Chevron: Higher Returns, Lower Carbon the Challenge

Copyright © 2021 Energy Intelligence Group

Chevron hasn’t made the net-zero emissions pledges of its European peers, but the US firm isn’t sitting still. The oil-weighted major is stepping bigger into gas, advancing renewables projects it sees as market-ready and easily integrated into its existing operations, and just completed the year’s largest acquisition, the $13 billion buyout of Noble Energy. CEO Mike Wirth discussed Chevron’s evolving strategy at this year’s Energy Intelligence Forum. Select excerpts are below. Q: Chevron’s CFO commented recently that the industry still had “too many CEOs per boe [barrels of oil equivalent].” Why would consolidation help the industry, and what is needed to get there? A: I think there's this perception of Big Oil, Big Oil and Gas that somehow has tremendous market power. But the reality today is, it's a highly fragmented industry and therefore there are certain inefficiencies. You use the quote that our CFO has made, which is, too many CEOs per boe. Along with that comes a lot of overhead and costs. I think consolidation really, from an industrial standpoint, is necessary to drive efficiency, to drive higher returns. Our industry has not delivered higher returns over the last decade. We certainly hear that from investors. Q: Can you elaborate more on why the East Med has become so attractive to Chevron and a place where you want to expand? A: Sure, so you know it's part of a broader set of assets [purchased via Noble] (PIW Jul.24'20). Noble has good positions in the Permian, in Colorado, and certainly in the Eastern Med, with a number of discoveries and developments. We like the Eastern Med. It's becoming quite a prospective province, an area that perhaps had been a little bit underexplored historically. Gas is a growing commodity, growing faster than oil. It is part of the energy transition story. And yet gas has its own unique challenges to, particularly transportation, which can be difficult. In this case in the Eastern Med, you are proximate to a growing region in the Middle East with strong demand growth [and] close to Europe. [You have] the ability to move gas via pipeline, potentially via LNG and supply a number of markets in a way that's competitive (PIW Jul.31'20). We like the quality of the resource. We like the size and the scale of the resource, which is certainly important over time, and then the access to markets. Gas markets can be complicated. It takes time to iron out all the commercial and infrastructure agreements that need to be made, but we think it's a good-quality resource in a good place. Certainly you know that the trend in that part of the world seems to be toward more cooperation. It's not without challenges and it's not without differences of opinion among certain countries. But in general I would say that the ties between countries are moving in a positive direction. These things aren't a straight line. They can go up and down. But we see a lot of positives to support the development of commercial ties between countries, and energy can be a very important component of that. Q: You have said you favor an asset-light approach to LNG expansion, debottlenecking and things like that, but the lowest-cost greenfield opportunities would still be on your radar. It sounds like you’re weighing the regional gas market play versus LNG in the East Med. Is that fair? A: Sure, I mean we just closed the transaction last week, so it's relatively early days. There is existing pipe infrastructure into certain markets. There are LNG facilities that are not far from some of these resources that have ullage and have capacity, and so installed infrastructure already. I don't think it's an either-or. I think it's probably some combination of the two over time that we'll see emerge as the pathway to markets and commercialization. Q: How about Qatar? Is Chevron interested in potentially partnering on its LNG expansion? A: We are. We've been involved in the process there now for a number of years. We've got a nice chemicals business in Qatar, so good existing relationships. Qatar certainly is blessed with a large and low-cost gas resource. The process has obviously been affected by the state of markets and some recent developments in the world but appears to be on path toward EPC [engineering, procurement and construction] bidding here as this year closes out (PIW Sep.4'20). And then some decisions on the part of the Qataris in terms of how they want to structure these investments going forward with partners -- we've been involved in that. We look forward to continuing with that process. Q: It seems fair to say you have been an oil bull -- not necessarily when it comes to price, but in terms of confidence in demand growth potential even with the energy transition ahead. Has anything this year changed your thinking? A: Well, certainly in the near term, we're facing quite a different set of dynamics than we would have been discussing a year ago. But fundamentally, I'm an energy optimist I'll say, rather than an oil bull. This is the industry I've worked in my entire career, and I've seen what affordable, reliable and ever-cleaner energy does for people around the world. We support energy of all forms. There's a phrase -- it became popular a few years ago -- “all of the above.” I think sometimes now people will criticize that, but there are different energy sources [that] really are ideally suited for different applications. Solar and wind work in certain types of applications. Hydropower in others. Oil and gas still in others. And things like nuclear, which has its detractors but has a lot of things to argue for it as well. I think those of us in the industry that want to see progress in society need to advocate for responsible energy development of all types. That's certainly what I believe. Our company has certain competencies, things we're good at technically, operationally. We believe we can do those even better as we go into the future and the demand for all of these sources of energy continues to grow. Q: I've noticed a real uptick this year in your public flagging of some of your low-carbon initiatives. Partnerships like Brightmark and Algonquin are meaningful commercial investments. Are these responses to pressure? Are you actually accelerating? Or is this exactly where you expected to be to hit your medium-term emissions targets? A: We've got really three areas that we're focused on. One is reducing the carbon intensity of our current operations. The second is to integrate renewables into our business in a bigger way. That is certainly what Algonquin and Brightmark, other things offer us the prospect to do. And then the third is to invest in technologies that we think are both commercially viable and then scalable to contribute in a meaningful way. These have been our priorities for a number of years, and I would tell you that some of the things you're seeing are because we see them now competing economically in our portfolio and creating value. There's a balance in everything in life, and certainly as we look at this, we need to deliver higher returns. Shareholders are telling us this. The industry has not really created value for its owners over this last decade, and so higher returns and lower carbon are the challenge. If we do one and not the other, we're not really making progress. So we have to find investments that are good for the environment and good for shareholders. If you over-index only on the shareholders, you're not going to be meeting expectations relative to the environment. I think if you over-index only on things that bring with them environmental good, many of these things are difficult to generate commercial returns on today. And so therein lies the tension in the system. As we make some of these more substantive commitments, it's because we believe that we found things that actually strike the right balance. Q: What is it going take to bring investors back to oil and gas? A: It's always darkest before the dawn, and certainly our sector is out of favor today. I think the primary reason is returns. If you look at the performance, whether you're talking return on capital that's been invested or you talk about shareholder returns, investors are frustrated. They feel like this is an industry that has not been responsible stewards of capital. I think it's hard to argue with them as you look at it in total, and this goes across different segments within the industry and companies large and small. This has been, I think, the biggest challenge. At the same time, over the last decade, expectations for environmental performance have steadily risen as well. I think it's an “and” world. I think we have to find a way to do both. I think investors will return when they see evidence that returns are improving and that companies are serious about addressing environmental priorities. Q: Given your experience of this year, what kind of flexibility does an oil-weighted portfolio need and do you have it? A: I think it's a really interesting change we've seen in the industry. If you go back to the 2000s’ strong commodity price cycle, people had to really invest into that to meet that growing demand. In the early 2000s, the conventional wisdom was the easy oil had been found, the cheap oil had been produced, and increasingly the industry is going to move into more complex and challenging environments, be they offshore, Arctic, the oil sands, and that this was going to require a higher commodity price in order to incentivize that marginal investment. And so a lot of capital [was] put into that thesis. Then along comes fracking and horizontal drilling technologies and all of a sudden the tight resource in shale that people have known about for decades becomes more economic and can compete. So we found ourselves in the last decade with many multibillion-dollar, multiyear investments which were challenging, and the industry’s experience broadly was not good. Projects were later than expected. They cost more than expected, and that weighed on returns even if oil prices had held. And then of course as prices have come off, things look even worse. Shale offers capital flexibility. If I go back to 2014, we were spending $40 billion a year and not growing our company. As we came into this year, we were spending $20 billion -- so, half of that amount -- and we were growing the company. We've been able to pull our spending this year down to $14 [billion], and actually in the second half of the year, more like $12 [billion] on a run-rate basis. Incredible flexibility on capital, lower capital intensity, and we've got the ability to adjust our program to meet market conditions on a much more contemporaneous cycle. So we've got [a] large position in the Permian now. A nice position of the DJ Basin. We've got the Duvernay in Canada and the Vaca Muerta in Argentina. We like the fact that our portfolio has much more flexibility. We’ll always have room for some of these large long-cycle projects. But we won't find ourselves weighted or overweighted to those I think in the foreseeable future. I think it will be quite the opposite. Q: Do you think that we will ever get back to 13 million barrel per day peak production in the US? A: I try not to make predictions for things like that. I think we certainly won't see a return in activity and the commensurate production response as we come out of this. I think you will see the eventual resumption of development in the United States being done in a less enthusiastic way -- I'll say, more disciplined way -- and I think that means a shallower growth curve coming out of it. Whether or not that gets back to 13 million b/d? I don't think it does in the next couple of years. As you get out into the back half of this decade or maybe into the 2030s? I think a lot will depend on the signals in the market at the time and the alternatives companies have for investment. Q: What do you think the industry needs to grow carbon capture and storage more effectively and have it be an integrated part of the business? A: At Gorgon, we've got some advantages. We're capturing CO2 [carbon dioxide] from a gas stream, so it's a relatively concentrated stream. We can use well-established technologies to do that. And then we've got access to depleted reservoirs with lots of pore space. So a set of conditions comes together there that you don't see everywhere. I think we're going to need to see technology developments, particularly in carbon capture on more diluted CO2 streams, particularly combustion streams. Lots of people are working on that. We've invested in some companies that have some interesting ideas. We’re going to understand how to work the infrastructure side of this and then of course the subsurface, which we understand technically, but the legal framework, the liability framework, policy framework, to enable long-term carbon storage still needs work. I think the industry needs to find ways to collaborate on this. It’s like any large-scale industrial development -- it needs technology, it needs engineering, it needs policy and then economic incentives that all come together to scale up what is in essence a new industry for the world.

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