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

2. 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

3. Shale Expansion

4. Shale Geography

5. Unconventional Oil Production 2016

6. Shale Production and R&D

7. Global Oil Cost Schedule

8. 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

9. Permian Basin Development II
Chevron (contd.)
Currently producing 150,000 b/d to expand to 350, ,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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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.