Why two recent US shale acquisitions chart a different future for oil industry

Strategies of big US oil companies are diverging from their European peers

Chevron said this month that it would pay $53 billion to acquire Hess Corporation. Reuters

The latest two deals by US oil rivals are similar to the mega-mergers – in dollars if not headlines – of the turn of the century, which spawned the modern super-major oil corporations.

In August, ExxonMobil agreed to buy Pioneer Natural Resources for $59.5 billion and last week, Chevron announced it would pay $53 billion for Hess Corporation. These deals chart a very different future for the US shale oil industry and for their European rivals.

The acquisitions are the third and fourth-biggest upstream oil and gas deals on record. However, despite the large purchases, they are very different. Pioneer is an onshore tight oil producer in the US and, under chief executive Scott Sheffield, was a pioneer of shale in the Permian Basin of West Texas and New Mexico.

Petroleum company Hess has had only two chief executives in its nearly 100-year history: Founder Leon Hess, who ran it as a 19-year-old in 1933 up to his retirement in 1995, and his son, John. It has important shale holdings, mostly in the Bakken Formation of North Dakota, rather than the Permian.

But its crown jewel is its 30 per cent stake in the Stabroek Block, nearly 200km offshore from Guyana, where it partners with ExxonMobil in one of the world’s most exciting new oil provinces. The small South American nation’s output could reach 900,000 barrels per day by 2028, which would make it the biggest per capita oil producer in the world.

The deals are landmarks for two reasons. First, they are crucial for the future of US shale output. Over the past decade, this has been the most important source of new global oil and gas, limiting price rises and giving the US government the confidence to challenge important petroleum-producing political opponents – Russia, Iran and Venezuela – with increasingly severe sanctions.

From 2011 to 2014, when Brent crude oil averaged $95 per barrel, US oil production expanded by 1 million bpd each year. From 2015 to 2017, prices were much lower and growth was only 200,000 bpd annually, but efficiencies were unlocked. In 2018 and 2019, with the recovery in prices to an average of $67 per barrel, shale oil grew even more, adding 1.5 million bpd each year before Covid struck.

In 2021, with Brent at $71 per barrel, output was flat. Now prices are much higher, at about $90 per barrel, and although consultancy Rystad Energy expects growth next year of 500,000 bpd, total US oil output in September regained its all-time high of about 13 million bpd.

This is partly due to the curse of success. Decline rates – the pace at which production reduces over a period – from shale wells are fast and the productive base is much bigger than when the shale boom started, so drillers now have to run much faster to stay still. It partly reflects depletion of the most productive parts of the main shales and the move to drilling in lower-quality rocks.

But to an increasing extent, it indicates consolidation and a change in mindset by oil companies. The pursuit of growth at all costs by a multitude of small, often private outfits, brought dismal profitability and a series of bankruptcies. Now, investors demand that shale producers focus on returning cash rather than spending.

The leading companies don’t face such a hyper-competitive environment. Occidental outbid Chevron for Anadarko in 2019; Chevron picked up PDC for $6.3 billion in May; and Pioneer itself acquired Parsley, run by Mr Sheffield’s son Bryan, in 2020. Many other private equity-backed corporations have merged or been acquired and European oil companies such as Shell and Equinor sold their shale holdings.

ExxonMobil, which never used to be much of an acquirer and had its fingers burnt with the purchase of shale gas outfit XTO in 2010, paid $6.6 billion for the Permian Basin holdings of the Bass family in 2017, and $4.9 billion for enhanced oil recovery specialist Denbury Resources in July. It will now hold 15 per cent of Permian oil output.

There are still a few more consolidation candidates, but apart from the other big players, Occidental and ConocoPhillips, only EOG is on the same scale as Pioneer and Hess, with Diamondback, Coterra, Devon, APA, Marathon, Chesapeake and gas-focused EQT rather smaller.

Some think dominant super-majors will grow shale faster. They bring technical excellence, efficiencies of scale, the consolidation of multiple fragmented holdings, and the financial firepower to invest long term.

But they are also traditionally conservative operators and face profitability pressures. Their approach will probably recover more oil ultimately, but not in rapid growth spurts when prices rise.

Their long runway of domestic drilling means they will be active internationally only in the most attractive locations, such as Guyana, and in the East Mediterranean, where Chevron built a position by buying compatriot Noble for $13 billion in 2020.

Second, the European super-majors are absent. Neither BP, TotalEnergies, Eni or Equinor have made any significant upstream acquisitions since Shell bought BG for its liquefied natural gas assets in 2015.

Shell, which pulled out of Stabroek before the first well was drilled, would surely have been a contender for Hess historically.

But even though TotalEnergies has continued seeking new oil and gas, and recently appointed Shell chief executive Wael Sawan has signalled a renewed interest in upstream, they are still heavily focused on their net-zero strategies and low-carbon businesses.

Chevron and ExxonMobil will do more carbon capture and perhaps hydrogen and biofuels. But they are not interested in wind, solar, electric vehicle charging networks, and the other energy transition themes the Europeans are trying to crack.

The two companies are betting very firmly on a strong future for oil.

Since the break-up of Standard Oil in 1911, the strategies of the big European and US oil companies have followed each other quite closely. Now, they are charting quite different paths.

The problem for Shell, BP and their peers is that even if they’re right about the pace and direction of the energy transition, they may not be the best placed to make the journey.

Robin M. Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis