The new Energy: Oil & Gas 2021 guide covers 21 jurisdictions. The guide provides the latest legal information on petroleum ownership; national oil or gas companies; private investment in upstream/midstream and downstream operations; foreign investment; environmental, health and safety (EHS); and liquefied natural gas (LNG) projects.
Last Updated: August 12, 2021
Global Overview – Energy: Oil & Gas 2021
What a difference a year makes. Pricing and deal activity levels are significantly more robust than a year ago. It is not surprising that there has been improvement given the evolution of the COVID-19 pandemic, vaccine progress and the corresponding economic resurgence. What has been somewhat surprising has been the pace of the resurgence and the commodity price levels reached through the first half of 2021.
There are a number of current trends characterising the energy space through the tail end of 2020 and the first half of 2021, as discussed below.
Robust commodity prices
On the crude oil side, through the first half of 2021, we have seen a relatively steady march upward for WTI and Brent. Global oil demand is still below pre-COVID-19 levels, but is significantly rebounding, with IEA forecasting at the end of June that global daily demand will grow by 5.7 million b/d in 2021 after falling 8.7 million b/d in 2020. The forecast has demand reaching pre-COVID-19 levels by the end of 2022.
On the supply side, significant increases in non-OPEC+ production (particularly in the USA) are anticipated to lag and are forecast to pick up in 2022. That leaves OPEC+ as the drivers on the supply side for 2021. In July 2021, OPEC+ members resolved a dispute over production baseline levels and agreed on certain output hikes, although the members continue to plan to meet monthly.
US natural gas prices have also shown some strength compared to the dislocations of 2020. At the end of June, IEA is forecasting average Henry Hub spot prices of USD3.07/MMBtu for 2021. Although offset by reduced power sector demand (as coal is switched out for natural gas as a result of price increases), economic expansion and weather-related factors are positives on the demand side. There has been some strength in LNG exports driven by higher prices internationally for natural gas.
Increased levels of M&A activity
The increased level of M&A activity seen toward the end of 2020 has continued into 2021. While not at record levels of activity, parties are certainly transacting. We continue to see consolidations which gathered steam in the second half of 2020. A recent example is the announced merger of Cabot and Cimarex, although that deal is a bit different given the distinct operating footprints of the two companies. The consolidation trend also continues among private players, including private equity-backed companies, as sponsors seek to reduce the number of players they are backing in particular basins. Auction processes for attractive assets are seeing multiple bidders and we are actually seeing some RBL availability for buyers, although certainly not at pre-2020 levels.
Access to capital markets
The energy high-yield market kicked back into life in the second half of 2020 and continues to see moderate to good levels of activity. Although we have seen a significant rally in E&P and midstream equities this year and the secondary market has recovered, IPOs continue to be a not particularly viable option for upstream and midstream players. The Vine Energy Inc. IPO is an exception on the upstream side, although it was sized and priced a little below targets. It will be interesting to see if several SPACs in the works targeting upstream assets will find targets and complete mergers.
Access to the RBL market
Even though the RBL market continues to be constrained, particularly in terms of new loans, we are seeing a few new loans for acquisition finance.
The ransomware threat which has recently hung over a variety of industries found a significant target in the Colonial Pipeline, which operates a significant pipeline system from Texas to New Jersey supplying significant amounts of fuel to the US East Coast. As a result of the attack, the pipeline shut down its operations as a precautionary measure. Reports indicated the shutdown lasted for six days, with the pipeline reaching full operational capacity again three days after restart.
Carbon capture utilisation and storage (CCUS)
Various players, both operators and investors, have been looking at a variety of projects relating to carbon capture utilisation and storage. These range from venture projects to identifying opportunities to utilise existing technologies (eg, CO₂ floods). In the USA, a key feature supporting the economics of these projects are Section 45Q tax credits. Even if utilising existing technologies, most of these projects are early stage, given the timing required to secure relevant federal permits.
Some of the current trends described above are manifestations of longer-term trends that have taken hold in the energy space and continue to develop. A number of these are already resulting in major shifts in the players in the oil and gas sector and the roles they occupy.
Although ESG and climate change concerns and focus have been gaining momentum for years, they have reached a point where they are having a significant impact on which players are willing to be involved in the conventional energy space.
Looking at this trend in the aggregate reveals a reduction in some of the traditional sources of capital. One example is a reduction in the number of banks actively seeking RBL exposure. Although currently this may be exacerbated by the pricing dislocations and corresponding credit quality issues from 2020, there is also significant investor pressure driving this trend. Diminishing investor appetite for conventional energy exposure is also evident in the shrinking portion of stock market capitalisations represented by the oil and gas companies, and the virtually moribund IPO market. Multiple factors are at play, but investor pressure and lack of interest arising out of ESG focus appears to be a significant one, and one that looks to have staying power.
US regulatory tightening
From the outset, the Biden administration has assumed a more actively regulatory posture regarding the energy business. In matters from leasing to permitting to enforcement, the administration has pursued a more restrictive approach. A high-profile example is the Keystone XL pipeline permit cancellation. Although court challenges will play a significant role in the ultimate affect of a number of these measures, the trend is clear, at least for the next few years.
Capital markets uncertainty
As noted, the IPO market for conventional energy is currently challenged. It is a market that has a history of significant ups and downs as pricing and related industry factors move. One would expect for there to be periods in the future where the market will be active again. It will be interesting to see how significant the dampening effect of investor sentiment around ESG and climate change will be. On the flip side, the energy transition space is generating considerable investor interest as evidenced by a host of energy transition SPACs and IPOs.
Exacerbated by the pressures arising out of 2020, consolidation is also a longer-term trend in the oil and gas space. For public companies, cooling investor sentiment, as well as activist activity, have prompted efforts by a number of companies to seek and act on consolidation opportunities that yield cost savings; with the markets generally subdued regarding new entrants, the overall trend is in the direction of fewer players.
To reiterate: capital markets activity in the oil and gas space goes through significant swings over time with commodity price cycles. Depending on prices, this is likely to occur again, potentially resulting in a reversal of the consolidation trend for the relevant periods. Having said that, the growing investor pressure around ESG and climate change in the space may mean the current consolidation trend is stickier.
On the private equity side, we have seen some players decide to exit the space, likely driven in part by investor pressures but also, in some cases, by performance depending on the timing of capital deployment relative to the commodity price cycle. On the other hand, we have seen some new players and existing players ramping up capital deployment, seeing opportunities in the space. On balance, however, the trend seems to be in the direction of fewer highly active participants. It is important to note that the consolidation is occurring not only in the upstream space, but also significantly in the midstream space.
Longer-term demand outlook
Forecasts are inherently dangerous, but many forecasts show oil demand peaking around 2029 or 2030, followed by either a plateau for some time or declining demand, varying significantly among different forecasts. As described below, technological disruption could accelerate a peak and the rate of decline.
In addition to the trends influencing the oil and gas space, there are potential disrupters to keep our eyes on.
COVID-19 variants and the possibility of vaccine levels plateauing could result in downward pressure on economic activity and corresponding energy demand.
On the increase side, examples would include more significant OPEC+ production increases, either officially or through non-compliance, and an easing of Iran sanctions. On the decrease side, examples would include cybersecurity issues and disruptions, presumably more of a temporary effect (as with weather-related disruptions such as hurricanes in the Gulf of Mexico). Furthermore, political and military conflict can also lead to supply disruption, as it did in Libya for many years.
Dramatic regulatory tightening
In the USA, if the Biden administration takes an even more aggressive approach – for example, around permitting or emissions – the operations could be more significantly affected and there could be knock-on effects in the capital markets as investors assess and account for these risks. As already noted, full implementation of any such measures would likely be delayed by litigation.
Subsidised alternative sources of energy
A significant component of any US infrastructure plan is likely to be an extension and/or expansion of tax credits or other subsidies for renewable sources of energy. As these subsidies drive investment and enhance the economics of the alternative sources, they are able to compete more effectively with oil and gas at lower price points.
Driven by tremendous investor interest as well as interest from the general public – and, in some cases, tax and other subsidies – we see a significant amount of investigation and investment into a variety of technologies relating to alternative sources of energy as well as achieving greater energy efficiency. The drive to produce green hydrogen at utilisable scale and cost effectiveness is an obvious example. Real progress in these areas could mean significant disruption for oil and gas on the demand side. Technological progress on CCUS could be a positive for oil and gas, although at this point it looks as though commercially deployable CCUS technology that would make any kind of difference on a global scale would be a remarkable achievement.
As these trends and factors continue to impact the USA and the global energy space, the energy picture continues to evolve in different jurisdictions around the world. The Energy: Oil & Gas 2021 Global Practice Guide provides valuable insight into the legal and commercial frameworks in important jurisdictions relevant to the energy industry, arming the reader with the information necessary not only to understand the current context but to assess the potential effects of the broader trends affecting the space.