Oil Majors Are Taking Over The Permian

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By Nick Cunningham

Drilling in the Permian has plateaued in recent months, but production is still growing. Crucially, Permian production is expected to continue to grow for years to come, but the region is increasingly dominated by the oil majors rather than mom-and-pop shale companies.

Chevron and ExxonMobil both held investor meetings on Monday, where both oil majors detailed aggressive drilling strategies in the Permian. Chevron expects to more than double output in the Permian to 900,000 bpd over the next five years, a 40 percent increase from its previous plan. ExxonMobil, for its part, expects to top 1 million barrels per day in the Permian in that same timeframe.

The presentations from both companies illustrate a growing trend in the Permian. Small and medium-sized shale companies were the ones to really develop the Permian in the early years. The oil majors were late to both the shale party in general, as well as to the Permian specifically.

However, they are making up for lost time. “The shale game has become a scale game,” Chevron CEO Mike Wirth told the Wall Street Journal. “The race doesn’t go to the one who gets out of the starting blocks the fastest. The race goes to the one who steadily builds the strongest machine.” As the WSJ notes, the oil majors including Exxon, Chevron, BP, Royal Dutch Shell, as well as Occidental Petroleum, accounted for a combined 9 percent share of Permian output five years ago. As of October, they made up 16 percent of Permian output. But with the oil majors entering an aggressive growth phase in the Permian, their combined market share in the Permian will balloon over the next five years.

The majors are now some of the largest drillers in the Permian. Exxon already has 48 rigs in the Permian, accounting for nearly 10 percent of the total 466 rigs in the entire basin. The oil major expects to raise its number of rigs in the Permian to 55 by the end of 2019. Chevron says it has cut development and production costs in the Permian by 40 percent since 2015, and that it will be cash flow positive in the region by 2020. That claim has been scrutinizedby critics. ExxonMobil says that it can earn a 10 percent return on its Permian acreage even if oil prices fell to $35 per barrel.

At the same time, shareholder pressure on profits and returns have forced smaller and medium-sized companies to trim spending. “Earnings and guidance confirm that most US shale operators aim to moderate drilling and completion activity this year, prioritizing cost discipline over aggressive growth,” Rystad Energy partner Artem Abramov said in a statement.

As they cut back on drilling and growth, their legacy wells could catch up to them. Worse, the shale industry is starting to encounter operational problems, including well interference that is leading to disappointing production figures. Spacing wells too close together, in many cases, has led to output falling significantly short of expectations.

It is unclear what this might mean for the industry. The chickens have not yet come home to roost, but many shale companies may not ultimately be as valuable as investors currently think they are.

This problem may not be as threatening to the oil majors, who not only have increasingly large contiguous territories, which may allow them to retool their spacing strategies, but also they have the resources and time to figure out the problem.

And Chevron, for instance, has been sitting on Permian acreage for a long time, and the value of that land has doubled over the past two years as the Permian rush accelerated. That meant the oil major didn’t need to shell out huge sums for a prime land position in the Permian. The company’s land position is “characterized by long-held acreage, zero-to-low royalty on more than 80 percent of our land position, and minimal drilling commitments,” Jay Johnson, executive vice president for upstream operations said in a statement.

So, there is a sort of two-speed environment going on right now – a spending slowdown by small and medium-sized companies in the Permian (and elsewhere), while the oil majors are scaling up. Shale companies are cutting spending, but the contraction is being offset by the expansion plans by the oil majors.

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