Oil and gas deals follow oil price over the cliff says PricewaterhouseCoopers report

February 24, 2009 — Deal value reduced progressively throughout 2008 before following the oil price over the cliff in the final quarter as the financial crisis intensified and economic conditions deteriorated. Companies slammed on the breaks in the final quarter with total oil and gas deal value down 59% on 2007 levels and 72% compared with the final quarter high of 2006.

Six of the top ten 2008 oil and gas deals were purchases of natural gas assets. Five of the six were ‘unconventional’ resources that require considerable technological investment. All of them were in Australia and North America reflecting the attraction of targets in stable locations close to end markets as companies responded to security of supply constraints.

The immediate outlook for oil and gas deal-making is the early part of 2009 is bleak. However, while deal activity in the first half of the year looks set to remain subdued, it is difficult to see stronger players remaining on the sidelines for the whole of 2009 given the opportunities for acquisitions at low valuations.

Deal makers
The biggest deals were two table-topping US$5.8bn gas deals — ConocoPhillips’ investment in Origin Energy’s coal seam methane gas assets and Royal Dutch Shell’s agreed offer for Canadian company Duvernay.

Deal places
Deal numbers were up in all territories with the exception of the dominant North American market and the Russian Federation. The pace of deal-making slowed everywhere during the year as financial and market conditions deteriorated. Deal activity was subdued in the Russian Federation with numbers down to 33 from 41.

Activity in Europe was relatively resilient compared to the big fall in volume elsewhere. Deal numbers rose 64% from 77 to 126 and the total deal value was down 15% compared to a 38% drop worldwide.

The immediate outlook for oil and gas deal-making is subdued. Constrained debt markets, depressed equity prices and commodity prices looks set to stall significant deal-making in the early part o f2009. An opening of the equity markets will be followed by the debt markets which will allow financing to become available.

Russian Federation:

The share of deals in the Russia Federation fell sharply. This was partly because of the completion of much of the Russian energy industry restructuring which had featured strongly in 2007 and also because of the difficult financial and regulatory context of Russian deal-making

The largest O&G deal in Europe came in the downstream sector with Russian company Lukoil acquiring a US$2.1bn 49% stake in a joint venture with Italy’s ERG to operate the ISAB refinery complex in Priolo, Sicily. The transaction is a significant move by Lukoil as it seeks to develop its downstream operations in Western Europe. According to the company, it increased Lukoil’s overall refining capacity by 13% and overseas refining capacity by 60%.

Deal activity was far more subdued in the Russian Federation in 2008 with deal numbers down to 33 from 41 the previous year. It was deal values, though, that saw the bigger drop, falling by around two–thirds across all the main deal activity sectors.

Sector	2008 Value	% share	2008 Number	2007 год Value	2008 Year on year % change
Upstream	10,0	82%	23	29,6	-66%
Midstream	1,1	9%	3	3,2	-65%
Downstream	1,1	9%	6	2,8	-61%
Services	0	0%	1	0,1	-84%
Total	US12,3 bn			US$35,7 bn	-66%

Not surprisingly, the vast majority, 82%, of the region’s O&G deal value was in the upstream sector. This was significantly higher than the 62% upstream share worldwide outside the region. The remainder of Russian and CIS deal activity was split evenly between the midstream and downstream with only one service sector deal. The big year-on-year fall in activity was primarily attributable to the impact on the 2007 deals of the restructuring of the Russian energy industry.

The largest 2008 O&G deal in the Russian Federation – Gazprom’s US$2.6bn acquisition of E.ON Ruhrgas’s 49% stake in the Russian company ZAO Gerosgaz – was the outcome of a step up in European-Russian energy reciprocity. In October 2008, Gazprom and German power utility E.ON signed a major gas exploration deal. E.ON received a 25% stake (minus one share) in Yuzhno- Russkoye, a Siberian field and one of the world’s largest gas reserves. In return it gave up almost half (3%) of its 6.5% stake in Gazprom through the sale of its share in Gerosgaz, which holds shares in Gazprom.

The second largest deal was a US$2.2bn takeover of FTSE–listed Imperial Energy by ONGC Videsh, the foreign investment arm of the Indian state oil company. The deal gives ONGC a presence in the Tomsk region of western Siberia, one of the world’s largest oil and gas producing regions.

David Gray, energy, utilities and mining leader, PricewaterhouseCoopers, says:

“Although the collapse in the volume of deals in late 2008 has impacted Russia like all other markets, Russian assets will definitely be an interesting area for deals once the market recovers. The quality and strategic value of the assets will ensure that Russian assets and Russian companies will both attract interest and play a part in the on-going changes in the global industry. If prices have been too high in the recent past, they now offer both National and well financed Independent energy companies unrivalled opportunities.”

Notes to Editor:

For additional information, please contact Anna Kogosova, PR Assistant Manager.
O&G Deals includes analysis of all global cross-border and domestic oil and gas deal activity. It is based on published transactions from John S. Herold, Inc. ‘M&A database’, December 2008.
A full list of transactions throughout 2008 is available by visiting the O&G Deals website at www.pwc.com/ogdeals.
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