(EnergyAsya, February 21 2012, Tuesday) — The vibrant oil and gas sector reported 1,322 oil and gas transactions last year for an increase of more than 5% compared to 1,258 in 2010, according to a survey by consultant Ernst & Young.

But in value terms, the global aggregate of these transactions was down 7% to US$317 billion from US$341 billion in 2010 as a result of a lack of mega deals. Last year, the sector reported 71 transactions each valued in excess of US$1 billion, compared to 76 the year before.
Sanjeev Gupta, Asia-Pacific Oil & Gas Leader and a Transaction Advisory Services specialist partner at Ernst & Young, said:

“The oil and gas market has proved that it can adapt to higher levels of uncertainty and keep transacting. The key questions now are how it will cope with the combination of commodity price volatility and structural contraction in global debt capacity.”
The upstream segment reported represented 75% of total Asian deal volumes and 72% globally. Of the US$66 billion shale related transactions, unconventional hydrocarbons are rapidly emerging as the new conventional.

While most of the deal activity has been in North America, the survey found that China is the largest shale gas resource holder in the world, with 19% of global resources. If the potential in this asset base can be unlocked, this could transform the oil and gas landscape in years to come.

Activity in the downstream segment declined modestly during 2011, although overall values were comparable to 2010 levels. Ownership change in refining and retail in mature markets continued, stemming from ongoing portfolio rebalance and capital allocation reviews amongst the majors.

“Downstream activity will continue but may be more concentrated in storage and midstream rather than refining,” said Mr Gupta.

The survey said oilfield services companies, like their customer base, are also globalising and consolidating. Many of the larger players are well-capitalised and opportunistic, and financial players also remain active.

As a result, the segment saw an increase in deal activity in 2011 and a positive outlook for 2012 underpinned by those seeking new geographies, new customers or new technologies.

Outlook for the Asia-Pacific in 2012

M&A activities will continue into 2012 but will be affected by wider economic volatility, said Ernst & Young.

Mr Gupta said winners will have to manage risk, volatility and capital across a global political landscape.

He said: “Despite substantial economic worries in the US and Europe, we expect to see more outbound acquisitions – especially for upstream assets – by the Asian players, notably Chinese and other broader Asian national oil companies (NOCs), and for unconventional gas assets.

“We also expect to see increasing supplies from Iraq and Libya in 2012 to meet the increasing energy demand from Asia-Pacific. We expect continuing portfolio rationalising and optimisation across subsectors, i.e., upstream, downstream and oilfield services and among a mixed set of players (NOCs, oil majors, independents, private equity and service companies).

“We also expect to see declining focus towards the renewable sector, as the industry will continue to see a rise in shale gas and oil sands production.”

Asia-Pacific oil and gas M&A in 2011

Australia’s deal-hungry junior oil and gas companies were starved of opportunity due to tough conditions in equity markets and as a result, the number of deals declined from 73 in 2010 to 58 in 2011, while their value plunged by 37% to US$7.2 billion. About 81% of last year’s transactions came from the upstream sector.

The major transaction focus of 2011 was the de–risking of upcoming LNG developments.

The largest deal involved China Petroleum & Chemical Corporation (Sinopec) taking a 15% stake in the Conoco Phillips/Origin Energy LNG venture (APLNG) for US$1.8 billion. In addition to the 15% equity interest, Sinopec secured off–take rights for 4.3 million tonnes/year of LNG from the proposed CSG-to-LNG project for 20 years.

The Fukushima nuclear disaster in March 2011 boosted gas demand, especially with respect to unconventional gas assets. The higher demand was evidenced in Japan, as well as in China and other Asian economies.

Most of Asia’s major transactions last year were focused on outbound investments as a means to secure energy supplies. These transactions were mainly driven by the Chinese NOCs, with focus on upstream assets in the Americas, especially unconventional Canadian and US shale gas plays, and South American conventional assets (such as in Brazil).

A notable trend emerged in this group to balance and optimise portfolios based on resources, expected economic returns and associated risks.

Other Asian countries also showed momentum for outbound investments in their attempt to provide security of energy supplies in lieu of increasing domestic energy demand.

Oilfield services sector transactions continued their momentum in this highly fragmented subsector, although the magnitude of deals was relatively smaller. Selective sovereign wealth funds and private equity remained focused on further building up their service portfolios, said Ernst & Young.