Shale front and center for US majors
Houston, 14 February (Argus) — Chevron is offering the clearest answer yet as to how central unconventional operations have become to the US majors' portfolios. Shale is aligned to what the company considers its base business, given its low risk.
Shale was not a mainstay for the majors, because of challenges including steep decline rates. But a strong emphasis on technology and efficiency since the oil market downturn in mid-2014 has helped overcome this, allowing the firms to tap into the advantages that the sector offers.
"It has been useful to think about putting base, shale and tight [assets] together because of their operational characteristics — the cycle time, the risk profile," chief executive Mike Wirth says. Chevron's base business has "more in common" with shale than its major capital projects, he says. The company has earmarked capital expenditure (capex) of $3.3bn for the Permian formation this year, around half its US upstream total. Wirth took over as chief executive on 1 February, following the retirement of John Watson.
The shale sector gives the firm "predictable, flexible and controllable growth", unlike longer-cycle projects, where there is a "big bang at the end, but a greater latency period", Wirth says. Chevron will add four rigs in the Permian this year, taking its total to 20. The region was the largest contributor to the company's reserves additions in 2017. And the firm expects to lower its cost structure and improve capital efficiency in the basin.
Chevron produced around 181,000 b/d of oil equivalent (boe/d) in the Permian in 2017, up by 35pc compared with a year earlier. Fourth-quarter output climbed by 60,000 boe/d on the year to 205,000 boe/d. The company transacted more than 240km² through swaps, joint ventures and asset sales last year, adding another 600 longer lateral wells to its inventory. "We intend to continue this activity to consolidate our land position and optimise the value of our future developments," Wirth says.
ExxonMobil is similarly drilling longer wells to cut its costs. It plans to drill 15-20 wells with lateral sections as long as 4.8km in North Dakota's Bakken shale. The firm recently completed its first 4.8km lateral well in the Midland region of the Permian, and is drilling a second. It aims to raise its rig count across the two formations to around 36 by the end of this year from 26, with 30 in the Permian. "We continue to grow our sub-surface understanding of the region," vice-president for investor relations Jeff Woodbury says.
Increased activity forms part of ExxonMobil's plan to treble its Permian output to more than 600,000 boe/d by 2025. The company has outlined a capex budget of $24bn for this year, up from $23.1bn in 2017, driven primarily by higher investment in shorter-cycle opportunities, including US shale. These projects yield "attractive returns" at $40/bl oil, Woodbury says.
Recent US tax reforms will provide a further stimulus to investment models — the change in the fiscal regime has already helped boost the majors' upstream operations. BP will "no doubt" increase its investments in the country, because of the reforms enacted by President Donald Trump's administration, chief executive Bob Dudley says. Corporate taxes have declined to 21pc from 35pc, one of the highest rates in the OECD. "This is of enormous value to business in many ways," Dudley says.
The tax reductions make investment opportunities attractive, according to Chevron, while ExxonMobil says they will support its plans for $50bn worth of US spending over the next five years.