Bloomberg: Exxon Becomes Top Permian Driller to Combat Falling Oil Output
I was asleep at the switch here. This article is a few days old but worth reading.
It’s not hard to see why the Permian has become so important to Exxon. A series of strategic mistakes sent the oil giant’s overall production careening to a 10-year low by the middle of this year. Drilling wells in the the Permian, the world’s premier shale field, yields low-cost oil in months rather than the years required for megaprojects to begin producing crude.
Exxon isn’t alone in tapping U.S. shale after years of pursuing overseas resources. Chevron Corp. will spend the highest portion of its capital budget at home in at least a decade. The Permian now accounts for about 10 percent of Chevron’s overall production.
BP Plc this year agreed to spend $10.5 billion on BHP Billiton Ltd.’s shale assets to gain access to the Permian while Royal Dutch Shell Plc is mulling a bid for one of the basin’s largest private companies, people familiar with the matter said Monday.
Exxon’s escalation in the Permian is essentially a bet that it can drill wells so cheaply that they’ll be profitable despite crude’s tumble since early October. The company says its shale wells can make double-digit returns with oil at just $35 a barrel. On Tuesday, prices for oil produced from the Permian in Midland, Texas, dropped below $40 for the first time since August 2016. West Texas Intermediate traded at $47.25 at 2:03 p.m. in New York.
“The business we build in the Permian, we’re building for the long term,” Woods said in a Bloomberg TV interview last month. “It needs to be efficient, low cost and effective.”
9 thoughts on “XOM Turns It Up”
There are several people who repeatedly cite that the quality of shale oil is less than desirable.Stahl recently stated the quality was good in a meeting in which he was speaking about TPL. With the majors being so involved, I would think that the quality must be acceptable. I know the refineries are tooled for heavier crude. Do you have any insight in regard to this quality issue?
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I’ve heard the same as you James. It appears to me as if most just repeat the narrative that best fits their needs. I’m not close enough to the action to know. I take comfort in the actions of the majors.
Can anyone shed some insight on the excerpt below from the article? I wasn’t aware that there was such a spread in the crude price from different production sites in the U.S. (or within Texas for that matter). Is the oil being pumped out of TPL lands in the Permian currently what we see as the West Texas Intermediate (WTI) crude price?
To my mind, the wicked selloff we’ve seen for TPL is being so over-driven simply by tracking to the drop in oil prices, but the much more important question for TPL’s outlook is what impact depressed oil prices will have (or not have) for production on the lands from which they draw the royalties. If oil prices have sunk, say, 35%, but production on their lands increases over the next year by, say, 40%, the net royalties will be higher than they were this year when oil prices were much higher. It’s the “technology option” that Murray Stahl talked about in his recent roundtable about how Permian producers can profit at lower prices than other producers around the world. Every analyst seems to be predicting OPEC’s and other oil regions will be cutting production in response to lower prices, but who cares… as long as our precious TPL lands are making up the slack because the big producers are invested and able to operate at smaller margins. I have not heard one iota of outlook that TPL lands will be seeing reduced production; conversely, all signs point to production accelerating. Why are TPL investors who have been dumping not seeing it this way? I can’t wait for 2019.
“On Tuesday, prices for oil produced from the Permian in Midland, Texas, dropped below $40 for the first time since August 2016. West Texas Intermediate traded at $47.25 at 2:03 p.m. in New York.”
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The harder the logistics, the lower the price. Permian prices are depressed due to a lack of pipelines. Transportation is expensive. This is generally true for all US oil which is why WTI trades below Brent.
tpltblogger – Thanks for your response. I have learned more about TPL from your blogs and resources in the few months I’ve been following you than in my 20+ years of ownership. I obsess about this stock because it holds the key to my family’s long-term financial future, but I’m a northeast yankee and admit to knowing next to nothing about how the oil industry functions. I’m really confused by your explanation about why WTI trades below Brent. From the Quora article you cite, it sounds to me that transportation expense is HIGHER for the countries that produce the Brent oil as opposed to the WTI oil, which would be why Brent must be priced higher on the market — based on this statement:. “WTI crude is located within a less expensive easy to use pipeline system in the middle of lots of refineries. Brent is produced in the cold, bad weather out of the way North Sea, a long distance from refineries, and needing specialized and expensive storage and transportation systems.”
I understand that there are pipeline constraints in the Permian (that we can hope are being improved with every passing day), but Isn’t it true that production costs in this area are lower than probably anyplace in the world? For example, Exxon is stating that they can be profitable at $35 per barrel in the Permian, and I’ve seen news articles stating that some OPEC countries need much higher prices to turn a profit. That’s the logic I’m following in thinking that — if production is going be cut in response to plunging oil prices and forecasted lower global demand– the reduction is going to be driven by almost anywhere else in the world EXCEPT the Permian.
Happy Holiday, and thanks for creating this thoughtful community of TPL fanatics!
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Thanks Jeff. At the risk of embarrassing myself, I think it all comes down to local supply and demand. When supply in the Permian overwhelms the takeaway logistics (as it is now) the price has no where to go but down.
Here is an article that highlights the divergence.
I must say that, like you, I’m removed from the industry. Lack of firsthand knowledge makes me subject to sharing misinformation though I do my best to limit it!
All the best to you and your family Jeff!
I also know nothing about the current takeaway environment, although I spent the first five years of my career working for a second tier sized integrated oil company. I learned a lot, but that knowledge is now 30 years ago, and I am retired from a different industry. I worked in capacity management for logistics, pipelines, and refinery feedstock planning.
The integrated companies have exploration and productuon, pipeline capacity, and refineries. Some even have distribution to the trade and distribution to retail. They key thing to remember, there is always a bottleneck somewhere to manage around. And profit from if you position yourself correctly. This was a common attitude.
That said, I know the spirit of the Texas oilman is a combination of river boat gambler and hard nosed businessman. There is a lot of hedging of taking production for when there is capacity at a good price, or when constrained does it make sense to take the oil, or trade it forward via futures contract, or store. The amount of wheeler-dealer actions I found amazing, and in today’s world of more financial tools its probably a lot greater. It was a surprisingly fluid (no pun intended) environment, and depending on the latest daily pricing, be overall short on needing more oil, or long and selling the excess at any reasonable price, since we had no place to put it.
My read on the capacity constraints of the Permian will be partly improved with projects like this 2019 project. (With 900,000 barrels of daily takeaway https://grayoakpipeline.com/qa/ ). But the ability of companies to use trading on both the daily price of oil, and the supply considerations of those downstream will still mean there will be wide variations in WTI pricing.
Thats my very dated experience based macro opinion.
Happy Holidays to all. And thanks TPLblogger for this site. Its been helpful to have a more in-depth view of TPL. Its a very unique investment.
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Thanks Ted! I appreciate your opinion and contributions to the blog!
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