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State-owned groups pursue energy assets

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By Ed Crooks in London

Published: March 15 2009 22:56 | Last updated: March 15 2009 22:56

State-controlled companies have continued to buy oil and gas assets even as merger and acquisition activity has slumped over the past year, the leading industry survey of deals has shown.

Acquisitions by national oil companies and sovereign wealth funds reached a record high last year as a proportion of total deals, according to the survey from IHS Herold, an oil and gas advisory firm, and Standard Chartered, the bank.

The survey also shows how new “unconventional” sources of oil and gas have become an increasingly important focus of M&A activity. Acquisitions of both companies and oil and gas fields slowed sharply in the second half of last year, as the credit crisis intensified following the collapse of Lehman Brothers in September. The total value of deals for 2008 stood at $104bn – the lowest for four years and down 32 per cent on 2007. The subdued trend has continued into this year.

The most active sector was “unconventional” gas, produced from rocks where it has not previously been possible to extract it. The year’s biggest deal in the worldwide oil and gas industry was the $5.9bn spent by ConocoPhillips of the US to buy into a coal-bed methane project with Origin Energy of Australia. The country’s reserves of coal-bed methane – gas produced from coal seams – were one of the few hot spots for deals worldwide. However, national oil companies and sovereign funds stepped up their M&A activity, accounting for a record 15 per cent of the total value of deals last year.

State-controlled companies have also become more internationally ambitious, with the value of their acquisitions outside their home countries rising from about $12bn in 2007 to $16bn in 2008. The indications so far are that they are likely to remain active, in spite of the global economic downturn.

After being the most active buyers of oil and gas assets among the state-controlled companies in 2005-06, the Chinese groups went quiet in 2007, but returned to the market last year. China has this year promised loans to Russian and Brazilian companies to invest in oil developments, according to advisers in London.

India emerged as a significant buyer for the first time last year. The biggest corporate deal from an emerging market buyer was the £1.4bn ($1.9bn) acquisition of Imperial Energy, the London-listed Russian oil company, by ONGC Videsh of India.

Herold and Standard Chartered expect acquisitions by private sector companies to pick up over the next year.

Chris Sheehan, director of M&A Research, IHS Herold, said: “You tend to get most consolidation in an industry down cycle.”

However, there are barriers to consolidation, including a shortage of finance. Even western oil groups, such as BP and Royal Dutch Shell, which have access to the capital markets, are cutting costs and being careful with their cash.

Ed Tockman, director of oil and gas advisory at Standard Chartered, said: “For deals to happen, both sides of the transaction need an equilibrium of expectations. Some further alignment of buyers’ and sellers’ expectations has to come about before there are more transactions, and today the outlook is still very uncertain.”

As companies run out of cash, however, and hopes of a quick return to an oil price of $100 per barrel fade, the pressure to do deals will mount; a position described in a research note last week by analysts at Sanford Bernstein as a “ticking time bomb” for M&A.


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