Chevron Corp. is raising capital spending in the Permian Basin by around 11% for the coming year, but Appalachia is to see budget cutbacks on the continued slump in natural gas prices.

In issuing its 2020 capital budget plans, the San Ramon-based supermajor said it was evaluating “strategic alternatives” for its Appalachian shale exploration and development, as well as for KM LNG, the proposed liquefied natural gas (LNG) project planned for Kitimat in British Columbia (BC). Also under scrutiny are “other” international projects.

In addition, a revised oil price outlook has resulted in an impairment for Chevron’s massive Big Foot oil and gas development in the deepwater Gulf of Mexico. Combined, the actions are expected to result in a one-time impairment of $10-11 billion for the fourth quarter, with more than half related to Appalachia shale.

“We believe the best use of our capital is investing in our most advantaged assets,” CEO Michael Wirth said. “With capital discipline and a conservative outlook comes the responsibility to make the tough choices necessary to deliver higher cash returns to our shareholders over the long term.”

The producer has earmarked $20 billion for 2020 organic capital and exploratory spend, highlighted by more funds directed to its No. 1 target in the Lower 48, the Permian Basin, as well as a major project in Kazakhstan and a queue of deepwater opportunities in the GOM.

“We are positioning Chevron to win in any environment by ratably investing in the highest return, lowest risk projects in our portfolio,” Wirth said. “This will be the third consecutive year with organic capital spending held flat at $20 billion, continuing our capital discipline through the cycle.

“Our emphasis on short-cycle investments is expected to deliver improved returns on capital and stronger free cash flow over the long-term.”

Earlier this year Wirth detailed why the Permian had become a priority. “It’s good rocks,” he said during the annual security analyst meeting. The company’s unique position in the Permian is based on long-held acreage, zero-to-low royalty on more than 80% of its acreage position, and minimal drilling commitments.

In 3Q2019, Permian volumes climbed 35% year/year to reach 455,000 boe/d. During 2018 Chevron gained 150,000 more acres to its Permian leasehold through swaps, joint ventures and farmouts, which provided room to add 1,600 long-lateral wells. In the Delaware sub-basin, the average estimated ultimate recovery for wells put online last year was 2 million boe, while in the twin Midland it was 1.3 million boe.

Even though gas projects continue to advance worldwide, they are not a priority for now. Chevron Canada Ltd. and Woodside Energy Ltd. recently were given the green light by the Canada Energy Regulator to double the size and planned lifespan of KM LNG with a 40-year license to export 35 Tcf at a rate of up to 2.7 Bcf/d from the still unsanctioned Pacific coast terminal at Kitimat in Bish Cove.

Of the total $20 billion in capital expenditures (capex), $6.2 billion would be earmarked for affiliated Chevron companies. The U.S. upstream unit would receive $7.6 billion, while the international upstream operations would receive $9.1 billion. Domestic downstream businesses have $1.6 billion in the 2020 budget, with the international business garnering $1.2 billion.

In the upstream business, around $11 billion is forecasted to sustain and grow producing assets, including about $4 billion for Permian unconventional development and about $1 billion for other international unconventional development.

Close to $5 billion of the upstream program is planned for major capital projects underway, while about 75% is associated with the Future Growth Project and Wellhead Pressure Management Project at the Tengiz field in Kazakhstan. Global exploration funding is expected to be about $1 billion.

Another $2.8 billion of planned capex is associated with the downstream businesses that refine, market and transport fuels, as well as manufacture and distribute lubricants, additives and petrochemicals.

Analysts with Tudor, Pickering, Holt & Co. (TPH) said there were no “real surprises” in the 2020 budget, which is at the high end of previous guidance of $18-20 billion. It’s no shocker that Chevron’s Permian spending is forecast to be around $4 billion in 2020, up 11% year/year.

The downturn in Appalachia spend is welcome, according to the TPH analysts.

“We’ve long seen investment in the company’s Appalachian assets as unattractive, and while we’re surprised by the inclusion of Kitimat LNG in this discussion given ongoing permitting of a new, low-emission design, we think investors will welcome stepping away from this project given the oversupplied outlook for LNG and difficulties with executing on such a complex project.”

However, KM LNG was considered the “logical successor” to follow Tengiz, so questions about Chevron’s long-term capital spend may begin to increase.

“We continue to favor the company’s shift to relatively stable, short-cycle capital and view ample resource potential available,” said analysts, through mergers and acquisitions given the “continued disparity” in the integrated producers’ performance versus the independent explorers.

Wood Mackenzie’s Tom Ellacott, senior vice president, said Chevron’s announcement “continues a wave of writedowns related to price downgrades. U.S. shale gas assets have been hardest hit, reflecting the weak outlook for U.S. gas prices.

“We expect the trend of writedowns to continue as price outlooks are adjusted down.”

Natural gas prices may have gotten a recent boost from early winter temperatures, but Henry Hub spot prices are expected to average $2.45/MMBtu in 2020, down 14 cents from the 2019 average, the Energy Information Administration (EIA) said in its latest Short-Term Energy Outlook issued Tuesday. The price forecast for 2020 is down 3 cents from the prognostication in EIA’s previous monthly report.