Business | Oil & Gas
Energy minnows can still thrive
Size matters in the energy business - more than ever following a record price surge that has raised costs across the energy complex.
- Reuters
- Published: 00:03 June 13, 2008
London: Size matters in the energy business - more than ever following a record price surge that has raised costs across the energy complex.
But there are still opportunities for clever niche players in oil exploration and trading, executives say, even if they are excluded from large-scale power and gas projects.
Oil has more than doubled from around $65 a barrel at the start of June last year to a record of more than $139 last week, and other tariffs have also risen.
Just when the credit crunch has made banks wary of lending, the cost of hiring a rig to drill an exploration well in the North Sea has risen to an average of $394,000 a day so far this year, up from $387,000 in 2007 and $43,000 in 2003, according to industry figures.
Independent oil firm Cairn Energy plc, which began as a two-man company, is among those that are undeterred.
"I have always believed the edge is in the mind," said Bill Gammell, chief executive of Cairn Energy.
Even if he were starting up now, in the climate of soaring costs, he said he would embrace the opportunity and it could even make things easier.
Attractive
"People suspect it's an area potentially attractive to invest in," he said.
Industry body Oil & Gas UK also said success was still possible regardless of size. "There is focus feeding all the way up the food chain," said Mike Tholen, economics director at Oil & Gas UK.
"The bigger get bigger. The niche players survive ... For anything in between, it's difficult times," said one industry source. Personally, he said the challenge was always to adapt to the current trading environment.
But nimble niche players find it far tougher as power generators and developers of liquefied natural gas (LNG). "This is a business for large companies. You need to be big to be long-term successful," said Lars Josefsson, chief executive officer of Sweden's state-owned Vattenfall.
Analysts agreed.
"You need to be big to achieve economies of scale and improve your competitive position," said Herve Gay, analyst at Societe Generale.
On the floor: Margins raised
While energy explorers face surging costs, so do oil traders, raising concerns among analysts that futures markets will become dominated by big financial players.
To help to protect against bad debts, exchanges have increased the margin - or deposit - a player must pay before buying a crude contract.
Clearing house LCH.Clearnet said on Wednesday that margins for Brent futures and West Texas Intermediate (WTI) crude futures on the IntercontinentalExchange (ICE) were raised to respectively $13,500 from $10,000 and to $14,000 from $11,000.
Around a year ago, the margin for a WTI crude contract on ICE was around $4,500, a spokeswoman said.
Share this article
Popular in Business
-
Budget travel
Airlines in the region
Take a pictorial look at some of the budget airlines in GCC
Business Editor's choice
-
It costs a million to raise a child
Generation Z doesn't leave home at 18, but stay with the parents until mid-20s
-
Investing in funds doesn't come cheap
Many people are unaware of the effect of different expenses on their returns
-
Firm turns televised events into marketing dream
Drops anchor in Dubai to sell world's richest yachting races
