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Chevron's U.S. Upstream Profits Slump 99%

Lower domestic natural gas production and a sharp reversal in commodity prices sent Chevron Corp.'s U.S. upstream earnings down 99% from a year ago, the biggest domestic decline in more than 25 years, the major reported Friday.

The San Ramon, CA-based major's U.S. upstream segment earned only $21 million in the first three months of 2009, versus $1.6 billion in the year-ago period. Chevron said it also had a ceiling test write down of almost $100 million on its U.S. exploration and production activities in 1Q2009.

Chevron's average realized sales price for U.S. gas in 1Q2009 was $4.14/Mcf, which was $3.41 lower than a year ago. The company received on average $36/bbl for its U.S. crude and natural gas liquids versus $51 in 1Q2008.

Worldwide Chevron reported earnings of $1.84 billion (92 cents/share) in 1Q2009, compared with $5.17 billion ($2.48) in 1Q2008. Earnings in 1Q2009 included $400 million (20 cents/share) gains from asset sales. Sales and other operating revenues fell to $35 billion in the quarter, down from $65 billion in the year-ago period.

Globally, said CEO Dave O'Reilly, Chevron's operations were "excellent..., with oil production and refinery inputs both higher than a year ago and operating expenses lower. However, upstream earnings declined sharply on lower prices for crude oil and natural gas."

U.S. net natural gas production in 1Q2009 totaled 1.38 Bcf/d, which was down 17% from the year-ago period. Nearly half of the decline in gas production was attributed to last year's hurricanes, which have continued to impact not only Chevron but other offshore producers. Chevron's total domestic net oil-equivalent output also was impacted by the hurricanes. Total net U.S. output was 671,000 boe/d, which was 44,000 boe/d below the year-ago period. Partially offsetting the drop in U.S. production was the start-up of the deepwater Blind Faith project, which ramped up 35,000 boe/d in late 2008.

Production increases in the first three months of 2009 included volumes from start-ups worldwide, including Blind Faith in the deepwater Gulf of Mexico (GOM). Deepwater production start-ups scheduled this year in the GOM include Chevron's 58%-owned Tahiti project, where total maximum production by the end of 2009 is estimated at 135,000 boe/d.

Tests are continuing at Chevron's jointly owned deepwater St. Malo and Jack projects, CFO Patricia Yarrington told energy analysts in a conference call Friday. The company shares stakes in some of the Lower Tertiary discoveries with Devon Energy Corp. and StatoilHydro ASA. Work continues on front-end engineering and design for a production facility that would have a capacity of between 120,000 boe/d and 150,000 boe/d, Yarrington said.

The facility would co-develop the Jack Field and the nearby St. Malo Field, which Chevron estimates have combined recoverable resources in excess of 500 million boe.

"We are in the process of engineering," Yarrington said. Chevron has "significant sized opportunities here, and reasonably large-sized reservoirs with long-lived production profile to them."

Despite the low commodity prices, she said Chevron "feels comfortable going forward at this stage" with its GOM opportunities. "We need the project management process done," she said. "Timing is 12 to 18 months."

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