Recent activity on the Norwegian Continental Shelf (NCS) suggests an increase in the number and value of upstream asset transactions. New entrants, including European energy utilities and companies with specialist technical skills, have entered the market through asset and corporate purchases, and all have ambitious growth targets. These new entrants have introduced an element of competition hitherto not apparent on the Norwegian shelf. This will inevitably increase the potential sales value of assets, lead to a more open and aggressive marketplace and ultimately increase the range of opportunities available. In addition, the benefits of a focused business with material equities and small numbers of joint-venture partners is becoming clearer as rationalization processes yield fruit. On the U.K. Continental Shelf (UKCS), between 400- and 500 million barrels of oil equivalent (BOE), valued at around $1.5 billion, have changed hands in upstream deals each year since 1999-equivalent to 35 deals per year on average. (However, it should be noted that 2001 was a relatively transaction-poor year due to a falling oil price and the lack of assets brought to the market by majors.) There is no reason to believe that this level of activity should not continue through 2005. Indeed, in early March, there were already more than $500 million worth of assets that were likely to come to the market in 2004, in addition to the well-publicized Intrepid sale. This is a competitive, complex and highly liquid market. In contrast, the level of activity in Norway has been much lower. There was very little value in the few transactions that did occur apart from the sale of SDFI (State Direct Financial Interests) stakes to Statoil, Norsk Hydro and others in 2001 and 2002. The peak in 2002 was largely taken up by Eni's purchase of Fortum Petroleum. Indeed, without the SDFI and Fortum sales, only some 30 transactions were reported during this period-some 440 million BOE changing hands with a total value of $800 million. However, there have been a number of recent transactions that we believe herald a significantly greater interest in the Norwegian sector than previously seen. These include: • The entry by Talisman through the purchase of Gyda, with other deals and acreage applications in the offing; • The purchases by Statoil of 10% and 1.24% interests in Snøhvit from Norsk Hydro and Svenska (including a 2% interest swap in Kristin in the former); • The corporate purchases of DNO by Lundin and of Aker Energy by OER (Lundin controlled); and • The asset acquisitions by Gaz de France (GdF) and Ruhrgas and their plans for growth. For the new entrants that have a smaller market capitalization, the successful move of Paladin into Norway will, in our view, encourage more qualified independents to consider the province as an area for business. The difference in prices paid for mid-life producing assets (average $4-$6 per BOE in the U.K. compared with $3-$3.5 in Norway) can only be explained in part by the relative tax regimes. It is undoubtedly the case that the lack of competition in Norway has had a significant impact on price. The U.K. experience The UKCS deals have been conducted in a competitive environment that has matured through a mixture of auctions and one-to-one deals, with some 70 to 100 companies available as potential buyers during the period, including aggressive newcomers. The U.K. North Sea basin has been described as a maturing oil and gas province. During the last few years we have witnessed several global companies, such as Repsol and Petrobras, exit the UKCS entirely, having failed to establish material positions. Meanwhile, some purely North Sea-based companies have been sold by their investors to reap an early return-for example, Highland, Consort and Intrepid. Despite this maturity, opportunities still range across a spectrum of asset types from exploration to late field life. During the past few years the UKCS has seen a large number of newcomers and existing companies, many with specialist skills, together reinvigorating the E&P scene. Some have been encouraged by government initiatives and tax incentives, others by astute application of commercial and technical skills to take advantage of the variable opportunities from exploration through to late-life field management. These companies include Talisman, Paladin, Dana, Tuscan, CNR, Highland, Newfield and ATP. The Norwegian experience The Norwegian experience is somewhat different, with the pace of development controlled by the state to a much greater degree. Significantly, there are only some 26 companies involved in E&P activities, as compared with 70 to 100 in the U.K. Furthermore, in many licenses and fields the equity levels of the global majors are low, with no real influence on the operation. These are, in the main, giant fields, with long life expectancy and high cash flow. With a few notable exceptions, abandonment issues have not been such a driving force in stimulating deal ideas as is the case in the U.K. This environment has inevitably led to a lack of commercial drive to develop a deals market. What has changed? The two most influential factors to have emerged during the past two years are: • A sense of real competition for assets and • An understanding of the added value that can be extracted by prudent portfolio rationalization and focus on core skills and areas. Sellers no longer need to look to the traditional "club" as the natural buyers of assets. Newcomers have staked positions in assets at all levels of maturity, and it is now plain that their growth aspirations will incentivize the owner community to monetize some of their assets early through a competitive sales process. Talisman's acquisition of Gyda and subsequent license applications and deal initiatives, GdF's acquisition of longer-term gas interests, "deepening" by Statoil in the Snøhvit and Tampen areas, growth by Eni through corporate acquisition, entry by DONG and Lundin, Ruhrgas and Paladin, together with long-term gas plans by Marathon all point to a more vigorous deals market emerging in both oil and gas assets, with carry-forward tax allowances for exploration a real incentive. This is not only good for the current owner community, but also for potential buyers/newcomers and for government. As a more liquid market emerges, an increasing number of opportunities is presented, activity increases and innovative technical and commercial applications are brought to bear on problem areas to extract more value. The Norwegian authorities are introducing tax changes and simplifications to encourage exploration, especially for new entrants without a tax shelter. From 2005, the government is proposing the state refund up to 78% of exploration costs in the year following the activity. This is equivalent to the tax shelter afforded by having oil and gas production but with a one-year delay in obtaining relief. However, a tax shelter afforded by production is still desirable to achieve maximum tax efficiency in the field development phase. Nonetheless, the new measures should encourage companies to enter Norway to pursue organic growth through exploration and will make entry less cash-intensive, as there will not be an immediate requirement to buy into producing fields. The global oil community is looking for a balance of political and fiscal stability, as well as technical risk and upside. The Norwegian Continental Shelf can provide these attributes. A regular licensing process and progressive fiscal regime is now being augmented by a more liquid deals market. This is providing a broader range of opportunities and incentives to current owners and newcomers alike. It is also fair to assume that Petoro, the caretaker-company of SDFI, holding 36% of the Norwegian oil and gas reserves, will be allowed in the future to divest some of its marginal holdings. This is expected to bring additional liquidity to the Norwegian asset market. John McCallum is director, U.K.-based transaction advisor Stellar Energy Advisors, and Ivar Haaland is director, Norway-based transaction-advisor PetroAdvisor. For more information on each firm, visit StellarLimited.com and PetroAdvisor.no.