As 2015 draws to a close, we take our annual look at some of the Ashurst global oil and gas team’s key predictions for the international oil and gas market in 2016: a year likely to be punctuated by continued oil price volatility but which will hopefully present some new opportunities for the oil and gas industry.
Our top six forecasts are below:
1. Will M&A activity in the sector continue to be limited but opportunistic?
Yes. There were signs of an upturn in the upstream M&A market, but the recent additional slide in prices has brought a further wind of caution. Levels of activity may well increase following the next round of borrowing base redeterminations.
It is also likely that companies will look to see if strategic objectives can be achieved in a more collaborative way, whether by full mergers, nonbinding alliances or strategic asset swaps – particularly to create strengths in particular local markets.
Where there is likely to continue to be high levels of activity is in the infrastructure and midstream space, where funds continue to search out high quality businesses that provide stable returns.
2. What shifts, if any, are we likely to see in the global LNG market?
The LNG market will continue to move away from the tight market conditions which were established post-Fukushima.
Supply in the Asia-Pacific basin will increase as a result of new liquefaction projects coming online, including from North America and Australia. At the same time, demand growth in Asia-Pacific will slow due to reduced economic growth in China and nuclear restarts in Japan and South Korea. As a result, the Asia-Pacific basin will look increasingly well-supplied.
This, combined with oil price movements, is likely to lead to continued narrowing of price differentials between Europe and Asia and a decrease in diversions from Europe to Asia. In particular, the International Energy Agency has predicted that Europe’s LNG imports will roughly double between 2014 and 2020.
From a pricing perspective, we expect to continue to see Asian LNG customers shift away from oil-linked pricing towards other pricing mechanisms, leading to a range of alternative pricing structures.
Increasingly liquidity in the LNG market with the continued growth of the spot market and the emergence of new LNG importing countries will likely add further complexity to LNG trade flows and dynamics.
3. Will we see new opportunities for LNG suppliers?
Yes. The LNG market is evolving and new uses for LNG are being developed.
We expect there will continue to be opportunities for LNG suppliers to place volumes into emerging or expanding markets, such as the Philippines, Thailand and India.
Also, we believe interest in LNG as a transportation fuel will grow, including in the trucking and maritime sectors. While alternative uses for LNG have been commercially proven for a number of years, developments have been relatively limited. Now there are signs that LNG as a transport fuel may take off (e.g. National Grid’s Isle of Grain truck loading development in the UK).
This trend is supported by regulatory developments, such as the EU’s Directive 2014/94/EU on the deployment of alternative fuels infrastructure, which requires member states to ensure that an appropriate number of LNG refuelling points (that meet common standards) be provided for maritime and inland waterway transport and heavy duty vehicles across the TEN-T Core Network. Key to the success of LNG being used as fuel in both transport and other industries is the availability of small-scale LNG facilities.
4. Will the challenging conditions of the oil and gas financing market continue?
Yes. The low oil price means that it will remain challenging for all but the strongest E&P companies to access finance on competitive terms.
Reserve based loans are likely to see further reductions in borrowing base availability at the half–year redeterminations, with borrowers being pressured by lenders to dispose of assets or raise fresh equity to strengthen their balance sheets. On the upside, new financing structures, often supported by new providers of capital, will continue to evolve.
5. Will the COP21 Paris Agreement on climate change have a detrimental effect?
No. The Paris Agreement means that there will be a shift in focus towards cleaner fuels and technologies, but this is by no means a “death knell” for the oil and gas industry.
To the contrary, as individual countries take steps to implement the Paris Agreement, gas will play an increasingly important role in taking over from other fossil fuels such as coal and diesel, and in meeting growing energy demand that cannot be met by nuclear and renewables alone. In the UK, for instance, a key element of the Government’s energy policy is that gas will continue to play a central role in the UK’s energy mix in the coming decades.
6. Will the Iran oil and gas sector finally re-open to IOCs?
Probably. Assuming Iran complies with its obligations under the July 2015 Joint Comprehensive Plan of Action, most EU sanctions and US secondary sanctions (which prevent non-US companies doing business with Iran) should be removed during 2016. US primary sanctions affecting US companies will remain in force.
The Iranian Government has been taking steps to attract foreign investment once the sanctions are lifted. In particular, it has been developing the new Iranian Petroleum Contract (IPC), which is to form the basis of any future licensing rounds open to foreign investment. The IPC is expected to be more attractive to foreign investors than the buy-back contracts which previously applied.
Looking back at 2015
Developments that we saw come through in force from our 2015 predictions include:
- wholesale business rationalisations and postponement of individual projects as a result of the changed economic conditions;
- decommissioning remaining a significant issue in the United Kingdom Continental Shelf; and
- in the global LNG market, fewer opportunities to arbitrage between the Atlantic basin and the Asian market.
Developments that did not come to pass include:
- opportunities for buyers to acquire assets: with lenders being prepared to be helpful to borrowers, not as many distressed sales as were expected were seen in 2015; and
- government action to lessen the impact of the lower oil price: there has not been a widespread trend to substantially reduce the fiscal burden imposed on oil and gas companies.
If you would like to join in the discussion or would like to discuss these predictions in further detail, please speak to your usual Ashurst contact, or one of our partners from our global oil & gas team below.
