In an effort to achieve the best shareholder return among oil majors from 2000 to 2004, Chevron Chairman Ken Derr and Chairman-elect Dave O’Reilly told security analysts last week the company plans to increase worldwide oil and gas production at an annual growth rate of 4 to 4.5%.

Of the key growth areas Derr and O’Reilly spoke about, the Viosca Knoll area of the Gulf of Mexico (GOM) and the Fort Liard play in Canada were the two most prominent natural gas assets. Dawn Soper, a Chevron spokeswoman, said the regions are two of Chevron’s most promising gas assets in North America. The San Francisco energy giant plans to have a total of 300 MMcf/d produced from these regions by the third quarter of 2000.

The Viosca Knoll carbonate trend was discovered by Chevron in April of 1998. It holds over 1 Tcf of gross reserves. The three Chevron wells in the area produce 60 MMcf/d, which represents over 6% of the company’s total GOM production.

Overall, Chevron GOM operations produce 950 MMcf/d, or 40% of its overall North American production. The company has interest in over 400 deep-water leases in the Gulf, more than 75 are in the Viosca Knoll.

Earlier this year, Chevron Canada Resources, Chevron’s Canadian production subsidiary, discovered the Fort Liard play (see NGI, May 17). Current production from the play is in the 70 to 100 MMcf/d range. With estimated reserves in the 400 to 600 Bcf range, the discovery is one of the largest in Northwest Canada, a performer in the top one-tenth of 1% of all 74,000 gas wells ever drilled in the country.

The company also expects to see profit increases from gas and electric sales and marketing, mainly due to its 25% ownership of the newly merged Dynegy-Illinova entity. Chevron is the only industrial shareholder in the new company and said it will invest $200 to $240 million in the new company once it gains full approval.

Chevron pegged other areas of operations for increases as well. They include the company’s assets in Kazakhstan, Russia, Angola, Canada’s East Coast, Alberta, South America and Thailand.

Besides being the leader in shareholder returns for oil majors, other financial targets revealed during the meeting included a long-term earnings growth rate in the top quartile of the S&P 500, a minimum of 12% return on capital employed and a continuing reduction in operating expense.

These goals will have to be obtained without Derr’s leadership. Effective Jan. 1, Derr will retire as chairman and CEO. O’Reilly, the current vice chairman and director of the company, will take over Derr’s position. Working at Chevron since 1968, O’Reilly has held several positions, including being the head of Chevron’s worldwide exploration and production activities and heading the company’s $500 million restructuring effort.

Also last week, Chevron settled a long-standing lawsuit. After 17 years of haggling over a breach of contract charge, Chevron agreed to pay Occidental Petroleum (OXY) $775 million in an out of court settlement.

Chevron had attempted to petition the Supreme Court to hear the case, but yesterday’s motion nullified the attempt. The case stems from an incident in 1982 when Gulf, now owned by Chevron, terminated plans to acquire Cities Service Co., a Tulsa oil company, which proceeded to file a breach of contract lawsuit. Cities Service, now owned by Occidental Petroleum, was awarded compensation of $230 million and more than $500 million in accrued interest.

Soper, however, said the settlement will add to the bottom line. Chevron accounted for the potential loss in 1998 by setting up a fund that has grown to nearly $1 billion. After subtracting the settlement costs, Soper said Chevron will recognize almost $145 million in additional after-tax income in the fourth quarter.

John Norris

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