Why US unconventionals are crucial to the Oil Majors
The Majors have made big strategic bets on the Lower 48. The scale, returns and investment flexibility offered by tight oil and gas has made it an essential part of most major players’ portfolios.
How important are US unconventionals to the Majors?
They are crucial, both for value and volume. US unconventionals are driving an unprecedented phase of production growth that will see output reach new highs over the next decade. Without US unconventionals, the Majors’ collective production would enter long-term decline from 2020. Volumes from the Lower 48 underpin future value: by the middle of the next decade, US unconventionals will be generating US$15 billion to US$20 billion of annual cash flow for the group, and will account for around 20% of total upstream value.
US unconventionals will drive the Majors’ output to new highs. Their investment in the resource theme is set to nearly double over the next five years, underpinned by tight oil. BP is the latest Major to go big in tight oil. Only Total and Eni still lack material exposure. We think the advantages of scale in US uncons will continue to manifest themselves as the industry shifts close to a ‘big company’ business – almost resembling conventional oil developments.
How do the Majors compare?
ExxonMobil ranks number one in terms of scale: most acreage, biggest resource, highest peak production. No Major has comparable diversity across the Permian, Bakken, Eagle Ford, Haynesville and Marcellus plays. But Chevron has the most valuable portfolio, dominated by its unrivalled Permian position. BP’s deal with BHP is transformational, establishing scale in tight oil and setting it on course to overtake ExxonMobil as the leading shale gas producer.
The Majors’ differentiated drilling strategies is another key theme. In the Permian, for instance, Shell shows a preference for larger completions in its Delaware core, while ExxonMobil remains the most committed to drilling laterals longer than two miles across its entire Permian position. When benchmarked against the leading Independents, the Majors appear to be adopting a longer-term approach to completions, sacrificing high initial production rates in favour of shallower declines, and ultimately, higher recovery rates.
We expect the Majors to continue to expand their footprint in tight oil, and the Permian in particular, over the coming decade. Any increase in the Majors’ share of Permian output will have knock-on ramifications for global supply. However, other factors driving the Majors’ strategies in unconventionals – competition for capital, portfolio mix, balance sheet strength, cost advantages, shifting investor sentiment – will have a much greater impact.