Does Oil & Gas Merger Boom Cast Doubt on Global Clean Energy Transition?
Mergers and acquisitions have always been a big part of the oil and gas business, but the sector is in the midst of a particularly intense consolidation. Historically, the reason is simple. As a company’s reserves decline, there are only two ways to replenish: either new exploration or buying the stuff that someone else found.
The recent run of tie-ups starting has been amplified by the industry’s windfall profits. S&P Global Market Intelligence reports the value of oil and gas deals topped $271 billion in 2023, double the previous year. Some of the biggest of these deals will aim to be finalized in 2024.
Some worry that mega mergers are a bet against the energy transition. But the truth might be more complex. ExxonMobil and Chevron may have “turbo-charged their own fossil fuel output,” but simply moving it from one company to another won’t change global production. New owners often have the same goal of adding incremental production as the previous ones.
For example, Exxon’s merger with Pioneer will bring assets in the Permian under one roof, granting cost efficiencies as well as access to an undeveloped domestic short-cycle unconventional inventory position. Chevron sees Hess’ Guyana assets as a long term opportunity for the production of high margin barrels.
But global oil demand does not have to grow for these deals to make sense. In fact, Exxon and Chevron are calculating that demand for oil and gas could decline and these deals would still work. They just need to own assets where their cost of production is in the top two performing quartiles.
Wagering big on growing demand would look different: allocating capital to new greenfield exploitation and development. But we’re seeing very little appetite for that sort of risky and very expensive play, even from those companies assuredly declaring that consumption will continue to grow for decades.
Consolidation might even be better for the environment
Something else we know is that industry urgently needs to eliminate methane emissions. All the largest western oil and gas companies have joined OGMP 2.0, committing to significantly reduce methane intensity and flaring. Many of these post-consolidation entities will find that achieving these goals becomes more efficient at scale.
In the Permian, consolidated acreage allows more efficient emission detecting overflights, and deployment of leak detection and repair crews. Engineering solutions also scale neatly over larger asset bases that share characteristics in terms of age and design. Mergers also offer efficiencies in the ability to deploy the best technology and practices not only to reduce methane emissions, but also improve energy efficiency and meet a broader set of scope 1 and 2 challenges.
By contrast, smaller operators are typically less focused on emission reductions. Merging with a large E&P with scope 1 and 2 commitments can bring these assets under targets. Larger E&Ps with strong balance sheets are far more able to address scope 3 issues by lowering the carbon intensity of their product mix with hydrogen, CCS, low-carbon aviation and shipping fuels, and solar, wind and geothermal energy.
No guarantees
The climate risks associated with oil and gas M&A are nevertheless genuine and serious. Transferring ageing assets from larger upstream companies to smaller ones is a longstanding industry practice. Today, sellers are increasingly offloading high emission assets to little-known operators to meet their emissions reduction targets.
Many of these aging assets are destined to be operated without emission targets, transition plans, or the strength of balance sheet to properly decommission them. Companies, banks and local regulators must ensure that these risks are controlled before, during and after the transaction.
In well run businesses, efficiency and environmental performance are well correlated. If you’re going to do a merger then climate, environment and energy transition must be central to deal making. We believe the most handsome acquisition targets in the future will have demonstrated mastery over scope 1 and 2 emissions.
M&A is simply how gravity works in the oil and gas industry. Instead of calling halt, companies, banks, governments and regulators should recognize it as an important inflexion point to ensure environmental harm is minimized and emissions are reduced.
