Chevron CEO expects Permian to thrive for long time Company holds annual shareolders’ meeting at new Midland campus

Chevron opened its bright new copper-colored Midland campus to its stockholders on Wednesday for its annual meeting in the heart of what is one of its most significant areas of operation. Tim Fischer\Reporter-Telegram less Chevron opened its bright new copper-colored Midland campus to its stockholders on Wednesday for its annual meeting in the heart of what is one of its most significant areas of operation. Tim ... more Photo: Tim Fischer Buy photo Photo: Tim Fischer Image 1 of / 1 Caption Close Chevron CEO expects Permian to thrive for long time 1 / 1 Back to Gallery

Chevron opened its bright new copper-colored Midland campus to its stockholders on Wednesday for its annual meeting in the heart of what is one of its most significant areas of operation.

As other producing basins have retreated amid continued low oil prices, the Permian has managed to continue growing production, and Chevron, for one, intends to pour billions into the region, where it has had a presence for about 90 years.

Recent gains in productivity and efficiency have changed the game for Chevron, John Watson, the company’s chairman and chief executive officer, told reporters following the meeting.

“It’s changed the game very significantly. If you go back to the beginning of this decade when I came into my job, it wasn’t clear how much oil could be extracted through hydraulic fracturing. Then it wasn’t clear at what cost it could be extracted,” he said. “What we’re seeing is, through innovation in the industry, it’s become more efficient and cheaper and cheaper and cheaper to produce.

“Right now we’re sitting in a $50 world and activity is rising in the Permian Basin,” Watson said.

The Permian “is in a very unique position in the world. If you look at the industry around the world, it’s still very depressed at $50,” he said. “Every class of asset -- whether it’s deepwater or conventional production -- in many locations every type of oil development is looking to reduce their costs so they can become competitive. It’s clear at this point that shales are outcompeting most other asset classes, particularly here in the Permian Basin.

“I expect to see activity to continue to rise here,” Watson said. “Certainly at the $50 level we’re seeing today, you’re seeing the rig count rise, activity rise. Certainly there could be some pressure on the price of business services, which could potentially limit some gains, but overall efficiencies that have been put in place are so significant, the Permian Basin in particular is going to be competitive for a long time to come. And that’s great news for Midland and Odessa and the people in the basin.”

Acknowledging that service costs are on the rise, Watson said the impact of that service cost inflation “depends on how companies structure their procurement methods and the relationships they have with vendors and suppliers.”

He said that Chevron develops its plans with a fairly long lead time, a contracting method “we think gives us the chance to have the business services we need at reasonable prices so that we can continue to ramp up.

“We’re contracting ahead with our providers,” Watson said. “Obviously, we don’t know what prices will be, but we do have a good idea of what the cost structure will look like based on the contracts we have in place. We expect we’ll see some price pressure in some areas, but overall, the kind of prices we’re seeing today will be able to support the kinds of rig additions we’re planning.”

The company is currently operating 12 rigs, with plans to increase that number to 15 by the end of the year and 20 next year, according to Watson. Those rigs are added at a deliberate, measured pace of one every eight to 10 weeks, he said.

Watson said Chevron has established a factory model for producing its Permian Basin assets.

“It’s critically important to understand the company you hire and the people they bring with them so you can have the workforce you need to deliver the productivity and efficiency we need. We have set up this factory model, so every step is critical, precisely choreographed. We need the right equipment, the right people, the right safety classes, all those things in place. Every eight to 10 weeks we’re adding a rig, so a lot of things need to be in place working with that supply chain — rigs, frac crews, sand providers.”

Aside from service cost inflation, the only other possible limitation to Chevron’s plans is takeaway capacity, Watson said. Working with pipelines and plant operators, dedicating acreage to them and ensuring pipelines have the capacity for the company’s production is part of Chevron’s meticulous planning process, he said.

Other topics Watson discussed:

-- He expects domestic natural gas prices to remain moderate for a long time to come, which should benefit the liquefied natural gas business as well as manufacturers who use natural gas for power and fuel.

-- The Trump administration is off to a good start “when it comes to many things in its energy policy,” Watson said.

He applauded efforts to review proposed regulations with an eye toward cost-benefit analysis. He cited as an example proposed methane production regulations that would equate to more than $50,000 a ton in costs. Some ozone standards in place also need to be scrutinized, he said.

“We all want clean air, we all want clean water, but let’s be sure the policies have been thought through, make sense, and that what we’re getting for the cost to industry and consumers measures up,” Watson said.