Big Oil Firms Are Exploring a New Frontier in Shale: Profits

MIDLAND, Texas -- For Bruce Niemeyer, the Chevron Corp. executive overseeing the company's $15 billion expansion here, one question looms above all: Will we make money?

Big oil companies including Chevron, Exxon Mobil Corp. and Royal Dutch Shell PLC are piling into the Permian Basin, the oil-rich region straddling Texas and New Mexico that is the epicenter of the second wave of U.S. shale drilling.

Chevron and others say they will soon achieve something that has proven surprisingly elusive for their smaller peers: turning a profit. The shale-drilling renaissance rocked global markets and helped send crude prices into a prolonged slump. What it didn't do was bring in much cash. Since 2011, the largest 30 independent U.S. shale producers spent an average of nearly $1.33 for every $1 they made drilling wells, according to a Wall Street Journal analysis.

In the past two years, those 30 have lost $130 billion. More than 120 companies have gone bankrupt, and many of those that survived have done so with cash infusions from Wall Street, which rewarded the drillers for their fast growth.

That model won't work for Chevron, Exxon and other companies who pay shareholders generous dividends and need to bring in more cash than they spend over time. To transform an important -- yet money-losing -- technology into a source of profit, executives like Mr. Niemeyer, the head of Chevron's midcontinent business, are turning to their strengths.

Those include massive scale, deep pockets that have given them time to learn from the successes and failures of others and an ability to bring techniques used all over the world into West Texas. They are joining the race to push crude production here to 4 million barrels a day within a decade, rivaling the output of Iraq.

"The early stages favored the smaller companies, which could test technology and try different things," said Anish Kapadia, an analyst at Tudor Pickering Holt & Co., an energy investment bank in Houston. "As they move into development mode, those with a low cost of capital will have an advantage. This is the domain" of large oil companies, he added.

The big companies face considerable skepticism from investors who don't see how they can meet growth targets and generate excess cash by exploiting shale fields. In recent years, Exxon, Chevron and Shell have lagged behind top operators in the Permian basin by a wide margin, with the big companies' individual wells producing about half as much oil and gas in some cases, analysts say.

Executives at the biggest companies counter that these results reflect, in part, a focus on drilling practices that bolster output over the life of the well, rather than maximize short-term flows.

"Big oil companies are basically lethargic, slow-moving giants," said David Arrington, a Midland-based entrepreneur who has drilled wells in Texas for decades.

But last year, the big companies showed signs of narrowing the gap, embracing techniques pioneered by smaller companies such as drilling longer wells horizontally and using more sand to prop open rock layers and let oil flow. Within a decade, Chevron estimates it may produce as much as 700,000 barrels a day in the Permian, an amount that would exceed the total current output in the U.K.'s portion of the North Sea. Last year, Chevron's output in the Permian averaged 175,000 barrels a day.

Chevron hasn't disclosed how much it will boost spending in the area over the next 10 years, but analysts say it is likely to exceed $15 billion.

"Nobody remembers who was winning the Indianapolis 500 after the first 100 miles," says Mr. Niemeyer, 55 years old. "How you start is interesting, but it's far more important how you finish."

Chevron is widely acknowledged as having the most valuable Permian position among giant oil companies, with access to land roughly double the size of Yosemite National Park. The land -- some of which the company has held since 1920 -- may hold as much as 18 billion barrels of oil and gas, according to Tudor Pickering.

Exxon in January doubled its potential reserves in the region in a deal worth up to $6.6 billion. From next year through 2020, about half the $50 billion or more the company plans to spend in its production business will go to the Permian, North Dakota and other areas that can pay off in a short period.

Beginning in the 1920s, the Permian was once a land of abundant gushers. But in the past two decades, many companies pulled out because they believed its resources had largely been exhausted. Chevron didn't.

In 2010 and 2011, a handful of small producers saw surprisingly promising results when they tested horizontal drilling and other techniques. It was then that Chevron began to entertain the notion that it could be sitting on an immense prize.

Initially, the company moved slowly to develop its position, wanting to maximize a key advantage over others: Chevron either owns outright or controls the mineral rights on about 85% of its 1.5 million acres in West Texas and New Mexico. That allows Chevron the luxury of developing the reserves in a way it finds most cost effective, rather than in the mad rush typified by companies that have to drill quickly or lose their lease.

A few years ago, Chevron began working with top operators in the region, even allowing some of them to drill on its land. By observing close-up the work of companies like Pioneer Natural Resources Inc., Chevron was able to learn without costly experimentation of its own.

Chevron has brought its production costs in the Permian Basin down 30% since 2015 to below $20 a barrel. It says its operations will generate free cash flow by 2020, far faster than typical big oil projects.

"The market may be underestimating the ability of these companies to change or adapt," said John Dowd, portfolio manager of the Fidelity Select Energy Fund, which holds about $2 billion in energy assets.

Write to Bradley Olson at

(END) Dow Jones Newswires

June 16, 2017 05:44 ET (09:44 GMT)