‘’Lower Your Costs, Or Die’’ Big Oil’s New Mantra

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By Tsvetana Paraskova

Fracking and the booming short-cycle shale production in the Permian have revolutionized not only U.S. crude oil production.

The prolific shale basin in West Texas and New Mexico has also shown U.S. supermajor Chevron that it needs to become more efficient in all of its other upstream operations, according to chairman and chief executive Mike Wirth.

The shale production “has forced us to get smarter about how we do everything else,” Wirth told Bloomberg in an interview a year after he took over as CEO at the U.S. oil and gas major.

U.S. shale has changed the way Chevron and Big Oil look at costs in all other projects, from deepwater oil to liquefied natural gas (LNG) facilities, according to Chevron’s boss.

It’s “lower your costs, or die,” Wirth told Bloomberg.

Before the oil price crash of 2014, Big Oil was spending billions of U.S. dollars on mega projects that would start returning cash in half a decade at the earliest, or even more. The oil price slump and the shorter-cycle shale production have shown that cash can be delivered within two-three years.

The ‘lower-for-longer’ oil prices have also forced Chevron and Big Oil to seek efficiencies in all other projects, to high-grade upstream portfolios, and to cherry-pick investments in large projects.

Going forward, Chevron is not betting on higher oil prices and will continue to keep discipline in capital allocation, according to Wirth.

“You make your own margin. Some of that comes through innovation and cost discipline. That’s a philosophy I bring to my current role and a belief that just because prices go back up, we shouldn’t accept the fact that costs have to go up,” the manager told Bloomberg.

Chevron is betting big on the Permian, where it has amassed a huge acreage position over the past century, and where it plans to double production by 2022.

In the upstream business, the company is investing this year US$10.4 billion to sustain and grow currently producing assets, including US$3.6 billion in the Permian and US$1.6 billion in other shale and tight projects, Chevron said in its 2019 budget plans announcement in December.

“Our investments are anchored in high-return short-cycle projects, with more than two-thirds of spend projected to realize cash flow within two years,” Wirth said.

On the Q4 2018 earnings conference call in early February, Wirth said that Chevron expects around 70 percent of its total spending for 2019 to deliver cash within two years.

“Our current spend profile has significantly lower execution risk relative to the past, when we had several large-scale major capital projects underway concurrently,” he noted.

Chevron’s Permian production in the fourth quarter was 377,000 bpd, up by 84 percent compared to Q4 2017. Annual production from the basin was up more than 70 percent, Wirth said on the earnings call.

“In the Permian, we remain focused on returns. We are not chasing a production target nor are we altering our plans based on the price of the day,” he added.

Chevron is also committed to capital discipline, Wirth reiterated several times during the call. For example, Chevron relinquished its rights to the Tigris development project in the Deepwater Gulf of Mexico, “not because it is not a good project or can’t generate a return, but because we have better opportunities within our portfolio.”

Capital discipline will be the key theme for Chevron in the near future, as it is for most of Big Oil, except for Exxon which has been raising capital spending over the past year.

Chevron has lowered project execution risks with shorter-cycle shale and will keep disciplined spending because, as Wirth said on the call, “we intend to win in any environment.”

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