Flat to lower oil price expectations and rising production costs will drive oil and gas companies to seek growth from mergers and acquisitions in the next few years, according to analysts.
Asian and mainland Chinese firms have an additional reason to buy overseas assets: to acquire knowledge and expertise in difficult and expensive-to-reach energy resources.
The US Department of Energy's Energy Information Administration (EIA) in January forecast the spot-market Brent benchmark for Atlantic Basin crude oil will average US$105 per barrel this year, 6.3 per cent lower than last year's US$112. It is projected to fall further to US$99 a barrel next year.
Torbjorn Kjus, senior oil analyst at DNB Markets, the investment banking unit of Norway's largest financial services group DNB, said deployment of advanced technologies in the United States has seen stronger than expected domestic production. This involves the combination of horizontal drilling and fracturing of tight rock formations to release previously non-extractable oil and gas.
Together with flat demand due to the weak global economy and energy consumption efficiency improvements, this means the US - the world's largest oil consumer - will import a lot less oil in the next five years, Kjus said. But he had a less bearish view than the EIA on Brent prices as he factored in a higher premium for geopolitical risks in the major oil-exporting Middle East and North Africa regions and predicted Brent would fall to US$107 a barrel this year and US$102 next year.
According to the EIA, US oil output topped seven million barrels a day in the last two months of last year, the highest in 20 years.
The International Energy Agency - an intergovernmental policy adviser to 28 mostly developed nations - last November projected that the US will unseat Saudi Arabia as the world's largest oil producer by 2017. Advances in shale oil technology in the US were the most important developments in the supply of oil over the last 40 years, after the discovery of oil in the North Sea, said Commerzbank global head of commodities research Eugen Weinberg.
With long-term oil prices predicted to be on a moderate declining trend and production costs expected to keep climbing as easy-to-extract oil dwindles, analysts said the majors will likely consider seeking savings from larger operations by buying or merging with rivals. "To reduce costs, you need to grow and have the scale effect," Weinberg said.
Analysts at US brokerage Sanford Bernstein said some of the conditions for a reappearance of "mega-mergers" seen over a decade ago have come back, such as declining industry returns. Mergers and acquisitions surged between 1998 and 2001, due to declining oil prices, which led to an underperformance of the oil majors relative to global share markets.
Data from industry research house IHS quoted in a Sanford Bernstein research report shows that last year the world saw a record US$260 billion of mergers and acquisitions in oil and gas exploration and production assets, almost doubling from 2011.
Another factor supporting deal flows is the fact that Asian firms have become more aggressive in buying overseas assets as the region's share of global oil and gas consumption rises. They accounted for over 20 per cent of worldwide mergers and acquisitions in the past three years.
Besides, the relative attractiveness of buying rather than replacing reserves via exploration is higher than it has been in the past two decades, the Sanford Bernstein analysts noted. The global average reserve discovery cost has risen to US$18 per barrel of oil equivalent (boe) from US$3 per boe in the past 15 years, they said.
"The point is that unless replacement costs start to decline or the market value of oil and gas majors increases, companies will be increasingly attracted to mergers and acquisitions as a means to growth," they said.
Unlike the large corporate mergers of the late 1990s, transactions in recent years are mainly asset acquisitions, they added. This is partly due to resistance to Asian corporate takeovers by governments in the US, Canada and Australia.
Besides, many resource explorers in developed nations lack funds to finance expensive, technology-intensive and risky unconventional and deep-water oil and gas projects. They prefer to partner with cash-rich Asian firms than to sell their entire interests in the projects.
Mainland China's state-owned oil trio - China National Petroleum Corp (CNPC), China Petrochemical Corp, and China National Offshore Oil Corp - together spent US$31 billion on acquisitions last year, according to international energy and metals consultancy Wood Mackenzie.
"The majors have very strong balance sheets and cash flows, so we can expect an uptick in activity," said Luke Parker, manager of Wood Mackenzie's mergers and acquisitions service.
"CNPC has yet to truly flex its muscles on the international stage: with enormous financial fire-power, 2013 might be the year in which it steps up activity. We expect national oil firms to be merger and acquisitions leaders again in 2013."Topics: Energy Oil Gas