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.
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.
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
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."
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
Some clear strategic trends
have developed in Northwest Europe as a result of the fluctuations
in the petroleum industry over the last six years.
"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."
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
Simultaneously, some are divesting non-strategic assets -- creating
opportunities for smaller independents and niche companies to stake
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
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
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.