Chevron's Watson on Oil Prices: $100 is the New $20

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As Chevron Chief Executive John Watson sees it, the last decade has ushered in a "new reality" for the oil and gas industry: Investment opportunities are almost too numerous to count, but the complexities involved mean that for oil prices "$100 is becoming the new $20." Watson told the IHS CeraWeek conference in Houston that this higher "base case" oil price is a result of the industry's increasing reliance on more expensive sources of oil and gas, including deepwater, LNG and harsh environments such as the Arctic. In some cases projects need higher oil prices to remain economic because the resources are difficult to develop. But in others, the enormous scale and long lead times associated with megaprojects are driving up the marginal cost of oil. Fiscal terms also push costs higher. What this means, Watson said, is that $100 oil is not the windfall for the industry that outsiders might think. As oil prices rose three-fold over the past decade, the industry responded by opening the spigots on capital spending, which greatly increased demand for oil-field goods and services. That caused upstream labor and capital costs to more than double, eroding the value of each dollar invested. "Costs have caught up to revenues for many classes of projects," Watson noted. Chevron has hardly been immune to this industry-wide battle with costs. For instance, its Gorgon LNG scheme in Australia has seen costs rise 46% in US-dollar terms to $54 billion since it was sanctioned in 2009 (OD Dec.12'13). And its Big Foot development in the Gulf of Mexico has seen costs rise 27.5% over the past three years to $5.1 billion (OD Feb.25'14). But Watson does not believe costs can go up forever. "The supply chain needs to address these constraints if we're going to be able to economically produce the resources that the world needs." Watson told reporters that looking out to 2030, the industry will have to bring 200 billion barrels of new oil on line, both to offset declines from current sources and to meet expected demand growth. So it is essential for costs and the fiscal environment to support that investment. In the meantime, Chevron is adapting to the new reality by taking a more careful look at its potential investments before giving them the green light. One example is the Rosebank oil development in the UK North Sea. Although the project's resources remain attractive, Chevron and its partners are overhauling the engineering work to reduce the final price tag before sanctioning it (OD Nov.25'13). Chevron's peer BP recently made a similar decision on its Mad Dog Phase II development in the US Gulf of Mexico (OD Apr.22'13). Watson told the conference that the industry faces a "great irony," as more countries are open for investment from foreign oil companies today than at any other time in his 33-year career. But he added that oil producing nations also face a "new reality" in which they must increasingly compete against each other to attract capital. "There is no shortage of projects," Watson said. The Chevron boss said the key elements his firm looks for when investing in a country are rule of law, transparent regulations, straightforward permitting processes and a stable tax environment. Casey Sattler, Houston

Oil Demand, Oil Supply, Offshore Oil and Gas
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