Chevron Focuses on Deepwater Amid Scramble for Onshore Gas

HOUSTON (Dow Jones), Dec. 17, 2009

Chevron Corp. is giving priority to developing hydrocarbon resources in the depths of the sea, while Exxon Mobil Corp. and other oil giants scramble for onshore natural gas assets.

The San Ramon, Calif.-based company is planning to invest a significant chunk of its $21.6 billion capital budget for 2010 in projects offshore the Gulf of Mexico, Western Australia, Brazil, Nigeria and Angola. The strategy, a continuation of Chevron's multi-year effort to increase oil and natural gas production, underscores the growing relevance of the deepwater as one of the few areas where major oil companies can still access new giant reserves using their technical and financial strength. Chevron is the second largest U.S. oil company by market value after Exxon.

"The prospects of deep water reserves are some of the biggest in the industry," said Bob Fryklund, vice president of energy consultancy IHS. But "it's still one of the most expensive areas to work in the world."

Although offshore resources are a key part of both oil giants' portfolios, Chevron has been more aggressive than Exxon Mobil in developing deepwater projects, especially in the U.S. Gulf. Exxon's Chief Executive Rex Tillerson said in 2008 that the Irving, Texas-based company has not emphasized exploration there because most discoveries haven't been large enough to justify the expense. This week Exxon said it would buy XTO Energy Inc., a company specialized in producing gas trapped in rock formations with a strong onshore North America asset base, for $31 billion.

Chevron is also spending on inland projects like the Chuandongbei natural gas development in China, but the bulk of the company's production in coming years is expected to come from deepwater projects and to be more oil than natural gas, according to a report from Credit Suisse.

"This should keep returns relatively higher than those transitioning more quickly to gas," the Credit Suisse report said. Some analysts see oil assets as more profitable than natural gas assets as oil prices are expected to keep rising in the near future while the outlook for natural gas prices is more modest.

"We think oil will prove enormously profitable over the coming five years," said Deutsche Bank (DB) analyst Paul Sankey in a note to clients published in October.

Some of the most coveted areas for oil production and exploration are the U.S. Gulf of Mexico, offshore Brazil and West Africa, a region known in the industry as the "golden triangle." But the U.S. Gulf, with its proximity to the world's largest market for crude, stands out.

This year was among the most prolific for the U.S. Gulf of Mexico when it comes to discoveries and production. Since January, there have been more than a dozen new oil findings, including BP PLC's giant prospect Tiber, unveiled in September. Also, massive projects like Chevron's Tahiti are producing above expectation, said Matt Snyder, lead analyst for Gulf of Mexico research at consulting firm Wood Mackenzie.

The Gulf of Mexico projects where Chevron plans to allocate billions of dollars next year are Jack-St. Malo, Perdido, Tahiti, Tonga and Big Foot. Shell-operated Perdido is set to become the deepest offshore oil-and-gas drilling and production hub in the area when it starts production early next year. Chevron has a 37.5% stake in that project.

Although exploring for energy resources in the Gulf of Mexico is onerous, with rates of drilling rigs still at more than a half million dollars a day, the area is more secure and offers a more stable fiscal regime than places like Nigeria, said Leta Smith, director for exploration and production trends at IHS Cambridge Energy Research Associates.

Chevron is also investing steadily in offshore Brazil. Its Frade and Papa Terra fields are located in the Campos Basin, off the coasts of Rio de Janeiro and Espirito Santo states, which produces nearly 85% of Brazil's crude oil.

Nigeria and Angola are also fertile exploration and production areas for the company. The company said it will invest in 2010 in the Usan and Agbami in Nigeria and in the deepwater Block 14 in Angola.

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