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Supermajors could spend $30B, drive up costs in Permian, IHS says

If the three global energy supermajors in the Permian Basin are to reach their ambitious growth objectives in the play, the cost would run in the tens of billions of dollars over the next two years, which could set off a chain reaction squeezing smaller producers, according to an analysis by IHS Markit.

Exxon Mobil Corp., Royal Dutch Shell PLC and Chevron Corp. would need to invest $30 billion in the West Texas shale play through 2020 to achieve their growth targets, the June 18 report found. Those investments, the IHS analysts said, would in turn spur cost inflation and eventually force consolidation in the world's hottest oil and gas play.

The production goals for Chevron and Exxon in the Permian are audacious. During its first-quarter earnings call, Chevron said it forecast growing unconventional production, which stood at 252,000 barrels of oil equivalent per day during the quarter, by 30% to 40% annually through 2020. Exxon has said it plans to more than triple its Permian production, to more than 600,000 boe/d, by 2025. Shell has been less precise with its plans in the basin but said it intends to expand production in liquids-rich unconventional plays from 100,000 boe/d to 300,000 boe/d by the end of 2020.

The price tag for such investments would be a heavy one that and have to be paid quickly, IHS Markit reasoned. "If truly committed to the Permian Basin, the traditionally return-focused supermajors will have to grow accustomed to a rising cost-basis in order to build their core, operated-acreage positions that currently do not suffice to meet medium- to long-term growth plans," said Sven del Pozzo, director of energy equity research and analysis at IHS Markit. "Supermajors will need to collectively invest nearly $30 billion in new investments — effectively adding three companies the size of [Pioneer Natural Resources Co.] to the Permian, to achieve their production growth targets by year-end 2020."

Pioneer, which is becoming a Permian-only play, reported first-quarter production of 260,000 boe/d while spending $818 million on capital expenditures.

IHS said approximately $8 billion would have to be allocated for 2018 CapEx, growing to more than $10 billion in 2020. The firm projected Exxon as being the biggest spender, with Permian-related expenditures exceeding $5 billion in 2020.

To reach their production goals, the supermajors would also have to continue to improve their efficiencies and expand their relationships with oilfield services companies. That would be likely to push costs higher, putting smaller independents in jeopardy. "The supermajors will further stress the Permian service sector, and as costs escalate, the increased execution risk may be too great for these smaller companies to overcome, possibly forcing them into mergers or sales," del Pozzo said.

IHS said the supermajors have been able to keep their Permian-related costs in check so far by having made low-cost acreage acquisitions a number of years ago, before the current boom in the play. Operating on the cheap in the Permian is no longer an option, something investors looking for tight balance sheets should be made aware of, del Pozzo wrote.