Energy

S H E A R M A N & S T E R L I N G L L P | 4 5 For example, for all its technological challenges, US shale projects are still much less capital intensive than other segments of the industry, such as deep water-offshore development or projects in geographically remote environments. When compared with some such competing resource types (or locations), the lower development costs of US shale production allow for lower break-even points. Similarly, unconventional oil and gas, by the nature of its development processes, can be undertaken in far less time (from land acquisition to first oil or gas) and thereafter offers operators some flexibility quickly to throttle the pace of development (and capital deployment) up and down by managing the timing of rig deployment and well completion. Particularly in basins with mature transportation infrastructure, unconventional shale can respond to volatile market conditions with some agility. Compared to other production sources subject to multi-year lead times and all-or-nothing capital commitments, US shale production has some advantages in a volatile market. In the face of anticipated volatility presented by the energy transition, the advantages of unconventional development may have impacts on the approach taken in joint ventures and farm-ins in the sector. For example, the traditional approach in these transactions is generally to require a certain number of wells drilled and completed within a set time horizon, but recognizing the existing situation and the uncertainty introduced by the energy transition may lead to a more flexible approach to development timing and requirements in such transactions that could benefit all parties. INCREASED MERGERS AND ACQUISITIONS ACTIVITY The current environment may help to drive M&A activity in the unconventional oil and gas space for some time. Many parties are looking to exit the space either due to financial, ESG, or energy transition concerns. This, combined with the fact that demand for oil and natural gas in the US (and the world) is unlikely to decline in any meaningful way in the short term, creates buying opportunities for companies committed to the space. Indeed, we are currently witnessing an increasingly robust M&A market with numerous buyers bidding to purchase valuable assets. As some parties are seeking to exit the oil and gas space and others look to consolidate positions within prolific basins, much of the M&A activity will likely remain traditional. However, we have seen and expect representation and warranty insurance to continue to grow in popularity in upstream transactions as some sellers are focused on a "clean" exit. This, in turn, places a greater emphasis on pre-execution due diligence on the part of buyers who seek to scope and manage their risk in the transaction. CONTINUED >

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