Chevron Corp., readying for its first major oil and natural gas production expansion in years, last week announced a 20% hike to its exploration and development spending for the coming year. In contrast, ConocoPhillips slashed its capital budget for 2007, and it warned that if service costs continue to escalate, its medium-term oil and natural gas production likely will be impacted.

Chevron will put a “significant component” of its 2007 budget on deepwater Gulf of Mexico (GOM) projects, which are ready to move into the construction phase. The $19.6 billion budget, up from $16 billion in 2006, includes about $4 billion for U.S. upstream projects. Another $1.6 billion will be spent on U.S. downstream projects.

The GOM projects that are expected to benefit the most from Chevron’s increased spending include the Tahiti, Great White Perdido, Blind Faith and Jack fields. To help commercialize the company’s large natural gas resource base outside the United States, Chevron also is budgeting funds to construct liquefied natural gas tankers and gas-to-liquids facilities. On the refining side, Chevron plans to expand its Athabasca Oil Sands Project in Canada, and upgrade refineries in Mississippi and California.

“Our 2007 capital and exploratory program is a record level of investment by our company,” said Chevron CEO Dave O’Reilly. “About 75% of next year’s budget is for oil and gas exploration and production (E&P) projects worldwide. Another 20% is dedicated to the company’s global refining, marketing and transportation businesses, which manufacture and sell gasoline, clean diesel fuel, biofuels and other refined products in the company’s marketing areas.”

Most of the new money reflects the impact of several large, multi-year development projects that are in their most capital-intensive phases. However, Chevron attributed some of the increase to the effect of higher costs for materials and services worldwide.

“Our long-range focus on capital discipline in executing our excellent project queue is critical in this environment,” O’Reilly said.

Capital and exploratory spending of $14.6 billion is budgeted for E&P and natural gas-related projects worldwide, with most of the budget directed toward “opportunities” in the deepwater GOM and western Africa. Funding is also earmarked for further appraisal and evaluation of other prospective areas in the world’s major hydrocarbon basins.

“Our upstream investments are aimed at finding and developing oil and gas resources to increase production and help supply the energy needs of world markets,” said George Kirkland, executive vice president of upstream oil and gas. “Our focus is both on improving the performance of existing fields and funding new projects that will provide this future production growth.”

The board of directors also approved a plan to acquire up to $5 billion of Chevron’s common stock over the next three years. This program follows two other $5 billion stock buyback programs that were initiated in April 2004 and December 2005.

Houston-based ConocoPhillips cut its 2007 capital expenditure budget to $11.8 billion, well short of a previous estimate of $15-16 billion. Total cash spending in 2007 is estimated at $13 billion, down from the $18 billion the producer is likely to spend in 2006.

The reduced budget reflects the completion of ConocoPhillips’ planned 20% equity investment in Russia’s OAO Lukoil Holdings. However, CEO Jim Mulva said escalating costs may impact new oil and gas developments planned worldwide.

“Given the increasingly challenging business environment, which has been marked by rising costs, greater discipline in capital spending is warranted to better ensure value delivery over the long term,” Mulva said in a statement. “Accordingly, we have prioritized our capital projects in 2007.” Mulva warned that “assuming continuation of the current cost environment, this capital program is expected to result in a slight reduction to the company’s medium-term production growth rate.”

About 84% of the total capital program will be directed to the exploration and production (E&P) segment. The refining and marketing segment will receive 13%, with the remaining budget will be spent in Emerging Businesses and Corporate endeavors.

E&P’s 2007 capital budget, including capitalized interest of $0.5 billion, is set at $10.2 billion. Combined with $0.6 billion for loans to affiliates and a planned $0.6 billion contribution to a transaction with EnCana Corp., the total E&P capital budget is $11.4 billion. Worldwide exploration activities of $1.5 billion and global gas activities of about $0.4 billion are included.

In North and South America, the E&P capital program is expected to be about $6.5 billion, which will be spent on:

“In addition to the capital budgeted in 2007 for projects that will provide needed energy supplies in the near- and long-term, the company also will increase research and development spending on technology by 50% to more than $150 million annually,” said Mulva. “Research and development efforts will focus on projects that aid the development of unconventional oil and gas resources, such as Canadian oil sands, as well as the development of new energy sources, such as alternatives and renewables.

Mulva said ConocoPhillips “intends to become a leader in new energy resource development,” and “is committed to diversifying its energy resource development, significantly enhancing the efficiency of energy use, and doing so in a way that addresses climate change and other environmental concerns.” ConocoPhillips “believes a number of sources of energy are necessary to meet the demands of consumers, including fossil fuels, unconventional sources like oil shale and heavy oil, and alternatives like biofuels.”

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