The Changing Role of Mergers and

Acquisitions (M&A) in the Energy Industry

Understanding and responding to the evolving M&A
environment to achieve high performance

Results of an Accenture research initiative

2
Table of contents
Introduction
Section 1: The “Business in a Fragile World” scenarios from an energy-sector
perspective 5

Section 2: Player market focus and mindsets for each scenario 10

Section 3: Predicted M&A activity under each scenario 13

Section 4: Distinctive capabilities required to compete in each scenario 17

Section 5: Will the M&A patterns of the past reoccur in the future? 20

3
Introduction
The pursuit of mergers and acquisitions (M&A) is a vital part of the
business strategies of many energy companies, but in recent years
its purpose has changed markedly. A decade ago, most M&A deals
were undertaken to create synergies and cut costs. Today, however,
companies are challenged to find new ways to grow and ensure
supply given declining levels of accessible oil and gas reserves.
Increasingly, they are using M&A as a way to address growth
challenges and gain access to reserves. Against this backdrop is a
host of nontraditional players jumping into the M&A game, including
national oil companies (NOCs), private equity firms and oil services
companies, making the landscape a highly competitive one driven by
entirely new motivations.

M&A in the energy industry1 used to
be primarily the realm of international
oil companies (IOCs), but the players
today have changed. The market is
seeing an influx of private equity
firms that have an abundance of cash,
as well as nontraditional players,
such as NOCs, which are targeting
resources in their own regions. As a
result, over the past few years the
level of M&A activity in the energy
industry has been quite high, with
activity ranging from deals between
small companies for acreage to
multibillion-dollar deals between
large multinational players. For all
players, this changing environment
raises questions around portfolios,
strategies and actions to take. The
assumptions used in the past no
longer serve companies today because
the types of players undertaking M&A
have changed and so, too, have their
underlying reasons. Thus, your firm
may be encountering (and losing
deals to) a surprising new group of
competitors who limit your options
for achieving inorganic growth.
Companies of all types need to
reexamine their strategies in terms of
the types of assets in which to invest
going forward and ask themselves: Do
we understand our marketplace well
enough to succeed in this changing
environment? Are we differentiated
enough to win the deals we are going
after? And are we positioned to be a
winner today and in the future?
To answer these questions, Accenture
conducted a research study to
understand the role M&A plays in the
energy industry today and uses these
findings as a basis to predict how
M&A would be used in the future. The
findings of our study are intended to
help companies shape a distinctive
M&A capability and to better
position themselves to compete in a
marketplace of players with varying
motivations.
The study findings are presented
in four scenarios which examine
possible ways the future could be
different from today and propose
ideas on how energy businesses can
prepare for tomorrow’s world. The
key questions are: What will be the
motivations of players in the future,
and which companies are advantaged,
disadvantaged and at risk? The points
of view Accenture presents in this
paper attempt to assess the future
through these four scenarios to help
give players an understanding of how
to go forward and what distinctive
capabilities they will need to achieve
high performance.

4
Section 1: The “Business in a Fragile World”
scenarios from an energy-sector perspective
In 2002, Accenture developed four politics, Accenture identified key more economically integrated world
scenarios of the business future economic and sociopolitical forces or, alternatively, to a more isolated,
collectively called “Business in a we felt would shape the future independent one. Along the other
Fragile World.”2 In 2003, the business environment. The economic dimension, forces exist that could push
implications of these scenarios were forces include economic ideology us toward either a more collaborative
applied to the global energy sector in and corporate strategy, market world or, conversely, a non-
a follow-up article titled “Managing developments, government economic collaborative one. By mapping these
the Unknown.”3 Four years later, these policy, the role of supranational forces in various ways, four different
scenarios are proving to be still quite institutions, the implications for scenarios for the future result:
relevant and robust, with only one travel and transport, and the impact • Survival of the Fittest: A Darwinian
needing to be updated to reflect recent of information and communications world of free markets and intense
events. For the purposes of creating a technologies. The sociopolitical competition, especially between
point of view about the future of M&A forces include attitudes and values, developed and emerging economies
in the energy industry, we have taken approach to policymaking, religion and • Common Ground: An economically
these scenarios and once again applied ideology, geopolitics, civil society, and integrated, highly collaborative world
them to the global energy sector.4 international institutions.5 • Tempestuous Times: A world in
which economic integration comes
In 2002, drawing on the experience When these forces are represented at the cost of growing conflict and
and knowledge of Accenture’s business graphically (see Figure 1), we can see tension between governments, and
and energy strategists, as well as on that one dimension includes forces between business and society
outside experts in economics and that could drive us either toward a • Worlds Apart: An actual reversal
of globalization into protectionism
and nationalism
Figure 1
Accenture depiction of four possible energy sector
future scenarios
Map of the future
A number of economic and political forces are shaping the future business environment.
Four scenarios for that future can be mapped along two axes: one ranges from a
collaborative to a non-collaborative world; the other ranges from an economically
independent to an economically interdependent world.

Collaborative

Common
Ground

Today Survival of
Economic Worlds the Fittest Economic
independence Apart interdependence

Tempestuous
Times

Non-collaborative

5
Scenario 1: Survival
of the Fittest
The Survival of the Fittest scenario
envisions a world of competition
in terms of trade and capital flows
in which economic and business
decision making is driven partially
by the capital markets and partially
by geopolitical interests. This
competition is particularly marked
between the developed economies
and those that are emerging. Russia
joins the World Trade Organization
(WTO) and, together with existing
member China, partially opens
up its energy markets to foreign
investment. Russian and Chinese
energy companies, pressed by
capital markets to demonstrate
improved corporate governance
and transparency, represent an
increasing source of competition in
global energy markets. Competition
6
is fierce between energy companies
from the developed economies and
those from the emerging economies,
so each tends to focus on short-
term strategic objectives. As more
of the key energy-producing
markets embark on liberalization
drives, energy companies look
to create value through mergers
and acquisitions. In parallel, oil
firms in emerging economies and
those in developed economies
move toward consolidation as a
vehicle to achieve scale. National
oil companies seek acquisitions in
the more open markets of Russia,
China and the Middle East to ensure
access and control of reserves as
well as production (security of
supply). This is particularly true in
the downstream market, where years
of tight and low margins have seen
some players consolidate or exit
the sector. As markets open and
competition intensifies, oil prices
fall but become more volatile. In
part, this is due to pressures within
OPEC, which is unable to contain the
tensions between price setting and
overproduction, which are driving
down oil prices. The organization,
now conceding market share to non-
OPEC producers, eventually breaks up
completely.
For energy companies, this world
offers many positive aspects:
economies from global supply chains,
low taxes and regulation, integrated
and highly liquid capital markets
producing a low cost of capital and
high levels of innovation. But there
is a negative side as well. Despite its
high growth performance, this world
generates tension and friction that
could boil over into instability.
As competitiveness begins to drive
every business decision, energy
companies are increasingly split
on issues such as sustainable
development, renewable fuels and
corporate citizenship. Because of this,
government and business support
for issues such as climate change
begins to recede. Increasing interest,
however, is paid to alternative forms
of energy (for example, nuclear, wind
and solar) by those in the developed
economies as their ownership of
conventional resources falls. As
state-owned energy companies are
privatized, they are increasingly
unable to fulfill the wider social
and community welfare roles they
once played in some countries,
contributing to rising social tensions.
Scenario 2: Common
Ground
In the Common Ground scenario,
strong forces push toward a more
integrated, collaborative world. On
the economic front, Russia becomes
a member of the WTO. Politically,
leading nations work together to
reduce international tensions in some
of the most volatile parts of the
world. Over the medium term, this
effort leads to a political settlement
in the Middle East, restoring some
stability to the region. Crude oil prices
become much less volatile and start
to decline, as concerns about the
security of supply fall.
Greater political stability paves the
way for new forms of cooperation
between energy companies and
governments, especially in the
developing world. There is a new
focus on sustainable development—
developing oil and gas resources
in ways that will leave a positive
economic legacy for those countries
when their reserves run out. In this
scenario, smart energy companies
seeking better access to new reserves
and a long-term license to operate
pay particular attention to sustainable
development.
Oil and gas companies still operate
across global markets, but there is a
growing emphasis on localization—
working with local partners, building
local skills and using local sources of
supply. Such local integration brings
real benefits—including lower costs
and much better access to local
skills, which reduces the reliance on
expatriate workers. New consumer
markets emerge in developing nations
as companies and countries alike
take advantage of this collaboration,
integration and localization.
Over the medium to long term,
strategic cooperation between
governments—particularly on
major transportation infrastructure
projects—radically changes energy
industry dynamics. Construction of a
Russo-Chinese oil pipeline and a new
terminal at Murmansk in Siberia to
export crude to the
7
United States dramatically increases
Russian oil exports and creates new
competition for producers in the now
stable Middle East.
Reduced tensions and greater stability
in key energy-producing regions
allow companies to plan better. But
there are growing concerns about the
high cost of the stability. There are
far stricter environmental controls
across all regions and energy sectors,
pushing up costs (and, indirectly,
energy prices for business and
residential users). Rules providing
greater job protection add to costs in
some stages along the supply chain.
While stability makes planning ahead
a better bet, the positive impact is
offset by time delays as growing
regulation and bureaucratic controls
hamper fast decision making.
Scenario 3:
Tempestuous Times
Our third scenario, Tempestuous
Times, is a world of conflict and
friction in which energy companies
can still operate globally but find
it more costly and difficult to do
so. They are forced to shorten
their supply chains and build more
backup facilities, as these become
increasingly vulnerable to disruption,
either from terrorists or extreme
antiglobalization protesters. Those oil
companies with carefully balanced
portfolios can cope reasonably
well—as trouble flares up in one
market, they can switch production to
another. However, independents and
niche players find life very difficult
as their key regions of production
erupt in turmoil, often forcing them
to suspend operations. Although
the larger players are better able
to spread their production risk,
they begin to encounter problems
in their major consumer markets,
as antiglobalization groups mount
a series of worldwide consumer
boycotts against well-known energy
brands. This prompts some energy
companies to differentiate their
brands by region. As some global
retail brands disappear, there is
disruption of those midstream and
downstream activities—such as
refining—that were previously geared
to production for global markets.
Security is the No. 1 concern for
energy companies in this scenario.
Security costs soar—especially for
insurance to protect employees and
key assets such as power stations,
refineries, pipelines, tankers and
liquefied natural gas (LNG) carriers.
As oil production becomes
increasingly costly and vulnerable to
disruption, the price of oil increases
dramatically and becomes extremely
volatile, making any kind of planning
difficult at best.

Table 1
Summary of the drivers and impacts across the four scenarios
Depending on the underlying status of the drivers and the associated impacts, companies
participating in the energy industry will need to adjust their market focus and mindset to
respond effectively across the different scenarios as summarized in the chart below.

Economic, geopolitical and environmental drivers and impacts across the four scenarios
Survival of Common Tempestuous Worlds Apart
the Fittest Ground Times
Drivers Economic growth Emerging—High High Low Very low
Developed—Low

Geopolitical situation Emerging—Neg. Positive Negative Neutral

Developed—Pos.

Environmental concerns Emerging—Low High Low Low

Developed—High

Impacts Oil price Medium Medium-low High & volatile High & stable

Cost of capital Medium Low High Very high

Regulation levels Low Medium Low High

Oil industry market Emerging—Nationalized Liberalized Mix

Nationalized
Developed—Protected

Global/regional/local focus Global Global with local Regional Local/national

partners

8
The cost of capital for investment in
high-risk areas also rises dramatically,
reflecting the higher-risk premium
demanded by the markets. Projects
in areas such as the Middle East are
canceled as several countries have
their credit ratings downgraded.
Encumbered with higher financing
costs and greater operational risk,
energy companies become unwilling
to invest in such regions. The focus
now turns to competing for existing,
less risky reserves and to using
technology to try to extend the life of
already mature areas.
Overall, energy companies become
less innovative and forward thinking.
As the focus turns to keeping the
oil and gas flowing, key product,
environmental and renewable-fuel
innovations take far longer to come
to market as companies concentrate
less on risky ventures. This is a very
unstable world, on the verge of
complete fragmentation.
Scenario 4: Worlds
Apart
Our final scenario, Worlds Apart,
provides a glimpse into that
fragmented world, which has
disintegrated into stagnation.
Barriers to trade and capital mobility
go up, and access to oil and gas
reserves is limited, threatening the
very existence of global energy
companies. Long-established global
supply chains or sourcing breaks
down, economies of scale are lost
as markets contract, and innovation
dwindles as it becomes impossible
to recoup the costs of research
and development. Governments
increasingly use their regulatory and
tax regimes to promote their own
national champions at the expense
of multinationals, and in some cases,
they renationalize their domestic
energy interests.
Global energy companies, facing barriers to the movement of people,
the risk of being unable to recoup and there is a reduction in knowledge
investment costs and protect transfer across different markets.
assets, are forced to withdraw from
developing countries. Previously There are no real winners in this
innovative sectors, such as LNG, gas- scenario, only regional survivors.
to-liquids technology, alternative Energy companies that have dominant
energy, and deepwater oil and gas positions in countries with large
developments slow as oil companies internal markets—for example, the
shy away from the costs of bringing United States, China or Russia—can
them onstream. still achieve reasonable economies
of scale, after a phase of strong
Countries that have been concerned domestic consolidation. Other energy
about the security of their energy companies seek to overcome the
supply now see their worst fears constraints of fragmented markets
realized as they struggle for supply by following a “multi-domestic”
in these tight markets. Blackouts strategy. In practice, this means
become quite common in countries building a local identity and brand
never before affected, such as the name, working with local partners,
United Kingdom, which becomes developing local supply chains, and
import-dependent for both oil and diversifying ownership structures
gas by 2017. internationally to minimize capital
transfers across borders.
With reduced access to reserves
and less competition among energy
companies, oil prices rise significantly,
but without the volatility they have
previously shown. Since there is no
global oil market, OPEC either breaks
up completely or fragments into
regionally based organizations. Russia
postpones indefinitely its previous
intention to join the WTO. Concerns
about the competitive impact of
WTO membership rise in China. The
Doha trade round, begun at the end
of 2001, collapses as developing and
industrialized countries fail to make
any progress on market-opening
measures. Energy companies find
it difficult to operate in markets
protected by rising walls of tariffs,
quotas and red tape. Increasingly
detached from global supply chains
and sourcing, downstream markets
become much less competitive.
Producers are also struggling locally
with rising costs of labor and
material. There are shortages of key
skills and personnel because of new
9
Section 2: Player market focus and mindsets
for each scenario
Going forward in tomorrow’s world
will entail looking at the world in a
fundamentally different way. Players
will be taking into account new
considerations when doing deals. To
compete in a changed competitive
arena, players will need to begin by
adjusting their market focus and
mindset, and from there, develop
distinctive capabilities to better
respond to possible future events and
meet organizational objectives. In this
section, we describe what we believe
will be necessary areas of market
focus and mindsets for firms to adopt.
10
Scenario 1: Survival invest in alternative energies because
of high growth, global economies
of the Fittest of scale and a reasonably low cost
of capital. Economic growth splits
Survival of the Fittest envisages a
between the two groups, and capital
more competitive world between the
moves toward the liberalized markets
emerging economies and developed
of emerging economies.
economies. The short-term focus
of both groups leads to moderate
In this scenario, a company’s ability
geopolitical tensions between those
to succeed will be helped by adopting
countries that are resource rich and
a market focus and position that
those that are not—increasing the
emphasizes the art of negotiating
potential for instability. High levels
access to high-demand economies
of competition reduce regulatory
and ensuring a balanced portfolio of
emphasis on environmental issues, but
resource supply from nonemerging
developed nations still look to foster
economies. As markets in China,
alternative energy and innovative
Russia and other BRIC (Brazil, Russia,
technologies due to the continuing
India and China) countries open
need to ensure security of supply.
more fully to the world, firms need
International oil companies can
to position themselves effectively to
finance high levels of innovation and
capitalize on the high demand for
transport and other refined products
(security of demand). Successful
companies will be those that can
partner with each other to secure
not only resource supply but also
demand. Oil- and gas-abundant
NOCs along with NOCs from high-
demand economies will be most
advantaged under this scenario, but
IOCs should look to negotiate access
to these markets through the use of
joint ventures/asset swaps and by
presenting attractive developmental
offerings to host nations.
For IOCs looking to achieve security
of supply, it will be critical to develop
or acquire interests in regions such as
Norway, Australia and Canada. Firms
that can technologically differentiate
themselves from their peers will be
best positioned within these highly
competitive regions, because they
will be able to extract reserves from
harder-to-reach unconventional
deposits. These specialized skills and
technologies can also be taken to
NOCs that have become as equally
operationally and commercially
established as most IOCs. Companies
from developed countries also need
to look to developing alternative
energies as part of their strategies to
secure supply.
Oil field services firms should
experience high growth globally
(resulting in scale-for-growth
plays)—they are well positioned to
partner with IOCs for unconventional
exploration and production (E&P)
development and with NOCs for
conventional E&P development.
As markets liberalize globally and
consumption increases in BRIC
economies, the gas and LNG markets
will be important sectors in the short
term. Midstream gas distribution
companies (for example, pipelines and
LNG shipping) can capitalize on gas-
rich NOCs that are expanding abroad
to secure demand.
Firms that look to be successful under
a Survival of the Fittest scenario
might exhibit a variety of mindsets,
such as:
• “NOCs operate as well as IOCs; IOCs
will have to offer something more
to encourage NOCs to partner with
them.”
• “Joint ventures and asset swaps
should be the choice of entry into
emerging economy markets.”
• “Our main consumer base (and
therefore strategies) will shift to
emerging economies.”
• “Investment in alternative energy
and unconventional sources (ultra-
deepwater, oil sands, coal to liquid
[CTL], gas to liquid [GTL]) will be
crucial to secure supply.”
• “NOC-NOC integration/partnering
will secure supply and demand.”
Scenario 2: Common
Ground
As previously mentioned, the Common
Ground scenario paints a picture of a
harmonious world where markets are
open and integrated, countries work
together to solve geopolitical issues
and a global determination exists to
support sustainable development.
High levels of collaboration mean
oil prices fall as security-of-
supply concerns decrease. Over
time, large infrastructure projects
(such as pipelines) enhance energy
interconnectedness across the globe.
Integration of local people and
partners into the operations of global
firms enables all countries to share in
the resulting economic benefits.
In this scenario, a firm’s chances of
success are increased by adopting
a market position and mindset
that emphasizes collaboration and
sustainable, global development.
From a market focus and position
perspective, high investment levels
would be anticipated across the entire
energy value chain due to the positive
short- to medium-term economic
outlook (however, investment in gas
over the longer term may be limited
by rising environmental and safety
regulations). In emerging economies,
investments would be particularly
targeted toward the downstream
as economic growth increases the
demand for transport fuels and
other refined products in these
geographies. Large oil companies
could improve their performance in
this scenario by pursuing security
of supply through country-facing
strategies that maximize local labor
and leverage local supply chains.
Additionally, NOCs would see the
benefits of collaborating with IOCs
to access different parts of the value
chain as well as creating economies
of scale in terms of innovation (thus
suggesting the growth of swaps and
joint ventures not only to achieve
security of demand but also to access
new capabilities).
Additional environmental standards
would mean a shift toward cleaner
established fuels such as LNG. The
oil field services industry would
undergo a scale-for-growth phase
to service increasing production
levels of both conventional and
unconventional resources. Under this
scenario, while there is a drive toward
better environmental standards,
alternative energy becomes a longer-
term play—R&D investment goes
toward improving the environmental
performance of existing energy
sources. Thus there is no immediate
shift toward alternative energy.
Firms that look to be successful under
a Common Ground scenario might
exhibit a variety of mindsets, such as:
•“We should take a collaborative
approach to extracting ever-fewer
resources—‘Expand the Pie’—and
adopt a partnership approach with
the resource owners.”
•“Joint ventures enable all parties
to share profits and should be the
growth vehicle of choice.”
•“Investment in unconventional oil
and LNG is critical.”
•“Alternative energy is the long-term
game, but there is no immediate
need for large investment here.”
11
Scenario 3:
Tempestuous Times
Tempestuous Times, as stated
previously, is a world characterized
by supply disruptions, political and
economic instability and a high oil
price. With low economic growth
in the long term and high costs of
capital, it is only the larger global or
regional players with geographically
diversified operations (useful as
fallback options) that can function
in this scenario. Even then the
successful firms would be limited
to those that can localize brands
so that they do not suffer from
growing antiglobalization consumer
backlash. Resource-limited energy
producers need to look for a range
of supply sources not only due to
the high oil price, but also because
security threats make global supply
chains vulnerable to disruption. As a
result, some energy companies exit
riskier countries, including in the
Middle East, and turn their focus to
competing for existing reserves in
mature regions (security of supply).
Achieving the “right” market focus
and position will become essential
for those companies from resource-
constrained countries. Resource-rich
nations will be self-sufficient in their
energy needs and can continue to
export excess supplies in a global
market to many resource-constrained
consumer nations (achieving security
of demand). For all companies,
understanding the risk profiles of
all locations will be integral to
success in this environment. IOCs
and companies that do not have
a sufficient amount of reserves
to meet demand will alleviate the
risks associated with operating in
volatile political areas by looking
to mature but politically stable
regions such as Norway, Canada
and Australia. These firms will also
need to focus their limited funds on
opportunities to increase production
from unconventional sources such as
12
oil sands and ultra-deepwater if they
want to remain competitive. This may
be accomplished either via acquisition
of a specialist unconventional
technology provider or through
purchasing the services from a third-
party oil field services company.
Firms wanting to succeed in
this environment should seek to
strengthen upstream and downstream
asset portfolios within their domestic
markets (portfolio diversification).
Ensuring complete control of the
value chain (supply and demand)
will be the main protection for
many companies against political
disruptions. At the same time,
energy firms are advised to spread
risk by diversifying their geographic
footprint so that a fallback option
is available if necessary. Within any
non-domestic markets, the emphasis
should be on companies repositioning
themselves as local brands and using
existing supply chains and workforces,
supplementing them with knowledge
and skills from the parent brand. A
high-growth area here for oil field
services is in the security sector
because physical and data security
will become a high priority for most
companies.
Firms that look to be successful under
a Tempestuous Times scenario might
exhibit a variety of mindsets, such as:
•“Understanding risk profiles is crucial
in order to be successful in this
environment.”
•“A diverse portfolio of locally and
regionally sustainable brands and
supply chains is required to be
competitive.”
•“A desire to have less dependence on
gas; there is a high risk attached to
a small amount of global suppliers.”
Scenario 4: Worlds
Apart
According to the Worlds Apart
scenario, countries would retreat into
themselves, effectively withdrawing
from the global economy and seeking
an independent future. Barriers to
trade and capital mobility soar. Some
governments start to renationalize
previously privatized enterprises, and
the trend of globalization reverses.
Trade and investment volumes
plummet. Economic growth grinds
to a halt or even contracts. It would
be the end of the oil industry as we
know it.
To survive in this environment, an
energy firm’s market positioning
and focus should reside primarily
with national interests. There is
little incentive for IOCs and NOCs to
collaborate. Domestic independents
become the sole acquisition option
for IOCs or NOCs in large countries to
create economies of scale (scale for
cost cutting and growth). Investment
in technology and infrastructure
should be kept at subsistence levels.
Local sourcing is a prerequisite,
so cost will become the key
differentiator. Oil field services will
fold or consolidate as investment by
their clients dries up. Private equity
exits the market due to the restriction
of capital flows combined with
weak stock market performances.
Finally, alternative energy gains little
traction, given that energy firms
and private equity are reining in
investment.
Firms that look to be successful under
a Worlds Apart scenario might exhibit
a variety of mindsets, such as:
• “Think local, buy local, act local.”
• “Apply rigorous cost control to
balance spiraling costs in local
markets.”
• “Abandon innovation efforts (both
in unconventional and alternative
energy) due to poor payback and
minimal likelihood of scaling across
borders.”
• “Scale domestically to benefit from
economies of scale.”
Section 3: Predicted M&A activity under each scenario
Combining the individual scenario
details with their predicted impacts
on market focus and mindsets, we
have formed a point of view about the
role of M&A under each eventuality.
Our point of view covers not only the
general volume of M&A we predict to
occur, but also which types of firms
potentially would be advantaged,
disadvantaged or at risk from an M&A
perspective. Table 2 summarizes our
views on the general level of M&A
activity.

Table 2
Accenture view of future M&A activity
Survival of Common Tempestuous Worlds Apart
the Fittest Ground Times
Degree of overall High Medium Low-medium Low
M&A activity
To achieve… Security of Investment Security of Security
supply supply of supply
Geographic
Security of and portfolio Security of Scale for growth
demand diversification demand and cost savings

Relationships Skills and Relationships Portfolio

technology diversification
Investment Geographic
and portfolio
Skills and diversification
technology
Skills and
technology

Characterized NOCs NOC-IOC joint Means to Domestic

by… looking to ventures scale in stable scaling deals
expand abroad geographies
Acquisition of Limited oil
Private equity downstream field services
investment shifts assets consolidation
to emerging
economies

13
Scenario 1: In keeping with the highly
competitive environment suggested

Survival of the by the Survival of the Fittest scenario,

the degree of M&A activity is

Fittest
predicted to be at a “High” level in
order to secure supply and demand,
establish relationships, capitalize
on investment opportunities, and
acquire additional skills and technical
capability. M&A in a Survival of the
Fittest world is characterized by
NOCs looking to expand abroad and
by private-equity activity similarly
moving toward the new emerging
economies. The specific types of firms
we believe would be advantaged,
disadvantaged or at risk from an M&A
perspective under this scenario are
illustrated in Table 3.

Table 3
Firms advantaged, disadvantaged and at risk under Survival of the Fittest scenario
Survival of the Fittest

Advantaged • NOCs from resource-rich and high-demand countries partnering with each other
• Cash-rich NOCs and private equity firms
• IOCs using joint ventures and asset swaps to create innovative deal structures with NOCs
• IOCs that acquire independent and midsize upstream companies in stable regions
• Alternative energy and renewables
• Midstream companies: LNG shipping, gas distribution and transportation companies
• Larger oil field services providers from emerging economies
• Unconventional oil field services companies

Disadvantaged • Small and midsize/independent companies in stable regions

• Small and midsize emerging-market oil field services companies

At risk • IOCs targeted by NOCs looking to expand more aggressively

14
Scenario 2: In keeping with the harmonious and
collaborative environment suggested

Common by the Common Ground scenario, the

degree of M&A activity is predicted

Ground
to be at a “Medium” level in order
to capitalize on global investment
opportunities, enhance geographic
and portfolio diversification,
and acquire skills and technical
capabilities. M&A in a Common
Ground world is characterized by
NOC-IOC joint ventures or asset
swaps, acquisition of downstream
assets in emerging markets (by other
energy firms or private equity), and oil
field services scale-for-growth plays.
The specific types of firms we believe
would be advantaged, disadvantaged
or at risk under this scenario are
illustrated in Table 4.

Table 4
Firms advantaged, disadvantaged and at risk under Common Ground scenario
Common Ground

Advantaged • IOC and NOC collaborations

• IOCs with access to LNG skills and gas assets
• Locally integrated large oil field services firms
• Local suppliers in close proximity to oil and gas operations (suppliers of choice)
• Midstream infrastructure companies: LNG shipping and distribution
• Private equity firms with an emerging-market, energy focus

Disadvantaged • Independent downstream players in emerging markets

• Small and midsize LNG producers/transporters
• Small oil field services companies
• Alternative energy companies
• IOCs targeted by NOCs looking to expand more aggressively

At risk • IOCs targeted by NOCs

• European and North American independent downstream companies (for example, refiners,
retailers) targeted by Asian and Russian NOCs
• Midsize gas players (in the longer term) who lack sufficient capital resources to survive
the lengthy planning and consultation timelines to environmentally upgrade plants

15
Scenario 3: In keeping with the highly disruptive
and unstable environment suggested
skills and technical capability. M&A
in a Tempestuous Times world is

Tempestuous by the Tempestuous Times scenario,

the degree of M&A activity is
characterized by IOCs and midsize
companies looking to scale in

Times
predicted to be at a “Low-Medium”
level because companies will be
looking to achieve security of
supply and demand and geographic
and portfolio diversification, and
to build relationships and acquire
stable geographies. The specific
types of firms we believe would be
advantaged, disadvantaged or at risk
from an M&A perspective under this
scenario are illustrated in Table 5.

Table 5
Firms advantaged, disadvantaged and at risk under Tempestuous Times scenario
Tempestuous Times

Advantaged • NOCs from resource-rich and high-demand countries partnering with each other
• IOCs with a diversified geographic footprint to mitigate security risks
• Unconventional oil field services companies in stable, mature regions
• Oil field services companies offering security services across all parts of the value
chain (for example, asset and personnel security, data protection software)

Disadvantaged • Alternative energy

At risk • Independents in stable, mature markets targeted by IOCs

• Small oil field services companies in stable and/or in unconventional areas

Scenario 4: Given the isolationist and nationalist

tendencies in the Worlds Apart
is characterized mainly by deals done
by NOCs or IOCs to achieve domestic

Worlds Apart scenario coupled with a depressed

economic environment, the degree
of M&A in this scenario is predicted
to be “Low” as companies look to
achieve security of supply, scale for
growth and cost savings, and portfolio
diversification. M&A in Worlds Apart
scale. There may also be some limited
activity in oil field services as the
stronger firms consolidate to survive.
The specific types of firms we believe
would be advantaged, disadvantaged
or at risk under this scenario are
illustrated in Table 6.

Table 6
Firms advantaged, disadvantaged and at risk under Worlds Apart scenario
Worlds Apart

Advantaged • National champions

• Small, nimble oil companies in small markets

Disadvantaged • Private equity firms

• Gas and downstream players
• Alternative energy

At risk • Oil services companies at risk of closure or becoming consolidation targets

• Independent domestic oil companies targeted by national champions
• NOCs and IOCs at risk of nationalization or reprivatization

16
Section 4: Distinctive capabilities required
to compete in each scenario
For energy companies to respond
to the challenges raised in each
scenario, greater focus needs to be
placed on developing a variety of
capabilities. As has been seen with
other industries, those that become
successful in finding and integrating
new businesses will be rewarded by
analysts and shareholders. As a result,
companies with M&A expertise
will have advantages in bidding for
targeted businesses against their
competitors because they will be able
to pay for and absorb higher premium
costs. In addition, the new business,
once integrated, can benefit from
other essential skills possessed by the
successful buyer, such as local content
knowledge, gas expertise and process
excellence. Accenture’s research-
based knowledge and experience with
hundreds of companies around the
world over many years in assisting
with M&A and business-improvement
programs have enabled us to identify
a number of distinctive capabilities
needed to position a company for
the future and for high performance.
These capabilities are listed in Table 7
and described in further detail in the
sections that follow.

Table 7
Distinctive capabilities needed to respond to future energy scenarios
Skills and capabilities Survival of Common Tempestuous Worlds Apart
the Fittest Ground Times
M&A strategy, screening & target
assessment

M&A transaction making (deal

structuring) Joint ventures and
asset swaps

M&A: Post-merger integration

Country-facing strategies
Negotiation Relationship Negotiation
management

Local content
Locally tailored
operating models
(particularly oil
field services)

Portfolio management

Gas knowledge and expertise

LNG

Standardization/process excellence
Unconventional Unconventional
technologies technologies

Highly appropriate
Appropriate

17
M&A capabilities
Merger and acquisition capabilities
are essential in all four scenarios.
These capabilities will play a
relatively minor role in the Worlds
Apart scenario because government
nationalization of energy assets
will dominate compared with the
small number of domestic scaling
deals completed; but even so, it
will be integral for firms to have
an understanding of M&A within
their overall growth strategies. In
the remaining scenarios, energy
companies should seek to develop
capabilities at all stages of the deal
life cycle, including:
• M&A strategy, screening and
target assessment: Identifying
winning opportunities to grow and/
or transform the company through
inorganic means; distinguishing
real and achievable synergies from
transactions; understanding and
managing risks to build a balanced
portfolio.
• M&A transaction making: Deal
structuring—that is, ensuring the
“right transaction” is done at the
“right price” and the “right time.”
• Post-merger integration: Capturing
value and synergies, understanding
cultural implications and building
on lessons learned.
Other suggested capabilities for
companies to build within the
M&A space include:
• Corporate restructuring: Increasing
shareholder value by dramatically
changing the way the business
operates.
• Divestitures: Successful divestiture
depends on a structured plan, timely
execution and clear stakeholder
communications.
Country-facing strategy and
local content skills
The necessity to collaborate with
emerging-economy stakeholders in
three out of four of the scenarios
highlights the importance of
building strong government and
18
community relationships as well as
local workforces. In the Survival of
the Fittest scenario, the strength
of capital market influence makes
it, relative to the Common Ground
and Tempestuous Times scenarios,
more difficult to institute measures
with longer-term payoffs such as
localization. However, companies
that strictly focus their operations in
mature but politically stable areas are
disadvantaged in this scenario, and
those that can effectively partner and
build relationships within emerging
economy nations will be better
placed.
Companies that develop strong
country-facing strategies to maximize
their footprint in a way that benefits
both them and the host nation will
be able to build more enduring and
sustainable relationships. Offers to
nations should include understanding
government and state entity relations,
national supplier and workforce
development, community and social
development, integration with
standards/processes, and public
relations and communication.
Effective transformation of a local
workforce requires a comprehensive
approach that addresses the larger
context in which the workforce
operates. This approach comprises
three elements:
• Developing a local workforce to
support operations.
• Leveraging a global workforce where
possible; this is vital in
the transformation and ongoing
success of a local workforce.
• Fostering sustainable local
businesses; this complements
strengthening the local workforce.
Portfolio management skills
Portfolio management is an essential
capability to build as all companies
grow and expand. Conditions in the
Tempestuous Times scenario will
force many firms to operate mostly
within their own borders, requiring
that they have robust, sustainable
domestic portfolios to solidify their
core businesses. Businesses that
do succeed at the global level in
this scenario are those that build a
balanced geographic portfolio flexible
enough to withstand any economic
or political shocks from individual
regions.
Understanding product strategy
(markets, customers, products,
competitor landscape), budget and
resource availability, and assessing
profitability/reward against
investment and risks are important
components of good portfolio
management. One key to building
a balanced, sustainable portfolio
is ensuring that assessments are
not simply based on financial
models, but also pay attention to
how the portfolio aligns with the
organization’s strategy.
Knowledge and expertise in gas
Gas will be a key area for market
focus and position in the Survival
of the Fittest and Common Ground
scenarios. To succeed in this fast-
changing environment, companies
must have effective hedging and
risk-management strategies. The
growth of LNG, allowing for gas to
be easily shipped around the world,
will create a global gas market.
Strong demand will prompt national
oil and gas companies to compete
globally with the energy and utility
majors currently dominating regional
markets. Understanding global
demand, the growing competition
for service provision to high-demand
economies, and the long cycle for
LNG infrastructural development will
differentiate those companies that
can profit from this growth area
from those that may be forced to
the sidelines.
Standardization and process
excellence
Standardization results in reduced
redundant work processes, improved
resource sharing and smoother
implementation of new initiatives.
Operational excellence consists of
continuous improvement involving
assets and equipment, standardized
and robust processes, and competent
people. Improvement in these
areas allows companies to capture
additional value through efficiencies
and ultimately to become safe,
sustainable organizations that can
operate under any potential scenario.
Capabilities that allow companies to
benefit from improved operational
and financial performance across
the value chain include asset
management, integrity management,
process safety management, people
and processes, effective leadership,
and the underlying technology
systems.
The three building blocks of high performance
Accenture’s High Performance
Business research program has
spanned 36 industry segments and
covered more than 6,000 companies,
including some 500 that meet
our criteria as high performers.
This ongoing research looks at
the nature of high performance,
and the approaches and actions
that businesses take to achieve
high performance. It is providing
unprecedented insights into the
characteristics and practices that help
organizations outperform their peers
and achieve sustained results over the
long term.
Through our research efforts, we have
identified three key building blocks of
high performance:
• Market focus and position. High-
performance businesses maximize
growth opportunities and economic
structural advantage by striving for
optimal scale within their industries.
These businesses better understand
the dynamics of their industries than
their peers and successfully manage
Energy players across all of the
scenarios will need to become
more cost-effective due to, in some
cases, intense competition from
industry peers operating in the same
geographic areas and, in other cases,
higher-cost structures. All energy
players need access to accurate,
timely information to compete
profitably in an increasingly complex
and demanding industry.
Summary
There are many statistics that point
to the rate of failure of past business
combinations. Thus it is important
for energy players to understand the
key challenges across the range of
possible futures and proactively build
robust skills and capabilities that
will help increase their likelihood of
the creation of value through
appropriate market strategies. Such
strategies lead to value creation
by enabling high-performance
businesses to identify and forcefully
enter attractive markets, to build
and manage powerful portfolios, to
exploit positioning advantages in the
value chain and to achieve optimal
scale.
• Distinctive capabilities. The focus
is on creating and exploiting a set
of distinctive, hard-to-replicate
capabilities that delivers the
promised customer experience,
while simultaneously driving the
most efficient use of assets. High-
performance businesses are clear
about what capabilities really
matter to delight their customers.
They understand the need to build
distinctive capabilities that are
demonstrably better, and in the
short term, are unmatched by their
competitors. This includes mastering
technical capabilities to maximize
differentiation. At the same time,
they excel at innovating and
success. Accenture believes many of
the skills and capabilities identified
in this paper are not only critical in
generating high performance today,
but will also be critical tomorrow
regardless of the scenario outcome.
Players participating in the energy
future create greater chances to win
by perfecting these capabilities now.
extending their mastery across their
business model.
• Performance anatomy. The focus
is on creating cultural and
organizational characteristics that
power companies in their goal of
out-executing the competition.
Performance anatomy comprises a
set of organizational “mindsets” that
exist in a way that are measurable
and immediately actionable by
organizational leadership.
These mindsets are:
• Execution excellence and successful
market creation must be balanced.
• IT is a strategic asset.
• Talent and its impact can be
multiplied, making workforce
productivity a key execution
differentiator.
• Performance measurement must be
broadly inclusive, yet highly selective
in its focus and metrics.
• Continuous renewal is a real and
permanent necessity within a high-
performance business.
19
Section 5: Will the M&A patterns of the past reoccur
in the future?
Looking at today’s M&A landscape
through a different lens is not the norm
for most companies. Yet, our research
points to the need for organizations
to rethink their approach to M&A and
reconsider what additional capabilities
need to be developed or enhanced. The
M&A environment is becoming more
competitive and complex. Companies
will need to prepare to compete with
firms driven by varying motivations.
What deals should your organization
pursue? Are you prepared to win the
deals that matter to your organization?
Do you understand why your
competitors are doing deals differently?
How can you position yourself to
be more attractive for particular
partnerships? These are some of the
questions our scenario analyses attempt
to answer and provide a foundation
for companies as they prepare for the
future.
M&A activity will always exist in some
fashion in the energy industry. Even in
a “worst-case” scenario such as Worlds
Apart, a small amount of domestic
consolidation would still be predicted.
Ironically, the type and focus of that
consolidation would mirror M&A
activity in the late 1990s/early 2000s
in most respects except for its lack of
cross-border participation.
The very use of scenario analysis means
that the future is uncertain. Thus there
is no guarantee about what level of
M&A activity will occur in the future
or who will be involved. However,
20
as events unfold and demonstrate
characteristics of a certain scenario,
we believe firms can make an
educated guess regarding what type
of M&A activity may occur and the
type of company that may be involved.
More important, our scenario analysis
also enables industry players to
determine how, and if, they themselves
wish to participate in the future.
Currently, the desire for access
to resources ranging from the
conventional to unconventional (such
as oil sands or coal-bed methane)
and alternative energy is driving
much of today’s M&A activity. As a
consequence, oil field services are
looking to M&A as a way to grow
quickly and meet the demand for
further exploration and production.
European refiners are undergoing a
purchasing trend similar to that of
their US counterparts (the rise of
independent ownership). Whether
all of these trends continue will
depend on economic, geopolitical and
environmental drivers.
Already we are seeing issues in the
US subprime market that could affect
not only private equity access to easy
liquidity but also, more fundamentally,
the economic growth of the developed
(if not global) economies. Other issues
such as the repercussions of the Iraq
war on the stability of the Middle
East or the growing use of energy
resources to reassert geopolitical
power (for example, Russia, Venezuela)
could rapidly change the underlying
global environment and affect existing
M&A patterns. Then, of course,
there is climate change. The actions
governments and firms are forced to
take could also affect M&A over the
short and medium term.
We believe that by reviewing and
understanding historical M&A activity
in the energy industry, energy and
non-energy players can gain a better
understanding of how the M&A
landscape has changed dramatically
and what motivates deals today. This
perspective enables companies to
recognize that the way they currently
play the M&A game most likely needs
to change. While no one can predict
the future, our analysis of four possible
scenarios aims to help companies
understand how events in the future
may unfold and what steps can be
taken to better respond to the evolving
M&A environment. To achieve high
performance going forward, Accenture
believes, organizations will need to
adopt new strategies and mindsets as
well as develop distinctive capabilities.
Accenture experience in energy mergers and
acquisitions
At Accenture, we have helped
hundreds of clients realize high-
performance objectives by helping
them through the merger and
acquisition process. We offer deep
industry and functional expertise
through a global network of more
than 2,000 strategy professionals.
Accenture’s distinction is that
we can provide assistance and
expertise through the entire M&A
life cycle—starting before the deal
and continuing through merger
integration. Most important, our
knowledge is based on deep industry
expertise, not theoretical constructs.
Accenture has provided M&A support
in more than 400 deals during the
past five years, including some of the
most challenging M&A engagements
in the energy sector. Our track record
for delivery stretches back to the
beginnings of the “supermajor era.”
Accenture’s Energy industry group
operates across 30 countries. We
serve approximately 90 energy clients
globally, including major international,
independent and national oil
companies, many of which are in the
Oil & Gas Journal 100.
Accenture’s M&A work has been
focused on pre-deal M&A and
transaction support and in helping
plan and implement pre-deal and
post-close merger integration. Our
M&A/merger integration professionals
offer in-depth expertise in the
following areas:
• Corporate strategy
• Transformation
• M&A strategy
• Pre-deal analysis
• Merger planning and integration
• Merger integration capability
development
• Divestitures
• Shareholder value analysis
• Alliances and joint ventures
Accenture collaborates with
companies to help exploit every
source of value from a merger or
acquisition, and brings a track record
of delivering value with merger
integration projects, in particular. To
deliver this value, Accenture applies
innovative, comprehensive services
supported by proprietary tools,
execution-driven playbooks, and
proven approaches and methodologies
(including Accenture’s Merger
Integration Toolkit Web application).
These tools can help accelerate value
realization and integration efforts.
Woven into our work with energy
companies and other organizations
are the insights gained from
Accenture’s High Performance
Business research. This ongoing
research looks at the characteristics
of high-performance businesses,
and the approaches and actions
that businesses take to achieve high
performance. Our High Performance
Business research program has
spanned 36 industry segments and
covered more than 6,000 companies,
including some 500 high-performing
organizations. As Accenture addresses
challenges with energy businesses,
we think in terms of creating the
high-performance business—one that
can deliver sustained results and
outperform its peers over the long
term, across business and economic
cycles.
For energy companies, the
combination of Accenture’s proven
experience, M&A capabilities, thought
leadership, leading-edge tools and
global capabilities can help deliver
innovative business solutions that
enable high performance.
21
Endnotes
1. For purposes of this study, “the
energy industry” is defined as oil,
gas, oil services and alternative
energy.
2. “Business in a Fragile World,”
Accenture report, 2002, http://
www.accenture.com/Global/
Research_and_Insights/Policy_And_
Corporate_Affairs/TheDecade.htm.
3. David Mowat, Mark Purdy and Julie
Adams, “Managing the Unknown,”
Accenture Outlook (May 2003):
47-59, http://www.accenture.com/
NR/rdonlyres/F027FB46-C87B-4F7F-
8FAE-71FAB5AD89C4/0/summary_
energy.pdf.
4. Accenture’s definition of the energy
sector includes oil, gas, oil field ser-
vices and alternative energy.
5. “Business in a Fragile World,”
Accenture report, 2002,
http://www.accenture.com/Global/
Research_and_Insights/Policy_And_
Corporate_Affairs/TheDecade.htm.

22
Author
Andrew Smart is the Senior Executive
lead for Accenture’s energy and
utilities strategy practice in Europe,
Latin America and Africa. Andrew
has been with Accenture’s strategy
practice for 14 years where his specific
focus has been in the M&A and
business development arena. This
has involved working with both
energy and utility companies to
plan and execute acquisitions,
divestments and joint ventures.
Based in London, he can be reached
at andrew.smart@accenture.com.

23
About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company. Committed
to delivering innovation, Accenture
collaborates with its clients to help
them become high-performance
businesses and governments. With
deep industry and business process
expertise, broad global resources and
a proven track record, Accenture can
mobilize the right people, skills and
technologies to help clients improve
their performance. With approximately
more than 180,000 people in 49
countries, the company generated net
revenues of US$19.70 billion for the
fiscal year ended August 31, 2007. Its
home page is www.accenture.com.

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