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Oil Majors Lower Risk: Favor Shale Over Offshore

Oil Rig

The first three months of this year have made one thing crystal clear: Big Oil is set on expanding in shale—hardened by the lessons the oil price crisis taught it—and leveraging the experience of oil and gas independents.

Shale has lower production costs, at least in the U.S. and possibly in Argentina, and returns come sooner than those from conventional oil and gas projects. That combination is irresistible for Shell, Exxon, and Chevron, who have suffered to varying degrees from their traditional focus on big projects.

Shell, for instance, had to write off several billion dollars after it dropped its Arctic endeavors, pressured by plummeting oil prices. Exxon recently wrote down its total reserves thanks to its assets in Canada’s oil sands becoming commercially unviable at current price levels. Chevron is in the middle of a three-year divestment program in an attempt to slim down and streamline its operations.

Meanwhile, all three are investing heavily in shale. Shell is boasting breakeven levels of $20 per barrel in its Permian acreage. Exxon is spending a third of its drilling budget on shale. Chevron plans to double its spending on shale this year to $3 billion, despite curbs elsewhere in its budget. Related: OPEC Out Of Moves As Goldman Sachs Expects Another Oil Glut In 2018

Combined, the three majors plan to splash around $10 billion on shale projects this year, Bloomberg’s Javier Blas writes, noting that just a few years ago, oil majors couldn’t have cared less about unconventional oil.

But things have changed for everyone, and Big Oil is better placed than independents to make the most of what shale can offer. It simply has greater flexibility thanks to the financial resources at its disposal, which it seems more than ready to utilize to the fullest.

Shell, for instance, is drilling multiple wells in a single oil pad, saving on the costs of moving a rig from pad to pad. It is also using three times the amount of fracking sand and fluid it used four years ago, cutting its costs per well to $5.5 million. Efficiency is the new mantra of Big Oil.

Chevron has boasted a 35-percent drop in operating costs in its Permian acreage for this year, with plans to further raise the number of its drilling rigs there. Going forward, CEO John Watson said that shale production could reach a quarter of Chevron’s overall output by the middle of the 2020s.

Exxon, which earlier this year struck a deal with the Bass family to buy Permian assets for $6.6 billion, said it is eyeing a 20-percent annual increase in its shale production in the period until 2025.

Independents have pumped from the shale patch for years. And while Big Oil is a relative newcomer, it has watched what the independents do, and is now doing the same—but on a much bigger scale. Some are still worried that this rush to the shale patch will end badly, because unlike Big Oil’s traditional projects, it requires constant spending; quick returns are, after all, part of the much shorter lifecycle of shale wells. The majors are not used to this business model, and could end up on the losing side.

Related: The Upcoming Surge In U.S. Oil Demand Explained In One Chart

Others are hailing Big Oil’s entry into shale as a way for the U.S. to gain the upper hand in the race with Saudi Arabia on who’s the biggest – and most energy independent – of them all. That’s where the main advantage of Big Oil lies: unlike independents that have limited resources and regularly overspend to keep the pumps going, Exxon, Shell, and Chevron have more robust cash flows that provide them with more space for maneuvering.

The big guys in oil are not just focusing on U.S. shale, either. They all have big plans for Argentina’s Vaca Muerta giant shale formation. Shale exploration is firmly a top priority for Big Oil, balancing the other top priority: deepwater projects. These are the traditional kind, with large upfront investments and then years and years of exploitations. Big Oil is keeping the balance between conventional and unconventional.

By Irina Slav for Oilprice.com

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