The accelerating shift in global energy means that assets are no longer in the hands of the right owners. Major European oil companies are transiting towards renewables and other low-carbon energy. But if there are more sellers than buyers, where is the natural home for their unwanted legacy?
The supermajor oil firms – Shell, ExxonMobil, Chevron, BP, Total and ENI, plus ConocoPhillips and Norway’s state Equinor – have collectively committed to sell 68 billion barrels of oil equivalent resources, with price tag estimated by consultancy Rystad of $111 billion, about 12 per cent of their total enterprise value. They would rather divest high-carbon, high-cost and declining fields.
The prospect of this change of ownership is not just because of the rise of competing energy sources and the prospect of falling oil demand as climate policy tightens. Recent returns from the petroleum sector have been very poor: big companies got into shale production too late, then overpaid for it; they were battered by the drop in oil prices in late 2014 and now by the coronavirus-induced drop in demand.
Last April, Shell cut its dividend for the first time since the Second World War, and ExxonMobil acknowledged on its latest earnings call that it would not be able to continue growing its dividend. Stock markets have punished ExxonMobil for its large investment programme, but they have not exactly rewarded the others: BP’s shares are back at the level of 1995, before the megamergers that reshaped the firm.
As Brent crude prices near $60 per barrel amid an economic recovery from the pandemic, smaller and tail-end fields still can be economically attractive. The question is, who will have both the appetite and the cash to acquire them?
Supermajors themselves could of course be acquirers, but only where they would be consolidating ownership.
Meanwhile, the aggressive independent firms of the early 2000s have mostly disappeared. A protracted effort by Premier Oil to buy North Sea fields from BP for $625 million in January last year was cut to $210m, and then the smaller firm dropped out of the deal entirely and instead merged with Chrysaor, backed by EIG Global Energy Partners, an institutional investor.
Private equity groups have been important backers of new independents, especially in US shale and the North Sea, but also picking up the supermajors’ cast-offs. Assala Energy, for instance, funded by the Carlyle Group, bought Shell Gabon in 2017. However, they also face increasing climate scrutiny, casting doubt on how much capital they might bring to the sector in future.
Tullow Oil, once the doyen of independent explorers, has been forced to cut back heavily after declining output in Ghana, a disappointing find in Guyana and long delays to developments in Uganda and Kenya.
American companies have largely gone home over the last decade, concentrating on shale, with a few venturing elsewhere in the Western Hemisphere such as Mexico, Guyana and Colombia.
Canadians are almost the only ones who still have appetite for Alberta’s sticky oil sands. The Europeans have already mostly sold out to local interests. Two of the leading Canadian players, Cenovus and Husky, finalised their $4.78bn merger in January. Suncor, itself the result of a 2009 merger with former state firm PetroCanada, just agreed to sell its Golden Eagle field in the UK to independent Enquest, retrenching to its home base. They will not be encouraged, though, by the Joe Biden administration’s recent block on construction of the Keystone XL pipeline, which would take Albertan crude to its southern neighbour.
Some companies have already spun off assets into partnerships and private equity-backed groups. Aker BP is the combination of BP’s Norwegian assets with a listed company backed by a Norwegian billionaire, Kjell Inge Roekke. Vår Energie joined Italian supermajor Eni’s Norwegian holdings with support from private equity investor Hitec Vision. Now, Aker BP’s interest in international expansion into countries such as Brazil potentially competes with its parent.
The specialists’ continuing appetite for fields in North America and the North Sea depends on government policy there. If a steadily tightening environmental agenda hampers drilling in the US and closes off new acreage, American companies may again have to venture overseas. In December, Denmark, the EU’s largest producer, banned new exploration as part of planning to end petroleum extraction by 2050.
So, if Western groups are hampered, that leaves emerging-market investors: state or privately-owned, from the Middle East, the former Soviet Union, China and other Asian countries. Private investors may be opportunistic, but the government ones are typically large and have strategic objectives. Middle Eastern national oil companies have little reason to deepen their exposure to oil and gas production outside their home base, when Opec+ constrains production and capital is needed for diversification at home.
The problem here is that such buyers are interested in high-quality purchases, not the supermajors’ discards. Earlier this month, Thailand’s PTTEP agreed to pay $2.6bn for 20 per cent of BP’s Khazzan gas field in Oman. Low-cost, low-carbon, large and long-life, this is exactly the kind of asset that should be the core of BP’s slimmed-down portfolio. But to meet its divestment targets, the company has little choice but to sell what the market wants.
There is an opening here for well-funded, technically-capable and nimble firms from hydrocarbon-friendly countries. Even in a declining market, they could make fortunes by picking up unwanted fields and profiting in episodes of tighter supply. Paradoxically, if such buyers do not emerge, the supermajors may struggle to raise the cash they need to get out of oil.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis