Upstream sector sets record merger and acquisition deals despite regulatory turmoil

A new international study has found that Australian upstream and liquefied natural gas (LNG) mergers and acquisitions (M&A) transactions have set a new record at $11 billion in 2023 despite growing concerns over major project delays.

Leading global energy industry research firm Wood Mackenzie says that M&A activity for the oil and gas production sector in Australia is at record levels despite the risk index ticks trending upwards due to current instability.

Wood Mackenzie said the legal and fiscal landscape over the last 12 months has been the most unstable seen in Australia for over a decade.

Barossa and Scarborough projects hit

In recent months, leading Australian oil and gas companies Woodside and Santos have seen their respective Scarborough and Barossa projects hit with significant delays following decisions by the Federal Court to support concerns raised by First Nations people.

Earlier this week, Santos confirmed that the Federal Court had issued a ruling impacting pipelay activities for the Barossa Gas Export Pipeline (GEP) off the northern coast of Australia.

A new hearing has been set for early December to hear an application brought by traditional owners seeking to restrain Santos from continuing the pipelay until it revises its environmental plan after re-consultation with relevant persons.

The pipelay plans have now been delayed for around a year.

Australia still hot for deals

Despite these delays to billions of dollars in new projects, Wood Mackenzie’s research has nevertheless confirmed the Australian market remains a leading global destination for investors with a record volume of upstream and LNG M&A deals in 2023.

Wood Mackenzie’s vice president of SME upstream APAC & Middle East, Angus Rodger, said that by October this year more than $11 billion had been outlaid on transactions of this nature.

“It is particularly interesting that such a strong vote of confidence in the upstream sector be delivered against [the current economic] backdrop,” he said.

“Most Australian deals are focused on LNG and domestic gas, such as EIG/MidOcean Energy’s move on APLNG, ConocoPhillips’ subsequent acquisition of an additional stake in the project, and Saudi Aramco then acquiring an interest in MidOcean. It’s interesting to note that Aramco made its first move towards becoming a global LNG player in an Australia-focused deal.”

Recent M&A deals in Australia include EIG and Brookfield’s acquisition of Origin Energy, a bidding war in Perth for Warrego Energy won by mining giant Hancock Energy and Taiwanese firm CPC’s purchase of a stake in Dorado.

BP also acquired Shell’s interest in the Browse development.

Criticism from Japan

Mr Rodger said the strong interest in Australian assets has come at a time when Tokyo has criticised Australia’s deteriorating investment climate.

He said Japanese companies still closed two back-to-back upstream deals in August. LNG Japan (a 50/50 Sojitz and Sumitomo joint venture) acquired a 10% share in Woodside’s Scarborough gas project, while TotalEnergies and Japan’s INPEX acquired PTTEP’s interest in the Cash/Maple fields, indicating continued investment in high-quality LNG assets and commitment to the country.

“Despite a more volatile risk environment, Australia is still attracting investment for a few key reasons,” he said.

“Firstly, we can see companies are focusing on strengthening their LNG portfolios, demonstrating confidence that Australia’s world-class LNG assets will continue to play a key [role] in the energy transition for decades to come. Secondly, tight conditions in domestic gas markets also creates (sic) opportunities, such as in the Perth basin hotspot.”

“Lastly, it is worth noting that companies are not selling under current or perceived future duress – for deals with an announced consideration the asset pricing is at levels equivalent or higher than the global upstream average.”

New entrants to local market

Wood Mackenzie also noted that transactions in 2023 have seen both new entrants come into the Australia upstream sector and existing players – such as TotalEnergies, ConocoPhillips and INPEX – strengthen their positions in this country.

“In our discussions with buyers and bankers, one message has come through consistently – while Australia may be slightly less attractive than it used to be, it is still far less risky than most other countries on their radar,” Mr Rodger said.

“Increased M&A activity in Australia also comes at a time when the overall global market is picking up. The Majors, NOCs [National Oil Companies] and North Asian players have all been more active buyers in 2023 than in previous years. This has in-part been driven by the invasion of Ukraine, which underlined the importance of energy security and the need to develop oil and gas supply for many years to come.”

More deals coming

Despite all the local issues with delays to a number of significant projects, Wood Mackenzie is tipping that more deals are in the pipeline.

It believes equity sell-downs of key assets such as Scarborough, Crux, Narrabri and Dorado will likely be targeted by operators, while non-core and mature assets located offshore of Western Australia are likely to be put up for sale. M&A activities in the Perth basin are also expected to continue.

“We believe the asset market will continue to be active, but primarily for bigger, higher-quality and lower-risk assets – primarily in gas and LNG. The market for mature fields appears less competitive as decommissioning regulations tighten up,” Mr Rodger said.

“The background political, legal and fiscal risks also cannot be ignored. The likelihood of more government intervention in domestic gas markets, and further delays in securing environmental approvals, are both high. If the regulatory volatility continues to increase, then it is inevitable that the M&A market will be impacted.”