For decades, pressure has been building on the energy sector to decarbonise. In 2020, we witnessed a paradigm shift in the sector.
Offering investors a low carbon future
Pressure to decarbonize has been driven by growing evidence and awareness of the link between burning hydrocarbons and climate change, and the prevalence of hydrocarbons in our global energy system (80% of our global energy demand is still provided by hydrocarbons). In 2020, we saw a major shift take place, with the emission reduction commitments made in Paris by the international community in 2015 finally finding their way into national commitments from the world’s major emitting nations (including the US, China and Europe), and becoming enshrined in the corporate visions of the major European hydrocarbon producing companies (such as bp, Shell, Eni and Total). Confidence to make this shift has been supplied by the remarkable cost-reductions in renewables in recent years (particularly solar PV and wind) and improvements in technology, reinforced by ESG concerns and pressure from financial institutions on energy companies to divest from hydrocarbons.
These trends have been accelerated by the changes in our living and working habits brought about by Covid-19, many of which are likely to stay. The European integrated oil companies have started to prepare themselves for this “new normal”: recording massive asset write-downs, slashing hydrocarbon CAPEX and announcing multi-billion divestment programmes (over US$80 billion worth of assets were on the block from the oil majors, at last count), whilst at the same time pivoting towards new energy (hydrogen and carbon capture, utilisation and storage (CCUS)), renewables, EVs and emission reduction technologies. We’re also seeing a rise in the fortunes of the pure-play renewable companies, such as Orsted, Enel, Iberdrola and NextEra Energy Inc. These companies are attracting record amounts of capital and growing quickly as they offer investors a clean bet on a low carbon future.
“Energy companies have taken decisive action to reposition themselves for the energy transition, as emission reduction commitments find their way into the corporate visions of the major European hydrocarbon producing companies.”
A wave of consolidation
Oil & gas M&A deals proved difficult to close in 2020, as dealmakers struggled to agree on asset valuations due to the Covid-induced lower oil price, leading many deals to be abandoned or put on hold (for example Energean/Neptune in the UK North Sea). Creativity came to the fore, with Chevron acquiring Noble in a US$13 billion share for share deal and Chrysaor reversing into Premier Oil’s London listing. Distress drove Chesapeake and numerous other higher-cost US shale producers to the wall but intense cash conservation saved many of the companies outside of North America, leaving the oil service companies to take the brunt. A wave of consolidation is still expected to break in the services sector, and the broader upstream market, perhaps next year. The national oil companies were largely absent from auction processes in 2020, but are likely to return in 2021 once stability and opportunism return to the market.
Some of the biggest deals in the energy sector involved pension and infra funds buying into credit-backed structures linked to mid-stream assets: ADNOC raised over $10 billion using this method, and Shell is looking at a similar method with its QCLNG assets in Australia. Infrastructure funds, private equity funds and pension funds are where much of the world’s free capital is located and they are now regular partners with oil & gas companies on bids.
Decisive repositioning for energy transition
Energy companies have taken decisive action to reposition themselves for the energy transition, with billion-dollar plus offshore wind acquisitions being made by many of the majors in 2020 (including bp, Total and Eni). The oil majors are now competing with traditional renewable energy companies and funds for assets, driving prices up and returns down. Early movers such as Orsted and Equinor are reaping the benefits. European utilities are rapidly unbundling and decarbonising, leading to an even greater focus on wind and solar and on enhancing the customer experience: Origin Energy’s strategic partnership with Octopus of the UK is an indicator of things to come.
In 2021, we can expect to see more of the same, with the major US oil companies (particularly Chevron and Exxon) likely to also enter the fray in some way, with their recently clarified focus on lowest cost, lowest carbon. 2021 is looking likely to be a block-buster year for energy sector M&A.
See also our full report M&A in 2021 – resilient, agile and coming off mute, which considers the most important legal issues faced by M&A deals under the challenges of 2020.