Implied proved reserve values in North America declined 7% to $16.57 per barrel of oil equivalent (BOE) in 2007, according to a preview of the annual upstream M&A review by energy-research firm John S. Herold Inc. and M&A advisor Harrison Lovegrove & Co., subsidiaries of IHS Inc. and Standard Chartered Bank, respectively.

Outside North America, proved reserves cost 44% less, declining to $5.05 per BOE, dragged down by low-price deals in the former Soviet Union, including the Russian auction of former Yukos assets to state-owned companies.

On average, globally, weighted-average deal pricing for proved reserves fell 22% in 2007 to $9.99 per BOE, Herold and Harrison Lovegrove report.

For 2008, Christine Juneau, John S. Herold chief operating officer, expects, “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- eplacement 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.

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

The 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. The worldwide deal count soared 14% to a record high of more than 330 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 says, “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.”

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 29% and 57% to $7.79 and $2.96 per BOE, respectively. Excluding 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 13% and 17% to $13.86 and $8.59 per BOE, 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- 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 per BOE and 2P prices jumped by two-thirds to $14.79. Excluding the FSU, the gap between 2P corporate and asset deals was more than $6.00, the widest in the past five years.

National oil companies spent less overall in 2007. Total transaction value by state-owned or -controlled producers 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 these producers outside of their home countries was about $13 billion in 2007, the same as 2006.

A notable shift in this activity was the emergence of petrodollar-backed Middle Eastern entities as the primary M&A 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 10%, but surged 29% when excluding Canadian oil sands and FSU deals.

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%.