Majors' U.S. retrenchment causes sale property glut.

Major U.S. oil and gas companies' accelerated rationalization of U.S. upstream assets in recent years has left a glut of available producing leases in a capital starved market.

The expanding divestment of such properties in the U.S. stems largely from a shift in upstream emphasis by majors to areas outside the U.S. As more of their exploration and development capital flees the U.S., majors are cutting the scope of their remaining U.S. operations, selling nonstrategic assets piecemeal and in sizable chunks.

Continuing a process that began in earnest for some companies before the 1986 oil price collapse, companies are assessing individual leases and wells for their strategic fit.

That process has resulted in a change in direction for majors, which until 1989 had been net buyers of production, and has put up for potential sale as much as $10 billion worth of U.S. producing leases.

However, the number of buyers are few, and the pace of sales is slow. Lack of capital and oil and gas price uncertainty are fueling a standoff between buyers and sellers, although innovative agreements and financing have pushed through some large transactions. With all the properties on the market and the current slowdown in activity, some officials expect a surge in deals before yearend. Even so, the overhang of available production on the market isn't expected to lead to a freefall of asset prices and instead is expected to correct itself in time, industry officials say.

Cost of reserves

A survey by John S. Herold, Greenwich, Conn., shows it is increasingly more cost effective to buy reserves than drill for them in the U.S.

Herold notes the 1991 cost of replacing U.S. reserves for the 186 public companies it surveyed rose nearly $1/bbl of oil equivalent (BOE) to $6/BOE. Excluding reserve acquisitions, the cost of additions via drilling jumped to $6.88/BOE from $5.16/BOE.

That compares with U.S. costs of acquiring proved reserves that averaged $3.62/BOE in 1991 and $4.33/BOE in 1990. Herold estimates acquired production accounted for 27% of the group's total U.S. reserves replacement in 1991.

Given that widening differential, Herold expects acquisitions to become a more important means of replacing reserves for companies committed to expanding their U.S. base.

"The exodus of majors from the U.S. and the resulting $10 billion overhang of properties on the market, coupled with diminishing exploration profits, will only enhance acquisition economics in the near term," Herold said.

Change of strategy

Since 1989, net combined property divestments have exceeded acquisitions among a group of 15 large companies tracked by Randall & Dewey Inc. (R&D), Houston.

R&D Partner Kenneth W. Dewey said the rush to sell U.S. oil and gas leases in part has emerged because of a strategy reversal by a few large U.S. oil companies dominating acquisition and divestment (A&D) action.

In the early and mid-1980s, the 15 companies tracked by R&d--today's big sellers--accounted for most U.S. oil and gas production acquisitions, Dewey said. R&D considers 1988 the turning point for companies in the group.

"From 1983 to 1988, this group was a significant net purchaser of U.S. producing assets," Dewey said. "Starting in 1989 ... they became net sellers."

That trend has continued. Dewey said R&D group combined net divestments were about $200 million in 1989, about $1 billion in 1990, and more than $2 billion in 1991.

For independent producers, the divestment strategies mean some good leases outside major company core areas are for sale. As a result, Dewey said U.S. exploration and production activity likely will become dominated by niche players that make the most of opportunities on leases that don't fit the majors' strengths or are outside their core operating areas.

"As an overall market change, we're seeing …