Worldwide energy demand is growing, but hitting required volume targets down the road will be more difficult because of industry spending cutbacks, Chevron Corp. CEO John Watson said Friday.

Watson spent close to an hour talking with energy analysts about the San Ramon, CA-based supermajor’s quarterly results. He also was asked about whether his view of the energy supply and demand picture has changed with the plunge in commodity prices.

“My basic view is, the world needs energy,” the CEO said. “The prices have to support the activity. We want it for the cost environment that we’re in. We can see short-run reductions in costs that can make projects more economic, but in general, the projects that are going to meet demand going forward are more complex than 20 or 30 years ago. The cost of those projects will go higher and require a higher price than we’re seeing today to meet the volume target.”

What’s worrisome is the decline curve in volumes if investments are not made into drilling more oil and gas wells.

“Oilfields decline worldwide roughly 15% a year without investment,” Watson noted. “The industry works very hard with its base business investment to attenuate that decline every year. But still, you do get declines of 3-5% industry-wide. So, you need new oilfields to meet demand. The 3-5% decline on a 90 million b/d-plus basis is significant. So you need investments in new fields.

“And $50/bbl does not support large new field developments, what I would call the big volumes that are going to contribute to meeting demand, whether its oilsands, deepwater, [they] aren’t supported at $50.”

The market sees that too, which is why forward prices and “most in the industry are expecting to see some rebound in prices because we simply won’t be able to support those projects at those kinds of prices,” he said. “In the short-run, when you have supply that’s exceeding demand in our business, short-run supply and demand are not very responsive to prices. So you take that decline, or action by OPEC or stronger economic growth, to close that gap. And that’s what will be required here over the next period of time to get prices into a range where they can support the sorts of projects” required.

“Our view is those forces are at work right now. We can debate when that gap will close, but the forces are at work, and every announcement I’ve seen, every cut, it’s more likely to happen sooner.”

For Chevron, it likely couldn’t happen soon enough. It’s paring its capital expenditures (capex), reducing the workforce, dropping drilling rigs and working with vendors, all part of an ambitious effort to pace itself until commodity prices are more accommodating. The supermajor also is not likely to make any final investment decisions on any significant projects this year, Watson said.

The San Ramon, CA-based company’s results showed the strain of low commodity prices, with the lowest quarterly profits in five years. Earnings were $3.5 billion ($1.85/share) versus $4.9 billion ($2.57) in 4Q2013. Full-year profits fell to $19.2 billion ($10.14/share) from $21.4 billion ($11.09). U.S. upstream earnings plunged by almost half in 4Q2014 year/year to $432 million from $803 million. For the year, domestic upstream profits fell to $3.3 billion from 2013’s $4.0 billion. However, in the downstream, U.S. earnings climbed to $889 million in the quarter from $265 million, and for the year, were higher at $2.6 billion from 2013’s $787 million.

“Significant cost reduction efforts are underway,” Watson said. It’s a natural part of the cycle, he noted, but this time is worse than even during the Great Recession of 2008-2009. Suppliers have begun scrambling to assist in any way they can, he said.

One of Chevron’s oilfield service suppliers already has offered to cut rig rates by 50%. “We’re actively engaged with our suppliers have have enjoyed early success. If prices remain low, we expect more success.”

The rigs “get a lot of attention,” but it’s only one aspect of the costs for a producer, he explained. “We’re also taking on costs in a fairly big way around the biggest category of spend,” engineering, procurement and construction (EPC), as well on fabrication (fab) and transportation costs. “We’re taking on all of these things through centralized procurement…We’re taking advantage of spare capacity in the supply chain…It varies considerably based on the category of spending and the precise timing…

“It’s a fast moving market…The longer the downturn persists, the longer we can capture [benefits] in major EPC, major fab yard spending that we might make on projects…”

Internal costs have become a target as well, and that means job losses across the board. In addition, no final triggers are expected to be pulled on any projects in the planning queue. That likely means the proposed Kitimat liquefied natural gas (LNG) export facility in Canada is on the back burner — unless it’s a bigger priority for partner Woodside Ltd. (see related story).

What is to be funded? Gulf of Mexico (GOM) deepwater, a Chevron specialty, remains a top priority. That would include Lower Tertiary Trend discoveries and production facilities underway, including the recently ramped up Jack/St. Malo, and a new joint endeavor with BP plc and ConocoPhillips (see Daily GPI, Jan. 28; Dec. 3, 2014).

Also a high priority is the Permian Basin, where Chevron has seen production soar while drilling costs have plummeted, Watson said.

All projects previously green lighted remain eligible for capex. That includes the two massive LNG projects in Australia, Gorgon and Wheatstone. Gorgon is 90% completed, with first gas exports to Asian markets expected by midyear. “Nothing is a higher priority” than Gorgon, Watson said. Wheatstone is around 55% done with first gas exports scheduled in another year or so.

Flexibility is the name of the game.

“Although commodity prices have fallen recently, we believe long-term market fundamentals remain attractive…We anticipate growing flexibility in our spend as projects under construction are completed and as supplier contracts are renewed. We are testing our short-cycle investments, particularly base business and unconventional assets, at current prices and are selecting only the most attractive opportunities to move forward.”

For the U.S. upstream, planned capex this year now is set at $8.2 billion. International upstream spending would be $23.4 billion. U.S. downstream capex would be about $2 billion, while international is set at $800 million.

About $12 billion of total planned upstream capex is directed at existing base producing assets, which includes $3.5 billion for shale and tight resource investments. Roughly $14 billion is set aside to construct major capital projects already underway, primarily LNG ($8.5 billion) and deepwater developments ($3.5 billion). Global exploration funding accounts for about $3 billion.

The pullback this year follows an extraordinarily successful year in terms of discovery for Chevron, particularly in the GOM. The company added about 840 million boe proved reserves in 2014, which equate to 89% of net boe for the year. The largest additions were for the Permian Basin and the Gorgon LNG project.

Meanwhile, production didn’t grow in the final quarter. Worldwide output was 2.58 million boe/d net in 4Q2014, flat from the year-ago period. Production ramp-ups were offset by asset sales and normal field declines.

U.S. crude oil and natural gas liquids prices in the final three months of 2014 averaged $66.00/bbl, down from $90.00 year/year. Natural gas averaged $3.34/Mcf, essentially unchanged. Domestic production overall hit 673,000 boe/d in the quarter, which was 4% higher (up 23,000 boe/d) from 4Q2013. Higher production was credited to gains in the Permian Basin, the Marcellus Shale and the GOM.

Chevron’s net liquids component increased 5% to 462,000 boe/d, while net natural gas production increased slightly to 1.27 Bcf/d.