Shell, Anadarko may let Permian JV expire to speed up development

Permian
Anadarko and Shell say if they were to let their joint venture expire, the two companies could drill Permian wells at their own pace. Anadarko photo.

10-year long Permian joint venture unlikely to be renewed

Royal Dutch Shell and Anadarko Petroleum are exploring the possibility of letting a 10-year joint venture in the Permian Basin expire. The move would allow both companies to split their properties in an effort to speed up development, according to a report by Reuters.

A senior Shell executive told Reuters the split would allow each firm to drill and develop new Permian wells at their own pace.  Under one proposal, Greg Guidry of Shell says “we could have ideally two 100 per cent owned and operated parcels.”

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“That would be a split that will allow us to manage the flexibilities in terms of capital pace, separate of Anadarko,” he said in an interview this month.

Texas’s Permian Basin is now the US oil industry’s hottest development area thanks to low operating costs and year-round drilling as crude prices remain stuck around the $50/barrel mark.

Guidry, who manages Shell’s shale business told Reuters that Shell and Anadarko have been discussing how to proceed following the expiration of the agreement this summer.  He says renewal of the joint venture deal is unlikely.

Shell is reportedly looking to increase its North American shale production by 140,000 barrels of oil equivalent per day in the coming three years.  This goal relies heavily on the company’s Permian output.

 

Negotiations on the agreement that was first signed in 2007 between Anadarko and Chesapeake Energy Corp are continuing.  In 2012, Shell bought Chesapeake’s Permian holdings which included the joint venture.

Should the two sides allow the deal to lapse, Anadarko would become the operator of more than 350,000 acres in the Delaware portion of the Permian, with a roughly 60 per cent interest.

Reuters reports Anadarko Chief Executive Al Walker said that he preferred an arrangement that would give his company majority control over the land once the deal with Shell expires.

“We and Shell, I think, have an extremely attractive position in the (Permian),” he told investors on a conference call. “We think the economics are certainly compelling for us to be operator going forward.”

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Anadarko has refused to comment beyond Walker’s earlier remarks.

So far, analysts at Bernstein said last month that the joint venture has benefitted Shell more than Anadarko as the latter has much more experience in horizontal well development which is crucial to Permian operations.

A “clean split” of the operations is easier said than done with acreage arrayed in a checkerboard pattern, the way drilling properties are organized in West Texas.  Moving a rig or other equipment between these land parcels would become more laborious should the joint venture lapse.

“It would be unusual if either party would view that as an optimal solution because that’s an inefficient way to develop those assets,” Ben Shattuck, an oil industry analyst with consultancy Wood Mackenzie told Reuters.

Both companies are moving their focus to the Permian. Anadarko has been selling off assets in other areas and shifting staff to West Texas to develop holdings.  Royal Dutch Shell is looking to lock in quick returns in the profitable area.

“The strategic fit of the Permian in the Shell portfolio will be different from a the strategic fit of the Permian in a pure upstream player,” said Guidry.

Investors are confused about what the end of the joint venture could mean for them as terms of the JV are not outlined in regulatory filings for either company.

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