Chevron In 2016/2017: A Few Insights

Understanding Chevron's Evolving Political Risk To Tengiz

Although 2016 was another tough year, the oil market is slowly moving toward balance, while U.S. production is down 900,000 bpd from the peak, reports with reference to the website of Chevron Corporation.

Although 2016 was another tough year, the oil market is slowly moving toward balance, while U.S. production is down 900,000 bpd from the peak. Prices have risen a bit ($51/bbl at the time of this writing), but many projects (especially in deep water) are still challenged.

Chevron has reduced operating costs substantially, and improved efficiency in our upstream businesses. Competitive development costs are down 30% in the Permian basin. Unit development costs are down 30% to 40% in the Vaca Muerta, Appalachia and Duvernay plays.

Exploration success. Chevron’s global exploration efforts continue to be effective. Last year, our reserves replacement ratio was 107%, i.e. we discovered more oil and gas than we produced. Our five-year reserves replacement ratio is 113%. Advances in seismic technology and high-performance computing have steadily improved our odds of finding commercial deposits of oil and gas. Our exploration success rate last year was 62%, and our 10-year average is 57%. This is a long way from the typical 10% success rate that prevailed when I joined the industry more than three decades ago. Improvements in stimulation technology, completion techniques, reservoir management and EOR have helped us recover more oil and gas from existing assets.

Safety and environmental responsibility continue to be core values for Chevron. We’ve seen improvement in safety metrics, but our ultimate goal continues to be zero people injured and zero spills. “Do it safely or not at all” and universal “Stop Work Authority” are deeply embedded in our culture. Advanced, customized training and processes help everyone stay focused on safety issues every day.

Major projects status. Chevron is coming off a period of very high capital spending, when a large number of mega-projects were all developing in similar timeframes. Many of these projects are nearing completion, including:

  • Gorgon’s (Australia) first LNG train is steadily producing cargos. Train 2 has just gone online, and Train 3 is expected to be online in less than a year.
  • Wheatstone (Australia) has completed all of its wells, and much of its infrastructure, and should ship its first LNG in 2017.
  • Angola LNG has had several cargos shipped.
  • Alder field (North Sea) achieved first gas this quarter.
  • Bangka (Indonesia) has achieved first gas.
  • Chuandongbei (China) has all three gas trains up and running.

Final Investment Decision was reached for expanding production at giant Tengiz field in Kazakhstan. Start-up for the project is planned for 2022, and it will bring an estimated, additional ~260,000 bopd to the field.

Chevron, along with many others, is shifting more focus to the lower-cost tight rock/unconventional plays in the extensive Permian region of West Texas and southeastern New Mexico. We hold ~2 million acres in these basins, many of which have zero or minimal royalties. Well development costs are down 30% over last year. Across the industry, initial production and estimated ultimate recoverable rates are trending up.

Technology will continue to play a large role in improving performance in these plays. The industry trend, to date, has been to create ever-larger amounts of surface area—longer laterals with more and larger fractures. These ultra-low permeability formations give up their oil very slowly, but the overall gains in initial production and ultimate recovery have been substantial in the last five years.

There is, however, still plenty of room for improvement. Recoveries are still well under 10% of the original oil-in-place. How can we double or triple that? Frac fluids are doing some damage to the producing rock. How can we reduce that?

The reservoir models for sandstones have become pretty sophisticated, but their math algorithms don’t describe how shales are producing from nanometer-sized pores. How do we develop new predictive models? The list of challenges goes on and on, and the industry is actively addressing them. The sheer volume of oil-saturated rock in these unconventional shale plays will keep us trying to “work smarter” for the next several decades.

Within the downstream, Chevron continues to make advancements in research to improve our operations. This year, Chevron announced the commercialization of ISOALKY, an ionic liquid alkylation catalyst used to produce high-octane motor fuels. Taking advantage of the boom in U.S. gas production, we also plan to start-up 1,500 kMTA of ethylene capacity in Baytown, Texas, and 1,000 kMTA of polyethylene capacity in Old Ocean, Texas, in 2017.

Overall, Chevron continues to adapt to the market and remains competitive while operating safely and responsibly, and planning carefully for a range of possible future conditions.

Chevron Corporation (NYSE: CVX) is an American multinational energy corporation. Chevron’s oil and gas exploration and production operations are primarily in the US, Australia, Nigeria, Angola, Kazakhstan, and the Gulf of Mexico. Tengizchevroil (TCO) consortium is 50 per cent owned by Chevron, 25 per cent by ExxonMobil, 20 per cent by KazMunaiGas, Kazakhstan’s state oil company, and 5 per cent by Lukoil of Russia.