New signs of rebound in US shale as oil majors put greater focus
While it might not have been obvious from the topline of their results last week, US shale oil is a growing part of the portfolios of ExxonMobil and Royal Dutch Shell.
This strategy shift by the two largest traditional oil majors is of particular note as both in the past couple of years have passed up on bidding for Abu Dhabi’s onshore oil concession, which is among the lowest-cost oil acreage in the world. Shell has also been passing up on other regional investments, because their contract terms can be low-return.
Shale oil in the US has been among the most expensive to develop but rapid advances in technology are pushing these costs down quickly.
Exxon’s results, released on Tuesday, showed the company lost more than US$4 billion in US upstream last year, including a $2bn write-off for Colorado gas assets in the fourth quarter, while it made more than $4bn in non-US upstream. Yet, the company also said it had made an investment of about $7bn last month that would focus its output even more on US shale.
Similarly, Shell executives talked mostly of focusing the company’s future on international gas business and selling off unwanted assets, which included the sale in October of $1.3bn of shale assets in western Canada. But they, too, put an even greater focus on US shale.
The Anglo-Dutch company has 11 billion barrels of “discovered and prospective” oil in its shale oil portfolio, spread across properties in the Permian, which is in west Texas and neighbouring states, Fox Creek in Canada and Argentina.
“The Permian is perhaps a hidden jewel in our portfolio,” Ben van Beurden, Shell’s chief executive, told investors. “We actually would quite like to have a little bit more of it. Now let’s see what the future brings.”
Simon Henry, Shell’s chief financial officer, said: “We’ve gone from [drilling costs of] $15m to $6m a well in the Permian … so we will continue to spend within the range of $2bn to $3bn this year, but we are shifting [the focus of investment in order to get a] better understanding of where we can really get the best bang for the buck.”
Exxon’s head of investor relations, Jeff Woodbury, told analysts that the acquisition in January of drilling rights from the Bass family of Texas for $6.6bn would add an estimated 3.4 billion barrels of reserves in acres contiguous to its existing shale portfolio in the Permian.
Already, about half of Exxon’s US oil production – about 12 per cent of global liquids output – comes from shale properties, which it acquired with the $41bn purchase of XTO seven years ago.
Mr Woodbury explained that Exxon has been on a fast learning curve since and even just in the last two years it has nearly doubled its average daily shale drilling rate.
The new acquisition “increases ExxonMobil’s inventory of Permian drill wells that yield at least a 10 per cent rate of return at $40 per barrel to more than 4,500 wells”, Mr Woodbury said. “We currently produce more than 140,000 net oil equivalent barrels per day in the Permian and are operating 10 rigs – this is expected to move higher in 2017.”
Shell and Exxon’s faith in the Permian underline what has become apparent during the oil price slump – that while US shale oil was among the most expensive to produce, concentration on the prolific Permian and technological improvement has changed that picture quickly.
Also, as Mr Henry pointed out, big companies such as his are aiming to have a balance of the kind of investment that are large and take a long time to pay off, such as offshore Brazil, and the more flexible onshore shale.
“The important point here is we have a great deepwater portfolio … and we have a very good shale portfolio. They’re both going to break even, looking forward, at $40 or better. We have the choice. It’s good to have both of these in the portfolio,” he said.
The price of a barrel of West Texas Intermediate closed on Friday at $53.83. Brent crude finished at $56.81.
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Updated: February 4, 2017 04:00 AM