CVX Chevron Corporation

By Bradley Olson 

Chevron Corp. and Exxon Mobil Corp. plan to significantly ramp up production in the oil field at the heart of the American fracking boom, the latest sign that the next era of shale drilling is likely to be led by the major oil companies.

In the next five years, Chevron expects to more than double its production in the Permian Basin in Texas and New Mexico to 900,000 barrels of oil and gas a day, the company said at an investor event Tuesday. That is a nearly 40% increase from its previous forecast.

"The shale game has become a scale game," Chevron Chief Executive Mike Wirth said in an interview. "The race doesn't go to the one who gets out of the starting blocks the fastest. The race goes to the one who steadily builds the strongest machine."

Not to be outdone, Exxon on Tuesday announced plans to increase its Permian output to one million barrels of oil and gas a day by as early as 2024, a day before it was expected to disclose growth at its own investor meeting Wednesday. BP PLC, Royal Dutch Shell PLC and Occidental Petroleum Corp. are also focusing on the region.

"We're increasingly confident about our Permian growth strategy due to our unique development plans," Neil Chapman, Exxon's senior vice president, said in a written statement.

Big oil's growing ambitions for the Permian follow a long-established pattern in the oil patch: Wildcatters and small exploration companies find ways to tap new reservoirs, then the big companies move in.

Five years ago, Exxon, Chevron, BP, Shell and Occidental collectively made up about 9% of crude production from modern fracking techniques in the Permian. In October, the latest period for which relevant figures are available, they made up about 16%, according to data on ShaleProfile, an industry analytics platform.

Those numbers are likely to grow significantly in the coming years, and it wouldn't be a surprise for the big five to produce far more of the booming area's crude within a decade, said Ed Hirs, who teaches energy economics at the University of Houston.

"It's going to be extremely difficult for smaller companies to compete with the oil giants," Mr. Hirs said.

As the energy giants continue their shale expansion, many have gained favor with investors. Chevron is up 14% in the past year even as crude prices have fallen, and all the biggest oil companies have outperformed the S&P 500.

Chevron, which now has the lowest debt relative to its size compared with any of its peers, says it can pay for its new spending and dividends at a price of about $51 a barrel. The company said that is the lowest among the big oil companies, citing data from analytics firm Wood Mackenzie.

Chevron plans to avoid major spending increases in coming years even if prices rise, executives said. It said it would hold annual spending this year and next year between $18 billion and $20 billion, and allow it to grow slightly from 2021 to 2023 to a range of $19 billion to $22 billion.

Many of the smaller companies that pioneered new technology to help make the U.S. the world's top crude producer have begun to struggle as they attempt to rein in spending and move closer to a goal that has so far largely eluded them: profitability.

Dozens of companies including Continental Resources Inc. and Pioneer Natural Resources Co. have reduced spending plans in response to investor pressure. Collectively, spending among the smaller companies is set to fall 11% this year, according to Citigroup.

Many smaller oil firms face the challenge of having to drill more to keep production rising, because shale wells produce a lot in the beginning but then taper off quickly.

The spending cuts, coupled with the fact that some companies have tapped a large proportion of their best wells, mean that returns from shale drilling might have already peaked as wells increasingly are less productive, according to Evercore ISI.

Meanwhile, the big companies are just getting started. Exxon is now the largest operator in the Permian, with almost 50 rigs. The company estimates its Permian wells can generate a 10% rate of return at an oil price of $35 a barrel. While many companies reduced fracking activity in the fourth quarter of last year, Exxon increased it significantly to over 80 wells, more than double the total in the fourth quarter of 2017, according to Rystad Energy.

Chevron is raising its production guidance to 900,000 barrels of oil and gas a day by 2023. Last year, it predicted 650,000 barrels a day by 2023. The company is boosting production without adding to its rig count, a testament to how size can lead to greater efficiencies.

Chevron employed what could be described as a tortoise-and-hare strategy in the Permian. While smaller companies at times paid more than $40,000 an acre to gain rights to prime drilling opportunities, Chevron held on to land it already owned in the region, which decades ago was one of the world's biggest traditional oil fields, without having to join in the buying frenzy.

The company's land is now recognized as having unrivaled value. Its shale portfolio, which includes its Permian holdings, is worth more than $70 billion, the largest of any operator, according to Rystad Energy. Chevron says the value has doubled in the past two years.

Chevron built a database of more than 25,000 wells to study the best techniques for drilling. That helped it avoid so-called downspacing, a practice in which companies drill wells in close proximity and that has been linked to reductions in productivity per well, Mr. Wirth said.

Because of its size, Chevron has the ability to obtain commitments for pipeline space, drill longer horizontal wells across its huge swaths of land in the Permian, and keep a lid on labor and other materials costs. The company can also apply new technology and use techniques mastered in the Permian on land in Canada, Argentina and Pennsylvania, he said.

"At times, we were criticized for not going faster," Mr. Wirth said. "We were steadily building up the knowledge to do this well, not to do it fast."

Write to Bradley Olson at Bradley.Olson@wsj.com

(END) Dow Jones Newswires

March 05, 2019 14:22 ET (19:22 GMT)

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