Energy demand surges as economies exit COVID-19 restrictions through 2021, helping oil and gas M&A to continue their recovery in H2. Deal value increased 24 percent year-on-year to US$102.7 billion in 2021, while the number of deals increased 16 percent to 150 deals.
Rising demand propelled energy commodity prices through 2021, though some volatility remained – the price of benchmark West Texas Intermediate (WTI) crude fell sharply in November on news of the emergence of the Omicron COVID-19 variant.
While there will be some volatility in the coming period – especially as COVID-19 is not yet completely under control – prices are expected to be more stable in 2022, not a major setback. This should unlock more of the M&A market, given that volatility is a bigger disadvantage on activity than actual price levels because it brings uncertainty that makes forecasting and investment planning more difficult.
Some private equity investors have held onto their investments over the years, and the current commodity price environment may increase the incentive and pressure for them to exit. This in turn will increase the pace of oil and gas M&A in 2022.
clean energy fuel deals
Overall, we expect dealmaking in this area to continue at a reasonable pace. Energy transformation will be a significant driver, as oil and gas majors shift their portfolios toward clean energy. The biggest deal in the sector in 2021 exemplifies this trend: the US$9.5 billion sale of Permian Basin assets of Royal Dutch Shell to ConocoPhillips, part of a move by Shell to reduce its hydrocarbon assets and move toward clean energy. Is.
Social and regulatory pressures for the energy transition will reduce M&A in the sector over the next few years. Although tax benefits (such as the intangible drilling tax deduction and inventory depreciation allowances) remain in the US for now, there is some uncertainty about how long it will last. If they change, the economics of traditional energy exploration and production will change dramatically.
However, tax reform would be necessary to encourage decarbonisation. Traditionally integrated companies are looking at reusing their infrastructure for carbon sequestration, although this is currently expensive and would require tax credits to make it a viable route to carbon neutrality. The same is true for downstream assets, where the feedstock for natural gas could, in theory, produce hydrogen using existing petrochemical infrastructure. Yet it is also expensive, and would require tax incentives.
With the potential for more stable pricing, and as the overall tax and regulatory regime becomes clearer over time, we expect the energy transition to generate significant M&A activity, as traditional players dispose of older assets and clean energy. Promote businesses.
Top oil and gas deals 2021
- Royal Dutch Shell sold its Permian Basin assets to ConocoPhillips Company $9.5 billion
- Cabot Oil & Gas bought Cimarex Energy for US$9 billion
- Southwest Gas Corporation was acquired by Icahn Enterprises: US$7.5 billion