The last barrel
The drive to abandon exploiting hydrocarbon-based energy is rapidly fading, as government authorities realize that few are buying their bombastic climate change rhetoric, designed to crush the oil and gas industry and install their green energy friends. The left-wing Democratic radicals messed with the wrong bunch of hombres when they challenged the U.S. oil and gas majors to a game of supply chain cat-and-mouse.
Loyal to serve. In typical fashion, our industry has survived yet another backhanded cheap shot and managed to emerge victorious, while focusing on carbon reduction and continuing to supply the U.S. with a reliable supply of reasonably priced energy, despite environmental extremism and unrelenting pressure from the Biden Administration to restrict drilling activity.
Enter the mega-merger. ExxonMobil’s purchase of Pioneer Natural Resources for $60 billion is a strategic gamble, based on company CEO Darren Woods’ belief that oil and gas will be central to the world’s energy mix for decades to come, whatever path the transition to a lower-carbon future takes, Fig. 1. But the wager comes with risk. The merger has created a shale-focused giant capable of producing 4.5 MMboed at a time when global authorities are aggressively seeking methods to reduce carbon emissions.
However, this type of strategic business venture has long been a tradition at Exxon. Former CEO Lee Raymond’s successful $80 billion merger with Mobil in 1999 ushered in the era of the cost-cutting supermajor amid low oil prices, successfully positioning the company for the strong commodities up-cycle of the 2000s.
The Pioneer deal is also perfectly timed to fully exploit record-high global oil demand. The IEA expects continued growth to 105.7 MMbopd in 2028 from an average 100 MMbopd in 2023. With talk of reaching peak oil demand in the 2030s rapidly fading, ExxonMobil’s landmark deal has positioned the company as a major oil producer for decades to come. Additionally, the Pioneer purchase provides more flexible production, with wells brought on in months, compared to years for offshore developments. And the Permian basin’s close proximity to ExxonMobil’s Gulf Coast refineries gives it a logistical advantage over competitors in the region.
Chevron joins the party. Chevron purchased Hess Corp. in an all-stock $53 billion deal to gain a share of ExxonMobil’s giant offshore Guyana discovery and build its position in the Bakken shale play. The Chevron deal, which was announced on Oct.23, will add years of oil and gas production to the company’s portfolio, much of it from U.S. shale. More importantly, the deal will leave Chevron’s European oil rivals, which have shifted their focus to renewable energy, further behind in fossil fuels. "This is great for U.S. energy security,” said Chevron CEO Michael Wirth, Fig. 2. “It brings together two great American producers, Chevron and ExxonMobil." Chevron also increased its shale holdings by recently acquiring U.S.-based PDC Energy and Noble Energy. The combination of Hess, PDC and Noble will bring Chevron's total oil output to approximately 3.7 MMbopd. It will expand the company's shale output 40%, to 1.3 MMbopd, slightly less than ExxonMobil's projected shale production following its Pioneer Natural Resources acquisition.
Crown jewel. The deal gives Chevron a 30% stake in the ExxonMobil and CNOOC Stabroek Block in Guyana, where output is expected to triple to 1.2 MMbopd by 2027. "This deal is mostly about the world-class Guyana asset, which is the crown jewel in the Hess portfolio," said a Capital One Securities analyst. Guyana has emerged as one of the world's fastest growing oil provinces following 11 Bboe of discoveries since 2015. Hess CEO John Hess said the government of Guyana and ExxonMobil will welcome Chevron's entry into the country's oil fields, Fig. 3. Hess said he has been in talks with Chevron’s Wirth for two years (Reuters).
Chevron’s willingness to pay a premium for Hess, even after the shares nearly doubled last year, shows that the U.S. supermajors are ready to use their financial prowess to secure low-cost oil supplies for the long term. Guyana is attractive, not just for the size of its discoveries, but also for its breakeven costs, which are some of the lowest for new offshore developments anywhere in the world.
Who’s right? Most oil executives dismiss the IEA’s 2030s peak oil projections, saying the world will need hydrocarbons for many decades to come. “I personally disagree, the majors disagree, OPEC disagrees and everybody that produces oil and gas disagrees,” said Pioneer CEO Scott Sheffield, Fig. 4. “The IEA misunderstands the demand for our products,” Sheffield added. “Who is going to replace jet fuel? Who is going to replace petrochemicals? What alternatives will replace that?” Sheffield asked (NYT).
But a day after Chevron announced its acquisition, the IEA released an extensive report, concluding that demand for oil, gas and other fossil fuels would peak by 2030 as sales of electric cars and use of renewable energy surged. The disconnect, between what oil companies and most energy experts think will happen in the coming years, has never been this stark.
The majors are doubling down on drilling for oil and gas and processing it into fuels for use in engines, power plants and industrial machinery. And, with only a few exceptions, they are not spending much on alternatives, including wind, solar power or electric-car batteries. “They are putting their money where their mouths are,” said Larry Goldstein, director of special projects at the Energy Policy Research Foundation.
Drinking the cool-aid. Officials at IEA think the oil companies are making a bad bet. They point to the fast growth in renewable energy and sales of electric cars and mopeds, saying one out of every five new vehicles sold this year will be battery-powered, up from one out of every 25 in 2020. “The transition to clean energy is happening worldwide and is unstoppable,” said Fatih Birol, the agency’s executive director.
Common sense approach. These large consolidations will help the U.S. majors invest more in relatively untested CCS and CCUS technologies. European leaders looking to address climate change should look to U.S. policy and “let the market work” to avoid driving companies away with prescriptive regulations, said ExxonMobil CEO Darren Woods. “I think it’s a huge mistake to be picking winners and losers and focusing on specific technologies. Instead, we should be looking more broadly at letting the markets determine which solutions provide the most emissions reductions for the lowest cost,” Woods continued.
“Carbon capture is going to play a significant role. It is a technology that exists today. It’s one that ExxonMobil has a lot of experience in,” Woods said. “Think carbon capture and storage, think hydrogen, think biofuels, all of those recognized by credible third parties are going to be needed as part of the solution. While other oil majors are looking to develop wind farms and solar parks, ExxonMobil is focused on technologies that dovetail with the company’s strengths. If we stop producing diesel and gasoline, the world demand doesn’t change. Somebody else will meet that requirement. If I stop growing liquefied natural gas, the world will burn more coal,” Woods concluded.
Oil is here to stay. Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said the ExxonMobil and Chevron megadeals are strong indicators that hydrocarbon-based energy is not going away any time soon, Fig. 5. “Oil is here to stay as the U.S. majors strike blockbuster deals while Saudi policies are helping stabilize global crude markets,” Abdulaziz bin Salman said at an annual investment forum in Riyadh. Saudi policy is working, and the method of restricting production is an effective strategy for managing crude markets. The kingdom has to “ensure that we have a less volatile oil market that will help the global economy to grow and prosper.”
Crude prices rebounded to almost $100/bbl last month, swelling profits at producers and creating growing confidence that bolstered the two mega-mergers. “I don’t think ExxonMobil would have merged with Pioneer for charity purposes, or for that matter Chevron would do that with Hess,” Prince Abdulaziz said. “It is a testament by its own virtue that hydrocarbons are here to stay.”
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