Whereas other shale oil companies have failed to deliver returns demanded by investors, Chevron Corp’s strategy has paid off well.
U.S. oil giant Chevron Corp is turning to drilling alliances and joint ventures in its bid to dominate the Permian Basin following a change of strategy which involved a takeover that would have made it the leading producer in the world’s biggest shale field.
Chevron Corp is now in a race with Exxon Mobil in order to pump a million barrels of shale oil a day from the field in the U.S. southwest with its broad-based strategy spread across a host of partners who pool in their expertise and output.
One of the cornerstones of this strategy is its joint venture with Cimarex Energy, one of the few Permian operators that has been consistently profitable since late 2016. Chevron has spread its bets by signing dozens of other agreements with other companies as well as which includes Devon Energy, Concho Resources, EOG Resources, and even arch-rivals Occidental Petroleum and Exxon, according to sources familiar with the matter at hand.
“We’re partners with all of the great operators,” said Scott Neal, a Chevron exploration executive while declining to name any partners, besides Cimarex.
Devon, Concho, Occidental, EOG, and Exxon declined to comment.
Chevron’s deals, ranges from large-scale joint ventures to small deals where it has leased land to other operators, who give it a share of the oil they produce. Further, they also provide crucial data from thousands of wells which stretches back years, which in turn allows Chevron to hone drilling strategies. In return, Chevron provides its partners access to areas adjacent to their wells and pipelines, reducing their costs.
Unlike conventional oil fields, shale wells decline quickly: they produce the bulk of their oil in the first few years, as a result operators need to constantly drill in order to keep the production at a steady pace; this is naturally an expensive affair.
“If there’s a downside, that’s the downside,” said Jeff Gustavson, who oversees Chevron’s Permian operations. “You’re always having to put more in.”
CERBERUS WELLS
At a site near Midland, Texas, technical expertise gleaned from Cimarex and other partners is enabling Chevron to drill a series of “ultra-deep wells – named after the mythical three-headed hound Cerberus – to reach an oil-rich layer more than a mile underground”.
Thanks to its alliances and vast land holdings, Chevron can drill longer wells than some of its rivals, thus providing it an edge since longer wells generally pump more oil and are a cost effective proposition.
According to Chevron, its Permian wells have averaged nearly 9,000 feet (2,743 meters) in 2019 – against an industry average of 8,500 feet, according to consultancy Wood Mackenzie. In 2020, Chevron aims to install wells which will average at 10,000 feet.
According to IHS Markit, in one formation near Midland, Chevron’s peak average production rate runs at 760 barrels per day (bpd) for each well, against its competitor production of 705 bpd.
Chevron has been shedding assets in Asia, the North Sea, and Africa and is expected to further shed up to $10 billion in properties in order to focus on projects which includes oil basins in the Permian, where it has controlled some of the best and cheapest acreage since the 1920s.
These holdings have helped lift Chevron’s oil and gas output to a record high in the second quarter. Its output from the Permian basin has soared by 56% from a year earlier to 421,000 bpd; Chevron’s goal is to pump 900,000 bpd from the oilfield by 2023.
Chevron’s Gustavson said its long-standing relationships provide it with “all of the data, all of the cost information” from wells across the basin. “It’s a huge advantage. Huge.”
Chevron is certainly not the sole company with a unique position in the Permian Basin. Whereas most shale firms have spent heavily but have failed to deliver returns demanded by investors, Chevron’s “slow and steady” approach has paid off well, said investor Matrix Asset Advisors, which holds 55,000 Chevron shares.
“They’ve got a game plan. They’re executing on the plan,” said David Katz, President of Matrix Asset Advisors.
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