US oil deals aim to get the industry fit for the long haul

There used to be a popular competition format in the US known as “Touch the Truck”. Contestants would start with their hands on a truck, and keep touching it for as long as they could. The one who lasted the longest would win the truck. It seems like a good metaphor for the long-term future of the oil market.

We cannot know for certain when world oil demand will peak, and the end of oil altogether will come far off in our future, if ever. But there is a good chance that total oil use will hit a plateau in the 2030s, under pressure from the rise of electric vehicles and improvements in fuel efficiency, and decline steadily thereafter. In those conditions, and in a world that is likely to be increasingly concerned about climate change, the oil producers that can remain in business will be the ones that can supply crude at the lowest cost and with the lowest greenhouse gas emissions. “Fuel the Truck”, you could call it.

Diamondback Energy’s US$26 billion deal to buy fellow Permian Basin producer Endeavor Energy Resources, announced this week, shows how the US oil industry is evolving to succeed in those increasingly competitive markets.

US tight oil faces challenges in a world where producers will need low costs and low emissions to survive. Oilfields in the US Lower 48 states have a very wide range of breakeven prices, and the lowest-cost ones are competitive with just about any other production in the world. But by the 2030s, their average breakevens are expected to be towards the top end of the global cost curve, and much higher than for fields in the Middle East. Methane emissions per barrel in US tight oil have fallen significantly in recent years, but still have a way to go to match the performance of world-leading producing regions such as Saudi Arabia, Norway, and the offshore fields in the US Gulf of Mexico.

For the long-term health of US onshore oil production, assets need to held by operators that can drive down production costs and cut methane leakage and other emissions. That seems to be what has been happening in many of the deals in the wave of consolidation that has been sweeping through the US oil industry in the past four months.

Since October, ExxonMobil has agreed to buy Pioneer Natural Resources for US$64.5 billion, Chevron has agreed a US$53 billion deal for Hess, and Occidental a US$12 billion deal for CrownRock. Much of the activity, including the Diamondback/Endeavor deal, has been focused on the Permian Basin, the largest oil-producing area in the US.

In those Permian deals, the acquirers have emphasised their plans to cut development costs, or emissions, or both. Travis Stice, Diamondback’s chief executive, said in a statement this week that a key motivation for the Endeavor deal was that “Diamondback has proven itself to be a premier low-cost operator in the Permian Basin over the last 12 years, and this combination allows us to bring this cost structure to a larger asset”.

Diamondback expects that its average cost to drill, complete and equip a well in 2024 will be US$625 per lateral foot, while Endeavor’s will be about 25% higher at roughly US$775 per foot. By 2025, it expects costs for the combined company to be down to around that pre-deal level of US$625 per foot.

The company highlights its proprietary drilling fluid, the Simulfrac technique for hydraulic fracturing of several different wells at the same time, and its “organisational culture focused on operational efficiency,” as key reasons why it is able to drive costs down.

Robert Clarke, Wood Mackenzie’s head of US onshore research, says the prospect of Diamondback rolling out its “execution machine” across Endeavor’s high-quality asset base was a key factor in the stock market’s positive reaction to the deal. Diamondback’s shares rose by about 10% on the Monday the news was announced, and have carried on rising since.

Unlike other privately held companies in the Permian, Endeavor has been cutting emissions from its operations in recent years, but here, too, there is scope for improvement. Diamondback says that since the start of 2021, all the oil and gas it produces will have net zero scope 1 emissions, through a combination of emissions reductions and purchases of voluntary carbon credits. It has near-term targets for further progress, including an end to routine flaring by 2025, which would mean a faster phase-out than had been expected from Endeavor.

There will be a similar acceleration as a result of the ExxonMobil/Pioneer deal. Pioneer had set an ambition of reaching net zero scope 1 and 2 emissions from its operations by 2050. ExxonMobil aims to bring that forward by 15 years, to 2035, while keeping its 2030 net zero goal for its current Permian operations.

Once a highly fragmented industry, US tight oil is becoming more concentrated. Once their deals go through, ExxonMobil and Diamondback will between them operate nearly 50% of the production in the Midland sub-basin.

It is a development that has started to attract political attention. In November, 23 Democratic senators, including the majority leader Chuck Schumer, wrote to Lina Khan, chair of the Federal Trade Commission (FTC), urging her to “closely review the Exxon-Pioneer and Chevron-Hess acquisitions and take appropriate action should such reviews uncover any possible anticompetitive effects enabled by the acquisitions”.

It is hard to see mergers between upstream companies being stopped on competition grounds, however. As the senators’ letter acknowledges, the US is highly integrated into world oil markets, and ExxonMobil’s post-acquisition Permian production of 1.3 million barrels of oil equivalent per day will still represent less than 1% of global demand for oil and gas. The FTC has asked for additional information from ExxonMobil, Chevron and Occidental, but the deals seem likely to be ultimately approved. Further consolidation is possible in the future.

The companies making these acquisitions still have to show that they can deliver the prospective benefits in terms of reductions in costs and emissions. But if they can make the progress they are promising, the US onshore oil industry will be in a stronger position to withstand the pressures that it is likely to face in the 2030s and beyond.

Around the world there are many companies and countries that say they will be the “last producer standing” as oil demand goes into decline. They cannot all be right. If world oil consumption shrinks, some producers will have to shrink, too. A fragmented, dynamic industry was vital for the success of US tight oil in the boom years. A consolidated and more stable industry, dominated by the best operators with the lowest costs and emissions, may be better suited to the years of decline.

In brief

The American Petroleum Institute has filed a legal challenge to the Biden administration’s planned five-year offshore lease sale programme. The plan from the Department of the Interior, published in December, included a maximum of just three potential oil and gas lease sales between 2024 and 2029, the fewest in a five-year programme since federal leasing began in the 1950s. Ryan Meyers, the API’s General Counsel, said the administration had “used every tool at its disposal” to close off federal waters for oil and gas development. He added: “The administration is limiting access in a region responsible for generating among the lowest carbon-intensive barrels in the world, [and] putting American consumers at greater risk of relying on foreign sources for our future energy needs.”

Fervo Energy, the enhanced geothermal power company, has reported drilling results at its first large-scale project that have exceeded the US Department of Energy’s expectations. Fervo, which uses technology adopted from the oil and gas industry, began its drilling campaign at Cape Station, its 400 megawatt project in Utah, back in June last year.

The fastest horizontal well that Fervo drilled at Cape Station took just 21 days, a 70% reduction from the time needed for its first such well, at its commercial pilot project in Nevada in 2022. As a result, the cost per well has been cut by almost 50%. Trey Lowe, chief technology officer of Devon Energy, the oil and gas exploration and production company, said: “Fervo’s drilling improvements are like the early days of the shale revolution.”

A coalition of 21 leading British universities has warned banks and investment managers they could withdraw their money unless the financial institutions accelerate plans for reaching net zero emissions. The universities, which are led by Cambridge, collectively have more than £5bn in cash and investments.

This year’s Super Bowl in Las Vegas was the first to be powered entirely by renewable energy, the host stadium organisation said. The Las Vegas Raiders and the Allegiant Stadium have reportedly signed a 25-year power purchase agreement with NV Energy linked to a nearby solar and storage project sufficient to cover the stadium’s demand during a game.

And finally: another energy-related Super Bowl story. Travis Kelce, the star tight end for the trophy-winning Kansas City Chiefs, is a producer on what is said to be the first film financed by energy tax credits available under the 2022 Inflation Reduction Act. Variety reported that Mike Field, a green energy entrepreneur who is another producer on the film, was using money from selling surplus tax credits to pay for it. His company, Radiant Media Studios, says “each million dollars of media investment under our model relates to approximately an acre of solar development”. The film, described as a dark comedy, is titled “My Dead Friend Zoe”.

Other views

Over the rainbow: Why understanding full value-chain carbon intensity is trumping the colour of hydrogen – Flor Lucia De la Cruz

Building an energy superpower: How India fuels its future growth – Simon Flowers

Metals investment: the darkest hour is just before the dawn – Julian Kettle

Black gold to green future? Incentives uncertainty clouds Pathways Alliance economic feasibility – Peter Findlay

Not made in China: the US$6 trillion cost of shifting the world’s clean-tech manufacturing hub – Rory McCarthy

Diamondback Energy and Endeavor Energy merger creates the largest pure play company in the Permian, according to Wood Mackenzie – Alex Beeker

Addressing climate change with behavioral science: A global intervention tournament in 63 countries – Madalina Vlasceanu and others

Is geothermal about to become the solar of the 2020s? – Matthew Zeitlin

Carbon offsets have a fatal flaw – Grayson Badgley

China is building more coal plants but might burn less coal – Hannah Ritchie

Quote of the week

“The President’s decision to impose a ban on new permits for clean US liquefied natural gas exports puts the interests of radical environmentalists ahead of the best interests of the United States and its allies. This ban will harm the American economy, jeopardise good-paying jobs, weaken US  energy security and threaten the security of our allies.” – Cathy McMorris Rodgers, Republican chair of the US House of Representatives Energy and Commerce Committee, criticised the Biden administration’s “pause” on approvals for LNG exports for new projects.

She was speaking after the House passed on a 224-200 vote a bill to lift the pause. The bill would take responsibility for authorising natural gas export projects away from the Department of Energy and hand it to the Federal Energy Regulatory Commission, with the instruction that the commission should deem gas exports to be consistent with the public interest. Despite the support in the House, the bill is seen as unlikely to become law.

Chart of the week

This comes from a new paper titled “North American power markets: navigating a trickier path to decarbonisation”, written by Ryan Sweezey, Robert Whaley and Sam Berman from Wood Mackenzie’s power and renewables team. The chart shows the enormous opportunity for investment in generation in the US and Canada over the coming 10 years. Despite challenges including cost pressures and the difficulty of securing connections to the grid, annual investment is still expected to be on a rising trend through the 2020s and remain at a high level into the 2030s. The great majority of that investment we expect will go into wind and solar.

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