LONDON (Reuters) - Strategic, focused M&A activity is set to rise as oil majors seek to plug gaps in their portfolios, said leading investment bankers and fund managers attending a Reuters summit this week.
National oil companies (NOCs) will also continue to hunt for resources in the OECD as they seek resource security, with Canadian and U.S. gas plays expected to be in the spotlight, said energy market participants at the Reuters Global Energy and Climate Summit.
The last 18 months have been relatively quiet for major deals, but James Janoskey, managing director at Credit Suisse and head of the bank's European oil and gas group, said this masked a very active level of M&A.
"(This) is more strategic and focused M&A than in the past 10 years, particularly around North America, with access to unconventional resources being the key driver," he said.
"You have seen a lot of the Asian NOCs and European majors go into North America to get access to resources but also to get experience." He also pointed to oil majors doing joint ventures and buying small to mid-sized private companies.
For example, Total did a joint venture for an oil sands project in Canada with Canadian Natural Resources (CNQ.TO), and bought stakes in three of Tullow's Ugandan exploration blocks in partnership with CNOOC (0883.HK).
Total also struck a $2.25 billion deal to enter the U.S. natural gas shale market via a joint venture with Chesapeake (CHK.N). "They have been very active on the M&A front but they are not large transactions," he said.
"From a strategic standpoint they fill out the portfolio and give them a lot of long-term investment opportunities that they can build on."
Stephen Trauber, global head of energy at Citigroup, said many large companies are facing significant declines in their oil reserve base, and these need to be filled. This is driving a different kind of M&A than that seen in the past between majors.
The super mergers of 1999/2000 occurred when oil was at $12-$15 a barrel and there was a view that oil prices would struggle to get above $20, said Janoskey.
"A lot of the deals were about scale and taking costs out to get efficiencies. At $90-$100 oil, companies are cashflow positive," he said.
This means they are looking more at big, long-term projects, which might take five years to build but give 20-plus years of cash flow, and more strategic joint ventures or focused acquisitions to fill gaps in their portfolios.
Some of the hottest plays are thought to be Canadian and U.S. gas reserves, with Canada's British Colombia well-placed for shipping gas to Asia, said Christopher Wheaton, fund manager of the Allianz RCM Energy fund.
He pointed to the joint venture between Progress Energy PRQ.TO and LNG giant Petronas (PETR.KL) to develop a British Colombian shale gas field as being typical of the kind of deal the market can expect.
He also sees more demand for Asia Pacific gas assets as demand for LNG will run ahead of expectations post Fukushima.
"Next year or 2013 we will see a lot more M&A from the oil majors as they will have big amounts of cash to invest and rather than hand it back to shareholders they will try to buy resources and accelerate their production," he said.
Slava Slavinskiy, EMEA head of energy at Citigroup, foresaw more instances of mature players taking positions in immature early markets such as east Africa and west Africa and the Asia Pacific.
Finally, national oil companies and emerging market players are expected to continue to hunt for resources.
"Today there is not a significant asset that goes on the market that the Chinese via one company or another aren't actively competing for," said Trauber.
Wheaton also highlighted the scramble for resources by NOCs, and expects to see more activity from the likes of Korea, targeting OECD assets.