Signs of change visible in oil industry globally

There's been more oil-and-gas M&A so far this year than in the same period of any other year on record

Oil markets were on fire on Thursday with crude oil futures rising by 10.3% to $42.56 a barrel, its best day since March 2009 when it soared 11.1%. With equity markets posting a smart recovery, not much interest was generated in India on oil’s recovery. Oil is no longer on investor’s radar, especially after it touched a new 6.5-year low on increased supplies and falling global demand.

Though markets are not excited about oil, the industry is witnessing structural changes that can decide the future of the oil industry. But first let’s look at some of the reasons attributed to the sharp jump in oil prices.

Like any asset class, oil was also beaten down after China announced a devaluation of its currency reflecting poor fundamentals of its economy. While other asset classes posted a strong recovery after a one-day fall, oil joined the party a little late. Part of the reason for the rise is short covering of trader’s position. However, there was other news that helped in oil prices moving higher.

The Chinese government's measures to stimulate the economy increased hopes of demand growth. But more importantly there was news that Venezuela has been contacting other OPEC (Organisation of Petroleum Exporting Countries) members to push for an emergency meeting in coordination with Russia to come up with a strategy to stop the current oil price rout. With the US now becoming an important force to reckon with in the oil market, Venezuela feels the OPEC alone will not be able to control prices and needs other large non-OPEC members like Russia.

Experts feel that the next meeting of OPEC is in December 2015 and no meeting can be expected before that time. Further, given the fierce fight for market share among the OPEC nations, not many are hopeful that Russia’s addition will help, especially since the country has clearly said that they are not keen on production cuts.

It looks like oil price jump was a dead cat bounce rally and prices may come down again. An ANZ report on the sharp rise in oil price says that the rally was sparked by higher-than-expected US GDP numbers. But the recovery in commodity prices looks fragile with concerns over China's growth still weighing on market activity, adds the report.

Though markets feel that oil prices are expected to be low, oil industry is going through a tectonic change. Oil wells are being closed, workers are losing their jobs, companies being taken over and consolidation among the major players is on. According to a Wall Street Journal report, low oil prices have been a catalyst for deal-making across the industry. Year-to-date, acquisitions totalling $314 billion have been announced — more than double the volume of oil-and-gas deals seen at this time last year. There’s been more oil-and-gas M&A so far this year than in the same period of any other year on record.

Schlumberger announced it would buy Cameron International Corp. for $12.7 billion in cash and stock. Earlier, Halliburton Co. and Baker Hughes Inc. agreed to merge in a $35 billion deal. Royal Dutch Shell PLC paid nearly $70 billion for Britain’s BG Group PLC, while pipeline giant Energy Transfer Equity LP bought Williams Cos for $48 billion and refiner Marathon Petroleum Corp. acquired MarkWest Energy Partners LP for $15.8 billion.

Meanwhile, oil giant Total announced plans of selling a Scottish gas terminal and interests in two pipelines in a deal worth £585m to Midstream Partners. It is the latest in a planned $5bn disposal programme this year as part of cutbacks at the group.

The sale is expected to lead to a wave of deals in North Sea which has been witnessing a drop in production and low oil prices are making them unviable. Danish driller Maersk Oil announced it would seek permission to close its Janice platform, with the loss of around 200 jobs. The impact of low oil prices has percolated down from companies to the worker in the North Sea area who is threatening a strike, a first for a generation on account of cutbacks and changes to working hours.

Low oil prices have also attracted the interests of cash-rich oil giants from China. A Bloomberg report says that PetroChina Co., the nation’s biggest explorer and producer, is eyeing targets and in discussions about assets swaps in North America. Its rival, China Petroleum & Chemical Corp, Asia’s largest refiner, signalled it’s looking at overseas acquisitions. The country’s so-called Big Three oil and gas companies, which also includes China National Offshore Oil Corp, spent nearly $119 billion from 2009 through 2013, accounting for 13% of global transactions in the industry.

While global players taking advantage of low oil prices, none of the Indian giants have closed major deals in the sector. For a country that is almost completely dependent on imported oil, not acquiring assets now can prove to be a big mistake when oil price starts rising.

But given the dynamics of oil and shale gas, it seems that oil prices are likely to be low for some more time. Perhaps the thinking is we are better off buying cheap oil rather than blocking big money in acquiring assets. This strategy will be put to test when oil prices rise.