Wood Mackenzie expects an energy transition to be the major driver of the future of Australia’s upstream oil and gas industry, with up to $US27 billion ($37.9 billion) of assets to be introduced on the market.
According to a Wood Mackenzie report, oil and gas operators have sharpened their strategies and highlighted the need for portfolios to be robust through the cycles in response to this year’s oil price crash and COVID-19.
In Australia, this means a lot of assets have already been put on the market, with up to $US10 billion on offer and a lot more on the way.
In the short term, renewed emphasis on portfolio rationalisation and deleveraging balance sheets is pushing non-core assets onto the market. The third driver, the energy transition, is a longer-term factor and it could end up having the most impact of them all.
Together, these three factors could propel a further US$17 billion of assets into Australia’s upstream M&A market, not including the US$10 billion of asset sales already announced.
Wood Mackenzie identified three key drivers for this re-shaping of the corporate landscape.
Senior analyst David Low said the goals of most upstream operators were getting simpler: squeeze maximum value from existing operations; and divest mature, non-core, on-stream low-margin and/or carbon-intensive assets where possible.
“A lighter upstream carbon footprint is essential to achieving this goal. The majors’ Australasian portfolios are up to two times more carbon-intensive compared to their global average. If energy transition targets are to be hit, this means more upstream M&A activity in region,” Low said.
The analysis further outlined that BP, Total and Shell all hold Australian liquified natural gas (LNG) assets with high-carbon footprints, alongside ambitious goals to increase their global LNG portfolios.
Wood Mackenzie has identified four buyer types – infrastructure funds and utilities, institutional investors and private equity, domestic buyers, and regional buyers.
However, Low explained that this range of buyers did not mean it would be easy to transact in the market.
“One of the biggest challenges we see is price discovery. Asset prices have unsurprisingly trended down post-crash, albeit with far less overall deal-flow. The implied long-term oil price within recent transactions is around US$50 per barrel of oil price equivalent (boe), down from around US$60/boe in 2019,” he said.
“The majors have also emphasised that there will be ‘no fire-sales’ and if internal asset valuations are not met, they simply will not sell.”