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Chevron Still Raising Rigs in Permian, Eyeing Progress by Apache in Alpine High

Chevron Corp. is known for its big oil and natural gas projects, its long reach across North America and overseas, but new opportunities are emerging more in the legacy Permian Basin, which by itself contributed a 50,000 b/d bounce in production during the third quarter.

The reasons for the turn to West Texas are clear. Shale and tight production increased in 3Q2016 by 50,000 boe/d, primarily because of growth in the Permian's Midland and Delaware sub-basins. Vice President Bruce Niemeyer, who runs the Mid-Continent Business Unit, discussed Chevron's success across its two-million-acre leasehold during a conference call last week.

"We're currently running eight drilling rigs on our operated acreage," he said. "We're standing up our ninth rig as we speak, and expect to be at 10 by the end of the year. Another 10 rigs are currently drilling on our nonoperated development areas."

To illustrate how quickly Chevron is ramping up, he noted that five rigs have been raised since the end of June.

The strategy is to build an asset about which Chevron knows quite a bit: large-scale and able to generate consistent returns and free cash flow.

"To accomplish this, we have implemented a 'well factory' modeled after the most efficient short-cycle operations in Chevron and in the industry," he said. "The goal of this factory is to create repeatable high-value outcomes at sufficient scale that are material for Chevron."

Decisions around a well's design elements are not only the obvious ones, such as horizontal lateral lengths, well spacing and completion parameters, but hundreds of other ones to ensure consistency.

"Today, we estimate that almost 600,000 of our acres have a net value in excess of $50,000 per acre. We have an additional 350,000 acres with a net value between $20,000 and $50,000 per acre. The balance of our acreage is a mix. Some is of lower quality, some is still under evaluation, some lacks nearby infrastructure, and some requires further appraisal."

The estimates are a snapshot that assumes a simultaneous development at flat $50/bbl West Texas Intermediate prices. To date this year Chevron has achieved a 30% development cost reduction from 2015 that's inclusive of drilling, completions, facilities and associated general/administrative (G&A) costs.

"The trend of improvement is mirrored in our overall unit operating expense," Niemeyer said. Direct  lease operating expense has fallen 45% from 2015. G&A is $3.50/bbl, more than 20% lower than in 2015.

Chevron now is pacing activity and production from the Permian to grow through the end of the decade. By the end of 2020, Chevron's Permian shale and tight production is expected to reach 250,000-350,000 boe/d.

"Production continues to track ahead of expectations and is 24% higher than third quarter 2015," Niemeyer said. “Our pace and rate of additions are intentional."

The Permian has been in Chevron's portfolio for decades. Some acreage has been sold, some bought, with pieces moved around. That is an ongoing process.

"There's been a great deal of fluidity in that valuation over the last couple of years," he said. "There's been a great deal of additional appraisal and evaluation work, and there's been a great deal of greater understanding, but there still has been significant movement.

"In some cases, pieces of property have moved up by a factor of 10,000 fold and that's the kind of thing that you would not want to get on the wrong side of, in your haste to make a decision about selling an asset.

"So our process will be to try to do evaluation and appraisal. We'll get a really good understanding of what this asset valuation is, and to the extent that we don't find it fitting into our longer-term development plans, then of course, we look to other monetization options."

Could the Permian, an analyst asked, be big enough to drive a more "meaningful strategic shift," as in taking capital from one area of the world and moving it into New Mexico or Texas?

"I think, when you have such an extraordinary asset base in the Permian, when it has as much depth and breadth to it, and I don't mean that in a literal sense but a figurative sense, such huge economic strength, everything in the portfolio needs to be judged against those options," CFO Pat Yarrington said. "We don't believe we want to be a single-asset class company, so we created strategic capabilities and basin positions in the Gulf of Mexico deepwater. We have the Tengiz project that we talked about. We have the LNG project. So we have a pretty broad-based portfolio here, and we're not looking to take all activity down to the Permian.

"But the value of the Permian and its tremendous economic capability, and its capital efficiency is great flexibility at short-cycle high-returned attributes does make other parts of the portfolio have to compete for capital against that," she said. "I think it raises the bar on where the incremental dollar is going to go.

"And I think Permian will get the first call, but we will manage it as a portfolio. Over time you should still expect us to have some significant other projects, but we can pace those projects quite nicely I think and match against, always coming back to and matching against the opportunities that the Permian provides for us."

One intriguing growth area is the Alpine High, a play in the southern part of the Delaware about which Apache Corp. is crowing (see Shale Daily, Sept. 7). Apache estimates the less traveled area of West Texas may hold at a minimum 8.1 billion boe, with at least 75 Tcf of natural gas and 3 billion bbl of oil.

"We're excited by this activity and hope it's fully successful," Niemeyer said. "We have 180,000 acres in our portfolio" in the Alpine High area within Reeves County, which Chevron currently estimates is worth less than $20,000/acre.

"Subsurface is structurally more complex," he said, and it appears to be a "little more gassy," as well as "far from existing infrastructure. But additional positive data certainly has the potential to move that area to higher value and if it does, and we go through a regular resort of priorities, we would adjust our activity as that indicated."

For the near-term, the focus is on capital efficiency, not chasing a particular production curve, he said.

"Growing production is important. Growing volume is important. But retaining efficiency throughout is what we do. We have many options going forward to adjust our pace of activity up-and-down. We have the ability to grow activity but it is returns that we are ultimately focused on and that will drive our decision-making going forward."

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