Big Oil’s Permian push to hike costs
Oil majors led by Exxon Mobil and Chevron will need to bulk up their Permian Basin spending to meet their growth goals, triggering more consolidation and higher costs for oil field services, according to a new report Monday.
The IHS Markit report argues that Exxon Mobil, Chevron and, to a lesser extent, Royal Dutch Shell, will need to spend nearly $30 billion from 2018 to 2020 just in West Texas’ booming Permian Basin to hit their production targets.
That means the three companies could be buyers of companies and acreage in the Permian, pressuring smaller exploration and production companies to sell as they struggle to keep up with cost inflation. At the same time, the Big Oil players will need to balance rising costs in the Permian with the pressure from shareholders to maintain conservative spending plans, the report states.
“If truly committed to the Permian Basin, the traditionally return-focused supermajors will have to grow accustomed to a rising cost-basis in order to build their core, operated-acreage positions that currently do not suffice to meet medium- to long-term growth plans,” said Sven del Pozzo, director of energy equity research and analysis at IHS Markit.
Irving-based Exxon Mobil for instance, which paid more than $6 billion last year to increase its Permian position, pledged to triple its Permian position by 2025.
The IHS Markit report contends 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. Exxon Mobil would build up to more than $5 billion in 2020, followed closely behind by Chevron with Shell spending almost $2 billion.
“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,” del Pozzo said.
The beginning of that wave likely began earlier this year with Midlandbased Concho Resources agreeing to buy Dallasbased rival RSP Permian for $8 billion, he said.
The next big show to drop could be Australia’s BHP Billiton selling its Permian acreage that’s valued at close to $10 billion. BHP, which is the world’s largest mining company, bought big into U.S. shale early this decade, but took a big hit during the recent oil bust and is now planning to exit the shale business.