According to market research, global upstream oil and gas M&A (upstream M&A activity) in 2010 totaled a record US$211 billion. That amount was 42 per cent greater than 2009 and 85 per cent greater than 2008.  

Industry experts project that upstream M&A activity in 2011 will continue 2010’s record-setting momentum as current market conditions present a wealth of opportunities for buyers and sellers to exploit. In this article, we will identify two trends that emerged in upstream M&A activity in 2010.

Shift from Unconventional Natural Gas to Unconventional Liquids

In 2010, US onshore oil production increased over the previous year, reversing a 30 year trend of declining oil production. The increase was largely attributed to oil and natural gas liquids production from complex geological shale-rock formations (unconventional liquids) as contrasted with previous production cycles which focused on production from cheaper and easier to produce conventional oilfields. As recently as 10 years ago, unconventional liquids were viewed by industry experts as too difficult to develop.  

Industry experts project that unconventional liquids production can reach 1.5 million barrels a day by 2015 from less than 500,000 barrels today. That amount is comparable to the amount of oil currently produced offshore in the Gulf of Mexico and is roughly equal to 30 per cent of current US production. The unconventional liquids boom is the product of two factors — advanced drilling technology and high oil prices.  

Horizontal drilling and hydraulic fracturing technology allow producers to retrieve oil and natural gas liquids trapped in complex shale-rock formations by breaking open the rocks at specific points and collecting the hydrocarbons contained inside. These technologies have become popular over the last five years among production companies to retrieve natural gas trapped in complex shale-rock formations (unconventional natural gas). In 2010, 17 per cent of the US’s natural gas production came from shale-rock, up from 1 per cent in 2000, and is projected to rise to 35 per cent in 2020.  

In early March 2011, North American crude traded over US$100 a barrel. According to industry experts, many leading unconventional liquids projects are profitable at prices under US$50, so many unconventional liquids projects will now provide high rates of return.  

According to Wood Mackenzie, in 2010, US unconventional natural gas acquisitions accounted for US$39 billion or 21 per cent of global upstream M&A activity and US unconventional liquids acquisitions accounted for US$15 billion or 8 per cent of global upstream M&A activity. For 2011, industry experts predict that, due to weak natural gas prices, a significant segment of upstream M&A activity will shift from unconventional natural gas to unconventional liquids.

Aggressive Purchasing by National Oil Companies in the Americas

As recently as 2007, national oil companies (NOCs) — such as CNOOC, Petrochina and Sinopec in China, the Korean National Oil Co. and KOGAS in South Korea, Petronas in Malaysia, Reliance Industries and ONGC in India, and Mitsubishi, Mitsui and Sumitomo in Japan — were small players in the upstream M&A market accounting for only 1 percent of upstream M&A activity. However, NOC upstream M&A activity has grown every year over the last six years. Today, NOCs have emerged as market major players.

In 2010, NOCs, primarily Chinese NOCs, had upstream M&A activity that totaled $40 billion or 19 percent of the world total. South America and Canada were the main targets of NOC upstream M&A activity in 2010. In South America, the second biggest upstream M&A market in 2010, Chinese NOCs accounted for four of the top five deals in 2010. Industry experts predict that aggressive NOC acquisitions will remain a key theme in upstream M&A in 2011. Industry experts speculate that the catalysts for increased Chinese NOC acquisitions are: (1) energy security; (2) to hedge against inflation; (3) a desire to acquire to diversify away from cash to hard assets; and (4) Chinese NOCs’ desire to behave like international supermajor oil companies by increasing oil and gas reserves and production and increasing shareholder value. Additional factors for NOC acquisitions include their focus on long-term central planning for future needs and their desire to learn horizontal drilling and hydraulic fracturing technologies.

Major upstream acquisitions by NOCs in 2010 in the Americas included:

  • Sinopec buying a 40 per cent stake in Repsol Brazil for US$7.1 billion and gaining access to Brazilian offshore pre-salt reserve assets  
  • Bridas Corp. (50 per cent owned by CNOOC) buying a 60 per cent stake in Pan American Energy, the second biggest oil and gas producer in Argentina for US$7 billion  
  • Sinopec buying a 9 per cent stake in Syncrude Canada, a major producer in the Canadian oilsands for US$4.65 billion  
  • Sinopec buying Occidental Petroleum Corp.’s Argentinean upstream assets for US$2.5 billion  
  • CNOOC buying a 33 per cent stake in Chesapeake Energy Corp.’s US Eagle Ford Shale assets for US$1.08 billion in cash and US$1.08 billion in drilling carries through 2012  


The year 2010 was an exciting year for upstream oil and gas M&A. The potential for another recordsetting year in 2011 remains high and the market promises to remain vibrant as both PLS, Inc. and Wood Mackenzie predict that upstream M&A activity in 2011 will continue 2010’s strong pace. In 2011, upstream M&A activity will likely continue shifting from unconventional natural gas to unconventional liquids as US natural gas prices remain depressed, North American oil prices remain high, and unconventional liquids projects provide higher rates of return. In 2011, NOC upstream acquisitions will likely continue at 2010’s aggressive pace as NOC acquisitions will be driven by several factors, all of which indicate that oil and gas assets at current prices are attractive.