Acquisitions may rise in oil sector

Acquisitions may rise in oil sector

SINGAPORE (Dow Jones): Indonesia's hard times are likely to
spur merger and acquisition activity in its oil and gas patch
during the second half of 1998, according to oil company
officials surveyed by Dow Jones Newswires.

"Out of the adversity will come some opportunity," said Bill
Fanagan, president and chief executive of Gulf Indonesia Resource
Ltd. (GRL), a Jakarta-listed unit of Gulf Canada Resources Ltd.
(GOU).

Gulf Indonesia's existing operations haven't been affected by
the recent political strife, and the company's interested in new
investments, Fanagan said.

Several of Indonesia's upstream oil and gas assets are on the
market, and more are expected to be put up for sale this year,
industry officials say.

Low oil prices, discounts for political risk and the cash
requirements of some smaller operators have created a buying
opportunity, oil company officials in Jakarta said.

"Indonesia's upstream (petroleum exploration and production)
sector will probably see about ten transactions - a reasonable
year," said a senior official with one oil company active in
Southeast Asia.

"In dollar terms it's going to be a big year... the number of
deals will likely be about the same as in 1997 and well below the
recent peaks in 1995 and 1996," said the official, who asked not
to be identified.

Indonesia's oil sector M&A activity peaked in 1996 with 16 oil
and gas assets changing hands, and has declined since owing
partly to deteriorating investor sentiment about Indonesia.
But larger, established players are less likely to be fazed by
political risk.

"Anyone in the business has to have a bit of the contrarian in
them," Fanagan said regarding current investor sentiment towards
Indonesia. "The fundamentals of Indonesia's oil industry haven't
changed."

Monday, Indonesian state oil company Pertamina's president,
Soegianto, called the country's production-sharing contractors
for a meeting to emphasize their contracts would remain intact
amid the current crisis.

Indonesia's upstream oil and gas business has seen three major
M&A deals so far this year, with the largest by far between U.S.
companies Atlantic Richfield Co. (ARC) and Union Texas Petroleum
Holdings Inc. (UTH).

Arco's $3.3 billion acquisition of Union Texas, announced in
early May, valued the latter's Indonesian assets, about 37
percent of its total assets, at more than $1.0 billion.

Arco was willing to bid nearly 40 percent above Union Texas
share price before the deal was announced because Union Texas has
liquefied natural gas capability, crucial to developing Arco's
Tangguh gas discovery in Irian Jaya, estimated to hold 10
trillion-13 trillion cubic feet in reserves, the official said.

With the purchase, Arco gained a stake in the Virginia
Indonesia Co., or Vico, joint venture that supplies and helps run
Indonesia's Bontang LNG export terminal in East Kalimantan.

The other two deals so far this year both involved stakes in
the onshore Tuban oil concession in East Java.

R.S. Holdings, a unit of Indonesian conglomerate Salim Group
(P.SLM), sold its 12.5 percent stake in the block to EEX Corp.
(EEX) of the U.S, while Total S.A. of France sold its 12.5
percent stake to block-operator Santa Fe Energy Resources Inc.
(SFR). Industry sources estimate the two sales were for $40
million and $43 million, respectively.

Spain's Repsol SA had planned to sell its stakes in the
southeast Sumatra Sea and the northwest Java Sea to state-owned
China National Offshore Oil Co. for an estimated $280 million,
but the Chinese government canceled the deal.

Among deals expected this year is a sale by Jakarta-listed PT
Medco Energi (P.MCE) of either corporate equity or assets. The
company has some high-quality assets, primarily a 140-million-
barrel oil discovery on the south Sumatra block it operates.

Medco's financial health is a concern for most potential
buyers, but it's relatively free of links to the family of former
President Soeharto.

Moreover, oil industry officials expect Pertamina's review of
120 of its contractors with links to the Soeharto family to have
little bearing on oil and gas production, suggesting the review
will be harder on trading affiliates and shipping companies.

Allegations of nepotism have surrounded some upstream deals,
particularly production-sharing stakes acquired under Pertamina's
10 percent "back-in" provision on all blocks, but the stakes
involved are minor. Pertamina has a legal right to take a 10
percent stake in Indonesian concessions.