Arms Race in the Permian? Chevron joins the super-major oil companies
The deal to purchase Anadarko turns Chevron into a ‘super-major’ and the Permian basin of west Texas-New Mexico into the focus of attention for giant oil companies. Expect more acquisitions of shale-based companies buys to follow.
It may have taken nearly a decade, but the conditions for consolidation in America’s shale industry have finally aligned. The global oil industry could be on the cusp on another merger frenzy, not quite to the extent of the late 1990s, but one that could see massive oil companies buying up smaller ones with valuable properties and experience in shale. Chevron’s purchase of Anadarko for US$33bn in cash and shares shows that, not only are the so-called ‘super-majors’ getting bigger but they’re becoming more shale-focused—including in America’s most productive oil field, the region known as the Permian base of west Texas-New Mexico.
Chevron was a giant oil company before the deal. As the California offspring of Standard Oil (Rockefeller’s monopoly was dissolved in 1911 for antitrust reasons; in 1984, it merged with Gulf), the company’s purchase of Anadarko turns it into the world’s second-biggest publicly traded oil-producing company, second only to ExxonMobil (each brothers of Standard Oil that merged in 1998). The Chevron-Anadarko deal is one of the biggest energy mergers in years and may set off an arms race of purchases ahead.
Into the Permian
The deal also answers a lingering question about America’s shale oil industry. Since Anadarko is above all a company with a significant position in the Permian basin, any hesitation of the majors and super-majors about the long-term commercial viability in the shale industry have been answered. The Permian basin, which accounts for about 1/3 of America’s oil production (nearly 4,000,000 bpd), is a big reason behind America’s return to the top oil-producing country slot. The productivity of the basin was never in doubt; the Permian complex now yields more oil than the world’s largest oil field, Ghawar of Saudi Arabia.
The question was whether the super-majors would get involved and in what way. The majors and super-majors were late to the fracking craze. It was something they neither pioneered nor mastered. When they did get involved, they did so clumsily by overpaying for assets in a time of high prices. Hydraulic fracking is the process by which one drills down—and more recently and more productively, horizontally, sometimes for several kilometres—and then blasting (‘fracking’) the rock with water and sand to liberate the oil. Lured by the abundance of resources in places like the Permian, Bakken, Eagle Ford and others as well as the high prices that made the risk worthwhile, the smaller companies engaged in cutthroat competition, drilled aggressively and took on as much debt as Wall Street was willing to give—until the market gave way in mid-2014. The dominant theme of the past decade or so of the so-called ‘shale revolution’ has been that profits and production resulted, but rarely in unison.
The question then became when the majors that upper echelon of publicly traded companies would seriously get involved in shale. Chevron’s purchasing of Anadarko looks like that the mindset of the supermajors has changed on shale, but not for reasons necessarily relating to shale itself. The benefits of shale were well-known: the drilling times are shorter, the cashflow more predictable and the stable and predictable American regulatory system stable and predictable. Added to this, the Trump administration calling for increased production of oil and gas—and willing to emasculate environmental regulators to do it. Likewise, the majors have narrowed the expertise gap, while also able to bring something to the shale industry that the smaller companies cannot. First, the majors’ activities and sources of revenue are more diverse, meaning not only do they have more eggs, but more baskets, too. Second, their balance-sheets are bigger—these are among the biggest companies in any industry by revenue, after all. Third, they’ve been gradually buying up oil-bearing land, so as to win he long game of drilling at a more gradual pace and in better price conditions.
On the one hand, this land-buying has given rise to the phenomenon of ‘shalennials’, the nouveau riche of the Permian basin who didn’t make their instant wealth from drilling for oil, but rather have bought and sold valuable land deeds. (In Texas, the rights of what’s found in the ground below belong to the owner of the surface property, unlike virtually every other country where the ‘subsoil’ is the property of the ‘nation’—meaning the government, and so potentially vulnerable to all kinds of political interference). The shale boom made the ability to own land as valuable as the ability to find oil, effectively turning an oil and gas lease into the new currency.
On the other hand, the unique nature of shale oil made it more akin to—and receptive to—a manufacturing model. This is where Chevron’s deal makes so much sense. The properties of Chevron and Anadarko combine to form a 75-mile (120 km) corridor across the Delaware Basin of the Permian, a contiguous stretch of oil-rich land that will allow Chevron to more efficiently manage production on an industrial scale, not that of drill-hungry wildcatters. Oil giants like Chevron can do this, systematizing and harmonizing production while their more diversified portfolios and bigger balance-sheets absorb the body-blows of the market.
Shift from land of wildcatters to giants
The supermajors are a growing presence in America’s shale oil industry. In the Permian basin, the biggest oil companies’ share of oil investment in the region will exceed 15%, up from just 6% in 2014. And there’s no reason to expect this to be the last big upstream deal in the Permian. The last came in 2015, when Royal Dutch Shell took over BG Group. Again, eyes are turning to Shell and ExxonMobil, with speculation that either—or both—could increase holdings in the Permian, part of what could soon turn into an arms race of sorts for upstream assets in shale. For its part, Shell is reportedly interested in purchasing Endeavor Energy, a company at the heart of the Permian. Exxon Mobil, the world’s largest publicly traded oil-producing company, is openly talking of acquiring more shale positions. Its production in the Permian is expected to exceed 1m barrels a day within five years.
Another well-known problem in the Permian relates not to production but to transport. Roads not pipelines, geology or skilled labour, seem to be the greatest obstacle to getting more oil out of the region and all the other necessities in—practically all of which travel by road. This deal with therefore also help Chevron access Anadarko’s substantial midstream infrastructure in the region.
The big get bigger
Anadarko had some noteworthy foreign assets, too, among them, an LNG project in Mozambique and holdings in the Gulf of Mexico. But there’s really no doubt that Anadarko’s Permian holdings were the real bounty that Chevron was looking for. But this isn’t to say that Chevron’s shale holdings were negligible before the deal. Quite the opposite, actually. Chevron stood atop some 1.7m acres (nearly 700,000 hectares) in two of the Permian’s most oil-rich regions. This deal opens the way for Chevron not just to drill for more oil, but to do so more rationally and transport it using Anadarko’s well-developed infrastructure.
So, are we on the verge of another merger frenzy, the likes of which we haven’t seen since the late 1990s and which consolidated the global oil industry into an oligarchical club of a few supermajors? That’s doubtful. The industry is already very well consolidated—thanks to that merger frenzy—though America’s shale oil industry is still in need of further rationalization. Just as in the mid- and late 1990s, when painfully low oil prices forced the companies to consolidate, the low prices from the mid-2014 have set in motion of a gradual process of consolidation that we may only now be seeing in the shale industry.