M&A, the Litmus Test of the International Balance of Power

M&A, the Litmus Test of the International Balance of Power

Nicoló Sartori | Senior Fellow and Head of the Energy program at the IAI
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Early 2017 showed encouraging signs of an upturn in the oil sector, an upturn confirmed by a rising number of deals and acquisitions worth nearly USD 140 billion in the first half of the year

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A slight rebound in the price of oil driven by the confidence generated by the agreement reached by OPEC in November 2016 boded well for the markets and leading industrial players. However, even though the oil industry is seriously in need of consolidation after tough years of price collapses and severe market volatility, there are still no signs of the major shifts in asset and capital that the new dynamics of the global Oil & Gas sector might need. Instead, we are seeing a confirmation of current trends: North American centrality, European decline, and emerging markets still in search of identity and balance.

America, the center of the world

As in 2016, the North American unconventional industry has been the focus of the main M&A activity in the oil sector this year. With more than three quarters of all transactions in the global upstream sector (worth around USD 70 billion), the U.S. and Canada have established themselves as the most dynamic and attractive markets for the industry and its investors. In particular, the slight rise in crude oil prices has seen operators starting to strengthen their portfolios again, with massive flows of capital into the United States’ big productive fields. Over the course of six months, there have been USD 20 billion worth of deals in the Permian Basin alone, with ExxonMobil alone paying USD 5.6 billion into BOPCO’s coffers to acquire 250 thousand acres in the basin between West Texas and New Mexico. The American industry’s message to the markets therefore seems clear: there is renewed confidence in unconventional production activities and the main players are consolidating their assets and operations to better exploit that position. This development has major implications for global dynamics and elasticity of supply and prices, a seachange potentially detrimental to traditional producers. 

Europe on the margins?

On the other side of the Atlantic, Europe remains in a prolonged energy standstill. European hydrocarbon demand and consumption data provide no encouragement, despite timid signs of growth in the gas segment. After problems in the refining sector, the upstream segment is also seeing the departure of major players, who are mostly being replaced by private equity investment, especially in the North Sea. Big players like Engie and Dong Energy have recently abandoned the North Sea. The former sold USD 4 billion in assets to Neptune, a firm owned by American and Chinese banks, and the latter has sold all its positions to the British chemicals company Ineos, which has also acquired the offshore Forties pipeline system from BP. Royal Dutch Shell, in line with its massive disinvestment plan to dispose of USD 30 billion of upstream assets, has also reduced its operating presence in the area, receiving USD 3.8 billion dollars from the sale of fields containing 115 thousand boe/d to Chrysaor. Finally, Maersk’s departure from the Danish offshore sector and sale of its historic assets to Total is also significant, not least of all in emotional terms because Maersk is Copenhagen based. These deals not only show the increasing marginality of Europe for major global players but also represent a major strategic alarm bell. Without forward-looking investments Europe risks a further contraction in its production capacity that would threaten the energy security of the entire bloc, which is already highly dependent on foreign imports.

Asia still in search of an identity

The future of the Asian continent remains uncertain. Obviously, in terms of fundamentals and market prospects, everything points east. With population and consumption growth, rapid rates of urbanization and vehicle ownership, Asia clearly has the perfect recipe for a substantial increase in hydrocarbon demand. However, despite solid foundations and exciting prospects, a significant consolidation of industrial balances in the region is yet to materialise. At the moment, the Western majors hold about USD 40 billion dollars of capacity and assets in Asia, which they would be ready to liquidate given adequate financial returns. Nevertheless, investments and transactions in the region seem to be pointing strongly towards the low-carbon segment. In 2016 over half the transactions in the energy sector related to renewable energies—wind, solar, hydroelectric and geothermal —and to electric transport, which is growing rapidly compared to previous years. Returning to the oil sector, it should be underlined that the major traditional producers, which are little inclined to make regional investments in the upstream sector, are moving to intercept the inevitable rise in demand in the region. And if American unconventional continues to dominate the supply side, there are a number of large national oil companies ready to invest in refining and downstream. Following on from Rosneft’s mega-deal in India in late 2016 (USD 12 billion for the acquisition of Essar Oil), at the start of the year Saudi Aramco signed a USD 7 billion deal with Petronas to acquire 50 percent of the RAPID (Refinery and Petrochemical Integrated) project, which can process 300 thousand barrels of crude oil a day and produce nearly 8 million tons of petrochemical products a year. Here, too, there is a chance for the growing competitiveness of U.S. oil products to make gains, and only huge investment in the region can slow down the advance of the stars and stripes beyond American borders.