Blankenship, Regens: More Demand, More M&A, More Regs

Mike Blankenship is managing partner of Winston & Strawn’s Houston office. His practice focuses on corporate finance, M&A, private equity and securities law. He also advises on ESG matters.

Matthew Regens is an associate attorney in Winston & Strawn’s Houston office where he specializes in energy-focused M&A, capital markets and corporate governance.

The oil and gas industry is cyclical. With each cycle, the industry adapts and evolves to meet unexpected challenges and new demands. In 2024, the oil and gas industry is dealing with higher interest rates, armed conflicts in Europe and the Middle East, rising material costs, a decrease in Tier 1 acreage and new policies and laws.

Market participants need to be nimble and respond quickly to rapid changes. This year, we are closely watching these issues:

• growth in demand;
• M&A;
• increased regulation of ESG matters across the oil patch;
• the energy transition; and
• the integration of technology.

Demand growth

We are not at peak demand. For the first time, demand rose beyond 100 MMbbl/d in 2023, as reported by the International Energy Agency (IEA) in its December Oil Market Report. To meet rising demand, global output rose to 101.9 MMbbl/d, including an additional 20 MMbbl/d from the U.S. Both the IEA and OPEC believe that both the demand for and the production of oil and gas will continue in the near term, with the IEA predicting a rise of more than 1.24 MMbbl/d and OPEC projecting 2.25 MMbbl/d. China and India are the primary drivers of new demand, and some market analysts expect India to account for more than one-third of demand growth until 2030.

M&A

In 2023 and early 2024, we have seen a surge in M&A transactions in the upstream, midstream and oilfield services sectors. Many of these have been large-cap transactions between publicly traded companies, including the $64.5 billion deal between Pioneer Natural Resources and Exxon Mobil related to their reverse-triangle merger and the $60 billion deal between Hess Corp., and Chevron related to their reverse-triangle merger. It appears that the market is responding to the lack of available and accessible resources for extraction on an economic basis. The access to premium Tier 1 acreage is becoming more limited.

For example, during its acquisition of Pioneer, Exxon listed undeveloped Tier 1 acreage in the Permian Basin held by Pioneer as a driving factor of the merger. Despite an increase in M&A activity, we still expect the oil and gas industry to contract because the pressure for diversification and capital efficiency will grow stronger over the near- and mid-terms. This may in turn stimulate even more M&A activity across the value chain, particularly with a focus on the acquisition of smaller or privately held companies.

ESG

We believe 2024 will see a continuation of the focus on ESG in the oil and gas industry, including the implementation of stricter targets and performance. Government regulators, including the U.S. Security and Exchange Commission (SEC), are proposing rules that would require companies to disclose climate-related information to the public.

Under a proposed series of SEC climate rules, public companies would be required to include climate data and risks in registration statements and periodic reports in order to give investors the complete, consistent and comparable information they need to make investment decisions.

Private actors, including investment institutions and proxy advisers, will continue to encourage sustainable business practices and easy-to-digest metrics to gauge a company’s progress through its annual voting guidelines. Many investors are pushing for compensation metrics to be aligned with ESG targets, and we expect companies in the industry to continue to develop and track their own ESG goals.

Energy transition

Many major oil and gas companies have already rebranded themselves to the market as more generalized energy and energy-transition companies, and we expect this trend to continue and trickle down to smaller players.

As noted above, Tier 1 acreage is becoming scarcer, which has led to increased exploration costs and a decline in production. Companies are diversifying to continue to grow and bring long-term returns to their shareholders. The industry will be a key player in the energy transition due to its experience in developing new technologies and developing large-scale projects.

We expect to see partnerships form between traditional oil and gas companies and new upstart energy-transition ventures.

Technology

Finally, the oil and gas industry will continue to be a leader in technological advancement because the industry is a “black gold mine” of data.

Artificial Intelligence (AI) may be a game changer for E&Ps. If properly developed, AI could quickly analyze historical data to provide insight into where to place the next well, build 3D seismograph images, or detail best fracking practices and procedures for specific formations. We expect that new strategic partnerships between AI developers and E&P companies will be formed in 2024 to capitalize on the transcendent growth in AI capabilities.

However, with new technologies come new risks, and industry participants need to ensure that their cybersecurity practices are keeping pace with the pace of change. Therefore, firms will need to focus on, and invest in, both data protection and defense from cyberattacks. As an example, the ransomware attack on the Colonial Pipeline in 2021 showed that oil and gas is vulnerable to cyberattacks.

In 2024, the industry faces a variety of challenges and opportunities. Future growth in oil and gas will be driven by increasing demand, adaptation to ESG regulation and policies, the energy transition and technological developments.