While European oil companies such as BP and Shell have been touting their transition from fossil fuels to wind and solar technology, major U.S. oil companies ExxonMobil and Chevron have made major acquisitions in recent weeks to ensure that, in an increasingly uncertain world, their supplies of oil and gas continue to flow.
“Chevron and ExxonMobil and others are trying to make sure they have access to resources, particularly in the United States,” Ryan Yonk, energy analyst and senior faculty at the American Institute for Economic Research, told The Epoch Times.
The purchase of Hess by Chevron “gives them access to a number of Bakken sites in North Dakota, as well as a field in Guyana,” he said.
On Oct. 23, Chevron announced that it was buying Hess for $53 billion in stock. In addition to the Stabroek block in Guyana, Hess’s Bakken shale assets in North Dakota add to Chevron’s Denver-Julesburg and Permian basin operations in Colorado and Texas respectively.
This came just two weeks after ExxonMobil bought Pioneer Natural Resources, also in an all-stock transaction, for about $60 billion. The merger combines Pioneer’s more than 850,000 net acres in Texas’s Midland Basin with ExxonMobil’s 570,000 net acres in the Delaware and Midland basins.
Gearing Up to ‘Meet Real-World Demands’ for Oil, Gas
“Anyone who believes that fossil fuels are going to be ‘transitioned’ out of the market over the next several decades is engaged in self-deception,” Benjamin Zycher, energy economist and senior fellow at the American Enterprise Institute, told The Epoch Times.
The Energy Information Administration (EIA) projects a modest but steady 0.7 percent growth worldwide in the demand for fossil fuels through 2050. However, energy executives believe that EIA projections fall short.
Chevron will continue to grow its output of oil and gas, he said, adding that his company was “not selling a product that is evil. We’re selling a product that’s good.”
Lower emissions, while important, shouldn’t come at the cost of depriving the world of affordable and reliable energy, Mr. Wirth said.
Beyond access to resources, a number of other factors are driving industry consolidation.
Higher interest rates have made financing more difficult for smaller companies, relative to larger corporate borrowers that can access capital markets at a lower cost, Mr. Zycher said.
“My hunch is that there is ongoing technological advance in exploration, discovery, and production, and such technological advance is likely to increase scale economies,” he said.
There’s another factor leading to consolidation, Mr. Zycher said. “The political assault on fossil energy producers has created an artificial scale economy,” he said. “Larger producers are in a better position to resist attacks from regulators, litigation, etc.”
Lawsuits against oil and gas companies alleging harm from global warming are the latest weapon being wielded by climate activists to stop the production of fossil fuels. In September, California filed a sweeping climate lawsuit against ExxonMobil, Shell, BP, ConocoPhillips, Chevron, and the American Petroleum Institute, demanding that they pay for costs related to weather events—from rising sea levels to drought and wildfires. California’s efforts coincide with a number of other lawsuits from nonprofits making similar allegations.
Consolidation Among the Wildcatters
In addition to the headline acquisitions, consolidation is playing out among smaller upstream companies. Enverus, an industry mergers and acquisitions (M&A) analytics firm, reported that the past two years have been an “M&A bonanza” of smaller upstream companies being sold by their private equity owners to larger, privately held firms.“The next logical step after private consolidation is deals among the public companies themselves,” Enverus correctly predicted in April. “All this seems to point toward an industry that looks increasingly like it did before shale, in the context of the biggest companies and majors holding the best, low-cost resources.”
The biggest players are also reaping the benefits of efficiencies of scale.
“There is a dynamic across producing fields and regions in which decline rates, new discoveries, field expansion, etc., are not uniform, so that there is likely to be a ‘smoothing’ or efficiency effect from consolidation,” Mr. Zycher said.
For all of these reasons, the sun may be setting on the wildcat days of independent shale production, as private equity companies that had financed much of the shale boom now sell off their ownership stakes to larger competitors. The shale revolution made the United States the largest producer of oil and gas a decade ago, but the industry has been notoriously volatile, as money flooded in, leading to oversupply, falling prices, and lower profitability or, in some cases, bankruptcy.
The current consolidation appears to be an industry-wide attempt to smooth the boom-and-bust cycle.
“What we’re most likely seeing is a recognition that those wildcatters have been out in the market for a while, and as that gets more difficult to do and as companies need to stabilize their ability to produce and to drill, they’re willing to purchase those companies,” Mr. Yonk said. “I don’t know that it means the wildcatting is done, but it certainly means that there’s a desire to stabilize access to resources; I think you’re going to see a lot more of that consolidation happening to try to make things more stable for the production stock.”
The EIA attributed this decline to lower prices for natural gas; however, the oil rig count in the United States’ Permian region followed a similar pattern, decreasing from 357 rigs in May to 305 rigs on Oct. 20.
The price of crude oil, which hit $118 per barrel in June 2022, has since fallen back to about $85 per barrel. Prices appear to be on an upward trend, however, with Russia and Saudi Arabia announcing production cuts, and many industry analysts predict prices will soon hit $100 a barrel.
While higher prices should incentivize oil companies to put more money toward capital expenditures, many continue to be reluctant, opting instead to ramp up production from existing wells or drill cheaper, shallower wells. Market watchers are skeptical that the current spending spree to acquire other companies marks a trend toward more investment in infrastructure.
“Rather than having to do large-scale exploration and capital-intensive drilling, what they’ve opted for instead is to acquire folks that already have production capability,” Mr. Yonk said. “We’ll have to watch to see what [Chevron and Exxon] do with these two acquisitions, but if they wanted to simply drill more, we would have probably seen them do that.
“They didn’t acquire new exploration or drilling companies; they acquired other companies already in the production field.”
The ‘Resource Curse’
A sidebar to the consolidation is the rise of Guyana—a small, impoverished South American country—into the ranks of global oil producers. Guyana held an auction for 14 offshore oil and gas exploration projects in September.In addition, Hess and ExxonMobil have jointly made more than 30 discoveries in Guyana’s offshore waters since 2015. The oil and gas boom is bringing waves of cash—$1.6 billion to date—to a historically poor country, with 40 percent of its population reportedly living on less than $5.50 per day.
“Typically, the resource curse for places like Guyana very rarely works out particularly well,” Mr. Yonk said. “Venezuela is a case in point; they did very well for a while, then they had political change that made it not so great.”
Venezuela, Guyana’s neighbor to the west, grew rich from oil and gas wells until it transitioned to socialism under then-President Hugo Chavez in the 1990s. Since then, the country has been plagued by corruption, hyperinflation, falling oil prices, and severe shortages of food, drinking water, gasoline, and medical supplies. About half of Venezuela’s 28 million residents now live in poverty, and more than 7 million Venezuelans have fled the country since 2014.
Part of the rationale for investing in Guyana is that the majors are attracted to production that’s closer to home, as tensions rise in the Middle East, Eastern Europe, and Asia. Given that the oil and gas industry is capital intensive, stability is key for investments that take years or decades to generate profitable returns.
“All things being equal, they like higher prices rather than lower, but they’re also very interested in stability because they’re in a capital-intensive industry,” Mr. Yonk said. “Being able to make long-term plans is far easier when you can have an expectation about the price.”
