Oil Market Report: Q2 2024

Supply risk security continues to put a premium on the oil price

Security risks and market tension increased during the quarter in the Israel-Hamas conflict. Bloomberg Intelligence (BI) warned that, according to a new analysis by BI and Bloomberg Economics (BE), “an escalation to a direct war between Israel and Iran could result in oil prices rising to $150 a barrel”. The BI base case scenario is that the war will remain geographically confined and thus limit the impact on the global economy. However, a high-risk scenario involving a prolonged conflict could trigger a global recession, with surging oil prices and declining global growth.

Peak oil demand: IEA vs. OPEC

The IEA is sticking with its forecast that oil demand will peak by 2030, as the world moves to renewable energy and other alternatives. OPEC is sceptical about this, and remains committed to continued growth in oil demand beyond 2030. Each organisation has their own fundamental reasons for their forecasts; the IEA focus is on renewables and climate action, while OPEC emphasises expected growth outside traditional industrialised economies, such as the G7. Unusually, the differences between the two bodies became public and somewhat fractious when Haitham Al Ghais, OPEC General Secretary, described the IEA forecasts as “dangerous”, and warned of “energy chaos on a potentially unprecedented scale” if producers stopped investing in new oil and gas projects.

Carbon transition plans to meet Paris accord targets face an uncertain future

Major oil and gas companies continued to moderate their previously ambitious plans to move rapidly into becoming major players in the renewables energy sector. This moderating trend is further demonstrated by major utility companies cutting back or revising downwards their targets to develop renewable energy due to high interest rates, high costs, and low electricity prices, thus exemplifying the difficulties of transitioning away from fossil fuels. One such instance is the world’s largest offshore wind developer Ørsted dropping its renewable targets for 2030 by more than 10GW after it cancelled two large US projects. Furthermore, political support in the EU for Paris accord targets could weaken due to Green Party loses suffered in the June EU parliamentary elections. Such carbon transition uncertainty thus appears to add weight to OPEC’s view that oil demand will last longer than expected, i.e. well beyond the IEA outlook.

Q2 upstream O&G M&A activity continued at a high pace

Industry players continued to lean in favour of the OPEC long-term oil demand outlook. Their M&A activities focused on optimising their upstream portfolios to build core assets, grow reserves and production, and achieve greater efficiencies. Significant deals included:

1. ConocoPhillips bidding for Marathon Oil for $17.1 billion plus $5.4 billion in debt, making the enterprise value of the transaction around $22.5 billion. At the core of the deal are 2 billion barrels of shale oil resources that Marathon holds in Texas and North Dakota.
2. Galp agreed with ADNOC on the sale of its upstream assets in Area 4, Mozambique, which includes Coral South FLNG (in operation since 2022), as well as the prospective Coral North FLNG and Rovuma LNG onshore developments, both expected to be sanctioned during 2024/25. The structured offer totals over $1 billion and allows Galp to focus on core assets, such as their substantial offshore oil discovery in Namibia.
3. ExxonMobil reached a $1.6B agreement in Nigeria to move forward with the sale of its interests in shallow-water OMLs 67, 68, 70, and 104, plus interests in the Bonny River and Qua Iboe terminals and an NGL plant. The parties in the transaction include Seplat Energy and NPCC. This transaction is part of a series by the company to exit non-core or problematic assets to be better able to focus on true new core assets, such as their massive oil discovery in Guyana.
4. Additionally, a series of significant US shale-focused deals demonstrated a desire on the part of companies to grow their core capabilities. Examples included SM Energy’s intention to buy XCL Resources for $2.55 billion, Crescent Energy’s offer of $2.1 billion for SilverBow Resources, and Matador Resources’ offer of $1.9 billion for Ameredev II. This set of transactions confirms the industry belief of major players that the Permian Basin will be a major long-term contributor to US oil production.