Another year is coming to an end – a year of uncertainty that has, nonetheless, brought relative stability to the oil and gas sector, compared to previous years. The global crisis seems to have finally passed its peak, and the sector has even seen some revival in business activity worldwide.
Record number of M&A deals
This year has seen a record number of merger and acquisition (M&A) deals, for the fourth consecutive period of growth – approximately 50% more in monetary terms than seen in 2016. There is a general opinion that during difficult times companies tend to combine their efforts in order to ensure market survival.
Smaller companies faced numerous issues and were acquired by larger ones. However, these larger firms also struggled to stabilise their budgets and regain market position after losses caused by the drop in oil price.
Upstream was leading the way, while downstream deals developed almost at the same pace as in previous years, along with a significant cut in midstream asset activities. This trend was mostly seen among service and technology companies that were looking to diversify their business, improve their industry influence, and add new customers and expertise to their portfolio. One major example was DowDuPont, where a successful merger of equals between the Dow Chemical Company (Dow) and EI du Pont de Nemours & Company (DuPont), was completed effective of August 31. The combined entity will operate as a holding company under the name DowDuPont, with three divisions – agriculture, materials science, and specialty products.
Another example was that of Baker Hughes and General Electric, which announced on 3 July that the transaction combining GE’s oil and gas business with Baker Hughes was complete. The new company, Baker Hughes, a GE Company (BHGE), brings together equipment, services, and digital solutions across the entire spectrum of oil and gas development. BHGE’s focus will be to acquire for its customers solutions for transporting and refining hydrocarbons more efficiently, productively, and safely, with a smaller environmental footprint, and at a lower cost per barrel.
In addition, Wood Group and Amec Foster Wheeler became WOOD following the recent merger of Amec and Foster Wheeler, and bringing together three large EPC-type companies focusing on upstream, midstream, and downstream, to deliver services to support customers across the complete lifecycle of their assets, from concept to decommissioning, and across a range of energy, process, and utility markets.
The oil-price situation in 2017
This year also saw oil prices decrease from levels around US $55 per barrel for Brent crude to around US $45 per barrel in July. Since then, prices have risen to values around US $60 per barrel, due mainly to decisions taken on the future of supply by many government and industry majors.
After a period of stagnation and profit collapse, which affected even large multinationals like ExxonMobil, market players realised that extra-low crude prices could negatively affect not only oil-dominant economies like the Middle East countries, the US, and Russia, but also key consumers like China, Latin America, and the developing countries of Asia Pacific.
Last month, a large delegation from Saudi Arabia travelled to Moscow for in-depth discussions on the many important issues affecting the oil and energy sectors. Russia and Saudi Arabia, along with the US, are among the leading global producers, and these important discussions will help bring stability to the markets. Stability is important for the industry and helps support companies in planning future developments and investments.
Project activity in 2017
Project activities in oil and gas in 2015 and 2016 were undermined by a lack of investment due to the re-evaluation of corporate strategies. This year, however, some projects resumed and new mega-projects were announced, including a number of cross-country pipeline projects, which are essential for further industry development.
Another important point is that even though the shale boom is now less prominent than before, different companies have acquired shares in promising oil and gas fields in the US. The Permian and Marcellus basins also attracted a lot of attention this year, and contributed significantly to a surge in upstream asset deals.
There has been heavy investment in Canadian oil sands exploration and production (E&P) projects, and major operating companies in the region, such as Shell and ConocoPhillips, surrendered their positions, partly to new players.
In the downstream sector, many national oil companies (NOCs)focused on asset investment in target regions. Saudi Aramco, for instance, concluded two major transactions in the US and Malaysia, which respectively involved splitting the assets of Motiva, a joint venture (JV) with Shell; and a US $7bn deal to acquire a 50% stake in Petronas’s refinery and petrochemical integrated development (RAPID) project.
Another example is Rosneft, which bought a 49% share of Essar Oil Refinery. Rosneft is also in discussions with Pertamina about the integrated refinery and petrochemicals Tuban project in Indonesia.
Additionally, Rosneft recently announced its interest in acquiring a share in Croatia’s INA. This case is not as surprising as it might at first seem: Russian oil companies own several downstream facilities already – in Germany, Bulgaria, Serbia, and Romania. But of course, for now, the main focus of the Russian industry majors is on developing fields in the Middle East, including Iraq and Iran.
The main reasons for a lower level of global investment compared to periods prior to 2013 include the average cost of oil production in some of the largest producing countries, which varies between US $50 and US $90 per barrel; and the fact that maintaining production levels continues to be more difficult and expensive from year to year.
In addition, producers are continuously looking for ways to make E&P activities more cost-effective, particularly in light of the significant reduction seen in margins since the US $100 oil-price period. This year Russia and the Middle East slightly increased their upstream investments compared to 2016, while Africa and Latin America showed a comparable decrease; only the US doubled its CAPEX in shale production.
The oil and gas sector investments continue to fall from what was seen in 2015, especially in refining, and five industry majors – ExxonMobil, Shell, BP, Total, and Chevron – kept their investment levels almost consistent with 2015 and 2016, much lower than the peak levels seen in 2013. The only energy subsector that grew in 2017 in terms of investment was energy-efficiency technologies, which saw around 4% growth in 2017 and 9% in 2016.
Global oil demand, contrary to previous forecasts, gradually decreased this year, which again supports the theory that lower oil prices are here to stay for at least the next two to five years. Global oil product demand is expected to keep growing at a steady pace, so oil demand should not fall dramatically any time soon.
Another important factor impacting markets has been the number of new and upgraded large refineries in the Middle East, India, and Asia, scheduled to come on stream between 2018 and 2020, not forgetting the impressive expansion seen in the global petrochemicals market, with ethylene capacities expected to grow by 100 million tonnes in the period from 2015 to 2020. The petrochemical industry has managed to thrive while other sectors have suffered during the crisis.
Gas outlook
For the global gas sector, we have seen the growing importance of relationships between Russia and Iran. They have the largest gas reserves and are becoming key players in the global gas markets.
Russia is now investing in pipelines and infrastructure in order to move gas towards the east, in particular to China. This is demonstrated by the large Amur project, which includes the world’s largest helium extraction facility. Another large project is the Yamal liquefied natural gas (LNG) facility.
Iran is looking for partners to further develop its gas fields and downstream conversion projects to chemicals and petrochemicals. We have recently seen interest from Rosneft and other Russian companies to enter into huge joint projects in Iran.
What about renewables?
Renewables and green energy investments were far below expectations. The biofuels market share in the transport segment will remain comparatively insignificant, at less than 10% in 2020. Taking into account the US’s present stance on the Paris Climate Change Agreement, many challenges remain in order to achieve the desired targets.
Conclusion
The year 2017 was certainly one of transition for the oil and gas sector, and will be remembered for these important developments.
Looking forward, we believe that 2018 will be a year of continued development, with a growing number of partnerships in different regions. Oil price stability will be key to such developments, and this is, of course, dependent on many factors, as we have seen over the past decade.
