Challenging Renewables: Mega M&A Deals in the Oil and Gas Industry

The M&A market can act as a harbinger of things to come. For better or worse, companies’ equity acquisitions unveil some truth about the future of an industry. The acquisitions publicly signal what investments are worth their attention and recently we have received strong messages about trends in the oil and gas industry. The announcement of four multi-billion-dollar acquisitions of fossil fuel companies —two in October 2023, one in December 2023, and one more in February 2024— hints at the perpetuation of an energy market dominated by traditional fuel sources for the following years. More than that, it could also point to the limitations found by renewables in overcoming its stalwart competitor: crude oil.

The hydrocarbon industry giants ExxonMobil, Chevron, Occidental and Diamondback have led the charge in declaring agreements to consolidate with secondary players Pioneer, Hess, CrownRock and Endeavor, respectively. Such a surge in M&A megadeals has helped accelerate the pace of deals in the natural resources field and merger activity overall for 2023. This arrives in a context where the M&A dealscape has been globally affected by higher interest rates and volatile oil prices, revealing a decline of more than $2 trillion in deal value for that period. The news about superlative oil transactions being announced has allowed experts to improve their dealmaking forecast for 2024.

There are several reasons that may explain this surge of M&A activity in the oil and gas industry. An important one is that business acquisitions allow companies to enter into synergies. Indeed, the aggregation of business models brings lower costs and higher operational efficiency, which are particularly rewarding outcomes in markets that rely heavily on cost efficiency, like the aviation industry. However, other driving factors of M&A relate to strategies to get ahead of competitors and solidify positions in production hotspots, whether old or new. The flurry of oil and gas deals provisioned for 2023 has been explained, among other reasons, by the need of the leaders in the industry to secure their predominance in key locations for gas extraction. The highly coveted oil repository, the Permian Basin, is a sedimentary rock field covering most of western Texas and constitutes one of the principal natural gas production centers of the world. In fact, these deals would leave that massive drilling site primarily in the concentrated hands of the acquirers, a fact that has projected arduous competition on the margins of these consolidations.

All of this signals that natural gas exploration ventures are still shaping energy production in our economy. Although the protagonists of these transactions have declared the implementation of transition and net-zero emissions plans in the past, their commitment to renewable energy has been second-guessed, even before these bets on more oil took place. Furthermore, authorities from Saudi Arabia, the largest oil-producing country, have relied on these deals to confirm that hydrocarbons are “here to stay.” In the same vein, experts have not been surprised by this rise in oil-related ventures; rather, they have anticipated that the peak of fossil fuel demand is yet to come. By providing such gloomy expectations, the natural gas expansion directly threatens the transition to renewable energy and decarbonization.

Although expected to proliferate as well, renewables projects have faced difficulty in taking flight. The general slow pace of M&A activity is due to continued strong demand for crude oil, rising interest rates, and price inflation. However, as evident as the intent to structurally and progressively invest in greener energy may be in certain regions like Europe, the devotion of the United States to become less reliant on crude oil still seems to be unclear. Indeed, the self-promoted Inflation Reduction Act (IRA) has been informedly criticized for having effectively allowed natural oil and gas to maintain its supremacy among energy suppliers.

Criticism against the U.S. green investment policies is echoed in the resistance heard against the oil titans’ —and their collaborators’— entertaining the M&A transactions herein discussed. Indeed, the rebuttals have come from different groups that are worried about climate action and the future of our democracy. These deals, they argue, would undermine the attempts to battle climate change and global warming and preserve political power in the hands of oil producers, allowing their economic self-interest to prevail.

In spite of all of these views on the transactional trend in the fossil fuel industry, the clear thing is that oil producers are weightily betting on more oil. And however desirable policies toward renewable energy may be, consolidation of the oil industry could perpetuate some obstacles encountered in battling climate change for years to come.

Ronny Vaisman is an LL.M. Candidate in Corporation Law at NYU School of Law and serves as a Graduate Editor for the NYU Journal of Law & Business. Before coming to New York, Ronny worked as a Corporate Associate at Cuatrecasas' Santiago office, where he focused his practice in M&A and finance transactions, advising international clients in the natural resources, financial, technology and payment card industries. He is a board member of the NYU Law & Business Association and member of the NYU Jewish Law Students Association.