Chevron Corp. is not being left behind in the race to acquire North American unconventional natural gas assets, thank you. But until it can make money by developing the resource base it now holds, those gassy development plans will be shelved, Vice Chairman George Kirkland told financial analysts on Friday.
In a conference call to discuss the San Ramon, CA-based major's earnings, Kirkland was asked if Chevron was "dabbling" in North America's unconventional resource plays and why it has not taken a more public role in its pursuit of shale properties across the United States and Canada. Kirkland said that was not the case.
"We like unconventional gas where we can make reasonable returns," Kirkland said. "I'll characterize it as simply as that. We've got a position in the Piceance Basin in Colorado...in the Haynesville Shale in East Texas...We've drilled wells there, we know how to get the gas out of the ground, and we understand it very well. We have good positions."
Chevron also added around 200,000 net acres to its shale gas leasehold in Western Canada in the latest quarter. Appraisal of the land, in an undisclosed area, is to begin by the end of 2011.
But Kirkland said development of all of its North American gas leaseholds could wait. "We don't think it presently makes development sense because of the gas price and market conditions...the oversupply. It just doesn't make it attractive."
In the gas-rich Piceance Basin, he said, Chevron doesn't have to pay royalties, and in the Haynesville Shale the acreage is held by production.
"What we really need is a market that says it needs the gas," Kirkland said. "Then I think there will be very good returns there. I don't see in the United States an opportunity to pay the land rentals and the royalty rates" that Chevron has overseas in some emerging unconventional gas plays. "When we see that in the U.S., then we'll make a competitive investment."
The oversupplied North American gas market is "why we're looking outside the United States to deploy the same technology," he said. In some emerging European gas plays, such as in Poland and Romania, "we see an organic exploration type of opportunity. There are low entry costs, and we can supply gas to markets in those markets."
Chevron reported production gains from its U.S. operations during the second quarter, all from oil and natural gas liquids. Domestic gas output fell 6% from a year ago.
In the United States, new oil and gas production included the start-up in the past year of the 58%-owned Tahiti Field in the Gulf of Mexico (GOM) (see Daily GPI, Aug. 3, 2009). GOM volumes lost in 2008 hurricanes also were restored over the past year. U.S. liquids output jumped 4% year/year to 488,000 b/d, while domestic natural gas production fell 6% to 1.32 Bcf/d net.
Chevron last August said it would pull down all of its active land rigs operating in the Lower 48 states by the end of the year because of the domestic oversupply. At the time Kirkland, who oversees Chevron's upstream and gas division, said that it didn't make sense to "build capacity where we're not able to produce it."
In late October then-CEO Dave O'Reilly said unconventional gas development was ongoing in the United States, but in a "very weak" gas market, the company had decided to work at its discretion and focus on more oily endeavors (see Daily GPI, Nov. 2, 2009).
The oil major offered a strong 2Q2010 profits report, with earnings of $5.41 billion ($2.70/share), compared with $1.75 billion (87 cents) in the year-ago period. Chevron in 2Q2008 -- before the financial markets collapsed -- earned net profits of $6 billion ($2.90/share) versus $5.4 billion ($2.52) in 2Q2007.
Sales and other operating revenues in the latest quarter jumped to $51 billion, up from $40 billion mostly on higher prices for crude oil, natural gas and refined products. Upstream earnings topped $4.5 billion, well ahead of $1.66 billion recorded in 2Q2009.
"Current quarter earnings from upstream operations benefited significantly from higher prices for crude oil and natural gas and higher net oil-equivalent production," said CEO John Watson. "During the second quarter, we continued to make significant progress toward building a leading natural gas business to supply Australia and the Asia-Pacific region.
U.S. upstream earnings totaled $1.09 billion in the latest quarter, well ahead of $280 million reported a year ago. The average sales price for natural gas was $4.01/Mcf versus from $3.27 a year ago. Crude and natural gas liquids prices averaged around $71/bbl, ahead of $50 in 2Q2009.
Chevron's worldwide production in 2Q2010 was 3% higher from a year earlier at 2.75 million boe/d. The gains in output primarily were driven by new production from major project start-ups and ramp-ups, including some in the United States. U.S. production was 708,000 boe/d, which was 8,000 boe/d, or 1%, higher than in 2Q2009.
Chevron also announced Friday that it has terminated the three-year $15 billion share repurchase program initiated in September 2007. In its place the board approved an ongoing share repurchase program with no set term or monetary limits. No shares are scheduled to be repurchased in 3Q2010, the company said.
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