Oil Majors Pursue Projects with $30 per Barrel Breakeven

The U.S. and global oil and gas sector is currently enjoying a third year of relatively high energy prices with oil demand on a steady growth trajectory. WTI crude has traded above $70 per barrel for the better part of the past 12 months, well above the $54 per barrel average breakeven price for U.S. shale basins. However, U.S. oil majors are not allowing high energy prices to lull them into a false sense of security, rankled by the memories of the historic oil price crash of 2020. Oil majors are now hedging their bets by targeting new oilfields that can be profitable even at $30 per barrel oil, reflecting executives' belief that high prices are anything but guaranteed.

"After three major oil price crashes in 15 years, there is wide acceptance that another one is likely to happen," Alex Beeker, director of corporate research at energy consultancy Wood Mackenzie, has told Reuters.
Exxon Mobil Corp. (NYSE:XOM), Chevron Corp. (NYSE:CVX) and Occidental Petroleum (NYSE:OXY) have struck deals worth a combined $125 billion to acquire companies with low-cost oilfields that can be profitable at $25 and $30 per barrel. Last October, Exxon acquired shale rival Pioneer Natural Resources in an all-stock transaction valued at $64.5 billion including debt. The merger combined Pioneer’s more than 850,000 net acres in the Midland Basin with ExxonMobil’s 570,000 net acres in the Delaware and Midland Basins, more than doubling Exxon’s Permian footprint and production to 1.3 million barrels of oil equivalent per day (MOEBD). The best part of the deal: Exxon expects a cost of supply of less than $35 per barrel from Pioneer's assets.

Around the same time, Exxon’s peer Chevron announced that it had agreed to acquire Hess Corp. (NYSE:HES) in an all-stock transaction valued at $60 billion, including debt. By acquiring Hess, Chevron gains control of Hess’ 30% stake in the Stabroek Block in Guyana, as well as highly competitive breakeven costs ranging from $25 to $35 per barrel across producing projects. According to Hess, the development will produce an initial 220,000 gross barrels of oil per day over the first half of 2024 before ramping up to 620,000 barrels of oil each day.

In December 2023, Occidental Petroleum announced it will acquire CrownRock, one of the most sought-after U.S. private shale oil producers, in a cash and stock deal valued at $12 billion. Unlike public oil companies which have been facing pressure from Wall Street to prioritize shareholder returns, CrownRock has ramped up production to 170,000 b/d in recent years, a nice addition to Hess’ 960,000 b/d. Whereas the transaction has come under scrutiny because it will be mostly financed through cash, the deal is expected to generate $1bn in free cash flow in the first year alone.

Lately, oil majors have preferred financing M&A deals using stock instead of cash because financing greenfield energy assets, especially in emerging markets, has become a challenging endeavor due to rising interest rates. But with interest rates now coming down in the U.S., we might start seeing cash playing a bigger role.

Meanwhile, in Europe, Shell Plc. (NYSE:SHEL) and Equinor ASA (NYSE:EQNR) are pursuing projects with $25-30 per barrel break-even, while France’s TotalEnergies (NYSE:TTE) has set an even more ambitious target to get production costs under $25.

These low costs are about half break-even level for oil projects just a decade ago, and are about 40% of today's Brent global oil benchmark. But these oil majors are betting that improved productivity of wells will continue.

Improved Efficiency

Improving drilling and cost efficiency have allowed oil companies to eke out a profit at much lower oil prices. According to J.P. Morgan, U.S. drilling and fracking costs have declined 36% since 2014, significantly decreasing breakeven points for many producers. For instance, JPM estimates that EOG Resources (NYSE:EOG) can earn as much from oil priced at $42/bbl today as it would have from $86/bbl oil in 2014.

ExxonMobil is now betting that shale producers can even double crude output from their existing wells by employing novel fracking technologies.

“There’s just a lot of oil being left in the ground. Fracking’s been around for a really long time, but the science of fracking is not well understood,” Exxon Chief Executive Officer Darren Woods has said. Woods has revealed that Exxon is trying to improve productivity and lower costs by fracking more precisely along the well so that more oil-soaked rock gets drained and also by keeping the fracked cracks open longer so as to boost oil flows.

Luckily for the U.S. shale patch, there's already a proven technology that allows oil producers to give existing oil wells a second, high-pressure blast to increase output for a fraction of the cost of finishing a new well: shale well refracturing. Refracturing is designed to restimulate a well after an initial period of production, and can restore well productivity to near original or even higher rates of production as well as extend the productive life of a well.

New research from the Eagle Ford Shale in south Texas estimates that North Dakota’s Bakken Shale straddles some 400 open-hole wells capable of generating an excess of $2 billion if refractured with oil prices at $60/bbl. According to Garrett Fowler, COO for ResFrac, a refrac can be up to 40% cheaper compared to drilling a well and can double or triple oil flows from aging wells.

By Alex Kimani for Oilprice.com