Global strategy: the American way

Exploration and production are truly global activities for oil and gas majors. They must scour the world looking for promising new assets to develop, while trying to maximise the production life and efficiency of mature assets. As Steven Green takes over as president of Chevron North America Exploration and Production, having guided the company’s upstream operations across the Asia Pacific region for many years, we look at how the region contributes to the future growth plans of both Chevron and ConocoPhillips.

Both companies have extensive portfolios of assets in the US, and across the globe, and balancing their development will be a key part of their strategy going forward. Last year, Mike Wirth, chairman and CEO of Chevron Corporation, laid out the company’s strategy ‘to win in any environment’, outlining three key strengths – an advantaged portfolio, sustainability at lower prices, and a strong balance sheet.

“We reached significant milestones with upstream major capital projects in 2018, including the start-up of Wheatstone Train Two, our fifth operated LNG train in Australia,” he remarked in a recent earnings call. “We also continued the rampup of the Permian Basin in Texas and New Mexico, started production from the Big Foot Project in the Gulf of Mexico and continued to progress our Future Growth Project at the company’s 50%- owned affiliate, Tengizchevroil, in Kazakhstan.”

“In 2018, we delivered,” he added. “We grew oil and gas production by more than 7%, achieving our highest-ever annual production. We grew cash margins in our operated upstream assets, contributing to an improvement in cash returns. We lowered our unit costs, and we sold $2 billion of assets. 2018 was a very successful year and we intend to build on this momentum in 2019.”

Part of this ongoing strategy is the allocation of capital across a diverse portfolio, including the funding of the company’s highest-return projects, which Wirth sees as essential to supporting sustainable growth in the future.

Asset sales show strategic intent

For Chevron, 2018 saw upstream earnings increase by more than $9 billion between periods, largely due to higher realisations and increased liftings, though these were slightly offset by higher operating expenses associated with continued ramp-up in production.

“2018 production was 2.93 million barrels a day, an increase of 202,000 barrels a day or more than 7% from 2017,” remarked Pat Yarrington, Chevron’s vice-president and CFO. “This is the highest level of production in the company’s history. Excluding the impact of 2018 asset sales, production grew approximately 8%, or 1% above the top of the guidance range we provided last January.”

In Australia, the LNG plants at Gorgon and Wheatstone performed well in the fourth quarter, averaging almost 400,000 barrels of oil equivalent per day. “Major capital projects increased production by 227,000 barrels a day as we continue to ramp up production at multiple projects, most significantly Wheatstone and Gorgon. Shale and tight production increased 132,000 barrels a day, primarily in the Permian, where production grew by more than 70% from 2017,” Yarrington added. The Permian Basin, which spans West Texas and south-eastern New Mexico, is one of the most prolific oil and natural gas geologic basins in the United States, and a key element in the company’s North American asset base. Chevron is among the largest producers of oil and natural gas in the basin, and with more than 8,900km2 it is one of the largest net acreage holders.

The basin holds some of the largest oil fields in the US, including 20 of the country’s 100 biggest fields, and is an area in which enhanced oil recovery techniques have been used to good effect.

“Turning to the Permian, production in the fourth quarter was 377,000 barrels per day, up 172,000 barrels per day or 84% relative to the same quarter last year,” remarked Wirth. “Annual production was up more than 70%. 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.

“We are pleased with our position and leading performance in the Permian,” he added. “In just two years we have doubled our rig count, increased our resource base, decreased unit development and operating costs, and more than doubled our production.”

The sale of assets has been a key part of the company’s portfolio management strategy, both in the US and the rest of the world. Its sale of assets in the US mid-continent, the Gulf of Mexico shelf, and the Elk Hills field in California reduced production by 50,000 barrels per day.

“As with all divestments, we are focused on generating good value from any transaction,” noted Wirth. “Divestments are driven by a view on strategic alignments. With our broader portfolio and our view of the future, the resource potential that remains in a particular asset, will it compete for capital within our portfolio.”

Against this backdrop of asset sales, the company has performed well in terms of reserve replacement. In 2018, its reserve replacement ratio was 136%, meaning that it added almost 400 million more barrels than it produced and divested.

This was achieved while production grew by more than 7%.“Our reserves to production ratio stands at a healthy 11.3 years, showing the strength and sustainability of our portfolio,” remarked Wirth. “Our five-year reserve replacement ratio of 117% further illustrates that strength through the price downturn. Our largest adds came through our Permian shale and tight activity, other shale and tight, Gorgon and Wheatstone. So, primarily in the unconventionals, but with contributions from Australia, Canada, Asia, Gulf of Mexico, Eurasia.”

Bring investors back into E&P

Looking back over the same time period, ConocoPhillips has managed its E&P activities in a way that it feels will attract investors back into the sector, and its activities in the US are central to this plan.

Located in south Texas, along a 200-mile corridor, the Eagle Ford shale trend represents one of the company’s most promising developments, and the Permian Basin in West Texas and New Mexico is a strong growth area. In North Dakota and Montana, the company is focused on further exploring and developing areas in the Bakken play in the Williston Basin.

“We’re on a path to manage this company for the business we’re in, one that’s mature, capital intensive and cyclical,” remarked chairman and CEO Ryan Lance in his company’s February earnings calls. “We’ve embraced this view of the business with a value proposition that we believe should be the new order for E&P companies. Now what do we mean by the new order? We mean a value proposition that competes on returns and doesn’t change cycles up or down.

“Our value proposition, now more than two years old, is fundamentally structured to offer this,” he added. “Over this period, we’ve driven our sustaining price lower and made our balance sheet stronger. We completed high-value asset acquisitions and achieved significant exploration success in Alaska. We progressed our Montney appraisal programme in Canada and began exploring in our new Louisiana Austin Chalk play.”

The company’s 2019 planned capital expenditure for 2019 is, at $6.1 billion, similar to the figure for the previous year, and it includes funding for ongoing conventional and unconventional development drilling programmes, major projects, exploration and appraisal activities, and base maintenance activities. Much of this spend will go to projects in the US. Just over $3 billion is slated for the Lower 48. This anticipates running 10–11 rigs across the Eagle Ford, Bakken and Delaware – the Big 3 unconventional plays – with some built-in flexibility to shift activity between these plays as necessary to maximise value. The budget allocation for Lower 48 Eagle Ford and Delaware also contains provisions to conduct multiwell pilots of new completion designs that the company believes may drive future resource upside and be applicable to other unconventional plays.

Outside of the Big 3, capital spending will also target ongoing exploration and appraisal activity in areas such as the Louisiana Austin Chalk play, and $1.2 billion is slated for projects in Alaska. The increase in budget for Alaska over 2018 reflects the cost of ongoing construction at Greater Mooses Tooth-1 (GMT-1), as well as the further appraisal of discoveries in the Willow area.

Risk-assess the balance

Projects in Canada are expected to see $0.5 billion in capital expenditure – an increase that reflects the company’s ongoing appraisal and development activity in the Montney unconventional programme. Last year, ConocoPhillips significantly expanded its 100% owned and operated position in Montney, and operations are currently under way to drill a multiwell pad and to install the requisite processing capacity.

“Our Montney 14-well pad programme is in full swing in Canada,” remarked Lance. “In the Lower 48 Big 3, we expect to grow production by about 19%. We’re focusing our activities in the early part of the year on testing potential resourceenhancing programmes such as multiwell pilots of our Vintage 5 completion technique. In the Louisiana Austin Chalk, we’ve already started our four-well exploration programme and expect to have results later this year.”

“We’re running six rigs in the Eagle Ford just now,” added Matt Fox, CEO at ConocoPhillips. “We actually dropped a rig at the beginning of the year in Eagle Ford to optimise the ratio of our rigs to completion crews. And we’re running three in the Bakken and two in the Permian. At those sort of rig levels, we would be continuing to grow in the Eagle Ford.”

It is clear that ongoing investment in E&P activities in the Lower 48, Canada and Alaska is high on the agenda for the big players, and that the balance of their global portfolios is constantly under review. Finding the line between low-risk opportunities in the US and potentially higher-risk plays around the world will no doubt define the strategy of the oil majors going forward into the future of the industry.