Implied proved reserve values in North America declined 7% to $16.57 per barrel in 2007, according to the “2008 Global Upstream M&A Review” prepared jointly by John S. Herold Inc. and Harrison Lovegrove & Co., subsidiaries of IHS Inc. and Standard Chartered Bank respectively.

Outside of North America, proved reserve deal pricing declined 44% to $5.05 per barrel, dampened significantly by low dollar per barrel-of-oil-equivalent transactions in the former Soviet Union (FSU). The Russian government auction of former Yukos assets to state-owned companies was the primary driver for this drop.

One likely reason for the decline is individual deal pricing retreated from the frothy highs of 2006. The report shows worldwide weighted average deal pricing for proved reserves fell 22% in 2007 to $9.99 per barrel of oil equivalent.

Looking to 2008, Christine Juneau, John S. Herold chief operating officer, says “In addition to mergers to achieve scale, corporate consolidation may occur to improve the efficiencies of the industry, but this will likely only happen in any significant way if oil prices were to fall for a sustained period to below US$80 per barrel.”

Martin Lovegrove, vice chairman, oil and gas, with Standard Chartered Bank, says, “With access to resources remaining restricted and organic reserve-replacement costs on the rise, this year companies will continue to look to grow through mergers, acquisitions and divestitures. The asset market will remain highly competitive in the most sought-after areas with increasing competition coming now also from the sovereign wealth funds, particularly those in the Middle East, who entered the market with vigor for the first time in 2007.

“Ironically, the industry had better margins at $30 oil than at the year-end 2007 price of $96 per barrel,” he says.

The total number of global upstream M&A deals and values for asset-type deals both reached record highs in 2007, but total transaction value slipped as did values in corporate deals.

Total worldwide deal count soared 14% to a record high to more than 330 deals in 2007 from approximately 280 the previous year. Total deal value for the year, however, dropped to just under $154 billion from $166 billion spent in 2006.

Lovegrove pointed out that after years of favorable conditions, “The industry has been facing rough seas. Access to opportunities has continued to become more restricted and securing approval for project and deal go-aheads has lengthened.”

Excluding FSU deals, worldwide weighted average and median proved reserves deal pricing held roughly flat with the prior year. Transactions in the FSU were the critical factor in global weighted average proved-plus-probable pricing, declining 10% over the prior year including the FSU, and increased more than 20% excluding the FSU.

Asset deal value proved strong in 2007, rising for the sixth straight year. Globally, asset transaction value rose nearly 40% to $89 billion in 2007. Asset deal count surged 30% in 2007 to more than 240 deals, with more than 90% in the sub $1-billion segment and nearly 75% in North America.

But worldwide proved (1P) and proved-plus-probable (2P) asset deal prices in 2007 fell by 29% and 57% to $7.79 and $2.96 per barrel equivalent respectively. Excluding the FSU asset deals, which comprised more than 30% of the total asset deal value for the year, prices still moved lower, with 1P and 2P asset deal metrics down by 13% and 17% to $13.86 and $8.59 per barrel respectively.

Global corporate transaction value fell to $65 billion, as no deals greater than $10 billion were transacted for the first time since 2004. Corporate deal activity was driven by a surge in the $5-billion to $10-billion segment, which jumped from totaling $5 billion in 2006 to nearly $34 billion—representing more than 50% of total corporate deal value in 2007.

Worldwide 1P corporate weighted average implied values were flat with 2006. But excluding corporate activity in the FSU, worldwide 1P corporate deal prices rose nearly 20% to $18.88 barrels and 2P prices jumped by two-thirds to $14.79 a barrel. Excluding the FSU, the gap between 2P corporate and asset deals was more than $6.00 per barrel, the widest in the past five years.

National oil companies spent less overall in 2007. Total transaction value by state-owned or controlled oil and gas companies (NOCs) slipped from its record high set in 2006, but still accounted for roughly $43 billion, or 29%, of total worldwide deal value during 2007. Total transaction value for NOCs outside of their home countries was about $13 billion in 2007, the same level as 2006.

A notable shift in this activity was the emergence of petro-dollar-backed Middle East entities as the primary M&A market investors outside of their region in 2007.

Despite a strong overall incline in commodity prices, implied values differed dramatically from region to region in 2007. Global average 2P reserve pricing declined by 10%, but surged by 29% excluding Canadian oil sands and FSU deals.

In 2007, 2P deal pricing was up in only two study regions, Asia-Pacific and (marginally) Africa and the Middle East. In all other regions, deal pricing declined, including modestly in the U.S. and Canada (on a 1P reporting basis) and more steeply outside North America (on a 2P basis) in Europe, Latin America and the FSU.

North America accounted for a record percentage of total global upstream M&A deal value in 2007, representing 62% of worldwide transaction value, a record high in the five-year study period, and a substantial increase over 55% the prior year. North America was the focus of three-quarters of total global deal count, slightly above its three-year and five-year averages and split evenly between the U.S. and Canada.

Outside North America, without a substantial multi-region corporate deal, M&A dollar volume in 2007 was primarily driven by the auction of the former Yukos assets in the FSU, which recorded 25% of total worldwide transaction value. The remaining regions accounted for a nominal 11% of worldwide total (in line with the five-year average) with each in the 2% to 3% range. Excluding the FSU, Europe scored the largest percentage of global total at just over 3.5%. Africa and the Middle East suffered the biggest (though relatively minor) year-on-year drop, from over 4% to under 3%.