Oil industry captains set the pace on exploration in the Permian Basin
ExxonMobil and Chevron, flush with cash, have set out their plans for growth in oil and gas production in Texas and New Mexico.
According Wood Mackenzie analysts ExxonMobil’s production in the Permian Basin is expected to rise by about 25% this year, continuing the pace of growth seen last year. This year, the US Majors will outpace their smaller rivals, the listed independent companies, in production growth in the Permian, the most important of the North American tight oil plays.
For these global companies, some of their most advantaged assets are in their own home territories.
Mike Wirth, chief executive of Chevron, said that its Permian production would rise by about 10% this year. That is slower than for ExxonMobil, but still faster than the growth Wood Mackenzie expects for the leading listed independent E&P companies, which have overall held their production roughly flat over the past two years.
“These growth numbers are probably double or triple what the listed independents are going to do,” says Robert Clarke, vice-president of upstream research in the US.
The two largest US oil groups are riding high at the moment. ExxonMobil’s shares are up 76% over the past year, rising more than 6% on Tuesday alone. Chevron’s are up 55%, over a period in which the S&P 500 index is up about 20%.
ExxonMobil generated free cash flow of about $31.6 billion in 2021, while Chevron made a record $21.1 billion. With Brent crude around $90 a barrel and Henry Hub gas around $5 per million British Thermal Units, the strong cash generation is set to continue.
Much of the cash is going into debt reduction, share buybacks and increased dividends. Chevron has increased its quarterly dividend by about 6%, and ExxonMobil by about 1%. But there is also more available for ramping up production. Chevron’s total capital and exploration budget for 2022 is $15.3 billion, up about 30% from last year, while ExxonMobil’s is rising by about 36%, to about $22.5 billion.
Significant proportions of that additional investment are being channeled into the Permian Basin. Chevron plans to spend $3 billion in the region this year, up from $2 billion last year. It expects to bring a little over 200 wells into production, an increase of about 50%. The step-up in activity reflects efficiency improvements in Chevron’s operations, “and just the quality of this asset, which endures as we go through cycles like the one we just went through,” Wirth said.
ExxonMobil has listed the Permian as one of its priorities for increased investment this year, along with Guyana, chemical performance products and project restarts in its downstream businesses. It has not specified how much it plans to ramp up activity, but it is sticking to its target of producing 700,000 barrels of oil equivalent per day in the Permian by the end of 2024, up from an average of about 460,000 boe/d last year. Chevron has reaffirmed a goal of 1 million boe/d in 2025, up from an average of 608,000 boe/d last year.
To stay on course for those goals, both companies will have to run more rigs and complete more wells. “Spud and completions activity at 2021 levels gets neither company to their stated production target,” Robert Clarke wrote last year.
For ExxonMobil and Chevron, as they make decisions on global capital allocation, the Permian is an attractive location. New wells generate a lot of cash and have quick paybacks. ExxonMobil said this week that the Brent price it needed to cover its capital spending and dividend from cash flow in 2021 was $41 a barrel, and would average just $35 a barrel between now and 2027, helped by its latest round of cost reductions. Both companies are also producing increasing volumes of gas as well as oil in the basin.
The US Majors’ Permian production also has relatively low greenhouse gas emissions compared to their other assets. For ExxonMobil, emissions intensity in the Permian is 42% below the average for its upstream portfolio, and for Chevron it is 36% lower. Moves to cut emissions such as curbs on methane leakage and the end of routine flaring in the Permian, which ExxonMobil expects to achieve this year, will increase that advantage still further.
