It is a question that faces the oil industry whenever there is a big shift in oil prices: what will be the effect on deals — on mergers and acquisitions, and on the buying and selling of assets?

Will there be a period of consolidation, when stronger companies gobble up weaker ones, or where companies get together as a defensive strategy? Or will oil price volatility dry up deal-making for an extended period?

For the Middle East, the strategic questions for the national oil companies are both about their international diversification strategies — taking positions, for example, in Mexico’s opening energy sector, or buying into North America’s unconventional oil and gas boom — as well as about decisions on long-term regional investment.

“The recent decline in oil prices … brings to sharp focus some issues that need to be addressed as a matter of urgency if the [Middle East oil] sector wants to deliver on its ambitions,” says Paul Navratil, the head of Middle East energy at consultancy PwC. “If oil prices remain as they are, or drop further, then the need for efficiency of capital will be even more important.”

PwC last week reiterated the conclusions of a survey it conducted last year on regional oil and gas project spending. It forecasts that despite the fall in oil prices, project spending will rise significantly because of the sector’s long-term strategic importance to governments and their national oil companies.

The survey had concluded that more than three-quarters of respondents — owners, developers, contractors, advisors and financiers — are expecting project spending to rise over the next 12 months and 40 per cent expected spending to rise by more than 25 per cent.

“Since this survey was conducted, the oil price has dropped significantly, but PwC does not believe this will dent the spending plans of projects planned or under way in the region. This is because of the fundamental importance of the sector to the region’s governments in helping to deliver revenue and employment,” it said in the report.

Nevertheless, Qatar and Royal Dutch Shell last week announced one of the biggest casualties of the oil price slump when they cancelled their $6.5 billion Al Karaana petrochemicals plant in Ras Laffan Industrial City north of Qatar. Already, late last year Shell had announced that it would kill a deal with Saudi Basic Industries to expand a petrochemicals plant in Jubail.

Other deals to die in the oil price maelstrom have included UAE-based Dragon Oil’s £492 million (Dh2.73bn) takeover of Petroceltic, an oil and gas exploration and production company headquartered in Dublin with offices in Edinburgh, London, Algiers, Varna, Cairo and Rome.

It may get worse before it gets better, as the volatile atmosphere makes both buyers and sellers hesitant.

“That’s why there are not a lot of deals when there is oil price volatility: sellers don’t want to sell if the think prices are bottoming out but buyers don’t want to overpay,” says Greig Aitken, the principal analyst for M&A at Wood Mackenzie, an energy industry consultancy. “But that is how you make money in M&A ultimately, it comes down to a bet on the longer-term outlook for oil prices.”

After the oil price crash that followed the financial crisis in 2008, deal-flow fell off sharply initially but recovered fairly quickly as companies went bargain-hunting. Back then, the oil price recovery was fairly rapid — a “v-shaped” recovery.

The industry’s rebound then included the funding and unprecedented expansion of the North American unconventional oil sector that is partly responsible for the recent oil price crash.

The pattern for the industry may be different this time and the recovery — both in oil prices and deal-flow — may be slower. But some analysts see this as an opportunity for big upheaval and deal-making on a scale not seen since the 1990s.

“We’ve seen a slowdown in deal-making to way below average at the end of last year and into January as well,” says Mr Aitken

“There are different circumstances this time than last time. In 2008-2009, deals dried up while oil prices were falling, but once oil prices were stabilised deals came back quickly,” Mr Aitken says. “People will be hesitant now to see if it is going to be a V-shaped recovery for the oil price, or a U-shaped recovery with a lot of volatility.”

Oil price volatility particularly is a deal killer, as well as the uncertainty about whether and how long a recovery in prices might take.

As it stands, there are wildly differing predictions from industry prognosticators such as Wall Street banks and the International Energy Agency about when and by how much oil prices will recover.

In recent weeks, many companies have announced lower spending for this year.

“Everybody knows there will be an oil price rebound at some time but now everyone is in defensive mode,” says Dani Kabbani, the managing partner of the Eversheds office in Qatar and the head of M&A for Qatar for the law firm. “Most oil and gas companies are going through budget cuts and some are entering into internal restructuring.”

The industry has not faced such pressure for quite some time. As Wood Mackenzie warned in a note to clients last Friday, “Lower oil prices pose the biggest threat to oil and gas industry earnings and financial solidity since the financial crash of 2008.”

Higher debt will make things worse, Wood Mackenzie added. Total net debt for the 46 international oil companies it follows has risen by 20 per cent — $53bn — in the past five years. “The cost of new capital for smaller companies will rise sharply in 2015,” Wood Mackenzie predicted. It estimated also that the companies would need to cut costs by $170bn to keep their debt levels from blowing out — and that it will be a matter of survival for some of them.

But Wood Mackenzie also concludes the dire situation for some will mean “a golden opportunity” for others and that this year may have “potential for a buyers’ market in M&A”.

“Financially strong players will put rationalisation programmes on hold but some companies will find themselves with little choice, unable to achieve the cuts in discretionary spend required to balance the books,” the consultancy said. “Large-scale corporate consolidation is more likely than at any point since the late-1990s.”

The frantic deal-making will mostly take place in North America and in Europe.

The pressure will be felt by those exposed to high-cost difficult players, such as Alberta’s bitumen mining in Canada and deepwater offshore in places such as the North Sea. It will be especially difficult for highly indebted companies.

“Where people are most concerned, that is where you find the best value,” says Mr Aitken.

For the Middle East governments, there are short-term tactical decisions. Lower oil prices offer an opportunity to negotiate for lower project prices and lower rig rates, says Mr Kabbani. But they are also an opportunity for the stronger companies to deepen their partnerships as, for example, Centrica and Shell did with Qatar Petroleum in the last oil price slump.

“These deals — especially with the national oil companies — do not complete in a couple of months,” Mr Kabbani says.

“That’s why even after the 2008 crisis you didn’t see deals fall off right away — they would have begun talks two, three years earlier. They are about existing relationships as much as strategic thinking and opportunism.”