Energy Deals Are Small, but Potential Is Big

Lower energy prices don’t seem to be sparking major energy deals, at least not yet.

On Tuesday, the energy giant BP took a $1.9 billion bite into Chesapeake Energy, a relatively small step that seemed to reaffirm Big Oil’s wariness of high-priced transactions. While energy prices have slid substantially from their record highs hit earlier this year, energy-related assets may still seem a bit too rich for energy companies, a risk-averse bunch, to make a bold move.

But if energy prices continue to descend, these kinds of small deals may lead to bigger ones.

BP’s announcement that it acquired 25 percent of the acreage in a natural gas play from Chesapeake, a small and relatively unknown energy company, is hardly the type of deal one might expect from such an enormous company. The oil majors, which include Exxon, Chevron, Shell, Total and ConocoPhillips as well as BP, would need to make big-ticket acquisitions if they hoped to move the needle and replenish their dwindling reserve base.

Normally, an exploration company like BP would have drilled its way into replacing reserves by finding more oil and gas on the properties it already owns. That is proving increasingly difficult for all oil majors as their fields mature. It is especially hard for BP, whose main producing region, the North Sea, is experiencing steep declines in production after 30 years of drilling.

So it could make sense for BP to go on a spending spree to replace its reserves and ensure future production. But with natural gas prices still high relative to historic averages, that’s a risky strategy.

In the meantime, some oil giants, like BP, appear to be using small acquisitions as a kind of option on some promising natural gas fields in the United States.

BP has bought small stakes in many of the major “unconventional” natural gas fields in the United States. By setting up shop in these regions and establishing a working relationship with the small companies that own the land, BP could be positioning itself to take over completely when (or if) prices drop and the small companies find they can no longer afford to operate those expensive fields.

The hope seems to be that an oil major’s scale as well as its cost and technological advantages over the smaller players will help it turn a profit if natural gas prices drop substantially.

Of course, prices could drop to levels where even the oil majors will find it hard to squeeze out a profit.

Most of the untapped natural gas fields in the United States are so-called unconventional fields, which are more expensive to operate than conventional fields. If demand and prices for natural gas fall hard, then these fields will be far out of the money.

For a company the size of BP, though, a nearly $2 billion option to gain a foothold in one of the last frontiers in American energy production might seem a cheap way to eventually become the dominant player in the region.

Sumber :http://dealbook.blogs.nytimes.com