Recent mega-mergers could signal a turning point for the US oil industry

Two of the largest oil companies in the United States — and the world — recently completed massive transactions that could potentially usher in a new era for the petroleum industry. The first to make a move was the country's largest oil company, Exxon Mobil, which purchased Pioneer Natural Resources earlier this month for a $60 billion all-stock deal. 

This makes Exxon, which according to a 2018 report "produces about 3% of the world's oil and about 2% of the world's energy," the biggest sole producer in the United States' largest oil field, the Permian Basin. Exxon's purchase was followed up today with the announcement that Chevron has acquired Hess Corp. for $53 billion. Chevron is the second-largest oil producer in the nation behind Exxon, and puts the two giants in the spotlight for expansion. 

While neither deal has closed yet, the mergers put Exxon and Chevron in the driver's seat for the next era of the petroleum industry — one in which clean energy has been placed at the forefront. But while these companies are making waves in the boardroom, there is also the potential for these deals to alter the industry as a whole.

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'Extreme consolidation' is coming for the oil industry

Exxon's newfound control over the Permian oil fields is a watershed moment, as Big Oil brands "have increasingly turned to the Permian Basin for oil and gas, where technological advancements and infrastructure have led to lower extraction costs," Ines Ferré wrote for Yahoo Finance. This uptick in the Permian "should lead to extreme consolidation" between oil companies as they are "definitely going to run out of inventory," Pioneer CEO Scott Sheffield said, per Yahoo. The basin itself "is highly valued by the U.S. energy industry because of its relatively low cost to extract oil and gas," Sabrina Valle and Arathy Somasekhar reported for Reuters.

Exxon's merger in particular is coming "at a time when the U.S. and other countries are moving towards an economy that is less reliant on fossil fuels," Ferré added, but these types of major acquisitions "[highlight] the challenges of that shift." The transition to this clean energy independence is "going to be a lot more expensive" than anticipated, Wells Fargo senior energy analyst Roger Read told Yahoo. This "speaks to why you would invest in oil and why Exxon would do this transaction."

While Exxon will have dominance over the Permian, Chevron's purchase will make it a key player among the oil-rich Bakken Shale of North Dakota and Montana. This deal "[enhances] Chevron’s short-term and long-term position in U.S. shale," David Blackmon wrote for Forbes. However, while rumors swirled of Chevron making a move, industry speculation "had mainly centered on it possibly gobbling up an independent with a big Permian position," Blackmon added. 

A new dynamic over international drilling 

While these two American oil giants have now made major gains in U.S. fields, the most notable part of the acquisitions might be the dynamic that is about to emerge around another nation: Guyana. 

The South American country is home to the Stabroek block, a massive offshore oil region that is reportedly "equivalent in size to 1,150 Gulf of Mexico" oil blocks. The Stabroek block is run by Exxon, but Hess, the company purchased by Chevron, has a 30% interest in it. As a result of the acquisition, this 30% control now goes to Chevron. As a result, both Exxon and Chevron now have major stakes in the Stabroek block, and "the diversification of [Chevron's] offshore South America position provided by Hess' major stake in the Stabroek development appears to be the biggest prize here," Blackmon wrote. 

The Chevron deal in particular was a key move for the future of the industry because it allows "entry into rich discoveries [from] offshore Guyana in the Stabroek block," Carolyn Davis wrote for trade outlet Natural Gas Intelligence. Some in Big Oil seemed surprised that the Chevron transaction occurred, especially given that Exxon "operates Hess' largest asset" in the Stabroek block, which will now become "one of Chevron’s largest assets going forward," analyst Neal Dingmann wrote, per Barron's. 

Either way, both mergers are likely to set off an "oil land grab" among other companies, Jinjoo Lee reported for The Wall Street Journal. "The smell of mergers and acquisitions is in the air" following the deals, Lee added, and the only question is, "who's next?"