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M&A wave to keep rolling in Australia's oil, gas sector

The flurry of deal activity in Australia's oil and gas sector at the close of 2017 should continue unabated as crude oil prices appear to have bottomed, giving producers more confidence and cash to pursue mergers, said Deloitte’s global LNG lead analyst, Bernadette Cullinane.

Speaking at a media roundtable Feb. 7 in Perth, Western Australia, Cullinane said hunting season is far from over for the industry's bigger fish.

"We've reached the [price cycle] bottom, if you will, so we will see more M&A activity across the board," Cullinane said.

Australia's oil and gas patch finished 2017 in a feeding frenzy, with Beach Energy Ltd. working on closing its A$1.59 billion acquisition of Lattice Energy Ltd. from Origin Energy Ltd.

AWE Ltd., which operates Western Australia's Waitsia gas discovery, one of the more highly prized assets in Lattice's portfolio, was also the subject of a bidding war between China Energy Reserve and Chemical Group Australia Pty. Ltd. and miner Mineral Resources Ltd., both of which wanted to use the gas to power Western Australia's mining operations.

On Feb. 5, Japanese player Mitsui & Co. Ltd., already heavily involved in Western Australia's gas markets, won the battle to take over AWE with an all-cash offer of 95 Australia cents per share, which valued the Perth Basin-focused producer at A$594 million.

All that came after Beach acquired a stake in Cue Energy Resources Ltd.'s giant Ironbark prospect — believed to hold 15 trillion cubic feet of gas — in November 2017, in a deal hoped to incentivize supermajor BP Plc to take up its option to acquire 42% in the WA-359-P permit offshore Western Australia.

In yet another deal, French supermajor Total SA and Adelaide-based oiler Santos Ltd. agreed in December 2017 to fully fund a 3D seismic survey over the Beehive prospect, also offshore Western Australia, in return for an option to acquire an 80% participating interest in the WA-488-P permit, which contains the prospect. Beehive is one of Australia's largest undrilled hydrocarbon structures.

Cullinane also said deal activity in the sector is likely to encompass other targets, including renewable energy, which could be the next big investment area for oil companies. Total and Statoil ASA have already made substantial renewable energy investments in Europe, and similar spending is expected in Australia, she said.

Royal Dutch Shell Plc has been looking at investing in Australian solar plants that can switch to gas when needed to deliver baseload power supply, and Woodside Petroleum Ltd. has made noises about getting involved in renewable energy.

Santos, which operates the Gladstone LNG project in Queensland, is already actively investing in renewables, having joined forces with ZEN Energy to roll out large-scale solar and battery farms at gas processing sites.

"[Renewable energy is] something oil and gas companies are now embracing, and not just supermajors in Europe and their agendas, but also many companies here [in Australia] are thinking about renewables, and new energies have been mentioned already as part of their portfolios," Cullinane said. "So it will be more a spectrum, or a continuum, rather than a single fuel focus."

Yet Cullinane also warned that Australian oil and gas producers could run into trouble if they do not start taking advantage of gradually rising oil prices to ramp up exploration. "Exploration ... is a big concern and a future challenge which needs to be addressed," she said.

"Reserves replacement has always been a big indicator of companies and their performance, and exploration spending is at a 24- to 25-year low in Australia, so in oil and gas, if we're not replacing reserves, our companies will eventually start to contract."

Cullinane attributed the recent exploration downturn to capital stewardship and discipline over the last few years since oil prices crashed in mid-2014 and to a focus on completing the construction of the large-scale, capital-intensive LNG projects and transitioning them into the operations phase.

"Commodity prices also have not supported the exploration budgets of what is required. Then you couple that with [the fact that] Australia does not present as a particularly favorable country, particularly in the east coast with the moratorium and bans [in Victoria and New South Wales] on drilling ... it's not an easy place to do business."

Western Australia and the Northern Territory, both of which are heavily prospective for shale and tight gas, have also been the subject of unconventional gas drilling moratoria pending the completion of separate inquiries.