News: Chevron Plans to Exit Appalachia
Posted February 10, 2020
It was announced this past December that Chevron, one of America’s largest oil and gas companies, would be putting its Utica and Marcellus shale operations up for sale. Now the company has begun the process of unloading its wells and drilling operations in the region.
This is a big move by a big name in the industry. So let’s break down this news—why is it happening and what implications (if any) does it have for landowners here in Ohio who have sold or are thinking of selling their mineral rights?
How long has Chevron been operating in the Appalachian region?
Chevron began working in the Appalachian region (an area of the Eastern United States around the Appalachian Mountains that stretches from New York to Georgia) back in 2011 when they acquired Atlas Energy for $4.3 billion. Since that time they opened up an office in Pennsylvania and began drilling in the Marcellus and Utica shales—including some areas of Ohio.
According to the Pittsburgh Post-Gazette, “Chevron controls about 890,000 acres in the Marcellus and Utica shales across Pennsylvania, West Virginia and Ohio”. All of that business is now up for sale as Chevron looks to exit the Marcellus and Utica shales less than a decade after they spent billions buying into them.
Why did Chevron make the decision to exit Appalachia?
There are few key reasons Chevron has decided to shut down its Appalachia operations:
1. Chevron has a lot of assets
Chevron is a massive, global corporation with assets all over the world. They’re not only one of the biggest oil and gas companies in the United States, they’re one of the largest companies (by revenue) in the world. And from what they’ve stated, Appalachia is not one of their best performing assets. So they’re moving on.
It’s hard to compare Chevron to other smaller operators in Appalachia because they’re so widespread—with extensive operations in over a hundred countries around the globe. While they have a moderately large position in the Appalachian region, it makes better economic sense for them to focus on other areas of their portfolio at this time.
2. Natural gas prices are down
It’s impossible to talk about this move without talking about the elephant in the room: the low price of natural gas at the moment. These low prices—which have been decreasing over the past year and are expected to remain low for the remainder of 2020—are the result of the supply of natural gas eclipsing demand due to factors like the increase in shale drilling, more effective drilling methods, and the past year’s milder weather.
Because of this low-price environment, Chevron wants to drill in areas where their economics make the most sense. That’s what we’re seeing with most big oil and gas companies right now. While there is some media speculation that the “shale boom” may be over, the Post-Gazette notes that many smaller oil and gas companies are still “going all in on Appalachian shales”.
3. Big energy wants “cash positive”
Another notable aspect of Chevron’s move is a trend we’re seeing among large oil and gas operators at the moment to pay down debt. The energy companies have really got hurt in the markets. Their stock prices are all significantly down (including Chevron which has lost 25% of its value since mid-2014), and this has sparked a movement in the industry to become cash positive.
That’s why Chevron, even though they’ve invested billions in Appalachia, is ready to write off their losses from this portion of the business and sell off what they can. The idea is, if they can sell their assets—especially non-core assets—and get something to pay down long-term or near-term debt, then it’ll help them steady the ship and weather the storm.
What does Chevron selling their assets mean for landowners?
The biggest thing for landowners is the unknown of what comes next. Who’s going to end up developing your minerals? When consolidation happens, you don’t know what company is going to purchase your lease or develop in your area—or whether that will end up being a good or bad thing.
At Gateway, we often say, when it comes to developing mineral interest, the three most important things are:
- Timing – You have to be able to drill the product
- Price – You need a good price for the product
- Infrastructure – You have to be able to move the product
For landowners, those three things largely determine your likelihood of earning royalties from your minerals and how much you’ll make. The biggest unknown for landowners when there’s consolidation is the timing of development—how quickly is development going to happen after your lease gets sold off to another company? Will it be weeks, months, years, or will it not even happen?
If you’re an Appalachia landowner that currently has a lease with Chevron, this recent news could delay the development of your minerals. That means a longer wait time until your minerals make it to market and a longer wait time until you receive royalties.
Are you an Ohio landowner who has questions about how the Chevron sale might impact your mineral rights or royalties? Reach out to the experts at Gateway today. We’ll be happy to answer any questions you might have.