Chevron Delays Some Projects to Focus on the Permian Basin

Getty

Getty

The oil bust and high production costs are forcing the No. 2 U.S. oil company and its rivals to cut projects and designate smaller budgets even as the volatile oil market makes it harder to determine how much they can grow their production.

In the fourth quarter, Chevron wrote down the value of $1.1 billion in assets and its revenues fell from $46.1 billion to $29.2 billion. International upstream earnings fell 73 percent to $593 million while income from its oil refining and downstream business dropped 33 percent to $1 billion. Overall, its cash flow from operations in 2015 came in at $19.5 billion, down from $31.5 billion the year before.

The uncertainty has forced Chevron to delay sanctioning projects, including a venture at the Tenghiz oil field in Kazakhstan.

“First, we thought it might have the potential to be a hub, and then we thought it had the potential to be a tieback,” Chevron CEO John Watson said. “We felt that for the foreseeable future, we’ve got better places to put our money.”

However, according to Watson, the company cut $9 billion in operating costs and capital spending last year. Similar reductions will be made this year as well with Chevron currently operating just six rigs companywide and shedding 4,000 jobs this year (on top of the 3,200 jobs it cut last year).

Additionally, Chevron converted to horizontal drilling in the Permian Basin and building a more efficient “factory” model of drilling used by shale oil companies to get rapid, repeatable drilling results within a certain region. The Permian has proven to be the most cost efficient within the United States.

As a result, Chevron boosted its domestic oil production by 7 percent in the fourth quarter and ramped up its output in Texas’ Permian Basin and at the deep-water Jack/St. Malo oil hub in the Gulf.

“The economics in some of the best areas at strip type prices work,” Watson said. “I would hate to lose the momentum that we have in the Permian with some of the cost reduction efforts we have under way. We’ve got 3,000 locations that we think meet economic thresholds at $50. Obviously, prices aren’t $50 today, but it’s indicative of the strength of the portfolio we have.”

The firm expects to begin producing liquefied natural gas at its Gorgon project in Australia within a few weeks.

Article written by HEI contributor Aliyah Cole.

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