Clifford Chance

Oil and gas sector respondents remain focused on emerging markets despite attendant risks

New survey published by Clifford Chance identifies top drivers and risks for growth through M&A across an increasingly complex global landscape

More than half (58%) of oil and gas sector respondents to a new survey of large global companies, Cross-border M&A: Perspectives on a changing world, published by Clifford Chance, indicates that the focus of their M&A strategy is on emerging/high-growth economies as opposed to domestic (14%) and global developed markets (29%).

The research, which was conducted by the Economist Intelligent Unit on behalf of Clifford Chance, surveyed nearly 400 companies with annual revenues in excess of US$1 billion from across a range of regions and industry sectors, including the oil and gas sector. 

A number of significant themes around the risks and challenges of embarking on opportunities in emerging/high growth markets emerge from the survey findings:

• Resource nationalism - 38% of respondents from the oil and gas industry express a greater concern regarding protectionism and obstacles to foreign ownership than other industries, reflecting the industry-wide concern as to how to respond to rising resource nationalism in many countries. Such concerns are no doubt fuelled by examples over recent years of outright state expropriation of foreign owned oil and gas assets, such as the announcement in April this year of the re-nationalisation of YPF, the largest oil company in Argentina, ousting the majority owner, Spain's Repsol. Leaving aside outright expropriation, foreign investors often encounter legal and regulatory barriers either explicitly or implicitly designed to restrict the nature and scope of overseas investment in prized oil and gas resources of certain nations.
• Bridging cultural divides – it is apparent from the survey that respondents from the oil and gas sector are becoming increasingly focused on the necessity to bridge cultural divides between foreign shareholders and management, employees, local partners and/or government when pursuing deals in the emerging/high growth markets. Interestingly, our research indicates that the extent to which respondents perceive cultural differences as "critical", varies from region to region. 53% of respondents from the Asia Pacific region consider that cultural differences are a deterrent to pursuing cross-border deals. By contrast, 45% of European respondents do, suggesting that European investors may be more familiar with negotiating the dynamics of post-deal integration.
• Environmental risks – 23% of respondents in the oil and gas sector placed environmental laws and issues in their top three risk factors when conducting cross-border M&A. With the legal and economic consequences of BP's 2010 Gulf of Mexico spill still being played out, and Spring 2012 seeing another high profile gas leak in the North Sea at Total's Elgin platform, it is not surprising that the respondents identified environmental laws as presenting a particular challenge to cross-border M&A.
• Joint ventures to manage risk – respondents in the oil and gas sector are placing more importance on partnering with co-investors than in previous years. 49% of respondents name joint ventures as one of the top three deal structures they would be most likely to pursue now in cross-border transactions, compared with 39% two years ago. A rise in the use of joint ventures is reported by respondents to correspond with a drop-off in “traditional” M&A, and also in partnering with financial institutions, compared with 2 years ago.  With an emphasis on joint ventures comes a focus on negotiating the terms of an on-going relationship with the appropriate partner, be that a local player or a multinational. Potential acquirers are also often looking to mitigate political risk by engaging with key stakeholders (including regulators and politicians) prior to announcing any deal.

Commenting on the results of the survey on the oil & gas sector, M&A partner David Lewis at Clifford Chance said: “Given the scarcity of resources in developed nations (the recent shale gas boom in North America aside), investors in the oil and gas industry are continuing to seek opportunities through M&A in emerging markets. With such deals can come significant country risk (such as resource nationalism), and it is unsurprising that investors are focusing on ways to mitigate this including via partnering.