Big Oil's shale revival prompts industry doubts: Fuel for Thought

Oil and gas majors have brushed themselves off after the industrywide downturn and are back on their feet trying to mimic the success of smaller companies in US shale. But many doubters still question whether Big Oil is up to the task after failing at earlier attempts in such plays.

The setbacks to global majors' shale efforts earlier in the decade were well-publicized. Several invested heavily in shale gas before prices collapsed, as more nimble rivals charged into liquids-rich plays.

Shell shared in the pain with a $2 billion write-down in 2013 and is among the majors persisting in shale plays. The company plans to more than double its Permian Basin output by 2020 to 200,000 b/d of oil equivalent, with just a third of production being crude and the rest lower-value gas and gas liquids.

Upstream director Andy Brown said in August that Shell had the ability to be a "top shales player."

Other majors recently made investments to grow their shale footprint.

BP CEO Bob Dudley said last month his company's Lower 48 unit, focused on shale, would "work magic" on the assets it bought from miner BHP for $10.5 billion, and ExxonMobil has also declared lofty goals after buying new acreage in January aimed at invigorating a shale unit widely seen as a disappointment.

SHALE SPECIFICS

But skeptics argue the majors' strengths in operating big, long-term projects--preferably offshore and away from population centers--don't equate to success in shale, where winning depends on speed, adaptability and local knowledge.

Other challenges include logistical complications, such as dealing with large quantities of water produced in shale operations. Trucking water from shale sites -- some of it contaminated or even radioactive -- is also becoming a big issue as traffic accidents and pollution take their toll.

Some say the majors may also struggle with the business of buying and selling land to refine their portfolios, a skill synonymous with American Energy Partners' former CEO Aubrey McClendon.

Several majors have tried giving their shale units arm's-length independence to handle such specific challenges, but those moves were not fruitful.

Shell shut its "unconventional resources directorate" in 2016 after unsuccessfully trying to transplant shale capability overseas, and ExxonMobil has re-integrated its XTO shale unit, acquired in a $41 billion deal in 2009.

Scott Sheffield, Pioneer Natural Resources chairman, told S&P Global Platts in August that he questioned the majors' ability to compete in shale. He said Shell had not been producing from shale plays long enough to be able to determine if it was successful, and other majors' activity is still lagging the smaller, more experienced shale producers.

"If the majors start drilling wells much faster than the independents, we should be able to see that in the data, but, so far, we're not seeing it," Sheffield said.

But there has been progress.

ExxonMobil says it increased its Permian and Bakken oil and gas output by 34% on the year in the third quarter, with Permian production reaching 170,000 boe/d.

Sheffield said Norway's Equinor seemed to be doing a "decent" job with its Marcellus and Utica shale gas, despite an $860 million write-down last year relating to issues with well spacing and productivity at its Eagle Ford assets.

Sheffield also praised the development of BP's Lower 48 unit under David Lawler, brother of Chesapeake Energy CEO Doug Lawler, but added BP may still need to buy more acreage.

Shell's shale goals reach beyond the US and encompass Canada's Montney tight gas, which will supply its LNG Canada project, and Argentina's Vaca Muerta, where Brown said it was beating the competition. But the pace of these companies' shale activities pales against their smaller, dedicated rivals. EOG Resources expects to complete 720 wells this year, and Pioneer aims to bring on stream 250-275 wells.

IDENTITY CRISIS

Bernard Duroc-Danner, former head of service company Weatherford, said that the majors should benefit from their scientific approach, or what he called the "purposeful pursuit of information," but were still struggling to define themselves in the face of the twin challenges of shale and resource nationalism.

He likened their shale efforts to teaching an elephant to dance, saying "they are the wrong owners because of their mass, the way they do things."

Duroc-Danner also highlighted the reputational risks of shale production, saying that in the "local towns in Oklahoma, Texas, Colorado, people are going to be really upset about the accidents and the [number] of trucks going back and forth."

The majors will also need to learn how to manage a rising stock of depleted wells producing a trickle of oil in their "nursing home" phase as they near the end of their lives, he said.

"The decline rate in a normal well in the Middle East or places in Latin America is just a gentle decline," he said. But in shale, "every year you drill, you expand production, [and] 18 months later, it joins the nursing home. What happens when these fine companies end up with a huge stock of these?"

"Yes, they will run the completion and fracking business more efficiently, if they allow people in the field to get their way. For the rest, they will inherit the liability, potentially the political exposure; they will inherit the nursing homes."

Some executives shared the doubts.

ENI CEO Claudio Descalzi has dismissed shale as beyond his company's competence.

Total CEO Patrick Pouyanne has suggested that his company was still bruised by its shale forays. In August, he said the challenge was not just the cost of investing, at this point, but in recruiting the right people.

"My peers who are investing [in shale] have a right to do it," Pouyanne said. "It's more a question of competitive advantage. It's clearly capital intensive, and it's a question of human resources."