Chevron and Exxon Say They Can Turn Around the Failed Finances of Fracking Industry

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After a decade of the American fracking industry burning through hundreds of billions of dollars more than it earned, this industry previously dominated by shaleย drilling specialistsย is entering a new phase. The oil majorsย โ€”ย a group ofย multinational companies that typically have divisions throughout the oil supply chainย โ€”ย now are investing heavily in fracked oil and gasย operations.

The latest development is Chevron acquiring shale oil and gas company Anadarko for $33 billion. One of Chevronโ€™s current โ€œhuman energyโ€ adsย uses the catchphraseย โ€œWe do difficult.โ€ Which is good for Chevron if the oil major hopes to profit off this investment, because making money on U.S. shale oil has proven very difficult for the currentย players.

Why would major oil companies choose to invest in an industry that has failed to turn profitsย in the past decade? It helps to consider the state of the broader oil and gasย industry.

Oil producers working in Canadian tar sandsย haveย been losing money for years, a trendย that continues. The natural gas industry in Canada is in even worseย shape.

In the U.S., natural gas prices are so low that in areas flush with itย like the Permian Shale in Texas, gasย is selling for negative amounts โ€” meaning gas producersย have to pay someone to take it. Norwayโ€™s state-owned investment fund โ€” an international leader with approximately a trillion dollars under management โ€” recently announced its divestment from U.S. shale oil and Canadian tar sands oilย companies.

Chevron CEO Mike Wirth recently told investors of the shale decision, โ€œThereโ€™s nothing we can invest in that delivers higher rates ofย return.โ€

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To put that in perspective, Reuters recently concluded,ย โ€œU.S. shale producers last year again spent more money than they collected.โ€ Chevron’s top executive says the company’s best investment optionย is a business model that consistently has delivered negativeย returns.

Not to be outdone, ExxonMobil is also making a big move into U.S. shale, with plans focusedย on the Permian Basin in Texas and New Mexico. As DeSmog reported, Exxon is selling the idea that a partnership with Microsoft and the use of cloud computing will help it unlock the secret to profits in the Permian. Reuters reported that Exxon CEO Darren Woods โ€œsaid on March 6 that Exxon would change โ€˜the way that game is playedโ€™ inย shale.โ€

The way the game is played now involves spending more money to produce shale oil than companies have beenย makingย selling thatย oil.

Without a doubt, the Permian Shale produces a lot of oil via horizontal drilling and fracking. And oil companies are in the business ofย producing oil, even if that means losing money doing it. This businessย has no guarantee of profits but has very strong evidence thatย oil is present inย shale basinsย and can be produced by fracking. However,ย the steeply declining production rates of fracked oil wells raises the question of how long U.S. shale basins will continue producingย record amounts ofย oil.

Chevron’s CEO says fracking is the best option right now for delivering higher rates of returns. Chevron also hasย stated itย doesnโ€™t expect to make money on shale oil production in 2019 but that should change in 2020. The refrain of โ€œweโ€™ll make money next yearโ€ is one constant in the shale oilย industry.

Betting That Bigger Isย Better

This week the Permian region hosted an annualย conference where the unconventional oil and gas industry gathers to talk shop. (Horizontal drilling and fracking forย oil and gas is considered โ€œunconventionalโ€ by traditional standards for accessing these fossil fuels.)ย And the message coming from the conferenceย supports the latest approach the oil majors are embracing:ย scale.

The promise to investors is that the oil majors will use economies of scale plus technologies like artificial intelligence and cloud computing to finally make a profit โ€” at some point in the future. There are a few obvious flaws with the idea that bigger is better in shaleย oil.

The first is a limited supply of what the industry calls โ€œsweet spots,โ€ or โ€œgood rock,โ€ the areas with highly productive,ย and even profitable, wells. The oil majors have acquired the rights to large amounts of land in shale basins to frack but how much of that area holds sweet spots? History indicates the answer to that question comes on a well-by-well basis and a company can’tย know for sure untilย itย drills.

Scott Sheffield has a long history in the shale oil business and was the founder of Pioneer Resources โ€” a company working in the Permian for decades. Sheffield recently returned from retirement to take the helm again atย Pioneer.

Reuters recently reported that in Sheffieldโ€™s opinion, the majors โ€œare eventually going to run out of inventory.โ€ Buying more inventory could be an option,ย  but what is the quality of that inventory, that rock? There are plenty of signs that the shaleย industry has already tapped out many of the known shale sweet spots inย shale plays like the Eagle Ford and theย Bakken.ย 

This week the industry publication Natural Gas Intelligence reported on a new analysis by the financial services firm Raymond James & Associates Inc., which warned that not only might the rapid ramp-up in U.S. shale oil production be slowing โ€”ย it may beย ending:

โ€œโ€ฆ.it is important to note that there is a very high likelihood that well productivities turn negative in the next few years as parent-child, and core acreage issues overwhelm the industries ability to complete longer laterals with moreย sand.โ€

DeSmog covered the issue of parent-child wells in August 2018ย (a โ€œparent wellโ€ is the primary test well and โ€œchild wellsโ€ are drilled around it). We also have noted thatย the shale industry is running up against the limits of fracking and horizontal drilling technology and the way these issues contribute toย industryย losses.

However, this latest prediction by Raymond James & Associatesย is a first. The fracking industry has proven it can produce large amounts of oil and gas but, overall, has lost money doing that. This new warningย questions the industry’s abilityย to produce ever-increasing amounts of oil fromย shale.

Raymond James summed up the issue, saying, โ€œTo simplify, as each play/basin’s sweet spot is drilled out, it’s reasonable to assume that well productivity will eventually be hampered by a shift to tier twoย acreage.โ€

Author Bethany McLean wrote aboutย a similar sentiment in herย book Saudi Americaย about the failed finances of the frackingย industry.

In the book, McLean quotes one industry investor, whose words presagedย the warning from Raymondย James.

โ€œOur view is that thereโ€™s only five years of drilling inventory left in the core,โ€ one prominent investor told McLean, whose book was published in September 2018. โ€œIf Iโ€™m OPEC, I would be laughing at shale. In five years, whoย cares?โ€

The major oil companies are making big predictions about how much oil they will be producing in five years, even though right now, Chevron admits it wonโ€™t make any money on shale thisย year.

The mantra of the shale industry to investors has been one asking for patience because payoff is still coming. But payoff, after a decade, has yet toย arrive. Now major oil companies are making the sameย claim.

Will Hickey, the co-CEO of Permian oil producer Colgate Energy LLC, this week explained to Reutersย the reality of producing shale oil: โ€œYouโ€™re at the mercy of what your acreageย produces.โ€

Do the oil majors own enough sweet spots and will those areas produce prolifically for the next five to 10 years? Unlikely, based on history, but as Chevronโ€™s CEO has explained, right now this is theirย bestย bet.

Alta Mesa: A Cautionaryย Tale

Anadarko is not only in the news this week because of the Chevron deal. Another reason tells a cautionary tale for theย industry.

Jim Hackett was the CEO of Anadarko before he retired in 2013. However, in 2017 he was lured back to the shale patch with a billion dollars of investor money, which he used to formย the company Alta Mesa Resources. Who better to start a new oil fracking company than a former shale company CEO?

Hackett spent the billion dollars, but it was not on โ€œgood rock.โ€ His move ledย the Wall Street Journalย to now call this โ€œone of the more spectacular failures met chasing the next big thing in the American shaleย boom.โ€

In 2017 Alta Mesa told investors โ€œits average well would produce nearly 250,000 barrels of oil over its life.โ€ In 2018 the new number was 120,000 barrels, and now Alta Mesa is in the midst of investor lawsuits, layoffs, and financial reporting issues. In about two years, aย billion dollars is gone and Hackett is borrowing more to try to keep the companyย afloat.

The Wall Street Journalย calls this โ€œ[a]ย cautionary tale for investors chasing wealth in the U.S. energy boom,โ€ but this is just the latest high-profile example of how shale oil is a capital destruction machine and how sweet spotsย can make or break aย business.

However, Chevron, Exxon, and other oil majors are ignoringย these cautionary tales and believe that this time, with them, it will be different because as Chevron puts it,ย โ€œWe doย difficult.โ€

That may be true, but so far,ย trying to make money on shale oil production suggests requiring,ย โ€œThey do theย impossible.โ€

Main image: Original photo Gas Price – July 18, 2005 by Philip Shoffner under licenseย CC BY 2.0ย adapted by Justin Mikulka,ย CC BY 2.0ย 

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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