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Chevron Corporation (NYSE:CVX)

Q3 2009 Earnings Call Transcript

October 30, 2009 11:08 am ET

Executives

Dave O'Reilly – Chairman and CEO

Pat Yarrington – VP and CFO

Analysts

Doug Terreson – ISI Group

Robert Kessler – Simmons & Company

Paul Sankey – Deutsche Bank

Evan Calio – Morgan Stanley

Arjun Murti – Goldman Sachs

Jason Gammel – Macquarie Research Equities

Paul Cheng – Barclays Capital

Mark Flannery – Credit Suisse

Mark Gilman – Benchmark

Neil McMahon – Sanford Bernstein

Pavel Molchanov – Raymond James

Operator

Good morning. My name is Sean and I will be your conference facilitator today. Welcome to Chevron's Third Quarter 2009 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks there will be a question-and-answer session and instruction will be given at that time (Operator instructions). As a reminder, this conference call is being recorded.

I will now turn the conference over to the Chairman and Chief Executive Officer of Chevron Corporation, Mr. Dave O'Reilly. Please go ahead.

Dave O'Reilly

Thank you, Sean. Welcome to Chevron's third quarter earnings conference call and webcast. On the call with me today are Pat Yerington, our CFO and Jeanette Ourada, General Manager of Investor Relations.

Our focus today is on Chevron's financial and operating results for the third quarter of 2009 and we'll refer to the slides that are available on Chevron's website. But before we get started, please be reminded that this presentation contains estimates, projections, and other forward-looking statements, so please review the cautionary statement on slide 2.

Turning to slide 3, which provides an overview of our financial performance, let me cover a few points. The company's third quarter earnings were $3.8 billion, or $1.92 per diluted share. Our third quarter 2009 earnings were down 51% from the third quarter of 2008. Third quarter earning were 120% higher than second quarter 2009, and Pat will be discussing this shortly.

Return on capital employed for the trailing 12 months was 12.6% and the debt ratio was 10.4% at the end of the quarter. Our net cash flow position this quarter was positive by nearly $2 billion after funding our capital program, dividend commitments and $700 million in pension contributions.

This positive cash generation was underpinned by higher crude oil prices and strong cash margins from our major capital projects.

I'd like to give a brief recap of our strategic progress in recent months, so please turn to slide 4. Our industry-leading expiration program has continued to success with the recent discoveries in Angola and Australia.

In Angola, we announced the Block 0 discovery and the Greater Vanza Longui Area. The discovery well encountered over 225 feet of net pay. This discovery extends the trends of undeveloped natural gas condensate and crude oil discoveries that are currently undergoing an appraisal.

We also announced three natural gas discoveries this quarter in Carnarvon Basin offshore Western Australia. The three discovery wells Clio-2, Kentish Knock-1 and Akalase [ph] are all located in Australia's premier hydrocarbon basin, where Chevron is the leading leaseholder. All three blocks are Chevron-operated and add to our significant gas resources in Australia.

Our upstream major the capital projects continue their strong performance. Offshore Nigeria Agbami project reach nameplate capacity of 250,000 barrels a day in August 2009. This was over four months ahead of schedule.

Production efficiencies to-date has been excellent and volumes are steady these target rates. Offshore Angola, Tombua and Landana is Chevron's most recent major project for Block 40. It achieved first production in the third quarter and drilling of additional wells continues and peak product of the 100,000 barrels a day is expected to be reached in 2011.

In the United States, we recently enter feed for deepwater Big Foot project. Big foot is located in the Walker Ridge area of the Gulf of Mexico 35 miles south of Chevrons’ Tahiti field. The development facility designed as a Tension Leg platform and it would be the deepest build to date. Chevron is the operator with the 60% interest. In Australia we announced a final investment decision for Gorgon. This occurred in September and has a significant milestone for the company.

We expect Gorgon to add to our reserves and provide stable and steady production for decades to come. The project has around 40 trillion cubic feet of resources, which is equivalent to about 6.7 billion barrels of oil. Gorgon is three-train, 15 million metric ton per year and is well positioned to meet growing Asian demand for natural gas, and it will be a legacy asset for the company.

Following the final investment decision milestone, we’ve assigned long term sales and purchase agreement representing greater than 40% of our Gorgon off-take. We also held up agreement in place for a roughly another 40% of production and expect to finalize these agreement in the coming months.

Also, in Australia, we recently signed agreements with two companies to join our Wheatstone LNG project. Together the two companies will be 25% partners in the project’s first two LNG trains. Chevron will maintain our current interest in Wheatstone and Iago fields, as our partner’s natural gas supply will be coming from their own field.

This establishes Wheatstone as an LNG hub, and we anticipate that additional Chevron and third party gas will be available for a future expansion, now that foundation project is in place. For example, our recent Clio l [ph] discoveries to provide additional volumes; and this will support Chevron’s strategy to commercialized gas in Australia, and also enhance it’s project economics.

We answered front-end engineering for Wheatstone in July 2009, and expect to make a final investment decision in 2011. I will now turn it over to Pat, who will take us through quarterly comparison. Pat.

Pat Yarrington

My remarks compare the results of third quarter 2009, with the second quarter of 2009. And as a reminder, our earnings release compares third quarter 2009 with the same quarter a year ago.

So turning to slide five, third quarter earnings were up $2.1 billion from the second quarter. Stronger upstream earnings accounted for all of this improvement, driven by higher crude oil realizations and a continued production ramp up of our major capital projects.

Upstream earnings also benefited from roughly $400 million of Gorgon related asset sales and tax items, as well as a favorable foreign currency variance of about $400 million.

As a reminder, these foreign currency earnings impact are predominantly related to balance sheet translation and do not have a cash impact.

Third quarter downstream results were essentially flat with the second quarter. Favorable timing effects and improved west coast margin were offset in part by unfavorable foreign currency effects. Also recall that the second quarter included a $140 million benefit from asset sale.

The variance in the other bar reflects higher chemical earnings more than offset by an unfavorable variance in corporate items.

On slide six, Our US upstream earnings through the third quarter were about $600 million higher than the second quarters result.

Combined crude oil and natural gas realization benefited earnings by $300 million. Chevron’s average US crude oil realization increased about $10 per barrel between consecutive quarters, more than the nearly $8.50 increase in the average spot price of WTI.

Natural gas realizations were flat between quarters. Production volumes increased more than 6% between the quarters as the ramp-up to up Tahiti in the Gulf of Mexico more than offset natural fuel declines.

In settlements of certain insurance claims related to Hurricane Rita contributed the $110 million to the current quarter result. And the other bar is like primarily lower impairment charges and lower DD&A rate.

Turning to slide 7, our international upstream earnings increased about $1.5 billion compared to a second quarter results, higher oil and natural gas realizations improved earnings by $520 million. Our unit realizations for liquids improved by 16% in line with the increased in Brent spot prices.

Natural gas realizations were also higher in the third quarter contributing about 25 million to earning. And as Dave mentioned, our Gorgon LNG project in Australia reached a final investment decision in September. This formal project to approval trigger recognition of roughly $400 million in gains on sales of partial interest in the project and related tax effects. This equity are realigning between Chevron and our partners occurred and cash was received in 2005, but the earnings impact was appropriately differed until project sanction.

The FX bar includes continued losses associated with the weakening of the US dollar against several major currencies, although the impact this quarter was nearly $400 million less than in the prior quarter.

The other bar is the benefit of $201 million, about half of which due to the absence of second quarter well write-off. Lower DD&A rate and higher lifting account of the majority of the remaining variant.

Slide eight , summarizes the change in worldwide oil equivalent productions, including volumes produced from oil sands in Canada. Production increased 32,000 barrels a day between quarters. Higher prices reduced volumes under production sharing contracts and variable royalty provisions by 21,000 barrels per day. The base business and external constraint bar shows a decline of 46,000 barrels per day. Reductions due to base business declines and local disruptions in Nigeria were partially offset by lower OPEC member constraint.

By early September, Nigerian oil operations were back to normal. And as George Kirkland mentioned in our second quarter call, we expect our full year based business decline rate to average about 6%, which is consistent with year-to-date result.

As shown in the green bar, increased production from major capital project benefited third quarter productions by almost 100,000 barrels a day, primarily driven by the ramp-up of Tahiti and higher volumes that TCO and Agbami.

Turning to slide nine, US downstream earnings increased about $130 million in the third quarter. The overall impact of refining and marketing indicator margins accounted for the entire $130 million increase. Marketing margins improved especially on the West Coast, where we refinery outages and maintenance combined with driving season demand drove retail prices higher.

Timing effects, represented a $75 million positive variants, in large part due to the absence of unfavorable effects in the second quarter. WTI prices were essentially flat from the beginning of the quarter, third quarter compared to $20. They were flat in the beginning to the end of the third quarter compared to a $20 per barrel increase during the second quarter.

In addition, like the aviation pricing created a positive variance in comparison to the second quarter. The components making up the other bar include reduced volumes due to Richmond planned third quarter 2009 maintenance, downtime and lower lubricants margins.

Turning to slide 10, international downstream earnings decreased about a $100 million from the second quarter's result. Timing effects represented $250 million positive variance between the quarters consistent with the US, this mostly reflects the absence of unfavorable timing effects in the second quarter. Impacts on the third quarter were much less, reflecting a lower pricing volatility. The next bar shows the absence of $140 million of gains on assets sales recorded in the second quarter.

Foreign exchange effects were negative $75 million, compared to the prior quarter and the other bar is a negative variance of $131 million, about half of which is attributable to an unfavorable tax variance. The remainder is comprised of several smaller items, including higher operating expenses related in part to increase transportation cost.

Slide 11, shows that earnings from our chemical operations increased $56 million in the third quarter results for Oliphant's, aromatics, and Oronite additives, all reflected higher realized margins.

Slide 12 covers all other. Third quarter net charges were $167 million, compared to a net $43 million charge in the second quarter. The increase of over $120 million between quarters, mostly reflects variances in tax items and foreign exchange effects. The all other charges for the second and third quarters were below our guidance range of $250 to $350 million per quarter.

Now on slide 13, I would like to wrap up by providing a brief summary of our operational performance through the first three quarters of 2009. On the second quarter earnings call, we raised our production outlook, we indicated, a year over year 5% volume increase, our major capital projects continue performing on plan or better, and on a year-to-date basis, we have achieved a 6% increase.

Assuming constant prices, we now expect to exceed the 2009, full year production outlook, as we communicated on the second quarter call. Our year-to-date, refinery crude utilization remains strong, at 92% of capacity. Solomon has recently released its 2008 result.

Solomon as you know, is an external benchmarking organization that gathers data on the refining industry and reports out every two years, so for two consecutive by annual reporting periods, Chevron has held the number one ranking in refinery utilization, compared to the 8 other international majors tracked by Solomon.

Our success in increasing refinery reliability contributed to these results and we believe that will be critical in this challenged downturn environment going forward. Our stream major capital projects are meeting or exceeding expectations with many starting and ramping up ahead of schedule.

Over the past five quarters, we have delivered six significant operative projects , Agbami in Nigeria , the Tengiz expansion in Kazakhstan Blind Faith in Tahiti and the Gulf of Mexico, Frade in Brazil and Tombua and Landana in Angola.

Combined, they represent a growth investment of over $25 billion with projected total peak production in excess of 900,000 barrels per day of oil equivalent. Our continued focus on cost management is delivering results to the first three quarters of 2009. Operating and SG&A expenses were down $3.5 billion, compared with the same period of 2009 on a recurring basis as mentioned in our press release; we are running about 13% below last year.

So, we are ahead of our $2.5 billion or 10% reduction goal that I communicated on the second quarter call. I know that this figure excludes fuel. Our focus on aggressively managing cost will continue and we expect to see further positive results from our efforts.

And finally, we are maintaining our strategic focus on the factors that will ensure our growth and our superior returns to stock holders in the year ahead. Now that you all know our Chairman and CEO, Dave O’Reilly has announced his retirement at the end of this year. I will be remised if I didn’t acknowledge and thank Dave for his more than 40 year of service to the company.

And in particular I would like to acknowledge his superior leadership of Chevron over the past 10 years as CEO, during which time our market capitalization has grown about $100 billion.

So, thank you Dave. I will now hand it back to you Dave for your closing comments.

Dave Reilly

Well, thanks, Pat. I would like to spend a few minutes talking about management transition, as Pat pointed out, I have announced my retirement at the end of the year, and John Watson will become Chairman and CEO in January. This is part of a well planned succession process. John is a proven leader, who has played pivotal role in many significant accomplishments in recent years, including leading the merger integration with Texaco.

He brings a mix of corporate and operational experience, having served as President of our International Exploration and Production operations and also as our CFO and Corporate Vice President of Strategy Planning.

John has also been actively engaged in formulating our current strategies as a member of the company's Strategy and Planning committee for over 10 years. John is supported by a very strong team including George Kirkland, who will join the Board and continue to lead our upstream oil and gas businesses.

Our strategies are working well and the company is performing well, but I think even more importantly the company is in very capable hand, and I expect a seamless transition.

I’m very proud of our accomplishments and deeply indebted to all of the people of Chevron for their dedication to the company during the time of my leadership. I also want to express my thanks to the many of you who are investors in the company. I've enjoyed our association over the years and I wish all of you the best for the future.

That concluded our prepared remarks; we now welcome your question. So, Sean, please open the line for question.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Dough Terreson with ISI Group.

Doug Terreson – ISI Group

First I want to congratulate you Dave on a great career and I agree with Jeanette [ph] you provided exemplary leadership during the past decade which is obviously been an important period of change for the super major. So good luck to you. On cost the release mentioned a 13% decline in your recurring expenses, which is obviously a pretty significant number. And on this point, I wanted to say if you would provide some color on the rate of change that is, how its movement in the capture rate on recovering cost in relation to previous couple of quarters?

Dave O'Reilly

Pat, do you want to can handle that question.

Pat Yarrington

Sure, yes.

Dave O'Reilly

Because I think its good question and we are very proud of what we will accomplished and I think we are on good run.

Doug Terreson – ISI Group

Sure.

Pat Yarrington

Doug, I think that we have continued to gain momentum on our cost reduction effort as they quarters have progressed here. A lot of the activity that we did in the earlier part of the year obviously we’re sitting down meaning one-on-one with the suppliers and vendors and to large extent, many of those contract renegotiations began to trigger in the second quarter and will continue on in the third quarter. So, we have tremendous amount of momentum behind us and as well as going forward. So, I would look forward to further positive results on this dimension going forward.

Operator

Our next question comes from Robert Kessler with Simmons & Company.

Robert Kessler – Simmons & Company

Couple of things from me. Firstly the tax rate, I am wondering Pat, if might be able offer us a clean tax rate figure recognizes with some of that $400 million from Gorgon item is buried in there and lowering the tax rate, and then any guidance going forward on that. And then secondly, just wondering if he might be willing to comment last year status of your Northwood [ph] prospect in the Gulf?

Pat Yarrington

Well, I’ll take tax question here, Dave. Yes, third quarter to second quarter, we did see our reduction in our tax rate of nearly 10%. The Gorgon related items were significant piece of that as were foreign exchange losses, those were about equally large contributors to that. So obviously, going forward you are not going to have of the Gorgon related component. But frankly foreign exchange is very hard for us to in any way predict. So, it’s hard for us to give you advance version of quarter clean number might look like. Lot of variables moving in a lot of directions, with a lot of jurisdiction and a lot of component, so I don’t have guidance for you.

Dave O'Reilly

I didn’t quite catch the prospect you were.

Robert Kessler – Simmons & Company

Northwood.

Pat Yarrington

Northwood.

Robert Kessler – Simmons & Company

Northwood, Paleogene prospect in the Gulf of Mexico?

Dave O'Reilly

I don’t think I am free to say anything about that at the moment. I apologies for I can’t, but I can’t comment it.

Operator

Our next question comes from Paul Sankey with Deutsche Bank.

Paul Sankey – Deutsche Bank

Gorgon, the CapEx number, could you give us an ideal of what that’s going to be. We’re working with the idea that it’s about $35 billion spend before 2015 growth ruled upon us.

Dave O'Reilly

We describe that pretty clearly on our press release, when we announced the projects the number was AUS43 billion. If I recall, I don’t have the press release in front of me, but I think that was the number. I might add that project just come from Australia, to check on the initial excuse of that project and the work is already under way on Barrel Island, there between $6 billion and $10 billion were the contracts have already been let. So this think is out, its very well planed and is already in the early execution phase and I was very, very pleased with what I saw there.

Paul Sankey- Deutsche Bank

Dave, the contracts that are signed are the going to be the classic oil price link?

Dave O'Reilly

Probably yes, the sales contract themselves.

Paul Sankey- Deutsche Bank

Yes, sorry I should have said the sales contract.

Dave O'Reilly

Whenever we move to the other sides of the project. Yeah these are essentially oil very close to oil parity oil link contracts. And as I mentioned, 40% of the volumes have already been executed and the others are very close within the next three months.

Paul Sankey- Deutsche Bank

Good, okay.

Dave O'Reilly

We are pleased with the progress there and thank you for the question.

Paul Sankey- Deutsche Bank

Sure, and then if I could ask my second question on the forex issue again? My understanding was tended to work against you when the dollar weakened, but it seems to be fruitfully and I understand it’s not a cash issue and everything else, but it does seems to work in your favor this quarter and that confused me a bit, could you just help me understand why it's kind of going the other way from somewhat?

Dave O'Reilly

I think it was negative of the both quarters, but just a little bit less negative, so quarter-to-quarter it worked positively, but it’s still negative on in absolute return. It was dramatically negative in the second quarter, not quite as negative in the third.

Pat Yarrington

That's because the rate of the currency changes, second quarter versus third quarter were different, a much greater weakening in the second quarter than in the third quarter of the US dollar.

Paul Sankey- Deutsche Bank

So the general trend remains same, or if we get a strengthening of the US dollar is going to work in the opposite way, okay. I understand that. Thanks a lot.

Pat Yarrington

That's correct.

Dave O'Reilly

That is correct. Yes.

Operator

Our next question comes from Evan Calio with Morgan Stanley.

Evan Calio – Morgan Stanley

Thanks for taking my call and congratulations on those strong quarter and congratulations to both, John, David and your new roles as well also previous contributions. I had a one question for you guys and it's a less favorite topic, but there have been some supportive facts for Chevron and the Ecuadorian proceeding. I know you've had motion for normal as well as the collateral action in the international arbitration, a hedge against the government now the preceding judge is on as off is one the case is off the case. Can you provide us with just any general update on timing or kind of facts around what's pending in the judicial process of for those claims in the what’s the hurdle before you may expect some kind of ultimate opinion to be rendered in the in Longui Area.

Dave O'Reilly

Well, thank you for the question and the comments. The answer on timing is we really don’t know. I mean we are going through period of appealing with the new judge. He has as you point out there, know the judge, there is one of the judge that judge that was previously on the case, for that we have accused himself and he was reinstated and he was accused again, so we are definitely now with the new judge we did file an appeal for a Normand our motion for Normand which this judge has in recent in the last week of so denied, but to be able to predict as timing in a court system that is a totally unpredictable and unreliable.

I think is just difficult to do. In the normal court process, this judge would be going very carefully through all the rulings that were made by the prior judge and spending considerable amount of time on evaluating the circumstances, so it's very hard for us to put a timetable on that. You mentioned the international arbitration, there’s really two issues there. There’s one long standing commercial claim issue, relative to the government’s refusal of to rule itself and its own courts in Ecuador on money that we believe is due us over the course of original contract. Then we have a second one much more recently filed which is really a breach of contract on basic fundamental contractual issues itself we believe, and we believe just the finally that the Ecuadorians are responsible for the damage that exist there. But Ecuador has chosen not appoint his arbitrator yet on that one, even though the dead line for appointing an arbitrator has passed. So these are all very hard to project from timing prospective and I wish I can give you a clear picture. So that’s that we have at the movement.

Evan Calio – Morgan Stanley

Is this judge Zambrano is he overseeing any other elements of the case if you know it’s been a longer history.

Dave O'Reilly

I don't know that answer, but I don't think so. I think he is new to the case, but has been in the same court. There is a panel of judges, so he is part of the same court system but not – I can’t answer the question that he is ever been a longer in case, I don't think he has directly as a judge but I am not sure.

Evan Calio – Morgan Stanley

And one last question if I may, on the way out, just if you could provide us any other your projects moving into FID still on track (inaudible) Phase II, Caesar Tonga, Chongdong Bay [ph] now any.

Dave O'Reilly

Basically there is been no real change. Chongdong Bay [ph] is I was also in China recently and that is moving along, all the government approvals have now been obtained. So we are actually in addition to the preliminary work which was done, we’ll now be ramping up. And preliminary work is kind of securing wells and some infrastructure work that could be done early, but now we’ll be moving into the kind of full execution phase later. So the Phase I of their product is moving along very well. We have a volume Phase II that is still on schedule. We’ve got Perdido which were partnered up in the deep water which is scheduled to come on in the first quarter of next year. So, we got, we basically everything else that we talked about Aven [ph] is pretty much on plan in general terms.

Operator

Our next question comes from Arjun Murti with Goldman Sachs.

Arjun Murti – Goldman Sachs

Let me off my congratulation and best wishes as well and do thank you for your help over the years. My question is really on US shale gas and if you could provide any comments on what interest you had into the building up a more meaningful position there. You also have the big Australia LNG positions and a lot of gas elsewhere, U.S. shale gas maybe one area possible opportunity. And then give an update to some of the status of the Jack/St. Malo project and where that isn’t moving along to FID. Thank you very much.

Dave O'Reilly

First of all, on shale gas, shale gas and tight gas overall we have a presence in the Hansville – it’s a land that we control, so we can control the pace of that. We have been doing some development drilling to test the most economic way to develop that and then the other area of tight gas, of course, is in the Piceance, where we have basically slowed down our progress there. We are building the capacity to produce 60 million cubic feet a day or so there. We have an upload capacities to supply that for some time. But as George mentioned in earlier calls, we have curtailed our gas activity somewhat because we have the discretion to do it and made that decision made last year because we could see that the gas market was going to be very weak and so we focused this year primarily on the oil side. Other than the big projects, the long-term projects of course which are in next oil, in the case of LNG. So that was a deliberate decision on our part. I don’t want to speculate about what we might do further in Shale other than its something that we are interested in and we’ll continue to pursue, but we are using this time to develop the expertise to do that as efficiently as we possibly can, using our drilling expertise and which we have in great depth in the company.

Arjun Murti – Goldman Sachs

I think Dave that not to interrupt, that really is sort of the question. I am not asking if you are going to do an acquisition or anything. But can a large super major like yourself, really be effective than shale gas. You are very good at the big projects around the world. It sort of the US E&P opportunity whether that’s something for you.

Dave O'Reilly

I know we can, because if you what we are doing in Thailand, it’s very instructive. We drill rapid fire well in Thailand, in the Gulf of Thailand and have been doing so. Unocal was the forerunner of that and when we combine Chevron and Unocal, we have been able to ramp that up and strengthen even further. So our drilling organization and our company is quite capable of multiple well programs and we demonstrated that capability. What we are demonstrating right, working on right now is making sure we understand, what it is that we have to replicate time and time again because what we will be doing in the shale is somewhat different than the drilling we are doing in the Gulf of Thailand. So, I feel pretty confident it can be done, but we have to be able to it at scale to move the needle and that is what we were proposed to do. Your second question I think was on Jack/St. Malo.

Arjun Murti – Goldman Sachs

Yes.

Dave O'Reilly

That is coming along ,well, it is front end engineering. It is expected that we will get to an investment decision in2011, also maybe not that, I’ll think about it, I think it’s late next year, 2010, late 2010, and everything there is pretty much unplanned that is always discussed at protocols and in our meetings direct in New York in March.

Operator

Our next question comes from Jason Gammel with Macquarie.

Jason Gammel – Macquarie

I was hoping to ask you a broader question on the refunding and marketing segment of the business, worldwide basis margins are obviously quiet poor right now, it seems to be a lot of over capacity. What are your thoughts on how that segment of the business gets back to a better margin environment and how long that is going to take? And may be if you could just add your strategic positioning, and how do you think you are advantage or disadvantage relative for the rest of the industry?

Dave O'Reilly

That's a big question. Well, first of all on the micro level, it is, we are headed for a weak period here. The golden age of refining didn't last that long, but we are into a weak period until we see the obvious combination of demand growth and some form of rationalization occur among the weaker players and in the more, oversupply areas of the globe. That's why as a company that we have chosen to invest primarily in what we consider to be the growth areas and that's been the West Coast of the US and the Pacific, where the growth characteristics are clearly more robust and I think that is playing out.

Having just been in Asia, you can see that the markets there, the economies there are growing and that is going to lead to growth in demand that will be ahead of what we will experience in the United States and certainly ahead of what we'll be experienced in Europe. I think our strategy, which is to focus on the growth areas and then strengthen those growth areas by culling out the parts of our portfolios that don't match up to what we are trying to accomplish strategically is the right strategy and it's the one we have been pursuing for sometime and we will continue, I think to pursue along that path.

The only other point I would make, that advantages have been relative to our size, I think our refining portfolio is so much smaller, but clearly more focused in these growth areas, and I think it will take a few years for this to kind of work its way through then I would expect 2010 and 2011 to be pretty sloppy before we see this begin to come back into better balance.

Jason Gammel – Macquarie

Thanks, Dave I appreciate your thoughts and best wishes for the future.

Dave O'Reilly

Thank you.

Operator

Our next question comes from Paul Cheng with Barclays Capital.

Paul Cheng – Barclays Capital

Dave, I just want to say congratulation and best wishes with your retirement. Thank you for the older [ph] half. If I could have two questions, one, Dave, you are talking about the Wheatstone. When you guys are going to start in terms of the sales effort, and if we look at between 2014 with the Gorgon coming on stream into 2017 with you guys Wheatstone and maybe the PNG and also plateau a number of very large projects still going to come on-stream. Have you guys sense that whether the market is still be able to absorb all those additional cargo and be able to maintain your pricing power there? Any kind of evident that would be helpful.

The second related to the $3.5 billion of the cost saving Pat mentioned. Pat, can you elaborate a bit more in terms of breaking down whether by different component, the labor to the vendor or anything like that, or by segment, that will be very helpful. Thank you.

Dave O'Reilly

I'll take the first one as you ask and then Pat will take the second one, Paul and thank you for your kind remarks. Wheatstone, we're very, very pleased with the progress at Wheatstone, not only on the supply side, where we've made this arrangement now with Apache and KUFPEC to augment their supply and have them participate obviously in the first two trains at Wheatstone.

The good news is that we're finding tremendous interest in the gas itself from the market, and I am absolutely conveyance that we will have successful out come here. Just as we have done another projects, we will execute heads of agreement with the appropriate parties that will be contingent on final investment decision. Just as we have done with Gorgon, and you will see continue to see progress in this area as we move the project along during the coming months and next year.

Paul Cheng – Barclays Capital

Can I interpret the marketing of the Wheatstone gases already started, that you are not waiting until you finalize the sales for Gorgon.

Dave O'Reilly

No absolutely. The sales on Gorgon are almost at a conclusion right now.

The final SPAs on the outstanding sales that we talked about are almost complete. I think I mentioned that in my remarks earlier. So our big efforts right now is on the marketing of Wheatstone and we are finding a very receptive market, and I think one that clearly is going to be needed, given the growth that we are experiencing in Asian demand. So, on the operating comps questions I am going to turn that back to Pat. Pat?.

Pat Yarrington

Paul you asked for a little bit more information on the cost side. Let me just start and say, of the $3.5 billion year-over-year reduction, our estimates are that about two-thirds of that is sustainable and about one-third is associated with self help. The cost reduction that were seeing is generally across the board, uniformly across all of our business segment and transportation is clearly a large component of that as is contract labor, material supplies services. It is really a very broad based, cost reduction success story that we’re having.

Paul Cheng – Barclays Capital

Pat I am sorry so you said two-third yet sustainable and one-third is self-help what exactly that mean between sustainable?

Pat Yarrington

On a go-forward basis we were down $3.5 billion year-over-year. Some of that is non-recurring, for example last year in the third quarter we had significant hurricane impact. So on a go-forward basis we are saying two-third of the reduction that you are seeing here we believe it’s sustainable component. Okay.

Paul Cheng – Barclays Capital

And that’s mean that two-thirds of the sustainable, you said one-third is self-help or that is over three and half and one-third is self-help.

Pat Yarrington

Of the $3.5 billion one-third is self help, the other relate to a kind of general market indicators, lower activity, kind of global demand, market-related our components.

Paul Cheng – Barclays Capital

And your $3.5 billion is not including energy due cost right you said?

Pat Yarrington

The $3.5 billion does include a small, very small energy fuel component.

Paul Cheng – Barclays Capital

Okay. Is it?

Dave O'Reilly

It is less than 10%.

Paul Cheng – Barclays Capital

Pat is it possible you can break down the $3.5 billion by divisions?

Pat Yarrington

I don’t want to do that Paul. As I said it’s pretty ratable in terms of the $3.5 billion reduction it’s very valuable according to the cost incidents, the original cost incident by our business segment.

Dave O'Reilly

The bottom line of all of this Paul is that about two third of this totally sustainable, about one third of if it is price sensitive, such as fuel and transportation those sort of things. So, that two thirds year-over-year we feel it is pretty about and some of it is related to that hurricane impacts and a lot of itself help as well. So, we’re seeing it all, but we are not going to break it down any further for year than we would for anybody else.

Operator

Our next question comes from Mark Flannery with Credit Suisse.

Mark Flannery – Credit Suisse

I’d like to talk about capital cost? You’ll talking a little bit about operating cost on this call. Other companies have pointed to some reductions on the capital side are you guys seeing that particularly in the upstream. If so, could you give some idea of the magnitude, then I have follow-up after that.

Dave O'Reilly

Well, I am going to have Pat address a few of these. Well, we are seeing some, it depends on the category of cost, capital cost where we’re seeing some reductions clearly and I will have Pat address just a little bit more triangular response to some of that.

Pat Yarrington

I’ve said in the past call that depending upon which cost category you are talking about, we’ve had cost reduction ranges anywhere from 60% on the high end, if it’s highly commoditized product versus 10% on the low end if it’s something much more specialized. We have seen and we’ve also stated in the past, in terms of our 2009 capital program, a large portion of that was already committed in our pre-committed before coming into the 2009 calendar year. So, the cost reduction activity lower capital cost activity you’ll see is really going be somewhat in 2009. But really in 2010 and going forward. And I am sure you are paying attention to just as we are the upstream CERA cost, capital cost indices and you’ve seen that they came down, they kind of they turned over. But they are not following nearly at the same rate of they that they were earlier in the year.

So with higher up prices we have seen little bit a dampening of that particular slop. But year-over-year we are going to see some benefit in ’09 for lower capital cost and we expect to see some continued benefit of that going forward in 2010.

Mark Flannery – Credit Suisse

My second question is on decline rate. And you reference was George said, earlier in the year underlying decline rate would be about 6%, little bit lower in the 7% that has been talked about before. With oil prices where they are let’s just call amazing dollars [ph] for ease. Is that scope to get that number down further do you think in 2010?

Dave O'Reilly

Go ahead, Pat.

Pat Yarrington

I was just going to say, on that one we really need we are putting our planes together now. We really need to finish that process and provide you better indication of that when we see you in March of the analyst.

Dave O'Reilly

I just going to add to Mark, I think that the underlying decline rate this year will be about 6% and as we pointed out that relates to deliberate decisions made. Primarily in the natural gas area where the prices were weak and it’s too soon to predict what was going on, rather than I think we demonstrated a agility here that, that we made the right decision on how to invest some of that discretionary capital at the beginning of the year and it’s paying off right now by having a leaning towards oil and lessen the near-term gas. I think by demonstrating that agility you can count that it will be demonstrated in the other direction if its appropriate, and we’ll make that read as we get closure to next years plan

Operator

Our next question comes from Mark Gilman from Benchmark

Mark Gilman – Benchmark

Just two questions if I could please, one relating to the Block Zero discovery announcement and the trend day which I believe you referred to. I am curious as to whether this is a new play, relative to your long standing activities in Block Zero or whether it merely extension those that which you being doing previously in terms of the horizon, that you’ll be exploiting and then I’ve got a follow-up.

Dave O'Reilly

Well, it’s not really a new play, we’ve had number of areas of Block Zero even though that we have been in it for some time, that we obviously deferred exploration and until we got the extension of Block Zero, which we concluded a few years ago. So I wouldn’t carry crises this a new play, but just a further validation, I think that we are in a very oil and gas rich area and that were exploiting and investing as you expect us to do, now that we have that contract extend for the next 25 years or so.

Mark Gilman – Benchmark

Second question relates to production sharing contract issues generally speaking. If you work-off the production bar chart, in essence you’re talking now I believe would be a sensitively about 2,000 barrels a day per dollar per barrel price change, which is higher than what has been discussed in the past, and you’ve indicated that this will move around. But I noticed in particular, frankly, both with your results as well as those of others that there seems to be some hypersensitivity with respect to Indonesian volumes lately vis-à-vis this issue. Can you folks offer some observations as to what might be going on this regard?

Pat Yarrington

Mark I don’t know that we have any particular insights share. We have indicated that tremendous kind of volatility or variability around a range of oil prices here. Indonesia is one of the primary contributors to that variant there, but I don’t know that I can speak to anything unique or uniquely different about Indonesia in this time period.

Mark Gilman – Benchmark

And Pat, nothing changed there in 2009 from structural standpoint?

Pat Yarrington

Not that I’m aware of, no.

Operator

Our next question comes from Neil McMahon with Sanford Bernstein.

Neil McMahon – Sanford Bernstein

Okay. It’s all the way from (inaudible). Just turning two questions; one really on Gorgon. If you look at Gorgon, and the development of all the LNG plants that you’ve got going there plus sellers. What is your sense that these projects will actually be developed on time, given the fact that so many people are putting a lot of construction capacity in to an area with extremely limited resources and infrastructure, that’s really the first one.

Dave O'Reilly

Well, that’s why I was there and heard just a week or two ago. I think the good news is that we have the contracts plus the projects are moving forward and it’s the first one out of the gate really in that area. There hasn’t been much new activity, and being first I think, gives me some assurance that this one is going to move a long way. By all the experts we’ve looked at, they believe that this project is best prepared for execution of any major project that they’ve seen.

So I am pretty confident that this one is out of the gate fast and already working. A lot of the work is on Australia, but some of it is outside Australia as well, and is using the so modelization [ph] contract that are already been led that we fabricated in Korea and other place. So this I think is an exemplary project, and I think the question for the longer term is one that we will have to weigh around some of the other projects as well and that is ensuring that we phase them in, and that’s one of the reasons that we put Wheatstone behind Gorgon because we think that the peak, we want to pass the peak of Gorgon and on the down slope before we pickup Wheatstone. So I think we’ve got a very good integrated plan to look at this in kind of orderly manner. So I think that’s the answer to your first question. You had another one.

Neil McMahon – Sanford Bernstein

(inaudible) Will you be utilizing the same construction contractors and quarry for Wheatstone and the same as Gorgon?

Dave O'Reilly

I think the answer to that question no. The seat contract with Wheatstone is a different contractor than with Gorgon. And that’s as far as I’ll go on that one.

Neil McMahon – Sanford Bernstein

And just a final quick one from me. Given your footprints in Asia, any comments in terms of overall Asian refining, refining product in that part of the world.

Dave O'Reilly

Well I mentioned that I had just come back from them and I see there is no question that there is a pickup in demand. The China stimulus package is pretty affective and definitely making an impact on demand and so I think that the Asian refining system will recover sooner than say North America or Europe, and I feel pretty positive about it. The momentum and the focus there is more than I would I have expected. Having been there a year ago and seen everything come to a stop it’s quiet amazing, how they have been able to turn that around. So I feel pretty confident that the outlook for Asia is still going to be sloppy, I think in Asia in 2010, but it shouldn’t prove sooner than some of the other areas of the world

We have probably got time for about another one question, we are reaching the top of the hour so let me, let’s take an other question here.

Operator

Okay, our next question comes from Pavel Molchanov with Raymond James.

Pavel Molchanov – Raymond James

Two questions about Gorgon. First just to clarify, the 40% figure you mentioned on the off-take does that only pertain to Chevron’s interest or is that the entire project?

Dave O'Reilly

No, that’s our interest only. And as I mentioned, we expect to double that in the next month or two.

Pavel Molchanov – Raymond James

And then the second point, how should we think about reserve bookings from Gorgon, now that you guys (inaudible) and particularly do you expect any reserve bookings this year.

Dave O'Reilly

Yes we do. We have it FID [ph] there will be reserve bookings and I can’t obviously say what those would be, but this will have a positive impact on our reserve replacement for the year.

Pavel Molchanov – Raymond James

Thanks very much.

Dave O'Reilly

I think we got to wrap it up folks. I appreciate your interest in the company and thank you for your questions, and again I want to thank all of you for your good questions and your support during the year, particularly those of you who that have been shareholders for my tenure with the company. So, I thank you very much and if there are any further questions. Please follow it up with Jeanette and the staff. Sean, thank you for your help and we are finished.

Operator

Thank you sir, ladies and gentlemen this concludes Chevron’s third quarter 2009 earnings conference call. You may now disconnect.

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