energies

Article Cross-Border Mergers and Acquisitions in the Oil and Gas Industry: An Overview

¸SevkatÖzgür * and Franz Wirl Faculty of Business, Economics and Statistics, University of Vienna, Oskar-Morgenstern-Platz 1, 1090 Vienna, Austria; [email protected] * Correspondence: [email protected]; Tel.: +43-664-838-5906 or +43-1-42770



Received: 24 September 2020; Accepted: 20 October 2020; Published: 26 October 2020


Abstract: This paper surveys cross-border oil and gas mergers and acquisitions (M&A) transactions in recent years using a large sample of 18,179 transactions announced over the period 2000–2018. M&A activities depend on economic fundamentals, but also on sector specifics and this particularly holds true for the oil and gas industry. Therefore, we have added sector specific to the standard economic explanations of mergers and acquisitions by accounting for institutions, resources, and politics. Indeed, our outputs show that industry-specific factors seem much more important in motivating M&A in the oil and gas industry than the familiar and researched economic conditions. In particular, the pattern of cross-border M&A is almost unrelated to opportunities offered by the resource base in different countries while political, institutional, and legal constraints shape the directions of cross-border M&A. The research covers the recent trends in the oil and gas M&A transactions, strengthens the understanding of various dynamics and sheds light on the potential future directions of the M&A market in the oil and gas industry.

Keywords: oil and gas industry; mergers and acquisitions; cross-border mergers and acquisitions; oil and gas investment; geographical patterns

1. Introduction The oil and gas industry provides more than half of the world’s primary energy needs, Reddy and Xie and Bos et al. [1,2]. Crude oil and natural gas are among the most traded commodities (In 2017, the volume of world crude oil exports was about USD 844 billion, and the export of natural gas reached USD 432 billion after a strong increase over the past decades. (International Trade Center, 2018)) [1,3,4]. Improvements in exploration and production activities during recent years, in particular of the United States (the U.S.), in hydraulic fracturing, horizontal drilling, drilling fluids and other techniques, shale oil and gas exploration and production have changed the industry substantially, Reddy and Xie and Hsu et al. [1,5]; Recent growth in supply (reaching 95 million barrels per day in 2018, BP plc (2019)) is mainly driven by high-cost producers, especially in the U.S. and Canada, while demand growth mainly comes from emerging economies, as a result of their rising prosperity. Natural gas production reached 3309 million tons of oil equivalents in 2018. The strong growth is broad-based—increases in low-cost supplies to react to increasing supplies of liquefied natural gas (LNG) [3]. Overall, this growth in oil and gas supply also enhances the investments in the industry. Particularly, inorganic growth strategies such as mergers and acquisitions are commonly applied corporate investments by the oil and gas companies. Although the industry receives more than its fair share of attention from the media and represents a significant share of the global mergers and acquisitions (M&A) market (according to Thomson Reuters (2018), the oil and gas industry is in the top ten industries in terms of M&A deals and it has the highest total transaction value, which reached more than USD 4 trillion in 2017), researchers have paid

Energies 2020, 13, 5580; doi:10.3390/en13215580 www.mdpi.com/journal/energies Energies 2020, 13, 5580 2 of 25 much less attention to oil and gas investments such as M&A transactions, Hsu et al. [5]. To the best of our knowledge, academic reviews of M&A studies in oil and gas industries are rare. Therefore, our motivation is to offer a better understanding of cross-border oil and gas M&A drawing on economic theories and sector specifics. Since the world’s resources and reserves are unequally allocated and firms need advanced technologies, cross-border M&A play an important role to gain access to resources, increase market share, boost profitability, foster corporate growth or to acquire certain capabilities, e.g., advanced technology and know-how. That means it is expected that M&A will remain as one of the key investment strategies of oil and gas companies. Cross-border M&A transactions are challenging, Shimizu et al. [6], and often fail due to involving two or more countries and the different cultural, economic, political, institutional, and regulatory environments. Specific for the oil and gas industry is that the choice of the target firm and target country must depend above all on the availability of resources and much less on other conditions, favorable or unfavorable, regulatory uncertainty, risk of nationalization and other kinds of financial, political, and institutional uncertainties. To date, research focusing on the oil and gas industry and cross-border M&A mostly concentrates on the U.S., the UK, Canada, China, Norway, or Gulf countries (Gulf Cooperation Council: Bahrain, Oman, Kuwait, Qatar, Saudi Arabia, and United Arab Emirates, (http://www.gcc-sg.org/en-us/AboutGCC/ MemberStates/Pages/Home.aspx)) and Organization of the Petroleum Exporting Countries (OPEC) (for OPEC countries: (https://www.opec.org/opec_web/en/about_us/25.htm)). Most of the earlier studies analyze the relationship between energy prices, volatility of oil prices and M&A activity, the relationship between stock performance and announcement of M&A deals or a review of the oil and gas industry in a specific country, e.g., in Kazakhstan, Kaiser and Pulsipher [7] but not directly cross-border oil and gas M&A investments, e.g., see, [2,8–10]. Therefore, a comprehensive investigation of this topic is lacking. This study is based on global oil and gas M&A data covering transactions from 2000 to 2018 and in this respect complementary to the study of Reddy and Xie [1]. First, our analysis is based on a more granular data set. Second, we review the M&A literature and various motives of oil and gas M&A transactions to trigger certain trends. The paper makes several contributions: (i) it provides statistics for various patterns of the M&A transactions during the last two decades; (ii) it discusses the underlying motives of oil and gas M&A transactions; (iii) it addresses the relationship between industry-specific events, trends, other factors and cross-border M&A flows. Our findings have implications for practitioners and policy makers. A major finding is that oil and gas M&A are less driven by the availability of resources and other economic opportunities (taxes, low costs of extraction, etc.) instead by institutional, political, and sector-specific considerations. In other words, the oil and gas industry differs substantially from other industries. Although we cannot address the dramatic effect of the current crisis due to an almost world-wide temporary economic lockdown due to the COVID-19 virus and we conjecture that this will have an effect beyond the relatively brief economic interruption, many of our observations should apply to a post-coronavirus world oil and gas market. The paper proceeds as follows. The next section briefly presents the literature review. Sections3 and4 follows with a discussion on M&A investment in the oil and gas industry along various noteworthy arguments. Section5 presents the data and methodology to collect and integrate M&A transactions from the database. We then provide results based on analysis of M&A transactions in Section6. The last section concludes and provides policy implications and recommendations for future studies.

2. Literature Review The literature on mergers and acquisitions that focuses on a specific sector, particularly focusing on the oil and gas industry, is fragmented, and has not thrived yet. This is perhaps due to the complexity of the industry and the fact that there are various theories and a set of theoretical models that can explain the underlying motivation and drivers of such investments from different aspects. Energies 2020, 13, 5580 3 of 25

In our attempt to explain oil and gas M&A and its various patterns and underlying motivation, we decide to cover a review on foreign direct investment (FDI), M&A and other multinational enterprises (MNEs) studies in general and recent research on M&A in the extracting, energy and oil and gas industry. Considering that it is difficult to distinguish multiple motives of such investments, particularly for cross-border investments that have a multinational context, analysis of cross-border M&A might present divergent outcomes. According to Kang and Johansson [11], the driving forces and trends of cross-border M&A across various sectors may differ. Their empirical research based on cross-border M&A in the pharmaceuticals, petroleum, steel, automobiles, and telecommunications sectors show that the drivers are mostly government related, macro-level, firm-level, technology-driven and industry-level factors. However, the significant impact of those factors also depends on the trends in sectors and other specific issues. Therefore, a sector-specific study of M&A is crucial and needed for future direction. In the previous literature, Shimizu et al. [6] conducted a research to examine the theoretical foundations of M&A, particularly for cross-border M&A. Their research was based on prior studies that grouped the cross-border M&A investment strategy into three perspectives: M&A as a mode of entry to a foreign country/market, M&A as a strategic value-adding investment, M&A as a dynamic learning process. These perspectives summarize that cross-border M&A are commonly applied to enter new geographies and are an opportunity to share cost and risk in the foreign markets. The factors such as local experience, cultural similarities, technological intensity, due diligence process, target home country characteristics, integration process, taxation, currency fluctuation all have an impact on the transactions. Moreover, those factors direct the decision of M&A, number of deals and the patterns of cross-border M&A flows from one country to another. To explain the underlying incentives, patterns and drivers, theories such as transaction cost economics (TCE), resource-based view (RBV), property rights, agency theories, institutional economics and organizational learning are commonly applied. Our review frames the most related ones and promotes a new link for the better understanding of oil and gas cross-border M&A. Our summary of the key findings of the M&A literature are summarized in Table1.

Table 1. Summary of the literature review. Source: authors’ research/interpretation.

Study Theoretical Perspective Sample (Geography) Key Findings M&A studies in general A rich set of theories can explain the firm boundaries. Transaction costs and property rights are crucial for integrations. For instance, when specific assets are involved or new Organizational behavior, resources are required for growth, parties apply Lafontaine and Slade [12] property rights, (Descriptive framework) for long term contracts to protect their transaction costs investments or gain desired assets. Given the incompleteness of contracts, companies prefer M&A and other integration methods to long-term contracts if the environment is uncertain or rents are large. Cross-border M&A requires special focus to target countries. For instance, factors such as Institutional Kissin and Herrera [13] (Theoretical framework) exchange rate, local rates, local accounting environment standards, trade regulations, debt/equity ratios may impact the acquisitions. Empirical evidence The increasing inflows to target countries are Institutional based on M&A strongly driven by institutional environment. Rossi and Volpin [14] environment, announcement in 49 Particularly, higher investor protection laws institutional economics target countries, over the and better accounting standards have a period 1990–1999. positive impact on M&A activity. Energies 2020, 13, 5580 4 of 25

Table 1. Cont.

Study Theoretical Perspective Sample (Geography) Key Findings Empirical evidence based on domestic and cross-border deals, 2419 transactions, The target corporate governance standards Marthnova and Corporate governance 24 countries from have an important impact on the returns from Renneboog [15] Continental Europe and cross-border mergers and acquisitions. UK, including acquirer and target view, over the period 1993–2001. Countries with rich natural resources, developed financial markets, large market potential, adequate infrastructure facilities, Neoclassical economics, strategic assets such as advanced technologies, Xie et al. [16] institutional economics, (Theoretical framework) and bilateral trade openness may likely behavioral approach encourage higher capital inflows through the acquisition method, which addresses the quality of institutions in the target country. M&A studies in the extracting, energy, and oil and gas industry Empirical evidence The relationship between oil returns, oil price Macroeconomics, based on the domestic volatility and M&A transactions show that Bos et al. [2] mergers, and U.S. M&A observations, M&A activity in the oil and gas industry acquisitions 468 deals, over the fundamentally depends on future expectations period 1978–2016. of oil and gas prices. Empirical evidence based on oil and gas The study shows that the most important companies operating on factors influencing the investment decisions are Investment the Norwegian Berntsen et al. [17] the size of the oil and gas reserves, geological decision-making Continental Shelf. variables, and the price of oil. The effect of oil 280 assets, 107 approved price volatility is insignificant. fields and 172 discoveries. Energy reserves and prices cause and affect takeover activity, value, and performance. Empirical evidence Economics, equity Acquirers are motivated to purchase reserves, Ng and Donker [10] based on Canadian oil valuation while targets are motivated to sell based on and gas companies. market timing. Acquirers have negative takeover performance from lower risk. Empirical evidence Neoclassical economics, Industry-specific factors, for instance, oil price based on 4724 M&A Hsu et al. [5] conventional financial is the most important indicator to drive M&A transactions in the U.S. theories investments in the oil and gas industry. between 2014 and 2013. Macroeconomic uncertainty creates a Empirical evidence bottleneck for oil and gas investment and Corporate investment, based on 115 companies Mohn and Misund [18] production, whereas industry-specific macroeconomics over the period uncertainty has a stimulating effect on the oil 1992–2005. and gas investments. Empirical evidence based on Gulf Effective formal institutions (good governance) Dowling and Institutional theory, Cooperation Council and close informal institutions (cultural Vanwalleghem [19] corporate governance (GCC) firms, over the similarity) in a target nation are preferred in period 2002–2014, M&A investments. 1126 deals. Empirical evidence based on GCC OLI paradigm, economies, 6 dependent The impact of corruption is positive and Elheddad [9] internalization oil countries, their FDI significant on oil foreign direct investments. inflows over the period 2003–2013.

Hence, these papers show some common results, but there are also various and inconclusive findings. Overall, the motivation of M&A can be explained by the incompleteness of contracts, transaction costs, corporate governance, internalization. On the other hand, sector-specific events, trends, resources, macroeconomic uncertainties, and institutional environment also have a strong impact. Although, it provides an important outcome, there is a need for more theoretical and empirical Energies 2020, 13, 5580 5 of 25 development, particularly for a sector-specific approach, where the recent research has not kept pace with the increasing number of transactions. In the light of previous literature, we aim to cover a sector-specific discussion through M&A in the oil and gas industry and potential drivers of the deals from various theoretical perspectives.

3. M&A in the Oil and Gas Industry The oil and gas industry operates in three main segments (IHS Markit [20]): upstream (exploration and production), midstream (transportation and pipelines) and downstream (refining and marketing) (according to IHS Markit/Connect (2019), the integrated oil and gas, and oil field services and equipment are also presented as another sub-segment of the industry). Although each segment plays an important role in the supply chain, the upstream industry is the essential one. It encompasses exploring and producing oil and gas, recovering reserves, drilling wells. New technologies have caused booms in exploration and production activities during the recent years (yet this year, 2020, seems to be vastly different due to the COVID-19 epidemy). Figures1 and2 show the most recent distribution of transactions (from our sample dating back to 2000) by different industry segments and deal levels (such as asset and corporate) (asset deals generally include straight acquisition of (or farming-into) assets (e.g., acquisition of a complete or partial interest in an oil and gas field) from a parent company, acquisitions from parent companies of subsidiaries or regional affiliated entities that hold ownership in assets, and may include the acquisition of minor corporate entities that only hold ownership in a single significant asset (https://connect.ihs.com/home). As an important distinction, different than the asset deals, the corporate deals are classified as the mega-size M&A transactions, which have a deal value above USD 10 billion and are mostly mergers (determined by IHS Markit)). Energies 2020, 13, x FOR PEER REVIEW 6 of 25

Deal Counts by Industry

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1400

1200

1000

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600 Transactions

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0 2015 2016 2017 2018 2019

Upstream Oilfield Services & Equipment Midstream Integrated Oil & Gas Downstream

Figure 1. Mergers and acquisitions (M&A) trends by industryindustry segment in recentrecent years.years. Source: IHS Markit Transaction Analysis, 2019,2019, authors’authors’ interpretation.interpretation.

Among the major triggers of M&A in the oil and gas industry are reserve replacement, the pursuit Deal Counts by Deal Levels of cost efficiency, pressure by investors, difficult and challenging market conditions during the last few years, e.g., oil1600 price volatility, considerations of acquisitions to supplement growth and the emergence of adjustments1400 to portfolio investment cycles, according to IHS Markit Transaction Analysis [20]. Increasing transactions1200 in the upstream sector fosters alliances, strategic partnerships, and integrations all to support1000 production and to enlarge the global reserve base of an acquiring company. 800 600 Transactions 400 200 0 2015 2016 2017 2018 2019

Corporate Asset

Figure 2. M&A trends by deal levels in recent years. Source: IHS Markit Transaction Analysis, 2019, authors’ interpretation.

Among the major triggers of M&A in the oil and gas industry are reserve replacement, the pursuit of cost efficiency, pressure by investors, difficult and challenging market conditions during the last few years, e.g., oil price volatility, considerations of acquisitions to supplement growth and the emergence of adjustments to portfolio investment cycles, according to IHS Markit Transaction Analysis [20]. Increasing transactions in the upstream sector fosters alliances, strategic partnerships, and integrations all to support production and to enlarge the global reserve base of an acquiring company.

4. Reasons for M&A in Oil and Gas Facilities What explains cross-country M&A in the oil and gas industry? This requires a benchmark. For instance, the alternative to buying an upstream firm is to enter a delivery contract, long or medium term. This applies if the acquirer owns a refinery or it is the part of another upstream company whose only interest is to use the extracted oil for products. Of course, there are economic constraints on such contracts, even in a very liquid and huge market such as the world oil market. By the law of no arbitrage, the contract prices are linked to the spot, more precisely, futures prices. That is, any discount associated with long-term contracts must be more or less zero, because otherwise we could sign a long-term contract and resell on the spot market and make a profit while the producers would

Energies 2020, 13, x FOR PEER REVIEW 6 of 25

Deal Counts by Industry

1600

1400

1200

1000

800

600 Transactions

400

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0 2015 2016 2017 2018 2019

Upstream Oilfield Services & Equipment Midstream Integrated Oil & Gas Downstream

EnergiesFigure2020, 131., Mergers 5580 and acquisitions (M&A) trends by industry segment in recent years. Source: IHS6 of 25 Markit Transaction Analysis, 2019, authors’ interpretation.

Deal Counts by Deal Levels

1600 1400 1200 1000 800 600 Transactions 400 200 0 2015 2016 2017 2018 2019

Corporate Asset

FigureFigure 2.2. M&A trends byby dealdeal levelslevels inin recentrecent years.years. Source: IHS Markit Transaction Analysis, 2019, authors’authors’ interpretation.interpretation.

4. ReasonsAmong for the M&A major in Oiltriggers and Gasof M&A Facilities in the oil and gas industry are reserve replacement, the pursuitWhat of cost explains efficiency, cross-country pressure M&Aby investors, in the oildifficult and gas and industry? challenging This market requires conditions a benchmark. during Forthe instance,last few years, the alternative e.g., oil price to buying volatility, an upstream considerations firm is to of enter acquisitions a delivery to contract,supplement long growth or medium and term.the emergence This applies of ifadjustments the acquirer to owns portfolio a refinery investme or itnt is thecycles, part according of another to upstream IHS Markit company Transaction whose onlyAnalysis interest [20]. is Increasing to use the transactions extracted oil in forthe products. upstream Ofsector course, fosters there alliances, are economic strategic constraints partnerships, on suchand integrations contracts, even all into asupport very liquid production and huge and market to enlarge such asthe the global world reserve oil market. base Byof thean lawacquiring of no arbitrage,company.the contract prices are linked to the spot, more precisely, futures prices. That is, any discount associated with long-term contracts must be more or less zero, because otherwise we could sign a 4. Reasons for M&A in Oil and Gas Facilities long-term contract and resell on the spot market and make a profit while the producers would leave moneyWhat on theexplains table. cross-country This is not likely M&A except in the for oil special and gas favors industry? that some This give requires to their a benchmark. associates (e.g., For Venezuelainstance, the to alternative Cuba andother to buying “friends”) an upstream (even if firm fixed is price to enter contracts a delivery existed, contract, they willlong face or medium ex-post opportunismterm. This applies if prices if the get acquirer far beyond owns a the refinery contracted or it is level, the part e.g., of due another to a upstream shortage crisis.company In suchwhose a situation,only interest the is supplier to use the may extracted ask for oil extra for remunerationproducts. Of course, to compensate there are for economic “losses” constraints from the contract on such (seecontracts, opposite even example in a very about liquid consumers and huge below). market The such supplier as the mayworld pretend oil market. that there By the are law technical of no problems,arbitrage, transportthe contract bottlenecks, prices are etc. linked to extort to the extra spot, payments. more precisely, The energy futures market prices. is litteredThat is, with any correspondingdiscount associated examples, with long-term e.g., Algeria’s contracts demand must for be extra more payments or less zero, (“exploration because otherwise fees”) for we its could gas salessign a to long-term Europe during contract the and high resell energy on the prices spot in market the first and half make of the a profit 1980s, while while the Norway producers stuck would to its contract. Of course, Algeria had to pay a price for this ex-post opportunism by losing its European customers except for France. In this respect, owning a field (completely or partially as a part of a joint venture) seems more promising). A possible advantage of a long-term contract with strategic suppliers is that it is easier to get marginal barrels, or to cancel them.

4.1. Economic Reasons It is one of the puzzling features of neoclassical economics that the crucial role of the firm and the entrepreneur (except for the role of the hero and revolutionary in Schumpeter’s theory of creative destruction [21]) is reduced to that of a production function. That is, the boundaries of a firm, what should be organized within a firm and what should be bought from the market, are not determined. Ronald Coase [22] was the first to address what seems to be an obvious question, which was nevertheless ignored for a long time, at least in the traditional textbooks. Oliver Williamson [23], who, the same as Coase, received the Nobel Prize for his insight, suggested that transaction costs are crucial. Buying from/selling to the market can be costly due to the potentially opportunistic behavior of contract partners given the unavoidable incompleteness of contracts. Therefore, the integration of activities with high transaction costs can be efficient even if an in-house provision is more costly. However, Energies 2020, 13, 5580 7 of 25 the acquisition of crude oil by a refiner seems to involve little or no transaction costs given the nature of oil as commodity. A third approach stresses the role of the entrepreneur, more precisely, the role of property rights, for which Oliver Hart received the Nobel Prize. What is a property right? A property right allows the owner to decide about all issues that are not specified in contracts, Hart [24]. That is, in a world with incomplete contracts (same assumption as in the transaction cost theory), the owner can fill these holes according to his own needs. In the case of “acquiring” an oil field with say average production of 100,000 b/d compared to a contract for the delivery of 100,000 b/d is that the control over the oil field allows the extraction of extra barrels in case of tight supply or even shortages or, vice versa, to lower output in case of a glut, or to be able to extract when contracts are not honored due to an embargo, political turmoil (i.e., similar to an inventory, but below ground). A crucial implication of the theory of property rights is that (i) integration makes only sense for substantial synergies since exploiting synergies often destroys incentives on the other side and (ii) whether the party that has to make the crucial investment decisions should own the property.

4.2. Industry Specific What does one acquire with an upstream investment or any M&A investment in the oil and gas industry? This depends to a large account on the specific conditions of the target country. In the U.S. and in a few other countries, the “owner” can have the oil whenever they want and can use it for whatever they want, of course paying all the taxes and royalties. In many other countries, the owners are restricted to a certain, often rather limited, take from each barrel extracted and do not have full control over production. Given the differences across countries, their regulatory regime, and the political risks, it makes a big difference between acquiring an oil field with the same potential of cumulative production, e.g., of say one million barrels, in Texas or Alberta or in Nigeria or Libya where the revenue is restricted to a fixed and rather small share or to you can keep only a fraction of the extracted oil and may face restrictions on the quantities produced. This suggests that country specifics such as the regime of taxing oil production, the economic, regulatory, and political environment all play a crucial role, and M&A investment is not only dependent on resource availability and costs of extraction. As mentioned, the gain from acquiring an upstream facility must be compared with a benchmark, either acquisition on the spot market or via long term contracts. Regarding the first point, being able to swing production according to specific needs and circumstances, an inventory coupled with forwards and futures contracts should be able to achieve this too. The second case of being able to extract and have access to oil in case of serious political troubles depends on where the oil is located. More precisely, owning an oil field in Saudi Arabia (if that were possible) will provide little insurance in times of serious political turmoil (e.g., in the above examples, a revolution in Saudi Arabia, or Russia using its energy supply as a political weapon). Only fields in secure locations (e.g., where? in the U.S.?) can provide this kind of insurance while a proper portfolio of owning/controlling fields and contracts can mitigate such political threats. However, as the recent financial crisis and to a lesser extent the past energy crisis documented, apparently uncorrelated events may become correlated. The potential benefits depend on the details. For example, a long-term contract linked to market prices—either following the netback scheme of the late 1980s or at spot or even future prices—will not provide a hedge against oil price volatility. In contrast, a fixed price contract would ensure the buyers against oil price increases and the sellers against declines. However, we are not aware that any fixed oil price contracts exist, let alone a significant number, and even if they existed, they would face upside and downside risks due to ex-post opportunism and political intervention (fixed heating oil price contracts with residential consumers reveals two things. First, the downside risk, since these consumers locked themselves into fixed price heating oil contracts offered by Standard Oil during the period of high oil prices in 2008. By the nature of the contract, these customers would lose money as oil prices have declined. Yet given the public pressure (“poor” consumers are suffering), Standard Oil “generously” decided to deliver oil from now on (i.e., since May 2009) at the market price. This verifies the limited Energies 2020, 13, 5580 8 of 25 range of private monopolies well expressed by Adelman [25] some time ago—that any expropriation of consumers creates powerful pressure groups, which demand short work of them). If spot prices got far beyond the contracted level, e.g., due to a shortage or a crisis, the supplier may ask for extra remuneration to compensate for “losses” from the contract (see opposite example about consumers). Portfolio considerations and, as a means of hedging supply uncertainties, economic, but in particular, political risks are the other considerations of oil companies, parallel to their national interest, e.g., for a national oil company with a broader mandate such as guaranteeing a reliable supply. First, one must have an idea about what kind of risk: a physical shortfall (e.g., accident or terror attacks as on Abqaiq and Khurais in Saudi Arabia on 14 September 2019, etc.) or another conflict in the Middle East (between Israel and Arabs, a revolution, another Arab Spring), or unanticipated high future oil prices (after all who dared to predict an oil price of USD 140 billion during 2008 or even during 2007). Nevertheless, those arguments for physical, instead of contractual, entitlements are not convincing. Starting with the first point, markets have proven to accommodate temporary supply disruptions including those during the two Iraq wars and other accidents and reported problems such as the aftermath of Katrina were due to upstream/refining capacity shortages. Thinking about political conflicts, contracts are presumably insufficient anyway. Since most, if not all, contracts have a price clause that links the contract to the spot or futures price, in such a way that there is truly little speculative gain from these contracts. Therefore, in the absence of fixed price long term contracts and the limited time frame financial markets (futures, options, derivatives) offer, investment in the physical barrel is the only way to hedge (or speculate) over the long term, because the investor is entitled (with all the caveats of course) to equity oil (varying across countries) and has to pay taxes and royalties from that share. Therefore, upstream investments can provide a somehow more reliable supply and a financial hedge against higher future prices since the investor owns a share of the output. However, even this entitlement is less certain than it appears on paper. The reason for this is that substantial gains for the contractor will attract domestic politicians and rent seekers to renegotiate the favorable terms (of course, favorable from a pure ex-post perspective). This will apply to long term contracts and to physical investment and related property titles. Examples are the nationalization of the Petrobras gas fields in Bolivia, the forced selling of Shell’s share to Gazprom from the joint operation in Sakhalin, the ousting of BP from the joint venture with TNK (it is one of the largest Russian oil companies, “TNK MEZHREGIONEFT”) in Russia, etc. Furthermore, the amount of financial hedge can be substantially diminished by ex-post negotiations, if, ex post, the terms result in being too favorable to the investor, as the oil companies did in Venezuela in 2008. This principle applies across the board and includes even law-abiding countries such as the UK, whose price caps contracted under a Conservative government were lowered after observing profits and then Labour went further (of course) and introduced ex-post a windfall tax on past profits). Of course, these degrees of possible ex-post exploitation differ. Owning an oil field in Texas will be less risky to this kind of ex-post expropriation than an oil field in Russia, Venezuela, or Libya. On the other hand, a big player such as the China National Offshore Oil Corporation (CNOOC) may have leverage over small developing countries such as Uganda, particularly if the deal is two-sided making the oil-supplying partner dependent on Chinese expertise, for example. Indeed, the case of national oil companies seems to be vindicated by the CNOOC and its broad range of acquisition all over the world. Companies rather than governments undertake this and (smart) governments often even refuse direct involvement since that always includes political extortion. A well-known example is Helmut Schmidt’s (former German chancellor) refusal of an offer from Colonel Ghaddafi, Revolutionary Chairman of the Libyan Arab Republic, after the energy crisis in the mid-seventies, even arguing that this is the business of the oil companies, not the government. However, national oil companies and their governments do not always exercise the noble attitude of Helmut Schmidt, but try or have tried to help their national champions, as was the case with Total and Elf-Aquitaine (major French oil companies which were merged) in France, ENI (which is an Italian multinational oil and gas company headquartered in Energies 2020, 13, 5580 9 of 25

Rome) in Italy, OMV (OMV Aktiengesellschaft is one of Austria’s largest listed industrial companies) in Austria, CNOOC and others.

4.3. Additional Characteristic of M&A Acquiring a firm in the oil and gas industry can be also linked to the following factors:

Horizontal integrations (e.g., upstream–upstream/downstream–downstream) (in addition, M&A • transactions between firms that are operating in other segments of the industry, such as midstream or oilfield services and equipment, e.g., midstream–midstream acquisitions or oilfield services and equipment–oilfield services and equipment could be driven by similar factors): according to the property rights theory, this makes only sense if the acquiring firm provides substantial synergy gains, e.g., from its superior knowledge in engineering and maybe marketing (but selling crude oil requires presumably not much of that). The question is how to approximate the technical gain and know-how of the acquiring firm? Is the overtaking firm being part of a more advanced economy (GDP per capita, but this is wrong for countries such as Kuwait, Qatar that have higher per capita incomes than most highly developed countries, and therefore, share of tertiary education). Vertical integrations (e.g., downstream–upstream/integrated oil and gas–upstream) (vertical • integrations refer to investments between companies that are operating in a different segment of the industry or different sectors, e.g., midstream oil and gas company invest into a firm that operates in the upstream industry): synergies as well as hedging arguments can explain this activity, but if this is the case, then vertically integrated companies must be more profitable than disintegrated ones. Full control (say over a Texas oil field) versus no control in many oil producing countries where • the “property” title is restricted to a production sharing agreement. The type of the acquirer (e.g., upstream, integrated oil and gas firm, investors) and a firm focusing on either upstream or downstream investments, a firm at least to some extent integrated (i.e., active in upstream and downstream), and a special role for (foreign) national oil companies. Facing political reasons, the extraction of natural resources is in many countries, if not most, • heavily restricted and limited to national monopolies. This includes many risks from changes in regulations, taxation, up to expropriation. Given the differences across countries and their regulatory regime and the political risk, there is a big difference between acquiring an oil field with a cumulative production, e.g., capacity of say one million barrels, in Texas or Alberta or in Nigeria or Libya. Hedging arguments make sense only for downstream–upstream mergers and only if the target • company is in a reliable country. In short, if one is willing to pay a premium, or only agrees to the contract if the target company is in a country in which the rule of law applies and economic liberty is guaranteed (corresponding indices exist)—less obvious is the role of democracy and political freedom. Finally, CEOs striving for empires provide an explanation for M&A, at least inter alia, if the above • economic reasons fail.

5. Data M&A transactions deal level data are obtained from IHS Markit, Connect. The transaction analysis database contains detailed information about various key indicators of M&A transactions announced between 1 January 2000 and 31 December 2018 (the deals contain the following given key indicators: year, buyer, seller (target), buyer and seller country, deal type, deal style, deal value, industry segment, region, key assets, reserve value and deal summary. Add to that the integration type. Our sample covers more than 23,855 transactions between 2000 and 2018. However, some of the deals have no given information on some of the certain key indicators, which makes them difficult to analyze. Those deals are excluded from the sample). Our final data set contains 18,179 observations including both Energies 2020, 13, 5580 10 of 25 domestic and cross-border transactions (summary statistics are shown in Tables2 and3). Our selection criteria according to IHS Markit categories is as follows: announced deals with deal types such as “acquisition/joint venture, acquisition, merger, acquisition/farm in” (according to IHS Markit, acquisition joint venture is purchase/sale of partial ownership in assets (such as upstream acreage, upstream producing properties/fields, pipelines, refineries, etc.) and the transaction parties joint venture/joint partner together further develop that transacted asset or set of assets. Acquisition is a purchase/sale of partial or full ownership in assets (such as upstream acreage, recoverable reserves/resources, producing properties/fields, pipelines, refineries, etc.), including purchase of, or from, incorporated subsidiary entities (of a parent company) that holds above assets. Acquisition/farm in is the purchase/sale of an interest in undeveloped acreage/field/project without estimated reserves where the seller retains an interest and the farm in buyer contributes exploratory/development cost funding in return for a specific working interest in the acreage/field project. Merger is for corporate takeover transactions with a total transaction value >=USD 10 billion. It is important to remind that IHS Markit defines the merger transactions differently to traditional definitions of a merger). Different to traditional definitions of merger and acquisition, we add two further deal styles, which are commonly applied methods in the oil and gas industry.

Table 2. M&A transactions based on total deal counts and average (avg.) deal value in USD million (MM). Source: final data produced based on IHS Markit Transaction Analysis, authors’ interpretation.

Total M&A Domestic M&A Cross-Border M&A Avg. Value Avg. Value Avg. Value Year Number Number Number USD MM USD MM USD MM 2000 635 429 410 534 225 174 2001 735 257 471 233 264 308 2002 740 183 498 190 242 160 2003 568 143 395 110 173 249 2004 821 205 543 197 278 226 2005 1095 237 664 254 431 198 2006 1393 314 904 359 489 220 2007 1516 288 940 286 576 292 2008 1089 240 637 170 452 366 2009 914 321 568 365 346 238 2010 1013 412 616 401 397 433 2011 1141 377 694 326 447 458 2012 1143 432 703 457 440 385 2013 944 314 567 287 377 365 2014 1008 553 691 580 317 484 2015 788 528 548 582 240 381 2016 836 561 606 498 230 752 2017 974 409 673 445 301 327 2018 826 847 547 922 279 675 Total 18,179 366 11,675 373 6504 352

The separation between domestic and cross-border transactions are done as follow: if the buyers’ headquarters is in a different country than the target/primary country the deal is a cross-border deal. In other words, deals that happen beyond the buyer country’s border [6,16,26] (according to IHS Markit [20], the primary country, i.e., target country, indicates the location where the buyer purchases or invests in assets, fields, or the entire business. It is common in the oil and gas industry that the assets, resources (e.g., reserves, refinery, petrol stations and similar) are located somewhere different than the firm’s headquarters, (e.g., European integrated oil and gas firm might have a refinery or other assets in Malaysia but the headquarters might be located in Europe). In this case, the headquarter information of sellers can be misleading to define transaction type as domestic versus cross-border. Therefore the primary location, i.e., target country, is a more accurate form of information for our analysis to define Energies 2020, 13, 5580 11 of 25 the purchased, acquired assets and their geographic location). The deals are defined as domestic if the buyer and target are in the same country and the deal is done within the borders (see AppendixA for the allocation of the sample). M&A deals refer to the number of deals and M&A transaction values were not applied to explain any patterns as they are sensitive to the oil price, and large variations in governments’ take. In addition to that, the transaction value information is missing for 40.3% of the deals of our sample due to the deals not being disclosed.

Table 3. Summary statistics of final sample. Source: final data produced based on IHS Markit Transaction Analysis, authors’ interpretation.

Summary Statistics Mean Standard Dev. Min Max Number of M&A Deals 956.79 241.04 568 1516 Avg. Total Deal Value USD MM 370.99 168.28 143.08 846.96 Number of Domestic M&A Deals 614.47 141.20 395 940 Avg. Total Deal Value USD MM 378.85 192.71 109.93 922.47 Number of Cross-Border M&A Deals 342.32 108.76 173 576 Avg. Total Deal Value USD MM 352.32 159.32 160.53 751.96

6. Results Natural resources, particularly oil and gas, are highly unevenly distributed. Therefore, the interaction between companies and countries is essential. In addition to points discussed in earlier sections, for instance, the different fiscal regimes for oil and gas in each country also impact oil and gas investments, particularly for cross-border investments (Natural Resource Governance Institute [27]). In addition to that, tax rates, contracts, royalties, bonus payments or quality of the field or production volumes, regulatory/legislative structures, environmental and safety concerns, macroeconomic environment and microeconomic factors impact the decisions of oil and gas investors at both the international and domestic level, Beer and Loeprick [28]. Similarly, national oil and gas companies (often monopolies) play a special role and have recently showed an increase in their M&A investments, [29].

6.1. Domestic Deals Domestic M&A transactions represented 64% during the last two decades, or 11,675 deals with an average deal value of USD 373 MM. Most of them, i.e., more than 90% of all domestic deals (10,561 with an average transaction value of USD 363 MM) occurred in the U.S., Australia, Canada, United Kingdom, Russia, and China, see Figure3. The first four countries o ffer good legal protection and infrastructure and are rich in natural resources, but not compared to the big reserve owners, particularly of low-cost oil reserves. Norway, Brazil, Indonesia, India, Nigeria, Argentina, and New Zealand follow as countries with a high number of domestic transactions, but they are in a different league. Most of the domestic deals are upstream (particularly, the major players such as the U.S., Canada, Australia, UK, China, and Russia), see Figure4, which presents view per sector for major players. The M&A in the U.S., Canada, Australia, and UK are mostly horizontal integrations, particularly between companies active in either upstream or oilfield services and equipment. This points out that the domestic horizontal integrations for those domestic players are either the result of more efficient companies buying less efficient ones or linked to technological changes, e.g., shale oil and gas revolution, exploration and production, horizontal drilling, which requires certain expertise in the field. One may pursue this point further and look for patterns in the deals. In our sample, particularly, horizontal integrations are in the field of unconventional oil and gas activities, production, drilling and wells services. Transactions in Russia and China are driven more by vertical integrations. After years of relative quiet compared to global super majors (e.g., the U.S., Canada), Chinese companies now tend Energies 2020, 13, x FOR PEER REVIEW 12 of 25 particularly of low-cost oil reserves. Norway, Brazil, Indonesia, India, Nigeria, Argentina, and New Zealand follow as countries with a high number of domestic transactions, but they are in a different league.

Domestic M&A Transactions: Major Players

United States of America Canada Australia United Kingdom Russia

Countries China 0 1000 2000 3000 4000 5000 6000 7000 Energies 2020, 13, 5580 12 of 25 Total Number of Deals

Energies 2020, 13, x FOR PEER REVIEW 12 of 25 to integrateFigure 3. their Countries supply with chain, a high particularly number of by domestic acquisitions deals, betweenover the period companies 2000–2018. from diSource:fferent based segment on IHS Markit Transaction Analysis, authors’ interpretation. ofparticularly the industry of low-cost (upstream oil versusreserves. downstream, Norway, Brazil, oilfield Indonesia, services India, versus Nigeria, upstream), Argentina, which and supports New andZealand strength follow their as countries investments with in a the high domestic number petrochemical of domestic transactions, sector. Similarly, but they companies are in a indifferent Russia Most of the domestic deals are upstream (particularly, the major players such as the U.S, Canada, enhanceleague. their supply chain by vertical integrations. Australia, UK, China, and Russia), see Figure 4, which presents view per sector for major players. The M&A in the U.S, Canada, Australia, and UK are mostly horizontal integrations, particularly between companies activeDomestic in either upstream M&A Transactions: or oilfield services Major and Players equipment. This points out that the domestic horizontal integrations for those domestic players are either the result of more efficient companies Unitedbuying States less of Americaefficient ones or linked to technological changes, e.g., shale oil and gas Canada revolution, exploration Australiaand production, horizontal drilling, which requires certain expertise in the field. One may pursueUnited this Kingdom point further and look for patterns in the deals. In our sample, particularly, horizontal integrations areRussia in the field of unconventional oil and gas activities, production, drilling and wells services.Countries TransactionsChina in Russia and China are driven more by vertical integrations. After years of relative quiet compared0 to global 1000 super 2000 majors 3000 (e.g., the 4000 U.S, Canada), 5000 6000 Chinese 7000 companies now tend to integrate their supply chain, particularlyTotal Number by of acquisitions Deals between companies from different segment of the industry (upstream versus downstream, oilfield services versus upstream), whichFigure supports 3. Countries and strength with a high their number investments of domestic in deals,the domestic overover thethe periodperiod petrochemical 2000–2018.2000–2018. Source:sector. basedSimilarly, companieson IHS in Markit Russia Transaction enhance Analysis, Analtheirysis, supply authors’authors’ chain interpretation.interpretation. by vertical integrations.

Most of the domestic deals are upstream (particularly, the major players such as the U.S, Canada, Australia, UK, China, andTop Russia), Domestic see Countries'Figure 4, which Transactions presents viewby Sector per sector for major players. The M&A in the U.S, Canada, Australia, and UK are mostly horizontal integrations, particularly Upstream between companies active in either upstream or oilfield services and equipment. This points out that the domesticOilfield horizontal Services & integrations Equipment for those domestic players are either the result of more efficient companies buying less efficientMidstream ones or linked to technological changes, e.g., shale oil and gas revolution, explorationIntegrated and Oil production,& Gas horizontal drilling, which requires certain expertise in the field. One may pursue this point further and look for patterns in the deals. In our sample, particularly, Downstream horizontal integrations are in the field of unconventional oil and gas activities, production, drilling and wells services. Transactions in0% Russia 10% and 20%China 30%are driven 40% more 50% by 60% vertical 70% integrations. 80% After years of relative quiet compared to global superBased majors on Deal (e.g., Counts the inU.S, % Canada), Chinese companies now tend to integrate their supply chain, particularly by acquisitions between companies from differentFigure segment 4. Domestic of the deal industry counts by (upstream sectors in topversus domesticdomest downstream,ic countries (major(majoroilfield players).players). services Source: versus based upstream), on whichIHS supports Markit TransactionTransaction and strength Analysis,Analys theiris, authors’authors’ investments interpretation.interpretation. in the domestic petrochemical sector. Similarly, companies in Russia enhance their supply chain by vertical integrations. The increase inin thethe U.S.U.S is is due due to to shale shale oil oil and and gas gas investments investments after after the the development development of hydraulic fracture andand horizontalhorizontal drillingdrilling techniquestechniques and isis supportedsupported byby sector-specificsector-specific developmentsdevelopments andand regulations, InternationalTop Tax Domestic ReviewReview Countries' [[30].30]. Afte Afterr Transactionsoil oil and and gas companies by Sector discover and invest in unconventional oil and gas, the companies, which havehave not yet entered this new business, started to Upstream invest expectingexpecting thatthat thethe assetasset pricesprices willwill rise,rise, HsuHsu et al. [[5].5]. After the discovery and the development Oilfield Services & Equipment of the fields, initial production signals the volume of reserves. This encourages and triggers the M&A investments. First moverMidstream companies start to sell their assets, know-how and operational expertise, Hsu et al. [5]. Moreover,Integrated Oil existing & Gas private property rights and an ideology supportive of private ownership increase pressure on politicians to adopt regulations that encourage drilling. As a result, Downstream the U.S. experienced a rapid increase in shale production, Murtazashvili [31]. The U.S. has been the epicenter0% of M&A 10% investments 20% 30% during 40% recent 50% decades 60% 70% (and over80% more than a century in drilling) and remains a major playerBased in the on oilDeal and Counts gas in industry. % US firms completed the highest number of domestic deals not only for unconventional, but also for conventional, oil and gas. Moreover,Figure the 4. Domestic U.S. has deal the additionalcounts by sectors advantages in top domest of advancedic countries oil and (major gas players). engineering Source: technologies, based on of rankingIHS amongMarkit Transaction the world’s Analys largestis, producersauthors’ interpretation. along Saudi Arabia and Russia and of a high domestic oil and gas demand [1]. The increase in the U.S is due to shale oil and gas investments after the development of hydraulic fracture and horizontal drilling techniques and is supported by sector-specific developments and regulations, International Tax Review [30]. After oil and gas companies discover and invest in unconventional oil and gas, the companies, which have not yet entered this new business, started to invest expecting that the asset prices will rise, Hsu et al. [5]. After the discovery and the development

Energies 2020, 13, x FOR PEER REVIEW 13 of 25 of the fields, initial production signals the volume of reserves. This encourages and triggers the M&A investments. First mover companies start to sell their assets, know-how and operational expertise, Hsu et al. [5]. Moreover, existing private property rights and an ideology supportive of private ownership increase pressure on politicians to adopt regulations that encourage drilling. As a result, the U.S experienced a rapid increase in shale production, Murtazashvili [31]. The U.S has been the epicenter of M&A investments during recent decades (and over more than a century in drilling) and remains a major player in the oil and gas industry. US firms completed the highest number of domestic deals not only for unconventional, but also for conventional, oil and gas. EnergiesMoreover,2020, the13, 5580 U.S has the additional advantages of advanced oil and gas engineering technologies,13 of 25 of ranking among the world’s largest producers along Saudi Arabia and Russia and of a high domestic oil and gas demand [1]. Similarly, therethere isis an increasing trend for acquisitionsacquisitions between small andand mid-size operators and large upstream companiescompanies in AustraliaAustralia andand CanadaCanada [[20].20]. In Canada, most transactions are for big natural gas projects. Furthermore, Canadian oil and gas companies, particularly the major oil sand producers, acquireacquire companies companies holding holding assets, assets, but but su ffsufferer from from low low stock stock market market valuation. valuation. At the At same the time,same domestictime, domestic transactions transactions in oilfield in servicesoilfield services and equipment and equipment increased increased in Canada in [ 20Canada]. Domestic [20]. transactionsDomestic transactions in Australia in areAustralia driven bothare driven by conventional both by conventional and unconventional and unconventional resources. Particularly, resources. investmentsParticularly, ininvestments coal-bed methane in coal-bed exploration methane and explor production,ation and tightproduction, oil, shale tight oil andoil, shale gas and oil shallowand gas waterand shallow are increasing. water are increasing. China’s domestic transactions can be explained by the concern of the government to increase domestic energyenergy security. security. This This boosts boosts investments investments in exploration in exploration and production and production and refining and activitiesrefining notactivities only internationally, not only internationally, but also nationally but also [ 3nationally]. In addition, [3]. In China addition, wants China to reduce wants its coalto reduce consumption its coal andconsumption carbon emissions, and carbon which emissions, require replacing which require coal with replacing natural gascoal or with renewable natural energy. gas or Particularly, renewable Chinaenergy. invested Particularly, in refining, China retail,invested distribution, in refining, pipeline retail, projectsdistribution, and increasedpipeline projects investment and inincreased natural gasinvestment and LNG. in natural gas and LNG. In the UK, UK, most most of of the the domestic domestic transactions transactions are are driven driven by by shallow shallow water water drilling drilling investment investment in inthe the North North Sea, Sea, primarily primarily M&A M&A investments investments in natural in natural gas exploration gas exploration and production. and production. Mostly, Mostly, large largeupstream upstream companies companies acquired acquired assets/equipment assets/equipment for shallow for shallow water waterdrilling drilling from fromfirms firmswith withhigh highexpertise expertise and andoperational operational skills. skills. Russia’s Russia’s domestic domestic transactions transactions are are driven driven by by investment investment in conventional oil and gas. Companies Companies such as as Novo Novotek,tek, Lukoil, Lukoil, Gazprom Gazprom and Rosneft Rosneft acquired acquired mostly upstream assets, reserves andand producingproducing fieldsfields fromfrom otherother smallsmall domesticdomestic players.players.

6.2. Cross-Border M&A: Geographical Patterns 6.2. Cross-Border M&A: Geographical Patterns Our sample contains 166 targets and 94 acquirer countries between 2000 and 2018 (countries such Our sample contains 166 targets and 94 acquirer countries between 2000 and 2018 (countries as Falkland Islands, Faroe Islands, East Timor, Republic of Georgia, and Sahrawi Arab Democratic such as Falkland Islands, Faroe Islands, East Timor, Republic of Georgia, and Sahrawi Arab RepublicDemocratic are Republic excluded dueare excluded to lack of availabledue to lack data of over available the period data of over 2000 the to 2018. period Moreover, of 2000 oneto 2018. must alsoMoreover, account one for must the di alsofferences account on for dispersion the differences of the dealson dispersion for some of countries the deals due for tosome country-size, countries lackdue ofto informationcountry-size, or lack access of informat to data).ion Those or access deals to accounted data). Those for 6504deals cross-border accounted for transactions 6504 cross-border and the averagetransactions deal and value the of average USD 352 deal MM. value Figure of USD5 shows 352 MM. the allocation Figure 5 shows of the the deals allocation in terms of of the sectors. deals Thein terms cross-border of sectors. upstream The cross-border deals are higherupstream than deal thes othersare higher based than on the deal others counts. based on deal counts.

Cross-border Transactions by Sector

Upstream Oilfield Services & Equipment Midstream Integrated Oil & Gas Downstream

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

Figure 5. Cross-border transactions by sectorssectors/segment/segmentss overover thethe periodperiod 2000–2018.2000–2018. Source: based on IHS Markit Transaction Analysis,Analysis, authors’authors’ interpretation.interpretation.

The U.S. had 1056 cross-border oil and gas transactions over this period, leading to the average transaction value of USD 312 MM. Figure6 shows the top target countries of the U.S. based on total number of transactions. Canada is the top target and is the fifth largest for natural gas and sixth largest for crude oil producer with huge proven reserves [3]. Its oil sands and oil and gas reserves can provide secure energy supply and this is with a stable political environment, an advanced technology, and skilled operators (according to Canadian Association of Petroleum Producers (2019), oil sands are a mixture of sand, water, and bitumen (oil that is too heavy or thick to flow on its own). The oil sands are found in three regions within the provinces of Alberta and Saskatchewan. Oil sands are Energies 2020, 13, x FOR PEER REVIEW 14 of 25

The U.S had 1056 cross-border oil and gas transactions over this period, leading to the average transaction value of USD 312 MM. Figure 6 shows the top target countries of the U.S based on total number of transactions. Canada is the top target and is the fifth largest for natural gas and sixth largest for crude oil producer with huge proven reserves [3]. Its oil sands and oil and gas reserves can provide secure energy supply and this is with a stable political environment, an advanced Energiestechnology,2020, 13 and, 5580 skilled operators (according to Canadian Association of Petroleum Producers (2019),14 of 25 oil sands are a mixture of sand, water, and bitumen (oil that is too heavy or thick to flow on its own). The oil sands are found in three regions within the provinces of Alberta and Saskatchewan. Oil sands recovered using two main methods: drilling (in situ) and mining. The method used depends on how are recovered using two main methods: drilling (in situ) and mining. The method used depends on deep the reserves are deposited). The U.S. oil and gas companies invest in oil and gas assets, mainly in how deep the reserves are deposited). The U.S oil and gas companies invest in oil and gas assets, Alberta and Saskatchewan Basins (Alberta has most of the oil and gas reserves and all the oil sands, mainly in Alberta and Saskatchewan Basins (Alberta has most of the oil and gas reserves and all the IHS Markit [20]). Reducing the cost of production is one motivation to invest in Canada. Of course, oil sands, IHS Markit [20]). Reducing the cost of production is one motivation to invest in Canada. Of proximity (not only geographically and here even linguistically) is helpful for any M&A investment, course, proximity (not only geographically and here even linguistically) is helpful for any M&A Reddy and Xie [1]. investment, Reddy and Xie [1].

The Cross-Border Transactions of the U.S: Top 10 Target Countries

United Kingdom

Colombia

Brazil Countries Russia

China 0 50 100 150 200 250 300 350

Deal Counts

Figure 6.6. TheThe U.S.U.S cross-border transactions by target countries over the periodperiod 2000–2018.2000–2018. Source: based onon IHSIHS MarkitMarkit TransactionTransaction Analysis,Analysis, authors’authors’ interpretation.interpretation.

Moreover, thethe U.S.U.S oil and gas companies make dealsdeals at the corporate level (transaction volumes areare aboveabove USDUSD 1010 billion)billion) withwith companies from CanadaCanada andand United Kingdom and acquire thethe entire businessbusiness of companiescompanies in thethe oilfieldoilfield servicesservices andand equipmentequipment sector.sector. A highhigh numbernumber of M&AM&A flowsflows toto UK,UK, AustraliaAustralia andand NorwayNorway andand alsoalso toto Brazil,Brazil, Russia,Russia, India,India, China,China, and South Africa (BRICS), whichwhich oofferffer similarsimilar investorinvestor friendlyfriendly environments,environments, richrich naturalnatural resources,resources, a developeddeveloped oil andand gasgas industryindustry andand relativelyrelatively cheapercheaper assetsassets comparedcompared toto otherother developeddeveloped countries.countries. Historically, the U.S.U.S companies companies were were not not present present in in China’s China’s oil oil and and gas gas industry. industry. However, However, in inrecent recent years years and and following following the the shale shale revolution revolution of of the the U.S U.S. and and its its lifted lifted oil oil and and gas gas export ban, companiescompanies enteredentered thethe ChineseChinese marketmarket [[20].20]. AnotherAnother focus ofof thethe U.S.U.S oil and gas companies is onon LatinLatin AmericanAmerican countriescountries such such as as Argentina Argentina and and Colombia Colombia because because their their governments governments support support oil and oil gasand transactionsgas transactions with with US companies. US companies. Most ofof thethe cross-bordercross-border transactionstransactions across didifferfferentent sectorssectors dealdeal withwith assetsassets (80%(80% ofof thethe totaltotal dealdeal counts).counts). It highlightshighlights opportunistic behavior and attemptsattempts toto improveimprove long-termlong-term relationshipsrelationships withwith otherother shareholdersshareholders byby acquiringacquiring assetsassets toto gaingain control.control. This supports Finklestein’sFinklestein’s view [[32]32] thatthat M&AM&A isis one one of theof the options options that athat firm a uses firm to reduceuses to its reduce environmental its environmental dependencies dependencies and uncertainties. and Gaininguncertainties. control Gaining of assets control by acquisitions of assets by reduces acquis theitions unforeseen reduces eventsthe unforeseen and provides events flexibility and provides to the ownerflexibility on decisionto the owner making. on decision making. However, therethere areare megamega dealsdeals inin corporatecorporate transactionstransactions (e.g.,(e.g., corporatecorporate transactions,transactions, thethe totaltotal averageaverage volumevolume ofof thethe dealsdeals areare USDUSD 620620 MM),MM), particularlyparticularly concerningconcerning thethe U.S.U.S andand CanadaCanada whowho hostedhosted aa large number ofof such transactionstransactions amongamong thethe toptop target countries.countries. Those corporate deals can bebe explained by the aims of minimizing production costs, increasing market shares and to gain other competitive advantages (e.g., horizontal integrations that increase the value of the company, Reddy and Xie [1], rather than seeking natural resources or capabilities.

The top 20 target countries (see Figure7) include 8 countries of the Organization for Economic Co-operation and Development (OECD) (https://www.oecd.org/about/), including some of the major players in the oil and gas industry (e.g., the U.S., Canada, United Kingdom, Australia, Norway, Netherland, Italy and New Zealand), three of the BRIC countries (Brazil, Russia and China), one OPEC Energies 2020, 13, x FOR PEER REVIEW 15 of 25 competitive advantages (e.g., horizontal integrations that increase the value of the company, Reddy and Xie [1], rather than seeking natural resources or capabilities. The top 20 target countries (see Figure 7) include 8 countries of the Organization for Economic Co-operation and Development (OECD) (https://www.oecd.org/about/), including some of the major

Energiesplayers2020 in, 13the, 5580 oil and gas industry (e.g., the U.S, Canada, United Kingdom, Australia, Norway,15 of 25 Netherland, Italy and New Zealand), three of the BRIC countries (Brazil, Russia and China), one OPEC (Nigeria) member and one former OPEC member (Indonesia), one Caspian region country (Nigeria)(Kazakhstan), member and and developing one former countries OPEC member such (Indonesia),as Colombia, one Argentina, Caspian region Egypt, country Peru, (Kazakhstan),Tunisia and andPapua developing New Guinea. countries such as Colombia, Argentina, Egypt, Peru, Tunisia and Papua New Guinea.

Figure 7. Top 20 target and acquirer countries based on total deal counts over the period 2000–2018. Source: based on IHS Markit Transactio Transactionn Analysis, authors’authors’ interpretation.interpretation.

The top 20 acquireracquirer countriescountries consistconsist ofof 1414 OECDOECD countriescountries (e.g.,(e.g., thethe U.S.,U.S, Canada, the UK, Australia, Norway, France,France, JapanJapan andand othersothers asas listed), the above three BRIC countries (Russia, India and China),China), one one OPEC OPEC member member (United (United Arab Arab Emirates), Emirates), and less and expected less expected countries countries such as Singapore such as andSingapore Bermuda and are Bermuda also in theare listalso of in top the acquirers. list of top acquirers. Similar toto thethe domesticdomestic transactions, transactions, the the U.S., U.S, Canada, Canada, Australia, Australia, and and United United Kingdom Kingdom are are also also the mostthe most active active countries countries in cross-border in cross-border M&A M&A transactions transactions either aseither acquirer as acquirer or target or country. target country. Canada hasCanada the highesthas the numberhighest number of transactions of transactions as an acquirer as an acquirer and the U.S.and hasthe becomeU.S has become the top targetthe top country target andcountry hosts and the hosts highest the numberhighest ofnumber M&A of transactions. M&A transactions. The case ofof thethe U.S.U.S and Canada is special.special. Canadian and the U.S.U.S firms firms run the M&A market globally and cultural cultural and and geographical geographical closeness closeness adds adds another another trigger. trigger. “Distance “Distance has has been been shown shown in inthe the previous previous literature literature as asa aproxy proxy for for the the internat internationalional capital capital market market failures, failures, due due to asymmetricasymmetric information” CovalCoval andand PortesPortes [[33,34].33,34]. Although thisthis seemsseems toto explainexplain thethe situationsituation betweenbetween U.S.U.S and Canada, the overall picture does notnot confirmconfirm thisthis view.view. The mostmost stunningstunning observationobservation is is the the mismatch mismatch between between target target countries countries and and the the availability availability of the of resources,the resources, i.e., proveni.e., proven reserves reserves of crude of crude oil and oil natural and natural gas, and gas, low and costs low of extraction.costs of extraction. More precisely, More theprecisely, countries the withcountries truly with large truly reserves large and reserves low extraction and low extraction costs are not costs among are not the among top target the top countries. target Thiscountries. highlights This highlights that political that andpolitical institutional and instit constraintsutional constraints beat pure beat economic pure economic opportunities opportunities in oil andin oil gas and M&A gas M&A transactions transactions and contradictsand contradicts thetheory the theory stressing stressing resource resource dependence dependence attributes attributes [1]. Our[1]. Our view view is supported is supported by the by studies the studies of (e.g., of (e.g., [14,15 [14,15,35]),,35]), which which found found that certain that certain factors factors that proxy that theproxy institutional the institutional environment environment could havecould a have negative a negative impact impact on the M&Aon the transactions. M&A transactions. The reason The isreason that resourcesis that resources are of courseare of course a condition a condition sine qua sine non, qua but non, politics but politics and regulation and regulation seem seem to be evento be more important, which could be the reason why U.S. oil and gas firms do not invest in certain regions and countries.

The top 10 countries in terms of oil and gas reserves are listed in Figure8, which are followed by countries such as the U.S., Kazakhstan, China, Qatar, Brazil, Algeria, Mexico, Angola, Ecuador and Azerbaijan with rich oil reserves (million in barrels) and Turkmenistan, Ukraine, Indonesia, Mozambique, Uzbekistan or Malaysia, with its rich natural gas reserves (trillion cubic feet), which are Energies 2020, 13, x FOR PEER REVIEW 16 of 25

even more important, which could be the reason why U.S oil and gas firms do not invest in certain regions and countries. The top 10 countries in terms of oil and gas reserves are listed in Figure 8, which are followed Energiesby countries2020, 13 such, 5580 as the U.S, Kazakhstan, China, Qatar, Brazil, Algeria, Mexico, Angola, Ecuador16 ofand 25 Azerbaijan with rich oil reserves (million in barrels) and Turkmenistan, Ukraine, Indonesia, Mozambique, Uzbekistan or Malaysia, with its rich natural gas reserves (trillion cubic feet), which inare the in the 10–20 10–20 top top countries countries with with rich rich oil oil and and gas gas reserves. reserves. However, However, most most of of those those countries countries dodo notnot attractattract a largerlarger numbernumber ofof M&AM&A transactionstransactions comparedcompared toto theirtheir reserves,reserves, whichwhich shouldshould be,be, ceterisceteris paribus,paribus, anan indicationindication ofof aa highhigh returnreturn onon investments.investments.

FigureFigure 8. Oil and gas reserves by countries, using figure figuress from 2015 (oil reserves in billion barrels, gas reservesreserves inin trilliontrillion cubiccubic feet).feet). Source:Source: U.S.U.S Energy Information AdministrationAdministration (EIA) Statistics, 20192019 ((www.eia.gov).www.eia.gov).

TheThe onlyonly wayway toto interpretinterpret thethe observedobserved patternpattern isis thatthat institutions,institutions, propertyproperty rightsrights andand politicspolitics mattermatter muchmuch moremore thanthan resources,resources, potentialpotential reserves,reserves, andand primaprima faciefacie economiceconomic opportunitiesopportunities in aa targettarget country.country. The The U.S., U.S, UK, UK, Canada, Canada, the UK,the Norway,UK, Norway, Netherlands, Netherlands, Italy, New Italy, Zealand New andZealand Australia and asAustralia developed as developed countries countries have stable have politics, stable politics, advanced advanced technologies, technologies, strong strong property property rights rights and internationaland international companies companies with know-howwith know-how in the oilin andthe oil gas and industry, gas industry, which renders which them renders an attractive them an targetattractive in spite target of highin spite extraction of high costs extraction (according costs to(according Property Rightto Property Alliance Right [36], Alliance The International [36], The PropertyInternational Right Property Index (IPRI) Rightscores Index the(IPRI) underlining scores the institutions underlining of institutions a strong property of a strong rights property regime: therights legal regime: and political the legal environment, and political environment, physical property physical rights, property and intellectual rights, and propertyintellectual rights. property It is therights. world’s It is the only world’s index only entirely index dedicated entirely todedica the measurementted to the measurement of intellectual of intellectual and physical and property physical rights.property The rights. IPRI The has IPRI a range has ofa range 1 to 10. of 1 The to 10. higher The thehigher index the score, index thescore, better the thebetter property the property rights regimerights regime of the countryof the country (https: //(https://www.internationalpropertyrightsindex.org)).www.internationalpropertyrightsindex.org)). However, However, unlike unlike in the U.S.in the and U.S in aand few in other a few countries, other companiescountries, orcomp individualsanies or cannotindividuals extract cannot or sell anyextract natural or /sellmineral any commoditynatural/mineral in most commodity countries in without most obtainingcountries rightswithout or licensesobtaining from rights the government. or licenses Therefore,from the agovernment. comparison Therefore, based on property a comparison rights based and ownership on property cannot rights yield and ownership a general conclusion cannot yield (Omorogbe a general and Oniemola [37]). Countries with large reserves score low in terms of property rights. For instance, according to the Property Rights Alliance, most of those countries have a score below six (1 to 10, where 10 indicates the best property rights), which indicates that countries lack institutions such as Energies 2020, 13, 5580 17 of 25 legal and political environment, control of corruption, rule of law, judicial independence, protection of physical property rights and similar. Furthermore, the natural resources are in most of the cases controlled by the governments and national oil companies. The flows between the top acquirer and top target countries show a similar and unexpected outcome. The neoclassical theory implies that capital should flow from capital rich to capital poor countries, Alfaro et al. [38]. However, Lucas [39] explains that factors such as production (i.e., economies of scale), government policies, and institutions may create different outcomes so that institutional quality shapes the capital flows, consequently, impacting investments such as mergers and acquisitions and foreign direct investments. In this context, institutions affect economic performance and influence investment decisions of companies. The pattern of cross-border M&A flows supports Lucas’s paradox because there is no significant capital flow in the oil and gas transactions from rich to poor countries as would be expected. Canada and the U.S. conclude more than 50% of their M&A transactions between each other. Oil and gas companies from the UK announce most of their M&A transactions in the U.S., Canada, Russia, Norway, and Australia. Australia also invests mostly in other developed countries such as the U.S. and New Zealand. The investments from the top European acquirers (such as France, Netherland, Norway, Germany, Spain, Switzerland, Sweden, and Italy) are mostly in the U.S., Canada, and the UK, with some going to Russia. Similar to European acquirers, Japan as another top acquirer also has a high amount of transactions in developed countries such as the U.S., UK, Canada and Australia covering more than 50% of the total capital flows of Japan in cross-border oil and gas transactions. On the other hand, China, Russia, India, and Singapore, also among the top acquirer countries, diversified their M&A transactions by investing both in developed countries and emerging and developing countries [1]. Particularly, Russia and Brazil, with their rich natural resources, focused on other developing and developed countries, looking for comparative advantages rather than additional resources. Colombia, Russia, Indonesia, Brazil, Argentina, Egypt, Kazakhstan receive a noticeable amount of transactions compared to other target countries. Colombia, for instance, mostly receive transactions in the upstream sector (more than 90% of its total transactions). Canada, the U.S. and the UK acquire mostly conventional oil and gas assets in Colombia. European oil and gas companies from France (e.g., Total S.A, Perenco S.A.) and Spain (e.g., Repsol S.A) acquire upstream assets in Colombia. Additionally, Peru and Chile acquire Colombian upstream assets. Colombia became an interesting opportunity for investors in the oil and gas industry over the last few decades, but its neighbor with the world’s largest oil reserves did not, Venezuela, due to its political regime. Brazil and Argentina are other countries in Latin America that receive most of their investments also from the U.S., Canada, and the UK. Moreover, China acquire oil and gas companies both in Brazil and Argentina. Brazil attracts investments from European countries such as Norway, Netherland, and France. Most of them are vertical integrations, between European integrated oil and gas companies (e.g., Statoil ASA, Total S.A, Vitol Group, Royal Dutch Shell), that invest in the upstream and downstream business in Brazil. Brazil has not been highly active in the M&A market in recent years despite its rich natural resources. Factors such as high capital and labor costs, taxation and problems with its infrastructure deter larger cross-border inflows. Likewise, Argentina’s ongoing economic problems have had a negative impact on foreign investors. The cross-border investments in Indonesia, most of them from Australia, the UK, Canada and the U.S. but also from neighboring regions (Singapore, China, Japan, South Korea, Thailand and Malaysia), show the increasing importance of South East Asia in the oil and gas industry and the place of Indonesia as a former OPEC country with its rich natural resources. The cross-border M&A inflows into Russia and China can be explained by their similar economic and institutional opportunities as BRICS and their rich natural resources, [1]. In general, BRIC countries offer comparable conditions for business and government support to foreign investors. Russia, for instance, holds the world’s largest natural gas reserves and significant oil reserves. European oil Energies 2020, 13, 5580 18 of 25 and gas integrated oil and gas companies invest in oil and gas assets in Russia (including some of the mega deals in cross-border M&A market in recent years). The M&A in China are more diversified in terms of deals by sectors such as upstream and downstream transactions. International investors have also acquired midstream assets, e.g., pipeline projects in China. Most of the investments come from U.S. oil and gas companies, particularly after the U.S. shale oil and gas revolution. The reason is that China holds unconventional oil and gas production reserves but lacks the expertise for production. Moreover, as China became itself active in M&As in the oil and gas industry over recent years, it has also opened up to foreign investors, because they could bring expertise and technological advancements to the oil and gas sector. Australia, Singapore, the UK, and Netherlands are the other countries that conclude M&A transactions in China. Although Russia and China are among the top target countries, one must still account that state-ownership can cause lower performance due to lower incentives, stronger organizational power, non-maximizing behavior, the risk of political interventions (which BP learned the hard way twice in Russia), which consequently impact and lower the benefit of M&A strategy, [40]. A few surprising observations are: although Peru and Papua New Guinea have rather little oil and natural gas resources, they became top targets for M&A transactions. Particularly, Peru’s resources are not comparable to Mexico, Brazil, and Venezuela, but Peru has a growing economy and stable politics since the 1990s, E&Y [41]. Canadian oil and gas companies and financial investors have acquired oilfield equipment and services and upstream assets in Peru over the last few decades. Add to those the transactions from Europe, mostly from the UK and Spain and from the same region, Colombia, Uruguay, and Chile. Similarly, Papua New Guinea has not been producing many basins, but active fields for explorations. Australia as a nearby developed country with oil and gas expertise was one of the first acquirers followed by Canada and the U.S. In recent years, with the increasing attempts to increase LNG production, the country has also received transactions from other countries such as France (e.g., Total S.A), Indonesia and Japan [20]. The obvious, puzzling observation is the lack of Middle East and OPEC member countries in our sample, although they control most of the world’s oil reserves (more than two thirds) and the areas of cheap extraction. The reasons are that their governments do not offer foreign investor opportunities and lack reliable political, economic, and legal institutions. Therefore, we find only few transactions in Ecuador, Qatar, Libya, Angola, Algeria, and other member countries. Most of the transactions are horizontal integrations rather than vertical integrations. Vertical integrations are more concentrated by the top listed European oil and gas companies, which want to increase and balance future oil and gas supplies and to create a hedge against unexpected events (e.g., oil price volatility). In an uncertain environment, the transaction costs of writing and enforcing contracts that specify all obligations under all contingencies are prohibitively costly, Barrare-Rey [42]. In such a context, vertical integrations are preferred by oil and gas companies. The flows of cross-border M&A transactions differ between acquirer and target countries. This suggests that M&As are not primarily driven by resource opportunities, but by other considerations such as geopolitics, seeking strategic assets, increasing overall efficiency, and even more likely, institutional environments and uncertainties, which play a strong role. Moreover, sectoral challenges, changes and innovations and economic development play an important role in M&A transactions. For instance, meeting the increasing domestic energy demand of China and India requires the acceptance of more risk than in developed countries, and therefore there seems to be a genuine concerned about political risks when choosing a target country.

6.3. Cross-Border M&A: Geopolitical and Economic Events M&A is one of the strategies for inorganic growth. On the one hand, the motivation and driving facts depend on the elements such as natural resources, capabilities, politics, institutions, and regulations. On the other hand, it depends on financial markets, capital market liquidity, commodity prices and the volatility of oil price, Hsu et al. and Schimizu et al. [5,6]. Particularly, oil price volatility has a strong Energies 2020, 13, 5580 19 of 25 Energies 2020, 13, x FOR PEER REVIEW 19 of 25 Energies 2020, 13, x FOR PEER REVIEW 19 of 25 impact on the value of oil and gas M&A transactions. The volatility of the oil market spills over to has a strong impact on the value of oil and gas M&A transactions. The volatility of the oil market otherhas a commoditystrong impact and on financial the value markets, of oil and Kang gas et M&A al. [43 transactions.]; Bos et al. [The2]. Wavesvolatility in M&Aof the activity oil market are spills over to other commodity and financial markets, Kang et al. [43]; Bos et al. [2]. Waves in M&A relatedspills over to this to other price commodity volatility. For and instance, financial an markets, increase Kang in the et oil al. price[43]; willBos et increase al. [2]. theWaves value in ofM&A the activity are related to this price volatility. For instance, an increase in the oil price will increase the reserves.activity are Therefore, related to one this would price expectvolatility. a positive For inst correlationance, an increase between in the the oil oil price price and will the increase value andthe value of the reserves. Therefore, one would expect a positive correlation between the oil price and volumevalue of ofthe oil reserves. and gas M&ATherefore, [5]. Figureone would9 shows expect the developmenta positive correlation of cross-border between M&A the oil transactions price and the value and volume of oil and gas M&A [5]. Figure 9 shows the development of cross-border M&A overthe value the years and volume and the of oil oil price. and gas A positive M&A [5]. relation Figure can9 shows be observed the development between theof cross-border numbers of M&A transactions over the years and the oil price. A positive relation can be observed between the numbers transactions over and thethe oilyears price. and the oil price. A positive relation can be observed between the numbers of M&A transactions and the oil price. of M&A transactions and the oil price.

Oil Price and Cross-border M&A Transactions 700 120 700 120 600 100 600 100 500 500 80 400 80 400 60 300 60 300 40 Deal Counts 200

40 Oil Price ($/bbl) Deal Counts 200 100 20 Oil Price ($/bbl) 100 20 0 0 0 0

Figure 9. Relationship between oil price (annual average oil price, West Texas Intermediate (WTI, Figure 9. RelationshipRelationship between between oil oil price price (annual (annual averag averagee oil oil price, price, West West Texas Intermediate (WTI, $/bbl.) (adjusted oil price based on inflation) and M&A transactions. Source: based on macro trends, $$/bbl.)/bbl.) (adjusted oil price based on inflation)inflation) and M&A transactions. Source: based based on on macro macro trends, 2019, authors’ interpretation. 2019, authors’ interpretation. One expects a similar relation with respect to natural gas price and M&A. Figure 10 shows the One expects a similar relation with respect to natural gas price and M&A. Figure 10 shows the natural gas prices and the development of M&A transactions (based on deal counts) and it shows a natural gas prices and and the the development development of of M&A M&A tran transactionssactions (based (based on on deal deal counts) counts) and and it itshows shows a less strong correlation to deal counts compared to the oil price (see Table 4 for the correlation matrix). aless less strong strong correlation correlation to deal to deal counts counts compared compared to the to oil the price oil (see price Table (see 4 Table for the4 forcorrelation the correlation matrix). However, both have a positive correlation with the number of M&A deals. On the other hand, it matrix).However, However, both have both a havepositive a positive correlation correlation with the with number the number of M&A of M&A deals. deals. On Onthe theother other hand, hand, it requires further investigation and empirical evidence. itrequires requires further further investigation investigation and and empirical empirical evidence. evidence.

Natural Gas Price and Cross-Border M&A Transactions 700 10 700 10 600 600 8 500 8 500 400 6 400 6 300 4 300 4 Deal Counts 200 Deal Counts 200 2 100 2 Natural Gas Price $ 100 Natural Gas Price $ 0 0 0 2000200120022003200420052006200720082009201020112012201320142015201620172018 0 2000200120022003200420052006200720082009201020112012201320142015201620172018

Figure 10. Relationship between natural gas prices (Henry Hub, $/Btu) and M&A transactions. Source: Figure 10. RelationshipRelationship between between natural gas prices prices (H (Henryenry Hub, Hub, $/Btu) $/Btu) and M&A M&A transactions. transactions. Source: Source: based on macro trends, 2019, authors’ interpretation. based on macro trends, 2019,2019, authors’ interpretation.interpretation. Table 4. The correlation matrix (correlation matrix shows the relationship between oil and natural gas FigureTable 4. 11 The shows correlation the cross-border matrix (correlation M&A transactionsmatrix shows inthe terms relationship of number between of deals oil and and natural their gas average prices (based on adjusted inflation prices of annual average WTI, $/bbl. and Henry Hub, $/Btu.) and deal valueprices over(based a periodon adjusted of 2000 inflation to 2018 prices and of it a indicatesnnual average crucial WTI, events. $/bbl. Oneand Henry can expect Hub, similar$/Btu.) and patterns cross-border M&A deal counts over the period 2000–2018). Source: based on IHS Markit Transaction betweencross-border M&A transactions M&A deal coun andts suchover the events. period M&A 2000–2018). transactions Source: based decreased on IHS between Markit Transaction 2007 and 2008 Analysis, illustrated by authors. parallelAnalysis, to the illustrated global financial by authors. crisis. Other events such as the U.S. shale increase, and OPEC production M&A Deal Counts Oil Price Natural Gas Price cuts also seems to have an impactM&A on the Deal M&A Counts transactions in Oil later Price years. Natural Gas Price M&A Deal Counts 1 M&A Deal Counts 1 Oil Price 0.6426 1 Oil Price 0.6426 1 Natural Gas Price 0.5533 0.2433 1 Natural Gas Price 0.5533 0.2433 1

Energies 2020, 13, 5580 20 of 25

Table 4. The correlation matrix (correlation matrix shows the relationship between oil and natural gas prices (based on adjusted inflation prices of annual average WTI, $/bbl. and Henry Hub, $/Btu.) and Energiescross-border 2020, 13, x FOR M&A PEER deal REVIEW counts over the period 2000–2018). Source: based on IHS Markit Transaction20 of 25 Analysis, illustrated by authors. Figure 11 shows the cross-border M&A transactions in terms of number of deals and their M&A Deal Counts Oil Price Natural Gas Price average deal value over a period of 2000 to 2018 and it indicates crucial events. One can expect similar patterns betweenM&A M&A Deal transactions Counts and such1 events. M&A transactions decreased between 2007 and Oil Price 0.6426 1 2008 parallel to the global financial crisis. Other events such as the U.S shale increase, and OPEC Natural Gas Price 0.5533 0.2433 1 production cuts also seems to have an impact on the M&A transactions in later years.

Cross-border M&A Transactions by Deal Value & Deal Count

700 1000 Banking crisis, Financial crisis 600 800 Iran threatened 500 Straits of Hormuz Global Crisis

600 400 Deal Counts 300 Avg. Deal Value (USD MM) 400

200

200 100

0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015201620172018

Afghanistan Great Oil price War Bernanke, Fed Chair Recession and OPEC The dollar rose production 15% and U.S cuts Recession & 9/11 Hurricane shale increased Attack Katrina

Figure 11. Geopolitical and economic events over the period 2000–2018. Source: based on IHS Markit Transaction Analysis,Analysis, BPBP (British(British PetroleumPetroleum Company)Company) StatisticsStatistics Report,Report, authors’authors’ interpretation.interpretation.

7. Discussion Discussion and Conclusions While therethere isis extensive extensive research research on on M&A M&A in general, in general, research research on M&A on inM&A the oilin andthe gasoil industryand gas industryis scarce. is However, scarce. However, this is crucial this givenis crucial the specificgiven th characteristicse specific characteristics of the oil and of the gas oil industry. and gas This industry. study Thishas analyzed study has the analyzed oil and the gas oil M&A and transactionsgas M&A transactio over thens last over decades, the last following decades, thefollowing call of Kangthe call and of JohanssonKang and Johansson [11] and Reddy [11] and and Reddy Xie [1] and for sector-specific Xie [1] for sector-specific research of cross-borderresearch of cross-border M&A investments M&A investmentsand extending and the extending works of the Ng works and Donker of Ng [and10], Donker Hsu et al.[10], [5] Hsu and et Reddy al. [5] and and Xie Reddy [1]. Itand investigates Xie [1]. It investigatesthe motives ofthe cross-border motives of cross-border M&A transactions M&A intransa thections oil and in gas the industry oil and gas from industry several from perspectives several perspectives (economic and political), exposes possible drivers of and analyzes patterns of recent oil and gas M&A transactions. The major finding, based on our large and unique data set, is that instead of standard economic reasons, industry-specific, political, and institutional considerations are more likely to drive M&A transactions. The increased number of transactions between developed countries and the lack of flows to developing countries rich in natural resources show that an acquirer focuses on political,

Energies 2020, 13, 5580 21 of 25

(economic and political), exposes possible drivers of and analyzes patterns of recent oil and gas M&A transactions. The major finding, based on our large and unique data set, is that instead of standard economic reasons, industry-specific, political, and institutional considerations are more likely to drive M&A transactions. The increased number of transactions between developed countries and the lack of flows to developing countries rich in natural resources show that an acquirer focuses on political, institutional risks and other uncertainties rather than accounting profits when choosing a target. This is highlighted by the many transactions between countries such as Canada, the U.S., the UK and Australia. Additionally, we make note of the increasing power of the U.S. companies in the oil and gas M&A market due to recent innovations and changes, such as increased production, shale oil and gas, and other technological improvements in production. We also show that countries with extensive know-how of the oil and gas industry and resources (e.g., Russia, China, the U.S., the UK and Canada) have focused on increasing their domestic transactions in recent years. Given the economic and political importance of international M&A activities, our analysis has important implications for policymakers and practitioners. M&A activity in upstream oil and gas depends of course on the availability of resources but much more on less tangible characteristics of a host country, such as the economic and political institutions. Therefore, policymakers can affect the flow of M&A substantially by changing regulatory and fiscal frameworks. Moreover, M&A flows and resource mobilization both in international and domestic levels can impact the future project economics, reduce the risk in higher risk environment and change patterns of asset allocation in the oil and gas industry. However, to change the most important political and legal institutions of a country will be difficult for most policymakers. Our survey can be the basis for future research. A major implication of our survey is that usual economic indicators for mergers will provide presumably little explanatory power given the institutional and political constraints. Therefore, an analysis of the drivers of M&A investments in the oil and gas industry, in particular upstream, requires an empirical analysis that must go far beyond the collection of the usual (mostly economic) data. It will be interesting to uncover the drivers of M&A transactions in terms of value and volume based on previous literature by adding potential sector-specific factors as we pointed out in this paper. For instance, it is essential to increase the awareness of the risk and uncertainties for investors for many dimensions, not least those caused by climate change mitigation policies (the current COVID-19 pandemic is a classical risk (because pandemics are a recurrent phenomenon as Bill Gates warned a few years ago) while climate change mitigation policies and political events such as reforms and revolutions have a high degree of uncertainty). Since many firms reshape their business strategies according to their expectations of the future oil and gas markets, changing regulation and energy policies will also stimulate M&A activity in the future. One may use certain event studies, how political and institutional changes affected M&A activity, which is also crucial to understand whether the changes in Saudi Arabia’s policy have economic effects.

Author Contributions: This work has been done by both authors. Conceptualization, ¸S.Ö.;methodology, ¸S.Ö.; validation, ¸S.Ö.and F.W.; formal analysis, ¸S.Ö.;investigation, ¸S.Ö.and F.W.; resources, ¸S.Ö.;writing—original draft preparation, ¸S.Ö.;writing—review and editing, F.W. and ¸S.Ö.;supervision, F.W.; project administration, ¸S.Ö. All authors have read and agreed to the published version of the manuscript. Funding: This research received from Open Access Funding by the University of Vienna. Acknowledgments: We gratefully acknowledge the collaboration of IHS Markit, Connect represented by Dillon Watts, John Cannon and Manon Carbiener for providing access to the database and their support for the project. Without their help to provide access to the M&A database, this work could not have been completed. OMV are represented by Arno Dettlinger, Johann Roithinger, and their team from Upstream Business Development and we thank them for their support. We thank Raffael Speitmann, WU Vienna, Research Associate, for his critical comments on a previous version of the paper. However, the design of the study, the analyses, the interpretation of data, the writing of the manuscript and any errors remain in the sole responsibility of the authors. Conflicts of Interest: The authors declare no conflict of interest. Energies 2020, 13, 5580 22 of 25

Energies 2020,, 13,, xx FORFOR PEERPEER REVIEWREVIEW 22 of 25 AppendixEnergies A2020, 13, x FOR PEER REVIEW 22 of 25 Appendix A Appendix A

Domestic Transactions by Deal Level 800 Domestic Transactions by Deal Level 800 600 600 400 400

Deal Counts 200

Deal Counts 200

Deal Counts 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Asset Corporate Asset Corporate Figure A1. Domestic M&A transactions by deal level based on deal counts (Figure A1 shows that FigureFigure A1. A1.Domestic Domestic M&A M&A transactions transactions byby dealdeal level based based on on deal deal counts counts (Figure (Figure A1 showsA1 shows that that assetFigure M&A A1. inDomestic domestic M&A transactions transactions are more by deal domina levelnt based than corporateon deal counts transactions (Figure over A1 showsthe period that asset M&A in domestic transactions are more dominant than corporate transactions over the period 2000–2018.asset M&A Itin trendsdomestic the transactions motivation areof resource-basedmore dominant acquisitions,acquisitions,than corporate acquisitionacquisition transactions ofof tangibletangibleover the assets,periodassets, 2000–2018. It trends the motivation of resource-based acquisitions, acquisition of tangible assets, replacement2000–2018. It reserves trends theby oilmotivation and gas companies of resource-based in domestic acquisitions, borders (see acquisition Figure A3 of fortangible cross-border assets, replacement reserves by oil and gas companies in domestic borders (see Figure A3 for cross-border transactionsreplacement reservesby deal by level)). oil and Source:gas companies based inon domestic IHS Markit borders Transa (see Figurection A3Analysis, for cross-border authors’ transactionsinterpretation.transactions by deal by level)).deal level)). Source: Source: based onbased IHS Markiton IHS Transaction Markit Transa Analysis,ction authors’Analysis, interpretation.authors’ interpretation. Domestic Transactions by Integration Level Domestic Transactions by Integration Level 800 800 600 600 400 400

Deal Counts 200 Deal Counts 200

Deal Counts 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 horizontal vertical horizontal vertical

FigureFigure A2. DomesticA2. Domestic M&A M&A transactions transactions by integration by integration level level based based on deal on countsdeal counts (Figure (Figure A2 represents A2 represents the distribution of the deal counts based on integration type. It shows that horizontal M&A the distributionrepresentsFigure A2. the ofDomestic distribution the deal M&A counts of thetransactions based deal counts on integration by base integrationd on integration type. level It shows basedtype. that It on shows horizontal deal that counts horizontal M&A (Figure transactions M&A A2 transactionsrepresents the are distribution higher than of the the deal vertical counts integr basedations on integration based on type. deal It showscounts, that which horizontal trends M&A the are highertransactions than the are vertical higher integrationsthan the vertical based integr on dealations counts, based which on deal trends counts, the increasingwhich trends acquisitions the increasingtransactions acquisitions are higher between than the oil vertical and gas integr compationsanies basedthat operate on deal in counts,the same which segment trends of thethe between oil and gas companies that operate in the same segment of the industry. It signals the firms that industry.increasing It acquisitionssignals the firms between that areoil motivatedand gas comp to increaseanies that synergies, operate cost in effectiveness,the same segment and expand of the are motivated to increase synergies, cost effectiveness, and expand the market control over domestic theindustry. market It controlsignals overthe firms domestic that areborders motivated by engaging to increase with synergies, acquisition cost strategy). effectiveness, Source: and based expand on bordersIHSthe bymarketMarkit engaging Transactioncontrol with over Analysis, acquisitiondomestic authors’ borders strategy). interpretation.by engaging Source: with based acquisition on IHS strategy). Markit Transaction Source: based Analysis, on authors’IHS interpretation.Markit Transaction Analysis, authors’ interpretation. Cross-border Transactions by Deal Level Cross-border Transactions by Deal Level 500 400500 300400 200300 100200 Deal Counts Deal Counts 1000 Deal Counts 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Asset Corporate Asset Corporate Figure A3. Cross-border M&A transactions by deal level based on deal counts. Source: based on IHS MarkitFigure TransactionA3. Cross-border Analysis, M&A authors’ transactions interpretation. by deal level based on deal counts. Source: based on IHS FigureMarkit A3. Cross-borderTransaction Analysis, M&A transactionsauthors’ interpretation. by deal level based on deal counts. Source: based on IHS Markit Transaction Analysis, authors’ interpretation. Markit Transaction Analysis, authors’ interpretation.

Energies 2020, 13, 5580 23 of 25 Energies 2020, 13, x FOR PEER REVIEW 23 of 25

Cross-border Transactions by Integration Level

400

300

200

100 Deal Counts 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

horizontal vertical

Figure A4. Cross-borderCross-border M&A M&A transactions by by integration level based on deal counts (Figure A4 shows the the trends trends based based on on integration integration type type for for cross-border cross-border oil oiland and gas gas M&A M&A transactions transactions over over the theperiod period 2000–2018. 2000–2018. Different Different than than the the domestic domestic tran transactions,sactions, patterns patterns for for horizontal horizontal and vertical integrations have similarities.similarities. However, However, the the horizontal integrations are stillstill dominant.dominant. One One of the motivations for cross-border M&A inin the oil and gas industryindustry is linked to boundaries of resources. By involving into cross-border transactions viavia vertical integration, companies might gain certain market intelligence and financialfinancial and operational gains). Source: based based on on IHS IHS Markit Markit Transaction Transaction Analysis, authors’ interpretation.

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