U.S. upstream producers need to undergo “a lot more consolidation” to restore the economies of scale necessary for shale development, Occidental Petroleum Corp. (NYSE: OXY) President and CEO Vicki Hollub told IHS Markit (NYSE: INFO).
“You have to create the scale necessary to optimize full-cycle development,” Hollub explained in the latest installment of CERAWeek Conversations with IHS Markit Vice Chairman Daniel Yergin. “Economies of scale are very important in shale development, otherwise the good returns that you get on the drilling and completion of wells gets eroded by infrastructure. The smaller the scale, the more likely an operator is going to have to do something with respect to consolidation.”
Hollub also predicted it will be difficult for U.S. shale development to return domestic oil production back to pre-pandemic highs on the order of 13 million barrels per day.
“Now, especially as consolidation occurs and as people really focus on full-cycle returns and net present value of their developments, the economics is going to drive a lot of decisions to not do these smaller-scale developments,” Hollub said. “It’s going to take a while for the industry to rationalize out the smaller-footprint companies and to help the ones that want to consolidate to get that scale so that development going forward does really generate a true return and profitability.”
A New Shale Framework
Hollub told Yergin her company is weighing a “new model for shale development” that leverages available infrastructure over time. As Bloomberg reported last month, Oxy aspires to become the first major U.S. oil producer to target net zero emissions from everything its extracts and sells. A key component of its plan is to build a “direct-air capture plant” in the Permian Basin designed to capture carbon dioxide from the air and concentrate it for underground storage or enhanced oil recovery.
“Now we’re going to be able to further optimize that (the shale development model) with the application of CO2 and enhanced oil recovery to the shale process in the future,” she said. “It’s now this opportunity to mitigate what people have so much concern about with shale.”
Hollub explained the concerns include:
- value and low recoveries
- the difficulty of overcoming the decline rate and growing over time.
Occidental’s shale development model will help the company “to maximize the value and increase the value over what we had before,” Hollub said. Moreover, she contends that Oxy’s carbon capture and enhanced oil recovery plan will help the company to align with investors’ changing attitudes about shale.
“There was a time when we had a lot of other places where we could put our capital dollars,” Hollub recalled. “Any time we mentioned investment in anything other than the shale, our shareholders got upset about it. When you look at the capital intensity of conventional low-decline development vs. high-decline shale, the shale pays back right away, but over time that lower decline – the capital intensity – is actually lower over time. We’re happy to have the flexibility to have an alternative. With respect to the shale we do believe that our enhanced oil recovery puts us in a unique position to make it almost seem closer to a low-decline kind of asset. Ultimately that’s going to deliver the most value out of the shale.”
Hollub also offered her perspective on how Oxy could “collaborate” with a Biden administration on shared priorities.
“They want to have a climate story,” she said. “I believe that our climate story and what we want to do could match very well with what they’re trying to accomplish. I believe that, at least on one point, we’re going to be aligned and we can collaborate, and we can hopefully make things happen. On other issues, we want to be there with the Environmental Protection Agency and the Bureau of Land Management as they will almost certainly introduce more regulations on the industry.”
The CEO noted that Oxy does not “have a problem with” new regulations because it has already adopted many practices that have been recommended.
“We think that there’s some middle ground that we can achieve if we are proactive in dealing with all of the regulatory agencies and doing it early on,” Hollub said. “They have to put some regulations in. We need to just make it something that’s effective, but reasonable.”
To contact the author, email mveazey@rigzone.com. Hollub’s full interview with Yergin – recorded on Nov. 18, 2020 – is available on IHS Markit’s CERAWeek Conversations website.
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