United States: Unconventional oil sector experiencing purchasing fever

The sector of Petroleum shale, also known as unconventional, is experiencing a wave of company acquisitions in the United States, marking the beginning of a new era for the field. Now the large companies in the sector prefer to buy their competitors before exploring new deposits.

In recent months alone, three acquisitions of unconventional oil companies have been reported each month, in which the resource is trapped in a rock and is extracted by “fracking”, a technique that involves injections of water and chemicals at very high pressure.

The most recent acquisition in the sector was made by Diamondback Energy. Last week the company announced the purchase of Endeavor Energy for US$26 billion, a union that will bring together two of the 10 largest operators in the so-called Permian basin.

This region, between western Texas and southeastern New Mexico, contains the largest reserves of unconventional crude oil in the United States.

A few months ago, in October, ExxonMobil also made a purchase of this type with a disbursement of US$ 59.5 billion for the acquisition of Pioneer Natural Resources, the largest producer in the permian basin.

In addition, other mergers and acquisitions also took place, such as Occidental Petroleum and CrownRock, for US$12 billion a few months ago.

“This consolidation was evident, because the landscape was fragmented. They want to grow in the basin,” explained Stewart Glickman of CFRA.

“There are easily 50 companies that have a significant number of wells in Texas,” added Richard Sweeney, a professor at Boston College.

Another purchase that was also concluded in October was that of Hess Corporation by Chevron, for US$53 billion, although this is not part of this consolidation movement in Texas, since Hess does not have assets in the Permian Basin.

Fragmentation vs. cost effectiveness

The fragmented landscape presents technical limitations to this controversial extraction method of “fracking”, highly criticized for the amount of water and chemicals it requires.

Until now, it was not possible to practice lateral drilling, also known as horizontal. This technique makes it possible to explore rocks that would otherwise require, for exploitation, the installation of another well, sometimes several kilometers away from the initial production point.

“Longer lateral drillings mean fewer wells, and therefore lower costs”said Kathryn Mikells, chief financial officer of ExxonMobil when she presented the Pioneer purchase to analysts.

The aggregated plots – which are generated from these mergers of companies and their oil fields – open up new possibilities in terms of horizontal or directional drilling, by allowing different hydrocarbon deposits to be reached far from each other, from the same well.

Diamondback Energy CFO Kaes Van’t Hof revealed that some 150 to 175 lateral drilling holes could be extended once the Endeavor purchase is completed.

More oil? Not necessarily

In any case, there will not necessarily be an increase in crude oil production, according to analysts, since the United States releases 13.3 million barrels per day (mbd) of oil into the market, a record for the country.

“It is the competition that generates the most barrels”explains Bill O’Grady, of Confluence Investment Management, who adds that concentration should moderate production.

Richard Sweeney agreed that this is because oil companies “They will seek to lower the unit costs (of each well) and that will probably make them be a little more selective as to which wells to exploit.” and which ones are not, instead of increasing volumes. “They are in no hurry to dump more barrels onto the market”he added.

Behind this purchasing fever, there is actually a prudent approach to the future of the sector.

For Andy Lipow, of Lipow Oil Associates, it is cheaper to buy reserves from another company than to look for new ones elsewhere in the United States “and there are not many attractive opportunities abroad. Therefore I think that the consolidation will continue.”

The shareholders of oil groups Publicly traded companies “will not be enthusiastic about a massive expansion project” and development of new fields, which could erode the dividends and share buybacks to which companies are accustomed. Instead, they could be seduced by the purchase of proven reserves, Glickman emphasizes.

This trend occurs in a context marked by the departure of several large banks from financing oil and gas projects, in particular BNP Paribas, Barclays and HSBC.

The fight against climate change could doom, in the long term, fossil fuels, which continue to account for more than 75% of global energy consumption.

In the gas sector there were also some transactions, mainly the purchase of Southwestern Energy by Chesapeak Energy for US$ 7.4 billion, announced in January.

Glickman expects more moderate consolidation in this sector, as the natural gas price In the United States it is at its lowest level in three and a half years, a sign of the instability of this sector, which is very sensitive to the climate.

(With information from the AFP agency).