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Chevron Remains Bullish on Gulf of Mexico, Says Exec

Chevron Corp. has no plans to alter its long-term strategy in the Gulf of Mexico (GOM), the company's North American exploration and production chief said Friday.

"Despite the regulatory environment, Chevron remains bullish on the Gulf of Mexico," Gary Luquette told financial analysts during a conference call.

In 2010 Chevron planned to drill four wells, which were delayed by the deepwater drilling moratorium. "Now we're ready to get back to work and the wells are our top priority," he said. "We will do so once the new permit requirements are fully understood, and regulators establish an efficient method of what is expected to be a backlog of permit applications."

In late March Chevron USA Inc. was granted the first permit for new exploration given to any operator after the moratorium was lifted (see Daily GPI, March 25). A rig arrived two days after the permit was granted and "we will soon be drilling," said Luquette.

Another permit to drill the Buckskin prospect was filed in mid-April, and approval is expected "in the next week or two." In addition, Chevron received a permit to drill a second injection well at the Tahiti development and drilling is under way.

"We have three deepwater drillships in the Gulf, and two have returned to work. One is awaiting the permit for Buckskin," he said. "Activity is slowly beginning to ramp up. It's too early to know what the 'new normal' is or what the activity levels will be...but we are hopeful that the [Obama] administration shares our wish to move forward and develop reserves."

Chevron's near-term deepwater drilling program will require approval of 10 plans, and 15 drilling permit applications for both development and exploration wells in total would be submitted, Luquette explained.

Development wells at the promising Jack/St. Malo prospects in the Lower Tertiary trend remain on the schedule to ramp up in the "second half of the year," he said. The deepwater development was sanctioned last year (see Daily GPI, Oct. 22, 2010). "That was when the wells were always planned, and we expect the start-up to stay on track. If the permit is delayed more, the start-up could be impacted."

Luquette was asked whether Chevron's strategy for North America, specifically the United States, would change if the government were to cancel the oil and gas tax incentives now in place.

"Certainly when you look at the deepwater Gulf of Mexico, it has been a huge royalty relief success for the government," he said, because the incentives allowed producers to invest in unproven reserves "at great cost and risk."

Luquette said the new federal regulations required to operate in the offshore are taking more time and most likely will be more costly. For instance, he said the new design requirements for casing wells will be higher, and casing is about 10% of total well costs. However, even at a higher cost there would be no changes to the long-term plans.

"It's too early to say, but I don't think so."

Chevron earned $6.2 billion ($3.09/share) in the first quarter, compared with $4.6 billion ($2.27) in the year-ago period. Sales and other operating revenues jumped to $58 billion, up from $47 billion, mainly on higher prices for crude oil and refined products. U.S. upstream earnings were $1.45 billion in the latest period, up $293 million from 1Q2010.

Net production of 694,000 boe/d in first three months of 2011 was down 40,000 boe/d, or about 5% from a year earlier. Partially offsetting this decrease was new production at both Perdido in the GOM and from the acquisition of Atlas Energy Inc. (see Daily GPI, Nov. 10, 2010). The net liquids component of oil-equivalent production fell 5% to 482,000 b/d, while net natural gas production declined about 8% to 1.27 Bcf/d.

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