HOUSTON – After years of spending billions of dollars constructing massive oil and gas projects, Chevron Corp. is planning to pivot to more profitable, shorter-cycle investments like its fields in the West Texas tight-oil plays.
The No. 2 U.S. oil company says it is winding down long-term investments on big projects as they come into production this year and next, but it’s going to put more of its budget toward the Permian Basin. It believes it can double or nearly triple its oil production there by the end of the decade by doubling its spending from $3 billion, about a tenth of its budget, and boosting its rig fleet there to 14 from seven.
“Don’t be surprised if by the middle of the next decade 20 to 25 percent of our production is in this short-cycle shale and tight activity,” Chevron chairman and CEO John Watson told investors Tuesday in an annual update.
In the Permian Basin, Chevron says it has 1,300 drilling locations that can make a 10-percent return at $40 oil; at $50 oil, 4,000 locations can turn a profit; at $60, 5,500 locations. And that’s just assessing a third of its portfolio there.
It expects to drill 175 wells this year with seven operated rigs and nine non-operated rigs. By 2020, the company projects it could pump up to 350,000 barrels a day out of the Permian, up from its current 125,000 barrels a day.
The only way to cope with the oil downturn is to get more efficient and productive. Over the past year, Chevron said its cost to drill a horizontal well has fallen 40 percent to about $7.1 million and the time it takes to drill a well has been cut in half to 20 days. By improving its well-stimulation techniques, the company has boosted its returns from the play by 30 percent.
“When you combine our royalty advantage with the good rocks and competitive execution performance, it translates to compelling economics,” said Jay Johnson, senior vice president of upstream at Chevron.
That cost-cutting has a human toll. Chevron said it plans to shed 20 to 25 percent of its upstream work force this year, and it has yet to make more than half of those job cuts. All told, it expects to cut 4,000 jobs this year, on top of the 3,000 it cut last year.
Bracing for low oil and gas prices, Chevron said it will cut its capital spending from a range of $26.6 billion this year to $22 billion to $17 billion a year in 2017 and 2018.
But the portion of money earmarked for big projects that were under construction last year should fall from about half to a fraction of the budget. Still, it expects production to increase through the end of the decade as its projects come online, Watson said.
The company expects to boost production to 2.9 to 3 million barrels a day in 2017, from 2.62 million barrels a day in 2015. Part of that will come from the massive Gorgon and Wheatstone liquefied natural gas projects coming online in Australia this year and next year, among other projects.
“We’re in a fairly unique position in the industry,” Watson said. “We’re cutting spending pretty dramatically but we’re going to see higher volumes.”