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Gaurav Agnihotri

Gaurav Agnihotri

Gaurav Agnihotri, a Mechanical engineer and an MBA -Marketing from ICFAI (Institute of Chartered Financial Accountants), Mumbai, is a result oriented and a business focused…

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M&A To Take Front Seat In Oil Industry

M&A To Take Front Seat In Oil Industry

Over the last decade, the oil majors have spent many billions on upstream exploration activity, hoping to find new gushers to replace their mature assets. But gone are the days when oil companies would take on new mega projects with tens of billions of dollars in exploration costs.

With the shadow of low oil prices looming large over the oil majors, mergers and acquisitions are now considered to be the best bet to increase revenues and market reach. The potential merger of Royal Dutch Shell and BG group will be the biggest oil and gas merger in over a decade, thereby making Shell the largest producer of liquefied natural gas in the world. It will hand Shell several projects that already have cash flow.

But Shell may not be the only one. According to latest industry sources, Norway’s Statoil is another major player that is actively hunting for an acquisition opportunity. 

OilPrices

Oil prices - Source: EIA (Click image to enlarge)

Statoil’s chief financial officer Torgrim Reitan recently admitted, “[a]cquiring barrels might be cheaper than exploring for barrels, so we are monitoring it very closely. There are a lot of assets for sale. But I think it’s fair to say that high-quality assets are still not cheap.” There was speculation this march that Statoil would target US based driller EOG in a deal that could exceed $50 billion, but neither company has confirmed these rumors. Related: Big Oil May Be Caught Off-Guard By Wave Of Retirement

In the past few months, Statoil has substantially increased its investments in renewables (especially wind energy) by forming a consortium called Forewind with RWE, SSE and Statkraft.

Is exploration largely dead for the time being?

CurrentOilPriceDecline

The recent oil price decline had been exceptionally long lasting when compared with previous oil price declines. To make matters worse for oil companies, Goldman Sachs even expects Brent to fall to $55 per barrel by year 2020. According to the US investment bank, “[w]e see global oil demand being met by U.S. shale, which is continuing to benefit from efficiency and productivity improvements and OPEC.”

This will force oil majors into retrenchment mode. To counter its rising costs, BP recently announced a 10 percent job cut from its North Sea business in addition selling its equity interests in the two Gulf of Mexico oilfields. French oil and gas giant Total announced a capital spending cut of 10 percent for this year. Even Conoco Phillips recently announced a 33 percent cut in its capital spending for 2015.

It would appear then, that exploration is largely dead for the time being, as several oil majors like ExxonMobil, Chevron, Total, ConocoPhillips and BP have either postponed or cancelled their upcoming exploration projects due to low oil prices, high production costs and falling yearly revenues. Related: This Tiny Nation Could Have Huge Oil And Gas Potential

How long before a restart?

At a time, while most of the major oil and gas firms are shying away from new projects, Royal Dutch Shell has been actively pursuing a $6 billion Arctic drilling project. The oil giant plans to start drilling in Chukchi Sea this summer as the US government has given the project the go-ahead. According to the US geological survey, the Arctic is said to have close to 30% of the world’s undiscovered natural gas reserves and 13% of the world’s undiscovered oil reserves. However, experts are concerned over the broad set of obstacles Shell will face in the Arctic.

Ian Lundin, the chairman of Lundin Petroleum AB said “I don’t think we will see any oil production in the Arctic anytime soon, probably not this decade and not the next, the commercial challenges are too big.” Apart from the harsh weather, lack of infrastructure, and short drilling season, Shell also has to contend with the prospect of an extended period of time with low oil prices.

Although WTI prices have rebounded from a 6 year low of $42.98 per barrel in March 2015 to the current levels of $60 per barrel, it is possible that oil prices could be in for another round of decline. Goldman Sachs believes that the current price rally as “premature” and “self-defeating,” as it could bring some drillers back, resulting in a further supply glut.  Related: Here Is Why Predictions For Lower Oil Prices Are Wrong

WorldLiquidsProductionSurplusDeficit

Source: World liquids production surplus or deficit (production minus consumption), January 2011-April 2015. Source: EIA and Labyrinth Consulting Services, Inc

As a result, oil prices may not rise significantly for quite some time. That will put a damper on exploration activity – producers may not find it worth it to venture out into unknown territory. For now, the best way for oil companies to growth their reserve base is through more mergers and acquisitions.

By Gaurav Agnihotri of Oilprice.com

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