NS4960 Spring Term 2017 Oil Major’s Shale Portfolios Panama Key issues 2016 Inclusive Growth in Panama

Overview IEA expecting a “second wave” of US shale production to enter the market World’s oil major’s slow to recognize rise of shale industry which was driven by smaller independent producers Now majors are getting into shale and are making shale a bigger part of their business Has long-term implications for the shale industry, which is seeing An influx of new cash and A change in the strategies of the world’s biggest oil companies

Shale Expansion

Shale Geography

Unconventional Oil Production 2016

Shale Production and R&D

Global Oil Cost Schedule

Permian Basin Development I Permian Players Now deep pocketed international oil majors betting on the future of shale in an era of “lower-for-longer” oil prices Most of those bets going into the Permian Basin in West Texas, the most active area of shale development Chevron Chevron largest landholder in the Permian Around 2 million acres thanks to its legacy business Company has driven Permian production costs down by one third in past 18 months to just $15 per barrel Now has thousands of potential Permian drilling sites profitable with oil around $50 per barrel

Permian Basin Development II Chevron (contd.) Currently producing 150,000 b/d to expand to 350,000-450,000 b/d by 2020 In one decade may account for one quarter of Chevron’s total output ExxonMobil Spent $6.6 billion to acquire sizeable tracts in the Permian in early 2017 Also got costs down and has more than 5,000 sites that can profitably produce at $40 per barrel Can grow at 20% for the next decade

Permian Basin Development III Shell Smaller position in Permian than Chevron and ExxonMobil, but accelerating activity Also getting costs down Plans to double Permian output over next decade Key metric for shale acquisitions is cost per acre Permian value more than doubled in recent years Price per acre more than $50,000 – more than twice the going price when oil was over $100 in the mid 2000s

Majors’ Strategy Shift I This all signals a significant sift for the majors For years, chased bigger and more complex megaprojects Brazil’s deep water fields Australia’s liquefied natural gas and Canada’s oil sands Chronic cost overruns undercut profits and often failed to deliver promised growth

Majors’ Strategy Shift II Shale offers an alternative Whereas megaprojects Lock in billions of dollars of investment for years – making them vulnerable during price downturns Shale projects have far shorter investment cycles Investment can be ramped up and down in response to changes in oil price in months rather than years Shale projects can provide returns within several months In era of volatile and lower oil prices these characteristics make share more attractive for the majors While majors will not abandon megaprojects altogether, short-cycle shale investments will make up an increasing share of their portfolios Will pull investment away from oil sands and deep water

Majors’ Strategy Shift III The entry of US majors into shale will also signal OPEC and oil markets that the Permian and broader shale industry will hold down prices and continue to be profitable at lower prices However it has been smaller independents that have delivered the most important innovations in shale Something the majors have not proven they can do If shale becomes dominated by more deliberate and risk-averse majors the pace of advancement could slow

Implications Rising US shale output will require new pipeline and infrastructure investment to get to market Oilfield service companies are likely to charge higher prices to deep-pocketed majors, pricing out smaller independents M&A (merger and acquisition) activities are likely to remain strong as majors expand their positions Smaller risk-taking and innovative wildcatters dominated the sale industry in its early years, looking for a niche in an industry dominated by some of the world’s biggest companies

Conclusions A greater share of oil majors’ investment will go towards short-cycle shale primarily in the United States Oil majors will drive shale output growth, taking over from smaller independent producers This in turn will hold down prices through 2020 with a downside risk for more expansive producers should demand growth slow.