Wirth: Returns Guide Chevron's Low-Carbon Strategy

Under the helm of Mike Wirth, Chevron has defined a “higher returns, lower carbon” strategy that continues to evolve as investors and society at large demand greater action on emissions. The US major is pitching an alternative energy transition path focused on carbon capture and storage (CCS), hydrogen and biofuels, citing lackluster returns in renewable electricity. Wirth sat down with Energy Intelligence on the sidelines of the World Petroleum Congress to discuss investor perceptions of its transition trajectory, and how carbon factors into its thinking on everything from final investment decisions (FIDs) to product offerings.

Q: You’ve recently accelerated your low-carbon investment plans and emissions targets. What has been the conversation with investors since then?

A: Broadly speaking, we had previously done a better job of defining and describing the details of the “higher returns” part of our commitment than our “lower carbon” part. So as we've announced new targets for both reducing carbon intensity in our traditional businesses as well as growing some of these new energy businesses, they've been warmly received by investors.

We had been pretty clear that we didn't think we added a lot of value in renewable power or electricity distribution and marketing, and so we're going to work on solutions that leverage our capabilities, assets and value chains. So bringing some more definition to what that means in terms of specific renewable fuels and some guidance on how big those businesses could grow — same thing with hydrogen, CCS and … the amount of capital we envision spending. All have been, I think, very welcomed.

I think investors have given pretty positive feedback that we are working on things that extend from our strengths, and they believe that makes sense. They've been positive that we intend to generate competitive returns on these businesses. Then of course the next questions are: Tell us more. Where? Which project? etc. So they would like more detail, which as we get into 2022 at our Investor Day in March and then subsequently, we’ll continue to provide further updates on.

Q: A lot of major institutional investors are looking to align their investment portfolios with net zero. Practically, what is the ask on Chevron to align with that?

A: I think that's still very much a work in progress. It's not entirely clear for an asset manager what it means to have a net-zero-aligned portfolio. And so I wouldn't say it's translated into specific asks as much as the general discussion that we've been having — which is, how will you sustain higher returns in a lower-carbon future? How will you create the capability and options to accelerate in some of these lower-carbon businesses if and when they begin to take off, so that you are prepared for that?

I would say there's a gradual process of recognition that our industry will be part of meeting these challenges, which is a little bit contrary to the narrative you sometimes hear, which says there's no place for our industry.

Q: What is Chevron’s medium-term view on oil and gas balances, and how is that informing your decision to grow production over the next few years?

A: As the economy reopens and continues to grow, and as we see a lot of stimulative policy in the US and other countries or regions around the world, demand for energy will go up, and 80% of today's energy system is fossil fuels. It's pretty easy to see that demand for traditional energy is likely to go up as a result of that, and … we intend to be a low-cost and low-carbon provider of oil and gas. We believe that in any scenario, consumers, policymakers and investors should want to see the demand for oil and gas that the world does have met by responsible producers.

Q: In light of the recent gas “prices crisis” and oil’s run-up this year, do investors have greater acceptance of this strategy, at least near term?

A: I think there's a recognition that companies like ours need to strike a balance. And of course, also — they want to see returns to shareholders. So it's not just about investment in traditional energy or new energy. It's also return of capital to the owners of the company.

If you look at our company, for as long as I've been around, we've had four financial priorities. The first is to sustain and grow our dividend. We've grown our dividend 12% during Covid-19, much more than any of our peers. Many of them have reduced their dividend, which has caught investors’ attention. Priority two is to reinvest in our business to grow organic cash flow for the future, and that's both traditional energy and new energies. No. 3 is to maintain the financial strength of the company, to have a balance sheet that can survive the volatility of commodity markets. We came into Covid-19 with the strongest balance sheet in the industry and we’ve emerged from Covid-19 with the strongest balance sheet in the industry. And then the fourth is to return excess cash to shareholders through share repurchases when we've got cash surplus … which is certainly what we are doing now. Last week when we announced our capital budget for next year, we increased our guidance on share repurchases to $3 billion to $5 billion per year.

So that's really responsive to what shareholders are asking [for], which is distributions, financial strength and investment in the future.

Q: How has your criteria for evaluating FIDs and project planning evolved in recent years?

A: There's a couple of things where we begin. One is to focus on returns. This industry and our company have work to do to improve the return on invested capital. We're focused on strengthening our engineering delivery, which has been at the root of some of the large projects that haven't been executed as well as we would like. And then, of course, the execution discipline that follows that.

We have a portfolio that is blessed with a lot of short-cycle, very attractive investment opportunities. It’s not just the Permian. It’s the DJ Basin, which came with Noble Energy and now competes very well within our portfolio — as do our unconventional assets in Argentina and Canada. That is a relatively low execution risk, low cycle-time risk and low financial risk place for us to invest because the economics are so good. So that has become a larger and larger part of our investment portfolio.

It's not everything — we have two big projects in Kazakhstan, we've got projects in the deepwater Gulf of Mexico and chemical projects. But what it does is set the bar pretty high for the marginal dollar of capital investment. It needs to offer similar attributes in terms of returns, execution risk — and the Permian is pretty low carbon in our portfolio.

If you want to go back a few years ago, we didn't spend nearly as much time talking about the carbon intensity of an asset over its life cycle as we do today. Today it’s a part of every FID decision. There's a very thorough discussion of carbon intensity — as an asset begins, what happens over the life of that asset, how does the profile change? Typically as production drops off, you need more energy to raise those barrels and so the carbon intensity profile can change over the course of a project’s life. And what are the technology opportunities over time to continue to reduce the carbon intensity of those assets?

Q: Chevron has some of the industry’s most ambitious CCS growth targets, but the track record on CCS has been mixed. What gives you confidence in the next generation of projects — and what are your lessons from the growing pains at Gorgon?

A: The first reason I'm optimistic about CCS is because we do it today. There are a lot of technologies that need to be invented. This doesn't need to be invented. In fact, we have a long history of taking molecules from inside the earth, moving them to the surface, and moving them through infrastructure, to a market where they're useful. This is really reverse engineering — taking molecules that we don't want in the atmosphere, moving through infrastructure, back down into the earth and into the containers where molecules were previously stored. So we know how to do it.

But it's a relatively young industry. Most carbon capture has been used for enhanced oil recovery historically, and so the longer-term issues around actual storage — it's a new thing. We're in the big [Gorgon] project in Australia, a big one [Quest] in Canada that actually do that. And are there lessons to be learned? For sure.

The most simple way I can describe the lessons at Gorgon is we had such a focus on the big LNG project that the engineering and discipline applied to some of the routine aspects of the CCS project didn't probably get the attention that they deserve. And the challenges we've had are all being addressed. They're not technically difficult.

Q: Chevron doesn’t see renewable electricity offering compelling returns, but do you need to consider the integrated oil and gas and renewable electricity projects we’ve seen pop up in places like Iraq and Libya as resource countries adopt their own climate goals?

A: Yeah, so we've looked at some of the projects that have been announced. We've talked to some of the companies that have gone into these. So we're pretty familiar with the opportunities … If you look back over the history of the industry, oftentimes when we would go in, there's an agreement to develop local workforce capability, local supply chains, schools, hospitals, roads and power plants. We've built a lot of domestic infrastructure and capacity over many decades as part of these broader resource deals. So it’s certainly within the realm of possibility that lower-carbon, Paris-targeted type things could become part of that as kind of the current generation or next generation of development.

It all has to compete economically. That's the bottom line. That's been historically true as well. It just has to make sense for us to come in and put people and capital to work in those areas. And it has to make sense for the host country. The deal works both ways. So in some ways, it's not dissimilar to what we've done over a long period of time.

Q: What is the market potential for carbon-neutral LNG, and is it a cost to be shared between buyer and seller?

A: It's a relatively newly emerging attribute of product sales. Historically, whether you're talking LNG or gasoline or whatever else, people want it to be affordable, they want to be very reliable and then they have certain quality specifications that they look toward. In some ways, this becomes a new specification that people are looking for. Historically, in many of our product lines, high-quality products can draw a premium. … The real question is what is the customers’ willingness and capacity to pay.

I actually think it's going to be very interesting to watch because while on the one hand, the average American consumer doesn't have a great track record of being willing to pay much more for a green product, I think as you look at some heavy industry — we talked about this today [during conference remarks] in road transport, aviation, shipping, manufacturing — many of these companies have set their own net-zero targets and implicitly, if not explicitly, they are saying we're willing to pay in order to achieve that. We know we're going to have to pay to get there. I’ve talked about sustainable aviation fuel costing a lot more than conventional aviation fuel. So we're going to work to get those premiums down, with technology and scale and all the things that we know how to do well. So I think we'll see this emerge over time as a quality attribute for product sales.

And I think there will be different types of customers … In all of these markets, you're going to see certain customers are willing to pay a premium price for a premium product. I think you're going to find that others will not be. We're going to see markets evolve here. We've always wanted to respond to customers, and we've always been a premium-positioned marketer at both the retail and the wholesale level. So I think we'll see this grow, but it's very nascent right now.

Q: Are you starting to hear of customers on the crude side that might also be willing to pay a premium for less carbon-intensive barrels?

A: I think on crude it’s going to be very interesting. In California right now, under the low-carbon fuel standard, crude oil does have varying carbon intensities and it actually does work into the crude acquisition economics today. So in a way, where you’ve got a policy environment in place, this exists.

I think the real question you're getting at is for customers that are not operating in a place with that policy. In this case, would they be willing to pay a little bit more for lower-carbon intensity crude?

Raw materials tend to be a little bit different than finished products because they get turned into finished products, and then if those are going into markets that are generally commoditized and very competitive, the ability to move through any premium you pay for the raw materials gets to be a challenge. That said, there's blockchain technology that is being used in all different industries to track attributes of products. In the Ag industry, it's the agricultural practices all the way through. You could see technology that allows people to track the carbon intensity all the way through the finished products. And I think the real question is, will the purchaser of the finished product be willing to pay for that, and can you demonstrate to them that there's integrity in that attribute that they’re willing to pay for?