ExxonMobil backs up bullish view of oil demand with $60bn bet

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ExxonMobil chief executive Darren Woods has long contended that oil and gas will remain central to the world’s energy mix despite efforts to drive down emissions created by burning them. This week he placed a $60bn bet on this proposition.

The US energy supermajor’s $59.5bn deal to acquire Pioneer Natural Resources will make it the dominant producer in the oil and gas-drenched Permian Basin of Texas and New Mexico. Tacking on Pioneer will immediately double Exxon’s Permian production to 1.3mn barrels of oil equivalent per day. Their combined acreage will further drive the basin’s output to about 2mn b/d by 2027. All told, Exxon will have access to 16bn oil-equivalent barrels, with 15 to 20 years of remaining inventory.

It is an audacious wager at a time when the International Energy Agency asserts that global demand for fossil fuels will peak before 2030, and must fall sharply in order to avoid the worst effects of global warming.

“It’s a massive oil deal that demonstrates ExxonMobil’s bullishness on longish-term oil demand and prices,” said Tom Ellacott, an analyst with consultancy Wood Mackenzie.

By 2050, the company anticipates oil and gas will still make up more than half of global energy demand based on rapid growth of the global middle class and a slower transition to greener forms of energy. It said in a recent report that the world was likely to fail to keep global temperature rises below 2C from pre-industrial levels, the target set by the Paris climate agreement.

Wednesday’s announcement of Exxon’s biggest deal since its 1999 merger with Mobil prompted a furious reaction from some environmental campaigners, who accused the company of “doubling down” on fossil fuels.

“This is really Exxon telling the world, ‘We don’t think the Paris climate agreement will ever be achieved. We’ll buy more assets and we’re going to fight tooth and nail to prevent the Paris climate agreement’s achievement,’” said Mark van Baal of Follow This, a Dutch shareholder activist group.

Just over two years ago Exxon’s commitment to invest heavily in oil and gas helped fuel a shareholder rebellion at Exxon, with activist hedge fund Engine No. 1 winning three board seats with a demand that it take climate change more seriously. Exxon has said it is investing billions in low-carbon businesses, such as carbon capture and storage, but remains committed to helping meet future energy demand.

“As long as the world needs oil and gas, we’ll all be focused on making sure that they have the most efficient, effective and responsible operator making and producing oil and gas, and doing it with the lowest carbon intensity,” Woods said on Wednesday. 

Exxon peers in Europe such as BP and Shell, have sold parts of their fossil fuel portfolio in response to climate concerns. Both companies have cut oil output since 2019.

In the US, rival supermajor Chevron spent $6.3bn to acquire US shale producer PDC Energy, adding new oil and gas reserves to its portfolio. Analysts have speculated Exxon’s deal for Pioneer would heighten the pressure on Chevron to pursue M&A in the Permian to remain competitive.

Biraj Borkhataria, an analyst at RBC Capital Markets, said Chevron was in quite a strong position because Exxon’s appetite for Permian assets would have been sated with Pioneer.

He said the deal made sense in terms of boosting efficiency and ensuring the company had resources that could plug into its large refining and chemicals assets on the Gulf coast.

Exxon pointed to Pioneer acreage in the eastern portion of the Permian Basin that abutted its own, enabling it to wring efficiencies from its drilling programme, including horizontal wells that extend as much as four miles though strata of oil-rich rock. It aims to cut its average cost per barrel in the Permian to below $35 — a fraction of the current west Texas oil price of about $83 a barrel.

“It’s a win-win for the country, a better, stronger US economy and better energy security,” Woods told reporters.

Exxon expects global production to decline by about 5-7 per cent a year to 2050, making “sustained investment essential to offset depletion” as consumption remains elevated. 

The company plans to ramp up growth in the Permian as it also invests heavily in new production off the coast of Guyana, where it made a massive discovery in 2015, which has now increased to a resource of more than 10mn barrels of oil equivalent.

“Exxon has the real luxury now — because of their success in Guyana — of having some very good organic growth with the drill bit,” said Bobby Tudor, founder and chief executive of Artemis Energy Partners. “They are the exception rather than the rule however in that space.”

Some experts said the Pioneer deal demonstrated that investor pressure was forcing Exxon and the wider industry to give up on organic growth which requires capital intensive drilling operations and exploration. The tie-up and an anticipated fresh wave of M&A in the Permian would likely lead to less production over time, they said.

“In an industry that is growing gangbusters you have diversification. You have more companies and increased competition whereas in an industry that is plateauing you see the opposite,” said Andrew Logan, senior director of climate energy at Ceres, a coalition of investors and environmental groups.   

“Exxon’s deal with Pioneer is about bringing in production and focusing on efficiency in a way that is a lower risk than other uses of capital. They are definitely planning to be the last man standing [in oil and gas], but they may not be much bigger than they are today.”

Additional reporting Tom Wilson in London