A couple of house-keeping items first. Number one, whilst we have changed Dick Ghiselin's remit a bit, he is still a valued member of the Hart editorial team. He hasn't been run over by a truck, shot by a jealous husband (although we think he has fantasies along those lines) or put out to pasture. Dick has a key to this office as long as he wants it.

Second, if you haven't thought about attending the E&P Brownfields: Optimizing Mature Assets conference yet, you really should. Brownfield development is vital to sustaining the world's energy supply. But, it will require a focused effort, and advanced technology, to wring all the recoverable hydrocarbons out of tired and damaged reservoirs. If that is your remit - and it will be, sooner or later - join us in Denver in September for and honest, authoritative discussion of the technology and techniques that will be required to optimize mature assets.

Now, there have been some interesting commentaries dealing with reserves replacement coming our way lately. They range from predictions that there will be an oil glut and less pressure to replace reserves to dire predictions about our short-term inability to add reserves. In between is some pretty good reasoning.

The one I like best comes from a new forecast by PricewaterhouseCoopers. Their reasoning goes something like this. Mergers and acquisitions (M&A) activity will make a strong comeback in the second half of 2005 because buying reserves is now cheaper than finding and developing them. As a dollars and cents argument, that makes sense to me. With, as the report estimates, finding and development costs in excess of US $10 per barrel, M&A acquisition costs of $8.50 to $9 per barrel look pretty attractive.

But other factors support this argument, according to the report.

· Demand growth, especially in China and India, make a fall in oil prices difficult to imagine.

· With high oil prices that need to be monetized quickly, independents do not have the luxury 3- to 5-year development projects with complex production sharing agreements with national oil companies.

· The majors remain conservative and continue to use their cash for stock buybacks and dividends. This trend strengthens as sanction levels move from $20 to $30 per barrel.

· Independents are looking to buy, and because sellers can get the best price now and buyers need to grow, M&A activity will intensify.

· Natural gas, at $6 per Mcf, is attractive. The report notes that 60% of the North American M&A activity in the past 2 years was natural gas focused. With liquefied natural gas still just on the horizon, the gas market will continue to intensify.

According to Rick Roberge, US Leader of Transaction Services' Houston-based energy practice, "The only wild card in this scenario is a major drop in the price of oil, but that just doesn't seem to be in the cards, certainly for the balance of 2005."

If the report is right - and it does seem reasonable - another round of M&As is gearing up. Maybe that will prove the best reserves replacement strategy for independents but it will wreak more havoc with the work force and the service and supply customer base. And, in the long run, it won't do much for global reserves replacement, a serious issue.

Of course, I didn't run this by our M&A analysis team here at Hart, so, either way, I am bound to catch grief.

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