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Chevron’s $11 Billion Write Down Is A Warning For The Oil Industry

Chevron’s $11 billion assets writedown…

Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Shale Is In A Deep State Of Flux

Oil prices are rising to their highest level in months, with WTI having topped $60 per barrel, but the U.S. shale industry is still showing signs of strain.

“This is a cycle in our industry where only the large well-capitalized companies can grow. Small companies without access to capital are stagnant,” one oil executive in Texas said in response to a survey from the Dallas Federal Reserve. “It is a major industry readjustment period.”

The oil majors are scaling up their operations in the Permian basin, with ambitious plans to ratchet up output. ExxonMobil plans on hitting 1 million barrels per day (mb/d) by 2024 from the Permian, and Chevron hopes to reach 900,000 bpd. U.S. shale is more important than ever to their business plans.

But even as the role of shale is critical to the majors, small- and medium-sized E&Ps are struggling. Poor financial returns, loss of interest from investors, pressure to cut spending and return cash to shareholders, and encroachment from the majors are tightening the screws on smaller drillers. The “shrinkage in market capitalization of some companies is breathtaking. These loses translate into a loss of interest in further direct investments in the drilling of new oil and/or natural gas prospects,” another respondent said in the Dallas Fed survey.

A few other concerns seemed to dominate the thinking of Texas oil executives:

  • “Qualified young professionals are avoiding joining the oil and gas industry.”
  • “Pipeline constraints in the Permian Basin continue to cost us up to $20 per barrel and have a significant impact on capital expenditures. This cost changes month by month, making revenue estimation difficult.”
  • “Smaller independents are competing with a different animal that is too expensive to tame. Deep pockets for manufacturing oil and gas have taken over the patch here.”

These concerns suggest that the shale industry is in a deep state of flux, with the majors edging out their smaller competitors. That could impact production, although it is still unclear how this will shake out. The EIA reported a decline in output in January, which suggests drillers came under pressure at the end of 2018 when oil prices collapsed. Related: Big Tech Joins Renewable Energy Buyers Alliance

And while prices are now rising strongly, and the market continues to tighten, the gloom in the shale patch has not ended. “Our customers are increasingly focused on cash flow, and clearly, the rush to add production is over. Oil and gas companies are delaying spending decisions as late as possible,” one more respondent from an oilfield service firm said in the Dallas Fed survey.

Other problems are also adding to the downbeat assessment, including low natural gas prices, access to capital, debt, pipeline bottlenecks, and operational problems related to the “parent-child” well problem, according to Standard Chartered. “We believe the survey results continue to support our view of a [quarter-on-quarter] slowdown in US shale oil output growth,” the investment bank wrote in a report. As evidence of this pressure, Vanguard Natural Resources, a medium-sized E&P, just declared Chapter 11 bankruptcy protection for the second time in two years.

The company’s struggles could be indicative of a broader problem in the industry. “We believe there is an ongoing problem of high debt across the industry which, when combined with an investor focus on returns within cash flow, is proving to be an extremely challenging operating environment,” Standard Chartered concluded.

It is important to note that the raft of poor data and depressing sentiment is not necessarily the consensus. Kayrros noted in a report that there are early signs that the production slowdown was temporary. And Rystad Energy points out that the global oil industry on the whole is “bringing in cash at the best rate ever witnessed even though oil prices have only partially recovered from the huge drop suffered in 2014 and 2015.”

But that is cold comfort to the small driller in Texas getting squeezed by debt, constraints on labor and pipelines, and the heavier presence from the oil majors.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Lee James on April 04 2019 said:
    Kind of sad and certainly sobering. Shale is so American -- so many hopes and dreams. We invented the technology to bring it up from 10k + feet under high pressure.

    I see us going increasingly after diffuse oil -- not the oil of bonanza reservoirs, as when I was a kid. Today's oil is tough and expensive to get at. It's the "source oil" that peculates upward with enough time and becomes trapped under dome rock formations.

    Black gold over the years has seen changing net value and benefit. We have seen many upsides from burning it, but downsides are are much in evidence. It is not a healthful source of energy as much as it is a convenience. We fritter it away in play as much in work, and do not fully realize the price that we pay for it. The price needs to include a compromised planet and national security.

    We see what next steps are needed in energy. It's a transition away from fossil fuel. The only question is how quickly will we get there.
  • Mamdouh Salameh on April 04 2019 said:
    I have always argued that US shale oil industry is not a profitable one. If it was judged by standard criteria of economics and profit that govern conventional oil companies, it would have been declared bankrupt years ago given the hundreds of billions of dollars it owes Wall Street.

    That is why a trend is taking hold of the US shale oil industry, namely, oil majors edging out their smaller independent competitors because they have the financial stamina to stay longer. Poor financial returns, loss of interest from investors, pressure to cut spending and return cash to shareholders and encroachment from the majors are tightening the screws on smaller drillers. Deep pockets for manufacturing oil and gas have taken over the patch here.

    All these issues confirm reports by numerous authoritative sources of a slowdown in US oil production and a projected production decline of 1-2 million barrels a day (mbd) mostly from US shale oil production by 2020. This could translate into a US production range of 10.0-11.0 mbd in 2019 and 11.0-12.0 mbd in 2020.

    Still, the US Energy Information Administration (EIA) is adhering to the ludicrous projection that US oil production will overtake the combined production of Russia and Saudi Arabia by 2025 despite the fact that an overwhelming number of analysts with the exception of the International Energy Agency (IEA) and Rystad Energy which are in cahoots with the EIA dismiss such a claim as self-delusional.

    The demise of the US shale oil is neigh. It could happen within the next 5-10 years.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Erik Reny on April 04 2019 said:
    Fear mongering is what I get out of this writers stories. 1 person he talked with and based this story on?

    “This is a cycle in our industry where only the large well-capitalized companies can grow. Small companies without access to capital are stagnant,” one oil executive in Texas said in response to a survey from the Dallas Federal Reserve. “It is a major industry readjustment period.”

    Crap reporting IMHO

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