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Tue 19 Feb 2008 12:10 PM

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Pure purchasing power

Overall merger and acquistion levels in the oil and gas industry held up throughout 2007, despite the impact of the credit crunch.

In 2007 mergers and acquisitions in the oil and gas sector fell just shy of $300 billion dollars.

This year, largely free from the constraints of the global credit crunch, Middle Eastern national oil companies and sovereign funds are in a fantastic position to swoop on major assets outside the region.

Indeed, with energy prices remaining high, many oilfield service and downstream sector companies are growing rapidly, and these companies worldwide may look to the Middle East to cash in on their recent success.

Overall M&A levels in the oil and gas industry held up throughout 2007 despite the impact of the credit crunch. The latest edition of annual analysis of M&A activity in the sector by PricewaterhouseCoopers, ‘O&G Deals', shows deal totals edging up slightly, from $291.1bn to $292.2bn year on year.

‘O&G Deals' anticipates that highly leveraged deals will become more difficult in the sector as the credit crunch takes effect. However, while the wider financial and economic environment will be less predictable, the report points to a range of factors that will continue to drive deal activity.

The report rightly highlights the fact that national oil companies will continue to use their strength to look for international investment opportunities, and suggests Middle Eastern investors will remain active deal makers.

Recently, Abu Dhabi National Energy Company, known as TAQA, confirmed its record preliminary results for 2007. The company's profits grew by 107%, and crucially, following a series of significant buyouts in the US, Canada, and many closer to home, the company grew its total assets by 30% to reach $18.5 billion in 2007. In the fourth quarter of last year the Saudi State-controlled Sabic staked it's claim towards international hegemony with its massive $11.6 billion acquisition of GE's plastics unit.

Super-majors continue to be relative M&A absentees with the dominance of the national oil companies (NOCs) constraining the use of M&A as a reserve replacement strategy.

"This phase of service sector consolidation and oilfield service companies' reach for global scale has a long way to run. Ultimately, logic points to a small number of large global oilfield services players that will be akin to the majors in the integrated sector," Rick Roberge, US energy transaction services leader, PricewaterhouseCoopers.

With revenues high, and business booming for Middle Eastern players the major deals of 2007 may act as a springboard to much wider foreign investments this year. The position of Middle Eastern sovereign funds in Abu Dhabi, Saudi Arabia, Qatar, and Kuwait, and the strength of the NOCs going into 2008 means regional entities have real purchasing power as Western sources of finance reel from last year's performance.

With energy requirements growing and record prices being paid to the companies that can deliver and service its production, it seems the region has never been in a better position to swoop on upstream and downstream assets that will bolster the Middle Eastern oil and gas sectors way beyond the resources they sit on.

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