THE WALL STREET JOURNAL: Big Oil May Drill New Paradigm: “…Royal Dutch/Shell Group, French giant Total SA and Norway's Statoil ASA, along with Chinese and other international oil firms, are considering investing.” (ShellNews.net) 2 Feb 05

Investment Interest in Tiny Firm

Could Mean Resource-Hunt Shift

By CHIP CUMMINS and JASON SINGER

Staff Reporters of THE WALL STREET JOURNAL

February 2, 2005; Page C4

LONDON -- Some of the world's largest energy companies are drilling deep into the books of a tiny Canadian oil firm that is for sale, and any deal could signal a significant shift in how Big Oil searches for new resources.

First Calgary Petroleums Ltd. put itself on the block in October after racking up promising natural-gas and oil discoveries in Algeria. The company doesn't actually produce any hydrocarbons. Its only recent quarterly profit was a result of favorable foreign-exchange fluctuations. It employs fewer than 50 people, and one of its major shareholders is a former Russian energy minister who once courted Saddam Hussein.

The oil industry traditionally has steered clear of such companies. But, according to people familiar with the situation, Royal Dutch/Shell Group, French giant Total SA and Norway's Statoil ASA, along with Chinese and other international oil firms, are considering investing. Options include entering a joint field-development deal with the firm, buying a slice of First Calgary or acquiring the company outright, these people say.

First Calgary's shares surged recently on the Toronto Stock Exchange as deep-pocketed buyers hover over the company, pushing the tiny firm's market capitalization to about $3.6 billion.

The sudden interest offers a window on to a potential new growth strategy for oil giants, which are struggling to find new oil and gas at a time when easy-to-tap supplies are growing scarce. Big acquisitions, which the majors used to top up their reserves in the past decade, have grown expensive at today's high prices for oil. That leaves a third, relatively rare option: partnering with, or buying, small -- even tiny -- but tightly focused exploration companies with good geological prospects.

The oil industry is littered with gutsy speculators who are betting on finding the next big gusher. Armed with small engineering staffs and private money, they count on their access to valuable acreage and a knack for finding oil, drawing in bigger companies if they make a strike.

Kosmos Energy LLC, a tiny Dallas firm, is concentrating on offshore West Africa. Denver-based Bill Barrett Corp., which raised $347 million in a public offering late last year, explores exclusively in the Rocky Mountains. Houston's Merlon Petroleum Co. is looking in Egypt.

While midtier oil companies sometimes invest in such minnows, the world's largest energy companies traditionally haven't, relying instead on their own globe-spanning teams of geologists and engineers. But with many traditional opportunities drying up, the super majors -- a term used for the world's largest publicly traded oil companies -- may begin taking these small prospectors more seriously.

The super majors are sitting on cash hoards from a long run of high oil prices, but executives have said they are reluctant to pay too much for an acquisition amid today's lofty prices. With smaller targets, "you're not betting the farm," says Mike Bock, the Denver-based head of corporate finance at Petrie Parkman & Co., an energy-focused investment bank. Petrie Parkman has done investment-banking work for Bill Barrett and Merlon.

Super majors such as Shell and Total probably would be more interested in buying a stake in First Calgary or entering into a joint-development deal with the firm, instead of buying it outright, according to people familiar with the situation. First Calgary is being advised by Lehman Brothers Holdings Inc., and a final deal isn't expected for three months or more. Representatives of Shell , Total and Statoil declined to comment on whether they intend to bid on First Calgary.

Some analysts tout small companies such as First Calgary as a tonic for the industry's exploration woes, drawing an analogy to the pharmaceuticals business. To cut spending on research and development, major drug companies have fostered a host of specialized players and snap them up or strike license deals once they hit on a big new drug. In a recent report, energy consultancy Wood Mackenzie recommended Big Oil emulate Big Pharma by leaving some of the high-risk, capital-intensive exploration to smaller, specialized firms. Boutique oil explorers are now "the ones taking risks," says Hamish Wilson, co-author of the report.

That is the model Kosmos Energy is banking on. The group was founded in 2003 by oil-patch veterans with experience exploring offshore West Africa. "The only option that the industry has is to take more risk to create more opportunities," says Kosmos partner Brian Maxted, who says his firm is out to build a portfolio that would be attractive to bigger companies, including the super majors.

Kosmos signed its first deal to explore acreage off Ghana last summer. Mr. Maxted said it is too early to think about cashing out, but calls Kosmos a potential "feeder" for bigger companies.

But there also are big risks for the super majors. Even the most promising of prospects often don't pan out, risking a black eye to a super major's reputation with investors and host-government officials. And even if a prospect delivers, it might not provide the economies of scale that a larger acquisition typically offers.

First Calgary was incorporated in Alberta in 1949 and has been listed in Toronto since 1979. By the mid-1990s, it had sold off its western Canadian oil and gas assets, recapitalized and brought in new management to look for oil overseas. In 2000 and 2001, the current chief executive, Richard Anderson, won agreements to explore in the Algerian desert near Tunisia and Libya. Mr. Anderson declined to comment, citing the possible sale.

Russian tycoon Yuri Shafranik, chairman of Russian energy player Soyuzneftegas, became a director in the company in 2003. A former Russian energy minister, he cultivated close ties with Mr. Hussein's regime in Iraq. The U.S. Central Intelligence Agency recently released a report about the United Nations' oil-for-food program in Iraq that contained documents naming a "Mr. Shafranik" and Soyuzneftegas as receiving lucrative rights to buy millions of barrels of Iraqi crude. A Soyuzneftegas spokesman confirmed the company participated in the oil-for-food program, saying it was part of the company's effort to win the right to develop Iraqi oil deposits. "Everything was conducted strictly according to the rules," the spokesman said.

--Greg White in Moscow contributed to this article.

Write to Chip Cummins at chip.cummins@wsj.com

and Jason Singer at jason.singer@wsj.com