Asian oil & gas M&A climbs in value as industry diversifies away from upstream oil assets

While the oil & gas sector works through a transitional phase globally, oil & gas companies are using M&A to diversify away from oil in the long term—and Asia is no exception

In 2018, oil & gas deal activity in Asia climbed 14.6% over the 2017 total, to US$27.5 billion, despite deal volume remaining flat at 51 deals. Although the 2018 total sits well below the US$60 billion in recorded deal value from 2015, that year’s figures were skewed by the US$24.4 billion asset swap between two entities of South Korean conglomerate SK Group, as part of an effort to simplify its ownership structure.

Deals in 2018 were mainly fueled by global, long-term changes in energy consumption. Around the world, upstream operators have taken advantage of the relatively stable oil price for the majority of 2018 to diversify into downstream assets and protect themselves from further price fluctuations while also preparing for a less fossil fuel-dependent future.

The largest oil & gas deal of the year in Asia, which saw India’s largest upstream operator, Oil and Natural Gas Corp (ONGC) acquire a majority stake in domestic refiner Hindustan Petroleum Corporation Limited (HPCL) for US$6.6 billion, typifies this kind of deal. Thanks mainly to this deal, India topped the regional chart with US$8.6 billion in deal value.

The second-largest deal of the year in Asia was also an example of the oil & gas industry responding to changes in energy consumption. The US$5.7 billion deal between Japan’s second largest refinery, Idemitsu, and the number four domestic player, Showa Shell, was a defensive move in the face of declining demand for gasoline due to increased energy efficiency and a falling population. Two years ago, the Japanese government forecast that the country’s demand for oil would fall 1.5% per year by 2022.

The year also witnessed a few hefty disposals by international oil majors in Asia. These should not be seen as signs the industry views the region as non-core, however. In Shell’s case, its US$750 million sale of a stake in the Bongkot gas field in Thailand to the country’s state-owned oil & gas firm PTT was part of a global US$30 billion divestment program.

Australia slides back

Often the key player in oil & gas M&A in the region, Australia last year came in second in the regional charts. The country saw a decline in deal value to US$6 billion, down 49% from the year before, but well above the US$1.63 billion recorded in deal value in 2016. Deal volume increased slightly, from 13 to 17 deals over the same period.

Not only did deal value nearly halve, but also the country saw two of the year’s major announced deals lapse, albeit for different reasons. The US$16.3 billion proposed deal between Hong Kong-based CKI and gas pipeline operator APA would have been by far the largest deal in the sector and region, but it was blocked by regulators for national security reasons.

With a federal election coming up down under, political scrutiny of foreign buyers could increase, especially when it comes to critical infrastructure assets.

In the other major lapsed deal in Australia, oil and natural gas operator Santos rejected a US$11.9 billion hostile bid from US-based Harbour Energy (an investment vehicle managed by PE firm EIG Global Energy Partners) because the offer did not reflect the true value of the company, according to Santos.

Thirsty for LNG

Oil will recover, analysts agree. But while it works through the current transition, all eyes are turning to LNG.

As the cleanest of the fossil fuels, liquefied natural gas (LNG) is gaining ground, especially in China, where the government has firmly promoted the use of LNG over coal. Thanks to its five-year plan to clean up its air quality, China’s demand for LNG is soaring, growing 48.5% from November 2017 to November 2018, according to the official state news agency. In 2019, China is set to overtake Japan as the world’s largest LNG importer. And as China’s appetite for LNG grows, neighboring countries could be encouraged to take steps to ensure they maintain access to the resource.

Woodside Petroleum’s US$744 million acquisition of a 50% stake in the Scarborough gas field from ExxonMobil is one example of the healthy demand for LNG. Discovered in 1979, the Scarborough field has sat undeveloped for decades due to its remote location in the Indian Ocean, but with demand for LNG rising, Woodside is planning to begin production on the site by 2025.

Looking ahead

With LNG demand rising so rapidly, not just in China, but in the Asia-Pacific regionally generally, according to energy consultancy Wood Mackenzie, conditions for M&A in the sector look good. By 2030, the Asia-Pacific region’s demand for LNG is expected to reach 337 tons per year, compared to only 75 tons per year globally today.

But despite optimism in the sector, there are still challenges. The performance of the oil price over the coming year will determine the ability of oil majors to carry out the M&A they deem necessary to rebalance their portfolios.

Even in the midst of volatility, there can be opportunities. At the beginning of October last year, Brent Crude reached a four-year high of US$86, before tumbling 41% to under US$50 in December. While it has recovered to US$68 today, this kind of price swings can make it difficult for businesses to access traditional sources of capital, putting strain on operations and increasing the chance of defaults—and the potential opportunities for distressed M&A in the sector.

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