Darren Woods, ExxonMobil’s chief executive, has been arguing for years that oil and natural gas will continue to be a major part of the global energy mix despite attempts to reduce emissions from burning them. He bet $60bn on the proposition this week.
The US energy supermajor $59.5bn deal for the acquisition of Pioneer Natural Resources makes it the dominant oil and gas producer in the Permian Basin, which is awash with oil and natural gas.
Exxon will instantly double its Permian production by acquiring Pioneer to 1.3mn barrels equivalents per day. By 2027, their combined acreage is expected to increase the output of the basin by about 2 million barrels per day. Exxon has access to 16 billion oil-equivalent barriques with 15 to 20 more years of inventory remaining.
This is a bold bet at a moment when the International Energy Agency claims that the global demand for fossils will reach its peak by 2030 and must drop sharply to avoid the worst impacts of global warming.
Tom Ellacott is an analyst at Wood Mackenzie. He said, “It’s the biggest oil deal ever and it shows ExxonMobil’s confidence in long-term oil prices and demand.”
The company predicts that oil and gas will continue to account for more than half the global energy demand by 2050. This is based on the rapid growth of middle-classes around the world and the slower transition towards greener energy sources. In a recent report, it said that the world is likely to miss the Paris Climate Agreement’s target of keeping global temperatures below 2C.
The announcement on Wednesday of Exxon’s largest deal since its merger with Mobil in 1999 sparked a furious response from environmental campaigners who accused the firm of “doubling down” when it comes to fossil fuels.
This is Exxon saying to the world that they don’t believe the Paris Climate Agreement will be realized. Mark van Baal, of Follow This, an activist Dutch shareholder group, said: “We’ll buy additional assets and fight to the death to prevent Paris Climate Agreement’s success.”
Exxon’s decision to invest heavily into oil and gas fueled a shareholder revolt at Exxon just over two years back. The activist hedge fund Engine No. Engine No. 1 won three board seats by demanding that Exxon take climate change seriously. Exxon said that it invests billions of dollars in low-carbon companies, like carbon capture and storage. However, the company remains committed to meeting future energy demands.
Woods stated on Wednesday that “as long as there is a need for oil and gas in the world, we will all be focusing on finding the most responsible, efficient and effective operator to produce oil and natural gas and do it with the least carbon intensity.”
Exxon’s European competitors, BP and Shell, have sold a portion of their fossil fuel portfolio to address climate concerns. Both companies have reduced oil production since 2019.
Chevron, a rival supermajor in the US, spent $6.3bn on acquiring US shale producers PDC Energy. This acquisition added new oil and natural gas reserves to Chevron’s portfolio. Analysts speculated that Exxon’s deal with Pioneer would increase the pressure on Chevron to pursue M&As in the Permian for the company to remain competitive.
Biraj Borkhataria is an analyst with RBC Capital Markets. He said Chevron had a very strong position, because Exxon was satisfied by Pioneer’s acquisition of Permian assets.
He said that the deal was a good one because it would boost efficiency and ensure the company has resources to plug into the large refining assets and chemicals on the Gulf Coast.
Exxon cited Pioneer’s acreage that bordered its own in the eastern part of the Permian Basin, which allowed it to maximize the efficiency of its drilling program, including horizontal drills that reach up to four miles through strata rich with oil. It wants to reduce its cost per barrel to less than $35, a fraction of what west Texas oil costs at the moment.
Woods told journalists that the US economy would be stronger and more secure, as well as have a greater energy security.
Exxon anticipates that global production will decline by 5-7 percent per year until 2050. “Sustained investments are essential to offset depletion”, as consumption continues to rise.
The company intends to increase growth in the Permian, while investing heavily in new production offshore of Guyana. This is where the company made a huge discovery in 2015. Its resource has increased to more than 10bn equivalent barrels of crude oil.
Bobby Tudor, the founder and CEO of Artemis Energy Partners, said: “Exxon now has the luxury — due to their success in Guyana — that they can have some very good organic growth using the drill bit.” “They are an exception, not the norm in that area.”
Experts said that the Pioneer deal showed how investor pressure is forcing Exxon to abandon organic growth, which requires expensive drilling operations and exploration. They said that the tie-up, and an expected new wave of M&As in the Permian, would lead to less production.
In an industry growing at a rapid pace, diversification is key. In an industry where growth is stagnant, you will see fewer companies and more competition.
“Exxon’s deal with Pioneer focuses on bringing production in and improving efficiency, which is lower risk than using capital in other ways.” They plan to be the last one standing [in oil & gas], but may not grow much larger than they are now.”