CERAWeek ’14: Chevron CEO sees ‘new reality’ in project pricing

By STEPHANY ROMANOW
Editor

HOUSTON -- John Watson, chairman and CEO of Chevron, delivered Tuesday's keynote address at the IHS CERAWeek 2014 conference. In his remarks, Watson reviewed the last few years of the oil and gas (O&G) industry. 

The last decade has been a period of change, especially for the global economy and the energy industry. Much of the new economic growth occurred in developing nations, especially China. 

Unfortunately, many in the energy underestimated the magnitude of growth that China would embark upon, Watson said. The reaction to the unexpected global economic growth was a narrowing in global spare oil capacity. 

This recent economic expansion and growth in energy demand has ushered in a new reality for oil pricing. In the new reality, $100/bbl of crude is now the $20/bbl as the Base Case for investments of future O&G projects, he said. 

This new Base Case for investment will affect marginal barrel projects going forward with high capital expense (CAPEX) projects such as deepwater and LNG, Watson explained.

Resources are available. There are no shortages of resources in the world, Watson said. However, the economics to develop such projects are increasing. Over the past 20 years, CAPEX for the upstream have increased 40%. 

The new reality is that some resources may be too unprofitable to move forward many reasons, Watson explained, noting that energy companies like Chevron can be "very choosy" in selecting projects to invest and move forward.  

Watson also remarked about the “new reality” for consumers. Economic progress and policies will be balanced against the environment and sustainability issues. In short, subsidies are costly. In 2012, nearly $ 100 billion was spent on subsidies. The net result to consumers is higher energy costs.

Looking forward, energy companies must manage costs more effectively and demand better cost management from their service companies as well. New global economic growth will require more energy. Replacement cost for barrels is rising. 

Likewise, replacement of talent and human resources is a priority as senior employees plan for retirement. In the US, new natural gas supplies have initiated many new petrochemical and gas-to-liquids (GTL) projects, thus requiring more craft workers and engineers to move these projects forward.

The IHS CERAWeek conference continues through Friday at the Hilton Americas in downtown Houston.

Photo by AARON M. SPRECHER, Bloomberg

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