Mergers and Acquisitions in the energy sector are not that different from those in other capital-intensive, global industries. They are driven by the desire to accelerate growth, to achieve a quick entry into a country or sector deemed to be of strategic importance, or to gain access to a new technology or scarce human capital. Sometimes, these large deals are also used as defensive measures as they seek to raise the barriers to entry for new competitors or limit the market power of existing rivals. Given the large size of the leading players in the energy industry, it is only natural that many of the mega-deals of the last decade have taken place in this sector. But the size and the nature of these deals point to an interesting question: why would so many of the big deals in the energy industry seem to be going against the trends that most experts think will define the industry? While there is a debate about the speed at which reliance on fossil fuels to produce energy will decline, there is little disagreement that in the future the world will use less of these fuels. Yet, the pattern of Mergers and Acquisitions in the energy industry during the last 15 years doesn’t seem reflect this trend. The main goal of most of the big deals among oil, gas and coal companies is to increase the proven reserves of the acquiring company or of the corporate entity resulting from the merger. Boosting synergies, economies of scale and production volumes of oil and gas are common drivers of the M&A activity in this sector. Why would the corporate behemoths of the energy industry double–down on fossil fuels, a sector whose weight is bound to decline? One answer is that they are not neglecting to increase their presence in renewables but that the size of the deals is still too small to attract the attention of the general media and the public. In contrast, the large-scale Mergers and Acquisitions in fossil-fuel companies are bound to capture the interest of the media and analysts. But there is more. Many of the mega-deals in the energy sector reflect the race against time faced by this industry’s leaders. They need to maximize their capacity to exploit hydrocarbons that in the future may face severely restricted markets, becoming in fact stranded assets. The "big-deals" we have seen in the fossil fuel industry are allowing the market leaders to quickly boost their oil and gas reserves rather than having to go through the lengthy process of exploring for new reservoirs and eventually developing them. For example, the average cost of finding and developing new oil and gas reserves in the United States is roughly twice as much as that of acquiring reserves through mergers or corporate acquisitions. This goal of quickly expanding reserves explains much of what’s behind the whopping USD 3 trillion worth of Mergers and Acquisitions that we have seen in the last 15 years in this industry. That is why in the league tables of the world’s largest M&A the energy industry ranks first.
Seeking size and efficiency
Important examples of this strategy include the case of India, where government plans are advanced to form a single, giant oil company by merging some of the existing 18 state-owned oil and gas companies into a unified corporation that would have revenues of some USD 140 billion and could become one of the world’s ten largest oil and gas corporations. This is also the case of Russia, where seven of the ten largest M&A in 2016 took place in the oil and gas sector. Some of these Russian deals also sought to attract more foreign investment into state-owned oil companies. An example of this is the USD 11 billion acquisition of 20 percent of Rosneft made by the Qatar Investment Authority and Glencore, the trading company. In the U.S., the $5 billion merger of Anadarko and Union Pacific that took place in 2000 is another interesting example. Quick access to leading-edge technology is another frequent motivation for M&A. Such was the case in the $16 billion acquisition of Cameron by Schlumberger in 2016. Paal Kibsgaard, Schlumberger Chairman and C.E.O. explained this deal as a move designed to merge Schlumberger’s reservoir and well technology with Cameron’s wellhead and surface technology. Add that to Schlumberger’s existing strengths in instrumentation, software and automation, Kibsgaard held, and you produce a new company with a significant technological edge. The planned acquisition of Baker-Hughes by Halliburton was also triggered by this desire to sustain its technological edge, although the deal ultimately fell through due to anti-trust considerations.
Big deals as a catch-up strategy
Occasionally, companies are driven to rely on acquisitions to correct important strategic omissions. That seems to have been the calculus of ExxonMobil in the case of hydrofracking, the critical set of technologies for the exploitation of shale oil and gas. After having been a latecomer to fracking, the U.S. giant has become one of the world’s leaders in this field, thanks to the acquisition this year of 250,000 acres of shale oil deposits in the Permian Basin, located in Texas and New Mexico. This deal, worth USD 6.6 billion, represents the company’s largest acquisition since 2009 and a major strategic departure from its reliance on conventional reserves of oil and gas in countries such as Russia, Qatar, Angola and Guyana. Another way in which oil and gas companies are using Mergers and Acquisitions to align their strategies to the trends shaping the industry is through the expansion into more environmentally friendly segments of the business. Perhaps the signature “big deal” of this kind was the 2016, USD 64 billion acquisition by Shell of the BG Group, the company spawned 20 years ago by the privatization of British Gas. This very large deal represented a significant reshaping of Shell’s traditional strategy of growth. It was the largest deal ever done by Shell. It was driven by what Gerald Paulides, the leader of the coordinating team, clearly defined as the need to respond to a strategic discontinuity in the energy sector, rather than by the desire to add new traditional oil and gas reserves. Mr. Paulides explained that with this deal, Shell was making a "deliberate move to emphasize the company’s strategic goals in certain segments, such as Liquefied Natural Gas." With the BG acquisition, he said, Shell achieved the goal of what could have been a ten year strategy in just one year. Although the acquisition did place Shell as the second largest oil and gas company in the world, its basic motivation was not to increase its size but to quickly become a dominant player in natural gas, the transition energy source of choice as the world moves into a lower carbon energy environment.
Is the oil and gas sector's adjustment to a low carbon economy too slow?
It would seem that large Mergers and Acquisitions by oil and gas companies are emphasizing business as usual, while lagging behind in adjusting to a low-carbon economy. But, is this lag real? Not really. The average size of a merger or an acquisition involving a renewable energy company is comparatively small and thus not as visible as the huge oil and gas deals. The average price tag of a renewable energy company tends to fall under $1 billion. In 2016, corporate Mergers and Acquisitions in wind and solar energy jumped 58 percent to an aggregate USD 27.6 billion. European oil and gas companies are leading in readying the sector for a transition to a low-carbon energy world, mostly through the acquisition of small and medium sized renewable energy companies. Some examples of this trend include TOTAL’s strategic decision that calls for one-fifth of its asset base to be focused on low-carbon technologies and the recent creation by Royal Dutch Shell of a New Energy Division. A recent report by Edinburgh based company Wood McKenzie predicts that major energy companies like Royal Dutch Shell, Total S.A, and Statoil, among others, will invest billions of dollars in wind, solar and energy storage projects in the coming decades. Valentina Kretzschmar, Director of Research at Wood Mackenzie, states that such commitments by oil and gas major corporations are due to the fact that they are recognizing renewables as a megatrend, not a passing fad.