Chevron says consolidation in the Permian basin will help boost financial returns rather than raise production rates, writes Jon Mainwairing
Consolidation of operators in the US Permian basin shale is a "natural next step", but it is unlikely to affect production growth rates to the same extent as the industry's current focus on returns, Chevron's head of crude supply and trading, Patti Leigh, told this week's ArgusEuropean Crude Conferencein London.
Leigh noted that the production growth rate in the Permian basin has dropped to around 10pc/yr from about 20pc/yr in previous years. A key reason for the slowdown is that "US producers have found religion" around capital discipline and returns, she said.
"Consolidation is a natural next step in the industry. And I think you'll see more of it, not less of it," Leigh said. "That returns focus will drive some of it. [Wall Street] analysts expect returns, not production growth, and the basin is more mature and more competitive," she said. "So, I'm not sure consolidation actually impacts the growth rate so much as… that focus on returns does."
Chevron itself agreed on 23 October to acquire US oil producer Hess, although it is more a complementary transaction in terms of shale, rather than consolidation, as Chevron will be adding Hess' Bakken production to its existing shale assets in the Permian, east Texas and Colorado.
ExxonMobil previously announced in October a $59.5bn deal for Pioneer Natural Resources to become the leading producer in the Permian, which straddles west Texas and southeast New Mexico.
In a wide-ranging discussion, Leigh highlighted that exports of US WTI crude have "filled a big gap" in European demand created by the absence of Russian supply following sanctions, with the grade now accounting for a quarter of the 1.4mn-1.5mn b/d increase in Europe's seaborne imports. "Urals is flowing east, US barrels are flowing to replace that," she said. "It really just changes where the flow happens and doesn't necessarily take supply out of the market. The Europeans are just importing a lot more from other places."
Domestic switching
But Leigh suggested that the pace of US crude exports to Europe could be affected by rising demand for domestic crude from US refiners. "Over time, you've also seen some of the US refineries expand their own footprints to be able to run the US barrel," she said.
Previously, US refineries, "particularly on the Gulf coast", have been geared towards using heavy sour imports. "And you've seen a lot of refineries switch to being able to run that WTI Midland barrel. My personal opinion is that the barrels are going to flow where the market needs it. Right now, a lot of that is export but it'll flow where the arbs are," she said.
Leigh noted that US crude availability might be improved by increased very large crude carrier (VLCC) export capacity on the Gulf coast. One of a couple of projects being proposed for increased offshore VLCC loading capacity to relieve congestion in the Houston Ship Channel "might happen" over the next three years, she said, adding that this would be transformative for the industry.
"I think there's going to be greater demand for VLCC export capacity in the Gulf coast," with Corpus Christi in Texas a viable export option, she said. "There's a little bit of quality premium that you get in Corpus. The barrel is a little bit nicer just because of the pipeline routes that go from the Permian to Corpus, versus into the Houston Ship Channel. The Houston Ship Channel can get very congested," she said.
Additional VLCC cargoes "would tend to go to Asia", she said, meaning that there would be less of an impact on flows to Europe.
