The energy giant is buying a portfolio of shale oil and gas properties from BHP Billiton in a $10.5 billion deal – its biggest in nearly 20 years.
BP’s last major deal was its purchase of American oil company Arco for $27 billion back in 1999. The company was something of a trendsetter in the global energy industry at that time, but the disastrous 2010 Deepwater Horizon oil spill in the Gulf of Mexico was deeply sobering. BP has since proceeded with caution regarding major investments.
The deal with BHP Billiton, announced July 26, suggests that BP believes the financial burdens of the spill, totalling about $66 billion, are mostly behind it. The purchase is strategic as well as symbolic. The properties cover 470,000 acres in Texas and Louisiana, and will give BP a strong foothold in the U.S. shale industry, where it has lagged rivals. “BP was aware that they were late on this crucial global resource theme,” said Roy Martin, an analyst at Wood Mackenzie, an energy consultancy.
During the time when BP was forced to curtail its investments, the energy industry shifted. Shale exploration, which had largely been the domain of smaller operations, became an important part of the energy mix for big multinationals, as both the price of oil and the capacity of the U.S. shale industry increased. As the New York Times describes, “Behemoths like Chevron and ExxonMobil have moved aggressively to extract oil from shale rock.”
Chevron’s investment in shale drilling is increasing by 50%, and according to Wood Mackenzie, will soon account for nearly a third of its overall spending on energy output. ExxonMobil is similarly increasing spending on shale drilling, aiming to rapidly develop the 275,000 acres it acquired in the Permian Basin last year.
Until the deal with BHP, shale accounted for only 10% of BP’s drilling expenditure. Wood Mackenzie predicts that, based on its scale, the new acquisition will make BP second among the big multinationals in shale oil output in the U.S. “Shale is becoming the realm of Big Oil”, said Rob West, a partner at financial analysis firm Redburn.
“The short-term return, which is the story of shale, is building its way into the boardroom”, said former Schlumberger CEO Andrew F. Gould. As renewables gain prevalence, the boards of big energy industry players anticipate lower demand for oil and gas, making them wary of long-term projects. Companies are under pressure to bring about faster returns and limit their exposure to oil price volatility.
Shale meets these demands, as it leads to oil extraction much faster than traditional oil and gas operations. The same pressures are driving energy giants to make deals in areas like solar and wind. These investments also bring faster returns, analysts say, as well as a hedge against the uncertain future of fossil fuels.
