Posted on August 10, 2019
The majors are returning to the Permian Basin, and they promise to change the competitive landscape over the next few years.
Narmadha Navaneethan, senior associate, plays and basins in IHS Markit’s Energy Upstream division, said the majors were key players in the Permian Basin’s initial oil and natural gas production before moving off to pursue opportunities offshore and internationally.
“Now they’re back,” she said in a phone interview, and they’re expected to drive the next wave of Permian Basin production growth.
But she estimates they will account for only about 20 percent of total Permian oil production in the next five years, up from the current 10 percent. She said there are 380 operators active in the Permian Basin, and the independents, large and small, and private equity companies, still will account for 80 percent of production.
“You cannot take all of the independents out of the Permian Basin,” she said.
But the independents will have to find ways to compete with majors, who operate differently.
She said their balance sheets, which are also different, give them flexibility on allocating capital and the ability to increase their spending over the next five years, whereas independents are being pressured by investors to focus on capital discipline, which limits their activity levels.
The majors, with their re-entry to the Permian Basin, also bring midstream and downstream assets. The size and strength of their balance sheets give them leverage in negotiating service contracts, pipeline capacity and other logistics.
Independents’ role over the next several years “is to win investors back,” said Navaneethan. “It’s not just production growth, but winning investors back — hedge funds, private equity. Their strategy needs to be getting money back as fast as they can.”
This changing competitive landscape may push some smaller operators to consolidate, she said.
ExxonMobil, through its subsidiary XTO Energy, has pledged to ramp up its Permian Basin production to more than 1 million barrels of oil equivalent per day by 2024, and Chevron plans to triple its production to more than 900,000 barrels a day by 2023. British Petroleum re-entered the area with its acquisition of assets from BHP Billiton, and Shell, with 270,000 acres through a joint venture with Anadarko (soon to be part of Occidental), is planning for growth in the Permian.
“The larger independents have led unconventional resource development the last few years. They’ve figured out the best acreage, the best drilling strategies,” she said. “The independents have the best productivity. The majors need to catch up.”
Chevron has figured out how to increase productivity in its Permian Basin unconventional assets, while Exxon’s efforts are still a work in progress, she said. Still, the majors managed to increase their production in the Delaware Basin 34 percent in 2018.
A silver lining is that, because the majors are less sensitive to oil prices, the region’s activity to oil price signals may be tempered, she said.