CHEVRON: BOUNC­ING BACK

In 2016, Chevron posted its first an­nual loss in 37 years. This year, solid re­sults in the first and sec­ond quar­ter saw the oil and gas gi­ant re­bound strongly into profit, while pre­dicted pro­duc­tion growth as Gor­gon ramps up and Wheat­stone comes on­line wi

The Australian Energy Review - - CONTENTS - REUBEN ADAMS

CHEVRON shares re­ceived a boost af­ter the oil and gas gi­ant beat mar­ket ex­pec­ta­tions with earn­ings of $US1.5 bil­lion for sec­ond quar­ter of 2017, com­pared with a loss of $US1.5 bil­lion in same pe­riod last year.

Q2 pro­duc­tion of 2.78 mil­lion bar­rels a day (BOE/D) rep­re­sented a 252,000 BOE/D, or 10 per cent, in­crease over Q2 2016.

Ma­jor cap­i­tal pro­jects in­creased pro­duc­tion by 265,000 BOE/D as mul­ti­ple pro­jects ramped up, in­clud­ing Gor­gon.

“Sec­ond quar­ter re­sults im­proved sub­stan­tially from a year ago and year-to-date net cash flow is pos­i­tive,” Chevron chair­man and chief ex­ec­u­tive John Watson said in the com­pany’s June quar­ter re­port.

“We’re de­liv­er­ing higher pro­duc­tion with lower cap­i­tal and oper­at­ing ex­pen­di­tures,” he said.

“Oil and gas pro­duc­tion was up 10 per­cent in the sec­ond quar­ter from a year ago.

“Our Gor­gon LNG Project in Aus­tralia closed the quar­ter run­ning above name­plate ca­pac­ity and we had record pro­duc­tion from our shale and tight re­source in the Per­mian Basin.

“First pro­duc­tion from the Wheat­stone LNG Project is ex­pected next month.”

Look­ing ahead to the sec­ond half of the year, Chevron ex­pected to see re­li­able pro­duc­tion from the as­sets that are cur­rently on stream and fur­ther growth in the Per­mian and with Wheat­stone com­ing on­line.

Chevron chief fi­nan­cial of­fi­cer Pa­tri­cia E. Yar­ring­ton used the Q2 earn­ings call to spruik the com­pany’s cap­i­tal ef­fi­ciency ini­tia­tives and debt re­duc­tion drive.

“At quar­ter-end, debt bal­ances stood at ap­prox­i­mately $43 bil­lion, more than $3 bil­lion lower than where we be­gan the year,” Ms Yar­ring­ton said.

“We con­tin­ued to re­duce our spend by fin­ish­ing our ma­jor cap­i­tal pro­jects un­der con­struc­tion and driv­ing cap­i­tal ef­fi­ciency gains through­out our in­vest­ment queue.”

Look­ing ahead to the sec­ond half of the year, Ms Yar­ring­ton ex­pected cash out­comes to fa­vor­ably re­flect grow­ing pro­duc­tion and ad­di­tional pro­ceeds from as­set sales.

De­spite “some an­tic­i­pated un­even­ness be­tween third quar­ter and fourth quar­ter, for ex­am­ple re­lated to the pre­cise tim­ing of sales trans­ac­tions” Chevron ex­pected to end the year in a cash bal­ance po­si­tion at cur­rent prices.

Gor­gon

“We're see­ing strong per­for­mance at Gor­gon,” Chevron ex­ec­u­tive vice president Up­stream James W. John­son told an­a­lysts dur­ing the Q2 earn­ings call.

“All three trains have achieved or ex­ceeded name­plate ca­pac­ity and are oper­at­ing smoothly.”

Gor­gon pro­duc­tion was 333,000 BOE/D (on a 100 per cent ba­sis), and by late July was av­er­ag­ing around 430,000 BOE/D. 88 LNG car­goes had been shipped by mid-year.

Mr John­son said that the Train 3 start-up was a par­tic­u­larly “beau­ti­ful thing”.

“So now all three trains are sta­ble at or above name­plate. And that was our goal. When we look at the re­li­a­bil­ity, it’s how many trips or how many times does the plant go of­fline, and ob­vi­ously we want to elim­i­nate those so that the plants run re­li­ably day in and day out,” Mr John­son said.

“Look­ing for­ward, we're fo­cused on achiev­ing sus­tained op­er­a­tions and are an­a­lyz­ing plant per­for­mance to find op­por­tu­ni­ties to in­crease re­li­a­bil­ity and pro­duc­tion.

“Ad­di­tional fine tun­ing of the plant will max­i­mize ef­fi­ciency and we ex­pect fur­ther de­bot­tle­neck­ing op­por­tu­ni­ties to in­crease plant ca­pac­ity.”

Plant per­for­mance data was be­ing used to iden­tify and cor­rect any bot­tle­necks to­wards in­creas­ing ul­ti­mate plant ca­pac­ity.

“So on bal­ance, I ex­pect to see us run­ning at th­ese lev­els through­out the year,” Mr John­son said.

“There may be times we'll take short pit stops but those would be planned in ad­vance and they'll be driven by eco­nomics.”

Wheat­stone

Chevron was also on track for first pro­duc­tion at Wheat­stone, with the plat­form and pipe­line op­er­a­tional and sup­ply­ing nat­u­ral gas to the in­let of the on­shore LNG plant.

Mr John­son said that early well per­for­mance was en­cour­ag­ing.

“We're in the process of start­ing up the plant and ex­pect to com­mence cool-down shortly.

“LNG pro­duc­tion is ex­pected to fol­low [in Au­gust]. Train 2 con­struc­tion is pro­gress­ing well and we're on track to start up six to eight months af­ter Train 1,” he said.

With no con­struc­tion and com­mis­sion­ing largely com­plete, Train 1 had now moved into the true start-up phase.

Train 2 was still are in bulk con­struc­tion mode, but Chevron ex­pected that to wind down in the fourth quar­ter on the year.

“A this point in time, re­ally don't see any par­tic­u­lar ob­sta­cles or chal­lenges in our path to get­ting Train 2 com­plete and get­ting into the com­mis­sion­ing and start-up,” Mr John­son said.

“There's al­ways the is­sues of mov­ing from bulk con­struc­tion into the se­quence of com­mis­sion­ing but we've got teams all over that.

“And just as we saw at Gor­gon, as we move from Trains 1, 2 and 3, we ex­pect to see con­tin­u­ing ef­fi­ciency both in the fi­nal con­struc­tion and in that tran­si­tion to com­mis­sion­ing build­ing on the ex­pe­ri­ence of the first train.”

In its first half con­fer­ence call, project part­ner Wood­side con­firmed that LNG Train 1 was well ad­vanced and near­ing com­ple­tion.

“Our ex­pec­ta­tion is we're tar­get­ing first car­goes in Septem­ber,” Wood­side chief ex­ec­u­tive Peter Cole­man said.

“The ques­tion will be just how quickly the plant can ramp up and main­tain re­li­a­bil­ity for us, but it's pretty clear as a joint ven­ture we're tar­get­ing first cargo in Septem­ber.”

ATO bites back

On April 21, 2017, the Fed­eral Court of Aus­tralia up­held a judg­ment pur­sued by the ATO re­gard­ing the in­ter­est rate ap­plied on cer­tain Chevron in­ter­com­pany loans – a de­ci­sion which would see the US oil and gas gi­ant face a $300m tax bill, plus sub­stan­tial costs.

Af­ter ap­ply­ing for spe­cial leave for the mat­ter to be heard by the High Court in May, Chevron had a change of heart, an­nounc­ing on 15 Au­gust that it had reached a con­fi­den­tial set­tle­ment with the ATO.

In the short state­ment, Chevron stated that “the agreed terms are a rea­son­able res­o­lu­tion of the mat­ter” which were “not ex­pected to have a ma­te­rial im­pact on the year to date re­sults of the com­pany”.

Rev­enue and Fi­nan­cial Ser­vices min­is­ter Kelly O’Dwyer said the ATO’s ini­tial es­ti­mates are that the Chevron de­ci­sion would bring in more than $10bn dol­lars of ad­di­tional rev­enue over the next ten years in re­la­tion to trans­fer pric­ing of re­lated party fi­nanc­ing alone.

“We have al­ready pro­vided an ad­di­tional $679 mil­lion fund­ing to the ATO through the Tax Avoid­ance Task­force to strengthen the ATO’s ca­pa­bil­i­ties and en­sure th­ese multi­na­tional com­pa­nies oper­at­ing in Aus­tralia are held to ac­count,” Ms Dwyer said.

“The Task­force is es­ti­mated to gen­er­ate $3.7bn from 2016-17 to 2019-20.”

“At quar­ter-end, debt bal­ances stood at ap­prox­i­mately $43 bil­lion, more than $3 bil­lion lower than where we be­gan the year.”

In­dus­try Out­look

“I do think 2017 is a tran­si­tion year,” Ms Yar­ring­ton said dur­ing the Q2 earn­ings call.

“And I think we are very much at a point of in­flec­tion as we get through this year in terms of higher cash gen­er­a­tion from the as­sets that are on­line; higher mar­gin-ac­cre­tive pro­duc­tion; lower oper­at­ing ex­penses; as well as lower C&E out­lays and greater flex­i­bil­ity around the cap­i­tal pro­gram al­to­gether.

“So I think it is very much a tran­si­tion year and an in­flec­tion year.”

On a macro level, in­dus­try re­ports and medium term pre­dic­tions were mixed.

While ac­tion to ad­dress un­sus­tain­able gas prices on the east coast of Aus­tralia had yet to bring prices down to af­ford­able lev­els, other large pro­duc­ers joined Chevron in en­joy­ing in­creased net prof­its on the im­proved per­for­mance of in­ter­na­tional oil and LNG prices.

Septem­ber data showed that spot cargo prices for Ja­pan – the world’s largest con­sumer – hit a five month high in Au­gust.

The In­ter­na­tional En­ergy Agency in its June medium-term gas out­look that the global LNG glut would per­sist through the end of 2022.

Paris-based in­dus­try group Cedigaz pre­dicted the im­bal­ance to per­sist un­til 2023 or even 2024 as to­tal LNG pro­duc­tion ca­pac­ity in­creased by an es­ti­mated 60 per cent to 387 mil­lion mt/year by 2021.

“De­mand will strug­gle to keep up with sup­ply ramp-up and an over­sup­ply sit­u­a­tion should pre­vail," the group said.

Yet as buy­ers in­crease their use of the fuel at a stag­ger­ing pace, the long term news was good for sup­pli­ers.

A sup­ply-de­mand gap could open up post-2024, un­less new LNG pro­duc­tion plants be­gin op­er­a­tions, ac­cord­ing to Cedigaz.

All images: Chevron.

Wheat­stone plat­form and pipe­line are op­er­a­tional and ready to sup­ply nat­u­ral gas to the on­shore LNG plant.

Key mile­stones con­tinue to be achieved at Wheat­stone with first cargo tar­geted for Septem­ber.

88 car­goes of LNG had been shipped from the Gor­gon Project by mid-year.

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