ExxonMobil’s acquisition of shale producer Pioneer Natural Resources for US$59.5 billion signals that the oil major expects fossil fuel production to remain profitable beyond the end of the decade, despite predictions that global oil demand will peak before 2030.
“They’re spending $60 billion today,” Dan Tsubouchi, Calgary-based principal and chief market strategist with SAF Group, told the Financial Post. “They wouldn’t do that if they didn’t see at least a 10-to-15-year window for oil.”
The merger brings Pioneer’s 850,000 net acres in the Midland Basin, the largest oil field in the larger Permian Basin in the United States, together with Exxon’s 570,000 net acres in the Delaware and Midland basins. The combined area will make Exxon the dominant player in the Permian, giving it control over one of the largest undeveloped oil and gas inventories in the world—if the deal gets regulatory approval.
The deal is the industry’s largest since 2015, when Royal Dutch Shell acquired BG, an offshoot of British Gas, for $82 billion. It puts the Exxon in “a peer group of one” as the world’s first “megamajor,” reports Rigzone.
Exxon will now have an estimated 16 billion barrels of oil equivalent in the Permian, the company said. “At close, ExxonMobil’s Permian production volume would more than double to 1.3 million barrels of oil equivalent per day.”
Combining resources with Pioneer will also allow Exxon to drill longer wells, deeper into the basin’s shale resources, writes the New York Times. “The companies said they could stretch some lateral drilling up to four miles.”
The acquisition shows Exxon is making some assumptions about the future of fossil fuels, including an expectation that oil and gas will remain a prominent component of the world’s energy mix in the coming years. That’s in spite of leading analysts like the International Energy Agency predicting that fossil demand will peak before 2030 as it gives way to renewables.
“This is proof of Exxon’s strategy to stay in oil and gas as long as possible,” Mark van Baal, founder of the activist shareholder group Follow This, told Business Insider. “It shows that the company doesn’t think there’s any chance the world will achieve the Paris Agreement, because if they did, they wouldn’t buy new assets.”
And since Pioneer’s shale is located in the United States, Exxon likely also expects the country’s energy policy to remain favourable to fossil fuels, despite the Biden administration’s push for decarbonization. Rather than accepting the transition away from fossils, Exxon executives are proposing to decarbonize using carbon capture technology as they expand production, says the Times. But “the technology to do that remains in an early stage and has not been successfully used on a large scale.”
Some investors appear wary of this trajectory and are questioning the acquisition’s price tag—with good reason, says the Institute for Energy Economics and Financial Analysis (IEEFA).
“ExxonMobil has a history of overpaying and misreading the dynamics involved with major upstream asset purchases,” IEEFA writes, pointing to “rocky dealmaking” in the last decade that include a $41-billion purchase of U.S. shale gas producer XTO and a Russian gas deal with Rosneft that was disrupted by sanctions following the invasion of Ukraine.
But activist investor Engine No. 1—which put three new executives onto Exxon’s board in 2021 amid criticism regarding its climate-related actions—argues that focusing on the company’s best assets is a better course than investing in far-off, costly projects.
“Short-cycle Permian assets make more sense against the backdrop of a long-term energy transition than megaprojects that would take decades to start earning a return,” said Charlie Penner, the hedge fund’s former head of active engagement.
Analysis by Wood Mackenzie backed this financial rationale, noting that “wells pay back in less than 24 months, driving stellar returns and some of the lowest break-even in the sector.” The consultancy also pointed out that Pioneer’s Scope 1 and 2 emissions intensity is 75% lower than ExxonMobil’s global upstream average over the next five years, “driving portfolio improvement through advantaged barrels.”
Experts say other companies might follow suit. Exxon competitor Chevron may try and make a similar deal to keep up, suggests Forbes. And overall, fossil fuel companies are considering higher production amidst recent windfall profits—especially as pressure to scale back oil has waned with the focus on energy security after Russia’s invasion of Ukraine.
“These companies aren’t going to go into something like the megaprojects of the past,” said Tsubouchi, looking to producers in Canada’s oilsands. “But they will look at short-cycle projects where they can take advantage of a 10- to 15-year window, just like Exxon has.”