Last year, Big Oil annoyed their home governments by raking in billions on the back of soaring oil and gas prices. Those were caused by demand exceeding supply for hydrocarbons.
The pain was especially great for the Biden administration. Despite its efforts to clip the industry’s wings, U.S. oil booked all-time high earnings. And while most used the money to pay down debt and boost shareholder returns, some set their sights higher and further into the future.
Exxon made $56 billion in net earnings last year. This year, it used a sum slightly higher than the 2022 net total to acquire Pioneer Natural Resources, establishing itself as the leader in U.S. shale.
All industry observers seem to agree that the time was ripe for a consolidation wave in U.S. oil. The reasons for this perception included the record profits that everyone made last year, new acreage running out in the shale patch, and limited new discoveries internationally.
According to the Financial Times, the two megamergers that Exxon and Chevron announced in the past couple of weeks have set off what its authors called “an arms race” to secure long-term oil and gas asset supply—at a time when some are predicting a peak for oil demand.
“We live in the real world, and have to allocate capital to meet real world demands,” Chevron’s chief executive Mike Wirth recently told the FT in an interview, adding that demand for oil will continue to grow beyond 2030.
Indeed, in its most recent forecast, OPEC said that oil demand will continue expanding until at least 2045, bringing into sharp relief the consistent underinvestment that has been a trend for years in the industry. The cause for that underinvestment is largely pressure from transition proponents that have drawn investors away from oil and gas while those remaining have insisted companies focus on investor returns.
But now investors are returning to oil and gas, and they want some of those returns. For that, and to secure the supply of a critical commodity in a world still very much dependent on it, the oil majors need access to more production assets. In an environment with a shortage of unexplored assets, securing that access is much easier done through acquisitions.
“It is an arms race,” one source involved in M&A activity told the FT. “In most sectors, deal one doesn’t necessarily lead to deal two and deal three. I believe in this case it will, because timing is of the essence and the two largest players have made their moves.”
In a recent Forbes article, public policy analyst and energy consultant David Blackmon also pointed out the need to secure production for the future as motivation for the megadeals. And it was a long-term need.
“The common thread connecting these deals is majors looking to refill their pipelines to maintain production against a declining asset base as they anticipate their legacy businesses staying profitable into the 2030s,” Enverus Intelligence Research senior VP Andrew Dittmar told Blackmon.
All of this goes against what the International Energy Agency said a couple of days ago in its latest World Energy Outlook: that oil and gas demand growth will peak within the next seven years.
The head of the IEA had made the prediction in an op-ed for the FT last month as a teaser of sorts for the WEO. Now that the report is out, so is the official prediction: oil demand will peak before 2030, along with gas and coal demand, as solar and EVs displace millions of barrels in oil demand.
The IEA sees a tenfold increase in the number of EVs on roads around the world by 2030 and a surge in wind and solar deployments so that by that year these—plus hydro, presumable—reach a share of 50% in global electricity generation capacity.
So, why are the supermajors spending tens of billions on oil and gas acquisitions? It might be because they are aware that the IEA’s projections and similar reports coming out of transition advocacy entities do not necessarily reflect reality.
Solar power demand in Europe has been on the decline at a time when it seasonally rises. Europe will not hit its 2023 targets for solar. Or for wind, for that matter as both industries suffer under the weight of higher costs.
EV sales are not exactly taking off in the U.S. In the third quarter, total EV sales in the country were a little over 300,000, which Cox Automotive said was a record high. All car sales, however, were over 3.8 million, making the share of EVs quite modest.
Supermajors rarely make stupid and expensive decisions, especially when these decisions are this expensive. The decisions by Exxon and Chevron to grow through acquisitions were made with a view to the realities of energy demand. That’s why neither supermajor went on a shopping spree for EV charger makers or wind turbine developers.
No, Exxon bought the leader in the Permian, and Chevron took over Exxon’s partner in Guyana, perhaps the hottest new oil location, with discoveries so far tapping into an estimated 11 billion barrels in reserves. These are not the actions of companies anticipating any sort of peak in oil demand anytime soon. These are the actions of companies that know very well oil will continue to be critical for the world for decades to come.
By Irina Slav for Oilprice.com
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