Oct 12, 2023 - Economy

Exxon's $60 billion bid to "build up" U.S. oil supply

Photo: Nicky Loh/Bloomberg via Getty Images

Exxon Mobil emphasized plans to boost production as part of its blockbuster deal announced Wednesday that would make it the single biggest player in the strategically important U.S. Permian Basin.

Why it matters: Russia's war in Ukraine altered world energy markets, underscoring the importance of domestic production for the U.S.

State of play: The oil giant plans to acquire Pioneer Natural Resources in an all-stock deal valued at roughly $60 billion.

  • The deal would make Exxon the largest single player in the Permian Basin, the largest U.S. oil field.
  • The combined companies plan to boost production by 700,000 more barrels of oil and gas per day over the next four years, bringing total Permian output to 2 million barrels per day by 2027, according to the press release announcing the deal.
  • That's a 21% increase compared to the previous production goals outlined separately by the two companies, according to Wells Fargo analysts.

What they're saying: "We're bringing on low-cost-of-supply barrels into a market that desperately needs them," said Exxon chief executive Darren Woods, on a call with analysts to answer questions about the proposed merger, which will face antitrust scrutiny. "So when we bring these two together, it's not about cutting back, it's about building up."

Context: The oil industry's slow production response to the energy price shock of the last year has been an irritant to the White House.

  • Almost exactly a year ago, President Biden publicly accused oil companies of "war profiteering" by benefitting from energy price spikes that resulted from the war in Ukraine, without boosting production.
  • "Exxon made more money than God this year," the president said in June 2022.
  • Theological implications aside, Exxon did post a profit of more than $55 billion last year.

Be smart: The Permian Basin, a swath of West Texas and New Mexico, emerged as a cornerstone of the U.S. oil industry over the last 20 years, thanks to hydraulic fracturing techniques.

Flashback: Production there exploded in the early 2010s, amid a wild west atmosphere for drilling and pumping.

  • The pumping bonanza returned the U.S. to the top spot in world oil production, took market share away from OPEC and Russia — now known as OPEC+ — and generated a steady flow of oil and gas.

Yes, but: When crude prices plunged in 2014 and again in 2020, bankruptcies in the Permian surged and investors lost billions.

  • Going forward, Wall Street demanded "capital discipline" from the smaller independent drillers who dominated the Permian.
  • They complied. Oil executives sold fewer barrels at higher prices and distributed that cash to shareholders, rather than boosting production.

Between the lines: "We've seen that market power shift dramatically back to OPEC+," Matthew Bernstein, senior analyst at Rystad Energy, tells Axios.

  • "It's because of the conscious decision-making of these public independent shale companies and the fact that they are no longer concerned, for the most part, with ramping up supply. Their concern is on making sure that they're able to deliver dividends, buybacks to investors," he said.

💭 Our thought bubble: As part of its effort to win antitrust approval for the deal, Exxon seems to be positioning itself as a more reliable provider of energy supplies for the American economy than Saudi Arabia or the smaller drillers that have traditionally been the source of the Permian's productivity.

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