Business

2024,Big Oil Gains Strength Through US Industry Consolidation

The oil and gas industry underwent a significant $250 billion spending spree in 2023, capitalizing on soaring stock prices of various companies. This rush aimed to secure reserves at more affordable rates and brace for anticipated changes in an industry ripe for further consolidation.
Exxon Mobil, Chevron, and Occidental Petroleum led the charge with acquisitions totaling $135 billion last year. ConocoPhillips also sealed two major deals in recent years, with all eyes set on securing the biggest prize: control over the Permian Basin, the largest U.S. shale-oil field. Together, these four companies now anticipate controlling around 58% of the future production in this lucrative region.
Their collective target is to extract at least 1 million barrels per day (bpd) from the Permian Basin, which is projected to reach a production rate of 7 million bpd by the end of 2027.
This spree might not be over yet, as three-quarters of energy executives, according to a December poll by the Federal Reserve Bank of Dallas, anticipate more oil deals valued at $50 billion or more to emerge in the next couple of years. Endeavor Energy Partners, a major player in the Permian shale realm, is also exploring a potential sale that could further concentrate U.S. shale oil output.
Ryan Duman, director of Americas upstream research at Wood Mackenzie, highlighted how this consolidation is actively reshaping the industry landscape. The outcomes of these mergers and acquisitions will largely determine whether production growth will be robust, relatively stable, or somewhere in between.
However, this consolidation isn’t limited to producers alone; it’s set to impact oilfield servicing and pipeline operators. The companies involved in drilling, hydraulic fracturing, sand provision, and oil/gas transportation to the market will contend with fewer but more influential customers wielding greater pricing power.
While this consolidation favors producers, it could strain the margins of service companies as existing contracts undergo renegotiation, impacting their profitability unfavorably.
Moreover, pipeline operators are facing their consolidation wave, with fewer approvals and constructions of new oil and gas pipelines. While expansions to existing lines from the Permian Basin might offer some relief, estimates suggest that pipeline capacity from this region could hit 90% by mid-2025.
The recent acquisitions highlight oil companies’ pursuit of untapped and cost-effective oil and gas reserves. These deals were largely stock swaps, bolstered by strong share prices, reducing the risk of heavy cash outlays that could jeopardize balance sheets if oil prices were to decline, similar to the downturns witnessed in 2016 and 2020.
Andre Gan, an M&A expert at Wong & Partners law firm, observed a resurgence in investments in fossil fuels, partly driven by rising interest rates in 2023, making stock-based acquisitions more appealing to investors than funding new renewable energy projects.
Recognizing the shift towards renewable fuels, electric vehicles, and greater energy efficiency, oil producers are adapting. They anticipate a decline in fossil fuel consumption, which may impact companies with higher production costs. As a result, big oil companies are focusing on cash flow rather than aggressively increasing production.
Consolidation in the industry has caught the attention of U.S. antitrust regulators, prompting requests for additional information from major players like Exxon and Chevron. Despite the delays caused by regulatory scrutiny, both companies are confident of securing approval, citing the presence of aggressive smaller rivals as a sign of continued robust competition in the U.S. oil market.
The emergence of fewer but larger oil producers, dedicated to extending the life of their fossil fuel businesses, could potentially clash with governments prioritizing a shift towards cleaner energy sources.
Meanwhile, global oil prices are predicted to remain relatively stable in 2024, hovering between $70 and $90 per barrel, following an average of about $83 per barrel in 2023. Analysts foresee this range to be above the $64 per barrel average seen in 2019, reflecting a steady but somewhat moderated price trajectory.

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