Asian oil and gas M&A hits record high amid uncertainty

In a year that saw global oil and gas M&A drop dramatically amid the COVID-19 pandemic, the Asian region generated record deal value

It has been a challenging year for global dealmakers, and the oil and gas sector has been no exception. A combination of falling demand due to COVID restrictions, alongside a prolonged slump in oil prices, resulted in a 52% drop in oil and gas deals year on year to a total of 155 deals in the first three quarters of 2020.

Yet Asian oil and gas dealmaking within the first three quarters of the year contrasted starkly with this global picture. The third quarter of 2020 saw US$103.7 billion in total value, far above the previous high of US$31.2 billion achieved in Q2 of 2015.

This impressive activity was largely driven by Chinese state strategy reform, which spurred a series of mammoth deals targeting oil and gas infrastructure assets. Still, despite Chinese activity dominating the top-end of the market, local trends such as the demand for LNG continue to drive deals on a regional level. The energy transition, meanwhile, looks set to generate further deals within the region, as companies look to diversify away from carbon-intensive assets.

Chinese reform generates landmark deals

A large portion of the record-high value recorded in 2020 was due to 6 deals, all announced on July 23, involving Chinese state-owned oil companies. The largest of these was the blockbuster US$49.1 billion deal which saw PetroChina sell a number of pipeline assets to a newly created entity, China Oil & Gas Pipeline Network Corporation (known as PipeChina). This was not only the largest deal across global M&A so far this year, but also the largest Chinese deal in Mergermarket history (since 2006).

The second-largest deal of the year saw a number of investors including the National Council for Social Security Fund, Silk Road Fund and China Chengtong Holdings invest US$34.8 billion in the newly created PipeChina.

These deals are part of the Chinese government’s ongoing plan to reform its national oil and gas pipeline network. The ownership of China’s pipeline and midstream infrastructure was previously divided between three state-owned enterprises (SOEs): CNPC, Sinopec, and CNOOC. The creation of a unified national pipeline network aims to grant fairer access for small and non-state-owned companies looking to enter the industry, promoting greater investment in China’s oil and gas market.

Shift to LNG gathers pace

The largest Asian M&A deal in the oil and gas sector outside of China was a domestic Indian deal—the US$507.1 million acquisition of a 28.14% stake in Konkan LNG, a company engaged in liquefaction and regasification of natural gas, by gas firm GAIL, under a debt resolution plan.

The deal, which saw GAIL extend its stake in Konkan LNG from 41%-60%, also saw Konkan become a subsidiary of GAIL. One cited reason behind the deal is to enable GAIL to complete the planned breakwater facility at its LNG terminal in Dabhol, transforming it into an all-weather facility able to receive cargo in the monsoon season.

As the cleanest of the fossil fuels, LNG demand is rising rapidly in Asia. The US’s Energy Information Administration (EIA) estimates that more than half of India’s gas needs are currently met by LNG imports, an increase from 31% in 2012. Despite demand being temporarily hit by the COVID pandemic, analysts expected that demand will grow by about 3% more in 2020-21 than in the previous year.

Australia bets on gas-led recovery

Australia also recorded a significant oil and gas deal in the first three quarters of 2020: Santos’ US$390 million sale of 25% stakes in the Bayu-Undan oil and gas field and the Darwin Liquified Natural Gas Project to South Korean energy firm SK E&S.

The deal came less than a year after Santos announced the acquisition of ConocoPhillips’ LNG infrastructure assets for US$1.5 billion. These transactions are taking place amid a governmental push to boost domestic production of natural gas—a push that has been accelerated by the pandemic. Australian Prime Minister Scott Morrison has called for a “gas-led recovery” from the economic shock caused by the COVID crisis.

Energy transition looks set to generate deals

The shift towards clean energy is dominating global dealmaking, as oil and gas companies look to shed their carbon-intensive assets. Asia will likely be no exception, as signatories of the Paris agreement strive to reach their goal of zero greenhouse gas emissions by 2050.

The Australasia market is under particular scrutiny in terms of its carbon emissions. According to energy consultancy Wood Mackenzie, the European majors’ Australasian portfolios are as much as two times more carbon-intensive than the global average. This will likely result in a healthy pipeline for deals in the country in the near-term, as oil and gas majors look to reach their energy transition targets.

Looking ahead

While China’s SOE reform will continue to fuel M&A activity within the top end of the market, rising demand for LNG, along with the ongoing energy transition, will ensure that deals continue to change hands in the final quarter and into 2021. Indeed, Wood Mackenzie estimates that there are an estimated US$12 billion in upstream assets in the market or rumored to be for sale within the Asia-Pacific region.

Energy demand has been knocked in 2020 amid global lockdowns, causing price volatility and a gap between buyer-seller price expectations. Yet the recent progress towards the delivery of a global vaccine will bring a sense of renewed optimism to the oil and gas market, and dealmakers will be looking to build sustainable and resilient portfolios to adapt to a post-COVID world.

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