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Executives

John S. Watson - Chairman and CEO

Patricia E. Yarrington - VP and CFO

Jeff Gustavson - General Manager, Investor Relations

Analysts

Evan Calio - Morgan Stanley, Research Division

Paul Sankey - Deutsche Bank Securities Inc.

Jason Gammel - Macquarie Research

Douglas Leggate - Bank of America Merrill Lynch, Research Division

Faisel Khan - Citigroup Inc, Research Division

Paul Cheng - Barclays Capital, Research Division

Iain Reid - Jefferies & Company, Inc., Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Allen Good - Morningstar, Inc

John P. Herrlin - Societe Generale Cross Asset Research

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Chevron Corporation (CVX) Q4 2012 Earnings Conference Call February 1, 2013 11:00 AM ET

Operator

Good morning. My name is Sean, and I’ll be your conference facilitator today. Welcome to Chevron's Fourth Quarter 2012 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I’d now like to turn the call over to the Chairman and Chief Executive Officer of Chevron Corporation Mr. John Watson. Please go ahead, sir.

John S. Watson

Okay. Thanks, Sean. Welcome to Chevron’s fourth quarter earnings conference call and webcast. On the call with me today are Pat Yarrington, our Chief Financial Officer and Jeff Gustavson, who is the General Manager of Investor Relations. We will of course refer to slides that are available on Chevron’s website.

Before we get started, please be reminded that the presentation contains estimates, projections and other forward-looking statements. We ask that you review the usual cautionary statement that we have on Slide 2.

Turning to slide 3, I want to begin where we always do is safety. We continue to achieve world-class low industrial injury and illness rates. We had our lowest ever days away from work rate and once the date is finalized we expect to again lead the industry for the second consecutive year on this measure. We are also focused on process safety, with many successes. Last year we had our fewest number of spills ever, which translated to record low spill volume. We believe this two will be the best in the industry. Having said this, it was not a perfect year. We do believe that zero incidence is attainable. We are not there yet, but we’re striving to learn and improve to get incidence free operations.

Our financial performance in 2012 was quite strong. We expect when all the 2012 results were in to again post the highest Upstream earnings per barrel by a significant margin and to be very near the top and Downstream earnings per barrel as well. These excellent financial results validate our strategies and the many past investment decisions.

We’d like to summarize just a few additional accomplishments from last year. In our Upstream business we’re steadily progressing our major capital projects, the Gorgon project was over 55% complete at year-end. And Wheatstone has made good progress as well, both from a construction standpoint and in securing of tick commitments through several new long-term LNG supply agreements. We just posted a short video of recent Gorgon construction progress on our webpage, www.chevron.com. I encourage you to take a few minutes to view the video. The progress is quite impressive.

We also continued construction activities on our projects in the deepwater Gulf of Mexico where Big Foot and Jack/St. Malo are both on budget and on schedule for start-up in 2014. We achieved start-up at Usan, and Agbami Phase 2 developments in Nigeria as well as Caesar/Tonga, Tahiti 2 deepwater projects in the Gulf of Mexico.

We continue to expand our discovered resource base with asset acquisitions in the Delaware basin in the U.S. and in Western Canada through an agreement to join the Kitimat LNG project. We also grew our exploration portfolio by acquiring positions in several new areas and including the Kurdistan region of Iraq, Suriname, Sierra Leone, Lithuania and the Ukraine.

Our reserve replacement ratio was 112% with ads distributed broadly across Upstream portfolio. In our Downstream business we completed our three year restructuring plan and have delivered on the commitments we made when we first began simplifying our business, streamlining our portfolio. We do see cost and improving returns all while retaining skill where we have competitive positions. We also continue to make progress on key growth projects in our lubricants and chemical businesses. We’re very proud of our performance this past year.

With that, I’ll turn it over to Pat, who’ll take you through our financials. Pat.

Patricia E. Yarrington

Hey, thank you, John. Slide 4 provides an overview of our financial performance. The Company’s fourth quarter earnings were $7.2 billion or $3.70 per diluted share. For the year, earnings were an impressive $26.2 billion. This equates to $13.32 per diluted share nearly tied with 2011’s record performance. Return on capital employed for the year approached 19% and our debt ratio at year-end was 8.2%. 2012 marked our 25th consecutive annual dividend increase with an 11.1% rise in the quarterly rate. This demonstrates our confidence in our future performance and is consistent with our priority of rewarding our shareholders with sustained and competitive dividend growth.

In the fourth quarter, we repurchased $1.25 billion of our shares bringing the full year share repurchase total to $5 billion. In the first quarter of 2013, we expect to repurchase the same amount $1.25 billion of shares.

Finally, Chevron's 2012 TSR was 5%. We continue to lead our peer group on total shareholder returns for the three-year, the five-year and the ten-year period as well as all periods in between. And you probably noticed we are also off to a strong TSR start so far this year.

Turning to slide 5, cash generated from operations was $12.9 billion during the fourth quarter. For the full year, cash from operations was nearly $39 billion reflecting our impressive operating performance and the cash generating strength of our portfolio.

At year end, our cash balances totaled $22 billion. This kept us in a net cash position of about $10 billion at year end. Our strong cash flow and solid balance sheet continued to be a competitive advantage.

Now on slide 6, I'll compare the results of fourth quarter 2012 with the third quarter of 2012. As a reminder, our earnings release compares fourth quarter 2012 with the same quarter a year ago.

Fourth quarter earnings were $7.2 billion, nearly $2 billion higher than third quarter results. Upstream earnings increased $1.7 billion reflecting increased gains on asset transactions and higher liftings.

Downstream results were up $236 million between quarters, driven by favorable inventory effects and gains on asset transactions. The variance in the other bar reflects a favorable swing in corporate tax items, partially offset by higher corporate charges.

On slide 7, our U.S. Upstream earnings for the fourth quarter were $241 million higher than third quarter's results. Higher realizations improved earnings by $40 million, driven largely by a 22% increase in natural gas realizations.

Higher production volumes increased earnings by $85 million between periods, reflecting recovery in production, post Hurricane Isaac in the Gulf of Mexico and increased production associated with recently acquired acreage in the Permian Basin. The other bar reflects a number of unrelated items, including favorable tax impacts and the net effect of small asset transactions.

Now on slide 8, international Upstream earnings were about $1.5 billion higher than the third quarter. Higher liftings increased earnings by $295 million. Planned turnarounds in Kazakhstan and in the UK in the third quarter were completed and production from these fields returned to normal levels in the fourth quarter.

Realizations increased earnings by $95 million, reflecting a 2% improvement in average liquid realizations currently in line with the increase in Brent prices. A favorable swing in foreign currency effects improved earnings by about $220 million. The fourth quarter had a loss of about $30 million compared to a loss of $250 million in the third quarter.

Asset sales gains increased earnings by a net $830 million. Fourth quarter results included a gain of $1.4 billion from the previously announced asset exchange in Australia while the third quarter contained a gain of $600 million associated with the sale of an equity interest in the Wheatstone Project. The other bar reflects a number of unrelated items, including lower exploration expenses.

Slide 9 summarizes the quarterly change in Chevron's worldwide net oil equivalent production. Production increased 152,000 barrels per day between quarters. Recovery from the impacts of Hurricane Isaac in the Gulf of Mexico increased production by 23,000 barrels per day. Absence of planned turnaround activity primarily in Kazakhstan and the UK increased production by 94,000 barrels a day.

The base business bar includes higher cost recovery volumes and production from newly acquired acreage in the Permian Basin, partially offset by normal field declines. Production for major capital projects increased in the fourth quarter by 7,000 barrels a day, primarily driven by the ramp-up of Perdido in the Gulf of Mexico.

Slide 10 compares full year 2012 net oil equivalent production to that of 2011. Production decreased by 63,000 barrels per day in 2012. Frade remained shut-in for the year reducing daily production by 29,000 barrels. The base business and other bar reflects normal sale decline as well as the impact of smaller asset sales. Our base decline rate for the year was approximately 4% in line with prior guidance. Incremental production for major capital projects contributed 85,000 barrels a day, driven by the ramp up of Platong 2 gas project, in Thailand and Perdido in the Gulf of Mexico as well as the start-up of Usan, in Nigeria. Our original production guidance for 2012 was 2.68 million barrels of oil equivalent per day. We got short of that guidance by 70,000 barrels per day, predominantly due to the Suriname project and the delayed experience with the start-up of Angola LNG.

Turning to slide 11. U.S. Downstream Earnings decreased $125 million in the fourth quarter. Realized margins decreased earnings by $90 million, driven mainly by weaker refining margins on both the Gulf and West coast due to lower demand and higher seasonal gasoline inventory levels. Improved marketing margins only partly offset the decline in refining margins.

Volumes reduced earnings by $30 million, primarily due to the continued shutdown of the Richmond, California, refinery crude unit. A return to normal operations at the Pascagoula, Mississippi refinery, post hurricane Isaac partly offset the decrease. Inventory effects represented a $95 million improvement in earnings between quarters, largely reflecting favorable year-end LIFO effect. Operating expenses increased $100 million, largely due to higher maintenance, transportation and environmental related expenses.

On slide 12, International Downstream Earnings improved $361 million this quarter. Higher realized margins benefited earnings by $60 million. Lower crack spreads in Asia were more than offset by improved marketing margins and pricing lag effects for sales in naphtha and jet fuel in key markets. Inventory effects represented a $145 million improvement in earnings between quarters, mostly reflecting the absence of negative inventory impacts during the third quarter.

Gains on asset sales combined with the absence of charges associated with the portfolio restructuring in Australia in the third quarter improved earnings by $210 million. The other bar reflects a number of unrelated items including unfavorable swing and foreign exchange impact.

Slide 13 covers All Other. Fourth quarter net charges were $538 million, compared to a net $575 million net charge in the third quarter, so a decrease of $37 million between periods. A favorable swing in corporate tax items resulted in $99 million benefit to earnings while corporate costs was $62 million higher this quarter.

For the full-year this segment had net charges of $1.9 billion which is higher than our quarterly guidance range of $300 million to $400 million. Given the number of discrete items that impacted this segment in 2012, we are upping our guidance range for 2013 to $400 million to $500 million per quarter to reflect several miscellaneous items including increased environment remediation costs and higher corporate expenses.

With that, I’d like to now turn it back over to John, for a few thoughts on 2013.

John S. Watson

Hey, thanks, Pat. Let’s turn to slide 14. In early December we announced $36.7 billion capital program for 2013. Our capital program is well aligned with our long stated strategy of investing in attractive projects that will deliver volume growth and value growth for our shareholders. The program supports continued progress at several large Upstream projects under construction, notably our legacy LNG projects in Australia and our deepwater Gulf of Mexico developments.

Continued investments in our current project queue is expected to drive profitable growth through the end of the decade. We are also increasing our exploration activities, including the initial appraisal of recently acquired acreage in the Kurdistan region of Iraq, Suriname, Sierra Leone and several international unconventional players among other areas.

Our Downstream investments for 2013 are directed toward our premium base oil facility at our Pascagoula refinery, expanded additives production in Singapore and our projects which will enhance the reliability and flexibility of our Global Refining system. Additional projects will be funded by affiliates in our refining and chemicals joint venture.

Turning to slide 15, our net production outlook for the year is $2.65 million barrels of oil equivalent per day, an increase of about 1.5% from 2012 levels. This is based on average Brent price of $112 per barrel, the same average prices as 2012 and does not assume OPEC curtailments, material security or market impacts.

Our full-year estimate for 2013 is about on par with our fourth quarter 2012 production. The start up of Angola LNG as well as increased production from the deepwater Gulf of Mexico, Thailand and Nigeria are expected to roughly offset base business decline and normal turnaround activities later in the year.

Although we expect restart production – to restart production at the Frade field in Brazil, it will not contribute materially to this year's net production. Base business decline is still expected to about 4%.

Our 2017 production target remains intact, at 3.3 million barrels per day. In fact, over 90% of the volume contributing to the target is either currently producing or under construction with the remaining volume well understood.

We'll keep you posted through the year on developments and progress in both our Upstream and Downstream businesses. We also plan to provide a greater amount of additional detail at our upcoming Security Analyst Meeting in early March.

That concludes our prepared marks. We know welcome your questions. We do have a full queue, so please limit yourself to one question and a single follow-up if necessary. We'll do our best to see that we get your questions answered.

Sean, please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Evan Calio with Morgan Stanley. Please go ahead with your question.

Evan Calio - Morgan Stanley, Research Division

Good morning, everybody.

John S. Watson

Hey, Evan.

Evan Calio - Morgan Stanley, Research Division

John, I believe you guys hold over 950,000 acres in the Delaware Basin inclusive of last year's asset acquisition and in a larger position in the Permian total making Chevron one of the larger acreage holders, yet running fewer rigs than some of the peers. So I mean how many unconventional rigs are you running and maybe you can discuss planned activity ramp in '13 and whether or not there is any internal constraints for you whether you're limited at all in the people side to accelerating this NAV realization? And I have a second question please.

John S. Watson

Well, we are ramping up rig activity. In fact, we're just looking at some of the material we're going to show you for the SAM meeting that's coming up, and we'll give you actually some pretty good rig count data. And what you'll see is we are ramping up rapidly in the Delaware Basin as you would expect. We got over – really over 20 in the Permian region that are running right now and we'll give you more specifics about the ramp-up that is headed there.

Activity in a fewer number of rigs are running up in the Marcellus region, but that too has been gradually ramping up as we -- as you know. We're still drilling gas prospects there as we have the carry that we're working through. I will be happy to give you a lot more detail on those with precision on the number of rigs. We are seeing volume growth in both of these areas that are part of the plan going forward.

You had a follow-up?

Evan Calio - Morgan Stanley, Research Division

Yes. I just was curious within that if you saw any internal constraints, meaning you're able to organically, to ramp those volumes.

John S. Watson

Well, we are. Having said that, I think the industry is very focused on building organizational capability and we've added a significant number of new people and added to our drilling training programs that we have in place both in the United States and overseas. And so organizational capability, we're not going to operate if we don't have people that we think are trained and capable and I think there are pressures on the industry, but when we plan to ramp up we only plan to ramp up if we have the right people.

Evan Calio - Morgan Stanley, Research Division

Understood. And my second question was, John, I know it's not your favorite topics as well as Pat is the Ecuador litigation. I know still there has been some positive movement there in the most recent quarter. We've read the judge directly implicating himself improper conduct as well as plaintiff, but also your legal involvement is spreading across the globe now in Argentina and Brazilian courts as well as U.S. and Canada and The Hague. So I was wondering if you could just provide any roadmap for activity in 2013 in these various theaters of operation and when the RICO case is set to commence, and I'll leave it there. Thanks.

John S. Watson

That’s a broad question. I will try to do it simply. First, your premises is correct. We continue to uncover evidence of quite profound fraud in the case and you mentioned that a judge that was actually involved in ghost riding the opinions, based on bribes he was receiving from the plaintiff’s lawyers has come forward and given a statement in U.S. court and has provided corroborating physical evidence to support his allegations that he ghost wrote the opinion for the plaintiff’s lawyers.

So, you now have a circumstance where we have through video, through sworn testimony, through email, and other means, clear evidence that the plaintiff’s lawyers have thoroughly corrupted the judicial process in Ecuador and this is an invalid opinion. I think that’s pretty well known by you and others out there. I think the question is well, how do you bring this thing to an end? And I would say that we’re moving forward in several areas. The RICO case, the wheels of justice move at a certain pace. We then – we’ve been moving our RICO case forward, we go to trial in New York, in October of this year.

We are actively in the courts, in Hague and we expect there are series of rulings that will take place over time. But there are – we’ve won virtually every procedural ruling there and expect that we will see some judge – there were already been some judgments that have been put out indicating for example, the Government of Ecuador should not do – they should do everything in their power to prevent this false judgment from being enforced, which of course they’ve ignored. And so we do expect that there will be possible rulings out of that panel as well. But there are multiple stages to that – to those cases. We’ve had multiple discovery proceedings in the U.S. The area that you’re probably interested in is the – we believe it’s an illegal verdict, but the plaintiff’s lawyers are taking it and trying to use that judgment for recoveries in other countries. Our view has been that any country that on a rule of law will not uphold this verdict and in fact will throw it out.

Having said that, we have to defend ourselves. And so we’re doing it in Canada, Argentina and Brazil. You should know that these cases take time. There are number of procedural steps that take place. And so, first, there are jurisdictional issues that are worked and it takes a while if you ever get through those hoops to get to the merits. And our view is that, when there’s been a fraud committed by the court that no government with a functioning judiciary is going to uphold this, and the countries where these enforcement actions have been filed we think ultimately we’ll support our rule of law, but we have to fight it every step of the way; and I can’t put a timeline on that. What I can tell you is; it's not going to reward people that have committed crimes against us.

Evan Calio - Morgan Stanley, Research Division

I appreciate it. Thank you for your update.

John S. Watson

Sure.

Operator

Our next question comes from Paul Sankey of Deutsche Bank. Please go ahead with your question.

Paul Sankey - Deutsche Bank Securities Inc.

Hi, good morning.

John S. Watson

Hi, Paul.

Paul Sankey - Deutsche Bank Securities Inc.

Again on the cash pile, I’m still perplexed by what's the large subsequent to the Gorgon CapEx announcement. John, and Pat, can you just remind us again why we’re holding so much cash on the balance sheet in this interest rate environment? Thank you.

John S. Watson

Sure, Paul. We've talked about the priorities for our cash made. I’ll just -- for the benefit of everyone online, I’ll just repeat them. Our uses of cash were geared toward paying and sustaining and growing the dividend, funding the capital programs that are required to make our earnings and cash flow grow, keeping some capacity on the balance sheet for the ups and downs in the commodity markets and changes that can take place in the business and finally returning cash to shareholders through repurchases and that’s been our strategy for a long, long time. You’re correct; we have more cash than debt on our balance sheet. But I think if you look at our capital program that we’ve announced this year where the cash portion of the C&E is about $33 billion. If you look at the cash that we generated this year and you can use your own estimate of what commodity prices and margins are going to be. It would be pretty easy to add at the current rate of dividend and repurchases some $12 billion in distributions and see that our net cash balances will come down this year based on a reasonable forecast. I’ll tell you that between now and the end of 2014 you should see our net cash less debt -- that net number that we talk about will come down over time. I don’t know exactly what commodity prices will be during that period, but it will come down to a combination of significant capital spending which we have underway this year and next, dividends and repurchases the we'll size to get our balance sheet back down to something with a little more net debt on the balance sheet than we've had previously. We have had a conservative balance sheet. Prices have been a little bit higher than we've expected, but we know that there are uncertainties out there and we think that's the best way to run our balances at this point.

Paul Sankey - Deutsche Bank Securities Inc.

Thank you, John. John, you said you're relatively bullish on oil prices and you like the shape of your portfolio. There is a U.S. oil revolution underway and you do seem relatively underway in that area, which is after all your own backyard. What's your appetite to step up your exposure to U.S. oil? Thank you.

John S. Watson

Sure. Well, we are investing in a big way in the United States, of course, offshore with our developments at Jack/St. Malo and Big Foot and the exploration program that we have in the Gulf of Mexico. I think you're probably referring to some of the onshore activity. And again, we've had a longstanding position in California that produces oil. We've had a mature business and a lot of acreage in West Texas. And then we've recently added to that with the acquisition that we – well, we picked up some acreage in New Mexico from Chesapeake.

Our unconventional production, we told you last year that our unconventional production around the world, 175,000 barrels a day by 2017 that was not an insignificant portion of the increase in our production between now and 2017 would be in the unconventional and a lot of that's in the United States. And I think what you'll see when we come back for the SAM presentation in a month or so is that number will be higher. And it will be a function of the ramp-up of activity in the Permian area as well as some successes that we expect to see in the Marcellus and in the Utica.

So I'll tell you we tend to be returns focused when we make investments. And I'll tell you right now a lot of what we see, a lot of transactions come across our desk but we take on opportunities where we think on a full cycle basis, including the acquisition costs, we can generate solid returns. And right now there are assets that are selling that we think are very pricey.

Now, we feel very good about the acquisition of acreage from Chesapeake. That was a complex transaction, but we think we negotiated a good deal there. We feel particularly good -- although it's not oil, we feel particularly good about the transaction in Canada. It's an enormous resource that we picked up that ultimately will produce LNG for export that will be at oil-linked pricing. And so, we feel pretty good about the way we've added to our portfolio given all the opportunities that we have around the world.

Paul Sankey - Deutsche Bank Securities Inc.

Sure. Conceptually, would you prefer the Bakken or the Permian?

John S. Watson

Well, I'd prefer an area where we can make a good return. Being very honest, we don't have a position in the Bakken. I think I've said before if I can wind back the clock and see that well, it'd be nice to have a position. But it's very pricy right now. And to just pour a bunch of capital in there and enter that fray, I don't know that we could make a full cycle economics look very good.

Paul Sankey - Deutsche Bank Securities Inc.

Thank you, John.

John S. Watson

Sure.

Operator

Our next question comes from Jason Gammel of Macquarie. Please go ahead with your question.

Jason Gammel - Macquarie Research

Thanks very much. I just had a couple of questions on LNG if I could please. First of all, revisions to the Gorgon budget are now out in the marketplace and John, I just wanted to or Pat just ask what potentially you've learned from the Gorgon process that you'll be able to apply to Wheatstone to potentially keep the cost of that projects more in line with the original budget?

John S. Watson

It's a fair question. If you look at the Gorgon project, when we went to FID back in 2009, oil prices were in the 60s, the Australian dollar was at 86 or so. And we don't hedge foreign exchange exposure because we think the Upstream dollar is pretty well hedged to commodity prices. And that actually has proven to be accurate. So part of the increase which you saw in cost was from foreign exchange, in fact about a third of the cost increase.

The areas where we had some challenges were really in the area of logistics and that was fairly unique to Barrow Island which some of the quantities of materials proved to be larger than expected. And the logistics, there's a large fleet of vessels moving goods and materials onto Barrow Island. And we have learnt from that. So, I think that in terms of things that triggered the cost increases at Gorgon, I think we've learned well about the logistics. But I – Wheatstone is an onshore project, it’s not on Barrow Island, so I think the circumstances are just a little bit different. Some of the learnings that are key to us are that you better get your infrastructure in order. So, for example we’re working very hard right now on simple things like beds and roads and infrastructure and that is going quite well at Wheatstone. At times, we were impacted by weather as we were constructing the beds and other facilities in the infrastructure, in the early days at Gorgon. There were a number of cyclones that went through the area and that impacted us.

So we know that infrastructure is critical path and we’re working very hard there. Now there are number of other learning’s and synergies, if you will, that will come from the people and procurement and other activity on Gorgon that of course will be applied to Wheatstone. So, we’re doing our best to learn from Gorgon and other projects as we move forward. Now remember, Wheatstone went to FID at – sort of parity with the Australian dollar, so I don’t expect a material impact from foreign exchange as we’ve seen in Gorgon today.

Jason Gammel - Macquarie Research

Sure. And John, if I could just follow-up please on the comment that you made about oiling pricing for the Kitimat project, that might be considered somewhat of a controversial remark in that, some buyers were trying to push away from oil price linkage. Can you just comment on what you’re seeing in your conversations with buyers about the ability to stay in that oil linkage?

John S. Watson

Well, as soon as it was announced that we were coming into that project, our phone started to ring. So, buyers – we’re a credible buyer in the marketplace and I think buyers throughout Asia, Japan, Korea, etcetera, are very interested in Chevron and interested in the project. I’m going to show you a little bit information at the SAM coming up in a month or so because there is a lot of talk about the different pricing for LNG and there is always a balance between supply and demand. And what we see is continuing growth in demand, there is a lot of gas out there, but pulling these projects together and getting them online, getting them online in time to meet that demand is a different matter. And I can tell you that it takes a large capital commitment and most companies in the world aren’t going to make that commitment without having pricing that gives them a fair return, and that pricing is going to need to be something close to oil parity or the projects – the projects won't get built. And so, we’ll talk more about that. I know that there are different contract negotiations going on in the industry but and talk of S-curves and things of that sort, but so far we have been able to keep our contracts on an oil link basis and have expectations that we’ll have strong pricing going forward or frankly these projects won't go. So, I mean, that’s the best way I can answer that.

Jason Gammel - Macquarie Research

Okay. I appreciate the comments, and I look forward to seeing you all in March.

John S. Watson

Thank you.

Operator

Douglas Leggate of Bank of America Merrill Lynch is on line with the question. Please go ahead with your question.

Douglas Leggate - Bank of America Merrill Lynch, Research Division

Thanks. Good morning everybody. Good morning, John.

John S. Watson

Hi, Doug.

Douglas Leggate - Bank of America Merrill Lynch, Research Division

I’ve got a couple of quick ones hopefully. First of all, a follow-up to Jason’s question, (indiscernible) the price debate in the Pacific Rim anyway (indiscernible) originally it’s obviously that …

Patricia E. Yarrington

Hey, Doug you’re cutting out and we can’t hear your question. Could you try again or maybe …

Douglas Leggate – Bank of America Merrill Lynch, Research Division

Yeah, let me dial back in. Let me try one more time.

John S. Watson

Okay. Thanks, Doug.

Patricia E. Yarrington

Okay. Thank you. We’ll go to another question.

John S. Watson

Move to another call.

Patricia E. Yarrington

Yeah.

Operator

Okay. Our next question – oh, go ahead.

Patricia E. Yarrington

(Indiscernible) moment.

Operator

Okay. Our next question comes from Faisel Khan of Citigroup. Please go ahead with your question.

Faisel Khan - Citigroup Inc, Research Division

Yeah. Hi, good morning.

John S. Watson

Good morning.

Faisel Khan - Citigroup Inc, Research Division

On the Downstream side, could you give us an update on the Richmond Refinery and when will it return to full operation and what regulatory approvals and permits are required to bring all the units back up and running?

John S. Watson

Sure. We had a fire that was back in August, since that time we've been going through the regulatory reviews as you would expect and going through the repairs that have been necessary, and we’re nearing the end of that repair work and we really have a couple of steps that are left, one is an order prohibiting use which has to be lifted by Cal/OSHA, and the second is our own sort of pre-start safety reviews that would be normal and customary to bring the crude unit back up. So, we’re really targeting the first quarter and I have no reason to think it will be other than that at this time. The repair work is going well. And it's been arduous getting permits and going through the process here in Richmond, but we're working through that and expect that we'll be ready to go here in the first quarter.

Faisel Khan - Citigroup Inc, Research Division

Okay, great. Thanks. And just a quick question on the asset sale gain in Downstream. Could you just confirm that the $210 million change quarter-over-quarter is also pretty close to the absolute asset sale gain in the quarter?

Patricia E. Yarrington

Let me just look here for a moment here. Well, actually, no. I mean we did have a third quarter -- there was the asset transaction, a negative impact associated with the Australia restructuring. So, it's the variances what we were talking about. It's a relatively small amount that you're talking about altogether…

Faisel Khan - Citigroup Inc, Research Division

Okay, fair enough.

Patricia E. Yarrington

In terms of an absolute in the quarter.

Faisel Khan - Citigroup Inc, Research Division

Absolute, okay. So the absolute number is fairly small or de minimis in the quarter.

Patricia E. Yarrington

Right. And the variance does take into account the Australia Kurnell refinery structuring in third quarter.

Faisel Khan - Citigroup Inc, Research Division

Okay, got you. Perfect. Thank you.

Operator

I have Doug back on the line. Doug Leggate, please go ahead with your questions.

John S. Watson

Hey, Doug.

Douglas Leggate - Bank of America Merrill Lynch, Research Division

Hi, guys. Can you hear me now.

John S. Watson

Got you.

Patricia E. Yarrington

Much better.

Douglas Leggate - Bank of America Merrill Lynch, Research Division

Great, excellent. Thank you. Because of (indiscernible) or something over here. So my question was on the timing of Kitimat and the FEED work that Apache had already done. What do you expect happens now to the timeline of that project? And I do have a follow-up if you can hear me. Thanks.

John S. Watson

Well, you know what, I'm going to wait until we close the transaction before I comment. Apache has been doing -- Apache and partners have been doing the work thus far and we hope to close the transaction soon and we'll become the operator at the plant and pick up where they've left off, and they have done quite a bit of work. But it's too early for me to talk about the specifics because, frankly, we're not yet in the project per se. So give us a pass for now and as we close the transaction and can follow-up on the due diligence work that we've done and really look more closely, we'll give you a better idea of both cost and schedule in due course here.

Douglas Leggate - Bank of America Merrill Lynch, Research Division

Great. Thanks. So my follow-up is going back to our lunch in December, you had mentioned some concern or maybe some issues around the tax regime in Nigeria. Could you give us an update as to where you see that currently and what the -- how it may or may not impact to the developed? Thanks.

John S. Watson

Yeah, I wish I could give you an update, but there's been a petroleum bill in progress in Nigeria for several years now. And frankly, I don't have any particular update on it right now. I mean…

Patricia E. Yarrington

Yeah, I was just going to say, the bill is currently in the National Assembly, and as John said, it's been under review for a long period of time and we really can't say much more about which way we think this will go. We've been on record as saying that as it's constructed, it's not an incentive for further investment, particularly deepwater.

Douglas Leggate - Bank of America Merrill Lynch, Research Division

So, (indiscernible) pretty far along though, I would assume that wouldn't be affected?

John S. Watson

I'm not going to speculate on where it may wind up. We and others have expressed our view that the ultimate bill that's put into law needs to offer incentive or they'll see reduced activity. Frankly, right now, the uncertainty is resulting in reduced activity. So they do need to come to resolution, but I'm not going to predict how or when that's going to happen.

Douglas Leggate - Bank of America Merrill Lynch, Research Division

All right, folks. Thanks for the answers, appreciate it.

John S. Watson

Sure.

Operator

Paul Cheng of Barclays is on the line, please go ahead with your questions.

John S. Watson

Hey, Paul.

Paul Cheng - Barclays Capital, Research Division

Thank you. Good morning. John, maybe it's a little bit of an oddball question. Over the last 10 years I think a lot of people, both in the industry and host government, believe the resources become more scarce. You see oil has already been tapped and so they have been pushing tougher and tougher terms. With the last several years of the newfound opportunity set in North America and, quite frankly, I think the budget course and the host government has continued to go up. So have you seen a bit of a change in your negotiation or in your dialogue with the host government that they become a bit more accommodating or that the burdens of power start shifting more back into a neutral zone?

John S. Watson

Fair question, Paul. I can't say that I've seen a relaxation in terms. What I will say is that it's a competitive market out there and countries that put forward terms and conditions that don't allow us to make a fair return, we look elsewhere. The reality is, we have a long queue of opportunities. It's as good as it's ever been since I've been in the Company, and we have more opportunities coming at us every day at all phases of development from exploration, all the way up through discovered resources and other opportunities, and so we can be a little bit choosey, and capital does move across the globe and goes to where the returns are.

I'm not going to single out specific countries, but I think you know well that there are a number of countries where activity has ground to a halt, and it's ground to a halt because investors do have choices and they are not going to go where they don't have the certainty of the returns, of fiscal environment and other conditions necessary to invest. So, it is a competitive world. And I will say that some host governments are acutely aware of what's happening in the U.S. and I know there is some nervousness in that regard. But I can't say that I've seen a wholesale change in…

Paul Cheng - Barclays Capital, Research Division

Can I ask as a follow-up that on, in the last say, 10 years that in some times that we have seen some foolish behavior from some of your competitors in rushing in some project and are setting really bad terms. In your discussion and when you chat with your peer or what you can see in your partner, have you seen the behavior change that the people now that believe they have better opportunities set than say in the past so that they are not going to be as maybe they're accepting those unreasonable terms as likely as in the past?

John S. Watson

If I understand your question, you are asking me to comment on the foolishness of my competitors and…

Paul Cheng - Barclays Capital, Research Division

Have you seen a change that in (indiscernible) amount of the business sometimes that unfortunate that you’re only as good as your next numbers (indiscernible)?

John S. Watson

Yeah, I am not going to comment on our competitors. What I will say is for us is, we have to see the right fiscal terms in order for us to invest. One of the areas we've talked about before that was frankly disappointing to me in many ways, because we worked very hard within Iraq. Where going way back to 2003, we had been providing technical support and training and we had hoped that there would be an opportunity to enter Southern Iraq. And when we – when push came to shove in those bid rounds, we just didn’t see that the opportunity measured up. We’re always value focused in what we do. We are not barrel focused per se. Those are great resources, but we didn't see an opportunity to make money. So, we politely passed on bidding and moved on to other opportunities. I can't speak for others, but that’s the calculus we go through. We want to help nations grow and develop their resources, but we have to get a fair return in doing so; and I think host governments are getting better recognizing that. I assume our partners have similar criteria. They may come to different judgments on these things. But that's what we're all trying to do.

Paul Cheng - Barclays Capital, Research Division

Thank you.

John S. Watson

Sure.

Operator

Our next question comes from Iain Reid of Jefferies. Please go ahead with your question.

Iain Reid - Jefferies & Company, Inc., Research Division

Hi, John. A couple of questions please. Firstly, I was a little bit surprised you said that there's going to be minimal production from Angola LNG this year. Is there still issue’s with that plant, that are getting delayed into say, the second half of the year or maybe if you could just expand a little bit on what the situation is there?

John S. Watson

I hope I said that there will be minimal production from Frade this year. Frade; we shutdown on a precautionary basis early in 2012, and we are working closely with the regulatory authorities to restart production, but I won't give you an estimated date until we can complete the discussions to settle some of the litigation that's involved there, and the discussions have been good. Angola LNG is different. We do expect Angola LNG to start up in the second quarter, so we do have a partial year of production, and in fact that's the single largest contributor. If you look at our major capital project wedge on production for 2013, Angola LNG is the largest single project. It will start up in the second quarter and will ramp-up over the course of the year. At full capacity, after full ramp-up, Angola LNG contributes about 60,000 barrels a day; so it's significant. But there will be a ramp-up that will happen over time.

Iain Reid - Jefferies & Company, Inc., Research Division

Okay. My follow-up is on your 2017 production. You said that you had 90% of the volumes in – ongoing in order to meet that. What’s the extra 10%? And I’m just wondering, you still got the fairly low price assumption on that. Do you want to give us any type of sensitivity of what it would be at the current prices?

John S. Watson

Sure. We categorize our projects into several different categories that we have producing assets today. So we have assets that are online today and there is a natural decline to those, but a significant number of those are producing today and will be online and still be online in 2017. We have projects that are under construction, projects like Jack/St. Malo in the Gulf of Mexico. That will be on production and ramped up and will contribute, but it's not contributing today. So that's a project that's under construction.

We also have projects that are in FEED or front-end engineering and design and then we have that will come to a final investment decision, investments will be made and they will start up. And then we have other smaller capital projects that have a shorter cycle time to them. So that remaining 10% are typically shorter cycle time projects that we know are coming or projects that have not yet -- are not yet under construction.

An example of some of the projects that will ramp up are some of -- the very activity in the Permian and elsewhere in the United States, smaller projects in Thailand and Indonesia, places like that. So, we have good knowledge of what's in there. What we're saying is, is the project itself may not be under construction right now on that remaining 10%. We're going to give you heck of a lot of detail on all of this information as we get up to the SAM meeting. I'll just say that we have greater certainty and knowledge and confidence today than a year ago on that 2017 target. We have work to do, but we know where the barrels are coming from.

Iain Reid - Jefferies & Company, Inc., Research Division

So you don't need Tengiz future growth?

John S. Watson

Actually not. When we first gave you our target for 2017, there was some contribution from the future growth project. We've been working with the government and our partners on FGP. In fact, I was in Kazakhstan late last year and the President was very supportive of the project and wanted us to move it forward expeditiously. It does have a long lead time to it. We've had to work through issues with our partners. We've done that and we expect that startup will be in 2018. So, we've been able to replace the barrels that we had previously earmarked for 2017 from Tengiz with other opportunities. And of course that means that we will have growth beyond 2017 from that very significant project, which only adds to the profile we've talked about.

Iain Reid - Jefferies & Company, Inc., Research Division

Any chance you can give us the target at today's prices?

John S. Watson

The volume target?

Iain Reid - Jefferies & Company, Inc., Research Division

Yeah.

Patricia E. Yarrington

That's something we can do at the SAM. We don't have the number here right now with us. So, you understand why we keep it at the $79 rate, correct?

Iain Reid - Jefferies & Company, Inc., Research Division

Yeah.

John S. Watson

The 3.3 million barrel a day target for 2017 hasn't changed. And we'll talk more about some of the projects that will contribute. I don't think we made a secret of the Tengiz, the next project at Tengiz is a 250,000 to 300,000 barrel a day gross project and we have about half of that. So, it's a significant contributor but there are other changes that have taken place in the portfolio. There are other opportunities as well. But essentially as that project moved out just a little bit, we've replaced it with unconventional and other opportunities.

Iain Reid - Jefferies & Company, Inc., Research Division

Okay. Thanks very much, guys.

Operator

Our next question comes from Ed Westlake of Credit Suisse. Please go ahead with your question.

Edward Westlake - Crédit Suisse AG, Research Division

Good morning. Thanks for the call so far. Just coming back to the Gulf of Mexico, obviously that's still an area with a lot of spend going on. Any updates on projects on time, on budget?

John S. Watson

Yeah, actually I just had a review recently and both Jack/St. Malo and Big Foot are on schedule for start-up next year. They're both going well. They're both over 50% complete. Big Foot, some two-thirds of the way long; Jack/St. Malo is close to 60% along. We've got development drilling that's taking place, a couple of rigs that are working in Jack/St. Malo now. So the progress is good. We'll give you a little more color around that next month at the SAM meeting, but the progress is good.

2014 will be a good year for us production-wise. We'll have in addition to those projects coming on during the year, we'll have full year of activity from Angola LNG. We'll have substantial contribution from Papa-Terra, Escravos gas to liquid and others. So we expect 2014 to be a pretty good year. And pretty consistent with what we've talked to you about before where on this 2017 pathway, the growth would be back-end loaded, and 2014 is when you’ll start to see most of that come to pass.

Edward Westlake - Crédit Suisse AG, Research Division

And then just switching to Shale, I mean you mentioned 175,000 barrels a day contribution to 2017. You may not have the numbers, but just maybe a rough sense of how much of that 175,000 comes from say, the Permian, the Duvernay, and the liquid rich Utica?

John S. Watson

We will leave that one for George to talk to you about. I’ll tell you the number will be bigger than 175,000 barrels a day and we’ll try to give you a little bit of color on that next month. How about that?

Edward Westlake - Crédit Suisse AG, Research Division

I could have asked the question more simply. Thanks so much.

John S. Watson

Okay.

Operator

Our next question comes from Allen Good of Morningstar. Please go ahead with your question.

Allen Good - Morningstar, Inc

Good morning.

John S. Watson

Good morning.

Allen Good - Morningstar, Inc

John, previously you mentioned the value of integration given that you never really know where the rents are going to be in the oil and gas business. Given the growing U.S. volumes, your participation in the unconventional and Gulf of Mexico, some of these volumes that may trade at a discount to global oil prices. Does it make sense at this point to maybe reevaluate your U.S. refining position and particularly get involved in maybe some of these areas in the U.S., whether it be the Mid-Con or the Gulf Coast that may see long-term benefits from this or is the focus still more, which is on the chemical side for your Downstream?

John S. Watson

Yeah. If you’re saying, are we thinking about buying a refinery, I would tell you, that’s not something that we’re looking to do. Our involvement really is along the lines you described where we do have low cost liquids and our terrific position with Chevron Phillips Chemical Company allows us to take advantage of that, both for existing assets and this expansion project at the Chemical Company has discussed. So, that’s the primary way that we will take advantage of it.

Now I will say that we’ve got two refineries that do take advantage of low-cost feedstock. We have a refinery at Salt Lake; we have a refinery at Burnaby in British Columbia and those two refineries take advantage of low-cost feedstocks and we’re always looking for ways to try to get lower-cost feedstocks into our West Coast and Pascagoula refineries. That’s a little tougher. We’ve moved a little bit there, but it’s a longer haul. So it’s not clear that we will be able to take advantage of it in that way. But we’ve got quite a bit of efforts, really – we’re pretty full up on what we think as goods investments in the Upstream end of the business.

But over time, I think these markets will equalize and so making investments that aren’t quite compatible with our strategy in the Downstream to take advantage of what we think will be a short-term phenomenon and it really isn’t something we are looking to do.

Allen Good - Morningstar, Inc

Okay. Thanks. And then you mentioned sort of the premium that was on unconventional opportunities here in the U.S., particularly in the Bakken, do you see more value and maybe internationally where the markets are a little bit less developed and maybe where you can apply a bit more expertise and have a bit more value add on the unconventional side or – if you look internationally as well, do you see a bit more opportunity maybe where areas you’re not currently involved or you may be able to leverage your deepwater expertise like in the Arctic or in East Africa or maybe even in Russia?

John S. Watson

Yeah, our commercial philosophy is to go in where we can bring technology or something unique. We favor early low cost entries where we can add value over time through the application of our technology or know-how. When it gets down to a pure bidding war with a lot of different players – in the U.S., there is a lot of money that’s looking for opportunities and if it’s not a particularly difficult entry for a party, it means there will be a lot of bidders and prices get bid up.

So, while the resources are very good and well understood in the U.S. and in many cases are quite prolific, we’re focused on the kind of returns we can get. And so we have made selective entries in the U.S., we feel good about those entries, done well in Canada. And we’ve picked some acreage overseas, notably in half a dozen countries in Central Europe, we have a preliminary agreement in South Africa, Argentina, China et cetera. Those are more exploration plays and are early stage entries. They don’t represent a significant capital commitments, but the upside if they're successful will be significant. We think we will be able to add value.

Similarly, in more conventional exploration, there are parties that come to us because of our knowledge and expertise in deepwater, that they want an experienced partner, and we’re able to typically negotiate arrangements that are better than just an open bidding. In some cases, we work directly with the government on awards and in other cases we work with smaller companies that may have accumulated acreage over time. That’s why you’ve seen we’ve added in acreage in Sierra Leone, Suriname and other locations.

Allen Good - Morningstar, Inc

Okay, great. Thanks.

John S. Watson

Sure.

Operator

Our next question comes from John Herrlin with Societe Generale. Please go ahead with your question.

John P. Herrlin - Societe Generale Cross Asset Research

Hi. Just two quick ones for you, John. You mentioned in the beginning that you had signed new LNG contracts in Australia. Are those incremental to what was discussed last September on the tour?

John S. Watson

No, I don't think we have anything new to talk about on the contracts. We're over 80% placed on Wheatstone and in the mid-60s on Gorgon. So, I don't…

John P. Herrlin - Societe Generale Cross Asset Research

Okay, I just wanted to make sure I didn't miss something. That's fine.

Patricia E. Yarrington

John, we were just commenting that that was an accomplishment for the year for 2012.

John P. Herrlin - Societe Generale Cross Asset Research

Okay, I just wanted to make sure I just didn't misunderstand, obviously I did. Next one, on the Gulf of Mexico, you have to do more BOP testing today. How has that kind of changed your development costs given the new regulations in the Gulf, and that's it?

John S. Watson

Well, several things have changed in the Gulf of Mexico for us. If you really look at what's happened, the regulatory environment, of course, is -- obviously, there's a great deal of attention to the regulatory environment. So the permitting process itself takes time, the n-number of inspections that takes place is significant. There are extra casing strings that can be required at times, added BOP inspections, added costs being a part of the Marine Well Containment Company, et cetera. So – plus other cost pressures that you're seeing in the business. So, we have seen some cost increases in addition to that rig rate. So, over the past several years, it's not unusual to say 20% to 25% increase in costs have been seen by the industry. And that's just the reality of doing business today. Of course, we've got over $100 oil too.

John P. Herrlin - Societe Generale Cross Asset Research

Great. Thank you.

John S. Watson

Yes.

Operator

Our final question comes from Pavel Molchanov with Raymond James. Please go ahead with your question.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Thanks for taking my question. On the Kitimat project, just taking a step back, as one of the top LNG producers particularly when Gorgon and Wheatstone start up, are you worried that with 30 U.S. and Canadian LNG export plants in some stage of development, there could be kind of a de-linking of LNG and crude in Asia Pacific?

John S. Watson

Well, I think that's been speculated about. Our view is that there are always a queue of projects that are discussed. And if you look closely at what's discussed versus what actually gets built, there is a difference between the two. I said earlier on the call that I don't think that you'll see, what I could call, speculative development of LNG sites without some certainty around contracts and sales prices. My view is, is it's going to take substantial prices to underpin developments of these tens of billions of dollars in spending that's going to be required. And therefore some projects will go and some will not. We think that we have a leg up in terms of the relationships we have, the credibility we have, our ability to construct facilities in our discussions with the buyers.

Next month at the SAM meeting, I'll show you a little bit of information about our view of both supply and demand for worldwide LNG and what we see is continued growth in demand and supply that tends to continually get pushed out because the lead time on these projects is long. It's now at a point that -- it's pretty close to six years. And so you can see these projects coming and there maybe announcements made, but until you see FID, until you see construction happen, you have to be somewhat circumspect about which projects will actually contribute to supply.

I think that's it. I appreciate the good question. That concludes our remarks. Let me say I just appreciate everyone's participation in today's call. I have given several plugs for our full Security Analyst Meeting that we're going to have in March. We'll look forward to seeing you there. Thank you all very much. Sean?

Operator

Thank you. Ladies and gentlemen, this concludes Chevron's fourth quarter 2012 earnings conference call. You may now disconnect.

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