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ONE MORE STEP FORWARD: GLOBAL OIL AND GAS INDUSTRY IN THE FIRST QUARTER OF 2017

Despite the persistence of uncertain and volatile conditions, the global oil and gas industry continued the recovery trend in the first quarter of 2017. At least this is revealed by the dynamics of mergers and acquisitions worldwide in the Upstream sector; an area whose transformation shows that, despite the unknowns on the commodity markets, exchange markets and stock exchanges, the oil and gas industry is in a process of restructuring and redevelopment on new coordinates. This is a process in which the companies in the United States and Canada lead detached in almost all chapters.

Harder or easier, most of the relevant players in the global oil and gas industry have managed to survive in recent years, in an extremely difficult time, characterized by falling demand, falling prices and budget cuts; a time when strategic decisions were impossible, which now however seems to have ended. This is the conclusion that emerges by analysing the oil market and industry’s transformations.

RESTRUCTURING AND STABILITY

On the one hand, there’s the prospect that the oil price will stabilize around the USD 50 per barrel threshold - a level by about 90% above the one at the end of 2016... even if it is still far below the level of over USD 100/barrel in 2011.
We are talking about a level that seems to increasingly become a relevant market benchmark, although the oil price fell by 10% against early 2017; both the OPEC decisions and the cartel’s agreements with other major oil and gas producers (such as Russia) are an indication that, despite the events and the unknowns that may put strong downward pressures on the prices, this threshold will be supported. The latest hint in this respect is the agreement reached by the OPEC states and non-OPEC producers at the end of May 2017 in Vienna; an understanding by which the main producers agreed to extend the agreement until the end of Q1 2018, the signatory states agreeing to cut the output by about 1.8 million barrels per day.
On the other hand, during the past two or three years of crisis, the industry has been forced to operate deep restructuring: the capable players have distanced from the weak ones, strengthening their position. Important human, material, technological and financial resources have been released and, most importantly, a significant increase in the level of productivity and efficiency of the actors has been enforced, which has led to an increase in the number of projects with a decreasing profitability threshold.

ADJUSTMENTS AS CRISIS ENDS

This is the image of an ending crisis cycle of a field in full restructuring; the transfer of assets, deposits, rights and/or exploitation blocks, technologies and facilities, or infrastructure and people from one player to another is one part of this process. In this context, the players’ constant operations in the global oil and gas industry on the merger and acquisition market (M&A) are a confirmation that things are going in the right direction. In this way may be understood the figures showing the increase in M&A activities in the Upstream sector worldwide in the first quarter of 2017 – given that this part of the year is usually a weak one from this point of view. This suggests that for the rest of the year, the number and value of transactions could peak to new maximum values.
After the fourth quarter of 2016, when the value of merger and acquisition operations in this sector was spectacular, at a peak of the previous six quarters, the first quarter of 2017 continued the positive trend. According to the most recent reports from Canadian company Evaluate Energy (one of the leading international consultants), in the first three months of this year, the value of merger and acquisition transactions worldwide in the Upstream sector was of about USD 65.1 billion - a maximum of the past seven quarters (see the graph ‘Evolution by value and number of M&A transactions worldwide’); the previously high unsurpassed level was of USD 110 billion in the second quarter of 2015; it was a period when the price of oil was in free fall, and the industry was disturbed in trying to cope with the unprecedented challenges up to that point. That period (Q2 2015) also includes the transaction by which Royal Dutch Shell bought the BG Group, one of the largest transactions worth USD 51 billion, which significantly pushed upwards the value recorded in that quarter.Evolution by Value

SMALLER TRANSACTIONS, BETTER PERSPECTIVES

As compared to this peak reached in the second quarter of 2015, the worldwide M&A activity in the Upstream sector was less spectacular, but more consistent during the past two quarters. In other words, instead of being stimulated by fewer very large transactions, this activity was supported by several transactions with lower values. Thus, in Q1 2016 the first three highest values were: USD 15.7 billion (Glencore and Qatar Investment Authority took over 19.5% of Rosneft), USD 6 billion (Dominic Resources took over Questar Corporation) and USD 5.9 billion (Rosneft took over 50.1% of Bashneft); in the first quarter of 2017, the figures were similar: the largest transaction was made by the Canadian company Cenovus by taking over Canadian mining operations from ConocoPhillips for USD 13.5 billion; the following transactions, of USD 8.5 billion and USD 6.6 billion respectively, were registered by the transaction through which Canadian Resources Ltd took over a series of assets from Royal Dutch Shell and by the one by which ExxonMobil took over an independent US company (see the graph ‘Top 10 Transactions in Upstream in Q1 2017’).

CANADA OUTRUNS THE US

A specific feature in the first quarter of the year is that the United States is, for the first time in the past seven years, outrun by Canada in terms of the value of Upstream transactions made by the national oil and gas companies; the transactions conducted by the Canadian entities exceeded the threshold of USD 25 billion, whereas the value of US companies’ transactions was, albeit not much, below this level (see the graph ‘Canada outruns the US in terms of transaction value in the Upstream sector’).Canada outruns the US
This development is supported by the transactions involving projects with operations on the oil sands area. These transactions amounted to USD 24.5 billion in the first quarter of 2017, a spectacular figure, as it is by only USD 3 billion less than the value of all transactions of the same kind over the past six years (2010-2016). In addition to the rebound in oil prices, US President Donald Trump’s favourable statements regarding the Keystone XL oil pipeline (a project blocked by former President Barack Obama), as well as numerous statements supporting the US traditional energy sector, have been strong incentives to the remarkable development mentioned above.
Therefore, the largest transaction of these first three months of the year (between Cenovus Energy and ConocoPhillips) deals with exploitation rights for such deposits (petroleum sands). The transaction between Canadian Natural Resources and Royal Dutch Shell, as well as the one between Canadian Natural Resources and Marathon Oil Corp., also involved, among others, the transfer of petroleum sands operations in the Athabasca Oil Sands project - one of the largest operations of its kind in Canada.
The result is that the Upstream transactions completed by Canadian companies have exceeded USD 25 billion, according to Evaluate Energy statistics, whereas the operations completed by US entities amounted to only USD 23.6 billion (exceeding by a bit the level of USD 23.1 billion completed by them in the last quarter of 2016). If the Canadian entities completed the largest transactions in the oil sands exploitation area, in the US there was a remarkable increase in the interest in the Permian Basin; one of the largest fields in the US, located in the State of Texas, southeast of New Mexico and a traditional area of oil and gas exploitation. Thus, in the United States, the transactions involving assets located in this area amounted to about USD 18.5 billion in the first quarter of the year, i.e. about 80% of the total value of transactions made in the Upstream sector by American companies - and, (attention!), the highest quarterly value of transactions ever recorded in this perimeter.
The largest transaction in this category, of USD 3.4 billion, ExxonMobil’s doubling of exposure in this petroleum region by taking over the independent company BOPCO - with an output of about 18,000 barrels of oil equivalent per day (boe/d). Another important transaction is that Noble Energy bought Clayton Williams Energy, taking over assets of about 28,700 hectares (71,000 acres) of land in the middle of the Delaware petroleum basin, 40,400 hectares (100,000 acres) in the Permian Basin, and an oil and gas extraction and transport infrastructure with a length of about 300 miles, the production of the acquired assets being about 10,000 boe/d.

THE US REMAINS LEADER OF THE INDUSTRY

As Energy Evaluate statistics show, the Upstream transactions completed by the US companies are on slight slowdown, however on the whole of the oil and gas industry the situation is totally different.
According to another study conducted by PricewaterhouseCoopers (PwC), another well-known consultancy house, the overall transactions in all areas (Upstream, Midstream and Downstream) completed by the US companies exceeded the USD 73 billion threshold in the first quarter of 2017, by 160% above the value registered one year ago. In Q1 2017, 53 transactions were completed, by 36% more than in the first quarter of 2016.
An important share in this value was taken by the transactions concerning the shale deposits exploitation operations. They amounted to about USD 24.6 billion in three months of the year, according to the PwC statistics; the statistics reveal the dominant position of the Permian Basin, as an area that attracted the highest interest from investors.
“The first quarter of 2017 was really active, with the Permian proving to be one of the hottest basins globally, attracting even foreign investment,” commented Seenu Akunuri, PwC specialist analyst, in a paper published in late April 2017. With a USD 50/barrel oil price, the Permian Basin prospects are continuously improving and the breakeven point continues to fall so that players in that area reach the same margin of profits they achieved a few years ago, he added, explaining the special interest in this oilfield.

NORTH AMERICA VS. THE REST OF THE WORLD

Canada and the United States are therefore continuing to set the pace in the oil and gas industry, if we consider the dynamics of upstream M&A operations; the weak presence in the top of the largest such transactions of players from other parts of the world is clear evidence in this respect. North America is by far the most dynamic area in the world when it comes to the global oil and gas industry. Thus, outside the US, only three transactions had the amplitude needed to be ranked: Royal Dutch sold North Sea operations to Chrysaor Holdings Ltd (a British independent company) for USD 3.8 billion, and ExxonMobil has taken over 25 percent stake of a Mozambican exploitation from the Italian company Eni - worth USD 2.8 billion.
Therefore, in this context it is noteworthy, from local perspective, that the Austrian OMV group - which mainly operates in Central and Eastern Europe, also present in Romania, ranks in the top. Thus, the transaction by which OMV has taken over the stake owned by the German company Uniper (an entity that strengthens the oil and gas operations of the German company E.ON) in the Yuzhno-Russkoye deposit, ranks eighth in the standings. By this transaction, OMV obtained not only a position in the global top, but also 25% of one of Russia’s largest natural gas operations (see the graph ‘Top 10 Transactions in Upstream in Q1 2017’).Top 10 transactions
It is obvious, however, that the United States in particular and North America in general set the pace! And taking into account the existing trends and clues about increasing the investment level in the exploration and production sector in this part of the world, we can say that the recovery is, from one quarter to the next, healthier and firmer. At least this is what the Fitch Ratings experts say, whose analytical models show that this year’s investment in the United States exploration and production area will grow by about 58% against the previous year, the first increase since 2014 - after years when bankruptcy and budget cuts were standing out.
The survey, conducted on a sample of 40 sites in the US, also shows that higher investment and the increasing number of drilling wells will lead to 5% production growth this year; most investments will go to high yield shale exploitations - especially in the Permian basin, Eagle Ford, STACK, Haynesville and Marcellus, the survey revealed in late April. An important element highlighted by Fitch is that the investments will not bring immediate obvious results - as revealed by the difference between the investments’ growth rate and the growth rate of the output (58% versus 5% per annum in 2017). The effects of these investments, which bring back exploitation to the productive cycle and bring efficiency gains, will lead to consistent increases in production as of 2018, Fitch analysts say in the report.
Existing statistics and forecasts indicate that the oil and gas industry is steadily developing in a positive cycle, with the problems generated by the crisis being overcome, and 2017 is another year during which a step has been taken in this direction. By the direction and speed of developments in the industry, North America collides with the interests of traditional oil and gas producers in other parts of the world. And this is one of the elements leading to tensions and volatility on the oil market, which will most likely counterbalance the investment momentum and will position the global industry, in the coming period, in an ever more unpredictable ups and downs.

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