Chevron Corp. is sitting in the sweet spot to deliver liquefied natural gas (LNG) to Asia-Pacific markets from two world-class Australian export facilities, but there's no hurry to move an inventory of dry natural gas prospects in the U.S. onshore until conditions are right, executives said Tuesday.
The San Ramon, CA-based major has a substantial lineup of oil and gas prospects across North America, including the deepwater Gulf of Mexico (GOM), conventional resources and shale/tight basins. Liquids are the domestic and Canadian focus today, but it's keeping an eye on its considerable dry gas assets that extend across the country, CEO John Watson said during the company’s annual analyst presentation.
Even at higher gas prices, there's no rush, said Vice Chairman George Kirkland, who oversees the upstream division.
"We have a significant gas market in the United States. However, it's now weak," Kirkland said. "We'll be ready when the time is right. Deferring our investments in gas is the right decision. We can adjust the plan as the market changes."
Chevron's advantage, he said, is that it doesn't have to drill in the United States to maintain its acreage. Most of the assets now are legacy or held by production.
"We have 5,000-plus gas prospects that don't compete for capital," Kirkland said of North America. "We plan to develop the acreage when the market conditions provide an attractive opportunity..."
Among Chevron's diverse onshore U.S. dry gas well prospects that he said could be developed today are:
Piceance Basin, 1,800;
Haynesville Shale, 1,200; and
Permian Basin, 2,500.
Only about 3% of capital spending this year is for domestic dry gas and most include a drilling carry with "limited exposure to pipeline constraints," Kirkland said.
Chevron's still high on gas, but it's the liquid form that offers the most compelling advantage, he explained. The massive Australian Gorgon and Wheatstone facilities both are securing commitments and are linked to oil prices.
The half-owned Kitimat LNG export proposal in British Columbia (BC), with capacity design of 1.6 Bcf/d remains on the "to be announced" list.
Kitimat, which doesn't make the Chevron queue before the end of this decade, should be "an important contributor to future LNG supply," and Chevron wants to maintain its first mover advantage, said Kirkland. Although it's still on the drawing board, he said 60-70% of the Kitimat supply will need firm commitments.
Wheatstone, 30% complete, has about 85% of its LNG committed to long-term contracts with Asia-Pacific buyers; it's scheduled for startup by 2015, a particularly advantageous time, said Watson.
"LNG demand is expected to double by 2015," with most of the demand in Asia, and in particular China and India, the CEO said. "Together with new customers entering the market, 29 countries now are purchasing LNG...On the supply side, new LNG is needed to meet demand..."
The only issues with greenfield export projects, like several in the United States and the multiple BC proposals are the costs and lack of capacity agreements."Sellers need the revenue stream," said Watson. "Buyers need a reliable supply." Some U.S. projects "reflect unique circumstances" as several would be built on existing import sites, making them less labor- and cost-intensive. "It's a different proposition for greenfield projects."
More than 80% of Chevron's global production is linked to oil prices, exactly where the operator wants to be.
"Our upstream is growing profitably primarily from crude oil and LNG," said Watson. Limited natural gas production and midstream growth offer support, and it's selectively committing some resources to renewables and a more energy-efficient business.
Like most operators, long-term production and spending goals have varied from original forecasts. In 2011, Chevron set its upstream plan on a healthy mix of oil and gas prospects, expecting that by 2017, it would be producing close to 3.3 million boe/d. Things change, said Watson.
"Oil prices were higher than we expected and U.S. gas prices were lower than we expected." The choices made in the portfolio three years ago weren't as good as the company had projected. Production in 2017 has been reset to 3.1 million boe/d. That's still 20% higher than in 2013.
The lower forecast also reflects plans to sell $10 billion in assets over the next three years, mostly in the upstream portfolio that haven't proven to be at par with other prospects. In the past three years Chevron sold about $7 billion worth of assets.
The asset sales would be "value-based decisions," said CFO Pat Yarrington. "We take into account the life cycle of an asset. We already have identified the candidates, but we won't announce them for commercial reasons. The outcomes here are driven by one thing: the ability to capture good value."
This year's capital spending is set at $39.8 billion, $2 billion less than in 2013, with 34% aimed at North America and about as much in the Asia-Pacific. About $40 billion a year should be the budget over the next few years, as peak LNG spending declines, the GOM deepwater developments continue and less-costly onshore liquids development expands. More also is to be spent also to prospect Canada's Duvernay Shale and for the Hebron offshore project.
Last year was a peak for capital outlay worldwide, while 2014 is to be a peak for LNG project spending, Yarrington told analysts. About $10 billion alone is being set aside for Gorgon and Wheatstone. The global upstream budget is drawing close to 90% of spending this year, with 60% dedicated to major capital projects (MCP) for LNG, deepwater and shale/tight resources to fuel growth.
Chevron is "invested heavily for growth with pre-production capital," said the CFO. "It will be decreasing noticeably" as MCPs come online.
Close to 70 project startups worldwide in which Chevron holds a stake are scheduled by 2020, said Senior Vice President Jay Johnson, who is in charge of the upstream portfolio under Kirkland. By 2020, about 60% of Chevron's output will come from its legacy assets and isn't based on acquiring more property.
Seventy-five exploration wells are planned worldwide this year, mostly in North America, the GOM, West Africa and Australia. Acreage also is being tested to determine its resource capture. Twelve "impact" wells that have more than 100 billion boe of potential are planned from conventional and shale/tight opportunities.
Chevron expects to add more than 800,000 boe/d to its production by 2017. Beyond 2017, North American growth is keyed to the GOM, Hebron, the Permian "and other shale/tight basins," Johnson said.
Most of Chevron's U.S. MCPs are in the deepwater. Caesar/Tonga (20.2%)began operations in 2012, and its operated Tahiti 2 platform (58%) started up last year. Now being built in the deepwater is the operated Jack/St. Malo (40.6/51%) in the prospective Lower Tertiary trend. Chevron is optimistic enough about its prospects in the trend that it already has preliminary designs for an expansion in future years. Tubular Bells (42.9%) also is being built this year.
Future plans in the GOM include Big Foot (60%), considered one of the top projects in the entire portfolio. Construction start-up is planned in 2015, with a design capacity of 75,000 b/d of liquids and 25 MMcf/d of natural gas.