Chevron: Cash balanced in 2017

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 09 Feb 2017   Posted by admin


Construction on Train 3 at Gorgon.      All Images: Chevron



By Reuben Adams

 

THE December quarterly report from the Department of Industry, Innovation & Science Resources and Energy was upbeat on the medium term future for Australian LNG.
The report forecast LNG export volumes to grow a further 28 per cent in 2017–18, while the value of Australia’s LNG exports would increase by 50 per cent a year to $37 billion, supported by higher LNG prices and export volumes.
As a leading energy company with an impressive, and growing, natural gas business, Chevron will be a major player in Australia’s growing status as an LNG powerhouse.


Exploration & Capital Investments


On December 7, 2016 Chevron announced a reduced $US19.8 billion capital and exploratory budget for 2017 as spending on major project construction, namely Gorgon and Wheatstone, neared completion.
Chevron chairman and chief executive John Watson said spending for 2017 would target shorter-cycle time, high-return investments and completing major projects under construction.
“In fact, over 70 percent of our planned upstream investment program is expected to generate production within two years,” Mr Watson said.
“This is the fourth consecutive year of spending reductions. Construction is nearing completion on several major capital projects, which are now online or expected to come online in the next few quarters.
“This combination of lower spending and growth in production revenues supports our overall objective of becoming cash balanced in 2017.”
The 2017 budget represented a reduction of 42 percent from 2015 and was expected to be at least 15 percent lower than projected 2016 capital investments. It included $US7 billion related to major capital projects currently underway, including about $US2 billion toward the completion of the Gorgon and Wheatstone.


First LNG from Gorgon’s Train 2 was achieved in March last year.


Gorgon & Wheatstone


For Chevron, the September 2016 quarter saw first production from the Gorgon domestic gas plant, which it called “the most significant entry into the WA domestic gas market for almost thirty years”.
Starting December, the project would initially produce 150 terajoules a day for the WA gas market.
At full capacity and subject to market demand, the Gorgon project could supply up to 300 Tj/d of gas to the WA market, equivalent to generating enough electricity for 2.5 million households.
In the Western market, Australia’s largest gas producing area, production is expected to rise in 2017 as the $54 million Gorgon project ramps up and the Wheatstone project comes on line.
In December, Chevron Australia managing director Nigel Hearne said the Gorgon Project was a significant new source of cleaner-burning energy for WA and would be a leading domestic gas supplier for decades to come.
On January 4, Chevron resumed production at one of its two units after another month-long outage, according to Reuters.
Gorgon LNG Train 1 operation resumed earlier this week,” a Chevron spokesperson told Reuters in an emailed statement.
“Production was halted in late November 2016 to assess and address some performance variations.”
Output at the plant’s Train 2 was unaffected during the period.
In April 2016, after just one shipment, Chevron was forced to temporarily halt Gorgon production due to “mechanical issues” with the propane refrigerant circuit on Train 1 at the plant site.
At the time Train 1 was producing LNG at 70 per cent of its 5.2 million tonne a year capacity, or about 90,000 barrels of oil equivalent a day.
Base on initial findings, work on the propane refrigerant circuit – a closed system used to cool natural gas supplied to the plant – would be of “a routine nature and all the necessary equipment and material is available on site”; but the plant would not be restarted until mid-July.
Wheatstone has also been troubled by delays, with first LNG pushed back in January last year from end of 2016 to mid-2017.
Chevron plans to produce 8.9mtpa of LNG through two trains to be supplied by permits WA-235-P and WA-17-R, located in the Wheatstone field, offshore WA.
At full capacity, the Wheatstone Project has the capacity to produce 200 terajoules per day (TJ/d) of domestic gas for the WA market, with first delivery expected in 2018.
In Chevrons fourth quarter 2016 earnings call on January 27, Mr Watson said Gorgon was currently stable with gross output of over 200,000 barrels a day and 130 million cubic feet of domestic gas output.
A total of 39 cargoes had been shipped; 10 since the beginning of the year.
“Train 1 ramp-up was below expectations as we worked through start-up issues we discussed previously,” Mr Watson said.
“All learnings from Train 1 were applied to Train 2 and consequently Train 2 ramped up to over 90 per cent of capacity within a week and continues to exceed expectations.
“Train 3 is also expected to benefit from these learnings. Construction is complete and we are well into start up and commissioning.
“We expect first LNG early in the second quarter of this year.”
At Wheatstone the outlook for first LNG remained mid-2017. All modules for Train 1 and Train 2 were on their foundations and the site is under permanent power, Mr Watson said.
“Ongoing hook up and commissioning of the offshore platform is the critical path activity,” he said. “We are leveraging our experience from Gorgon and incorporating learnings into our ongoing activities. We expect Train 2 to start up 6 to 8 months following Train 1.”


Drilling the GAB



Chevron has said it would push ahead with a $400 million drilling program in the Great Australian Bight after “very promising” results.


The Great Australian Bight (GAB), about 300 kilometres west of Port Lincoln off the southern Australian coast, represents one of Australia’s most prospective frontier hydrocarbon exploration regions.
In October 2013, Chevron Australia acquired two deepwater exploration permits in the GAB’s Commonwealth marine waters.
The exploration permits, EPP44 and EPP45, span more than 32,000 square kilometres – or eight million acres – and nearly doubled Chevron’s Australian offshore acreage holding. Chevron’s work program includes marine seismic surveys, geological studies and two exploration wells in each permit.
In September 2015, a significant partnership between CSIRO and Chevron kicked off investigating unexplored deepwater regions in the GAB.
Former Minister for Industry and Science Ian Macfarlane said the partnership was an ideal example of the benefits from closer collaboration between Australia’s diverse scientific community and industry.
The multimillion dollar Great Australian Bight Deepwater Marine Program, funded by Chevron, aimed to answer questions about the geology and ecology of this unique region.
The program would provide a better understanding of the Basin’s geology and petroleum prospectivity to reduce exploration risks and costs, while improving understanding of the ecology and provide baseline data to inform environmental assessments.
“The RV Investigator is Australia’s sophisticated research vessel, which has already completed a number of voyages to gather data and research the marine environment,” Mr Macfarlane said.
“As Australia’s pre-eminent science and research body, CSIRO has a central role to play in providing expertise and applying its track record of research excellence as the Australian Government works to encourage greater collaboration between industry and science.
“While just on our doorstep, the Great Australian Bight remains relatively unknown, but it also represents one of Australia’s most prospective exploration regions for oil and gas.
“This partnership is an example of how science and industry can work collectively to ensure Australia’s offshore hydrocarbon endowment can bring economic and social benefits that are efficient and sustainable.”
Despite BP abandoning plans to drill two exploration wells in the Bight late 2016, in January Chevron has said it would push ahead with $400 million worth of drilling after “very promising” results from early studies indicated the ¬potential for a new Bass Strait or North West Shelf.
Chevron Australian exploration manager David Moffat, in front of a Senate inquiry in Adelaide, said the company was still planning to drill in 2017 or 2018, the ABC reported.
“They (the seismic studies) provide early but very promising evidence that the Bight represents a tremendous opportunity for both Australia and South Australia in particular on a scale possibly akin to the Bass Strait or the North West Shelf,” Mr ¬Moffat said.
“Chevron is still committed to its four-well program in the Bight. Given what we have seen from the seismic data, it is very optimistic that we have a viable project.”
Mr Moffat told the senate committee hearing, held in November last year, that the four wells, estimated to cost $100m each, would be delayed; Chevron was in discussions with the regulator to likely commence exploration drilling in 2018.
“The extension is to simply allow more time to complete the analysis of the seismic data, to undertake extra work involved in optimally locating the well locations, to prepare our environment plan, and to undertake stakeholder consultation.”
Mr Moffat said Chevron’s experience in deepwater exploration drilling would be vital in the Bight’s weather and ocean conditions.
“If you look at our record around Australia and the world, we have extensive experience in deepwater exploration, drilling in extreme conditions and in remote locations,” he said.
“We were the first operator allowed to resume drilling in the Gulf of Mexico post-Macondo, and recently drilled three deepwater wells off Newfoundland, which is analogous to the Bight.”


Global Outlook


Consensus amongst analysts is that global gas consumption growth is expected to remain slow in the next two years as LNG supplies grow rapidly, underpinned by export capacity expansions in both Australia and the US.
Australia’s share of global LNG exports is forecast to increase from 12 per cent in 2015, to 24 per cent in 2018.
Yet the outlook for Australia’s resources and energy exports is positive. The December quarterly report from the Department of Industry, Innovation & Science Resources and Energy forecast export earnings to increase 30 per cent in 2016–17, to a nominal record of $204 billion, before steadying in 2017–18.
The strongest growth in export earnings over the two years to 2017–18 will come from LNG, which is forecast to increase by 124 per cent, from $17 billion in 2015–16 to $37 billion in 2017–18, as recently completed projects ramp up output and projects under construction come online.
“Australian producers are expected to capture an increasing share of imports into major markets in North East Asia, as long-term LNG import contracts commence,” the report stated.
“The forecast for export earnings has been revised up, reflecting an improved outlook for oil prices.”
Mr Watson told analysts on 27 January that Chevron needed to do a number of things well to adjust to lower prices.
First, finish projects under construction, which reduces spend and brings on new revenue.
“Gorgon Train 1 and 2, Chuandongbei, Bangka, Alder, Angola LNG are all on production and stable. In 2017 progress will continue with Gorgon Train 3 and Wheatstone coming online,” he said.
Second, Chevron needed to reduce capital expenditures and focus on work that was profitable at lower prices.
“2016 capital was down 34% or $11.6 billion from 2015,” Mr Watson said.
“We are further reducing capital spending in 2017 and investing a larger percentage of capital in short cycle, high return opportunities presented by our advantaged portfolio.”
Third, the company was lowering operating expenses through efficiency gains.
“2016 operating expense was down 9 per cent or $US2.5 billion from 2015 and we expect further reductions in 201,” Mr Watson said.