From scarcity to abundance
Oil and gas transactions in review 2014 – Canada
We believe that a structural shift is underway in the oil and gas business as the industry transitions from a “resource scarcity” model to a “resource abundance” model.
For the Canadian industry, three key implications result from this structural shift:
- Costs matter – In a “resource abundance” world, future commodity prices will not preserve or rescue high-cost projects as the industry grapples with structural cost pressures. Capital-intensive unconventional resource development, increasing regulatory and environmental costs, and the growing technology and service costs of unlocking abundant yet complex plays will drive new business models and a renewed focus on operational excellence resulting in a bifurcation of winners and losers – those able to adapt and those who fail to adjust.
- Globalization – The global nature of the industry continues to change. Growing unconventional production has challenged old market dynamics, with new competition at a global level (for example, liquefied natural gas (LNG) can be viewed as an effort to globalize the Canadian natural gas business). Capital continues to flow to projects with little regard for borders, while players continue to evolve strategies and structures in ways to best address and succeed in the global energy marketplace.
- Innovation – Essential to realizing the massive resource potential of the Canadian industry, innovation — in technology, business processes, structures, operating and funding models — will be required to offset high structural costs (e.g., the oil sands and unconventional plays). Innovation will be a key driver of success.
In many ways, transaction activity in 2014 in Canada and involving Canadian companies reflected reactions to the implications of the structural shift currently underway with executives and investors trying to reposition their companies and capitalize on emerging opportunities.
Supported by a host of significant transformative business transactions, favourable commodity prices and strong capital markets in early 2014, aggregate Canadian transaction levels (excluding oilfield services) grew significantly in total dollar terms in 2014. The total deal value of US$42.2 billion in 2014 was more than three times the 2013 total of US$14.0 billion.
Despite these robust transaction figures, total publicly announced transactions completed in Canada in 2014 continued a downward trend, declining 17% compared to 2013 (with 281 deals vs. 337 deals). Some of this decline in completed transactions is likely attributable to lingering sector uncertainties at the start of the year, coupled with a pronounced decline in overall transaction activity in the final months of 2014 as the oil price collapse took hold.