Oil Majors Battle For Shale Leadership

Big oil is getting bigger.

The Permian Basin of West Texas and New Mexico, the largest US shale oil field, recently passed Saudi Arabia’s Ghawar field as the world’s biggest oil producer. The battle between Chevron and Occidental Petroleum for Anadarko Petroleum will decide which becomes the top shale-oil producer in the Permian.

“Increasingly, super majors such as Chevron and ExxonMobil are dominating the Permian,” James Reeve, chief economist at Samba Financial Group, wrote in a recent report. “These firms have both the cash flow to ride out periods of low oil prices, and the technology to overcome issues stemming from congested well placement. Both Chevron and Exxon expect to treble their Permian output over the next five years or so.”

By buying Anadarko, based in Woodland, Texas, Chevron would be able to connect several fields it already owns in the Permian to create a 75-mile-wide corridor where extended lateral drilling will enable the extraction of more oil at a lower cost per barrel.

As Chevron CEO and Chairman Michael Wirth commented in an interview with CNBC “the shale game is a scale game.” The oil majors are piecing together multiple horizontal wells to industrialize the process.

Chevron says it has only tapped about 8% to 9% of its reserves. “With enhanced recovery techniques, one would expect a minimum recovery rate of 40%,” says Reeve. “Chevron is also in the happy position of owning the land it is drilling on and, therefore, has no drilling right fees to pay.”

He says there was a surge in drilled but uncompleted wells last year, as companies raced to meet drilling requirements set by landowners, despite pipeline capacity constraints in the Permian. “Thus, many wells were drilled, but the oil left underground in lieu of pipeline capacity being expanded,” Reeve says. “With new pipelines set to be rolled out, the expectation is that Permian shale will see a fresh production spurt this year.”

The acquisition of Anadarko will be the sixth-largest oil and gas deal in history and the largest since Royal Dutch Shell bought British energy group BG Energy Trading for $70 billion in cash and shares in 2015.

The purchase will give the buyer significant oil and gas projects in the Gulf of Mexico, a liquefied natural gas project under development in Mozambique, as well as some transportation and storage assets. Chevron would put the merged company headquarters in San Ramon, Calif., where Chevron is based, with Wirth at the helm.

Chevron’s $65-a-share offer for Anadarko at press-time represented a 39% premium to the market price, but the stock traded at more than $77 less than a year ago. Chevron said it would divest up to $20 billion of assets between 2020 and 2022, after it closes the transaction, to pay down debt and return cash to shareholders.

The Anadarko deal followed a first quarter in which global M&A deals fell 18% from a year earlier, although US-target deals increased 7% to the highest level since 2000, according to Refinitiv.