Abu Dhabi’s Spain deal lifts Mena energy M&A

A recent decision by Abu Dhabi to acquire the remaining shares in Spain’s CEPSA energy giant and a similar move by Qatar in another foreign venture will largely boost Mena’s M&A activity after a sharp fall in the wake of the 2008 global fiscal distress, according to an official Arab group.

Mergers and acquisitions (M&A) in the energy sector have dominated the M&A activity over the past years worldwide and is expected to remain as high as $142 billion in 2011, down from about $185bn in 2010, the Saudi-based Arab Petroleum Investment Corporation (Apicorp) said.

In a study sent to 'Emirates24|7', Apicorp said the share of MENA in global oil and gas M&A peaked at nearly 22 per cent in 2007 before tumbling below 15 per cent in 2008 and under 10 per cent in 2010.

“It should improve in 2011 to about 14 per cent thanks to outbound activities of key SWFs’ investment arms from the region,” said the study, authored by Ali Aissaoui, senior consultant at Apicorp, an affiliate of the Kuwaiti-based Organisation of Arab Petroleum Exporting Countries (Oapec).

He said those deals include Qatar Holding’s $3bn investment in Spain’s Iberdrola utility company and the Abu Dhabi-based International Petroleum Investment Company (IPIC), which paid $5.4bn to acquire the remaining shares in CEPSA, Spain’s second biggest oil firm.

“Before speculating on the outlook, it would be interesting to put energy M&A activities in the context of organic investment requirements and the underlying trends in oil and gas supply,” said Aissaoui, an Algerian.

Referring to the International Energy Agency’s current World Energy Outlook and its central scenario – the ‘New Policies Scenario’,  one may assume that although global energy demand will likely be met by an increasing number of sources, including oil, gas, coal, biomass, nuclear, hydro, solar and wind, hydrocarbons are likely to remain the dominant foundation in the foreseeable future.

In this context, the IEA study reveals the following trends:

-To meet future oil demand, world liquids supply – from conventional oil, biofuels, enhanced oil recovery (EOR), ultra‐heavy oil, deep water, shale oil and Arctic oil – is expected to increase from 88mn b/d in 2010 to 104mn b/d in 2035.

Mena’s share (mostly conventional with gradually more EOR) is projected to increase from 30mn b/d in 2010 to about 40mn b/d in 2035. This means MENA share in world oil supply could expand from 34% in 2010 to 38 per cent in 2035.

Aissaoui cited estimates by IEA showing world cumulative investment in oil and gas supply infrastructure (excluding petrochemicals and power generation) over the period 2011-2035 could reach $19.5 trillion (in 2010 dollars). He said this translates into an annual average of $780bn, adding that Mena will have to invest a cumulative amount of $2.1 trillion, which translates into an average annual investment of $85bn.

“As a result, MENA share of investment will be about 11 per cent. One explanation for this relatively low contribution, compared to the above supply shares, is that upstream oil and gas investment in Mena region requires comparatively less capital due to lower costs of finding, developing and producing,” he said.

“The above projections underpin huge organic growth prospects for the energy sector. But they can hardly inform on the outlook for M&A in this sector. What is certain, however, is that energy M&A are likely to become an increasing substitute for denied opportunities and restricted options in oil and gas.

“According to the study, access to resources permitting, well-funded IOCs would prefer acquiring equity oil and gas through traditional licensing and production sharing agreements. But he added that because access is closed, as is the case of Saudi Arabia for oil, or restricted under service contracts, as is the case of Iran, Kuwait and, so far, (non-Kurdistan) Iraq, few options are left to them.

“Furthermore, as their downstream activities are inherently incapable of generating the returns expected by shareholders, IOCs have come under growing pressure to divest related assets, many of which are likely to be bought by national oil companies. Their remaining options can typically be narrowed down to unconventional oil, deep water operations and other frontier plays such as ultra-deep water and the Arctic, as well as unconventional natural gas, the primary source of which is shale gas.”Aissaoui concluded that the current global trend in energy M&A tends to confirm the limited organic growth opportunities for IOCs in low cost conventional hydrocarbons. Within MENA, inbound energy M&A remain mostly restricted as a result of the strategic nature of oil and gas resources and the preference for the prevailing partnerships and alliances.

“Domestic energy M&A is embryonic and further progress ultimately depends on the stance of closed family‐owned businesses,” he said.

“Surplus oil and gas revenues permitting, Mena outbound M&A will only thrive once restrictions on acquisitions in some target countries are relaxed……..otherwise, such investment may well be relegated from an investment of choice to that of last resort.”