Big Oil Takes On American Shale

There is a renewed interest in American shale and Big Oil is ready to make their mark. Planning to spend a combined $10 billion this year alone, Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron are ready to increase spending. A few years ago, these companies were spending nearly nothing on American shale, but this is quickly changing.

Independent companies, which made up a majority of the shale boom are uncertain how to feel about Big Oil’s interest in American shale. On one hand, the behemoth entities are able to spend much more on service contracts and prime drilling locations. On the other, if Exxon, Shell and Chevron pursue acquisition deals, something they’ve done in the past, the independent companies stand to gain.

The first shale boom belonged to the wildcatters who borrowed money into the billions, taking the risk and reaping the rewards. Big oil continued to stick to what they know, building huge rigs out in the middle of nowhere which can take years to construct, an option not available to the smaller independent shale producers. However, this is changing with projects like Bongo 76-43, a well being drilled 10,000 feet beneath the desert in West Texas. Financed by Shell, they’ll be capturing light crude from the enormous Permian Basin.

Drilling for shale has turned into a science and Big Oil stands to gain from this recent increase in efficiency. After the 2014 oil-price crash, oil producers were forced to dramatically increase efficiency in order to stay in business. Known as Shale 2.0, the capabilities of the larger oil companies have the potential to dramatically disrupt the U.S. energy industry, boost oil production all while able to thrive in a low price environment. As production rises, being able to weather low oil prices will be essential.

“We’ve turned shale drilling from art into science, Cindy Taff, Shell’s vice president of unconventional wells said at her visit to Bongo 76-43. 

Even with the Organization of Petroleum Exporting Countries (OPEC) commitment to the production cap agreement, U.S. production continues to rise. This is negating the production caps’ effectiveness and oil prices look as though they won’t be returning to pre-2014 levels any time soon. This is where the efficiency and capabilities of larger oil producers come into play. If they can continue to pump light crude in the U.S. without breaking the bank, they could stand to gain. This avenue will be much more affordable than constructing huge, off-shore oil rigs.

Exxon did invest in shale back in 2010, but compared to traditional multibillion-dollar engineering marvels in the middle of the ocean, it was a relatively small investment. However, Exxon now plans to spend one-third of its drilling budget this year on shale. The goal is to raise output by nearly 800,000 barrels a day by 2025. By acquiring $6.6 billion in properties located near the Permian basin, the company is ready to get their shale initiative off the ground and in a big way.

Chevron estimated that shale output will increase by as much as 30% per year for the next ten years. Production is expected to increase by 500,000 barrels a day by 2020.

These notable oil producers will be leaving a big impression on the American energy industry. With their increased capabilities and experience, they will be pumping light crude at an impressive rate. It’s still up in the air what kind of impact it will have on the oil market and what it will mean for the independent companies occupying the space today. Only time will tell, but with the oil prices remaining volatile it’ll be vital for producers to avoid flooding the market and offsetting supply and demand once again.

 

Sources:

https://www.bloomberg.com/news/features/2017-03-21/big-oil-s-plan-to-buy-into-the-shale-boom

http://www.proactiveinvestors.co.uk/columns/fuller-treacy-money/27357/big-oil-plan-to-buy-into-the-shale-boom-27357.html

https://www.bloomberg.com/news/articles/2017-03-21/oil-extends-losses-as-markets-weigh-u-s-supplies-trump-reform?cmpid=socialflow-facebook-business&utm_content=business&utm_campaign=socialflow-organic&utm_source=facebook&utm_medium=social