Call Them Little Oil

The loamy soil around Bordeaux is home to some of the world's most famous vineyards. But wine is not the only liquid gold produced in the area. Since 1997 a tiny Canadian oil company called Vermilion Energy Trust has been pumping around 4,000 barrels a day from several dozen small wells in France's Aquitaine Basin and an additional 2,000 from acreage outside of Paris -- almost one-third of France's total oil production.

Toronto-listed Vermilion is just one of a slew of independent exploration and production companies that have sprung up in recent years in response to soaring oil prices. So far, access to capital isn't a problem: Many of the new players are either turning to private-equity outfits for funding or floating shares on smaller exchanges, such as London's Alternative Investment Market. More than 20 independent oil companies listed on AIM in 2004 alone, bringing the total to 44. Few of these companies make any money or have any significant production.

Take London-based Equator Exploration. After an initial public offering in December, the company is valued at more than $200 million. Yet it doesn't have a single oil well to its name, despite owning concessions in the West African island state of São Tomé & Príncipe. Little wonder some analysts say a shakeout is inevitable when prices fall. "High oil prices have encouraged a lot of companies to come to the market to raise money," says Investec Securities oil analyst Bruce Evers. "But some are low-quality, and not all will survive."

While soaring oil prices may bring the speculators out of the woodwork, industry observers point out that there are more than enough opportunities for the better-run independents to grow and prosper. Some of the savvier new players are taking advantage of a wealth of exploration prospects in the former Soviet Union, an area previously closed even to the majors. London-based Victoria Oil & Gas PLC acquired an exploration and production license for Kazakhstan's Kemerkol field in February for $8.5 million. Prior to the deal the field was producing 200 barrels of oil equivalent per day. But the company believes that by drilling new wells and redeveloping existing ones, it can bring that up to 4,400 barrels per day. London-based JKX Oil & Gas PLC has clinched exploration and production licenses in Russia, Ukraine, and Georgia. "Many of these smaller companies have been adroit in spotting opportunities that have been overlooked by the majors," says J. Robert Maguire, global co-head of energy investment banking at Morgan Stanley (MWD ) in London.

Others are expanding by picking up fields cast off by the majors. Vermilion's big break came in the late 1990s, when it paid $45 million for Esso's French assets. Although it has pumped about $100 million into developing the fields since then, the payoff has been rich: Vermilion's share price has risen from 10 cents in 1997 to $18.50 today. "It's all about timing and being there when the majors are looking to sell," says Daniel Goulet, a Canadian petroleum engineer who runs Vermilion's French operations. Prices for Bordeaux wines may be tanking, but Vermilion's vintage is fetching top dollar.

By Kerry Capell in London, with John Rossant in Paris

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