A New Hotbed For Oil Mergers And Acquisitions

1. Iraq’s Oil Ambitions Face Harsh Reality of Low Investment

- Iraq’s oil production capacity is set for a decline in the long term as political infighting and worsening upstream terms disappointed Western majors, leading to years of insufficient investment.

- Having enjoyed steady output growth in the early 2010s, Iraqi oil production has been stagnating at around 4.5 million b/d, despite repeated government calls for a 7-8 million b/c production capacity.

- Low recovery factors, high natural decline rates and lacking government funding for infrastructure upgrades have compelled ExxonMobil and Shell to leave the country, narrowing the playing field.

- One of the key projects for further supply growth, a massive seawater treatment project supposed to be led by TotalEnergies has stalled, whilst the expansion of the Basrah port is nowhere to be seen, buried by missing government approvals.

2. Europe’s Gas-to-Coal Switching Runs Its Course

- European gas inventories are 56% full by end-March, greatly alleviating the upward pressure on natural gas prices as the benchmark TTF contract hovers around €40-45 per MWh.

- Liquefaction capacity has been greatly boosted across Europe thanks to new FSRUs, although the threat of Chinese LNG demand mopping up available spot cargoes still lurks in the background.

- Nevertheless, spark spreads (the gross margin of selling a unit of electricity produced at a gas-fired power plant) have at last overtaken dark spreads from coal, albeit remaining in negative territory.

- Coal accounted for 16% of EU electricity generation last year and has enjoyed a short-lived renaissance in 2022 on the back of soaring gas prices, rising 7% year-on-year to 2021.

3. Southeast Asia Rocks the Oil M&A Market

- Rystad Energy estimates that Southeast Asia will become a hotbed for mergers and acquisitions in 2023-2024 with up to $5 billion in assets up for sale across the region.

- Southeast Asia has already had a strong start with $700 million worth of deals already completed in Q1, and Indonesia could be seeing even more action as some $2 billion of assets remain up for grabs.

- Most of the prospective projects in Indonesia are in the pre-FID stage, whilst most Malaysian assets on offer – mostly mature fields operated by Western majors - are currently producing.

- Hydrocarbon assets in Southeast Asia are tilted 63:37 towards gas and the average production metric stands at $17,000-20,000 and some $2-3 per boe of resources.

4. After Oil and Gas, French Strikes Start Crippling Nuclear

- The rolling strike of nuclear industry workers at France’s national champion EDF, part of a larger pension reform revolt, is jeopardizing the recovery in the country’s nuclear generation.

- EDF is forced to delay reactor return dates as several have already undergone repair works, resulting in a 3 TWh generation loss over the course of March.

- Simultaneously, 80% of France’s refining capacity is shut down, forcing the government to release SPR stocks and cancel flights across the country as fuel supply is becoming scarce.

- Warm weather and robust renewable power generation have been keeping power prices from increasing so far, even though France’s three largest LNG terminals remain blocked by striking workers.

5. Need for Data Pushes Power Demand Higher

- Rebounding healthily after the coronavirus shock, global electricity demand rose by another 3% last year as new sources of consumption gain prominence.

- An oft-overlooked source of electricity demand, the data center industry has been increasing by an annualized rate of 5-6% and is already accounting for almost 4% of global power consumption.

- As OECD regulators are increasingly aware of the power intensity of the data industry, the temptation might be to move future growth into grids with less oversight and a higher carbon intensity.

- The rise of cryptocurrencies has added to that pressure, already accounting for 1% of global demand, with Bitcoin alone estimated to consume 140-150 TWh of electricity.

6. Global Gas Flaring Falls to Lowest in 12 Years

- According to a World Bank study, global gas flaring decreased by 5 bcm last year to 139 bcm, its lowest annual level since 2010, releasing 357 million tonnes of CO2 equivalents.

- Traditionally, Russia tops the list of countries with the largest flaring volume, burning some 25 bcm of natural gas, however, adjusting for scope Venezuela is the most flaring-intensive country globally, burning 33 cubic meters per barrel.

- Nigeria, Mexico, and the United States accounted for most of the decline in flaring in 2022, but it is only in the US that flaring intensity decreased substantially, halving compared to 2019 levels.

- Generally speaking, flaring intensity dropped to its lowest since satellite data began as the flaring drop of 2022 coincided with a 5% year-on-year increase in oil production.

7. The Tide Might be Turning for Tin

- Tin, a crucial MIFT metal that is heavily used in electronics, has had a very tumultuous 2022 which saw its prices spike at an all-time high of $51,000/mt in March only to shrink to a mere $17,000/mt by November.

- For many years, tight inventories of tin were believed to propel the metal into the commodity limelight, however weak electronics demand last year led to a 0.6% year-on-year contraction in consumption.

- Supply disruptions have capped inventory builds as protests in Peru and Bolivia limited Latin American production whilst Indonesia is flirting with the idea of banning exports of unrefined tin.

- At the same time, current exchange positioning shows that market investors are net short of the LME tin contract even though time-spreads have moved back into backwardation recently after months of contango.