Big Oil’s Plan to Buy Into the Shale Boom

Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron Corp., are jumping into American shale with gusto, planning to spend a combined $10 billion this year, up from next to nothing only a few years ago.
The giants are gaining a foothold in West Texas with such projects as Bongo 76-43, a well which is being drilled 10,000 feet beneath the table-flat, sage-scented desert, and which then extends horizontally for a mile, blasting through rock to capture light crude from the sprawling Permian Basin.
While the first chapter of the U.S. shale revolution belonged to wildcatters such as Harold Hamm and the late Aubrey McClendon, who parlayed borrowed money into billions, Bongo 76-43 is financed by Shell.
If the big boys are successful, they’ll scramble the U.S. energy business, boost American oil production, keep prices low, and steal influence from big producers, such as Saudi Arabia. And even with their enviable balance sheets, the majors have been as relentless in transforming shale drilling into a more economical operation as the pioneering wildcatters before them.
“We’ve turned shale drilling from art into science,” Cindy Taff, Shell’s vice president of unconventional wells, said on a recent visit to Bongo 76-43, about 100 miles (160 kilometers) west of Midland, Texas, capital of the Permian.
Bongo 76-43, named after an African antelope, is an example of a leaner, faster industry nicknamed “Shale 2.0” after the 2014 oil-price crash. Traditionally, oil companies drilled one well per pad—the flat area they clear to put in the rig. At Bongo 76-43, Shell is drilling five wells in a single pad for the first time, each about 20 feet apart. That saves money otherwise spent moving rigs from site to site. Shell said it’s now able to drill 16 wells with a single rig every year, up from six in 2013.
With multiple wells on the same pad, a single fracking crew can work several weeks consecutively without having to travel from one pad to other. At Bongo 76-43, Shell is using three times more sand and fluids to break up the shale, a process called fracking, than it did four years ago. The company said it spends about $5.5 million per well today in the Permian, down nearly 60 percent from 2013.
“We’re literally down to measuring efficiency in minutes, rather than hours or days,” said Bryan Boyles, Bongo 76-43’s manager.
Independent companies are watching the big three’s arrival with ambivalence. Exxon, Shell, and Chevron will be able to spend more than independents can for service contracts and prime drilling acreage. But if the majors pursue acquisition deals, as they’ve done before, the wildcatters stand to reap the benefits.
Exxon invested big in shale in 2010 when it bought XTO Energy Inc. in a deal valued at $41 billion. For years, however, the major companies spent little on shale, instead focusing on their traditional turf: multibillion-dollar engineering marvels in the middle of nowhere that took years to build. The wells that Big Oil drilled were mostly in deep water, where a single hole could cost $100 million, rather than shale wells that can be set up for as little as $5 million each.
The machinery used to fracture shale formations inside the Delaware Basin pumps water, sand, and chemicals into the holes already drilled at a Royal Dutch Shell hydraulic fracking site near Mentone, Texas, on Thursday, March 2, 2017.
All that changed after oil prices crashed in 2014. Big companies were forced to cut costs and focus on projects that delivered cash quickly and could easily be sped up or slowed down. Shale was the solution.
“The arrival of Big Oil is very significant for shale,” said Deborah Byers, U.S. energy leader at consultant Ernst & Young in Houston. “It marries a great geological resource with a very strong balance sheet.”
The big three have all hatched ambitious catch-up strategies. Shell plans to spend about $2.5 billion a year, or about one-tenth of its total spending—a bet that’s bigger than those of some pure-play shale companies such as Hamm’s Continental Resources Inc.
“The majors arrived late,” said Greg Guidry, who runs Shell’s shale business. “We want to be as nimble as the independents but levering the capabilities of a major.”
Chevron said it estimates its shale output will increase as much as 30 percent per year for the next decade, with production expanding to 500,000 barrels a day by 2020, from about 100,000 now. “We can see production above 700,000 barrels a day within a decade,” Chevron Chief Executive Officer John Watson told investors this month.
Exxon said it plans to spend one-third of its drilling budget this year on shale, with a goal to lift output to nearly 800,000 barrels a day by 2025, up from less than 200,000 barrels now. The company doubled its Permian footprint with a $6.6 billion acquisition of properties from the billionaire Bass family. Darren Woods, Exxon’s new CEO, said shale isn’t “on a discovery mode, it’s in an extraction mode.”
The price of oil is starting to reflect rising U.S. output. West Texas Intermediate, the national benchmark, this month dropped below $50 a barrel for the first time this year, down 10 percent from its 2017 peak.
Big Oil’s dive into shale could weaken the hand of Saudi Arabia and other big exporters by raising U.S. output. Economically, the countries would have to contend with lower oil prices. Geopolitically, their share of the global energy market would fall, and the U.S. would depend less on foreign supplies.
U.S. domestic production is likely to top 10 million barrels a day by December 2018, a level surpassed only twice, in October and November 1970, according to the U.S. Energy Information Administration.
Bryan Boyles, the on-site representative for Royal Dutch Shell, wears a hard hat with the Shell logo and a Permian Basin sticker on an oil rig site near Mentone, Texas, on Thursday, March 2, 2017.
Some investors remain unconvinced. Shale, they argue, is a very different business for the big companies. Huge projects, their mainstays, require a big upfront investment before becoming cash cows for decades with relatively little spending. Shale, on the other hand, requires ongoing spending because output quickly falls after an initial burst.
Guidry, head of Shell’s shale, said the company could make money in the Permian with oil at $40 a barrel, with new wells profitable at about $20 a barrel.
A lesson of the oil-price crash was how important it was to keep cash on hand. The independents typically overspent, taking on debt to keep drilling, so when prices fell, they slowed their operations. The big three will experience no such pinch, said Bryan Sheffield, the billionaire third-generation oilman who heads Parsley Energy Inc.
“Big Oil is cash-flow positive, so they can take a longer-term view,’’ Sheffield said. “You’re going to see them investing more in shale.”