Oil and gas activity rebounds in 2Q

If global merger and acquisition deal counts are any indication, oil and gas activity is on the rebound. IHS Herold reports the upstream M&A deal count nearly doubled in the second quarter of this year from a 10-year low in the first quarter. The dramatic improvement was spurred by a resurgence in oil prices and a thaw in equity and credit markets, according to the Norwalk, Conn.-based research and consulting firm. IHS Herold (formerly John S. Herold) focuses on valuation, strategy, and performance measurement of the world’s leading oil and gas companies.

“Both US onshore and international deal counts increased significantly, although North American activity remained well below historical averages,” said Chris Sheehan, IHS Herold director of M&A research. “International pricing for proved plus probable reserves held firm on stronger crude oil prices (currently $67/bbl at press time), but falling gas prices plunged North American asset deal prices to the lowest level since 2005.”

Sheehan continued, “The upsurge in activity in the second quarter is encouraging, but the market is still extremely volatile.” He added that IHS Herold will provide detailed insights into the outlook for upstream M&A at its upcoming 18th annual Pacesetters Energy Conference in Greenwich, Conn., Sept. 22-24.

Herold reported that second quarter 2009 total transaction value increased four-fold outside North America, driven by strong activity in the Africa/Middle East region and upturns in Europe and Asia/Pacific. Total worldwide transaction value was flat at $28.4 billion, as first quarter 2009 figures were buttressed by the $20 billion Suncor/Petro-Canada merger. National oil companies represented nearly 40% of global deal value, including Sinopec’s $8.8 billion agreement to acquire Addax Petroleum, the largest overseas upstream transaction by a Chinese company to date.

There may be a silver lining in falling natural gas prices. The Edinburgh, Scotland-based research and consulting firm Wood Mackenzie says that lower domestic natural gas prices in the US are having a major impact on US coal. This has greatly increased the competition between coal and gas-fired power generating units.

“The combination of lower electricity demand and low gas prices, backed up by significant gas supply, have led coal markets into uncharted territory with excess supply and declining demand,” said Matt Preston, principal North America coal analyst for Wood Mackenzie.

Coal prices have boomed over the past two years and Central Appalachian producers struggled to increase production to meet demand, while those in the Powder River, Northern Appalachian, and Illinois basins were planning major expansion for 2009. However, due to the worldwide economic slowdown, low natural gas prices, and high stockpile levels, the industry has been forced to cut back dramatically, and Wood Mackenzie says it isn’t enough.

Adding to the problems for coal producers, the Obama administration’s environmental initiatives will certainly present an additional burden for them, especially if Congress passes a cap-and-trade bill, which President Obama has said he will sign.

Conventional wisdom is that bad news for the coal industry is generally good news for natural gas, which is widely viewed as a cleaner-burning alternative fuel for powering electricity generation. Nevertheless, Wood Mackenzie forecasts that domestic natural gas prices in the US will remain between $4 and $6/MMbtu until 2014.

Jobs lost in the coal industry could be replaced by job gains in the natural gas sector, according to a new study issued by Penn State University’s College of Earth & Mineral Sciences in late July. The Penn State report says that, in Pennsylvania alone, the deployment of hydraulic fracturing technology in the Marcellus Shale region generated more than $240 million in state and local taxes for Pennsylvania, created 29,000 good-paying jobs, and $2.3 billion in total economic development.

Among its key findings, the report found that each natural gas well drilled in the Marcellus region produced $6.2 million in economic impact, both for the state and to citizens directly. It also calculated that for every $1 that Marcellus shale gas producers spend to find and produce that gas, $1.94 of total economic output is generated.

The report points to hydraulic fracturing for making these resources and revenues possible. “This remarkable, almost unbelievable, increase in estimated [natural gas] reserves is due to technological advancements in horizontal drilling and …the implementation of hydrofracturing.”

“One hundred and fifty years after Pennsylvania gave us the world’s first commercial oil well, the critical work of finding and producing the energy our nation needs continues in the natural gas fields of Pennsylvania’s Marcellus Shale,” said Lee Fuller, the IPAA’s vice president of government relations. “All told, we’re talking about a resource that’s expected in 2009 to create 50,000 jobs in a single state.”

Doubtless that’s more jobs than cap-and-trade would create in Pennsylvania.