Increased energy demand as economies moved out of COVID-19 restrictions through 2021 helped oil & gas M&A continue its recovery in H2. Deal values jumped by 24 percent year-on-year to US$102.7 billion in 2021, while the number of deals increased by 16 percent to 150 deals.

Rising demand drove the surge in energy commodity prices through 2021, although some volatility remained—the price of the benchmark West Texas Intermediate (WTI) crude took a sharp dip in November on the news of the emergence of the Omicron COVID-19 variant.

While there will be some volatility over the coming period—in particular as COVID-19 is not yet fully under control—prices are expected to be more stable in 2022, absent a major shock. This should unlock the M&A market further, given that volatility is a bigger dampener on activity than actual price levels because it brings uncertainty that makes forecasting and investment planning more difficult.

Some private equity investors have been holding on to their investments in the last couple of years, and there may be increased incentive and pressure for them to exit in the current commodity price environment. This will in turn increase the pace of oil & gas M&A in 2022.

Clean energy fuels deals

Overall, we expect dealmaking to continue in the sector at a reasonable pace. Energy transition will be a significant driver, as oil & gas majors reposition their portfolios toward clean energy. The largest deal in the sector in 2021 exemplifies the trend: Royal Dutch Shell’s US$9.5 billion sale of its Permian Basin assets to ConocoPhillips is part of a move by Shell to reduce its hydrocarbon assets and move to clean energy.

Societal and regulatory pressure for energy transition will underpin M&A in the sector over the next few years. Although tax advantages (such as the intangible drilling tax deduction and inventory depreciation allowances) remain in place in the US for now, there is some uncertainty about how long this will be the case. If they change, the economics of traditional energy exploration and production will change dramatically.

Government support

Tax reform will be necessary, however, to encourage decarbonization. Traditional integrated companies are looking at repurposing their infrastructure for carbon sequestration, although this is currently expensive and will require tax credits to make it a viable path to carbon neutrality. The same is true for downstream assets, where feedstock for natural gas can, in theory, produce hydrogen using existing petrochemical infrastructure. Yet this is also costly, and tax incentives will be needed.

With the prospect of more stable pricing, and as the overall tax and regulatory regime becomes clearer over time, we expect energy transition to generate significant M&A activity, as traditional players dispose of older assets and acquire businesses that promote clean energy.

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