Market Update: Oil & Gas - July 2018 | KPMG | QA
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Market Update: Oil & Gas - July 2018

Market Update: Oil & Gas - July 2018

A closer look at industry M&A activity and consolidation on the Norwegian continental shelf.

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Consolidation on the Norwegian Continental Shelf continues

Italian energy company Eni recently signed an agreement to merge its subsidiary Eni Norge with HitecVision's Norwegian exploration and production firm Point Resources to create Vår Energi1. The company will be among the largest players on the Norwegian Continental Shelf (NCS) producing around 180,000 barrels of oil equivalent per day (boepd) in 2018 from a portfolio of 17 producing oil and gas fields2. Point Resources (to be Vår Energi) also announced early in 2018 the signing of an agreement to acquire ExxonMobil's upstream business in Norway3. Private equity-backed Neptune Energy recently agreed to buy the Norwegian and Danish offshore oil and gas assets of German gas utility VNG4. Another private equity backed player, OKEA, recently announced it had agreed to acquire the working interests of Shell in Draugen (44.56%) and Gjoa (12%) fields5.

The 2018 transactions come off the back of an active year for NCS transactions where AkerBP acquired HESS' Norwegian business6, Total acquired Maersk Oil & Gas7, INEOS acquired Dong Energy8 and Neptune Energy acquire Engie on top of several asset deals9 and the merger announcements of Wintershall/DEA10 and Centrica/Bayerngas11.

“Companies on the NCS are transforming from smaller exploration companies into significant entities with complete life cycle activity including exploration, development and production, hereunder operatorship. On the contrary, international oil majors continue to divest and scale down its Norwegian activity. We expect that private equity backed players and newcomers will continue its growth and further diversify the marketplace. ”

- Per Daniel Nyberg, Partner, KPMG in Norway.

M&A Activity Highlights West of Shetlands Rise in Prominence

The UK Continental Shelf is enjoying somewhat of a renaissance, with rising production, falling costs and government support increasing the UK’s competitiveness when ranked against other mature basins. With multi-billion barrel fields undergoing development, the West of Shetlands in particular is becoming increasingly important, with E&Ps continuing to deploy substantial amounts of capital to the region. The Total operated Greater Laggan Area was brought onstream in 2016 and is expected to account for up to 8% of UK’s gas demand12.

Junior E&P Hurricane Energy raised over $500M in tough market conditions in 2017 to fund early production from the Lancaster field, which is projected to hold up to two billion barrels of heavy oil in a fractured basement play13. These projects, along with the re-development of BP operated Schiehallion and Clair projects, is expected to double production from the West of Shetlands to 350,000 boepd in 2019.

Building on this, regional M&A activity has been robust this year highlighting the area’s strong potential for growth. Shell farmed into the 600 MMbbl Siccar Point operated Cambo appraisal project earlier in the year14 and this month BP announced it has increased its stake in Clair, acquiring 16.5% in the seven billion barrel heavy oil asset15. Chevron is reported to have held on to its West of Shetland interests in Clair and Rosebank despite putting other significant Central North Sea assets up for sale according to press reports.

Despite prevailing harsh weather conditions and relatively higher cost developments, given its clear resource potential we believe the relatively unexplored West of Shetlands region will continue to be a bright spot for growth within the UKCS for the foreseeable future.

Mohammed Chunara, Associate Director, Energy & Natural Resources

Industry M&A activity and its impact on Australia

Industry M&A activity has been increasing as confidence grows in pricing and future demand. Players are focused on securing deals now, rather than risk paying at the top of the market. Over the past month it has become clear that global confidence in specific Australian M&A opportunities in the industry is strengthening, this is a good signal for Australian O&G, its future prospects and counter concerns about the Australian investment environment and sovereign risk. One Australian listed operator has only recently terminated all negotiations with a US PE Group with the board stating it is 'not in the best interest of its shareholders'. Additionally midstream operator APA Group are considering a USD$13Bn takeover bid from a Hong Kong consortium who plan on breaking up the pipeline monopoly16. For Australia the challenge of the APA deal is the perceived risk of handing ownership and control or further Australian major infrastructure to a foreign owned company.

It now seems highly likely that the plans to import LNG into Australia will move forward with contracts increasingly firmed up and FIDs planned in the near future for two import locations on the east coast of Australia. These projects should allow Australian industrial gas users to rely on longer term contracts and help lower the domestic gas price in general. ExxonMobil Australia is considering the import of LNG into eastern Australia to help ease the predicted shortfall of gas supply from 2021 and protect its existing market share17. Among the upstream operators, Prelude FLNG has received its ‘cooling down' LNG cargo in preparation for start-up18, only a few months behind the Inpex operated Ichthys project, who expect their first shipment to be in September19. Meanwhile all operating LNG assets continue to develop backfill options and volumes to keep their plants full and viable. The Australian LNG sector is firmly moving to the 'Operate' phase following the frantic years of building projects on both coasts during the recent low oil price cycle. The opportunity now for Australia and these major operators is to put in place 20-40 years of safely and profitably run industry infrastructure and for KPMG the opportunity to support and provide insights from its global teams is substantial. This production increase is particularly salient, following recent reports confirming the global LNG market rebalancing, driven by accelerating Chinese demand for LNG. Right now players are pleased to see prices firming and the future demand curve on the up. Soon the voices calling for increased investment in more LNG projects, probably smaller, more flexible and agile than those seen to date, will become louder and hopefully gain traction in the industry. Australia and its O&G industry will have to compete in a challenging market to attract these investment dollars and continue the industry and economic growth trend.

- Jonathon Peacock, Partner, Advisory, KPMG Australia 

Analyst estimates: oil

  2018 2019 2020 2021
Min 65.0 57.0 60.0 63.5
Average 70.3 67.6 66.7 67.6
Median 70.0 67.5 67.0 67.5
Max 77.0 75.0 72.0 70.0

 

  2018 2019 2020 2021
May Avg 67.8 65.4 66.4 67.6
June Avg 70.3 67.6 66.7 67.6
May Median 66.3 65.0 67.0 67.5
June Median 70.0 67.5 67.0 67.5

Analysts estimate: gas

  2018 2019 2020 2021
Min 2.8 2.6 2.6 2.7
Avg 2.9 2.9 2.8 2.8
Median 2.8 2.9 2.8 2.8
Max 3.0 3.4 2.9 2.9

 

  2018 2019 2020 2021
May Avg 2.9 2.9 2.8 2.9
June Avg 2.9 2.9 2.8 2.8
May Median 2.8 2.9 2.8 2.8
June Median 2.8 2.9 2.8 2.8

Note: The forecasts/analyst estimates above from Brent & Henry Hub are an indication based on third party sources and information. They do not represent the views of KPMG.

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