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Chevron Waits for Better Times to Develop U.S. Shale, Tight Gas

Unconventional natural gas development in the United States is ongoing at Chevron Corp., but in a "very weak" gas market, the company will work at its "discretion" and focus today on more oily endeavors, CEO Dave O'Reilly said.

On Friday the industry veteran helmed his final quarterly earnings conference call as chairman of Chevron. O'Reilly, 62, turns the reins over to John Watson at the end of the year after a 41-year career, including 10 years as chairman and CEO.

With a roster of prospective oil and gas opportunities worldwide, an analyst questioned whether Chevron, or any supermajor, could compete head-to-head with more nimble independents in pursing shale gas opportunities in the United States.

"We have shale gas and tight gas," O'Reilly said. "We have a presence in [the] Haynesville [shale], land we control, and we control the pace of that. We are doing some development drilling, some tests on an economic way to develop that. And then the other part is the tight gas we have in the Piceance Basin...We have slowed down progress there, but we're building to a capacity to produce 60 MMcf/d or so there, enough capacity to supply that for some time.

"We have curtailed our gas activity somewhat because we have the discretion to do that...Late last year we began to do that because we could see that the gas market was very weak...We have focused this year on the oil side, other than our big, long-term projects...and that was a deliberate decision on our part."

O'Reilly said he wouldn't "speculate further on shale, other than we have an interest in it and we continue to pursue it, but we are using this time to develop an expertise to do that as efficiently as we can using our drilling expertise, which we have in great depth in the company."

Multi-well drilling isn't just about speed, said O'Reilly. "We drill rapid-fire wells in the Gulf of Thailand...and we are quite capable of multiple well programs; we've demonstrated that capability. What we are working on right now is to make sure we understand what we have to replicate time and time again. What we are doing in shale is somewhat different that drilling in the Gulf of Thailand, but I feel confident it can be done. But it has to be done at a scale to move the needle...and that's what we propose to do."

Chevron, the second-largest U.S. producer after ExxonMobil Corp., posted an 11% jump in oil and gas output in 3Q2009 from the same period a year ago, the biggest gain since the company bought Unocal Corp. four years ago (see NGI, Aug. 15, 2005). In the United States, net production was 745,000 boe/d in 3Q2009, which was up 98,000 boe/d, or about 15%, from a year earlier.

The increase in U.S. production was primarily associated with start-up in the Gulf of Mexico (GOM) of the Blind Faith Field in late 2008 and the Tahiti Field in 2Q2009, along with the restoration of volumes that were offline in September 2008 due to hurricanes in the GOM. The net liquids component of production was up 24% to 509,000 b/d in 3Q2009, while net gas production of 1.42 Bcf/d was down about 1% from a year ago.

Chevron's net income declined to $3.83 billion ($1.92/share) in 3Q2009, which was down 51% from $7.89 billion ($3.85) in 3Q2008. Revenue fell 41% from the year-ago period to $46.6 billion. Upstream earnings of $3.64 billion declined 41% from 3Q2008 because of lower commodity prices. U.S. upstream earnings of $878 million were down $1.3 billion from a year earlier on the "effects of sharply lower prices for crude oil and natural gas, lower gains on asset sales and higher depreciation expense," which were partially offset by the benefits of increased production and lower operating expenses."

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