Industries Energy, Utilities & Mining O&G Deals* · O&G Deals includes analysis of all global cross-border and domestic oil and gas deal activity. It is based on published transactions

IndustriesEnergy, Utilities & Mining

O&G Deals*Mergers and acquisitions activity within the global oil and gas market

2008 Annual Review

*connectedthinking

Contents

Methodology

O&G Deals includes analysis of all global cross-border and domestic oil and gas deal activity. It is based on published transactionsfrom John S. Herold, Inc. ‘M&A database’, December 2008. Analysis encompasses announced deals, including those pendingfinancial and legal closure and those which are completed. Deal values are the consideration value announced or reported includingany assumption of debt and liabilities. Figures relate to actual stake purchased and are not multiplied up to 100%. Thegeographical split of the deals refers to the location of the asset. The sector and subsectors analysed include: Downstream:gasoline service stations, petrochemical, propane distribution, refining, retailing/marketing - misc., terminals/storages; Midstream:gas gathering/processing, pipelines - gas, pipeline - liquids, tankers/other transportation; Oilfield Equipment Services: diversified,drillers/drilling rigs, geophysical/reservoir services, manufacturers, miscellaneous, offshore services/vessels, production/wellservices, tool rental/drilling services; Upstream: acreage, reserves. A full list of transactions throughout 2008 is available by visitingthe O&G Deals website at www.pwc.com/ogdeals.

01 Introduction

02 Report highlights

04 Deal totals

06 Deal makers

08 Deal places 10 The Americas

12 Europe

14 The Russian Federation

16 Asia Pacific

18 International and the

rest of the world

20 Looking ahead

21 Contact us

We also highlight, in a series of dealdialogues throughout the report, some of thecritical issues for companies engaging in dealactivity within the sector. Drawing on ourglobal experience as an adviser to oil andgas M&A players, our commentary addressesall key markets in the sector.

Looking ahead, we examine the prospects for2009. We see the immediate outlook assubdued but would expect any easing of thedebt and equity markets, combined with anypositive movement in the oil price, to herald areawakening of deal activity. The long-termenergy supply and demand fundamentals arestill compelling. When the market returns,and the financial crisis has passed, thepotential for a fast revival in commodityprices and deal-making is there.

Introduction 01

O&G Deals 2008 reviewsdeal activity in the oil andgas industry. We examineboth the rationale behind theoverall trends and look at thekey individual deals. We look

both at the year under review and ahead tothe future direction of deal-making in thesector.

Like commodity prices, deal activity wascharacterised by a record rise and a recordfall. Deal numbers climbed to new highs butvalue was down throughout the year. Dealvalue fell precipitously in the final months ofthe year as the credit crisis intensified and theindustry watched the oil price fall faster in thespace of five months than it had done in fiveyears during the last great oil price decline inthe early 1980s.

O&G Deals is a companion publication toPricewaterhouseCoopers’ Power Deals andRenewables Deals series which review dealactivity in the power utilities and renewableenergy sectors. Together, the threepublications provide a comprehensiveanalysis of M&A moves in the energy sectoras a whole.

Michael HurleyGlobal Energy, Utilities & Mining Advisory Leader

Rick Roberge US Energy Transaction Services Partner

Richard PatersonGlobal Energy, Utilities and Mining Leader, Global Oil & Gas Leader

02 Report highlights

Deals follow the oil price over a cliff

A slowing in O&G deal momentum, asmeasured by deal value, was evident fromthe start of 2008 compared with 2007.Deal value reduced progressivelythroughout 2008 before following the oilprice over a cliff in the final quarter as thefinancial crisis intensified and economicconditions deteriorated. Companiesslammed on the brakes in the final quarterwith total O&G deal value down 59% on2007 levels and 72% compared with thefinal quarter high of 2006.

Big deals in retreat

Even before the worsening of theeconomic climate and the oil priceplunge, big deals were in retreat. Therewere only two deals that topped theUS$5bn mark in 2008 compared withten such deals in 2007. The hiatus in bigdeals was especially evident in theoilfield services sector. The sector hadbeen particularly dynamic in 2007 withthree US$5bn plus deals worth a total ofUS$31.4bn. In 2008, the number ofdeals remained high but the completedisappearance of US$5bn plus dealsmeant total deal value in the sectornearly halved.

03

Natural gas grabs top spot

Six of the top ten 2008 O&G deals werepurchases of natural gas assets. Five ofthe six were for ‘unconventional’resources that require considerabletechnological investment. All of themwere in Australia and North Americareflecting the attraction of targets instable locations close to end markets ascompanies responded to security ofsupply constraints. Indeed, the rush todevelop Australian coal bed methane gasassets for LNG export helped catapultAustralia’s share of worldwide O&G dealvalue up tenfold. Upstream deal value inAustralia multiplied, from US$1.7bn in2007 to US$16.6bn in 2008.

Deal target pencils sharpen

The immediate outlook for O&G deal-making in the early part of 2009 is bleak.However, while deal activity in the firsthalf of the year looks set to remainsubdued, it is difficult to see strongerplayers remaining on the sidelines for thewhole of 2009 given the opportunities foracquisitions at low valuations. Many ofthe majors and national oil companiesare in a strong position following aperiod of high oil prices. For companiesfrom countries such as China, thecurrent market offers unrivalledopportunities to gain access which, inother circumstances, may be denied tothem. Similarly, sovereign wealth fundsand many private equity investors will bewatching the sector closely.

04 Deal totals

Despite the changing financial and market background, thenumber of oil and gas deals soared to a record 969 in 2008, up8.5% from 893 in 2007. The increase in deal numbers waswholly attributable to upstream activity and smaller deals belowUS$0.5bn which rose by 15% (see Figure 2). In contrast, therewere significant falls in the number of larger value deals and abig falling-off of very large deals. There were only two dealsthat topped the US$5bn mark in 2008 compared with ten suchdeals in 2007. The hiatus in big deals was especially evident inthe oilfield services sector. The sector had been particularlydynamic in 2007 with three US$5bn plus deals worth a total ofUS$31.4bn. In 2008, the number of deals remained high butthe complete disappearance of US$5bn plus deals meant totaldeal value in the sector nearly halved.

2008 was a year of two halves for deal-making. Activity was robust in the firsthalf. During the second half, commodityprices began a steep decline and dealactivity slid alongside them. Overall dealnumbers contrasted with a slump invalues as companies faced new marketrealities following boom M&A years in2007 and 2006. The number of deals in2008 actually topped the levels reachedin the preceding years but the impact ofthe credit crunch, the wider economicdownturn, and a plummeting oil price hitvalues hard. Total deal value fell 38% toUS$180.4bn from the 2007 high ofUS$292.2bn (see Figure 1).

Source: PricewaterhouseCoopers, O&G Deals 2008 Annual Review; John S. Herold

Figure 2: Size of deals, 2008 (year on year % change in parenthesis)

By value Number Total value Average value(US$bn) (US$bn)

Less than US$250m 815 (+15%) 29.6 (-12%) 0.06 (-8%)

US$250m – US$1bn 113 (-12%) 58.9 (-12%) 0.52 (+1%)

More than US$1bn 41 (-28%) 91.9 (-52%) 2.24 (-8%)


Figure 1: Total oil and gas deals by value and number of deals – 2005-2008

By value (US$bn)

60

120

180

240

2006 2007 2008

250.1

291.1 292.2

180.4

2005

300

By number

200

400

600

800

2006 2007 2008

924 912 893

969

2005

1000

05

A 20% rise in upstream activity offset the stalling of servicesector deal growth and a reversal of midstream anddownstream deal numbers (see Figure 3). The latter fell 31%and 17% respectively. US$13.7bn of the US$17bn fall inmidstream deal activity was attributable to a huge 71% dropin North American midstream activity. The master limitedpartnerships (MLPs) that dominate the US midstream foundthemselves heavily constrained by the credit crisis.

Reserves acquisition, rather than acreage, accounted for94% of total US$114.2bn 2008 upstream deal value.Companies continued to seek growth primarily throughacquisition as opposed to exploration as the oil price soaredin the first half of the year. Purchases in relatively stablelocations such as Australia and Canada featured strongly ascompanies looked to safe havens to secure largeunconventional reserves to meet future energy demand.

Source: PricewaterhouseCoopers, O&G Deals 2008 Annual Review ; John S. Herold

Deal-making slowed progressively through the year and thendropped precipitously in the final quarter of 2008 with theautumn intensification of the financial crisis and theaccelerating oil price fall. Deal value was down throughout theyear but companies slammed the brakes on in the last quarter(see Figure 4). Deal value fell 59% in the last three months of2008 compared to the same period in 2007 and was 72%down on the final quarter high of US$95.5bn reached in 2006.Oil prices charted a series of ever more precipitous falls frommid-July onwards and, indeed, fell further in the space of justfive months than it did in five years during the other majorrecent historic price fall in the early 1980s. Faced withunprecedented oil price deflation and uncertainty, even thosecompanies who wanted to make deals struggled and, in manycases, failed to come to a common view on valuations.


Figure 4: Slamming on the deal brakes – 2007-2008

2007

20

40

60

80

100

65.5 (239)

26.6 (154)

2008

Last quarter deal value (US$bn)(number of deals in parenthesis)

2008 quarter by quarter fall in deal value compared with 2007

Q4

Q3

Q2

Q1

-30 -10 10 30 50

-27%

-29%

-38%

-59%

-50 -40 -20 0 20 40 60%-60%

Q3Q2Q1 Q4

-27% -29%

-38%

-59%

-30

-10

10

30

50

-50

-40

-20

0

20

40

60%

-60%

Figure 3: Analysis of O&G deals by sector (year on year % change in parenthesis)

Number Total deal value Average deal value(US$bn) (US$bn)

Upstream 690 (+20%) 114.2 (-14%) 0.166 (-28%)

Midstream 51 (-31%) 12.9 (-57%) 0.252 (-38%)

Downstream 78 (-17%) 17.1 (-72%) 0.220 (-67%)

Services 150 (+1%) 36.2 (-46%) 0.231 (-47%)

06 Deal makers

Both deals were for ‘unconventional’ resources that requireconsiderable technological investment to access. Theywere among five such deals in the 2008 top ten. Shell’spurchase of Duvernay extends its interests in Canadiantight gas assets. Duvernay has large holdings in westernCanada including a portion near Montney, British Columbia.The Montney deposit, divided between a number ofcompanies, is estimated to contain 1.4 trillion cubic metresof gas, more than all the proven reserves in Alberta, theprovince with the largest natural gas production in Canada.The Duvernay purchase is potentially complementary toShell’s oil sands operational requirements in Canada as oilsands production requires considerable amounts of naturalgas.

The price range of the 2008 top ten O&Gdeals looks very different compared withthe US$5bn – US$20bn range of 2007.Certainly, deals of the size of 2006’sUS$32bn Kinder Morgan buy-out andStatoil’s similarly sized merger with NorskHydro seem very distant. Instead, thebiggest deals were two table-toppingUS$5.8bn gas deals – ConocoPhillips’investment in Origin Energy’s coal seammethane gas assets and Royal DutchShell’s agreed offer for Canadiancompany Duvernay.

No. Value of Date Buyers Sellers Sector Primary transaction announced Continent(US$m)

Source: PricewaterhouseCoopers, O&G Deals 2008 Annual Review; based on published transactions from John S. Herold, Inc. M&A database, December 2008

Figure 5: Top Ten – oil and gas deals 2008

5,848

5,838

4,732

4,191

3,791

3,698

3,375

3,300

2,920

2,808

08 Sep 08

14 Jul 08

15 Sep 08

10 Jun 08

07 Jul 08

13 Jun 08

11 Nov 08

01 Jul 08

28 Oct 08

03 Jun 08

ConocoPhillips

Royal Dutch Shell plc

BASF AG

XTO Energy Incorporated

China Oilfield Services Limited

AlpInvest Partners; JC Flowers & Co LLC; Goldman Sachs Group Inc; Candover Investments Plc

StatoilHydro ASA

Plains Exploration & Production Co

BG Group plc

Smith International Incorporated

Origin Energy Ltd

Duvernay Oil Corp

Ciba Holding AG

Hassie Hunt Exploration Co; Hunt Petroleum Corporation

Awilco Offshore ASA

Expro International Group

Chesapeake Energy Corporation

Chesapeake Energy Corporation

Queensland Gas Company Ltd

W-H Energy Services Inc

Australia

North America

International

North America

International

International

North America

North America

Australia

International

1

2

3

4

5

6

7

8

9

10

Upstream: reserves

Upstream: reserves

Downstream:petrochemicals

Upstream: reserves

Services: drilling rigs

Services: well services

Upstream: reserves

Upstream: acreage

Upstream: reserves

Services: well services

07

Origin Energy has retail power and generation operationsacross Australia and New Zealand but it was thecompany’s coal seam gas (CSG) assets that were at thecentre of the ConocoPhillips deal. ConocoPhillips becomesa 50% shareholder in the company that holds all of Origin’sCSG assets. The deal allows Origin to focus on being anupstream gas provider with ConocoPhillips developing thedownstream LNG operation needed to monetise theassets. The purchase came after a six-month-long pursuitof Origin by British oil and gas company, BG Group. Originhad held out for a higher valuation in negotiations with BGthat went hostile after talks on an agreed deal failed toreach agreement. The pursuit ended when ConocoPhillips’move placed a higher valuation on the CSG assets thanwas reflected in BG’s offer.

Australian gas assets are particularly attractive as they areconvenient for growing Asian markets as well as being in acongenial and stable business location. BG’sdisappointment at missing out on the Origin deal wouldhave been offset somewhat by their successful US$2.9bnpurchase of Queensland Gas Company, again with theconversion of CSG for LNG export at its heart.

2007 2008Number Total value Number Total value

Entity of deals (US$bn) Entity of deals (US$bn)

Source: PricewaterhouseCoopers, O&G Deals 2008 Annual Review; John S. Herold*Sovereign fund

Figure 6: Private equity and sovereign fund purchases over US$0.5bn – 2008 vs 2007

Apollo Management LP

TAQA*

Institutional Investors;Babcock & Brown Infrastructure; Babcock & Brown Energy Inc

General Electric

First Reserve Corp

OSS Capital Management LP;Vestar Capital Partners; Kelso & Company; Goldman Sachs Group Inc; CAI Capital Management Co

GP Investments Ltd

Mittal Group;Mittal Investment Sarl

Industry Funds Management

Blackstone Group

Total

1

4

1

2

1

1

1

1

1

1

14

9.6

8.2

5.3

4.0

2.9

2.6

1.0

0.7

0.6

0.6

35.5

AlpInvest Partners; JC Flowers & Co LLC; Goldman Sachs Group Inc; Candover Investments Plc

First Reserve Corp

Deutsche Bank AG; AMP Capital Investors

Quicksilver Resources Incorporated

Fortune Super Equity Management LLC

Riverstone Holdings LLC

Total

1

1

1

1

1

1

6

3.7

2.2

1.6

1.3

1.2

1.0

11.0

While the Australian and Canadian gas deals in the top tentable were very much about development, other dealsreflected a note of distress as market and financial conditionsdeteriorated during the year. These included the two othertop ten deals for ‘unconventional gas assets’. They bothfeatured sales by Chesapeake Energy of tight gas in the USin separate deals with Norway’s StatoilHydro and PlainsExploration. Elsewhere, Swiss specialty chemical companyCiba had announced second quarter losses and a significantimpairment charge ahead of its US$4.7bn purchase byGermany’s BASF. The deal with BASF, which produces oiland gas, brings a degree of vertical integration to protectagainst fluctuating oil prices as well as the potential ofconsiderable synergies across the two companies’ chemicalsoperations.

Private equity and sovereign funds had played a significantrole in the boom M&A years of 2006 and 2007 but this wasreined back in 2008. An analysis of deals over US$500 million(see Figure 6) shows a 69% fall in the total value of largersize purchases by such entities and an absence of sovereignfund activity. This is in contrast to 2007 when four deals byAbu Dhabi’s TAQA accounted for US$8.2bn of deal value.

08 Deal places

Figure 7 : All O&G deals by continent

Like the oil price, 2008 was a tale of upsand downs in deal numbers acrossdifferent parts of the world. Year-on-yeardeal numbers were up in all territories withthe exception of the dominant NorthAmerican market and the RussianFederation. The pace of deal-makingeverywhere, though, slowed during theyear as financial and market conditionsdeteriorated.

The moves for Australian gas assets helped catapultAustralia’s share of worldwide O&G deal value up tenfold.Along with Africa, Australia was the only territory where totaldeal value increased from 2007 to 2008. African deal totalswere boosted by the US$2.2bn sale by Devon Energy of itsoil and gas business in Equatorial Guinea to the country’snational oil company GEPetrol. The sale was part of a US$3 billion African divestiture programme by the company.

The share of deals in the Russia Federation fell sharply. Thiswas partly because of the completion of much of the Russianenergy industry restructuring which had featured strongly in2007 and also because of the difficult financial and regulatorycontext of Russian deal-making. Deals for Middle Easternassets held up compared to most other territories althoughthey represent a small share of worldwide value given thelargely sovereign or state ownership structures in the region.

Source: PricewaterhouseCoopers, O&G Deals 2008 Annual Review

North America 2007 2008 % change

Value of deals (US$bn) 129.7 73.6 -43%

Number of deals 563 518 -8%

Europe 2007 2008 % change


Number of deals 78 126 +64%

Russian Federation 2007 2008 % change


Number of deals 41 33 -20%

International 2007 2008 % change



South America 2007 2008 % change



09

Figure 8: All transactions by continent by value of transactions – 2006-2007

Source: PricewaterhouseCoopers, O&G Deals 2008 Annual Review

2008 (total US$180.4bn) North America 41%

International 22%

Australia 10%

Europe 8%

Africa 3%

Russian Federation 7%

Middle East 2%

2007 (total US$292.2bn)

South America 4%

Asia Pacific 3%

North America 44%

International 26%

Australia 1%

Europe 6%

Africa 2%

Russian Federation 12%

Middle East 1%

South America 4%

Asia Pacific 4%

Africa 2007 2008 % change

Value of deals (US$bn) 5.2 6.2 +20%


Asia Pacific 2007 2008 % change



Australia 2007 2008 % change

Value of deals (US$bn) 2.6 17.2 +560%


Middle East 2007 2008 % change



10 Deal places: The Americas

The fall in North America O&G deal volumefrom its 2006 US$164.7bn high acceleratedsharply in 2008. Total deal value fell 43%,from US$129.7bn in 2007 to US$73.6bn in2008. Deal numbers were down by 8% butit was a halving of the number of bigtransactions that really hit total value. Therewere just 15 deals in 2008 worth US$1bnor above, for example, compared to 31 in2007. This alone accounted for US$49.4bnof the total US$56bn year-on-year fall intotal deal value.


Upstream activity experienced the smallest fall of all thesectors but still saw total value down by 27% (see Figure9). Between them, two companies – Chesapeake and XTO– accounted for US$22.4bn of the total US$59.6bnupstream deal value. The difference was that, while XTOwas on the acquisition trail with nine purchases in 2008totalling US$10.6bn, Chesapeake was a seller as itresponded to a closing of the debt markets. A series ofeight cash-raising deals yielded a total of US$11.8bn. Aswell as the sales to StatoilHydro and Plains Exploration (seepage 7), two further ‘US$1bn plus’ deals saw BP acquiretight gas assets from Chesapeake totalling US$3.65bn. Thecontrasting deal context was matched by their timing. Sixof the nine XTO purchases were made in the first half of theyear as the oil price remained buoyant while all but two ofChesapeake’s sales came in the second half of the year asthe financial market deterioration intensified and commodityprices collapsed.

Figure 9: North America oil and gas deals by sector – 2007-2008

2008 2008 2007 2008Value % share Number Value Year on year % change

Upstream 59.6 81% 404 81.2 -27%

Midstream 5.7 8% 28 19.4 -71%

Downstream 2.7 4% 21 6.2 -56%

Services 5.6 8% 65 22.9 -75%

Total US$73.6bn US$129.7bn -43%


Figure 10: South America oil and gas deals by sector – 2007-2008


Upstream 4.3 53% 36 5.6 -23%

Midstream 0.2 3% 1 0.7 -66%

Downstream 2.6 32% 8 3.1 -15%

Services 1.0 12% 3 2.0 -53%


11

The largest XTO transaction was the US$4.2bn acquisition of HuntPetroleum and associated entities. The deal gives XTO anestimated 1.05 trillion cubic feet of gas equivalent in East Texas,Louisiana, the Gulf Coast and non-operating assets in the NorthSea. Hunt is an 80-year private company founded by legendarywildcatter, the late Haroldson Lafayette Hunt. The Hunt sale wasthe second largest North American deal after the Royal DutchShell’s US$5.8bn Duvernay purchase (see page 6). It was a sign ofstraitened debt market conditions that these were the only twocorporate deals among the five largest North American O&G deals.The remaining three transactions were the Chesapeake asset salesand, indeed, 2008 was a year in which asset deals were much morecommon. Moves by foreign buyers for North American assetscontinued to catch the eye in 2008 with the Shell, BP andStatoilHydro purchases accounting for three of the five biggestNorth American deals.

Deals outside of the upstream sector were down very sharply withtotal value shrinking by more than a half of its 2007 level in the caseof the downstream sector. The fall was even greater in themidstream and service sectors – total deal value in both sectorsplummeted to around a quarter of 2007 totals. One of the moststriking contrasts with the preceding years was the relative absenceof service sector plays. The services sector had attracted investorsas demand for services grew but anticipation of reduced demandhas dampened sentiment. Oilfield services deals had leapt fromUS$5.9bn in 2006 to US$22.9bn in 2007 with four suchtransactions among the 12 largest 2007 North American deals. Onlyone service sector deal – Precision Drilling Trust’s US$1.6bnacquisition of drilling rig assets from Grey Wolf – featured so high in2008.

South America followed the trend elsewhere of declining O&G dealvalue (see Figure 10). Deal-making in 2008 tended to beconcentrated in countries such as Brazil, Columbia and Chilewhich, unlike countries such as Venezuela, are more open tomodernisation and internationalisation. The largest deal wasNorwegian company StatoilHydro’s US$2.1bn purchase of the half-share it did not own in Peregrino, a heavy oil field in Brazil, and25% of the deep water Kaskida discovery in the Gulf of Mexico,from US company Anadarko Petroleum. The deal reflected intenseinterest in the growth of the upstream industry in Brazil but alsostood out in a year when there was less international activity in theregion.

The other major deal sector was in the downstream sector wherethere has been a trend for local companies to take over distributionnetworks from the majors. The second largest deal continued thistrend with Brazilian sugar and ethanol producer Cosan SA Indústriae Coméricio buying ExxonMobil’s Brazilian fuel distribution unit,Esso Brasileira de Petroleo, for US$954 million. The deal was thefirst big investment by a sugar and ethanol producer in retail fueldistribution. Looking ahead, the low oil price will put pressure onthe cost base of many of the national oil companies and addrenewed momentum to the role of international companies.

One of the most strikingcontrasts with the precedingyears was the relative absence of service sector deals.

Acquisitions of companies with differentreporting standards

The US Securities & Exchange Commission (SEC)published its ‘Roadmap for the Potential Use ofFinancial Statements Prepared in Accordance withInternational Financial Reporting Standards (IFRS)by US Issuers’ in November 2008. Its releaseappears to move US financial reporting one stepcloser to the adoption of IFRS.

The exclusive use of IFRS by all public companieswill help to improve the efficiency of cross-bordertransactions. However, until the use of IFRS for USissuers is adopted, differences between IFRS andUS GAAP could have significant impacts on thetiming and completion of cross-bordertransactions involving both US GAAP and IFRSfinancial reporting.

Companies contemplating acquisitions of entitieswho report under a different accounting standardhave many issues to consider. These include:

• Compliance with SEC regulations related to calculating the ‘significance’ of an acquired entity that previously reported under IFRS, preparing pro forma information related to the acquisition, ongoing reporting related to equity affiliates using IFRS, and the ability to meet quarterly and other periodic SEC reporting requirements;

• The level of IFRS knowledge in the US. Currently, accounting and operational personnel at US-based companies are likely to only have avery limited understanding of IFRS. Thus, immediate pre- and post-acquisition IFRS training may be necessary to complete the acquisition and properly report results of an acquired entity that previously reported under US GAAP that now reports under IFRS;

• Significant information systems modifications may be required in order to capture both the additional and the different information required under IFRS or US GAAP and for internal management reporting;

• Depending on the structure or type of acquisition, an acquiring entity may be subject to dual reporting requirements subsequent to the acquisition. This dual reporting requirement may substantially complicate the post-acquisition integration activities and cost savings initiatives.

PricewaterhouseCoopers has a proven trackrecord helping companies successfully completemergers and acquisitions. Along with ourworldwide experience in the oil and gas industry,our specialists bring practical solutions to thetechnical accounting, information systems andchange management challenges inherent in suchcross-border transactions, regardless of whetherthe transaction relates to IFRS, US GAAP or both.

O&G deal dialogue:

12 Deal places: Europe

Oil and gas deal activity in Europe wasrelatively resilient compared to the big fallin volume elsewhere. Deal numbers rose64% from 77 to 126 and total deal valuewas down 15% compared to a 38% dropworldwide. Indeed, upstream andmidstream value was up (see Figure 11), onthe back of a series of deals for North Seaassets and Enbridge’s US$1.6bn sale of a25% stake in its Spanish pipeline business,Compania Logistica de Hidrocarburos.

Midstream deals of the size of the Enbridge sale are rare inEurope. This single deal was one of just four midstreamEuropean deals. It accounted for 85% of total Europeanmidstream deal value. The largest O&G deal in Europecame in the downstream sector with Russian companyLukoil acquiring a US$2.1bn 49% stake in a joint venturewith Italy’s ERG to operate the ISAB refinery complex inPriolo, Sicily. The transaction is a significant move by Lukoilas it seeks to develop its downstream operations inWestern Europe. According to the company, it increasedLukoil’s overall refining capacity by 13% and overseasrefining capacity by 60%.

While the eye-catching larger deals were in the midstreamand downstream, it was upstream plays where there wasthe biggest aggregate growth, adding US$3.1bn to reach atotal of US$7.5bn. The North Sea sector was very activewith a large number of mostly small swap agreements andincreased stakes being taken. The biggest upstream dealwas GDF Suez’s US$1.6bn purchase of a package ofassets situated along the NOGAT pipeline in the Dutchsection of the North Sea from Royal Dutch Shell andExxonMobil’s Dutch joint venture company, NederlandseAardolie Maatschappij (NAM). At the time of the deal GDFSuez reported that the purchase makes the company thelargest exploration and production operator in the Dutchsector of the North Sea. The company is Europe’s biggestbuyer of gas and the deal is a step upstream to securesupply against a background of continued uncertainty inEurope around imported Russian gas.


Figure 11: Europe oil and gas deals by sector – 2007-2008


Upstream 7.5 49% 86 4.6 +63%

Midstream 1.8 12% 4 0.3 +456%

Downstream 3.3 22% 18 8.4 -61%

Services 2.6 17% 18 4.7 -43%


13

The biggest deal in the European oilfield services sector wasNorwegian company BW Offshore’s US$989 million sale of a26.5% stake in its accommodation rig company Prosafe.Elsewhere in the European oilfield service sector, while dealnumbers remained comparable with the previous year’sactivity, the size of deals was sharply down. Only four 2008oilfield service deals topped the US$250 million markcompared with eight such transactions in 2007.

While the eye-catching largerdeals were in the midstream anddownstream, it was upstreamdeals where there was the biggestaggregate growth.

The impact of Foreign Corrupt Practices Act on transactions

Multinational energy companies findthemselves under increased scrutiny byfederal investigators intent on curbingviolations of the US Foreign CorruptPractices Act (FCPA). FCPA primarilyconcerns bribes given to public officials oremployees of companies in which agovernment has a significant stake.

It does not matter if the merger or acquisitionis an asset or stock transaction. If onecompany buys another company, the buyeracquires any problems that exist at theseller’s organisation. This has brought FCPAcompliance to the forefront of any acquisitionof an international company. Joint forensicand accounting investigations are becomingcommonplace due to deal pressures and theneed for transparency. It is no longer enoughto study the financial statements whenmaking a deal – most underlying transactionsthat violate FCPA regulations involve smalldollar amounts.

Key areas of focus that should beconsidered when assessing the risk of non-compliance of the FCPA include:

• Geographic location• Countries with a low Corruption

Perception Index (CPI) are at higher risk for non-compliance

• Management at the target company• Culture• Centralised vs. decentralised structure• Bookkeeping sophistication• Third-party agents• Remember “they are you … and their

actions are your actions.”• Target customer base• Key decision makers• State-owned enterprises

The increased focus on FCPA-based duediligence is making it more common forAmerican companies to walk away frompotential international acquisitions.PricewaterhouseCoopers has aninternational network of Transaction Servicesspecialists available to assist companies withfinancial and forensic due diligenceassessments.

O&G deal dialogue:

14 Deal places: The Russian Federation

Deal activity was far more subdued in theRussian Federation in 2008 with dealnumbers down to 33 from 41 the previousyear. It was deal values, though, that sawthe bigger drop, falling by around two-thirdsacross all the main deal activity sectors (see Figure 12).

Not surprisingly, the vast majority, 82%, of the region’sO&G deal value was in the upstream sector. This wassignificantly higher than the 62% upstream shareworldwide outside the region. The remainder of Russianand CIS deal activity was split evenly between themidstream and downstream with only one service sectordeal. The big year-on-year fall in activity was primarilyattributable to the impact on the 2007 deals of therestructuring of the Russian energy industry. There was noequivalent in 2008 of the large transactions seen followingthe break-up of Yukos’ assets.


Figure 12: Russian Federation oil and gas deals by sector – 2007-2008


Upstream 10.0 82% 23 29.6 -66%

Midstream 1.1 9% 3 3.2 -65%

Downstream 1.1 9% 6 2.8 -61%

Services 0 0% 1 0.1 -84%


Deal activity fell sharply reflectingthe near-completion of therestructuring of the Russianenergy market.

15

The largest 2008 O&G deal in the Russian Federation –Gazprom’s US$2.6bn acquisition of E.ON Ruhrgas’s49% stake in the Russian company ZAO Gerosgaz –was the outcome of a step up in European-Russianenergy reciprocity. In October 2008, Gazprom andGerman power utility E.ON signed a major gasexploration deal. The geo-political context of European-Russian energy was highlighted by the fact that the dealfollowed talks between German chancellor AngelaMerkel and Dmitry Medvedev, Russia’s president. E.ONreceived a 25% stake (minus one share) in Yuzhno-Russkoye, a Siberian field and one of the world’s largestgas reserves. In return it gave up almost half (3%) of its6.5% stake in Gazprom through the sale of its share inGerosgaz, which holds shares in Gazprom.

The second largest deal was a US$2.2bn takeover ofFTSE-listed Imperial Energy by ONGC Videsh, theforeign investment arm of the Indian state oil company.The deal gives ONGC a presence in the Tomsk region ofwestern Siberia, one of the world’s largest oil and gasproducing regions.

A year of climate change policy initiatives

Although carbon risks are rarely a significantfactor in oil & gas deals today, emergingclimate regulation is likely to change this. 2009 is set to be a milestone year for climatepolicy, whether at the international, regionalor national level. In December, governmentsmeet in Copenhagen, aiming to concludenegotiations of a new climate deal tosucceed the Kyoto Protocol. The EU isexpected to propose mechanisms toachieve the carbon and energy goals agreedin 2008 and some federal climate legislationis anticipated in the US. Carbon is anincreasingly strategic concern, not least forthe oil and gas sector.

As the world slowly develops a patchwork ofcarbon regulation including taxes, standardsand potentially linked cap-and-tradeprogrammes, companies will need toconsider how to account for carbon in deals.Currently there is no international standardor agreed protocol on how to do this.Companies are starting to develop their owninternal competencies and processes butthese are still evolving. The in-house HSEspecialists in M&A teams that onceconcerned themselves with traditionalenvironmental liabilities, issues such as soiland groundwater contamination, are nowbeing asked to build carbon into theiranalysis. Leading companies are stresstesting projects and acquisitions with highcarbon prices over the short-term and long-term. But these practices are not consistentor common.

Post-Copenhagen, it is likely investors willstart asking more questions of companies.While carbon only has a marginal impact onthe sector’s investment decisions today, themarket will expect increasingly sophisticatedtreatment of carbon in deals, particularlythose with a mega carbon aspect – such ascoal-to-liquids or oil sands projects. Whetheryour company is considering a transaction,joint venture agreement, production sharingagreement, divestiture or organic expansion,PricewaterhouseCoopers brings together aglobal team with appropriate industryexperience and skills on carbon and climatechange, including functional and technicalspecialists.

O&G deal dialogue:

Gazprom and E.ON’s activity steps up European-Russian energy reciprocity.

16 Deal places: Asia Pacific

2008 deal value in the Asia Pacific regionshot up by 73%, from US$13.2bn in 2007to US$22.7bn in 2008. The dramatic rise indeal volume was almost wholly driven bydeals to acquire Australian gas assets.Australia’s share of total Asia Pacific O&Gdeal value rose from just 20% in 2007 to75% in 2008.

The three largest deals – ConocoPhillips/Origin, BGGroup/Queensland Gas Company and Petronas/Santos –together accounted for US$10.8bn of deal value. The firsttwo are discussed on page 7. In the third deal, Malaysianstate-owned energy group Petronas acquired a 40%interest in the proposed Gladstone LNG project fromSantos for US$2.0bn in cash. The deal included a furtherpayment of up to US$0.5bn subject to final investmentdecision approval for a second LNG train. The finalinvestment decision is expected by the end of 2009 withthe project’s first LNG cargoes planned for 2014. Thestrategic fit is very similar to the ConocoPhillips/Origin andBG Group/Queensland Gas Company deals with Petronasutilising its LNG technical and shipping expertise whileSantos focuses on upstream exploration and extraction.



Figure 13: Asia Pacific (excluding Australia) oil and gas deals by sector – 2007-2008


Upstream 2.6 46% 28 2.0 +26%

Midstream 0 0% 1 0.9 -99%

Downstream 1.4 25% 14 7.1 -80%

Services 1.6 29% 9 0.6 +179%


Figure 14: Australia oil and gas deals by sector – 2007-2008


Upstream 16.6 97% 45 1.7 +851%

Midstream 0.6 3% 2 0.6 -8%

Downstream 0 0% 1 0.1 -100%

Services 0 0% 2 0.2 -79%


17

Further down the deal scale in Australia, there was aconsiderable amount of activity among smaller coalseam methane companies seeking to bulk up and, inturn, increase their asset attractiveness. Significantcritical mass is needed to develop LNG operations, thusleading to much scope for consolidation among smallerentities and buy-outs by larger entities. Queensland GasCompany, for example, acquired coal bed methanecompany Sunshine Gas in a US$0.7bn friendly deal.Arrow Energy teamed up with Royal Dutch Shell tojointly develop Arrow’s Australian and international coalseam gas projects in a US$0.4bn deal.

2008 also saw an increase in consolidation of oil assetsamong medium sized companies. These included theUS$0.6bn merger between Roc Oil and Anzon, andAustralian Worldwide Exploration’s (AWE) purchase ofArc Energy in a US$0.5bn cash and stock offer. Inboundinterest in Australian oil and gas assets was not confinedto the big coal bed methane deals. Sinopec InternationalPetroleum Exploration and Production Corporation(SIPC), a wholly owned subsidiary of ChinaPetrochemical Corporation (Sinopec), acquired a 60%joint venture interest in the licenses containing the Puffinand Talbot offshore oilfields in a US$0.6bn deal withAED Oil.

Deal activity in the wider Asia Pacific region was verysubdued. The largest deal came in the services sectorwhen MISC, the shipping unit of Malaysian state energygroup Petronas, merged its shipbuilding business withoil services company Ramunia Holdings in a US$977million transaction. The deal will allow the merged entityto compete more effectively in a competitive regionaloilfield service market. A second notable Asia Pacificdeal saw Abu Dhabi investment company, MubadalaDevelopment, acquire Pearl Energy, itself owned by anAbu Dhabi-based company (Aabar), for US$833 million.Pearl’s oil production operations are located in Indonesiaand the Gulf of Thailand.

The importance of synergy costreduction in today’s environment

Traditionally, in the majority of transactions,significantly more earnings growth is drivenfrom the core business than from synergies.Organic growth typically accounts for about70% of forecast profit growth with synergiesarising from the deal contributing 30%.However in the current environment of aUS$40 crude barrel, shrinking refinery margins,over-capacity in various oil & gas markets,capex projects authorised under differentmarket conditions and limited financeavailable, it is now exceptionally important tocapture the extra synergy value from atransaction.

Realising Legacy Synergy Value enables the identification and delivery of latent synergyvalue from previous acquisitions andintegrations. It is designed to identify andaddress a number of key issues affectingmany companies that have growninorganically. These include the identification of:

• Further shareholder value that has not been delivered from previous acquisition integrations;

• Further synergies available that would support current cash and EBIT targets;

• Areas of the business where the synergies were deemed too difficult to deliver for cultural, political or capability reasons;

• Non-fully integrated business functions with respect to resources (staffing and capability), processes and technology to maximise value; and

• Cultural implications that may be creating barriers to synergy delivery. How can these be overcome?

PricewaterhouseCoopers’ Legacy SynergyRealisation begins with a high-levelassessment of business functions wheretrapped synergies are most likely to existbased on our experience of previous synergyreviews and merger integrations in specificindustries. We provide recommendationsbased on our extensive experience of synergyassessments and acquisition integration toidentify and quantify the additional synergyvalue trapped within acquired/mergedbusinesses.

We focus on identifying and capturing easy todeliver synergies without the need for complexchanges to the operating model. Leveragingour core capabilities of industry insight and theexperience of our people, we workcollaboratively with our clients to tailor ourmethodology to agree an optimum approachto planning and delivering the synergies.

O&G deal dialogue:

Inbound interest in Australian oil andgas assets was not confined to thebig coal bed methane deals.

18 Deal places: International and the rest of the world

International activity, involving eitherinternational groups of investors orassets that are spread across territories,remained lively in 2008. Deal numbersedged up from 71 in 2007 to 79 in 2008although, as elsewhere, none of thedeals compared with the largest 2007deals. Forty-nine of the 71 internationaldeals were in the oilfield services sectorwhere consolidation continued apace,albeit at lower absolute values than in2007, ahead of the oil price drop.


Figure 15: International oil and gas deals by sector – 2007-2008


Upstream 5.5 14% 15 3.9 +42%

Midstream 3.4 9% 12 4.3 -20%

Downstream 5.2 13% 3 31.6 -83%

Services 25.0 64% 49 36.1 -31%


The fall in international deal value – from US$75.8 bn in2007 to US$39.1bn in 2008 – stemmed from thedisappearance of very large deals. In 2007, four deals alone– for Lyondell, GlobalSantaFe, Huntsman and GrantPrideco – together accounted for US$53.7bn of deal value.In contrast in 2008, the four largest International deals –bids by BASF, China Oilfield Services, Alpinvest and aconsortium of investors, and Smith International – totalledUS$15bn. The largest of these, BASF’s US$4.7bn purchaseof Ciba, is discussed on page 7.

The second largest international deal saw China OilfieldServices, a subsidiary of the China National Offshore OilCorporation, join the wave of consolidation in the oilfieldservices sector as companies continued to move to acquirescarce service assets in a booming market. The companyacquired Norwegian rival Awilco Offshore in a US$3.8bndeal giving it extra drilling capacity and enabling it toexpand in international markets. The acquisition was ChinaOilfield’s first successful overseas purchase after it failed toseal a small deal for the Russian oil services business STUfrom TNK-BP.

Two other large international deals featured in the top tenO&G deals in 2008. The wave of oilfield servicesconsolidation included Halliburton competing in a hard-fought contest with a consortium of private equitybidders for UK oilfield services company ExproInternational. Expro decided to go with the US$3.7bnprivate equity bid led by Candover Investments withAlpInvest Partners, JC Flowers and the Goldman SachsGroup. A fourth large international deal again highlightedthe continued first half year activity in oilfield services asSmith International and W-H Energy Services combinedtogether in a US$2.8bn merger agreement. SmithInternational said the deal would give it entry intodirectional drilling services, one of the oilfield serviceindustry’s fastest growing markets. Directional drilling isused to reach oil under areas that are ecologically sensitiveor where traditional forms of drilling are not feasible.

19

Elsewhere in the world, there was an increase in Africandeal value headed by GEPetrol’s US$2.2bn purchase ofDevon Energy’s oil and gas business in EquatorialGuinea (see page 8). Italian oil and gas company Eniadded to its already substantial oil and gas operations inAfrica in two separate deals. In the largest, it expandedits operations in Algeria in a US$995 million purchase ofFirst Calgary. Earlier in the year, ENI acquired Shell’sstakes in two offshore Nigeria blocks for US$626 million.In the Middle East, the big surge in upstream valuecame from Sinopec International Petroleum Explorationand Production Corporation’s US$1.8bn purchase of Calgary-based Tanganyika Oil giving it access toTanganyika’s exploration and production assets in Syria and Egypt.



Figure 16: Africa oil and gas deals by sector – 2007-2008


Upstream 5.8 93% 47 4.0 +44.5%

Midstream 0.0 0% - 0.5 -100%

Downstream 0.5 7% 5 0.2 +185%

Services 0.0 0% - 0.6 -100%

Total US$6.2bn US$5.2bn +19.5%

Figure 17: Middle East oil and gas deals by sector – 2007-2008


Upstream 2.4 78% 6 0.7 +228%

Midstream 0.0 0% - 0.0 0%

Downstream 0.4 12% 2 2.3 -84%

Services 0.3 10% 3 0.2 +57%


20 Looking ahead

The immediate outlook is for O&G deal-making to be subdued. A triplebottom line of constrained debt markets,depressed equity prices and commodityprices looks set to stall significant deal-making in the early part of 2009 atleast. An opening of the equity marketswill be followed by the debt marketswhich will allow financing to becomeavailable. This in turn will allow the buyerand seller expectation gap in valuationto narrow, opening up deal negotiation.

Such easing, combined with somepositive movement in the oil price, islikely to herald a reawakening of dealactivity. The long-term energy supplyand demand fundamentals are stillcompelling. A change in confidencewould remind everyone that supplyconstraints remain and the potential fora fast revival in the oil price and deal-making is there.

Once target debt can be refinanced, the turnaround indeal momentum could happen quite fast. Even withoutfunding constraints being lifted, there are many playersin the sector with healthy balance sheets and healthyacquisition funds available. Many of the majors andnational oil companies are in a strong position followinga period of high commodity prices. For companies fromcountries such as China, the current market offersunrivalled opportunities to gain access which, in othercircumstances, would be denied to them. Similarly,sovereign wealth funds and many private equityinvestors will be watching the sector closely.

A sector environment with strong and weak players will,ultimately, be ripe for renewed deal momentum.Acquisitions are very compelling at current valuations.The larger upstream players will be able to bide theirtime if they choose, in the meantime concentrating ondrilling rather than acquisition-led growth. The outlook ismuch tougher for smaller exploration and productioncompanies who need M&A to show growth. Many willbecome targets. A similar dynamic lies ahead betweenthe larger and smaller players in the oilfield servicessector.

While deal activity in the first half of the year is likely toremain low, it is difficult to see stronger playersremaining on the sidelines for the whole of 2009 giventhe opportunities for acquisitions at low valuations.Deals for major assets in locations such as Brazil andCanada, with access to end markets and promisingreserve potential, are likely to be high on manycompanies’ target screens. In the US, the opportunity toaccess the natural gas shale plays is also verycompelling at these valuation levels.

There is also the potential for secondary deals to fall outfrom transactions made at stretched valuations at orclose to the top of the market as companies are forcedto ease balance sheet pressure. Finally, companiesseeking to broaden their portfolios into alternativeenergy may also find that distress and low valuations inalternative energy stocks offer a ripe opportunity fordiversification moves. The appetite for moves of thiskind will, in part, be influenced by the progress of talksin the run-up to and at the December 2009 UN ClimateSummit and the extent to which this establishes aframework for clean energy.

21

Rick RobergeUS Energy Transaction ServicesTelephone: +1 713 356 8285Email: [email protected]

Mike CollierUS Energy Transaction ServicesTelephone: +1 713 356 8133Email: [email protected]

Michael HurleyGlobal Energy, Utilities & Mining Telephone: +44 207 804 4465Email: [email protected]

Tony SkrzypeckiUK Energy Transaction ServicesTelephone: + 44 20 7804 550Email: [email protected]

Neil LeppardUK Transaction ServicesTelephone: +44 20 7804 3168Email: [email protected]

Global O&G Deals Team

Territory Contacts

PolandOlga GrygierTelephone: +48 22 523 4000Email: [email protected]

Russia & Central and Eastern EuropeDave GrayTelephone: +7 495 967-6311 Email: [email protected]

SingaporeOng Chao ChoonTelephone +65 6236 3018Email: [email protected]

Sanjeev V GuptaTelephone +65 6236 4053Email: [email protected]

SpainGonzalo Sanchez MartinezTelephone: +34 946 022 534Email: [email protected]

SwedenLars Tvede-JensenTelephone: +46 8 555 33 403Email: [email protected]

SwitzerlandRalf SchlaepferTelephone: +41 58 792 1620Email: [email protected]

TurkeyFaruk SabuncuTelephone: +90 212 326 6082Email: [email protected]

United KingdomRoss HunterTelephone: +44 20 7804 4326Email: [email protected]

United StatesRichard PatersonTelephone: +1 713 356 5579Email: [email protected]

GreeceSocrates Leptis-BourgiTelephone: +30 210 687 4693Email: [email protected]

IndiaKameswara RaoTelephone: +91 40 233 00 750Email: [email protected]

IrelandAnn O’ConnellTelephone: +353 1 792 8512Email: [email protected]

ItalyJohn McQuistonTelephone: +390 6 570 25 2439Email: [email protected]

Latin AmericaJorge BacherTelephone: +54 11 5811 6952Email: [email protected]

Middle EastPaul SuddabyTelephone: +968 563 717 122Email: [email protected]

NetherlandsFred KoningsTelephone: +31 70 342 6150Email: [email protected]

New ZealandCraig RiceTelephone: +64 9 355 8641Email: [email protected]

NorwayOle Schei MartinsenTelephone: +47 95 261 162Email: [email protected]

AfricaElias PungongTelephone: +241 77 2335Email: [email protected]

AustralasiaNick HenryTelephone: +61 8 9238 3475Email: [email protected]

AustriaBernhard HaiderTelephone: +43 1 501 88 2900Email: [email protected]

CanadaJohn WilliamsonTelephone: +1 403 509 7507Email: [email protected]

ChinaGavin ChuiTelephone: +86 10 6533 2188Email: [email protected]

DenmarkPer TimmermannTelephone: +45 39 459 145Email: [email protected]

FinlandMauri HätönenTelephone: +358 9 2280 1946Email: [email protected]

FrancePhilippe GiraultTelephone: +33 1 5657 8897Email: [email protected]

GermanyManfred WiegandTelephone: +49 201 438 1517Email: [email protected]

David LewisAustralia TaxTelephone: + 61 8 9238 3336Email: [email protected]

John MullinsUS Energy Transaction ServicesTelephone: + 1 713 356 4078Email: [email protected]

Charlotte RhodesUK Strategy AnalystTelephone: + 44 207 213 1642Email: [email protected]

Annette C. MorganGlobal Energy Marketing DirectorTelephone: +1 713 356 6561Email: [email protected]

Contact us

Igor LotakovRussia Energy Transaction ServicesTelephone: + 7 495 967 6314Email: [email protected]

Elias PungongAfrica Territory Advisory & Assurance LeaderTelephone: + 241 772335Email: [email protected]

Jorge BacherSOACAT Energy, Utilities & Mining LeaderTelephone: + 5411 4850 6814Email: [email protected]

Michael HappellAustralia Energy LeaderTelephone: + 61 3 8603 6016Email: [email protected]

Nick Henry Australia AssuranceTelephone: + 61 8 9238 3475 Email: [email protected]

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Industries Energy, Utilities & Mining O&G Deals* · O&G Deals includes analysis of all global cross-border and domestic oil and gas deal activity. It is based on published transactions