December 1, 2023

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The Chevron-Hess deal may lift oil production in the Bakken, but it will not return to the boom days

The Chevron-Hess deal may lift oil production in the Bakken, but it will not return to the boom days
  • The Chevron-Hess deal makes Chevron the largest producer in the Bakken
  • Production in the Bakken remains 18% below its peak in late 2019
  • Breakeven prices in the Bakken are higher than other shale areas

NEW YORK (Reuters) – Chevron’s (CVX.N) agreement announced last week to buy Hess (HES.N), one of the largest operators of the Bakken shale field in North Dakota, may increase oil production there marginally, but analysts do not expect a return to days. The peak it was before the pandemic.

New drilling techniques during the so-called Bakken Boom turned North Dakota into the nation’s second-largest crude oil-producing state from 2012 to 2020. New Mexico took over second place after the COVID-19 pandemic crushed oil demand and plunged demand. On oil. Drilling activity.

Located along the Canadian border, the Bakken formation is far from export terminals and refineries, meaning producers have higher transportation fees and typically lower profits than their competitors in the giant shale region of Texas and New Mexico that are closer to the main refining area. And export centers on the Gulf Coast.

Production in the most expensive Bakken region is about 1.27 million barrels per day, about 18 percent less than the peak in late 2019, according to US government data.

The company said on Wednesday in its earnings statement that it produced 190,000 barrels of oil equivalent per day there during the third quarter of this year.

Chevron’s acquisition gives it that production and 465,000 net acres (1,882 square kilometers) in the region, which Chevron described as “long-term inventory” when it announced the deal.

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Reuters graphics

Chevron is expected to largely adhere to Hess’s plans for Bakken, which include increasing its net production there to about 200,000 barrels of oil per day in 2025, analysts said.

Drilling with the same number of rigs as Hess used would give Chevron about 15 years of inventory in the area, Chevron CEO Mike Wirth said when the deal was announced.

“This is a very attractive asset that can provide the kind of consistent production and strong cash flow for many years to come,” Wirth said.

He added that Chevron hopes that the new technology it is pioneering in other shale oil areas in which it operates will help put greater pressure on Beijing in the future.

“This sale represents a big deal in North Dakota,” said Ron Ness, president of the North Dakota Petroleum Council, an industry trade group.

“Bringing Chevron’s expertise to the state is very welcome.”

Chevron’s entry also represents a cultural change in the state’s energy industry. Hess has been part of North Dakota’s energy industry since 1951, and has helped establish the state as one of the largest producers of shale oil and gas.

“There’s an emotional feeling to this sale,” said Kathy Nesset, who runs a prominent North Dakota oil industry consulting firm and counts Hess as one of her biggest clients.

Upside down?

Matthew Bernstein, a senior analyst at Rystad Energy, said Chevron could raise Bakken production to a higher level than Hess is targeting in the future.

Given the breadth of their operations, larger integrated companies like Chevron are under less pressure from shale producers to adhere to modest target increases in each region in which they operate — as long as they continue to provide shareholders with returns, Bernstein said.

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The Bakken is more consolidated and mature than areas like the largest US oil field – the Permian Basin – and is much smaller, so there is less room for increased activity, said Jessie Jones, of Energy Aspects.

Breakeven prices in the Bakken have been higher on average than other shale regions since 2019.

Half-Bakken break-even prices, which include transportation costs, income taxes and price differentials, are expected to average $58.86 per barrel in 2023, well below the $50.69 per barrel in the Permian Basin’s Midland region, according to Rystad. Energy data.

Reuters graphics Reuters graphics

Energy Information Administration data showed that the Permian Basin in Texas and New Mexico exceeded its previous peaks and reached a record high this year at about six million barrels per day.

Jones expects Bakken production to reach 1.3 million barrels per day this year, which is still far from the pre-pandemic peak of 1.54 million barrels per day.

It remains to be seen whether renewed investment or technological advances can prevent a long-term decline in Bakken production.

Nathan Nemeth, principal analyst at Wood Mackenzie, said oil production in the Bakken could fall to 1.15 million barrels per day from 2026 and remain stable until 2030, before entering a gradual decline as reserves begin to be depleted.

Stephanie Kelly reports. Additional reporting by Ernest Scheider, Editing by Margarita Choy, Editing by Simone Webb and Margarita Choy

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A New York-based correspondent covering the US crude market and a member of the energy team since 2018 covering oil and fuel markets as well as federal policy around renewable fuels. Contact: 646-737-4649

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