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Middle East oil and gas M&A in a downturn

AFTER A BUSY few years in the asset market, Middle Eastern oil and gas companies reduced corporate mergers and acquisitions (M&A) activity in 2009. With equity markets still subdued – few companies are raising funds through initial public offerings (IPO) on regional bourses at present – there seems little prospect of a revival in 2010.

Even cash-rich oil companies have been inactive, despite the ready availability of moderately priced assets. Dubai's financial crisis, triggered by the Dubai World default in late November, is only likely to reinforce conservatism among oil company executives in 2010.

The most active regional energy-asset buyer of recent years, Abu Dhabi National Energy (Taqa), changed its strategy in October. Following a restructuring of senior management, including the resignation of chief executive Peter Barker-Homek, the company is ceasing asset acquisitions a long way short of the $60bn target it had set for its asset portfolio.

According to state-backed Taqa's chairman, Hamad al-Suwaidi, the company is entering a new phase of development. It will now focus on the continued integration of its various global businesses, investing in its existing network of assets and paying down debt. The €285m ($422m) October purchase of DSM Energie Holding may be its last big foray into the asset market for some time. Taqa has spent $24bn on global acquisitions over the past three years; over the next four, it plans to spend just $3bn.

The last minute collapse in late November of what would have been one of the region's largest deals in 2009 – UK independent's Heritage Oil's proposed $6bn merger with Turkey's Genel Energi, involving substantial acreage in Iraqi Kurdistan – may come to be seen as a symbol of the difficult times confronting the region.

The M&A downturn is not restricted to the energy sector. According to Ernst & Young, the value of deals in the Middle East and North Africa region fell by 54% to $7.14bn in the third quarter of 2009, compared with the same period in 2008.

There were several notable M&A deals in 2009, mostly involving the UAE. Abu Dhabi's International Petroleum Investment's $3.8bn acquisition of a 32.5% stake in Spain's Cepsa in March was the biggest.

In a sign of the times, some of the most important figures involved in Middle East M&A deals have moved to other global regions. In September, Richard Lorentz, the former vice-president of new ventures at Abu Dhabi's Aabar Petroleum, formed a new Singapore upstream energy group, KrisEnergy, which aims to build a portfolio of exploration, development and production assets in Asia, where it sees primary energy consumption underpinned by healthy economic growth.

Whereas the Middle East's oil income provided the foundation for its asset haul in the post-2006 period, it is Asian players that are likely to show increasing appetite for acquiring overseas energy assets. According to Deloitte, a consultancy, Asian companies – led by the Chinese – are primed to take advantage of the more favourable conditions created by the global economic crisis, which prompted a fall in the valuations of international energy resources and assets, and the weakening of the US dollar against many other world currencies.

But, says Deloitte, increased M&A activity may not begin until much of the uncertainty that has constrained the M&A markets begins to dissipate: these include credit availability, global economic conditions and lack of confidence in oil and gas price trends.

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