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Oil and gas sector M&A activity to pick up next year

CONDITIONS are becoming "increasingly favourable" for another round of mergers and acquisitions (M&A) activity in the oil and gas sector by mid-2010, according to accountancy firm Deloitte. The upsurge in activity will develop a mantra of "acquire or be acquired" predicts Deloitte, which says a recovery to pre-recession M&A transaction levels could come by 2011.

But the report – Energy Predictions 2010 – warns companies that the macro-economic environment will remain a significant concern, with stability in commodity markets and better access to credit needed for a new burst of transaction activity.

Independent oil and gas companies could be involved in two ways: as targets for reserves-hungry majors, and as potential acquirers of assets sold off by larger firms as they rationalise their portfolios.

National oil companies (NOC) will also be active on the M&A market, says the report. They have three goals: expanding reserves portfolios; bolstering their marketing strategies; and developing strategic alliances. One feature will continue to be NOC-to-NOC transactions, such as recent deals between Korea National Oil Corporation and China's Sinopec; and Kuwait Petroleum International and Vietnam. These "suggest that state-backed companies prefer to deal with each other rather than engaging with independents and international oil companies (IOCs)".

Deloitte says such transactions between the NOCs are likely to increase "dramatically" in 2010, as consumer nations seek new reserves to fuel their growing economies and the producers tie up markets for their exports. Meanwhile, although the "skills gap" between NOCs and IOCs is narrowing, the former still need to bring in expertise – providing an opportunity for IOCs, especially as consumer NOCs seek to meet ever-growing demand in their own markets. However, the battle will intensify in the coming years as a tighter market for oil and gas talent emerges.

Deloitte's other predictions bring mixed news for the environment. Smart meters, despite cost and efficiency advantages, will spread across networks slowly. And while carbon capture and storage plans remain costly (see p28), coal-fired generation plants will continue to be built, especially in developing nations. Traditional oil-producing countries, in areas like the Middle East, will increasingly look to develop clean, alternative-energy sources in coming years, although oil will continue to dominate their economies.

The forecast also includes a warning for the oil industry, saying it cannot adopt a "wait and see" attitude to carbon reduction, but should look for its own means of reducing emissions and play a role in developing an effective carbon-trading scheme. Deloitte says a trading scheme exclusive to refiners, for example, would offer "greater certainty around the cost of compliance, because it would more realistically reflect intrinsic factors, such as what the industry pays for technology, and research and development". It would also free the market from speculators, giving more predictability in the price – crucial for investment.

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