American shale peaked in February of this year, and is on glide path lower as the drilling decline takes its toll on legacy production. As shown in the chart below, as a result of well shut-ins and drilling declines shale production reversed its trend upward, has begun a decline that we think will reduce shale production by half as we exit 2020. The dotted red line is the EIA’s estimate for the amount of the drop in June. I think they are a bit optimistic, although the current restart of legacy wells may be included in this calculation. It won’t matter as the year ages, shale is going to decline majorly as we exit this year. I will have some calculations later in this article to validate that position.
EIA-Chart by author We are now moving into a time that I have forecast in a number of previous OilPrice articles, where certain key factors will mean the difference between survival, and value destruction as the industry consolidates. Here is a quote from the most recent, “Supermajors Are On The Prowl For Fresh Deals In The Permian.”
- Rock quality
- Low costs of production
In this article we are going to circle back to focus on rock quality as being a driver for growth as the Permian begins to restart. This is what the rivalry between Chevron (NYSE:CVX) and Occidental (NYSE:OXY) back in 2019 was all about from the start. Who would be the lowest cost domestic producer? The stakes were always high, OXY won the battle, and it almost killed the company. It still could as OXY looks to reschedule ~$40 bn in debt. We think much of the danger has passed for this operator however and will discuss in this article why as oil prices rise, OXY could benefit out of proportion to other shale players.
The Permian is the King of Oilfields
A little over a year ago I published an article in OilPrice in which I made a case for the Occidental Petroleum, (NYSE:OXY) takeover of Anadarko would payout in the long run due to quality of reservoirs in the acreage. It was appropriately entitled, “What The Market Is Overlooking In The Occidental Deal,” and is worth going back reading for the technical detail it contained on the rock quality in this section of the Permian.
The Prize both CVX and OXY coveted
If you look closely at the graphic below you can see what the Anadarko acreage (shown in blue) meant to both companies. It is located right in the heart of the deepest part of the Permian, and is what yields the most prolific wells.
It is simply among the best rock on the planet for producing oil. If you refer back to my 5-point thesis, you see rock quality is number one.
What that means is the wells that are drilled will respond more fully, and for a longer time period than well drilled and completed in more marginal rock. This will improve EURs, and provide more cash flow per foot of interval through lower decline rates. Essentially this adds up to more oil from fewer wells, with associated cost savings to the operator, and value to shareholders!