HOUSTON -- Technological innovations and private ownership of reserves within the U.S. drove upstream M&A activity to a near record in 2012 and, looking forward, 2013 should be another active year, according to a recent study from Deloitte LLP.

The fourth quarter of 2012, in particular, was unusually active and helped push the totals for the year up abruptly.
The number of deals in the fourth quarter surged to about 160 for a total value of about $190 billion, far in excess of the value of the two previous quarters combined.

The activity in the U.S. was centered around the development of unconventional assets and deepwater assets.
National oil companies and other large international buyers remain active in the U.S. market as they worked to lock in reserves for their own economies. These companies were drawn to the U.S. because of political stability and the maturity of the investment environment and the ability to invest in resource plays that are well known with predictable results.

In addition, foreign companies want access to the technology that has driven the boom in exploration and production of unconventional and deepwater sources of oil and gas in North America. Deloitte does not expect natural gas prices to rebound significantly in 2013, but deal activity in upstream and services areas may pick up.
Relatively stable oil prices gave both buyers and sellers additional confidence about upstream oil investments, but the same cannot be said of the market for natural gas assets. Natural gas prices rose in the second half of 2012 from record lows in the first six months of the year, but remained weak. Natural gas liquids prices declined in the second half of 2012 in response to a glut of supply — and that oversupply could hang over the market throughout 2013, Deloitte said.

Uncertainty and inaction on domestic energy policies from Washington made some energy industry executives and investors hesitate. Investors are still waiting for the emergence of a clear tax policy from Washington.

Deloitte also predicted the need to move additional domestic oil and gas to market from new regions, and new directions will continue to drive capital spending and funding needs in the midstream sector for years to come.

Midstream M&A activity remained brisk in 2012, although the total value of midstream mergers and acquisitions fell significantly from $35.6 billion in 2012, from $84.5 billion in 2011.

Worldwide, a handful of major transactions near the end of the year pushed the total oil and gas industry’s overall deal value to $321.5 billion, about 7% higher than 2011. The total was pushed by at least one mega-deal, the $61.6 billion purchase by Rosneft of BP-TNK.

The total number of worldwide deals fell moderately from 698 in 2011 to 576 in 2012. The gain in transaction value reflects the inclusion of a few large international transactions during the fourth quarter, according to the Deloitte report.

“The unconventional trend has had ripple effects throughout the industry value chain,” said Trevear Thomas, principal, Deloitte Consulting LLP. “First E&P assets, then midstream and even downstream refinery activities have responded to the shale and tight oil boom in North America.”

The economic slowdown in Europe and the sluggish growth of the U.S. economy restrained the number of deals done.

“Some of the moderation in oil prices also has to do with the significant increase in North American supplies,” said Jim Dilavous, partner Deloitte & Touche LLP M&A Transaction Services. “North America is importing less oil, and this helped to moderate global prices in spite of the embargo on Iranian oil. Also, because of supply bottlenecks with the new North American supplies, U.S. oil prices are often below those in the rest of the world, creating a price differential that has traditionally not existed.”

--Keefe Borden, Hart Energy