Oil companies such as China National Petroleum and Chevron are showing greater confidence that higher-priced crude is here to stay, judging by the amounts they are paying in acquisitions. China National's agreement last week to buy PetroKazakhstan for US$4.18-billion valued the company's reserves at $10.66 a barrel. Chevron this month paid the equivalent of $10.17 a barrel for Unocal, and the $17.8B price was triple what the company spent in the past five years to find reserves. The average price paid in takeovers during the past four years was about $4 a barrel, according to consulting firm John S. Herold in Norwalk, CT. Companies are locking in higher costs for oil they will produce over a decade or more, posing a risk should prices plummet. "They've all seen the cyclical boom and bust, but it's different this time," says David Baker, who helps oversee $800-million at North American Management in Boston. "Oil is a scarce resource. The easy oil is gone." As oil prices surge to records, industry executives are becoming more willing buyers, Baker said in an interview. Memories are fading of past routs, such as the drop to $10 a barrel after a global economic slowdown in 1998, he said. Energy producers are paying a record $8.83 a barrel on average for acquisitions announced in 2005, up from $3.03 a barrel in 2004. They are also doing more deals this year than in any of the past three years. "This isn't a temporary phenomenon," says Grant Porter, head of energy mergers and acquisitions at Lehman Brothers, an adviser to Chevron as it battled China's CNOOC to acquire Unocal. "We're seeing increased activity across the board. It's going to continue." Buyers can justify the prices by entering into contracts to sell production in advance, Porter said. Oil futures contracts for 2010 are valued at more than $61 a barrel on the New York Mercantile Exchange.
(National Post 050830)
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