Global upstream merger and acquisition (M&A) activity is bouncing back, and the frozen Asia Pacific sector is now beginning to thaw, according to consultancy Wood Mackenzie.

The recent increase in asset acquisitions saw North American deal flow hit its highest level since 2019, while across the rest of the world M&A activity is showing signs of a gradual — if uneven — recovery from the abyss of 2020.

Horrendous challenges

“This isn’t a huge surprise, given the horrendous challenges companies faced last year as lockdowns and crashing oil prices paralysed the market. But with recovery in prices and demand, and success with ongoing vaccine rollouts, optimism is creeping back into the market,” said WoodMac.

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The Asia Pacific region is playing a key part in this encouraging story.

Following a miserable 2020, Anglo-Dutch supermajor Shell and Repsol of Spain have sold assets across Southeast Asia, said to be clear evidence that there’s business to be done in the region.

WoodMac’s upstream team now identifies almost $14 billion worth of assets up for grabs across Asia Pacific — with almost the same again in the speculative “bucket”.

The oil majors and large independents continue to be the main sellers, as portfolio high grading and the energy transition continue to drive further non-core divestments.

However, two key challenges remain: Finding sufficient buyers and securing finance to close the level of opportunities coming to market. But there are reasons for optimism, with several serious buyers emerging, even if not all yet have access to enough capital, noted WoodMac.

Asia Pacific upstream deal spend collapsed last year, with only just over $400 million of assets sold. To put this in context, the region accounted for less than 5% of global upstream M&A spend, excluding North America while, in 2018, Asia’s share was above 35%, said Alay Patel and Andrew Harwood from WoodMac’s Apac upstream research team.

Late-life specialist

“But we’re off to a much stronger start in 2021. Local conglomerate Udenna acquired Shell’s stake in the Malampaya project in the Philippines as Shell continues to sharpen focus on core upstream areas, while Repsol has divested assets in Malaysia and Vietnam to late-life specialist Hibiscus Petroleum.

[The] year-to-date disclosed regional deal spend of $1.6 billion is already over three times that of 2020,” said the analysts in last week’s Apac Energy Buzz blog.

Of the some $14 billion-worth of regional assets potentially coming to market, LNG projects account for more than half, with conventional shelf and onshore making up almost all other opportunities.

In terms of project status, pre-final investment decision assets dominate, with less than a third of the $14 billion of assets up for sale currently in production.

Heavyweights dominate

Industry heavyweights dominate the selling pool. US supermajor ExxonMobil is considering divestment of its Malaysia portfolio and the Ca Voi Xanh asset offshore Vietnam, compatriot Chevron looking to sell its stake in Indonesia’s IDD (Indonesia Deepwater Development) and the North West Shelf in Australia, and Shell putting its positions in mature, shallow-water oil and gas fields in Sarawak, East Malaysia up for sale.

“The large cap international oil companies are also active, with ConocoPhillips potentially looking to exit the Corridor production sharing contract in Indonesia as it further streamlines its global portfolio and BHP looking to offload its position in the Bass Strait and Kipper fields,” said Harwood and Patel.

“Other sellers include Pertamina farming-down in the Rokan PSC in Indonesia and Santos looking to do the same at the pre-FID Dorado project in Australia. Meanwhile there have been recent smaller scale deals such as Jadestone entering Malaysia and Cue Energy/NZOG taking a position in Australia. Eni has now exited Pakistan.”

And there are more potential assets in the mix.

WoodMac has categorised a further $13 billion-worth of Apac assets as potential farm-downs or speculative candidates for divestment as portfolio rationalisation, balance sheet rebuilding and decarbonisation encourage future divestments.

Regional players could be in line to pick up some of these assets as they have done of late.

Philippines outfit Udenna Corporation has agreed to acquire for a $380 million base consideration plus up to a further contingent $80 million Shell’s 45% interest in Service Contract 38 offshore the Philippines that hosts the producing deep-water Malampaya field.

Udenna last year had acquired Chevron’s 45% stake in Malampaya, which now gives it a 90% holding.

“While it’s expected Udenna will face challenges managing a mature and depleting deep-water gas asset and will need to secure a contract extension to sustain cash flow from the asset beyond 2024, it has shown the appetite for local players to enter the market and to agree terms with the majors,” added Harwood and Patel.

Other Apac assets on the market, according to industry sources, include Shell’s 35% interest in the Inpex-operated Masela PSC offshore Indonesia that hosts the giant Abadi gas field and ExxonMobil’s operated stake in the producing Cepu PSC onshore Indonesia.

“Attention will continue to focus on who could buy these assets. But as we’ve seen this year, regional players are already making a splash and are likely to be the key target buyers for future disposals. In addition, private equity-backed buyers may also make moves as they adapt their strategies to a rapidly evolving upstream outlook,” concluded Patel and Harwood.

“Divesting in Asia Pacific was never going to be easy but there are clear signs the region’s upstream M&A sector is coming out of hibernation.”