Woods: Selling off a polluting business to sit on someone else’s balance sheet is a beauty competition that makes no difference in carbon terms. — AP
LIKE many oil company bosses, Exxon Mobil Corp chief executive officer Darren Woods is a sceptic about the potential of merger and acquisition deals to reduce carbon emissions.
So, it’s surprising how many people have seen his biggest acquisition as a bet on the opposite outcome.
Selling off a polluting business to sit on someone else’s balance sheet is a “beauty competition” that makes no difference in carbon terms, he told a March 2020 investor call.
“It doesn’t change the demand,” he said. “All you’re doing is moving out from one company or one country to someplace else.”
That’s not how most analysts have received his US$60bil deal to put the polluting business of Pioneer Natural Resources Co on his own balance sheet.
“ExxonMobil doubles down on fossil fuels,” read a headline in the Washington Post. It’s “a very expensive bet that fossil fuels will remain a central part of the global economy for the foreseeable future,” according to the New York Times.
It “demonstrates Exxon Mobil’s bullishness on longish-term oil demand and prices,” the Financial Times quoted Wood Mackenzie analyst Tom Ellacott as saying.
Clearly, anyone dropping 10 figures on an oil producer isn’t predicting an immediate demise for petroleum.
And yet buying a company that’s already pumping 649,800 barrels of oil a day isn’t bringing new production into the world, either – any more than selling off such a business would remove it from the planet.
It’s simply, as Woods almost said, assets “moving from one company to someplace else.”Seek and ye shall find
Exxon Mobil’s exploration spending is modest relative to other oil companies. The best way to think about this is by looking at the spending choices Wood has in front of him.
Energy transition advocates, including Exxon’s climate-gadfly shareholder Engine No. 1, would prefer that he was dedicating money to his newly created low-carbon solutions business.
That’s clearly not happening. The unit is “not really meaningful” in terms of the company’s portfolio, Woods told an investor call this week.
On the opposite extreme, he has the option of developing entirely new fields, such as the prospects Exxon has been exploring in deep waters off the coast of Brazil, Cyprus, Namibia and Suriname.
If you were truly bullish about the potential for oil demand growth, that’s going to be the best place to dedicate your capital.
Similar projects in Guyana have been the standout success story for Exxon in recent years, producing their barrels at lower costs than relatively expensive shale fields like those owned by Pioneer.
What’s more, he’d be bringing entirely new hydrocarbons into the market.
The oil sector is facing a crisis of under-investment that is going to leave the world short of energy, according to the Organisation of the Petroleum Exporting Countries (Opec) and Saudi Arabian Oil Co.
Buying another company’s projects doesn’t do much to fix that.
At the margin, Exxon’s larger balance sheet and synergies might free up capital to spend more aggressively on Pioneer’s acreage – but on the flipside, its more conservative approach to capital investment might push in the other direction.
Thrifty business
Exxon Mobil is far more conservative on spending than Pioneer. That’s the argument of Anas Alhajji, managing partner of Energy Outlook Advisors, a notably bullish oil analyst.
“The world needs investments that bring more oil and gas reserves and not ones that only replace the owners of the resources,” he wrote recently.
An Exxon-Pioneer deal is “buying existing production, and not developing a new one.”
Put that way, the Pioneer deal looks less like a poke in the eye of Engine No. 1 than an attempt to split the difference between those like Opec who predict a future of ongoing demand, and those like the International Energy Agency who are forecasting a peak for all fossil fuels this decade.
One advantage that shale fields have over deepwater developments is that they wear out quickly.
A typical shale well will run dry in less than five years and has to make money over a comparably short timeframe, whereas deepwater projects need to remain in the black for 15 to 20 years to realise their lower costs.
If you’re looking at current oil prices that are nudging US$100 a barrel, but worried about how rapidly demand might start evaporating 10 years hence, you’re better off investing in shorter-term shale rather than longer-term offshore oil.
That’s explicitly one of the motivations behind the Pioneer deal. The acquisition will mean that “short-cycle barrels” are more than 40% of production by 2027, according to a company presentation.
That will leave Exxon “well-positioned to react quickly to energy demand changes.”
Commentators like to make big pronouncements about whether lines are going up or down, but the smartest traders do their best to avoid such behaviour.
If this is a wager on the future of oil demand, it’s an each-way bet. — Bloomberg
David Fickling is a Bloomberg Opinion columnist covering energy and commodities. The views expressed here are the writer’s own.
