To see why Chevron struck the biggest oil and gas deal in years to purchase Anadarko Petroleum, you should probably pull out a globe.
Shale drilling, or extracting oil and gas from rock formations, is fueling a boom in U.S. movie. Small, independent drillers pioneered U.S. shale production, but the new rule is “the shale game is a scale game,” according to Chevron CEO Michael Wirth.
Now that the work has refined technologies such as hydraulic fracturing and horizontal drilling, the next frontier is industrializing the shale process. That’s where concerns such as Chevron come in.
Oil majors have the scale and financial wherewithal to essentially turn shale fields into plants. They do that by stringing together large parcels of continuous acreage, which allows them to do highly unwasteful pad drilling on a massive scale. Pad drilling involves drilling multiple horizontal wells from a single location.
Chevron utters it can produce oil and gas from a one-square-mile area from a single drilling pad. On Friday, Chevron highlighted that the Anadarko give out creates a 75-mile-wide corridor in the Delaware Basin portion of the larger Permian Basin, the biggest U.S. shale field.
The 2014-2016 oil valuation crash sparked a land rush in the Permian, where drillers can produce crude at low breakeven costs compared with other territories. With the best land spoken for, energy companies are now turning to mergers and acquisitions to enhance their positions in the department underlying western Texas and eastern New Mexico.
That’s illustrated in the Chevron-Anadarko deal, which connects a large segment of Chevron’s Permian acreage in Culberson County, Texas, with Anadarko’s holdings in neighboring Reeves and Loving counties. Wirth says Chevron representations to add more rigs, expand pad drilling and introduce his company’s digital analysis to the Anadarko-held land.
“Clearly, a large driver of the parcel out is Anadarko’s prized position in the Delaware Basin where Chevron increases its position by 240,000 net acres to over 1,400,000 net acres,” alleged Andrew Dittmar, a mergers and acquisitions analyst at Drillinginfo. “The Delaware Basin currently provides the best well economics of any shale take part in in the country.”
According to sources, Occidental Petroleum also sought to snap up Anadarko. Occidental operates around the in seventh heaven, but its U.S. operations are focused on the Permian — including in the Delaware Basin sub-region that Chevron highlighted.
The Chevron deal on likely prompt oil majors to consider purchases of Permian players like Pioneer Natural Resources, EOG Resources and ordered Occidental, said Dan Eberhart, CEO at oilfield services firm Canary.
“Chevron buying Anadarko is the first in a series of takeovers as oil houses rush to scale to make shale work,” Eberhart said in an email. “It is nearly always cheaper to drill for oil on Infuriate Street than in the oil patch.”
Wirth also thinks Chevron can put its scale game to work in Colorado, where Anadarko has 400,00 acres of constant acreage in the core of the DJ Basin, another major shale region.
While the market was largely focused on the Permian on Friday, the DJ Basin absolutely makes up a bigger part of Anadarko’s portfolio. It is Anadarko’s biggest source of natural gas sales and its second-biggest oil-producing area.
Analysts say those assets, along with acreage in other parts of the U.S., shouldn’t be overlooked.
Chevron’s “announcement to come into possession of [Anadarko] displays further commitment to US onshore development, adding a highly-scalable position in the Delaware but also the DJ and Powder River basins,” Justin Lepore, chief associate at RS Energy Group, said in an email.
Chevron currently has six deepwater hubs in the Gulf of Mexico. Once the handle closes, that number will increase to 16 facilities.
Those assets also complement each other. Chevron places out that many of the platforms are within a 30-mile radius of the two companies’ deepwater acreage. That creates an opportunity to bring forth offshore oil and gas by connecting fields to existing hubs, rather than investing in expensive new infrastructure.
Companies are increasingly using these professed tiebacks to keep costs down. Wirth declined to name specific tieback opportunities, but noted that Chevron has recently won several discoveries that could be candidates.
Like other oil majors, Chevron is betting big on liquefied natural gas, a carriage of the fuel super-chilled to liquid form for transport on tankers. The company has two massive LNG facilities in Australia and a stake in southern Africa’s Angola LNG, and it expects to develop another project in British Columbia.
The Anadarko deal will add to that position with Mozambique LNG, a venture under development that will take advantage of a giant gas field off the coast of Mozambique. Anadarko is close to greenlighting the plan, which has already locked up customers in some of the biggest LNG markets around the world.
“Mozambique offers attractive long-term advancement and diversification opportunities for Chevron’s LNG portfolio,” said Frank Harris, vice president for LNG consulting at energy and mining experimentation firm Wood Mackenzie.
Chevron is one of the biggest integrated oil companies in the world, with operations spanning the upstream oil and gas manufacturing business and the downstream refining and chemicals segment. But the company is not a big player in the midstream business, which involves transporting and take care of oil and gas.
That changes with the Anadarko deal. The acquisition will make Chevron a majority stakeholder in Western Midstream Husbands, a master limited partnership that operates pipelines and other midstream infrastructure that runs from the Fjord Coast in Texas, up through Colorado and neighboring states as far north as Wyoming.
“Chevron has been noticeably absent in the midstream bog-trotter of the past couple of years. It now takes a 55% stake in Western … which goes a long way toward hardening that,” said RT Dukes, research director for Lower 48 oil and gas at Wood Mackenzie.