Balance of power shifts between national and international oil companies

While the immediate market conditions may not be economically viable for some companies, global financial decline is starting to open up deal opportunities for international oil companies with access to debt.

National oil companies with governmental support, such as the Chinese; also have the opportunity to access oil and gas reserves at prices which, 12 months ago, would not have been possible.

Abdullah Hamad Al Fozan, KPMG in Saudi Arabia's Senior Partner, commented:

"As confirmed by the latest annual reporting season, international oil companies have been hit badly by the economic downturn. Our research, however, has shown that market volatility has created a shift in the balance of power between national and international oil companies in exploring new projects and transactions. Unlike in 2008 where our survey showed that NOCs were excluding IOCs from new reserves, the position has now changed. While volatility is starting to open up the field for IOCs, both IOCs and NOCs face the same problem of surviving the lower oil price whilst maintaining multi-billion pound capital projects. This is likely to lead to closer relations between IOCs and NOCs and partnering will be seen as a mutually beneficial way forward."

Al Fozan said, "With 9% of the world's oil, Iraq is a good example of the Government looking to IOCs to assist developing its huge reserves. Although pricing expectations still need to converge, with the Iraqi Government needing close to $50 billion to develop these reserves, the door has been opened to IOCs with strong balance sheets and those NOCs that are cash rich."

Commenting on future deal opportunities, Al Fozan went on to say, "Our research with national oil companies in China has shown that they are in the enviable position of an almost unhindered access to capital and strong demand for oil and gas reserves. The Government has built up huge foreign currency reserves, which the NOCs can tap into. With such demand and capital reserves, the Chinese NOCs, and to a lesser extent Russian NOCs, are at the vanguard of M&A activity in the oil and gas sector. This could have a beneficial impact for the global energy industry - and the myriad of contractors which supply into the industry - at a time when the global economy needs investment more than ever. Indeed while the IOCs are well placed to capitalise on their strengthened positions, most will be waiting for the Chinese wave of M&A to complete so they do not have to compete on price. We therefore expect the next few months to be dominated by Chinese-led deals, with the IOCs continuing to look for innovative ways into new reserves with partnerships."

While the last oil price crash in the late 90s led to a rush of mega deal consolidation, this turn in the cycle is not expected to ignite a similar round of mega transactions.

Al Fozan continued to say, "While the major IOCs will be looking to make the most of the strength of their positions, we do not believe that we will see a repeat of the 'mega merger' activity of the 1990s. We think most deal activity will be taking place in the below $30bn deal range, which is still pretty big ticket stuff by any other industry's standards, but the $70bn plus deals seen last decade are unlikely to happen. The magic formula in the oil and gas industry is the combination of cash and reserves. At the moment, the IOCs have plenty of cash and access to debt but the NOCs hold the keys to many of the reserves. One IOC buying another arguably compounds an existing problem. As NOCs are not up for sale this means that we are likely to see IOCs proposing new joint ventures. Such joint ventures may be the dawn of a new age in the energy industry as they would require NOCs to disclose information which has hitherto been closely guarded."

Whether national or international, well-placed or cash-drained, the research shows that all oil and gas companies have implemented cost-cutting programs, Al Fozan concluded, "While the global oil and gas sector looks ripe for multi-billion pound activity over the coming months, all companies in the sector are nervous of the repercussions of the volatile oil price and are adopting aggressive cost-cutting strategies to limit their exposure. Our research shows that IOCs have the advantage over the NOCs in adopting cost-cutting programs in that they do not have the same Government pressure to limit labor costs similar to what we have seen in Saudi Arabia. Both NOCs and IOCs, however, are making the most of cheaper commodity prices to renegotiate supplier costs (eg steel and aluminum for plant construction) and pushing down external contractor costs."