Nicholas Watson in Prague -

China National Petroleum Corporation's raising in September of a $30bn loan for an acquisition spree for energy assets shows financing is available even in this climate of deep recession and depressed gas prices. However, experts say such funding is mostly the preserve of larger players and for a majority of smaller gas explorers operating in Central and Eastern Europe and elsewhere money remains worryingly tight.

The difficulty for smaller firms in the upstream gas sector is that while oil prices have doubled since February, the gas market is mired in a deep malaise, with conflicting signals about whether the bottom of the market has been reached, even though prices fell to below seven-year lows in September. On September 9, the gas contract for October delivery on the New York Mercantile Exchange settled at $2.83 per million British thermal units, which was down by almost 80% from its high last summer.

The reasons for the steep price falls aren't hard to find. The economic crisis has brought industrial production around the world crashing to a halt, which is in turn hitting demand. Despite a colder-than-normal 2008-09 winter in Europe, gas demand in the EU's five biggest economies - Spain, Italy, Germany, France and the UK - fell by 12-23%. Projections that demand would rise to 0.686 trillion cm/y by 2012 now look fanciful. IHS Global Insight says a deep recession could see demand fall to 0.610 trillion cm/y by 2012, annual growth from 2008 of just 0.3%. Gazprom has reacted to this by slashing its forecast exports to Europe from 179bn cm in 2008 to an expected 140bn cm this year.

All this is terrible news for smaller gas producers, many of which are increasingly struggling to raise money to stay in business.

White knights

Of course, the problem with accessing finance is not a new phenomenon, after all the credit crunch began back in 2008. However, until now, experts say that financially-strapped oil and gas companies have managed to put off the day of reckoning by drawing on the cash reserves they built up during commodity price boom during the first half of 2008.

Some gas companies have introduced joint ventures, while others have simply sold off their share in assets to larger companies that are in better financial health. "Well-capitalised larger players are potential funding partners or, in some cases, simply acquirers of junior companies' working interests," says Jon Clark of Ernst & Young's oil and gas transaction advisory services team.

For some companies, these actions provided critical breathing space before the markets began to show some signs of life in the second quarter. According to Ernst & Young's most recent "Oil and Gas Eye" report on energy companies listed on London's Alternative Investment Market, the second quarter saw secondary share offerings worth a total of £281m, a steep rise from the £25m raised in the first quarter and the highest level since the fourth quarter of 2007. Among the successful gas producers to raise money were Aurelian Oil and Gas, which explores for gas in several emerging European countries such as Bulgaria and Romania. Aurelian raised approximately £11.6m in June. Another, Volga Gas, which explores in Russia, raised about £16.6m in June from a secondary share offering. "We've seen challenging times for financing in the junior oil and gas sector over the past 12 months, particularly for those without existing production... [but] there is some evidence of equity investors and potential lenders returning to this part of the market," says Clark.

For many others, however, bankruptcy or forced mergers look like the only alternatives. Analysts and industry players say the expected consolidation of the industry, which has been delayed somewhat by the meltdown in the financial markets and the crash in commodity prices, looks set to kick off in earnest. "Market turmoil has opened up new acquisition opportunities for cash-rich players, particularly in countries perceived as high risk, where valuations have fallen the furthest," says Andy Brogan of Ernst & Young.

Those high-risk areas obviously include dangerous countries like Iraq. On September 11, Hungarian oil and gas company Mol was forced to sell existing treasury shares to the tune of $3.57m to raise money to help finance a gas project in Iraq's Kurdistan. But Russia, too, with its questionable commitment to respecting property rights, is regarded by many bankers as a high-risk place to fund projects, especially in light of falling demand and prices. Gazprom is struggling to raise the $1bn plus necessary to purchase the giant Kovykta gas field from TNK-BP, a deal it originally agreed back in 2007. Local reports in August quoted unnamed government and TNK-BP officials as saying the rights to develop Kovykta would eventually be transferred to state-controlled Rosneftegaz. Russia's jewel in the crown gas project, Shtokman in the Barents Sea, is also in trouble, with Gazprom's deputy CEO Alexander Medvedev saying on September 11 the firm might delay the launch of the giant gasfield beyond 2013 should demand in Europe not recover fast enough.

The Shtokman project involves France's Total, which together with Shell and Eni are seeing their credit ratings come under pressure, and hence their funding costs rise, from the worsening gas market conditions. On September 3, Standard & Poor's lowered its credit ratings on Shell by a one notch to 'AA', while lowering its ratings outlooks on Eni and Total to negative from stable. "A lot of that goes back to lower oil prices during 2009 and record low gas prices," says John Martin, managing director of the oil and gas strategic client coverage group at Standard Chartered Bank.

Amidst all this turmoil stand Chinese energy companies, which have access to plenty of funding, about $2 trillion by some estimates - witness September's $30bn low-interest loan from China Development Bank to CNPC - but limited scope to buy energy assets given the increased national interest shown by host countries around the world. "In the [Organisation for Economic Co-operation and Development] countries it's politically very difficult to do a corporate acquisition, but governments would never stop Chinese companies from taking equity stakes in projects, so that's feasible. Any company that has international oil and gas projects struggling and the product can get back to China, then you're sure to see the Chinese looking at those stakes in projects," says Martin.

With rumours swirling around Spanish oil major Repsol that a Chinese company is looking to acquire a stake in its Argentine YPF unit, Spanish Industry Minister Miguel Sebastian on September 22 told reporters that Spain is open to Chinese investors taking financial, not strategic stakes in companies like energy firms. "If Chinese companies are interested in Spanish strategic companies, we would be delighted that they take a stake, as long as it is for financial reasons," Sebastian said on an official visit to China.

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