Exxon and Chevron plan for Permian shale boomBy Ed Crooks | March 05, 2019
ExxonMobil and Chevron have sharply lifted their expectations for production in the Permian Basin, the heartland of the US shale boom, in the first half of the 2020s.
In a presentation to analysts this week, Exxon is revising up its projection of oil and gas production in the Permian region of Texas and New Mexico from 600,000 barrels equivalent a day to 1m in 2024, while Chevron has lifted its estimate from 650,000 b/d to 900,000 in 2023.
The revised projections demonstrate the two largest US energy groups’ confidence in the continued growth of the country’s oil and gas production.
The ambitious expansion plans also lay down a marker for Opec, the oil producers’ cartel, that competition from US shale, which has put downward pressure on prices and transformed global crude markets over the past decade, can be expected to continue well into the 2020s.
They also reflect the way that the shale industry, which was pioneered by small and mid-sized companies, is increasingly being dominated by larger players.
The growth plans mean that both companies expect approximately to treble their Permian production from 2018 levels over the next five years or so.
Michael Wirth, Chevron’s chief executive, said at a presentation for analysts in New York that he was confident of being able to achieve further growth beyond that.
“This doesn’t end where our charts end. Not even close,” he said. “We’re right now recovering high single-digits [percentages] of the hydrocarbon in place. If we left 90 per cent of the oil and gas behind, it would be the first time in the history of the industry.”
Standard production techniques typically lead to 20-40 per cent of the original oil in place being extracted, and enhanced oil recovery raises that to 30-60 per cent.
Mr Wirth added that Chevron was not seeing problems with an issue that has raised concerns about long-term prospects in the Permian Basin: the fact that newer “child” wells drilled too close to an older “parent” would have lower production, and could cut output from the original well.
He said Chevron was using “pretty sophisticated machine learning technology” to plan where and how to drill and complete its wells, and “we’re only on the front end of using those kinds of tools”.
Estimates of its resource base of oil and gas show how Chevron is becoming increasingly dependent on shale for its expected future production. The company estimated its Permian resources of oil and gas at 16.2bn barrels, nearly a quarter of its global resource base of 67.8bn barrels.
Exxon is moving in the same direction, but its reliance on shale is relatively smaller. It estimated its Permian resources at about 10bn barrels of oil and gas, roughly 10 per cent of its global resource base, reported at 97bn barrels at the end of 2017.
Both Chevron and Exxon said they expected their Permian production to be profitable, despite the shale industry’s record of needing continual infusions of capital to finance drilling programmes.
Chevron highlighted what Jay Johnson, its head of oil and gas production, described as the company’s “unique position” in the Permian, because it owns most of its land outright, rather than having to pay landowners for drilling rights.
Mr Wirth said that the company’s growth in shale would not mean a lower average return on capital.
“Shale returns are the highest in our portfolio,” he said. “Returns on our shale investments are north of 30 per cent, at low oil prices. There’s nothing we can invest in that delivers higher rates of return. So this will improve returns over time, not dilute them.”
Exxon also expects to be able to be profitable in the Permian Basin even at lower oil prices, saying it can earn an average return of more than 10 per cent there even with crude at $35 a barrel.
Neil Chapman, a senior vice-president at Exxon, said in a statement: “We’re increasingly confident about our Permian growth strategy due to our unique development plans.”
The company has been buying drilling rights in the Permian to build up large contiguous areas, allowing it to drill longer horizontal wells and have more efficient development.
It is also investing in pipelines and other infrastructure to address some of the challenges created by the breakneck pace of development in the Permian region, including water shortages and a surplus of gas, produced as a byproduct along with the oil.
Biraj Borkhataria, an analyst at RBC Capital Markets, said that Chevron’s shares seemed “expensive relative to European peers”, while “the growth options outside of the Permian [are] weaker than Chevron’s European counterparts”.
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