Low oil prices seem to have done little to dampen Chevron’s spirits. The No. 2 oil and gas company in the U.S. has recently announced that while it is winding down long-term investments on big projects as they come into production this year and next, it is still committed to exploration in the Permian Basin where it is planning to double its spending and boost its rig fleet in the hope of doubling, or even tripling, production by the end of the decade. At the same time the company announced it has started producing liquefied natural gas (LNG) and condensate at the Gorgon Project on Barrow Island off the northwest coast of Western Australia, expecting the first LNG cargo to be shipped next week.
At its annual security analyst meeting in New York, Chevron’s executives reiterated priorities, expressed confidence in the company’s near term outlook and emphasized an advantaged position when markets rebound.
“We’re completing major projects that have been under construction for several years. This enables us to grow production and reduce spending at the same time, which should improve our net cash flow significantly,” said John Watson, Chevron’s chairman and chief executive officer. Watson reiterated the importance of dividend growth and maintaining a strong balance sheet in the company’s financial priorities, noting the company’s record of 28 consecutive years of dividend increases, and plans to limit debt increases beyond 2016.
“Industry conditions are tough right now, with low oil and natural gas prices. We believe markets will improve, and we’ll be well positioned when they do,” Watson continued. “We have an excellent upstream and downstream portfolio, and we are driving operating and administrative efficiencies across the company.”
In the Permian Basin, Chevron says it has 1,300 drilling locations that can make a 10-percent return at $40 oil; at $50 oil, 4,000 locations can turn a profit; at $60, 5,500 locations. And that’s just assessing a third of its portfolio there.
It expects to drill 175 wells this year with seven operated rigs and nine non-operated rigs. By 2020, the company projects it could pump up to 350,000 barrels a day out of the Permian, up from its current 125,000 barrels a day.
The company has responded to the tough market conditions by shedding jobs – it is planning to shed 4,000 jobs on top of the 3,000 redundancies last year – and increasing productivity. Bracing for low oil and gas prices, Chevron said it will cut its capital spending from a range of $26.6 billion this year to $22 billion to $17 billion a year in 2017 and 2018. At the same time, new efficiency measures – bringing the cost and time to drill horizontal wells to $7.1 million (down by 40 percent) and 20 days respectively – mean that the company expects to boost production to 2.9 to 3 million barrels a day in 2017, from 2.62 million barrels a day in 2015.
Meanwhile, Chevron is positioning itself to become a major LNG supplier by 2020. In particular, Chevron’s Australian projects are well located to meet growing demand for energy in the Asia-Pacific region and more than 80 percent of Chevron’s Australian subsidiaries’ equity LNG from the Gorgon and Wheatstone projects is covered by sales and purchase agreements and heads of agreements with customers in the region.
Jay Johnson, executive vice president, upstream, said on March 8th: “We’re focused on safe, reliable operations and effective project start-ups and ramp-ups. At Gorgon, we’re producing LNG and the first cargo is expected to ship next week. With an advantaged position in the Permian and a deep portfolio of operating assets, we’re transitioning our spending to more short-cycle, higher-return activity that utilizes existing infrastructure. We have a portfolio of assets that should allow production growth through the end of the decade, even at moderate prices.”
The Gorgon Project is supplied from the Gorgon and Jansz-Io gas fields, located within the Greater Gorgon area, between 80 miles (130 km) and 136 miles (220 km) off the northwest coast of Western Australia. It includes a 15.6 MTPA LNG plant on Barrow Island, a carbon dioxide injection project and a domestic gas plant with the capacity to supply 300 terajoules of gas per day to Western Australia.
The Chevron-operated Gorgon Project is a joint venture between the Australian subsidiaries of Chevron (47.3 percent), ExxonMobil (25 percent), Shell (25 percent), Osaka Gas (1.25 percent), Tokyo Gas (1 percent) and Chubu Electric Power (0.417 percent).
“We expect legacy assets such as Gorgon will drive long-term growth and create shareholder value for decades to come,” said John Watson. “The long-term fundamentals for LNG are attractive, particularly in the Asia-Pacific region, and this is a significant milestone for all involved.”
Image: Gorgon LNG facility, source: Chevron press release
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