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Chevron Plans No Active Gas Drilling in Lower 48 by Year's End

Chevron Corp. plans to pull down all of its active natural gas land rigs operating in the Lower 48 states by the end of the year, the company's exploration chief said Friday.

George Kirkland, executive vice president of upstream and gas, told financial analysts during a quarterly earnings conference call that it "doesn't make sense to build capacity where we're not be able to produce it." Similar to constraints imposed in some areas internationally by OPEC, low domestic gas prices have forced the U.S. producer to refocus.

"We won't have a single gas rig running by the end of the year," Kirkland said. "With gas prices where they are, it doesn't make sense for us to drill those gas wells."

Asked to clarify whether the producer would have any workover gas rigs in operation, Kirkland said there would be "no development gas drilling" by year's end. Oil development drilling would continue -- or be increased -- and there are no plans to pull back in the Gulf of Mexico (GOM).

If the domestic gas rig rate continues to fall, supplies eventually would balance to lift prices.

"The decline rates on U.S. gas are pretty high," he said. "We are pulling the trigger on reducing the amount of investment in that arena, and [supply/demand] is going to start responding..."

One area expected to take a hit is in Colorado's Piceance Basin, said Kirkland.

"In the Piceance Basin we have a facility, a nice area of development up there, with 30,000-plus acres. We've drilled a large number of wells, but we are shutting down all drilling in the Piceance. We had planned at one time to have six to eight rigs running there. We now have shut down the last rig."

Beyond dropping its rigs, Kirkland was asked at what gas price Chevron might "turn off the taps."

"This is a question that gets more into the supply/demand balance," he said. "Of course, at some point, there won't be any supply of gas. We've done no work, and I've seen none in that arena," to point to when Chevron might begin shutting in domestic gas supplies.

Shrinking demand for fuel and lower natural gas and oil prices sent Chevron's 2Q2009 profit down 71% from a year ago, the company said. U.S. natural gas sales quarter/quarter fell to 5,721 MMcf/d from 7,631 MMcf/d.

The second largest U.S. major reported earnings of $1.75 billion (87 cents/share) in 2Q2009, compared with $5.98 billion ($2.90) in 2Q2008. Sales and other operating revenues fell by half to $40 billion from $81 billion.

"Operationally, we had another very successful quarter," said CEO Dave O'Reilly. "In our upstream business we had major project start-ups at Tahiti in the GOM and Frade offshore Brazil, and our company's net oil-equivalent production increased 5% from a year ago. In our downstream operations, refinery utilization was higher than in last year's second quarter."

A 79% drop in upstream quarterly earnings, which was driven by lower commodity prices, was offset only partially by improved results in the downstream segment, noted the CEO. On a companywide basis, aggressive cost-management efforts resulted in about a 15% decrease in expenses from a year ago, he said.

In the United States Chevron ramped up production at its 58%-owned and operated Tahiti Field in the deepwater GOM. The field reached maximum production of 135,000 boe/d during July, the company said.

Worldwide oil-equivalent production was 5% higher in 2Q2009, reaching 2.67 million boe/d from 2.54 million boe/d in the year-ago period. Chevron credited the increase to project start-ups in the past year and the impact of lower prices on cost-recovery and variable-royalty volumes in production contracts outside the United States.

U.S. upstream earnings of $273 million in 2Q2009 were down $1.9 billion from a year earlier on sharply lower commodity prices. Domestic operating expenses were lower between periods, "but this benefit to income was more than offset by higher depreciation expense, including charges of approximately $100 million for asset impairments," the producer said.

The average sales price for the company's crude oil and natural gas liquids was $50/bbl in 2Q2009 quarter, compared with $109 a year ago. The average sales price of its natural gas was $3.27/Mcf, nearly two-thirds less than the $9.84 that Chevron received in 2Q2008.

Net production was 700,000 boe/d, down 2,000 boe/d quarter/quarter. A production increase of 60,000 boe/d in the past year came from the late-2008 start-up of the Blind Faith Field and the Tahiti Field, both in the GOM.

However, the production increase was offset by normal field declines, production shut-ins from last year's GOM hurricanes and asset sales, said Chevron. The net liquids component of production was up about 7% to 467,000 bbl/d. Net natural gas production of 1.40 Bcf/d declined 12% quarter/quarter, "with most of the decrease associated with normal field declines, asset sales and the hurricane effects," said Chevron.

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