Abstract

Oil and gas auctions were relatively uncommon before 1987. Since then the auction market has grown at a rate of almost forty percent annually, and auctions have become a useful and accepted method of buying and selling producing interests. Thousands of properties, totaling almost $200 million, are anticipated to be committed to auctions in 1997.

Auctions provide advantages to both sellers and buyers. For sellers, they offer a quick and convenient means of "rationalizing" lower value, non-operated or geographically dispersed interests. For buyers, bids are transparent, against other willing bidders. Titles pass the day of the auction, eliminating the delays inherent in negotiated sales.

Disadvantages exist. Lack of time or data for sufficient due diligence increase the risks of mistakes. Nevertheless, for many buyers the opportunity to acquire good properties at reasonable costs outweigh concerns.

Introduction

The unprecedented increase in oil and natural gas prices in the 1970's and early 1980's created the boom most of us experienced. Oil prices rose tenfold, and gas by more. Even so, expectations of even higher prices drove companies and independent to use easily available credit to lease, explore and drill.

1981 was a turning point in the industry. Oil and gas prices dropped substantially, and drilling virtually ceased. Companies canceled drilling plans and laid off employees. Those who survived the depression adopted survival tactics, attempted to meet debt obligations and retain key employees. In 1986, when it seemed that the industry was beginning to stabilize, prices again plummeted. Many companies that had managed to remain in business until then finally succumbed to bankruptcy. Companies that were still in business were forced to expand the development of their survival strategies. For many companies, that meant acknowledging that eighty percent of their income was derived from only twenty percent of their assets, and the remaining eighty percent was but a drain on their ability to make new money. Companies realized that it was necessary to increase efficiency in order to remain competitive in an industry which continued to experience marginal commodity prices. By reducing the costs of administration to properties which consistently lost money or were marginally profitable, corporate attention could be directed to finding new reserves and enhancing the recovery of existing profitable assets.

The industry increasingly began to accept the eighty/twenty perspective, and to implement the practice of "asset rationalization" by initiating the sale of less profitable properties and assets. Exploratory and production activities were consolidated into "core areas" and assets located elsewhere were targeted for divestiture.

In 1989, the fall of the Berlin Wall and the collapse of communism throughout the world provided the opportunity for many companies to initiate long-awaited exploration efforts in areas previously closed. Projected exploration and development expenses in remote areas easily exceeded normal budget requirements. A readily available source of capital to expand overseas operations was in the inventory of less profitable domestic U.S. properties.

A problem with the new strategy was how to sell the thousands of properties which did not meet the new criteria. It became apparent that it was effectively impossible to individually negotiate the sale of so many properties within the time requirements set by management. The stage was set for development of the auction process in the oil and gas industry.

Growth of Oil and Gas Auctions

The majors have traditionally been net purchasers of producing properties. In 1987, majors purchased a net $9.3 billion of properties, in 1988, a net $4.4 billion. P. 97^

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