As the year began, Chevron said it was on track to produce 1 million BOE/D in the Permian Basin by 2024. Instead, the international major is joining a chorus of other oil producers that are drawing down their growth plans in response to the major market disruptions caused by a Russia-Saudi Arabia price war and an unfolding global pandemic.
To address the new landscape, Chevron announced on Tuesday, 24 March, that it has reduced its capital outlay from $20 billion to $16 billion. About $2 billion of the cuts will come from the company’s unconventional programs in Argentina and the US. But a company release said the reductions will “primarily” affect the Permian where it holds about 2.2 million acres.
Chevron said its new Permian production target is about 125,000 BOE/D, down 20% from the original expectation. In 2018, Chevron said it produced 159,000 BOE/D. Overall, the company’s total production is expected to remain flat over the year.
At least $1.2 billion in reductions will be spread across Chevron’s other upstream business units in the US and across the world. Another $800 million will be trimmed from the downstream and chemicals businesses.
Chevron does not plan to cut its dividend, but is taking other actions to improve its balance sheet:
· Eliminating a $5-billion share buyback program ($1.75 billion was already used to purchase shares in the first quarter)
· Completed a $500-million sale of an interest stake in the Philippines
· Next month, Chevron expects to sell all of its upstream and midstream assets in Azerbaijan
· Reducing operating costs by $1 billion by end of year
The downward adjustment amounts to a total of $8 billion. In an interview with CNBC, Chevron’s top executive indicated that he assumes the now 3-week-old price war will not let up anytime soon. Since Russia balked at production cuts and Saudi Arabia reacted with major discounts and production increases, oil prices have tumbled by nearly 60%.
“Certainly political dialogue is always helpful, but I don’t think we can count on it. We’re taking actions on the things that we can control. We’re preparing for a difficult market,” said Michael Wirth, chief executive officer of Chevron. “It’s an uncertain market, which is why we’ve taken actions on the things we can control.”
Making the price war all the more unprecedented is that it comes amid an expanding pandemic. As COVID-19 infects people in nearly every country on the planet, oil traders are forecasting demand drops of 10 to 20 million B/D. Chevron noted in its announcement that both the unpredictability of the current geopolitical situation and effects of COVID-19 may materially alter its plans and results going forward.
“This is the fourth time in my career I’ve seen prices drop by more than 50% in a very short period of time,” Wirth added. “We’ve been here before, we know what to do, we’re taking action.”