In the wake of two US oil and gas megadeals in October, analysts said bigger just might be better in the battle against greenhouse gas emissions.

Supermajors have the financial flexibility and the engineering skills to reduce the carbon intensity of their operations, but they run the risk of being stuck with oil and gas operations and infrastructure that might not be needed further out into a low-carbon future.

Exxon Mobil Corp. said Oct. 11 that it had reached a definitive agreement to buy Permian Basin neighbor Pioneer Natural Resources Co. for approximately $60 billion in stock. Less than two weeks later, Chevron Corp., the other US supermajor, announced an agreement to buy large independent Hess Corp. for $53 billion in stock.

Critics of the deals said it makes little sense to buy what could become stranded assets at a time when the need for more oil and gas has begun to subside in favor of renewables and electrification. On the other hand, some analysts agreed with the companies that larger, well-capitalized operators have the resources to fund emissions-reduction programs and technologies at scale.

"Having Chevron and Hess is arguably better in the Bakken, and Exxon and Pioneer is arguably better in Midland [Permian], as Chevron and Exxon will make sure methane emissions, leaks and e-fracs, etc. exceed all regulation," Jefferies oil and gas analyst Lloyd Byrne said in an email. "With that said, Hess and Pioneer were already top operators, so any 'clean well' improvement is probably marginal."

"Where the biggest improvement will likely come is in the smaller deals where privates have been sold to public companies, who are held accountable by stockholders and measured by consultants; those standards will all likely be stepped up," Byrne said. "Privates used to make up 50% of US shale production. This is falling measurably as privates get consolidated into publics."

Public pressure

None of the big oil and gas companies have plans to take down their core business, but they are moving increasing amounts of money to renewable energy sources and clean energy technology, Raymond James oil, gas and renewables analyst Pavel Molchanov said in an email.

"These investments represent the substance — real money — behind the industry's net-zero CO₂ emissions (carbon neutrality) targets," Molchanov wrote.

Oil and gas deals are happening because valuations are low and companies are cheap, Molchanov said. Some institutional investors have left oil and gas stocks because of environmental considerations, and this is a headwind for share values, Molchanov said.

Both Exxon and Chevron will add more onshore shale oil and gas assets if their deals close as scheduled in the first half of 2024. Onshore oil and gas extraction is relatively easy to start and stop, in contrast to offshore operations that typically have a life span in decades and represent billions of dollars of capital spending. Climate-focused financial think tank Carbon Tracker Initiative has encouraged operators to buy these shale assets. Carbon Tracker researches the financial implications of society's transition to low-carbon energy sources.

"We've been advocating for the oil companies to invest more in a short cycle of production that will lessen your risk in the energy transition because it lessens the chances that you're going to produce oil that will impinge on a lower demand scenario in the energy transition," Neil Quach, senior corporate research analyst for North American oil and gas at Carbon Tracker, said in an interview.

"I would also say that larger companies generally tend to be better at meeting emission targets," Quach added.

Chevron and Exxon made emissions reductions part of their deal announcements and presentations. Chevron spokesperson Braden Reddall pointed to an anticipated 50% reduction in methane emissions by 2028. Exxon spokesperson Michelle Gray said in a Nov. 6 email that Exxon has pushed forward Pioneer's target of net-zero greenhouse gas emissions in the Permian Basin by 15 years, to 2035 from 2050.

"This planned merger advances the energy transition by bringing together the best technologies and operational excellence to an important source of domestic supply," Gray said. "The combined operations will be more efficient with a much lower environmental impact."

Short leash

Exxon has money and incentives to lower its emissions, especially in the Permian, said Lysle Brinker, executive director of equity research and analysis at S&P Global Commodity Insights.

"There is a much greater motivation by the big integrated companies to reduce their emissions and to hit their net-zero targets or carbon-neutral targets because the shareholder bases are more demanding of the integrated companies for hitting more aggressive emission targets," Brinker said.

Andrew Logan, a senior director for climate and energy in the oil and gas industry for investor advocacy group Ceres, said the world needs to limit carbon, and these megadeals just shuffle hydrocarbons from one pocket to another. But the emissions targets in the deal news is a sign of shareholder influence, Logan said.

"All this consolidation is just a sign that investors have kept, and are keeping, the industry on a pretty short leash in terms of growth," Logan said. "In that environment, consolidation makes a lot of sense."

The shift to low-carbon energy is "going to be a messy and maybe a longer transition than many folks had hoped," Logan said.

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