Pace of energy deals set to accelerate

The total value of deals in the first half of 2014 rose by nearly $40 billion globally. Above, a flame from a Saudi Aramco oil installion in Khouris east of Riyadh. Marwan Naamani / AFP

The pace of dealmaking in the oil and gas sector picked up in the first half of the year after 12 months of slowing activity, and there are signs that it could gain momentum, according to a new report by Deloitte, a consulting firm.

“The uptick in deal activity in June of this year could signify a stronger deal market in the second half of the year,” said John England, the head of US oil and gas at Deloitte. There are a number of factors driving deals, including the continued interest of private equity firms in riding the higher commodity prices seen in the first half of the year, the margin pressures on oil services companies making consolidation attractive, and the opportunities to enter into the new areas – such as shale oil and gas – that are still available in North America, and increasingly elsewhere.

“The deal market may be primed for an increase in activity as companies seek more capital to fund North America’s ongoing energy renaissance,” Mr England said. “The level of investment needed to maintain or increase current production and maintain reserve replacement will likely continue to drive capital into shale plays, oil sands, conventional projects, as well as the infrastructure required to support them.”

Although oil prices have slumped by 20 per cent since the summer high at around US$115 a barrel, they are still historically high and the dip in prices may make some assets more attractive to buyers. And despite the outlook for weaker global economic growth, there are reasons to expect oil prices to stay fairly firm. "Largely because of geopolitical unrest that has curtailed production from Libya, Iraq and Iran, commodity prices have remained relatively high for the first half of the year … Expectations for continued upward pressure on prices for the remainder of the year may make producers less likely to part with assets," said Kenneth McKellar, partner in charge of the energy and resources industry at Deloitte Middle East, although if the current weakness persists this could change.

There are also still signs that regional oil interests have an appetite for projects in North America, even though Taqa, for example, has spent much of the past year making up for losses incurred on its gas interests there.

Earlier this month, Chevron agreed to sell a 30 per cent interest in its Duvernay shale operation in Alberta, Canada to a unit of Kuwait Foreign Petroleum Exploration for US$1.5 billion in cash and committing to providing a portion of Chevron Canada’s share of the joint venture’s future capital costs. That deal also created a partnership for appraisal and development of shale plays in 330,000 net acres in the Kaybob area of the Duvernay.

Despite the turmoil in parts of the Middle East, the relative stability in Egypt – and even Libya – has been a factor in deals that give companies exposure to regional plays. This week, for example, Dubai-based Dragon Oil said it is close to buying Dublin-headquartered Petroceltic for about £491.5 million (Dh2.92bn), a deal that would help Dragon diversify away from Turkmenistan, particularly by giving it a piece of the big Ain Tsila gas play in Algeria.

Deloitte’s report said the total value of deals in the first half of 2014 rose by nearly $40bn globally, to $141bn compared with a year earlier. The United States and Canada remained the centre of deal activity, accounting for 61 per cent of all transactions globally. Among the factors that might drive future deals is the prospect of increased demand for future liquefied natural gas (LNG) exports from the US.

Internationally, laws passed this year in Mexico allowing foreign direct investment in the oil and gas sector for the first time since the 1930s could help to drive deals. Mexico needs to attract $50bn to the sector over the next five years to explore and develop new resources and has already signed memos of understanding with Adnoc and Mubadala Petroleum. The Mexican president is due to make a visit to the UAE in December and further deals are expected to be announced.

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