Bloomberg Opinion / Exxon Looks to Future-Proof Its Business With Shale Bet ......................
Bloomberg Opinion
October 6, 2023
Exxon Looks to Future-Proof Its Business With Shale Bet
Buying Pioneer would give the oil giant flexibility to cope with the changing landscape
By Javier Blas
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities.
When the International Energy Agency released its landmark net-zero emissions roadmap in 2021, it made no mention of shale oil as it signaled the demise of the drilling industry as we had come to know it. In an updated version last month, it hedged: the IEA said that “no new conventional long-lead time” projects were needed, but “some” shale drilling would be required “to avoid a sudden near-term drop in supply.”
Unsurprisingly, that’s where ExxonMobil Corp. is looking to expand, in a move that is all about future-proofing its business. For several months, the American oil giant has been in talks to buy US shale giant Pioneer Natural Resources Co.; a deal with a reported price tag of as much as $60 billion now looks closer than ever.
For more than a century, Exxon’s business was straightforward. Fossil-fuel demand rose every year -- and executives knew it would continue doing so for as long as they could predict. Prices moved up and down in long commodity cycles.
All that Big Oil needed was the geological acumen to find the next reservoir and the political skills to sign a contract with a government in a far-flung corner of the world. Its cash and prowess to build marvels of engineering mega-projects would do the rest for the next 50 years or so. Those were the good old days of Lee Raymond and Lucio Noto, the two executives who created the modern ExxonMobil via a merger in 1998. Back then, the deal they crafted was about cutting costs -- thousands of jobs went at the start -- so those projects could make money even when oil prices were low. The industrial logic was simple: add size and reduce costs.
Darren Woods, the current Exxon boss, doesn’t enjoy the same predictable landscape. While the transaction he’s pulling together is as consequential as the one his predecessors inked a quarter-of-a-century ago, it reflects a different kind of industrial logic. This time it’s about flexibility to deal with the uncertainty of fossil-fuel demand as government policies seek to discourage its use. And oil prices are far more volatile: over the last five years, West Texas Intermediate crude has traded as high as $130 a barrel and as low as minus $40 a barrel.
If Exxon is going to thrive, it needs a portfolio adapted to that new landscape. Where in the past certainty was key, today it’s agility. In industry-speak, that’s short-cycle oil as opposed to long-lead oil, projects that can be brought on stream quickly and cheaply, with costs measured in millions of dollars rather than billions, and lead times of weeks rather than decades.
Luckily for Exxon, that short-cycle oil exists in its own backyard. The Permian Basin region, straddling West Texas and southeast New Mexico, is the world’s most flexible source of new production. Exxon made its first big shale acquisition in 2009, buying XTO Energy Inc. for $31 billion in a bet on natural gas. The deal, the brainchild of Woods’ mentor, Rex Tillerson, was ill-timed, coming at the peak of the gas price cycle. Exxon, already under Woods, got it right a few years later in its second attempt in shale, buying the oil business of the Bass family of Texas for $6.6 billion.
The XTO-Bass deals gave Exxon some of the flexibility that shale allows. Still, the mega projects of yesteryear dominated. But acquiring Pioneer would super-size that flexibility. Back-of-the-envelope math suggests that after a deal with Pioneer, Exxon would pump nearly 1.2 million barrels a day in the US, or about half of its global oil output.
It’s not the size that matters most, though. It’s the ability to adjust production -- and investment -- quickly. Typically, the way Big Oil manages throughout the cycle is by keeping costs down and taking on debt when prices fall and accumulating cash when prices recover. That’s because conventional long-lead projects can’t be stopped if oil prices fall. They’re the industry equivalent of Catholic marriage vows: for better, for worse, for richer, for poorer, in sickness and in health, until death do us part.
Shale oil is, instead, more progressive: It allows divorce. For a business planner, that has three advantages. First, it can fine-tune output to prices; second, it can allow a retreat if demand starts to fall; and third, it permits cutting investment during a downturn, making it easier to pay shareholders richly even when prices falter. And as ExxonMobil -- like the rest of us -- doesn’t know what the future holds, a permanent commitment is hard; love-with-an-option sounds like a better deal.
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