Opinion: Tom Hurley

Oil and gas deal activity remains at its highest point on record through July 2010, with some data suggesting global year to date transactions now exceeding $120 billion.

The sector is of vital importance to global M&A and willing buyers, including private equity investors, continue to show strong interest. Indeed oil and gas deals account for some 15 percent of the total global M&A volume. Deals should continue to stay strong amidst BP's Gulf of Mexico oil spill, as the aftermath of the disaster shifts the regulatory landscape and could make onshore assets more attractive.

Furthermore the spill could also force smaller operators in the Gulf to consolidate or sell assets, as the new regulatory landscape shifts favour towards larger firms as higher regulatory costs and legal risks make operating there too expensive.

More stringent rules are therefore likely to increase costs and slow the pace of drilling. Companies may also face higher liability caps and requirements to cover some clean-up costs in advance. The result may be that drilling in the Gulf of Mexico is only feasible for the world’s largest energy companies such as Exxon, Total and Statoil.

This in turn will have a knock-on effect for the UK industry. We are actively engaged now with contacts in the industry who must now get to grips with the implications of the spill - who will want to exit and who will want to become consolidators? Only time will tell.

Global M&A activity in the oil and gas sector has so far this year exceeded $38 billion, the highest year-to-date level since records began.

Despite extreme volatility in the price of crude oil and gas prevailing throughout 2008 and 2009, activity in the sector is now being spurred by relative stability. Oil prices have also risen to a level that will encourage spending and are likely to be sustained throughout the year.

I believe global M&A indicators will remain strong, due mainly to:

• strong growth driven by increasing global energy demand
• high oil prices for the foreseeable future
• economic growth in Asia where energy demand is growing by 4% to 8% per annum
• reserves concentrated in the Middle East and Russia, benefiting those who can successfully exploit these areas
• the industry is fragmenting as established producing areas such as the North Sea, Gulf of Mexico and Southeast Asia mature

What does this mean for the UK players? The upstream sector is key to the success of the UK oil and gas industry and plays a key role in the development of reserves in the UK and also overseas. Innovative processes to access unconventional reserves will therefore boost M&A as oil majors look to pick up businesses with exposure to the likes of shale gas and the technology to access it.

Expect to see further opportunities in unconventional reserves which require special treatment and complex projects as these projects continue to move ahead. This will increase demand for sophisticated equipment and services and will benefit UK companies with pioneering IP in this space.