Consolidation in the U.S. shale sector has always seemed an inevitability to most seasoned industry analysts and observers. The comparatively high breakeven costs involved in drilling and completing 10,000 ft. deep wells with horizontal laterals spanning 2-3 miles places a premium on controlling vast tracks of leased land and the ability to leverage economies of scale.
Thus, as time has progressed, companies have sought to either buy or merge with competitors operating on lands adjacent to their own to help achieve these objectives. The guiding principle in the shale patch in recent years has been “bigger is better,” and it has been the motivator of a series of mergers and acquisitions.
In early October, ExxonMobil and Pioneer Natural Resources announced the largest such transaction to date, an all-stock $59.5 billion deal in which ExxonMobil will absorb Pioneer, a pure Permian Basin play that is the biggest producer and leaseholder in the Midland sub-Basin which makes up the Eastern portion of the greater Permian region. The two companies have long been considered natural fits for one another given the high degree of connectivity between their respective operational areas.
Operating on a political principle of their own, “never miss a chance to demagogue Big Oil,” Senate Majority Leader Chuck Schumer and 22 fellow Democrat senators sent a letter to the Federal Trade Commission recently in which they claim the Exxon/Pioneer deal, along with Chevron’s $53 billion buyout of Hess Corp., “are likely to harm competition, risking increased consumer prices and reduced output throughout the United States.” This is, to quote the late, great James J. Kilpatrick, a lot of stuff and nonsense, but it is also par for the course for congressional Democrats motivated by anti-oil and gas activism.
First there is the fact that, even after it adds Pioneer’s operations to its Permian portfolio, ExxonMobil will hold about a 15% position in a region the size of South Carolina in which hundreds of companies of all shapes and sizes will continue to operate. The Permian Basin has long been the most competitive play area for oil and gas in the world and will remain so after this deal is completed.
The case against the Chevron/Hess deal is even more specious given that roughly 80% of the value in that deal comes from Hess’s 30% ownership of the Stabroek Block development off the coast of the tiny South American nation of Guyana. Chevron is not even currently a producer in the Bakken play, where all of Hess’s shale-related assets are located. In reality, the inclusion of the Chevron/Hess deal harms rather than helps Schumer’s case.
The letter alleges that ExxonMobil’s acquisition of Pioneer would harm consumers by exporting much of the oil produced in the Permian overseas. But the truth is that much of the light, sweet crude produced by Pioneer is already exported due to a shortage of refining capacity for that grade of oil in the U.S., and that U.S. exports actually benefit the U.S. consumer and help protect energy security by lowering the global price of oil and reducing dependence on OPEC.
Schumer’s letter further claims that historical mergers in the petroleum industry have harmed consumers, and consequently the Exxon-Pioneer and Chevron-Hess proposed deals will drive up gasoline prices, too. This claim relies on a 2004 GAO report on the impacts of oil and gas mergers. Ironically, the FTC’s own review of the GAO research found that it was “fundamentally flawed.”
The American oil and gas industry is dynamic and highly competitive. According to statistics from IBISWorld, there were approximately 61,945 oil drilling and gas extraction businesses operating in the U.S. as of last year. That number has stayed relatively stable over the last five years despite economic volatility that particularly impacted oil and gas companies.
The Permian Basin is especially competitive. In 2022, there were 24,617 oil and gas drilling and extraction businesses operating in Texas alone, with the overwhelming majority active in the Permian.
It was perhaps inevitable that congressional Democrats would mount an effort to demonize these two major mergers, given that “Big Oil” has always been a favored target for such rank demagoguery. But in reality, this letter is an embarrassing farce that should simply be ignored by officials at the FTC, even those appointed by the current anti-oil and gas President.
David Blackmon on November 11, 2023