Investors target Libya, Iraq oil ventures

Global oil and gas transactions have suffered a modest decline in both deal count and total value in the first half of 2012. However, increasing merger and acquisition (M&A) interest by MENA-based energy and petroleum (E&P) companies and investors has been witnessed, says a new report from Deloitte.
The MENA region has seen some significant developments and opportunities for upstream M&A in recent months, says the white paper entitled ‘Mergers and Acquisitions in the Oil and Gas Industry: Current Upstream M&A Issues and Transaction Considerations.’
It points out that foreign investors are eyeing opportunities regionally with the expectations for Libya, now poised to return to full-scale oil production in the near future and Iraqi oil production, which has now passed the 3 million barrels per day level.
“When we assess the current state of the oil and gas sector in the MENA region, the question remains as to whether these nations will achieve optimum production levels or whether they will continue to face constraints due to outdated infrastructure, political challenges, policy uncertainty and continued security threats,” said Kenneth McKellar, energy and resources leader, Deloitte Middle East.
“These are some of the issues that interested E&P companies are being faced with,” he added.
North African countries are also now seen to be returning to the ‘business as usual’ mode, with an increase in foreign investments. Legacy risks remain, however, off-take contracts with national oil companies continue to experience disruption during the transition period of governments with E&P companies in the region facing significant challenges to working capital management, the white paper highlights.
The Deloitte white paper also sheds light on the unconventional sources of hydrocarbons, such as US shale gas exploration, oil production from the bituminous sands in Canada and deep water production in Brazil’s pre-salt blocks that have provided new opportunities and a recent surge in interest from international oil companies (IOCs).
“While the uncertainty caused by the Arab Spring might be keeping certain investors out of these markets, there are other investors who are taking a longer term view on opportunities in MENA, particularly strategic investors who have the financial and operational resources, to acquire these assets at low prices,” said Adnan Fazli, oil and gas financial advisory leader, Deloitte Middle East.
The Deloitte white paper takes a closer look at the M&A issues that face investors looking to transact in the region, and how these are being managed through the screening, diligence and valuation phases of the transaction.
Here are some of the issues outlined in the Deloitte white paper:
Fiscal regime and pricing uncertainty: The fiscal terms being offered by governments have been on the top of the agenda for contractors with assets in countries affected by the Arab Spring and consequent regime change.
Operational challenges and valuing risk: Although it is unlikely that there will be any radical overhaul to the current systems in place, the transitional challenges around cash collection by the operators has led to financial distress for a number of operators, who are offering such assets for sale.
Capital and carry commitments and decommissioning liabilities: As investors look to enter new upstream geographies they need to give adequate consideration to asset retirement obligations that are being introduced into new agreements or renewals and their impact on the project economics, the government’s take and operator’s carry obligations.
Unconventional assets: The operational resources and effort required to develop unconventional assets are more complex and the costs significantly higher than development of conventional assets.
Tax considerations: The tax provisions applicable to oil and gas exploration and production companies vary significantly according to the specific terms included in their contract with the government as well as the type of the contract agreed.
While oil and gas prices rise and fall, a resurgent regional and global energy market driven by increased demand from many Asian economies and the MENA region, and the investment needs that accompany that resurgence, should set the stage for sustained M&A activity over the longer term, the Deloitte whitepaper highlights.