Oil majors’ shale deals are a worry for Opec

Opec should take note of the $60bn (£46bn) bidding war raging to buy US oil producer Anadarko. Chevron and Occidental are competing to acquire the unconventional driller, and a deal could signal a wave of further consolidation across the Permian Basin and US oil patch, with potentially 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 $57bn counter offer, worth $76 a share, to buy Anadarko. Although the target company has ventured into developing gas projects in west Africa, its main attraction is much closer to its home in Texas.

“Anadarko’s Western midstream asset is attractive to both Oxy and Chevron,” 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, start-up 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.”

Anadarko produced about 130,000 barrels per day of oil equivalent in the Permian in the fourth quarter, and the company holds vast acreage 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. “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.”

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.

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 deal makers were able to leverage their real-estate trading skills to make billions.

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. In response, former Saudi oil minister Ali al-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, but 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 now forecasts that US oil output will surge to almost 15 million barrels per day by 2027, up from nearly 11 million barrels per day 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 barrels per day by 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.

‘The Saudis tried to keep pumping to squeeze US shale. The strategy failed’