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Growing the Permian 'at scale': US oil majors have big plans in West Texas

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Growing the Permian 'at scale': US oil majors have big plans in West Texas

The biggest oil companies in North America are leveraging their size to bring "end-to-end integration" to the hottest oil play in the Western Hemisphere.

Exxon Mobil Corp. and Chevron Corp. see a decadeslong runway of oil production growth in Permian Basin. Unsatisfied with congested pipelines, mismatched refineries and limited export options, the two supermajors have laid the groundwork for the future through a series of moves to integrate their operations in Texas and New Mexico.

"We are taking a different approach to the Permian ... leveraging the scale of this corporation," Exxon Vice President of Investor Relations and Secretary Neil Hansen said during the company's Aug. 2 second quarter earnings call. "It's a manufacturing approach. We're doing it at scale, which obviously a lot of the small players wouldn't have the capacity to do."

Over the past decade, Permian oil production quadrupled from under 1 million barrels per day to more than 4 million bbl/d, while gas production raced from about 4.5 Bcf/d to more than 14.5 Bcf/d, according to U.S. government statistics. That growth has maxed out infrastructure. Sourcing water and sand has overwhelmed roads and rails, pipeline constraints have created huge price differentials, and downstream export and refining companies are pouring billions into their infrastructure to try to keep up.

Because of ongoing constraints, logistical issues and volatile prices, many smaller Permian producers throttled back capital expenditures and output growth plans. But the biggest companies are banking on scale and integration to enable growth.

To achieve scale, KPMG oil and gas expert Regina Mayor said the biggest companies are trying to fill in checkerboard acreage positions to create consolidated footprints. "The second part of their strategy is full scale end-to-end integration," said Mayor, KPMG's global sector head and the U.S. national sector leader of energy and natural resources.

"The larger players are really trying to connect upstream to downstream," she said. "That is the benefit of being an integrated oil company. I think it always has been but they didn't always operate in that way. They have the deep pockets, the financial wherewithal and the balance sheets to be able to pull it off."

Exxon will spend $30 billion this year and $33 billion to $35 billion in 2020. The Permian is a big part of those spending plans as the company hopes to increase production to 1 million barrels of oil equivalent per day in the next five years. In the second quarter, Exxon's Permian output was 274,000 boe/d, soaring nearly 90% on the year.

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To get that production to market, Exxon is teaming up with midstream companies Plains All American Pipeline LP and Lotus Midstream LLC to build a 1 million bbl/d pipeline from the Permian to the Gulf Coast. The line will connect to Exxon's Baytown and Beaumont refineries. Exxon is also a partner on several new gas pipelines in the region.

"Exxon's large size is beneficial as it gives it negotiating power when dealing with oil service and midstream companies, and its large diversified nature means that it does not have to slow down drilling when oil prices decline," Raymond James analyst Muhammed Ghulam told S&P Global Market Intelligence on Aug. 16.

Chevron is a few steps ahead of Exxon, in terms of production, and its recent deals have focused on end-use of its burgeoning supplies. Chevron's Permian region output rose 55% on the year to 421,000 boe/d. The company hopes to hit 900,000 boe/d by 2023.

Chevron is expanding its Gulf Coast refineries to process crude oil closer to the Permian. In May, Chevron added a second refinery to its Gulf Coast base, the 110,000 bbl/d Pasadena, Texas, refinery. The location, adjacent to the Houston Ship Channel, provides access to domestic crude supply and refined products.

Chevron has three objectives for its Gulf Coast refinery operations: to provide fuel to its retail network in Texas; to coordinate and optimize feedstocks and other flows between Texas and its refinery in Pascagoula, Miss.; "and increasingly, try to position and retool the refinery a little bit to take more and more Permian oil," Chevron Vice President and CFO Pierre Breber said during the company's Aug. 2 second quarter earnings conference call.

While Chevron is "well covered" on its Permian crude oil takeaway capacity this year and into early 2020, the major inked deals with midstream giant Enterprise Products Partners LP to lock in future Permian takeaway. The Enterprise deal also calls for Chevron to partner on a new deepwater export facility offshore Houston, the Sea Port Oil Terminal. "That will lengthen our ability to supply crude not only in the domestic U.S. but internationally," Chevron Executive Vice President of Upstream James Johnson said during the call.

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Existing export terminals on the Gulf Coast can process almost 4.4 million bbl/d, but the international market is pushing for U.S. terminals that can load very large crude carriers, analysts said. The Sea Port Oil Terminal project is expected to include onshore and offshore facilities, as well as a fixed platform to load very large crude carriers at a rate of up to 2 million bbl/d. The project will include storage at Enterprise's ECHO terminal and connect to all refiners in Houston, Pasadena, Texas City and Beaumont/Port Arthur along the Houston Ship Channel.