Independent shale drillers in the US are facing pressure to either expand or be acquired, Robert Kaplan, president of the Federal Reserve Bank of Dallas, has said. Despite the classic “wildcatting” image of plucky entrepreneurs trying their luck, smaller, independent drillers are losing access to capital and hearing complaints from shareholders, he said in an interview with the Financial Times.
Mr Kaplan’s comments come less than two weeks after Occidental Petroleum agreed to acquire rival Anadarko Petroleum, one of the largest US independent oil and gas groups, for $56bn. “People have said to me in this industry, you’re either a buyer or a seller today,” Mr Kaplan said. “But if you stand pat, where you are, you’re going to be in a dangerous place … Even shale is not immune from disruption and capital discipline, and they’re feeling it right now. And this is why you’re seeing more merger activity.” In the Dallas Fed’s most recent Energy Survey – a quarterly poll of about 200 oil and gas companies – one anonymous oil industry executive wrote that “the shrinkage in market capitalization of some companies is breathtaking”. Investors, according to the survey, are no longer willing to speculate on new, unproven acreage.
“Vertical drilling prospects are dead,” wrote another oil industry executive. “Deep pockets for manufacturing oil and gas have taken over the patch here.” The development of the US shale oil and gas industry was pioneered by smaller and midsized exploration and production companies. But larger groups are becoming increasingly important, particularly in the Permian Basin, the heartland of the latest oil boom.
ExxonMobil and Chevron, the two largest US oil groups, have both set out plans for rapid growth in the Permian region, and other international companies have either been making acquisitions there, as BP has done, or are looking at possible deals, which Royal Dutch Shell is doing. There are two principal forces driving consolidation in the industry. One is the value of having larger areas with drilling rights that are contiguous or at least close together, to make it easier to manage the logistics of production.