Replies to post #2351 on The Rising Influence of Rising Affluence

[DewDiligence]

(CVX)—Fracking/Horizontal Drilling Rekindles Interest in Permian Basin

http://online.wsj.com/article/SB10001424052748704530204576232663668256674.html

›APRIL 8, 2011
By ISABEL ORDONEZ

MIDLAND, Texas—Climbing oil prices are making the aging oil fields of Texas's Permian Basin look attractive again to some big petroleum companies.

Chevron Corp. has pumped oil from this well-plowed area of west Texas and New Mexico since 1925. But in recent decades, as production in the area declined, Chevron and other companies used it primarily as a lab for oil-extraction techniques that could be employed in larger projects elsewhere.

This year, Chevron, the second-largest U.S. oil company by market value after Exxon Mobil Corp., plans to boost investment to $600 million in the Permian Basin, 32% more than a year earlier, and drill twice as many wells as it did in 2010 in the area. Its goal is to squeeze more oil out of these aging fields at a time when commodity-oil prices have risen to over $100 a barrel—levels not seen since summer of 2008—and access to oil in the Gulf of Mexico and lucrative foreign fields has become more of a challenge [duh]. The company is also seeking to employ new technologies only recently available to unlock significant amounts of Permian crude that were hard to reach before.

Some "people in the industry said the Permian Basin was used up, tapped out, yesterday's news," Chevron Vice Chairman George Kirkland told company employees and retirees in a recent gathering here. But "we listened to veterans here who reminded us that the best place to find oil is where it has already been found."

Chevron and other major oil companies, such as Exxon Mobil and ConocoPhillips, began refocusing on this flat, arid region dotted by hundreds of rusty pump jacks last year, after the federal government temporarily banned new exploratory drilling in the deep water Gulf of Mexico following BP PLC's massive oil spill.

The revival of the Permian Basin is also driven by the widespread use of relatively new technologies such as hydraulic fracturing, which involves injecting a mixture of water, sand and chemicals underground at high pressures to release oil from hydrocarbon deposits. In recent years, this and other technologies have unlocked shale oil and gas that wasn't previously accessible, leading to a boom of new wells across the country. Now they are being adapted and used to boost production from mature oil fields like the ones in the Permian Basin. Chevron and others are also planning to apply the techniques in previously unexplored shale areas of the basin.

The Permian Basin is especially attractive because its oil reserves, the second largest in the U.S. after Alaska, are already proven and its geology is very well known, said Matthew Jurecky, an analyst at energy consultant Wood Mackenzie. This means companies can update old wells with new technologies and add new reserves at a significantly lower cost than in other areas, such as the Gulf or Canada's oil sands.

The downtown of Midland, where former President George W. Bush grew up, is full of high-rises from a storied oil past. Nearby Odessa was depicted in H.G. Bissinger's book "Friday Night Lights" as a model of small-town Texas life, with its reliance on oil-field work and devotion to high-school football.

Oil production at the Permian Basin is less than half what it was in the early 1970s. But after a long decline, in the past five years production in the basin has reversed that trend, growing slowly but steadily. In 2010, the area's oil output rose 1.5% to about 891,600 barrels a day [about 16% and 5%, respectively, of total US oil production and consumption] from the previous year, Wood Mackenzie said. The new flow of Permian oil helped U.S. production reach 5.51 million barrels a day last year, its highest since 2004.

The growing interest in the Permian Basin made it relatively easy for BP to sell assets there to Apache Corp. for $3.1 billion last August, as part of the large sell-off it is undertaking to help pay for the Gulf of Mexico spill.

With an output of about 53,000 barrels of oil a day, Chevron, of San Ramon, Calif., is the fourth-largest oil producer in the Permian Basin, behind Occidental Petroleum Corp., Apache and Concho Resources Inc., according to energy consultant IHS Inc.

For Chevron, the Permian Basin is especially significant because it has a bigger presence there than rival majors ExxonMobil and ConocoPhillips, said Fadel Gheit, an analyst at Oppenheimer & Co. A large part of the four million acres Chevron owns in the area were acquired over many years, through the purchase of companies such as Gulf Oil in 1984 and Texaco in 2001.

Chevron said it currently operates 11,000 wells in the Permian Basin and that it plans to drill 350 wells this year.

Most of the company's wells are targeting deeper, tight rock formations that weren't previously thought of as reservoir-quality rock. Some wells also use horizontal drilling, a recent innovation that helped unlock new oil reservoirs in North Dakota and southern Texas. [LOL re calling horizontal drilling “recent”; it’s been around for quite a while now.]

"This is a very, very mature basin, but our objective is to sustain production with new investment," Gary Luquette, Chevron's head of exploration and production for the U.S. and Canada, said an interview. "The Permian is a very significant asset in our North America portfolio."‹

[DewDiligence]

Oil Without Apologies

http://online.wsj.com/article/SB10001424052748704013604576248881417246502.html

›John Watson, Chevron's CEO, says Americans must stop taking affordable energy for granted—that means more 'oil, gas and coal'

APRIL 16, 2011
By KIMBERLEY A. STRASSEL
San Ramon, Calif.

It's the day after President Obama delivered his most recent vision of America's energy future, and I'm sitting in the sunny corporate offices of Chevron, the country's second-largest oil company. Let's just say John Watson has a different view.

The Chevron CEO is a rare breed these days: an unapologetic oil man. For decades—going back to Jimmy Carter—politicians have been peddling an America free of fossil fuels. Mr. Obama has taken that to an unprecedented level, closing off more acreage to drilling, pouring money into green energy, pushing new oil company taxes, instituting anticarbon regulations. America is going backward on affordable energy, even as oil hits $110 a barrel.

Enter the tall, bespectacled Mr. Watson, who a little more than a year ago stepped into the shoes of longtime CEO David O'Reilly. An economist by training, soft-spoken by nature, the 53-year-old Mr. Watson is hardly some swaggering wildcatter. Yet in a year of speeches, he has emerged as one of the industry's foremost energy realists. No "Beyond Petroleum" (BP) for him. On energy, he says, America "has a lot to learn."

Starting with the argument—so popular among greens and Democrats—that we are running out of oil. "Peak oil"—the theory that global oil production will soon hit maximum levels and begin to decline—is a favorite among this crowd, and it is one basis for their call for more biofuels and solar power. Mr. Watson doesn't dismiss the idea but explains why it remains largely irrelevant.

In theory, he says, "we've been running out of oil and gas for a long time," yet technology creates new opportunities. Mr. Watson cites a Chevron field long in decline down the road in Bakersfield—to the point that for every 100 barrels of oil "in place," the company was extracting only 10 or 20. But thanks to a new technology called steam flooding, Chevron is now getting 70 to 80 barrels. "Price creates incentive, and energy will be developed if there's demand for it at the price you can develop it," Mr. Watson says. In that sense, "oil and gas are plentiful."

Don't believe it? Over the past 30 years, even as "peak oil" was a trendy theme, the world's proven reserves of oil and natural gas increased 130%, to 2.5 trillion barrels.

Or consider America's latest energy innovation: hydrofracking for abundant and cheap natural gas. This advance, says Mr. Watson, took even the industry "by surprise"—as evidenced by the many U.S. ports to import liquid natural gas that are now "sitting idle." Chevron last year paid $3.2 billion to buy natural-gas producer Atlas Energy as its foray into this new market.

Mr. Watson has little time for the Beltway fiction that America will soon be able to do without, or nearly without, fossil fuels. Yes, "we need all forms of energy." But the world consumes 250 million barrels of energy equivalent today, only a "tiny fraction of which" is wind and solar—and even those "are not affordable at scale," he says.

As for biofuels, "we would need to consume land the size of states" to hit the country's current ethanol targets. Chevron is investigating biofuels, but Mr. Watson says the "economics aren't there" yet. Unlike many CEOs, Mr. Watson insists on products that can prosper without federal subsidies, which he believes are costly and lacking in transparency when "consumer pockets are tight, government pockets are tight."

Bottom line: "We're going to need oil and gas and coal for a long time if America wants to keep the lights on."

He seems to mean it, too: Chevron recently announced the largest capital and exploratory budget in its history, $26 billion to drill in Australia, Western Africa and the Gulf of Thailand, among other places. Some of that cash will go to the Gulf of Mexico, though Mr. Watson wishes there were more U.S. opportunities.

"Most of the well-developed world—Australia, Western Europe—they develop their resources base, they inventory it, they develop it, and they view it as a good source of jobs and revenue," he says. The U.S.? "We are a country" that for too long has taken "affordable energy for granted."

The Chevron exec was "pleased" to see Mr. Obama acknowledge that "oil and gas were fuels of the future—because I hadn't heard that before. That's a significant step." Looking to reassure Americans about rising gas prices, the president nonetheless resorted to the old standby of calling for a one-third reduction in U.S. oil imports by 2025. Mr. Watson thinks that's a fine goal, but he points to the enormous disconnect between what the president is proposing and existing policies.

The only conceivable way to meet that goal is by dramatically increasing U.S. oil production—immediately. The White House recently bragged that last year American oil production hit its highest levels since 2003. What it failed to mention is that it takes years for leases to start producing, so credit for last year's surge goes to the Bush administration.

But what about the BP Gulf spill? Mr. Watson blames the "cultural aspects and behavioral aspects" of the particular drilling rig that exploded. He roundly disagrees with the finding of Mr. Obama's spill commission that the "root causes" of the spill were "systemic" to the industry.

"There is no evidence to support that. I don't know how that conclusion was reached. I know the industry has drilled 14,000 deep water wells without having this sort of problem." As for the moratorium, "I can understand taking a pause. I can't understand shutting down a whole industry for a better part of a year."

Chevron has three deep water rigs in the Gulf, so the ban cost it millions of dollars in idle rigs and lost jobs. For the country, says Mr. Watson, it means "less oil." Offshore drilling takes years of lead time. Mr. Watson cites Chevron's Gulf "Tahiti" project, which started producing about 18 months ago. It has taken "the better part of a decade to do the seismic work, drill the exploratory wells, evaluate those wells, drill other development wells, to delineate it, to build the facilities and to place the oil wells online," he explains.

The endless moratorium has already meant that "if you go out to the middle of the decade, there are already 200,000 to 300,000 barrels a day of oil that aren't going to be produced that year. . . . That won't be retrieved." And the lost production number is getting larger, since the new Bureau of Ocean and Energy Management is still dallying on permits—and those primarily for backlogged projects, not new leases.

Democrats are now arguing, as Mr. Obama did in his speech, that the oil industry already "holds tens of millions of acres of leases where it's not producing a drop." Some are advocating "use it or lose it," calling for the government to strip oil companies of their leases if they don't immediately start producing.

Mr. Watson explains why this is bogus. Only one-third of Chevron's offshore leases are classified as "producing" oil and gas today. The other two-thirds either are "unsuccessful" (they don't hold viable oil or gas) or "are in varying stages of development—seismic work, drilling wells, constructing facilities." Mr. Watson says companies would be crazy to sit on productive lands, since leases require costly bonus payments and annual rental payments to the government.

If Washington institutes Mr. Obama's "use it or lose it" policy, Mr. Watson says, it will mean less U.S. oil production. And how does this help Mr. Obama with his goal of reducing imported oil?

As for soaring oil prices, Mr. Watson blames growing demand, tighter supply, Mideast uncertainty and inflation. He doesn't predict future price trends, though during a recent analyst call he warned that the drilling moratorium would only make them higher. Lost production in the Gulf is "going to represent a sizable chunk of the spare capacity that the industry expects to see. And that will impact prices, and that will retard economic growth."

The economy is also why Mr. Watson won't pay the usual energy CEO lip service to new carbon regulations. The cap-and-trade bill the House passed in 2009 was "poorly conceived and it collapsed under its own weight for good reason," he notes.

The EPA move to regulate carbon is no better: "It's not why the Clean Air Act was put in place, and it doesn't seem to be the right way to attack concerns about greenhouse gas emissions," he says. The EPA is "placing huge new regulatory burdens on industries that are import sensitive." The regulations will place burdens on refineries, putting "their competitiveness at risk, and ultimately we'll produce less gasoline here and end up importing it from refineries that are less energy efficient overseas."

Mr. Watson says Americans can accomplish a great deal with "affordable conservation." And "a wealthy economy," he adds, "is better able to deal with the costs of greenhouse gas abatement than a poor economy." Since "large numbers" of countries are "unlikely to take aggressive action on greenhouse gas emissions," the "U.S. is going to have to decide, just as California is going to have to decide, if they want to go it alone. . . . Are they willing to place the burden on our economy and our consumers, at the expense of jobs?"

That pretty much sums up the broader choice America faces on energy policy. It can listen to the Washington siren song on alternative energy, pouring scarce dollars into green subsidies, driving up the cost of energy, and driving out U.S. manufacturing and jobs. Or it can embrace our own fossil fuel resources, which are cheap and plentiful.

"What I see are people who want affordable energy," says Mr. Watson. "They want strong environmental standards—they want a lot of things—but first and foremost they want affordable energy. And if you want affordable energy, you want oil, gas and coal."‹

[DewDiligence]

CVX says 2Q11 EPS will be better than 1Q11 due to improvements in upstream and downstream segments:

http://finance.yahoo.com/news/Chevron-Issues-Interim-Update-bw-1643641459.html?x=0&.v=1

The 2Q11 earnings date is Jul 29.

[DewDiligence]

CVX Reports (Uneventful) 2Q11 Results

http://online.wsj.com/article/SB10001424053111904800304576475942089091376.html

›JULY 29, 2011, 5:02 P.M. ET
By Isabel Ordonez

HOUSTON—Chevron Corp. posted a 43% jump in earnings, cashing in on markedly higher oil prices and more profitable fuel sales.

The second-largest U.S. oil company by market value made $7.73 billion in the second quarter, or $3.85 a share, widely beating analyst expectations on better-than-anticipated results in its refining arm. Chevron's results, like the eye-popping profits earned by fellow U.S. oil companies Exxon Mobil Corp. and ConocoPhillips, are a sign of how quickly the energy industry has recovered from the recession due to strong global demand for oil.

Most of Chevron's earnings came from the company's exploration-and-production segment, which benefited from high oil prices due to turmoil in the Arab world. Its average second-quarter sale price of oil was $104 per barrel in the U.S. and $107 in the rest of the world, up 47% and 51%, respectively, from a year earlier.

But high oil prices hit Chevron's production, which dropped 2.2% to 2.69 million barrels of oil equivalent per day, in the second quarter. This was due to the effect of production-sharing contracts with foreign governments, which generally give oil companies less production from projects if oil prices go up.

The decline shows that although oil giants are benefiting from higher oil prices, they continue to struggle to raise output at a time when their fields are depleting rapidly and access to new, vast reserves has become more difficult, said Phil Weiss, an analyst with Argus Research.

Chevron also cut its production guidance for this year by 1% to 2.76 million barrels of oil equivalent per day. Company executives said on a conference call with analysts that the revision primarily was driven by a recent incident in Thailand that caused a gas pipeline that was not operated by Chevron to be shut down, and by a slower-than-expected increase of production at Royal Dutch Shell PLC's plc Perdido project in the deepwater Gulf of Mexico. Chevron has a 37.5% interest in the project.

Chevron reaffirmed, however, that it expects to have average annual production growth of about 1% from 2010 until 2014 and 4% to 5% from 2014 to 2017.

UBS analyst William Featherston said it is unlikely Chevron's production-guidance revision would impact the company's share price because the valuations of major oil companies are driven mainly by the profits they obtain on the money they invest rather than by how much they increase production.

Chevron Chief Financial Officer Patricia Yarrington said the company is on track to have a capital expenditure budget of $26 billion this year. She added that the company continues to buy back its own shares, but at a moderate pace, partly due to concerns about the U.S. and global economic environment.

The policy environment in Washington coupled with concerns about slow GDP growth in the U.S. and China have the company on the fence, Ms. Yarrington said. "I think you would agree with us there's a fair amount of uncertainty out there," she told analysts.

Continued economic uncertainty could result in a short-term fall in oil prices, although the company is confident in increased demand for oil in the long-term.

Chevron said it has "high confidence" it will increase its Australian Gorgon project's capacity by adding a fourth production unit to chill natural gas to a liquid for shipment, known as a train. Chevron owns nearly 50% of Gorgon, which also counts Exxon Mobil and Shell as major investors. The company signed off on Gorgon's initial phase in September 2009 and plans to ship its first LNG cargo from the project, located offshore Western Australia in 2014.

Chevron confirmed that it is advancing in the development of various projects in the deepwater Gulf of Mexico that are expected to boost its future growth. Executives said the company is planning to bring two extra rigs into the area later this year in order to accelerate drilling.

Chevron Executive Vice President George Kirkland said Chevron may make some small acquisitions in the Marcellus Shale in Pennsylvania that could fit well with the acreage the company recently bought in the area. But he said it was unlikely the company will embark on a major asset acquisition.‹