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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Big Oil’s Biggest Weapon In The Permian

While European oil supermajors are yielding to investor pressure to set emission reduction targets and announcing investments in renewables and EV charging networks, U.S. majors ExxonMobil and Chevron are doubling down on oil production on their home turf, turning the ‘shale game’ into a ‘scale game’, as Chevron’s CEO Michael Wirth has recently said.

The two biggest U.S. oil firms aim to boost significantly their respective production from the most prolific U.S. basin, the Permian, which now pumps more than 4 million bpd of crude oil.

Both Exxon and Chevron hold vast acreage positions in the basin, and both have the financial resources to invest in ramping up shale production even through various oil price cycles, even at oil prices at which smaller independent drillers struggle to break even and scale back drilling and capital spending.

The shorter-cycle shale production yields returns in two-three years, compared to many years of lag time from discovery to development to start-up of complex offshore oil projects, for example.  

While Exxon and Chevron are not giving up on their most promising conventional oil projects outside the U.S., their common key priority by the middle of the next decade will be the Permian. And in order to achieve their ambitious growth targets, the U.S. supermajors rely on innovation—not only innovation in drilling, but also digital innovation and transformation with increased use of various AI technology, cloud computing, automation, and data analytics. Related: The Index Investors Need To Watch In This Oil Rally

Chevron and ExxonMobil, for example, work with Microsoft to boost efficiencies and profits.

Chevron signed in 2017 a seven-year partnership with Microsoft, under which the tech giant is Chevron’s primary cloud provider and the companies are working on speeding up the application of analytics and the Internet of Things (IoT).

Earlier this year, Exxon struck a digital partnership with Microsoft to use cloud technology to increase oil production and profitability in the Permian. According to Exxon, the partnership will make its Permian operations the largest-ever oil and gas acreage to use cloud technology. Cloud technology application is expected to generate billions of U.S. dollars in net cash flow for Exxon over the next decade, as data analysis and operational efficiencies improve. The partnership also has the potential to increase Exxon’s production in the Permian by 50,000 oil-equivalent barrels a day by 2025, the U.S. supermajor says.

Last month, Exxon and Chevron announced increased targets for their Permian production. Chevron now sees its Permian unconventional net oil-equivalent production rising to 600,000 bpd by the end of 2020, and to 900,000 bpd by the end of 2023. In 2018, Chevron’s annual production in the Permian was 310,000 bpd, up by 71 percent on the year.  

Chevron boasts a “unique position” in the Permian “characterized by long-held acreage, zero-to-low royalty on more than 80 percent of our land position, and minimal drilling commitments,” said Jay Johnson, executive vice president, upstream. These factors, combined with the use of new technologies, are driving higher returns and stronger cash flows, according to Johnson.

Similarly, Exxon also revised up its Permian growth plans to produce more than 1 million oil-equivalent barrels per day by as early as 2024, which would be an increase of almost 80 percent. Related: Iran Demands U.S. Apologize For “Illegal” Sanctions

The shale game is now a ‘scale game’, Chevron’s Wirth told CNBC in March after the company announced its latest Permian growth targets.

“The big thing that I think has changed is the shale game has become a scale game, and so people that can do things at large scale and bring the capabilities to bear that a company like Chevron has are the ones that really can take this to the next level,” Wirth told CNBC.

While independent exploration and production firms are much more sensitive to oil price trends in their drilling plans, the supermajors are bringing in scale and technological innovation to the shale game to squeeze as much profits from the Permian as possible.

Chevron’s agreement to buy Anadarko and Occidental Petroleum’s offer two weeks later to buy Anadarko at a higher price than the one Anadarko had accepted from Chevron highlight “a larger scale pivot in supermajors strategy to short cycle shale investments,” Tortoise, which invests in energy assets, said in a recent update.

“With strong balance sheets, stable multi-year investment programs and the ability to invest through production cycles, the expanding presence of supermajors in U.S. shale is positive for stable, visible longer term production growth,” said Tortoise, noting that it expects “more large acquisitions of independent U.S. E&Ps, particularly in the Permian basin, as the supermajors look to increase scale by blocking up significant chunks of acreage to support their growth plans in the future.”  

By Tsvetana Paraskova for Oilprice.com

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