By Jennifer Hiller
EDDY COUNTY, NEW MEXICO, March 20 (Reuters) - In NewMexico's Chihuahuan Desert, Exxon Mobil Corp is buildinga massive shale oil project that its executives boast will allowit to ride out the industry's notorious boom-and-bust cycles.
Workers at its Remuda lease near Carlsbad - part of a staffof 5,000 spread across New Mexico and Texas - are drillingwells, operating fleets of hydraulic pumps and digging trenchesfor pipelines.
The sprawling site reflects the massive commitment to thePermian Basin by oil majors, who have spent an estimated $10billion buying acreage in the top U.S. shale field since thebeginning of 2017, according to research firm Drillinginfo Inc.
The rising investment also reflects a recognition thatExxon, Chevron, Royal Dutch Shell and BP Plclargely missed out on the first phase of the Permianshale bonanza while more nimble independent producers, whopioneered shale drilling technology, leased Permian acreage onthe cheap.
Now that the field has made the U.S. the world's top oilproducer, Exxon and other majors are moving aggressively todominate the Permian and use the oil to feed their sprawlingpipeline, trading, logistics, refining and chemicals businesses.The majors have 75 drilling rigs here this month, up from 31 in2017, according to Drillinginfo. Exxon operates 48 of those rigsand plans to add seven more this year.
The majors' expansion comes as smaller independentproducers, who profit only from selling the oil, are slowingexploration and cutting staff and budgets amid investor pressureto control spending and boost returns.
Exxon Chief Executive Darren Woods said on March 6 thatExxon would change "the way that game is played" in shale. Itssize and businesses could allow Exxon to earn double-digitpercentage returns in the Permian even if oil prices - now above$58 per barrel - crashed to below $35, added Senior VicePresident Neil Chapman.
Exxon's 1.6 million acres in the Permian means it canapproach the field as a "megaproject," said Staale Gjervik, thehead of shale subsidiary XTO Resources, whose headquarters wasrecently relocated to share space with its logistics andrefining businesses. The firm also recently outlined plans tonearly double the capacity of a Gulf Coast refinery to processshale oil.
"It sets us up to take a longer-term view," Gjervik said.
The majors' Permian investments position the field tocompete with Saudi Arabia as the world's top oil-producingregion and solidifies the United States as a powerhouse inglobal oil markets, said Daniel Yergin, an oil historian andvice chairman of consultancy IHS Markit.
"A decade ago, capital investment was leaving the U.S.," hesaid. "Now it's coming home in a very big way."
The Permian is expected to generate 5.4 million barrels perday (bpd) by 2023 - more than any single member of theOrganization of the Petroleum Exporting Countries (OPEC) otherthan Saudi Arabia, according to IHS Markit. Production thismonth, at about 4 million bpd, will about double that of twoyears ago.
Exxon, Chevron, Shell and BP now hold about 4.5 millionacres in the Permian Basin, according to Drillinginfo. Chevronand Exxon are poised to become the biggest producers in thefield, leapfrogging independent producers such as PioneerNatural Resources.
Pioneer recently dropped a pledge to hit 1 million bpd by2026 amid pressure from investors to boost returns. It shiftedits emphasis to generating cash flow and replaced its chiefexecutive after posting fourth quarter profit that missed WallStreet earnings targets by 36 cents a share.
Shell, meanwhile, is considering a multi-billion dollar dealto purchase independent producer Endeavor Energy Resources,according to people familiar with the talks. Shell declined tocomment and Endeavor did not respond to a request.
Chevron said it would produce 900,000 bpd by 2023, whileExxon forecast pumping 1 million barrels per day by about 2024.That would give the two companies one-third of Permianproduction within five years.
SMALLER PRODUCERS GET SQUEEZED
At first, the rise of the Permian was driven largely bynimble explorers that pioneered new technology for hydraulicfracturing, or fracking, and horizontal drilling to unlock oilfrom shale rock, slashing production costs.
The advances by smaller companies initially left the majorsbehind. Now, those technologies are easily copied and widelyavailable from service firms.
Surging Permian production has overwhelmed pipelines andforced producers to sell crude at a deep discount, sapping cashand profits of independents who, unlike the majors, don't owntheir own pipeline networks.
Even as the majors have ramped up operations, the totalnumber of drilling rigs at work in the Permian has dropped to464, from 493 in November, as independent producers have slowedproduction, according to oilfield services provider Baker Hughes.
Shell, by contrast, plans to keep expanding even if pricesfall further, said Amir Gerges, Shell's Permian general manager.
"We have a bit more resilience" than the independents,Gerges said.
In west Texas, the firm drills four to six wells at a timenext to one another, a process called cube development thattargets multiple layers of shale as deep as 8,000 feet.
Cube development is expensive and can take months, making itan option only for the majors and the largest independentproducers. Shell has used the tactic to double production in twoyears, to 145,000 bpd.
The largest oil firms can also take advantage of theirvolume-buying power even if service companies raise prices forsupplies or drilling and fracking crews, said Andrew Dittmar, aDrillinginfo analyst.
"It’s like buying at Costco versus a neighborhood market,"Dittmar said.
The majors' rush into the market means smaller companies aregoing to struggle to compete for service contracts and payhigher prices, said Roy Martin, analyst with energy consultancyWood Mackenzie.
"When you’re sitting across the negotiating table from themajors, the chips are stacked on their side," he said.
REBIRTH
The revival of interest in the Permian marks a reversal fromthe late 1990s, when production had been falling for twodecades.
"All the majors and all the companies with names you’veheard left with their employees," said Karr Ingham, an oil andgas economist. "Conventional wisdom was this place was going todry up."
Chevron was the only major that stayed in the Permian. Itholds 2.3 million acres and owns most of its mineral rights,too, but until recently left drilling to others.
But this month, Chief Executive Mike Wirth called thePermian its best bet for delivering profits "north of 30 percentat low oil prices."
"There's nothing we can invest in that delivers higher ratesof return," Wirth said this month at its annual investor meetingin New York.
'HUNGER AND FEAR'
Matt Gallagher, CEO of Parsley Energy Inc, calls themajors' investments "the best form of flattery" for independentsoperating here.
Parsley holds 192,000 Permian acres - most of which wassnatched up on the cheap during oil busts - and sees its smallersize as an advantage in shale.
"We’re not finished yet," Gallagher said. "We can move veryquickly."
The majors have greater infrastructure, but independentscontinue to innovate and design better wells, said Allen Gilmer,a co-founder of Drillinginfo.
"Nothing is a bigger motivator than, 'Am I going to be alivetomorrow?'" Gilmer said. "Hunger and fear is something thatevery independent oil-and-gas person knows - and that somethingno major oil-and-gas person has ever felt in their career."
(Reporting by Jennifer HillerAdditional reporting by David FrenchEditing by Gary McWilliams and Brian Thevenot)
