CERAWeek by S&P Global 2023: Navigating through a changing energy landscape

(WO) – CERAWeek by S&P Global 2023, commenced Monday morning with an opening address by Chevron CEO Mike Wirth and Daniel Yergin, S&P Global’s vice chairman. The talk, entitled “New perspectives, new strategies,” started with a discussion about the best approach to reduce carbon emissions while working toward global energy security.

Yergin opened the discussion with the statement/question, “affordable and reliable energy is essential to the quality of life and the advancement of human progress. However, I think the issue of how we best move toward a lower-carbon energy system is being reframed, as we gain experience with the challenges of pushing these new carbon reduction technologies forward.” Wirth responded, “I think the discussion is moving to a more balanced and just energy transition.” However, what is just in one person's mind is different than what is justice in another. “I prefer to talk about an orderly transition, which means markets remain supplied, economies remain competitive, while energy remains affordable for consumers.

“And we have to be cognizant of the fact that as we go through changes, a disorderly transition can be painful and chaotic,” Wirth continued. “When we lose support for the progress that so many want to make, if the chaos overwhelms the perceived benefit, it will slow the transition process. It's partly what we saw in 2022.”

“Chevron’s approach is to leverage our strengths to continue to deliver lower-carbon energy to a growing market, and we intend to grow energy supplies in both traditional energy and new energy prospects, because demand for both continues to grow. Chevron intends to reduce carbon intensity of the energy that was historically produced and will continue to be produced. And we want to build new energy solutions. Chevron is not a big player in wind or solar, because we don't have unique capabilities that would enable us to compete with other companies. These companies are exceptionally good at wind and solar, but we are not.”

Successful acquisition. M&A is another avenue that Chevron is pursuing to diversify its energy feedstocks. Wirth stated ,“we acquired a renewable energy company in 2022. This enterprise was one of the leading biofuels producers in the U.S. and the second largest producer of bio-based vehicles in the U.S., as well. The new Chevron-owned company has tremendous capability on the feedstock side of the business, with deep competence in traditional feedstocks and petroleum-based feedstocks. The company distills product from corn and bean oils and has exceptional technical/commercial expertise and established business relationships.”

Permian basin. Chevron has had an off-and-on relationship with the Permian basin, “and we have paid for this ongoing lesson with West Texas,” said Wirth. “However, we remained resilient, and last year Chevron produced an average of over 700,000 bopd in the region and is projected to hit 1 MMbopd in 2025. We are still learning. The geographic area is vast, and the geology is extremely heterogeneous, but we are gaining experience/expertise and are becoming more effective on a yearly basis. Compared to five years ago, we are drilling twice as much ft/day and fracing twice as many stages. Our productivity continues to expand, as technology continues to advance. Inflation is a real issue, and supply chains are tight. Access to both equipment and people is challenging. But we're progressing our plan.”

DJ basin. “Chevron’s position in the DJ basin, in eastern Colorado, came to us with the acquisition of Noble Energy in 2020,” continued Wirth. “We have learned that Noble was successfully implementing several different methods of methane control that were more advanced than what Chevron was doing,” Wirth explained.

“This led to significant learnings regarding electrified drilling and operational facilities. These technologies have practically eliminated flaring, while innovative engineering design, combined with strong operational performance, has benefited our business in areas well beyond Colorado. We have also learned that some of the greatest potential of M&A is oftentimes the value that comes with seasoned HR resources acquired from the purchased companies.”

International footprint. “Chevron has increased focus on expanding its activity in Kazakhstan for about 10 years,” Wirth continued. “We entered the country, right after the fall of the Soviet Union, and it became an independent republic. Chevron was the first large American investor in the country that helped develop their energy system, to the benefit of the country. And it’s been good for Chevron, too. We are producing 700,000 boed, and we have a project underway to increase that total to around 1 MMboed by 2025.”

Effects of Ukraine war. Wirth also suggested the conflict between Russia and Ukraine, combined with the destruction of the two Nord Stream subsea pipelines, has fundamentally altered global gas markets. As a result, Europe is now competing with Asia for LNG, and the U.S. has become a significant exporter of gas. These changes have led to shifts in trade flows, pricing mechanisms and project economics, which will have long-lasting effects on the industry.

Israel and eastern Mediterranean. The push to establish alternative European natural gas supplies has increased focus on new Israeli supply and the gas delivery infrastructure in the Middle East. Gas helped decarbonize Israel's power grid, which was 100% coal-fired just a decade ago. “It is now somewhere between 70% to 80%, natural gas-fired,” noted Wirth. “Air quality is better, gas emissions are much lower. Chevron is working on potential expansions that would enable us to get gas into Europe from recent offshore discoveries in Egypt and Cyprus. Although the area holds immense potential, geopolitical issues have been a historical problem in the region. But Chevron is cautiously optimistic and has plans to expand our operations in Leviathan field. We are working on several different LNG concepts that would help us get gas into markets like Europe.”

Thriving despite boom/bust. Finally, Wirth touched on the cyclical nature of the energy industry and commodity markets that Chevron serves. He acknowledged the many painful boom-and-bust cycles that the industry has experienced and outlined the lessons learned from previous events. Wirth emphasized the importance of staying resilient through the ups and downs by maintaining a strong balance sheet, while employing a consistent approach to capital investment and a commitment to shareholder distributions that people rely on and help drive the overall economy.