Tuesday 7th February 2006 AD

"SNAPPING UP THOSE HYDROCARBONS"

It was a brisk, noisy and tense atmosphere. I was sitting with the Anglo Energy management team, surrounded by a host of people - from executives and lawyers of top oil companies all the way to small family operated oil and gas exploration outfits. 

This year's 'Oil and Gas Clearinghouse Auction' in Houston had attracted a bumper crowd, as property after property hit the auction block. Bidders from the floor, brokers on the phone to their clients and internet tenders; there was no shortage of buyers or fat cheque books, as each oil and gas field was bid up and up and quickly sold off. 

This feverish buying didn't resemble a mania or unconsidered hype, but rather an orderly, deliberate, thought-out, determination on behalf of companies to acquire already proven, productive assets. 

"These are going for prices as high as 70 or more months" one of my colleagues commented above the noise, working quickly on his calculator as the hammer fell on each property. 

What did he mean by "70 months"? Well, in past times, when purchasing an already established and producing oil and gas field, it has been normal to pay a price equivalent of 40 to 50 months of current production net revenue (after operational costs). But over the last year or two, buyers are happily paying prices 50% above the historic norm. 

So why are medium to large energy companies paying such a high premium to acquire productive assets? 

Most of these companies have been around the traps for a long time and have ridden through the booms and busts of the past, and are most unlikely to be hooked into the hype of a flash-in-the-pan mania. Rather, they are simply reacting to the fact that we are in an established long-term bull market in oil and gas prices. 

These companies understand that productive assets are becoming more and more valuable and difficult to acquire, and so, are naturally beginning to 'price in' future increases in the value of the hydrocarbons held below the ground. 

"A premium today will be cheap tomorrow" my colleague finished, closing his auction catalogue and packing away his calculator. My associate was right, but more importantly, the increasing scarcity and value of 'in-the-ground' hydrocarbons, and who owns and controls those assets, 
are going to play an exceedingly important role in the tender monetary and geo-political balances of tomorrow's world. 

Sincerely - Philip Judge pjudge@anglofareast.com