Mergers reshape Basin’s energy industry

Experts say oil and gas prices may stabilize

Hints of the setting sun highlight a pumpjack crude oil battery Tuesday, July 5, 2022 in Midland, Texas. (Odessa American/Eli Hartman)

The recent round of oil company mergers spurred great interest with speculation that oil and natural gas prices might stabilize as the bigger companies become even more attentive to maximizing returns to shareholders and less reactive to price fluctuations.

State Rep. Brooks Landgraf and Waco economist Ray Perryman say the effects are still being gauged, but the benefits will outweigh any drawbacks.

“The mergers among major oil companies underscore the enduring strength of the energy sector and the critical role that the Permian Basin plays in America’s energy landscape,” Landgraf said. “These consolidations are not solely about enhancing shareholder returns.

“Most importantly they represent a step toward creating a more stable and efficient market. This stability is crucial for long-term planning and investment, benefiting consumers, the energy industry and the workforce behind it.”

The Odessa Republican said it’s clear that the Basin remains a cornerstone of the nation’s energy production.

“As the energy industry evolves, future mergers could indeed explore other basins across the country,” he said. “However, the innovation and leadership originating from our region will undoubtedly set the standard.”

“Our region’s established energy infrastructure and experienced workforce make it a highly attractive area for continued investment. Moving forward I am confident the Permian will continue to lead the charge, driving prosperity for Texas and reinforcing the energy independence and economic security of our nation for many years to come.

“But I do believe that even in this changing landscape there is still room for independent operators with the wildcatter spirit to start up and grow in the industry.”

Perryman said the mergers have obviously resulted in greater concentration and larger oil and gas companies.

He referred to the new combinations of ExxonMobil and Pioneer Natural Resources for $60 billion, Chevron and the Hess Corp. for $53 billion, Diamondback Energy and Endeavor Energy Resources for $26 billion, Occidental Petroleum and CrownRock Operating for $12 billion and most recently ConocoPhillips and Marathon Oil for $22.5 billion.

The London-based news website said Devon Energy of Oklahoma City had made a bid for Marathon Oil.

Perryman said there is nonetheless still significant competition in the market when it is necessary to obtain federal approval for transactions of this magnitude.

“Basic economics tells us that when there is competition no individual firm can set market prices solely through their actions such as, in this case, failing to drill in hopes of propping up prices,” the economist said. “If one firm doesn’t drill but others do, the only loser is the firm choosing not to drill in an effort to manipulate the market. It would not be an economically rational strategy.

“Thus I wouldn’t expect any extreme changes in behavior.”

Perryman said there are valid reasons that there could be less fluctuation in drilling going forward.

“For example larger companies with greater financial resources may be somewhat less sensitive to short-term price changes and may take a more measured pace in their drilling programs,” he said. “It is generally but not universally true that larger firms tend to have a longer time horizon in their planning.

“In fact one of the motivations for the recent spate of mergers was the desire to accumulate large quantities of relatively low-carbon shale reserves in anticipation of the demand being strong for decades to come. However, oil and gas prices are set on a global basis and a few firms, even large ones, in the Permian Basin will not be setting market prices.”

Perryman said that even OPEC-Plus has discovered in recent years that its ability to control prices is severely constrained.

“Global economic patterns and the resulting demand for oil and gas are a critically important factor as are the geopolitical tensions in many oil-producing regions,” he said. “The actions of other participants in the market can also shift supply.

“Even though the Permian Basin is a major play with vast reserves it only produces around 6 million of the 80 to 90 million barrels of oil generated each day and other forces in the market limit the potential effects of actions in the region on oil and gas prices, particularly in the long run.”

Perryman said a primary goal in any merger is to increase operational efficiency and thus shareholder value.

“In the case of an oil and gas firm that could mean anything from corporate office activity to equipment usage to staffing synergies,” he said. “Decisions for drilling are based on the expected economics of the well and no oil and gas firm would stay in business long if it sought to stop drilling wells where the economics are favorable.

“Size may bring a bit more stability due to an expanded time horizon, but the Permian Basin will remain heavily impacted by complex international market forces.”