Sinopec mentioned - A Bidding Frenzy on Angola's Oil
JUNE 7, 2006
Europe
By Stanley Reed
A Bidding Frenzy for Angola's Oil
Record bids for drilling rights demonstrate the big bets oil companies are making to secure reserves of black gold
Just how wild is the bidding for good oil acreage these days? Very wild, going by a recent auction of acreage in the Congo Basin, off the coast of Angola. To land the licenses needed to explore three deepwater exploration tracts, oil companies offered to pay an astronomical $3.1 billion in signing bonuses, plus another $240 million in commitments for social projects in the impoverished African country. Advertisement
All the more remarkable, the bidding was for tracts that had already been "cherry picked" by other international oil companies. These bids were "the highest ever offered for exploration acreage anywhere in the world," says Catriona O'Rourke, an analyst at Edinburgh consultants Wood Mackenzie, which has published an analysis of data provided by the Angolans.
The Angola episode shows how governments and companies are adjusting to the new high-price oil environment. Governments are trying to recoup a bigger chunk of the money, while companies -- many of them hungry for crude -- are bidding properties up to unseen levels. These dynamics are eventually likely to squeeze the current high returns that companies are earning. Meanwhile, some of the big players such as ExxonMobil (XOM) and BP (BP) are playing a waiting game and staying out of some of the hottest auctions.
GUSHERS. The most lavish bidder in the Angola round was a consortium led by China's Sinopec (SNP), which is desperately trying to line up oil and gas reserves. It bid a combined $2.2 billion for Blocks 17 and 18. Italy's ENI (E) also put in a $902 million offer for Block 15. O'Rourke of Wood Mackenzie says these areas were "prime acreage," and high bids were expected. Even so, few expected the action to exceed $1 billion. How the projects will actually go forward hasn't yet been fully worked out, and talks between Sonangol, the Angolan national oil company, and the bidders are still under way.
Angola has been one of the great success stories in the oil business recently, and the values of Angolan tracts have risen enormously. Oil companies won exploration rights for these three blocks in the early 1990s for bonuses in the range of $6 million to $35 million.
Some excellent discoveries were made there. They include Total's (TOT) Girrassol project in Block 17, which produces 240,000 barrels per day. Because of this stellar track record, later Angolan acreage next to these blocks went for as high as $350 million. Now, Angola, which has a relatively generous though toughening tax regime for oil production, is taking advantage of high prices and the scarcity of good opportunities to maximize its short-term revenue.
The lesson that may be learned from this round, Wood Mackenzie notes, is that companies are willing to pay very large bonuses to governments offering decent production terms. Another lesson: Governments may start looking for higher upfront payments.
TENANTS' RIGHTS. In the Angolan case, the numbers could turn ugly. Having made such huge initial payments before even finding oil -- let alone producing it -- the oil companies will find it tough to secure the 20% or so rate of return they ordinarily seek for projects that involve considerable risk. In a study, Deutsche Bank (DB) reckons the new "winners" will have to make finds in the range of a billion barrels -- a very large discovery -- to make good money.
While not impossible, what works against the likelihood of massive finds is that companies including ExxonMobil and BP have already worked over each of the blocks, presumably drilling what they thought were the best prospects. ExxonMobil, for instance, has already found 3.3 billion barrels of reserves in Block 15, making 17 discoveries with 19 wells. As a result, Deutsche Bank reckons that 12% returns -- more typical of refining and marketing than exploration and production -- would be a "high-side case" for the ENI-led group with the new license. Much lower returns are possible.
The companies that have already found reserves in the blocks retain the rights to the oil and gas that they have found, while the new consortia will work in other parts of these massive offshore zones. In Blocks 15 and 18, ExxonMobil and BP, the operators of existing projects in these areas, bid only $120 million and $15 million respectively in the new round. BP's low bid came on the same block for which a Sinopec-led group offered $1.2 billion.
ExxonMobil and BP already have a lot on their plates in Angola, and, apparently, they figure they're better off waiting until better opportunities emerge. No matter: Other companies seem more than willing to bid sky high.
Reed is London bureau chief for BusinessWeek
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