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Permian Offering Big Advantages, Price-Wise, for Chevron

Chevron Corp. has dropped some rigs in the Permian Basin this year; but, it's not because of lower commodity prices. In fact, the operator is as enthusiastic as ever about the legacy play, where efficiencies in completions are leading to more production for the buck.

The executive team for the San Ramon, CA-based oil major met with analysts in New York City on Tuesday to outline global strategies through 2017. Deepwater developments and liquefied natural gas projects are the big driver for output in the near-term. However, the Midland and Delaware sub-basins of the Permian are a mesmerizing, low-cost target, said Senior Vice President Jay Johnson.

"The Permian Basin is one of our most important growth areas," he told analysts. Chevron holds a legacy leasehold of two million net acres, with a resource base estimated at more than 7 billion boe and multiple stacked plays.

What's driving the growth as much as anything is the royalty rate. Most of the leasehold, 85%, has no or low royalty rates of $5.00/bbl and below, which is less than half that of any competitor.

"That's a significant differentiator on the barrels," Johnson noted. "It's always important," making the Permian "more compelling in the current price environment. We are taking the approach of developing at a measured pace, and the approach is working. We are able to derisk acreage, move to horizontal wells, and employ our factory model in deliberate fashion."

The Permian's Midland and Delaware sub-basins have grown in Chevron's esteem since 2012, said Johnson, who is taking over the upstream division later this year when Vice Chairman George Kirkland retires. Every year since 2012 Chevron has increased its production outlook for Permian. By 2020, the company expects the leasehold to be producing 250,000 boe/d net.

The higher production is going to come as Chevron "shifts from exploration to development drilling," Johnson said. By derisking the acreage before pouring money into development, Chevron in the past two years has reduced its Permian drilling costs per foot by 20%, reduced completion costs by 28% and increased the wells per rig year by 21%.

Nineteen rigs were running in the sub-basins during 2014. Sixteen are scheduled to work the plays this year and they will produce more oil and gas, Johnson said. Chevron had planned to drill 500 wells, mostly verticals, last year, but efficiencies led the operator to drill about 550 instead. This year, horizontal drilling is planned, which means fewer wells, about 375, but more output.

Of particular importance is the Bradford Ranch development in the Wolfcamp Shale within the Midland play. Two horizontals have been completed, with initial production (IP) rates for the AC/AF No. 5 of 1,300 boe/d, 88% liquids. The well was drilled with a 7,500-foot lateral. The No. 6 well had an IP rate of 830 boe/d, 87% liquids on a 4,600-foot lateral.

Based on the results to date, most of the future wells -- all horizontals -- would use 7,500-foot laterals, Johnson said. "There's a potential for over 200 wells at Bradford Ranch," with upside potential from the Lower Spraberry formation. Chevron has an estimated ultimate recovery of 800,000-900,000 b/d based on the results to date per well, he added.

"The Bradford Ranch represents just a small portion of the Midland Basin."

Chevron expects to see some price breaks from its oilfield service vendors in the range of 10% to 40%, Johnson said. If prices don't fall, "we will re-bid contracts."

Don't expect Chevron to pursue onshore natural gas development until prices increase, Kirkland said. Chevron has some holdings in the gassy Marcellus Shale, but there was no mention of 2015 plans.

"As far as the natural gas market, it's not a good market in the U.S., to be really blunt," Kirkland said. "$3 gas is $18 oil, in my view. It's hard to make a return there that really pays the cost of capital. For me, it's a learning that we've seen many times around the world...We really need to understand domestic gas...with a risk of investment relative to getting it to the international market." Getting international prices "is typically easy on the oil side...

"On the gas side, we can get in a regional market and be very price limited for what you can receive. This will have to change. The U.S. has been, and North America is, well endowed, but at some point, economics have got to come into play."

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