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Licence to drill

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Licence to drill

Published: July 25 2008 03:00 | Last updated: July 25 2008 03:00

Real estate is not exactly a hot product in the US right now – unless there is possibly gas beneath it. Some 200 deals to buy exploration acreage have been announced so far this year, according to John S Herold, a consultancy. BP has just paid $1.75bn for 90,000 acres in Oklahoma.

BP’s interest is understandable – obtaining visas for workers is somewhat easier stateside than in Russia. But ExxonMobil and Royal Dutch Shell have also splashed out on North American gas properties. In recent years, finding and developing new fields in North America has been the preserve of the smaller exploration and production (E&P) companies. The majors, with legacy assets to milk, have left the job to the minnows. But foreign openings are scarce. Meanwhile, higher gas prices have made unconventional gas resources, such as “tight gas” formations, viable prospects with large reserves.

The majors, however, have been reluctant to pay up during a commodities price boom. From the start of the decade, E&P stocks had risen more than fivefold by the time they hit a peak in late June. Since then, however, they have slumped by more than a quarter, making it more attractive. That is partly due to falling energy prices. But it also reflects concerns about rising costs associated with the land grab.

Exploration acreage sucks in cash for years before it spits it back out, and developing unconventional gas is especially capital-intensive. Credit Suisse estimates the sector’s reinvestment rate – capital expenditure over cash flow from operations – is currently running at 88 per cent and is set to rise. The natural source for financing high-risk exploration – equity – remains available for now: at $10.1bn, US oil sector issuance so far this year is running at about twice the rate of 2007, according to data from Dealogic. But recent volatility, combined with tightening credit, could change that, forcing E&P companies to sell off acreage or even themselves. The likes of Exxon, which has net cash of more than $30bn, make natural buyers.

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