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Gas powers global upstream M&A

Indian megadeals and North American Shales lead M&A activity

North America’s shales remain the busiest realm for upstream mergers and acquisitions (M&A), as companies fortify gas positions and move into liquids-rich plays to capitalise on high oil prices. But it is not all about the shales, with BP’s continuing efforts to redraw its asset portfolio leading to a big deal in India and uncertainty in Russia (see p30).

Low natural gas prices in North America are no obstacle to the bigger players taking a longer-term view of the shale-gas sector and, if they can present a buying opportunity in some cases, if the result is more attractive asset prices.The size of the biggest transactions in the US and Canadian unconventional sector may have diminished since the megadeals of 2009, which saw ExxonMobil buy shale-gas producer XTO Energy for more than $30 billion and, in the oil sands, Suncor snap up its rival Petro-Canada for around $15 billion. The number of transactions is also lower than the bumper year of 2010. But activity in North America remains buoyant for medium-sized deals up to around $5 billion.

“If companies can build sufficient scale, this will be an arm of the business that can support reserve bookings and production growth for decades to come, so the forward gas-price curve for the next year or so isn’t a big concern. They’ve got an eye to the long term, when prices are likely to be robust enough to support the development of these plays,” said Luke Parker, M&A analyst at energy consultancy Wood Mackenzie.

In the first quarter of the year, the North American shale gas sector accounted for around 40% of global M&A by value, with over $16 billion of deals, according to Wood Mackenzie. China’s continued interest was demonstrated by PetroChina’s proposed $5.4 billion acquisition, in February, of 50% of the interests of Canada’s Encana in the Cutbank Ridge shale reserves in British Columbia. Cutbank Ridge produces around 255 million cubic feet a day (cf/d) of gas and has proved reserves of some 1 trillion cf.

But the deal is yet to be approved by the Canadian government, which routinely investigates the benefits of big foreign investments in the country before approving them. A decision had been delayed twice by late May, at least partly because of the distraction of parliamentary elections in early May. If the deal does go though, it will be PetroChina’s largest foreign investment and the largest Chinese investment in Canada, beating Sinopec’s $4.65 billion purchase of ConocoPhillips’ stake in the Syncrude Canada oil sands venture last year.

Chinese state-owned companies remain keen to secure a greater involvement in North American shales to gain access to drilling expertise not readily available elsewhere in the world, as China seeks to exploit its own shale-gas reserves. The same is true of India’s Reliance Industries, which has made several acquisitions of North American shale acreage over the last year or so. But it is not only Asian investors that are prepared to spend big in the shales.

BHP’s shale play

In February, Australia’s BHP Billiton, the world’s largest mining firm, agreed to buy shale-gas assets in Arkansas with 2.4 trillion cf of proved reserves from Chesapeake Energy for $4.75 billion. BHP said the assets produce over 400 million cf/d and would increase its net reserves and resource base by 45%.

The deal marked BHP’s first investment in US shale gas and enabled the firm to tap a large cash pile amassed as a result of failed 2010 bids for Canada’s Potash Corporation and UK-Australian mining company Rio Tinto. While the Fayetteville shales involved contain oil as well as gas, the acquisition is likely to be a long-term play based on the likelihood of rising gas prices. BHP expects the shales to support substantially higher production over a 40-year operating life.

For Chesapeake, the deal represents another stage in its efforts to reduce $15 billion of long-term debt through asset sales. In January, the Oklahoma City-based company sold a one-third stake in its oil-rich leasehold acreage in northeast Colorado and southeast Wyoming to China’s state-owned China National Offshore Oil Corporation (CNOOC) in a deal worth a total $1.3 billion. That followed another deal with CNOOC, in October 2010, when the Chinese firm agreed to buy a one-third stake in Chesapeake’s oil and gas assets in South Texas’s Eagle Ford Shale for around $1.1 billion.

North America may be dominating M&A activity in terms of total volume, but some of the bigger deals and prospective transactions have been elsewhere. BP’s efforts to change the balance of its asset portfolio in the wake of last year’s Macondo blowout in the Gulf of Mexico continues to provide impetus – and potentially open up opportunities for others.

The company’s stalled efforts to seal a partnership with Rosneft to explore in the Arctic have captured the headlines. That deal was seemingly halted in May, when Rosneft pulled out of the planned $7.8 billion share swap, as BP failed to reach an agreement over the move with its existing Russian partners in its TNK-BP joint venture. BP and Rosneft were said to be pursuing efforts behind the scenes to resurrect the deal in a new form, but there was no sign of a breakthrough in late May.

BP has been wheeling and dealing with more success elsewhere. Since mid-2010, the supermajor has been divesting assets, now considered to be non-core, to raise $30 billion by the end of the year – BP says it has already sold more than $25 billion of assets. The most recent deal was the mid-May sale its interests in the UK’s largest onshore oilfield, Wytch Farm in Dorset, and other smaller North Sea holdings to Perenco UK for at least $555 million ($897 million).

Indian carve up

But BP has not shunned the opportunity to make big strategic acquisitions, as shown by February’s deal to partner Reliance in its Indian deep-water oil and gas blocks (PE 4/11 p31). The partnership is costing BP $7.2 billion, payable by March 2012, with up to another $1.8 billion payable if it leads to the development of commercial discoveries.

The venture marks the biggest deal carried out by new chief executive Bob Dudley. He said at the time that it made financial sense, as the Indian assets were being acquired at a price equivalent to around $7.5 a barrel, compared with the average $12/b raised from BP’s asset-sales programme.

The BP-Reliance deal follows last year’s agreement by Vedanta Resources to buy stake of up to 60% in Cairn India for as much as $9.6 billion, giving the Indian-oriented mining firm a big stake in India’s onshore oil reserves, largely concentrated in Rajasthan. But government approval of the deal has been held up, in part by a dispute over royalty payments, and has yet to receive the go-ahead nine months after it was proposed. The government was set to meet to consider the deal at the end of May. Vedanta Resources said last month that it planned to raise up to $1.5 billion through a private bond offering to help pay for the acquisition.

Assuming the Vedanta deal does go through, these two deals leave little room for further upstream deals on the same scale in India, but the significant presence of BP may well give other foreign players cause to consider investing in a country that some investors have fought shy of in the past, say regional observers. 

Into Africa

Cairn India’s director of exploration and new ventures recently told an oil and gas conference in Nairobi, Kenya, that east Africa would be an obvious place to consider as part of the firm’s expansion plans. While investments in the more unsettled parts of North Africa have not fared well in recent months, there is a growing interest in sub-Saharan Africa among investors, as opportunities arise on both sides of the continent. “Africa will be an area that will pick up in terms of M&A activity,” said Wood Mackenzie’s Parker.

Nigeria is likely to be a prime source of deals, as some of international oil companies (IOCs) seek to divest their non-core assets. Shell is rumoured to have already lined up $2 billion to $3 billion of asset sales, though no deals have been announced yet.

Angola may also yield further activity related to the BP-operated offshore Block 31, following the sale of the 5% stake owned by France’s Total to Hong Kong-based China Sonangol International in December. ExxonMobil has been trying to sell its 25% stake in the block and is believed to have held talks with a number of potential buyers, including China’s Sinopec and India’s ONGC.

The latest possible suitor to emerge is Indonesian state-owned oil company Pertamina, which was reported in early May to have outbid its rivals with an offer of $3.5 billion for the ExxonMobil stake. No formal announcement had been made by late May.

M&A activity is also set to pick up away from these traditional African energy hubs. On the west coast, the emerging plays of the transform margin, such as Ghana and Sierra Leone, are also likely to provide investment opportunities (PE 2/11 p17).

Kosmos Energy’s assets in Ghana could be a possible target, following the abandonment of state-owned Ghana National Petroleum Corporation’s (GNPC) attempt to buy Kosmos’ 23.49% stake in the huge Jubilee field. US-based Kosmos recently filed for a $620 million initial public offering, perhaps indicating it remains committed to Jubilee, but speculation is certain to persist.

In Uganda, the resolution of a protracted tax dispute earlier this year finally allowed Total and CNOOC to join Tullow’s development of blocks in the Lake Albert region, paying $1.5 billion each (PE 5/11 p30). That development should see Uganda produce around 200,000 barrels of oil initially, with the region potentially providing more oil and more investment possibilities.

Elsewhere in east Africa, a series of gas discoveries by Anadarko in Mozambique could make that country a target for investment in a liquefied natural gas (LNG) project, while neighbouring Tanzania also hopes to expand its gas sector. The Tanzanian government recently opened up more acreage for exploration, with UK-based Aminex expecting to start drilling its fourth well in the Nyuni offshore area shortly.

Scramble for LNG investors

The Australian LNG sector also continues to provide opportunities, as lead companies urgently try to sell stakes to gas buyers so they can push on with their projects. “We can expect to see further deals in Australia, as LNG projects seek enough backers to move to final-investment decision (FID) this year,” says Parker.

First out the blocks could be Australia Pacific LNG (APLNG), a venture led by Origin Energy and ConocoPhillips, which is based on coal-bed methane reserves in Queensland. China’s Sinopec recently took a 15% stake in the $40 billion project.

Meanwhile, Japan’s Inpex is on the hunt for investors in its $20 billion-plus Ichthys LNG, based on offshore reserves, so it can move to FID before the end of the year. Ichthys received a significant boost in mid-May, when the government of Australia’s Northern Territory gave environmental approval for the project.

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