31/01/2015 21:34 AST
It is a question that faces the oil industry whenever there is a big shift in oil prices: what will be the effect on deals — on mergers and acquisitions, and on the buying and selling of assets?
Will there be a period of consolidation, when stronger companies gobble up weaker ones, or where companies get together as a defensive strategy? Or will oil price volatility dry up deal-making for an extended period?
For the Middle East, the strategic questions for the national oil companies are both about their international diversification strategies — taking positions, for example, in Mexico’s opening energy sector, or buying into North America’s unconventional oil and gas boom — as well as about decisions on long-term regional investment.
“The recent decline in oil prices … brings to sharp focus some issues that need to be addressed as a matter of urgency if the [Middle East oil] sector wants to deliver on its ambitions,” says Paul Navratil, the head of Middle East energy at consultancy PwC. “If oil prices remain as they are, or drop further, then the need for efficiency of capital will be even more important.”
PwC last week reiterated the conclusions of a survey it conducted last year on regional oil and gas project spending. It forecasts that despite the fall in oil prices, project spending will rise significantly because of the sector’s long-term strategic importance to governments and their national oil companies.
The survey had concluded that more than three-quarters of respondents — owners, developers, contractors, advisors and financiers — are expecting project spending to rise over the next 12 months and 40 per cent expected spending to rise by more than 25 per cent.
“Since this survey was conducted, the oil price has dropped significantly, but PwC does not believe this will dent the spending plans of projects planned or under way in the region. This is because of the fundamental importance of the sector to the region’s governments in helping to deliver revenue and employment,” it said in the report.
Nevertheless, Qatar and Royal Dutch Shell last week announced one of the biggest casualties of the oil price slump when they cancelled their $6.5 billion Al Karaana petrochemicals plant in Ras Laffan Industrial City north of Qatar. Already, late last year Shell had announced that it would kill a deal with Saudi Basic Industries to expand a petrochemicals plant in Jubail.
Other deals to die in the oil price maelstrom have included UAE-based Dragon Oil’s £492 million (Dh2.73bn) takeover of Petroceltic, an oil and gas exploration and production company headquartered in Dublin with offices in Edinburgh, London, Algiers, Varna, Cairo and Rome.
It may get worse before it gets better, as the volatile atmosphere makes both buyers and sellers hesitant.
“That’s why there are not a lot of deals when there is oil price volatility: sellers don’t want to sell if the think prices are bottoming out but buyers don’t want to overpay,” says Greig Aitken, the principal analyst for M&A at Wood Mackenzie, an energy industry consultancy. “But that is how you make money in M&A ultimately, it comes down to a bet on the longer-term outlook for oil prices.”
After the oil price crash that followed the financial crisis in 2008, deal-flow fell off sharply initially but recovered fairly quickly as companies went bargain-hunting. Back then, the oil price recovery was fairly rapid — a “v-shaped” recovery.
The industry’s rebound then included the funding and unprecedented expansion of the North American unconventional oil sector that is partly responsible for the recent oil price crash.
The pattern for the industry may be different this time and the recovery — both in oil prices and deal-flow — may be slower. But some analysts see this as an opportunity for big upheaval and deal-making on a scale not seen since the 1990s.
The National
Please wait...
