We set out below our top predictions for the global oil and gas industry in 2020.
Mergers & acquisitions
M&A activity in 2020 will be variable across the oil and gas value chain. From an upstream perspective, large corporates will continue to sell non-core assets, NOCs will become key players in auction processes on large transactions – particularly in LNG and downstream – and infrastructure funds will continue to look at midstream investments (particularly those that are gas-linked). We may also see infrastructure funds look further downstream to structure retail station portfolio deals with long-term contracting strategies.
Oilfield services M&A will likely be busy in 2020. The blue chips in the sub-sector continue to review their asset portfolios and there are a number of hold periods for private equity that are coming towards their typical end. We will also see a number of structured-finance deals linked to floating production facilities as corporates continue to seek to release capital to pay down debt.
The largest volume (as opposed to deal value) will likely be in the energy transition space. Those under pressure from investors to push forward a low carbon global economy will focus a significant amount of time on investment in this area. The critical aspect to these investments is choosing those that balance the need for timely investor returns (particularly as compared to historic investments) against the requirement for low carbon credentials. This is not an easy task, but those investment teams that can get it right will be seen as leaders over the next decade.
A number of upstream oil and gas companies and oil field services companies will need to refinance at least part of their borrowings during 2020.
Debt structures have become more complicated, with companies often employing multiple sources of debt financing in their capital structures, using more diverse funders than the traditional core oil and gas banks.
All this can throw up challenges for the refinancing process, with blockages caused by holdout, non-consenting lenders. One structure that we expect to see more of is the use of schemes of arrangement to unlock these blockages, not just when a company is facing insolvency.
Continuing recent trends, there is likely to be an increased use of bonds to finance oil and gas companies in emerging markets as well as developed ones.
2020 is almost certain to see a continuation of the buyer’s market in LNG. While the demand for LNG is set to grow, the current glut in LNG supply means that prices may not immediately respond to a surge in demand. The IEA has predicted that in terms of export volumes, Australia will overtake Qatar in 2022. However, both countries will be overtaken by the United States by 2024.
In the Asia Pacific region, a number of LNG liquefaction projects are expected to get close to (or actually reach) FID in 2020, after some years of little FID activity.
LNG regasification projects, in particular floating projects, are likely to continue momentum as a preferred way of getting LNG to new markets, thereby broadening the markets for LNG away from the core East Asian consumers. This will provide a partial balance to the trend towards a buyers’ market by stimulating new demand to absorb the increased LNG liquefaction capacity coming online.
The trends that have emerged from there being large volumes of LNG available – in particular, shorter contracts which are more flexible and have fewer associated restrictions – are here to stay. With continued pressure on LNG pricing, some price reviews under long-term LNG SPAs will be hard fought and potentially move to formal dispute resolution. Given pricing pressure and the price review dynamic mentioned, long-term LNG SPAs may be shortened in duration.
Africa continues to represent a wealth of untapped opportunity in terms of oil and gas reserves. However, a myriad of factors, including limited infrastructure, political and regulatory uncertainty, as well as, in certain cases, unfavourable fiscal terms, means that production levels are still low, relative to reserves. This is particularly the case for gas, owing to its prohibitive cost of capex.
Nigeria, for example, is representative of a growing trend for a further round of divestments by IOCs who are strategically limiting new capex due to political uncertainty relating to (in the case of Nigeria) the new fiscal regime. The purchasers of these assets are likely to be indigenous players, primarily, although this will be especially dependent on their access to debt – which could rule out the heavily leveraged established indigenous players in favour of some new entrants.
While 2020 may not hail significant changes in the levels of international investment, in the medium-term Africa’s oil and gas industry will be well placed to revitalise as global demand for gas surges, provided appropriate regulatory and fiscal terms are in place. In that context, a positive impact is expected from the signing, in 2019, of the African Continental Free Trade Agreement by 54 of the 55 countries in Africa.
The energy transition
While the energy transition has been gaining momentum over the past decade or longer, 2019 will be considered by many as a turning point. Oil and gas companies across the globe are increasingly looking to reduce the impact of their operations on greenhouse gas emission, as well as diversifying their portfolios by investing in renewables and other low carbon technologies.
In 2020, oil and gas companies will continue to hone their energy transition strategies, while governments look to develop policies that seek to achieve a carbon “detox” over the coming decades that appropriately acknowledges the continuing role of oil and gas in delivering energy security.
That pathway may be influenced by two major events scheduled for the end of 2020: the UN COP 26 conference, when parties to the Paris Agreement will be called upon to “upgrade” their emission reduction targets; and the US election.
In the UK context, 2020 is projected to be the year the newly elected UK Government firms up its carbon capture, usage and storage delivery framework, which is key to integrating the UK oil and gas industry into the energy transition strategy.