Big Permian spenders may have to step it up
Report says large oil companies likely needing to spend $30 billion to increase their production
OIL majors led by Exxon Mobil and Chevron will need to increase their spending in the booming Permian Basin by billions of dollars over the next three years to meet their production goals, likely leading them to acquire more companies and acreage while increasing demand — and costs — for oil field services, according to a new report.
The report, by the research firm IHS Markit, argues that Exxon Mobil Corp., Chevron Corp. and, to a lesser extent, Royal Dutch Shell, will need to spend nearly $30 billion from 2018 to 2020 in the West Texas shale play. IHS last week projected that the Permian is on track to become the world’s largest oil field by 2023, producing by itself more than any other country in the world, except Russia and Saudi Arabia.
The expansion in the Permian of the largest energy companies, called supermajors, could pressure smaller exploration and pro-
duction companies to sell as they struggle to keep up with cost inflation driven by demand for workers, pipeline and oilfield services. At the same time, the Big Oil companies will need to balance rising costs in the Permian against the pressure from shareholders to hold down expenses, the report said.
Both Exxon Mobil, headquartered in Irving, and Chevron, of California, are banking on the Permian to boost their overall bottom lines in the years ahead.
Earlier this year, Exxon Mobil pledged to triple its Permian production by 2025 to more than 600,000 barrels of oil equivalent a day. Even though Exxon paid more than $6 billion last year to greatly expand its Permian position and hold nearly 400,000 acres in the oil field, the IHS Markit report contended the Texas oil giant needs to increase its holdings further to reach its production targets.
The IHS Markit report projects that the three oil majors in the Permian must spend to close $8 billion combined this year, $10 billion next year and $11 billion in 2020.
As drilling activity increases in the the region, the more the costs are expected to rise as demore mand for limited numbers of drilling and hydraulic fracturing crews increases. Many companies working in the Permian won’t be able to afford to compete, IHS Markit concluded.
“The supermajors will further stress the Permian service sector, and as costs escalate, the increased execution risk may be too great for these smaller companies to overcome, possibly forcing them into mergers or sales,” said Sven del Pozzo, director of energy equity research and analysis at IHS Markit.
With less acreage available for sale in the Permian, companies are turning to acquiring competitors, del Pozzo said, at increasingly dear prices. Earlier this year with Midland-based Concho Resources agreeing to buy Dallas-based rival RSP Permian for $8 billion, he said.
The next major acquisition target might be the shale business of the Australian mining company BHP Billiton. That acreage is valued at close to $10 billion. BHP, the world’s largest mining company, bought into U.S. shale early this decade, but took a big hit during the recent oil bust, writing down the value of its shale assets by $7 billion two years ago. The company is planning to get out of shale.
The Permian accounts for than half the nation’s oil drilling rigs and about one-third of U.S. production. IHS Markit projects the Permian’s oil production to more than double from an average of about 2.5 million barrels a day in 2017 to 5.4 million barrels by 2023.
Companies are rushing to build pipelines to carry the production surge to port and refining hubs near Houston and Corpus Christi.
Exxon Mobil said last week it plans to create a joint venture with Houston’s Plains All American Pipeline to construct a multibillion-dollar line that would stretch from west of Midland to the Houston and Beaumont areas and carry more than 1 million barrels of oil and condensate a day.
That pipeline announcement shows that Big Oil companies have spending requirements beyond drilling wells, said Ethan Bellamy, an energy analyst at Robert W. Baird & Co. They also need nearby water and sand supplies used to hydraulically fracture wells, and storage hubs and processing facilities to handle all of the oil and gas.
“It’s all hands on deck,” Bellamy said. “We are in for a wild ride.”