M&A deals in the upstream oil and gas sector soared in value in 2023, shows exclusive deals data from Energy Monitor’s parent company GlobalData.
Countries including the US, Norway, the UK, Canada and Australia all saw a major uptick in upstream oil and gas deals last year, which were collectively more than double the value that they were in 2022.
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Oil and gas majors have seen bumper profits since Russia’s invasion of Ukraine. The $256bn worth of upstream deals recorded last year – which includes mergers, acquisitions and asset transactions – reveal that they are using these profits at least in part to expand their hydrocarbon businesses.
Two US megadeals in particular lifted global oil and gas M&A activity last year. In October, US major Chevron announced that it was buying its smaller rival Hess Corp in a $53bn, all-stock deal. Two-and-a-half weeks previously, ExxonMobil – Chevron’s larger rival – announced its purchase of Pioneer Natural Resources for almost $60bn in another all-stock deal.
Two other deals in 2023 were among the ten largest upstream oil and gas deals of the past five years. The first was US major Occidental Petroleum’s purchase of smaller US rival CrownRock for $12bn.
The second was British North Sea-focused oil company Harbour Energy’s $11.2bn acquisition of German oil company Wintershall Dea from Germany’s BASF – the world’s largest chemicals producer – and Luxembourg-based asset manager LetterOne.
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By GlobalDataHess, Pioneer and CrownRock have massive interests in US shale oil and gas. Hess largely does so in North Dakota, while Pioneer and CrownRock do so in the Permian Basin, which lies across Texas and New Mexico.
These three deals lifted shale-focused oil and gas M&A to a record high of $168bn in 2023.
What does all this upstream M&A activity mean for the energy transition? Analysts approached by Energy Monitor were divided.
For Ben Cahill at the Washington-based Center for Strategic and International Studies, they are a “signal of confidence in continued oil demand”, which indicate that majors “want to add to their drilling inventory and think they can squeeze more efficiency out of consolidated operations”.
He suggests that current global economic headwinds including high inflation and interest rates mean investors prefer to invest their profits in more risk-averse M&A as opposed to new exploration ventures.
“With the focus on capital discipline and efficient spending, investors aren’t rewarding growth plans,” says Cahill. “That lends itself to mergers and acquisitions rather than a continued flowering of growth-focused independents.”
Raj Shekhar, director of oil and gas at GlobalData, believes the M&A activity also shows US oil majors attempting to use their profits to boost their competitiveness with national oil companies (NOCs), which tend to have a near monopoly over national upstream assets.
“NOCs try to set the rules of the game in their respective countries, which results in unattractive returns for the IOCs [international oil companies] if the latter agree to work with them,” he says. “In this context, the lack of quality assets globally and the availability of shale assets at the home of two to three oil majors in their backyard, where there are no NOCs as the dictating stakeholders, make the US shale market ripe for deals.”
Shekhar adds that there is significant industry confidence that oil and gas demand is set to remain healthy for some time, despite the International Energy Agency (IEA) warning in its latest World Energy Outlook that demand for each is set to peak this decade.
“Despite all the noise over climate change, oil and gas consumption is not going downhill that soon,” says Shekhar. “Considering the importance of natural gas as a transition fuel – especially when Europe and Asia are expected to depend on LNG [liquefied natural gas] for years to come – or even domestic US energy consumption, which might continue to be heavily dependent on fossil fuels, IOCs still see some steam left in hydrocarbons.”
Oil and gas M&A an "acknowledgement of the energy transition"
Mike Coffin, head of oil and gas at the think tank Carbon Tracker, takes a different view.
“At its heart, this increased M&A activity is an acknowledgment of the energy transition from the oil industry. Rather than spending lots of money on exploration or developing new projects, companies are pursuing a more risk-averse strategy [of] buying into existing production,” he says.
The focus on shale is also significant, says Coffin, because shale assets tend to be short-cycle in nature. “With shale projects, you are continually drilling new wells, and the production from new wells declines rapidly, so you have a greater ability to align your capex with any changes to price and demand, versus more conventional assets that are expected to deliver returns longer-term”.
In November, Coffin co-authored a Carbon Tracker report titled Navigating Peak Demand, which suggests there is “no doubt” the energy transition is under way. Investment into clean energy outstripped investment into oil and gas for the first time in 2022, and did so by an even greater margin in 2023.
Rather than attempting a full energy transition of their own, the report suggests that “planning for declining upstream production may be the best way for many oil and gas companies to deliver maximum value to shareholders” as the energy transition accelerates globally.
“If you go back one hundred years, not all horse breeders became car manufacturers, to use a very crude analogy,” says Coffin. “It is hard for a CEO to admit that they might envisage growing smaller longer term, as it goes against the corporate psyche.
“But rather than wasting shareholder value on new exploration or a diversification strategy that will be hard to pull off and provides a totally different risk-return profile, it seems that some of the American majors are likely to continue maximising shareholder returns, but ultimately get smaller over time,” he says.
For their part, no US oil major is saying that they anticipate becoming smaller over time.
The latest long-term outlook from ExxonMobil – which "forms the basis for the company’s business planning" – sees wind and solar providing only 11% of global energy in 2050, with oil and gas providing 54%. Emissions, suggests the company, are expected to fall 25%, as opposed to meeting net zero.
