Why Majors Will Take a Bigger Role in US Shale
Independent producers will forever be pioneers of the U.S. shale sector, but as the play matures, expect major oil companies to play a growing and critical role in its future development.
Majors, with their financial strength and integrated solutions, are well-equipped to handle the structural challenges that the U.S. shale sector now faces, from insufficient pipeline and export infrastructure in the Permian and Gulf Coast, to excessive gas flaring in Bakken.
The time also looks right for majors get more involved and “scale up” in shale. Big Oil remains very light in U.S. shale oil relative to other upstream assets in their portfolio. Majors have traditionally focused on “megaprojects,” schemes such as those in deep water or oil sands, where capital investments are massive and payback periods are long.
Giants like Royal Dutch Shell plc and Total S.A. have already exited from Canada’s oil sands, where they believe breakeven costs are too high. The onset of the low-carbon energy transition also must be considered, and the fact is that oil sands emit more carbon dioxide than any other oil projects and must produce for many years—at relatively high oil prices—to deliver sufficient financial returns.
U.S. shale oil, on the other hand, has proven its mettle at low prices, having stood up to OPEC in a price war. Breakeven prices for shale have been driven below $40 a barrel and are even lower for companies fracking the best rock. Shale is a “short-cycle” upstream asset, meaning new production can be brought on within months after investment decisions are made.
That’s a highly attractive feature to majors, which must not only manage today’s volatile prices but also consider the long-term demand outlook for new “long-cycle” megaprojects. Would majors greenlight a $55-billion project like Kashagan again? Probably not.
There are other reasons to believe the majors will push more aggressively into shale. U.S. independents have demonstrated recently that shale can generate significant free cash flow.
That’s extremely important to majors, because investors target them for robust shareholder returns—dividends and buybacks—not growth. Shale’s past issues with cash burn—where investment exceeds cash flow—was a big turn off to Big Oil.
Low geopolitical risk in the U.S. is also a big draw. A quick look at today’s map of large oil-producing nations—the type that can make a difference for a massive integrated oil company—shows geopolitical hot spots everywhere.
Russia and Iran are potential upstream difference makers for majors but are under severe U.S. sanctions.
The IPO of Saudi Aramco is comatose, removing an opportunity for investors gain exposure to the world’s lowest cost reserves. Most majors in recent years have also been pulling back from Iraq and Libya due to security or fiscal concerns.
Corruption, as well as security issues, continue to plague West Africa, while Latin America has never been able to live up to its full potential due to political and economic issues, as demonstrated most vividly in Venezuela.
Compare this to the U.S., which just became the world’s largest oil producer. Geopolitical risk is nil, while the Trump administration has lowered the corporate tax rate and pursued a deregulatory agenda that, aside from his wayward trade policy, favors oil and gas development in the pursuit of U.S. “energy dominance.”
Looking at the constraints the shale sector now faces, it’s clear they demand a more integrated enterprise. Majors can bring that, as well as abundant capital. BP plc served notice with its recent $10 billion-plus acquisition of BHP-Billiton Ltd.’s U.S. onshore assets. The UK-based major is already the biggest gas trader in the U.S. and LNG export capacity at the Freeport terminal is due on line next year, which means it can help with the region’s gas glut.
Exxon Mobil Corp., which has used bolt-on acquisitions to beef up its shale position in recent years in the Bakken and Permian, is also ready to integrate its upstream operations into new pipelines, refinery capacity, petrochemical crackers and export deals. BP, Exxon, Shell and Chevron Corp. have all identified shale as key growth assets over the next decade. It makes sense for them to expand in shale at this stage in the game, and the broader sector should benefit.
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