According to recent statistics released by GlobalData, M&A deals and capital raising activity stood at $130.5bn in Q2 for the global upstream sector alone.

To understand the trends within this massive industry we spoke to co-head oil and gas Norman Wisely and head of the oil and gas, Middle East Matthew Culver at global law firm CMS about why major companies are divesting from well-established oil sites, and how they are facing up to the energy transition challenge. CMS is a legal adviser on financial deals in the oil and gas sector.

Jack Unwin (JU): What are the current trends in M&As in your areas of expertise?

Norman Wisely (NW): In the North Sea area, M&A activity is relatively buoyant again. North Sea assets can be divided into two types of assets. One is decent producing assets and the other is potentially more mature assets. Often buyers and sellers have to innovate a lot more in order to transact on those types of assets.

The main trend has been the continuing exit of the oil and gas majors from the more mature assets in the traditional areas of the North Sea and the advent of private equity (PE) buyers into that marketplace.

We will see those PE investors look to realise their investments and sell out, in many cases to other PE investors by way of secondary buyout but we’re also seeing the larger ones who have bought significant assets look for an exit route through other negotiations and an initial public offering (IPO). Those are the main trends

Matthew Culver (MC): The appetite for private equity is not necessarily replicated elsewhere, there is a real keenness in the North Sea by private equity to sell out but that is not the same in the Middle East, which is seen as having a more high-risk profile than PE’s are willing to take.

The major oil companies in the Middle East have driven forward their exploration programmes, as they seem to be back on the hunt for exploration acreage for drilling wells rather than taking over smaller players that have acquired assets and made discoveries.

The main trend in the US is the refocus by some of the major oil companies on shale oil and gas, which has driven their decisions to sell out of the North Sea and refocus on the US sales side.

JU: Why are the big companies exiting from well-established sites?

NW: There is a combination of reasons. One of which is that some of the majors are finding US shale oil particularly attractive because it’s a lot more cost-effective to produce in comparison to 10-15 years ago when the technology was in its infancy.

I think the principal reason for leaving the North Sea is that the oilfields are what everyone refers to as a “very mature” basin, which consists of smaller reservoirs, oilfields and pockets of existing oilfields that can produce a few more barrels.

The larger oil and gas players are not set up to produce from smaller oil and gas reservoirs because these companies operate with very fairly large and substantial overheads and therefore are better suited to getting production from larger projects.

The phrase that has been used for the North Sea is “right assets, right hands”, which effectively means smaller oil and gas players are much better set up to come in and develop the remainder of the North Sea oil, it’s just not an environment that is particularly well suited to major companies these days.

JU: To move onto natural gas I often hear talk of a golden age of natural gas, is this something you agree with?

MC: There have been huge discoveries in Africa and off the coast of Australia that have transformed the liquid natural gas (LNG) market, whether the major players would refer to it as a golden age is debatable but certainly but there are a lot of projects that are looking for final investment decisions related to LNG plants that can bring this gas to market in the future.

NW: The term “golden age” is probably derived from the fact that although gas is not 100% clean or renewable but it’s a lot cleaner than coal and others, it’s certainly the energy source of choice at the moment to bridge the gap in the energy market as coal retreats worldwide.

JU:  Why are some oil and gas companies making divestments at the moment?

NW: There are different reasons for different companies. I think one of the reasons we are seeing some of the majors divest in their assets and invest more in non-hydrocarbon assets is because of the wider energy transition discussion.

The major companies in Europe are under increasingly aggressive shareholder and societal pressure to move from being pure hydrocarbon companies to doing more in the energy transition space.

At the same time you have to balance that with the fact that hydrocarbon assets will generate a much larger return for shareholders than investment in renewables, so for big companies there is a balance to be struck as how far they go in investing in new sources.

MC: Companies have a broad portfolio and at any moment they will have a particular focus, whether it’s on a particular area such as LNG, and they will have a huge capital expenditure and run the risk of consequences.

For example governments will want the projects built, up and running and producing quickly. This is usually capital intensive and you have to find the money to pay for it somehow, so it’s often by selling off non-core assets in order to raise those finds.

JU: How big an impact have the extinction rebellion protests had on oil and gas companies?

NW: As I said previously, the pressure is strong in Europe and it does affect what oil and gas companies do in terms of decision making and PR.

We’ve seen the likes of BP, Equinor, Total and Eni invest significant amounts into energy transition such as wind, solar, storage or battery technologies whereas I think certainly in terms of the US majors there is less pressure there and societal demands there are slightly different.

JU: Which areas around the world are we likely to see M&A activity?

NW: For the North Sea I think we will see continue to see M&A activity. We will see a number of secondary buyouts by private equity investors and potentially see IPO’s from the larger oil and gas companies. I think there will be a continuation of a trend of the majors exiting the mature areas.

MC: Geopolitically all eyes are on Iran and Saudi Arabia in the Middle East. I also think what you’re seeing in the Middle East is the oil majors working together with national oil companies to develop those resources. It’s going to be more partnerships going forward and the big one now is Saudi Aramco. We will see how its IPO goes and what impact that has on the global market.