Upstream Intel 7/8/24
Family oil companies come into M&A focus | Top 5 upstream regulations on the chopping block post-Chevron | Oil market financialization leads to manipulation
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Data Drill
Permian family oil companies attract outsized M&A attention
As the Permian Basin continues to be the epicenter of the US oil and gas industry, family-owned oil companies in the region are garnering significant attention from potential acquirers, Hart Energy finds. These companies, some of which have been operating in the Permian for nearly a century, hold vast swathes of valuable acreage and boast impressive inventories of drilling locations. With the industry increasingly favoring scale and efficiency, major players like Exxon Mobil, Chevron, and ConocoPhillips are actively seeking to consolidate their positions in the basin through strategic acquisitions.
Among the most coveted targets are companies like Fasken Oil & Ranch and Mewbourne Oil, which have weathered numerous commodity cycles and built substantial portfolios over generations. As the patriarchs of these family-run businesses age, more and more are considering the prospect of selling, as evidenced by recent high-profile deals such as Diamondback Energy's $26 billion acquisition of Endeavor Energy Resources and Occidental's $12 billion purchase of CrownRock. However, some family oil companies remain committed to maintaining their independence and continuing their legacy, as seen with Petro-Hunt, which is actively expanding its presence in the Delaware Basin and other regions.
While the influence of family oil companies may have diminished over time, family capital has not entirely abandoned the sector. Instead, many family offices are now investing in energy-focused private equity funds or directly into operators, helping to fill the void left by banks and public markets that have pulled back from the industry in recent years. As the Permian Basin continues to evolve, the role of family oil companies and their valuable assets will undoubtedly shape the future of the region's energy landscape, whether through strategic acquisitions or ongoing independent operations.
Advanced asset monitoring requires robust data management in O&G
As the oil and gas industry increasingly adopts advanced asset monitoring technologies, such as condition-based monitoring, artificial intelligence, and even drone-based inspections, the importance of robust data management has become more apparent than ever. These innovative solutions offer unprecedented control and insights, enabling operators to maintain efficiency, safety, and regulatory compliance in an increasingly complex landscape. However, the success of these technologies relies heavily on the quality and accessibility of the data they generate and analyze.
Remote monitoring solutions significantly reduce the need for physical inspections, cutting costs and minimizing risks. By leveraging high-resolution images and data collected by drones and sensors, operators can make quick, informed decisions and prevent minor issues from escalating into major failures. Moreover, having comprehensive and accurate data readily available helps companies avoid significant fines and penalties by simplifying compliance reporting and reducing the risk of non-compliance.
However, to fully realize the benefits of advanced asset monitoring, oil and gas companies must prioritize data cleanliness, visibility, and management. Poor data management can lead to inefficiencies, increased operational costs, and an incomplete picture of asset health. Land teams often report spending a considerable amount of time gathering data from various departments, manually re-entering data due to lack of integration, and cleaning and correcting errors.
To overcome these challenges, companies should invest in integrated, end-to-end software solutions that streamline data management processes and provide a holistic view of their assets. By doing so, they can ensure that their advanced monitoring systems have access to the high-quality data necessary to drive proactive maintenance, enhance safety, and support long-term operational success.
Post-’Chevron’ regulatory change is coming for oil and gas, here are the top 5 laws likely in the crosshairs
The consolidation in the onshore upstream industry is reshaping the capital landscape, Hart Energy reports. Private equity-backed companies are increasingly turning to public markets for capital, either through mergers with publicly traded entities, or by being acquired outright. This trend is exemplified by the recent merger of Colgate Energy Partners with Centennial Resource Development, creating Permian Resources, which has since acquired Earthstone Energy in a $4.5 billion deal.
The Supreme Court's decision to overturn the Chevron doctrine, which previously allowed federal agencies deference in interpreting ambiguous statutes, is expected to generate significant regulatory waves across the oil and gas sector. This shift in interpretive authority from expert agencies to the judiciary could lead to increased legal challenges, slower regulatory processes, and a more restrictive regulatory environment overall. As a result, several key environmental regulations that impact the oil and gas industry are now at risk of being overturned, or weakened.
1. Clean Air Act Regulations: The overturning of Chevron deference could potentially benefit the oil and gas sector by reducing the regulatory burden imposed by the Clean Air Act (CAA). Without Chevron, courts may no longer automatically defer to the EPA's interpretation of what constitutes the "best system of emissions reduction." This means that stringent carbon reduction technologies, such as carbon capture and storage (CCS), which are costly and not widely implemented, might face greater scrutiny in court. If courts determine that these technologies are not "adequately demonstrated" or cost-effective, the EPA may be forced to revise its regulations, potentially easing the compliance costs for oil and gas companies.
2. Clean Water Act Protections: Deregulatory effects on Clean Water Act (CWA) protections could also emerge as a result of Chevron's overturning. The EPA's broad interpretation of the CWA to include various bodies of water under federal protection has often been contested by industry stakeholders. With Chevron deference removed, oil and gas companies might successfully challenge these expansive definitions in court, leading to a narrower scope of regulated waters. This could result in fewer regulatory hurdles and lower compliance costs for companies engaged in activities that might affect water bodies, streamlining operations and reducing legal uncertainties.
3. Methane Emissions Standards: The deregulatory impact on methane emissions standards could be significant for the oil and gas sector. Methane regulations, particularly those targeting emissions from drilling and extraction activities, have been stringent and costly to implement. Without Chevron deference, courts may require the EPA to provide more robust evidence that its methane control technologies are the best available methods. This increased scrutiny could lead to the rollback of some regulations, reducing the compliance burden and operational costs for oil and gas companies, thereby improving their economic viability and encouraging greater investment in the sector.
4. Public Land Use for Conservation: Chevron's elimination could also favor oil and gas companies by affecting the Bureau of Land Management's (BLM) authority to issue conservation leases. These leases have restricted land availability for resource extraction, but without Chevron deference, the BLM's interpretation of the Federal Land Policy and Management Act (FLPMA) might be successfully challenged in court. A favorable ruling for the industry could lead to more land being made available for oil and gas leasing, expanding opportunities for exploration and extraction activities, and potentially boosting production.
5. LNG Export Regulations: Regulations concerning liquefied natural gas (LNG) exports could see a deregulatory shift post-Chevron. The Department of Energy (DOE) has imposed pauses and restrictions on LNG export approvals to consider environmental impacts. Without Chevron, the DOE might face stricter judicial scrutiny of its authority under the Natural Gas Act, potentially leading to fewer regulatory barriers for LNG exports. This could facilitate a more robust export framework, enhance the competitiveness of US LNG in global markets, and stimulate growth and investment in the domestic natural gas sector.
While the post-Chevron landscape presents significant challenges for environmental regulations, it may also offer some opportunities for the oil and gas industry to push back against stringent regulatory requirements.
In Other News
US has a growing energy surplus but demand picture strengthens
The United States has achieved an unprecedented level of energy self-sufficiency, with total primary energy production reaching a record high of 103 quadrillion British thermal units (BTU) in 2022, Bloomberg reports. This surge in output, driven by the shale boom, advancements in renewable energy, and favorable policies, has led to the nation becoming a net exporter of petroleum for the first time in more than half a century. The energy surplus, which reached 9 quadrillion BTU last year, is the highest since 1949, highlighting the country's robust energy landscape.
However, the future of this energy glut remains uncertain as the nation grapples with the challenges of rising energy consumption. The anticipated increase in power demand, fueled by the growth of data centers and the artificial intelligence boom, will require the US to find effective ways to meet these needs. While tax incentives may accelerate the deployment of renewable energy capacity, the pace of crude oil production growth is being tempered by investor demands for slower growth and higher dividends amid consolidation.
As the nation navigates this complex energy landscape, policymakers and industry leaders must engage in meaningful debates to determine the best course of action. Balancing the need for energy security, environmental sustainability, and economic growth will be crucial in shaping the future of the U.S. energy sector. By addressing these challenges head-on and embracing innovative solutions, the United States can maintain its position as a global energy leader while ensuring a stable and prosperous future for its citizens.
California has a new largest producer and upstream has an indicator of regulatory risk
California Resources Corp (CRC) has completed its $1.13 billion all-stock merger with Aera Energy, a joint venture previously owned by Shell, Exxon Mobil, IKAV, Canada Pension Plan Investment Board (CPP), and Oaktree Capital Management. The transaction, valued at $2.1 billion including debt, creates California's largest oil producer, with combined net daily production averaging 146,000 boe/d (79% oil). CRC expects the deal to more than double its 2024 free cash flow and expand cash returns to shareholders, Hart Energy reported.
The combined company, which will continue to be led by CRC's current executive team and headquartered in Long Beach, California, anticipates realizing $150 million in annual synergies within 15 months of closing. These synergies are expected to be achieved through lower operating costs, capital efficiencies, administrative expense reductions, and the optimization of shared field infrastructure. In connection with the closing, CRC has increased its borrowing base from $1.2 billion to $1.5 billion and the aggregate commitment amount under its revolving credit facility from $630 million to $1.1 billion.
As the largest oil producer in California, CRC now serves as a useful indicator of the challenges and opportunities associated with managing political and regulatory risk in the oil and gas sector. California's stringent environmental regulations and ambitious climate goals pose unique challenges for energy companies operating within the state. CRC's ability to navigate this complex regulatory landscape while delivering value to shareholders will provide valuable insights for other upstream companies facing similar challenges in politically sensitive regions. The company's expanded carbon management platform, which aims to help California meet its climate objectives, underscores the importance of adapting to evolving regulatory environments and embracing sustainable practices to ensure long-term success in the industry.
Eni eyes $4bn in upstream asset sales
Italian energy giant Eni SpA is planning to raise more than €4 billion ($4.3 billion) through the sale of assets across its global upstream business, Bloomberg reports. This move is part of a broader strategy to dispose of €8 billion in assets over the next three years, as the company aims to gradually divest from oil and gas-related activities to finance its energy transition plan. Potential candidates for the asset sale include operations in Indonesia, Cyprus, Alaska, and Ivory Coast.
Chief Executive Officer Claudio Descalzi is pursuing a "satellite model" that involves splitting off divisions and partnering with external investors, with the ultimate goal of listing these businesses. This approach encompasses sectors such as renewables, biorefining, and mobility. The upstream segment, which includes identifying, extracting, and producing oil and gas, is expected to account for more than half of Eni's future asset disposals, as outlined in the company's most recent business plan.
Managing the data and assets associated with such a large-scale divestiture program is inherently complex. Eni will need to ensure that all relevant information, including geological data, production histories, and financial records, is accurately maintained and seamlessly transferred to potential buyers. This process will require robust data management systems and clear communication channels between various departments within the company. Additionally, Eni must carefully evaluate the strategic value of each asset, considering factors such as profitability, growth potential, and alignment with the company's long-term objectives.
Financialization of the oil market raises risks of manipulation
The oil trading industry has been rocked by a series of scandals involving the manipulation of fuel oil prices by some of the world's largest trading houses, including Vitol, Glencore, and Trafigura. These companies have been fined by the US Commodity Futures Trading Commission (CFTC) for submitting false and misleading bids and offers to influence key oil benchmarks, resulting in artificial prices and millions in profits. The repeated occurrence of such misconduct suggests a systemic problem in the market that regulators must address.
The price discovery process for oil benchmarks, which relies on the assumption that traders will always provide truthful prices, bears similarities to the Libor scandal that exposed the unreliability of money-market rate setting. The manipulation of fuel oil prices has gone uncorrected, undermining confidence in the price-setting mechanism. To restore trust, regulators should launch a broad industry initiative to overhaul how oil products are priced, potentially uncovering more widespread manipulation in the process.
The CFTC's recent penalties on Vitol, Glencore, and Trafigura are a step in the right direction, but regulators must impose tougher penalties to deter future misconduct, as current fines are often dismissed as the cost of doing business. Furthermore, the lack of enforcement action in Europe and Asia raises concerns about the transparency and honesty of non-US traders. As the financialization of the oil market continues, regulators must remain vigilant and proactive in addressing the risks of manipulation to ensure a fair and efficient marketplace.
Stat of the Week: Breakeven prices per country
What We’re Reading
US Energy Development Corporation to invest $750 million on Permian projects. (World Oil)
The Rise of a Shale Man: CEO Kyle Koontz takes the reins of BPX Energy’s rapid onshore growth amid big changes at BP. (Hart Energy)
Canadian oil sands come back into limelight as U.S. shale growth slows, Enverus reports. (World Oil)
Securing Tomorrow, Protecting Today: Prioritizing Energy Needs and Environmental Responsibility. (Hart Energy)
Fossil fuel groups ask SCOTUS to overturn California’s clean car waiver. (Politico)
Alaska Sues Biden Administration Over Restricted Oil Drilling. (Oilprice.com)
Federal Judge Halts Biden’s Ban on LNG Permits. (EnergyNow)
Cracking the Fracking Code: Efficient Approaches to Optimize Wellbores Technology and process innovations improve operational efficiencies even as companies scramble for greener fracking solutions. (Hart Energy)