Au revoir, reservoirs: is Europe pulling back from North American shale?

Data InsightDealspeak 27 September

Au revoir, reservoirs: is Europe pulling back from North American shale?

For more than a decade, European oil and gas producers fought their way into North America’s shales for access to cheap and plentiful hydrocarbons. London-based BP [LON:BP], for example, spent USD 10.5bn on assets in the Permian Basin in 2018. Royal Dutch Shell's [AMS:RDSA] USD 9.5bn deal to sell its Permian operations to ConocoPhillips [NYSE:COP], announced on 20 September, is the biggest indicator an exodus by European companies is now underway.

The move comes after a Dutch court in May ordered Shell to reduce its worldwide CO2 emissions by 45% by 2030 as part of global efforts to prevent climate change. Other European producers are facing stiff headwinds too. Norway's Equinor [NYSE:EQNR] was the focus in an election won this month by left-wing parties that campaigned on changing the country’s relationship with oil. All are emphasizing commitments to cleaner, greener energy in the coming years while investors and leaders want to decarbonize quickly. Even assets with strong cash flow could end up divested because of their carbon intensity. Throw in the Biden administration’s anti-US oil and gas stance, and assets in the US become even likelier to be sold.  

Euro outflow

Dealogic data shows 30 deals in North America between 2017 and 2020 where European companies sold oil and gas assets in North America, with deals leaning heavily towards the sale of pipelines, refineries, and services businesses. The most notable deals for upstream assets tended to involve offshore, oil sands and conventional plays.

The pace has accelerated in 2021, with nine deals in less than nine months. Notably, European operators' largest shale sales in at least five years have come this year – Shell's Permian exit, Equinor's USD 900m departure from the Bakken and Shell's USD 765m sale of its Kaybob Duvernay assets in Canada. 

Cash in, carbon out

US-based operators have yet to feel the same pressure to cut carbon, with some voluntarily pledging to eliminate emissions from activities like production, transport, and refining. Meanwhile, European companies must account for end users in their efforts. That means American companies have a lower bar to clear and have been more willing to buy onshore assets. Well-capitalized public companies such as Chevron [NYSE:CVX], Marathon Oil [NYSE:MRO] and Devon Energy [NYSE:DVN] are logical acquirers, while private equity-backed Black Knight Energy and FourPass Energy have expressed interest in large acquisitions.

Equinor, which has pledged to get to net zero by 2050, still has assets in the gassy Appalachian Basin and Austin Chalk that could make sense to divest. BP, which has yet to make the same kinds of divestitures, carved out its US Lower 48 operations into a subsidiary years ago that industry participants have tipped previously as a logical divestiture candidate.

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