, but with major growth aspirations outside of Northwest Europe.

Retrenching in the region based on legacy assets, with high volumes and infrastructure ownership.

Harvesting the area with no aim at growth.

Northwest Europe has been an important oil and gas producing province for decades, but exploitation is now the order of the day.

Indeed, much like the U.S. Gulf of Mexico shelf, major oil companies are concentrating on emerging plays elsewhere — mergers, acquisitions and the divesting of assets all are changing the face of the industry in Northwest Europe.

So what do these changes mean for new and old players in the region?

London-based Paras Consulting has provided answers to that question, having started a study that looks at the emerging trends and what they mean for Northwest Europe.


What does all this realignment in the upstream business in Northwest Europe mean in terms of performance?

According to Ian Norbury, with Paras Consulting, with a couple of exceptions, the larger companies have delivered better performance over the six-year study period.

"Many of the larger companies have retrenched and their levels of investment per unit of production were below average," he said. "Despite this, eight of the 10 largest companies are in the top half of our performance league table."

He said there are several reasons for this higher than average performance by large companies:

Quality of assets.

They have concentrated on and around existing assets to enhance reserves, production and revenues at relatively low cost.

They focused on maximizing the value of earlier investments and owned infrastructure by increasing throughput via low-cost satellite developments.

They have driven the cost base down and improved earnings performance.

Image Caption

Figure 1.
Northwest Europe E&A Investment

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When boiled down to a summary model, London-based Paras Consulting identifies a general growth model for Northwest Europe:

Growing reserves and production significantly, but through acquisitions and mergers rather than organic growth. This is true for firms deepening their existing position or establishing the region as a new core area.

Modest growth through organic means, but with major growth aspirations outside of Northwest Europe.

Retrenching in the region based on legacy assets, with high volumes and infrastructure ownership.

Harvesting the area with no aim at growth.

Northwest Europe has been an important oil and gas producing province for decades, but exploitation is now the order of the day.

Indeed, much like the U.S. Gulf of Mexico shelf, major oil companies are concentrating on emerging plays elsewhere — mergers, acquisitions and the divesting of assets all are changing the face of the industry in Northwest Europe.

So what do these changes mean for new and old players in the region?

London-based Paras Consulting has provided answers to that question, having started a study that looks at the emerging trends and what they mean for Northwest Europe.


What does all this realignment in the upstream business in Northwest Europe mean in terms of performance?

According to Ian Norbury, with Paras Consulting, with a couple of exceptions, the larger companies have delivered better performance over the six-year study period.

"Many of the larger companies have retrenched and their levels of investment per unit of production were below average," he said. "Despite this, eight of the 10 largest companies are in the top half of our performance league table."

He said there are several reasons for this higher than average performance by large companies:

Quality of assets.

They have concentrated on and around existing assets to enhance reserves, production and revenues at relatively low cost.

They focused on maximizing the value of earlier investments and owned infrastructure by increasing throughput via low-cost satellite developments.

They have driven the cost base down and improved earnings performance.

These companies have reduced exploration in mature areas other than value-based, near-field exploration close to owned infrastructure — but they also have maintained exposure to potentially high-impact plays in deepwater along the Atlantic Margin.

Several large firms have divested non-core or high-cost/low potential reward mature properties to concentrate financial and technical resources on higher reward projects — and therefore have enjoyed the benefits of rationalization.

"Northwest Europe is still core to these companies because of the production and cash flow, but they are unable, in the long term, to replace reserves and production organically at an acceptable risk and cost," Norbury said.

Of course, he added, these companies have some inherent advantages that drive performance:

  • They benefit from strong legacy asset positions because of their early involvement in the region.
  • They have large inventories of investment options globally and can continually high-grade to generate better performance and results.
  • They have applied rigorous processes for cost control and enjoy low unit costs across a large production base in the region.

That work, presented in Houston at the recent AAPG Annual Meeting, is a detailed analysis of industry upstream performance between 1995-2000 based on information available in the public domain that includes capital expenditures, proved reserves movements by source, production and other operational data, according to Ian Norbury with Paras Consulting.

"In a global context, Northwest Europe has been in decline as a focus for upstream investment since 1995," Norbury said.

He points to statistics showing how the proportion of worldwide upstream capital expenditures directed at the area, including acquisition expenditures, declined from 24 percent in 1995 to just 11 percent in 2000. The proportion of worldwide exploration and development investment declined from 26 percent to 17 percent.

"At the same time finding and development costs on a BOE basis have increased by around 20 percent," he said.

Also, investment has declined in absolute terms since 1995. According to information from government agencies, investment increases in exploration and appraisal peaked in 1997 and in development activity in 1998, but was followed by a steep decline to 2000 in response to lower oil prices. Exploration and appraisal investments in 2000 amounted to 53 percent of 1995 levels, and development investments were only 74 percent of that seen five years earlier.

Perhaps even more ominous was this: Investments failed to revive in 2000 when average oil prices were sharply higher.

Trend Setters

The number of exploration and appraisal wells drilled in Northwest Europe since 1995 mirrored this trend. Exploration and appraisal drilling peaked in 1997, fell dramatically in 1998 and 1999, but picked up in 2000 — although drilling remained 25 percent below 1995 levels.

According to forecasts, the number of exploration and appraisal wells was lower in 2001.

"There are obviously factors other than oil price influencing these trends," Norbury said. Contributing factors include:

  • Diminished returns from finding and development investment and activity in Northwest Europe, both in absolute terms and relative to other regions.
  • Companies continuing to switch the focus of upstream budgets to other areas, with worldwide deepwater exploration and to some extent North American gas the primary beneficiaries.
  • Many companies in the region adopting more exploitation-led strategies with relatively more funds from already reduced budgets directed at development.
  • A larger share of annual budgets aimed at acquisition of proved reserves rather than organic growth.

While these trends clearly indicate that Northwest Europe has entered the mature phase of its upstream history, the region — particularly the United Kingdom — remains quite attractive to smaller players and new entrants.

"Northwest Europe has an attractive fiscal/political regime," Norbury said. "The UK is one of the top three in the world. Estimates of yet-to-find resources are still large, although these new reserves will be spread over smaller fields.

"Also, opportunities to acquire existing production are increasing as some of the larger companies sell assets," he added, "which is a trend we expect to increase."

Obvious Choices?

There are problems, however, these new entrants and smaller companies will have to tackle. Opportunities to operate and therefore control activity and investment are difficult to find. The region has long license tenure, which tends to preclude acreage turnover.

"Because of the license arrangements, some of the major international companies like Shell are sitting on acreage most people would say is under-explored, making it hard for newcomers to get a foothold," Norbury said. "Plus, partnerships in many blocks are quite diverse, which can result in a poor strategic alignment. It can also be very difficult for newcomers to access export infrastructure.

"All these factors are blocking new investment in Northwest Europe, particularly the UK," he said. "It is refreshing that the UK government has acted to alleviate this to some degree — in the new initiative, the government has stated that it will use its statutory powers to compel companies to invest within much shorter deadlines or relinquish licenses to other companies that are willing to invest."

Many of the region's emerging trends are a result of a combination of shifts in global strategies, particularly of the larger companies, and of sharply lower oil prices from 1997 to 1999, Norbury added. When prices collapsed companies began to emphasize cost reduction and operational improvements with severe cutbacks in discretionary spending, particularly for exploration. Firms high-graded existing portfolios toward low cost and low risk production and reserves replacement.

Both large and small companies turned to mergers and acquisitions as a means to lower costs and replace reserves.

"In 2000, with higher prevailing and predicted oil and gas prices, we again saw a shift in emphasis globally in Northwest Europe from cost reduction back to growth," he said, "although companies continued to use mergers and acquisitions as the engine to drive growth and value creation."

Some clear strategic trends have developed in Northwest Europe as a result of the fluctuations in the petroleum industry over the last six years.


What does all this realignment in the upstream business in Northwest Europe mean in terms of performance?

According to Ian Norbury, with Paras Consulting, with a couple of exceptions, the larger companies have delivered better performance over the six-year study period.

"Many of the larger companies have retrenched and their levels of investment per unit of production were below average," he said. "Despite this, eight of the 10 largest companies are in the top half of our performance league table."

He said there are several reasons for this higher than average performance by large companies:

Quality of assets.

They have concentrated on and around existing assets to enhance reserves, production and revenues at relatively low cost.

They focused on maximizing the value of earlier investments and owned infrastructure by increasing throughput via low-cost satellite developments.

They have driven the cost base down and improved earnings performance.

These companies have reduced exploration in mature areas other than value-based, near-field exploration close to owned infrastructure — but they also have maintained exposure to potentially high-impact plays in deepwater along the Atlantic Margin.

Several large firms have divested non-core or high-cost/low potential reward mature properties to concentrate financial and technical resources on higher reward projects — and therefore have enjoyed the benefits of rationalization.

"Northwest Europe is still core to these companies because of the production and cash flow, but they are unable, in the long term, to replace reserves and production organically at an acceptable risk and cost," Norbury said.

Of course, he added, these companies have some inherent advantages that drive performance:

  • They benefit from strong legacy asset positions because of their early involvement in the region.
  • They have large inventories of investment options globally and can continually high-grade to generate better performance and results.
  • They have applied rigorous processes for cost control and enjoy low unit costs across a large production base in the region.

"Even before the recent flurry of merger activity, the major operators in the region, almost without exception, were reappraising their portfolios and commitments within Northwest Europe as global strategies were redefined," Norbury said. "This is continuing, even though the oil price trend in 2000 and beyond has greatly improved profitability in the region.

"The larger operators like Shell, ExxonMobil, ChevronTexaco, BP and TotalFinaElf all have significant positions around the globe in exploration hotspots as well as in major discoveries under development or planned for development," he continued. "These positions offer low-cost, high-impact opportunities that, with the exception of the Norwegian Sea and perhaps other parts of the Atlantic Margin, are generally lacking in Northwest Europe.

"The choices for investment for the larger player seem obvious."

Open Doors

Although these large companies are maintaining a strategic presence on the Atlantic Margin, they have retrenched in Northwest Europe, with an emphasis on maximizing the value of legacy assets and infrastructure through development of profitable satellite fields and focused near-field exploration.

Simultaneously, some are divesting non-strategic assets — creating opportunities for smaller independents and niche companies to stake their claim.

Large independent companies like Kerr-McGee and Talisman claim to have a clear focus of where they can prosper by exploiting their competitive strengths, he said.

"Their strategies have been generally low-risk and characterized by strategic acquisitions to provide a basis for growth through operating efficiency gains, technology initiatives on existing fields, a more high-tech approach to development and focused, low-risk infrastructure-led exploration," Norbury said. "The objectives are cost savings, increased production and reserves and, therefore, a longer productive life for some mature assets."

Mid-sized companies such as Amerada Hess, Conoco, British Gas, Enterprise and Agip are all long-established players in Northwest Europe with some core upstream operations. While these firms recognize that the region's growth potential is limited, they are still committed to at least modest growth in Northwest Europe. They have seized appropriate opportunities and have undertaken some relatively minor rationalization.

In contrast, the strategies of other mid-cap companies like Marathon and Murphy — long-time players but on a small scale — focus on harvesting long-standing assets with no aspirations for significant growth.

Through the years Norway has been somewhat of an anomaly in the region. Companies participating in Norway are primarily major firms operating large development projects. There are few newcomers and historically there was little in the way of asset trading.

But even the Norway scene may be changing. Privatization of state ownership and likely asset sales by Statoil could increase diversity and competition in Norway.

In general, consolidation and the emergence of new global strategies has had the most profound impact on Northwest Europe.

"Of course, it's too early to know if the mergers and acquisitions will be successful strategies in as much as they result in longer-term performance gains," Norbury said.

But if other mature regions around the globe are any indication, there's still plenty of life remaining in the region. After all, the Gulf of Mexico shelf has yet to sing its swan song — and Northwest Europe will likely stay in step.