US Permian shale takeover battle is a warning for OPEC

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US Permian shale takeover battle is a warning for OPEC

OPEC should take note of the $55 billion bidding war raging to buy US oil producer Anadarko.

Chevron and Occidental are competing to acquire the unconventional driller. A deal could signal a wave of further consolidation across the Permian Basin and US oil patch, potentially with big implications for the Middle East dominated cartel.

Chevron was on track to become the dominant player in US onshore shale before Oxy swept in this week with a bold $38 billion cash-and-stock counter offer, worth $76 a share, to buy Anadarko. Although the target company has ventured recently into developing gas projects in West Africa, its main attraction for giant petroleum predators is much closer to its home in Texas. Oxy’s offer is now viewed as the “superior proposal”, the company’s board said on Monday.

The ball is now in Chevron’s court to improve its bid, or look elsewhere to boost its Permian footprint.

“Anadarko’s Western midstream asset is attractive to both Oxy and Chevron, so that is one piece of the puzzle,” said Matthew Andre, energy analyst at S&P Global Platts Analytics in Denver. “But Anadarko’s presence in the Gulf of Mexico would complement both potential purchasers as well. In the Gulf of Mexico, startup costs are high while returns and production are achieved over a long period of time. So if Oxy or Chevron can acquire long-term Gulf of Mexico assets that are already producing it is a win-win.”

Permian possibilities

Anadarko produced about 130,000 b/d of oil equivalent in the Permian in the fourth quarter and the company holds vast acreage further north of the prolific area where both Chevron and Oxy believe they can squeeze more out of the operator’s assets.

“Occidental is known for being a leader in Permian shale as well as internationally,” said Oxy’s chief executive Vicki Hollub on a conference call this week. “In combination with Anadarko, we will also be the number one producer in the Denver-Julesburg Basin, the number one producer in the Uinta Basin, and the number one independent producer in Oman.”

It is in the deserts of Oman where Oxy fine-tuned some of the enhanced oil recovery techniques that it is renowned for using in the Permian. The process has involved injecting high-pressure gas, or water, into some of the Sultanate’s tired wells to flush out every drop of crude. The subsequent production boost has helped steady a historic decline in national output. Snatching Anadarko from under the nose of Chevron would make Oxy the third-largest producer in the US and give it an opportunity to deploy its expertise over a much bigger area.

Graph showing increase in Oman liquid hydrocarbon production

Oil majors are changing their view of US shale, which had previously been left to smaller independent producers to develop. The industry’s giants had previously taken a cautious approach to an oil and gas patch where Wall Street financiers and dealmakers such as the late Aubrey McClendon were essentially able to leverage their real-estate trading skills to make billions.

The fragmented and fiercely independent nature of the US shale industry arguably allowed it to grow quicker than anyone had expected. OPEC was certainly caught off guard by the rapid increase in output from the Permian basin, which many senior officials blamed for the oil price crash in 2014.

US oil power

In response, former Saudi oil minister Ali Naimi then persuaded the kingdom’s rulers to keep pumping crude in order to protect market share and squeeze higher-cost independent US shale producers in what became a price war. The strategy failed. Greater consolidation in the US oil sector could make it even harder for OPEC to manage oil markets in the future.

Of course, OPEC’s alliance with Russia has given the cartel more flexibility to counter the rise of US shale. Oil prices have rebounded to around $75/b since the group abandoned its strategy of trying to bankrupt America’s army of small drillers, who have been at the forefront of its shale oil revolution. However, without help from the Kremlin, the group has continued to lose market share to the US.

International oil majors applying their big balance sheets and advanced technology to US shale could even trigger a second energy revolution in the country, which during the 1970s was held economic hostage by OPEC and the Arab oil embargo.

The Energy Information Administration (EIA) now forecasts that US oil output will surge to almost 15 million b/d by 2027, up from nearly 11 million b/d last year. But in its best-case scenario the EIA predicts an even bigger bounty of petroleum. With bigger companies capable of deploying better technology more efficiently, the EIA estimates US output could climb to 20 million b/d by 2040.

US oil production forecast to 2040

More worrying for OPEC, the EIA also forecasts the US will become a net energy exporter in 2020 and remain so through to at least 2050. This transformation will come largely due to the rapid growth of domestic crude, gas and natural gas liquids output coupled with a slowdown in domestic consumption growth. Big oil vying for an even bigger share of US shale will add to the region’s increasing power in the oil market.

“Those days that oil markets, developments and prices are determined by resolutions, discussions and so on are over. There are very strong market forces now, mainly driven by the US shale revolution,” said IEA executive director Fatih Birol in a recent interview with S&P Global Platts.

The fate of Anadarko could signal that big changes are coming for the nature of international oil politics.

Read it from Platts


From the Oil Patch gives weekly updates on U.S. Rig Counts and Offshore Utilization Rates, as well as a round up of important industry news and key economic indicators.

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