Shale Consolidation Could Put A Permanent Lid On Oil Output

Back in April, the Wall Street Journal reported Exxon was interested in acquiring Pioneer Natural Resources.

The company is the biggest independent producer in the Permian and an acquisition was the most logical path to growth there after the record year that Exxon, like the rest of the industry, had in 2022.

The information re-emerged this month when the WSJ wrote the two were negotiating the deal, which could end up being worth $60 billion. And it would change the face of shale.

The oil price surge last year left supermajors and independents alike flush with cash. At the same time, both groups of shale operators showed restraint in spending and de-prioritized production growth. Some noted faster depletion of wells and exhaustion of high-quality drilling spots, while others reported a surprising boost in well productivity.

Interestingly, Pioneer’s former CEO, Scott Sheffield, was both among those who said shale was not going to ramp up production because it was running out of good-quality drilling acreage and among those who reported higher than-expected well productivity thanks to drilling longer laterals. All in all, shale had become cautious and frugal.

It was only a matter of time before a consolidation drive began to gather pace in these circumstances. Exxon has a production target of 1 million barrels daily from the Permian by 2025, and just buying more land and drilling more wells won’t do it in the most economical way. So Exxon is negotiating the acquisition of the largest operator in the Permian, which would add around 700,000 bpd to its total from the play.

“With this Pioneer deal, there is a possibility that Exxon might say they’ve achieved that growth target for Permian production, and so they don’t have to grow as rapidly as they originally intended,” East Daley Analytics director of analytics and research Ajay Bakshani told Reuters this week.

Others may be thinking along the same lines if only to stay in the race. The Wall Street Journal reported that Exxon’s rivals Chevron and ConocoPhillips, both with considerable presence in the Permian, were looking for acquisition targets. And there are targets, the report said, quoting unnamed sources from the industry. There were independents that were signaling to the supermajors that they would sell if the price was right.

The Wall Street Journal called this an “era of megadeals”, which would reshape the industry, leaving a handful of large players in charge rather than the hundreds of small independents that pumped at will at the height of the shale revolution.

Such a development would tighten control on production growth further, Reuters wrote this week, citing industry insiders, and it would also put additional pressure on oilfield service providers and midstream operators. With fewer players in the field, there will be less competition for their services and more negotiating power for the producers.

All this would be good news for oil investors. No wonder they rushed to energy stocks after the news about Exxon and Pioneer broke, boosting the market cap of the 10 largest shale independents by a total of $16 billion, per the Wall Street Journal.

It might be less good news for transition-focused investors planning to continue pressuring companies into moving away from their core business. If Exxon spends billions to acquire an oil driller, it will not shut all the newly acquired wells and build carbon capture systems on top. It will pump oil from those wells.

So will Chevron, which is looking for smaller acquisition targets, again per the WSJ sources. Earlier this year, the supermajor was reportedly interested in taking over Occidental, but since then, it had reconsidered and was focusing on smaller sector players.

Chevron, too, will likely not change the nature of its potential target’s business. It will continue to extract oil and gas from the shale patch. And like Exxon, it will have the power to turn the rate of extraction up or down depending on its interests. Control over production growth in U.S. shale will tighten if the era of the megadeals materializes.

It may well do just that in the absence of motives for the federal government to set its anti-trust sights on such deals. According to an earlier Reuters report, the White House did want to keep a close eye on Exxon-Pioneer developments, but legal professionals seem to believe there were no grounds for anti-trust action on the deal.

The era of megadeals will put the final strokes in shale’s move to a mature industry, according to analyses of the trend. It would go from hundreds of small players drilling themselves out of business in the 2000s and 2010 to a small group of large producers and some mid-sized ones for variety’s sake, all of which think really well before they start spending their money.

This would mean slower production growth for shale output but it would also likely mean more stable and consistent growth, which, all in all, is better over the long term.

Source: Oilprice.com