We have observed an uptick in upstream transaction activity over the past quarter. The $9.5-billion sale by Shell of its Permian assets to ConocoPhillips is particularly emblematic of the tough decisions traditional oil and gas companies and investors are making. As we talk with our clients, both corporate and private equity, are all virtually trying to figure out what their long-term strategy should be going forward. Some, like Shell in this example, are responding to the call by investors to reduce or even eliminate oil and gas production due to decarbonization efforts. Others, like ConocoPhillips, see the investor pressure as an opportunity to invest in a contrarian way at a time when the sector is out of favor but when the need for oil and gas will arguably continue even in an “energy transition”.
Opportune had the opportunity to attend the Baker Institute’s Annual Energy Summit on Sept. 29-30 where the theme was: “Electrification and Decarbonization: Pathways to a New Energy Future”. The Baker Institute had assembled a very impressive group of speakers from all sides of the energy sector. It was a lively discussion that seemed to focus on the hurdles, constraints, and limitations to a rollout of a worldwide decarbonized energy supply.
In prior years, much of the discussion about renewable energy focused on the technical and economic limitations of certain technologies like solar, wind, batteries, etc. With the extension of government tax incentives, there isn’t any question about whether solar and wind, especially, are economic compared to other forms of electric generation. Those technologies have certainly reached the tipping point economically.
A maxim was mentioned several times at the conference: “Everybody wants clean, cheap, reliable energy but with a large-scale scenario and with today’s technologies, you can only pick two.” Pragmatic planning for an energy transition must consider the role of traditional oil and gas. New technologies in carbon capture utilization and sequestration (CCUS), green and blue hydrogen, non-combustion hydrocarbon generation, and other emerging technologies support oil and natural gas’ role in the transition.
Universally, with our clients, even the most traditional oil and gas companies are keenly focused on reducing their carbon footprint. What differs is their strategy to get there. These differences are what make transactions like Shell’s and ConocoPhillips’ in the Permian possible. We expect to see an acceleration of similar (albeit smaller) transactions as companies and private equity firms rebalance their portfolios to reflect their firm’s specific strategies to address lower-carbon initiatives and the energy transition.
