Big oil looks to cash in on shale
Summary: For Bruce Niemeyer, the Chevron executive overseeing the company’s $US15 billion ($20bn) expansion, one question looms above all: will we make money?....
Big oil companies including Chevron, ExxonMobil and Royal Dutch Shell are piling into the Permian Basin, the oil-rich region straddling Texas and New Mexico that is the epicentre of the second wave of US shale drilling.
Chevron and others say they will soon achieve something that has proved surprisingly elusive for their smaller peers: turning a profit. The shale-drilling renaissance rocked global markets and helped send crude prices into a prolonged slump. What it didn’t do was bring in much cash.
Since 2011, the largest 30 independent US shale producers spent an average of nearly $US1.33 for every $US1 they made drilling wells.
In the past two years, those 30 have lost $US130bn. More than 120 companies have gone bankrupt, and many of those that survived have done so with cash infusions from Wall Street, which rewarded the drillers for fast growth.
That model won’t work for Chevron, Exxon and other companies that pay shareholders generous dividends and need to bring in more cash than they spend over time.
To transform an important — yet money-losing — technology into a source of profit, executives such as Mr Niemeyer, the head of Chevron’s midcontinent business, are turning to their strengths.
Those include huge scale, deep pockets that have given them time to learn from the successes and failures of others and an ability to bring techniques used all over the world into West Texas.
They are joining the race to push crude production here to 4 million barrels a day within a decade, rivalling Iraq’s output.
“The early stages favoured the smaller companies, which could test technology and try different things,” said Anish Kapadia, an analyst at Tudor Pickering Holt & Co, an energy investment bank.
“As they move into development mode, those with a low cost of capital will have an advantage. This is the domain” of large oil companies, he added.
The big companies face considerable scepticism from investors who don’t see how they can meet growth targets and generate excess cash by exploiting shale fields.
In recent years, Exxon, Chevron and Shell have lagged behind top operators in the Permian basin by a wide margin, with the big companies’ individual wells producing about half as much oil and gas in some cases, analysts say.
Executives at the biggest companies counter these results partly reflect a focus on drilling practices that bolster output over the life of the well, rather than maximise short-term flows.
“Big oil companies are basically lethargic, slow-moving giants,” said David Arrington, an entrepreneur who has drilled wells in Texas for decades.