ExxonMobil’s new CEO Darren Woods announced a dramatic shift towards shale drilling this week, a new strategy that will prioritize drilling thousands of smaller wells while reducing spending on the massive projects that the oil major has long been accustomed to pursuing.
Mr. Woods gave a presentation to investors on March 1, selling his vision after recently taking over from Rex Tillerson, who left to become U.S. Secretary of State. Exxon will now ramp up spending on shale drilling, after watching dozens of smaller companies profit from the surge in production in Texas, North Dakota and elsewhere over the past decade. Exxon will dedicate a quarter of its 2017 spending budget on shale, putting $5.5 billion into the effort. “More than one quarter of the planned spending this year will be made in high-value, short-cycle opportunities, including in the Permian and Bakken basins,” Exxon wrote in a March 1 statement. The oil major says that it has 5,500 wells in its queue for drilling in the Permian and the Bakken shales, each with a return of 10 percent or more at $40 per barrel. Exxon was able to build up this inventory of shale wells with the $6.6 billion it spent in January to double its Permian acreage.
The shift towards shale should pay off over time, with a portfolio of thousands of tiny shale wells making up a growing share of the oil major’s production portfolio. By 2025, Exxon says that its production from the Permian and the Bakken could amount to 750,000 barrels per day, or about a fifth of its total output.
Still, other oil companies offer more attractive prospects to investors than Exxon these days. Reuters notes that only five of the 25 Wall Street analysts that follow Exxon recommend a “buy” rating, while 17 of them have awarded the “buy” rating to Chevron. Exxon has had a rough go by any standard. The breakdown in relations between Russia and the West over Crimea in 2014 led to Russian sanctions, forcing Exxon to pull out of its Russian ventures.
The struggle to find and book new reserves can be partly attributed to lower oil prices, which make high-cost reserves unprofitable. Exxon recently removed 3.3 billion barrels of Canadian oil sands from its books because the oil is not profitable to produce at today’s prices, for example. But it also highlights the growing difficulty that the oil majors are having at making major new discoveries. Low oil prices are forcing cutbacks in exploration budgets, which is making new discoveries more difficult. In the last two years, the global oil industry logged the lowest volume of new discoveries in seven decades. On top of that, it is also the case that there are simply fewer and fewer major oil fields left to discover.