Oil and Gas M&A at New Heights Sparks Debate Among Energy Transition Analysts
In a compelling revelation, exclusive deals data from GlobalData, the parent company of Energy Monitor, underscores a significant surge in the value of M&A deals in the upstream oil and gas sector in 2023. Several countries, including the US, Norway, the UK, Canada, and Australia, experienced a substantial increase in deals, collectively surpassing double the value recorded in 2022.
The heightened M&A activity can be attributed to the robust profits generated by oil and gas majors in the aftermath of Russia’s invasion of Ukraine. The data, totaling $256 billion in upstream deals last year, encompassing mergers, acquisitions, and asset transactions, indicates that companies are leveraging these profits to expand their hydrocarbon businesses.
Key contributors to the global uptick in oil and gas M&A were two megadeals announced by US majors. In October, Chevron revealed its $53 billion, all-stock acquisition of smaller rival Hess Corp. Shortly before, ExxonMobil, Chevron’s larger rival, announced a $60 billion, all-stock purchase of Pioneer Natural Resources.
These deals, along with Occidental Petroleum’s $12 billion acquisition of CrownRock and Harbour Energy’s $11.2 billion purchase of Wintershall Dea, rank among the ten largest upstream oil and gas deals in the past five years.
Notably, Hess, Pioneer, and CrownRock possess extensive interests in US shale oil and gas, particularly in North Dakota and the Permian Basin. This focus propelled shale-focused oil and gas M&A to a record high of $168 billion in 2023.
The implications of this surge in upstream M&A activity on the energy transition remain a subject of debate among analysts. While some view it as a sign of the industry’s resilience and adaptability, others express concerns about the potential impact on efforts to transition towards cleaner and sustainable energy sources.
As the oil and gas sector continues to navigate geopolitical shifts and capitalize on profits, the balance between traditional hydrocarbon investments and commitments to the energy transition will likely shape the industry’s trajectory in the coming years. The evolving landscape underscores the need for a nuanced and strategic approach to ensure a sustainable and responsible transition in the energy sector.
According to Ben Cahill, associated with the Center for Strategic and International Studies, the recent merger and acquisition activities in the oil and gas sector are seen as a “signal of confidence in continued oil demand.” This perspective indicates that major players in the industry are looking to bolster their drilling inventory and believe in the potential for increased efficiency through consolidated operations.
Cahill suggests that prevailing global economic challenges, such as high inflation and interest rates, lead investors to favor more risk-averse mergers and acquisitions over new exploration ventures, reflecting a strategic shift in investment preferences within the sector.
“With the focus on capital discipline and efficient spending, investors aren’t rewarding growth plans,” says Cahill. “That lends itself to mergers and acquisitions rather than a continued flowering of growth-focused independents.”
Raj Shekhar, the Director of Oil and Gas at GlobalData, suggests that the recent merger and acquisition activities in the oil and gas sector by U.S. majors indicate an attempt to leverage profits to enhance competitiveness with national oil companies (NOCs).
NOCs often have significant control over national upstream assets, and U.S. oil majors may be aiming to strengthen their positions and operational capabilities in this context. This strategic move reflects an effort to navigate the competitive landscape and potentially secure a more prominent role in the global upstream sector.
“NOCs try to set the rules of the game in their respective countries, which results in unattractive returns for the IOCs [international oil companies] if the latter agrees to work with them,” he says. “In this context, the lack of quality assets globally and the availability of shale assets at the home of two to three oil majors in their backyard, where there are no NOCs as the dictating stakeholders, make the US shale market ripe for deals.”
Raj Shekhar further notes that the significant merger and acquisition activity in the oil and gas industry reflects industry confidence in the continued health of oil and gas demand.
This perspective contrasts with the International Energy Agency’s (IEA) warning in its latest World Energy Outlook, where it anticipates that demand for both oil and gas is set to peak within this decade. The industry’s confidence suggests a belief that, despite potential shifts in the long-term trajectory, oil and gas will continue to be crucial energy sources for the foreseeable future.
“Despite all the noise over climate change, oil and gas consumption is not going downhill that soon,” says Shekhar. “Considering the importance of natural gas as a transition fuel – especially when Europe and Asia are expected to depend on LNG [liquefied natural gas] for years to come – or even domestic US energy consumption, which might continue to be heavily dependent on fossil fuels, IOCs still see some steam left in hydrocarbons.”
Mike Coffin, head of oil and gas at the think tank Carbon Tracker, offers a different perspective, stating that the recent merger and acquisition activities in the oil and gas sector represent an “acknowledgment of the energy transition.”
This viewpoint suggests that companies in the industry are recognizing the imperative to adapt to changing energy dynamics and are strategically positioning themselves to navigate the evolving landscape of the energy transition. The M&A activities may reflect a response to the broader industry shift towards cleaner and more sustainable energy sources.
“At its heart, this increased M&A activity is an acknowledgment of the energy transition from the oil industry. Rather than spending lots of money on exploration or developing new projects, companies are pursuing a more risk-averse strategy [of] buying into existing production,” he says.
The focus on shale is also significant, says Coffin, because shale assets tend to be short-cycle in nature. “With shale projects, you are continually drilling new wells, and the production from new wells declines rapidly, so you have a greater ability to align your capex with any changes to price and demand, versus more conventional assets that are expected to deliver returns longer-term”.
Mike Coffin’s perspective is aligned with a report he co-authored for Carbon Tracker in November, titled “Navigating Peak Demand.” The report asserts that there is “no doubt” the energy transition is underway. It highlights a notable shift in investment, with clean energy attracting more investment than oil and gas in 2022, and an even wider margin in 2023.
The report suggests that, rather than attempting a full-scale energy transition, many oil and gas companies may find value in planning for declining upstream production.
This strategic approach is seen as a way for these companies to deliver maximum value to shareholders amid the accelerating global energy transition. The acknowledgment of peak demand and the evolving investment landscape signals a recognition within the industry of the need to adapt to changing energy dynamics.
“If you go back one hundred years, not all horse breeders became car manufacturers, to use a very crude analogy,” says Coffin. “It is hard for a CEO to admit that they might envisage growing smaller longer term, as it goes against the corporate psyche.
“But rather than wasting shareholder value on new exploration or a diversification strategy that will be hard to pull off and provides a different risk-return profile, it seems that some of the American majors are likely to continue maximizing shareholder returns, but ultimately get smaller over time,” he says.
Despite the broader trends and discussions around energy transition, no major U.S. oil company is explicitly indicating an anticipation of becoming smaller over time.
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ExxonMobil’s latest long-term outlook, which influences the company’s business planning, projects that wind and solar will contribute only 11% of global energy by 2050, while oil and gas are expected to provide 54%. Additionally, ExxonMobil suggests emissions will fall by 25%, rather than reaching net zero.
This outlook indicates a commitment by major U.S. oil companies to remain substantial players in the global energy landscape, emphasizing the continued importance of oil and gas in their strategic planning.
