Chevron And Exxon Mobil Approved $37 Billion Project

| About: Chevron Corporation (CVX)

Summary

Tengizchevroil expansion was announced by Chevron Corporation on July 5, 2016.

The Tengiz expansion is one of the biggest investment projects in the oil industry.

I will provide further details on the expansion project.

Chevron Corporation (NYSE:CVX), Exxon Mobil (NYSE:XOM) and their partners committed to a $36.8 billion oil expansion project in Kazakhstan.

Partnership Structure

Tengizchevroil (TCO) is a Kazakhstan partnership which explores and produces crude oil, NGL and gas. Formed in 1993 between the Republic of Kazakhstan and Chevron to develop and operate the Tengiz oilfield, current partners are:

Source: Tengizchevroil presentation

TCO joint venture participants are Chevron (50 %), ExxonMobil (25 %), KazMunayGas (20 %) and LukArco (5 %).

TCO is developing the Tengiz and Korolev crude oil fields in Western Kazakhstan under a concession agreement that expires in 2033. Daily production in 2015 from these fields averaged 595,000 barrels of crude oil, 700 million cubic feet of natural gas and 44,000 barrels of NGLs.

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Source: Tengizchevroil presentation

Chevron is also the largest private shareholder in the Caspian Pipeline Consortium, which operates a 935-mile (1,505-km) crude oil export pipeline from the Tengiz Field in Kazakhstan to tanker-loading facilities at Novorossiysk on the Russian coast of the Black Sea. The pipeline provides the key export route for crude oil from TCO.

Source: Tengizchevroil presentation

The majority of TCO's crude oil production was exported through the Caspian Pipeline Consortium (CPC) Pipeline.

Expansion projects.

In 2008, TCO completed a significant expansion composed of two integrated projects referred to as Second Generation Plant (SGP) and Sour Gas Injection (SGI). Total cost of the project was $7.4 billion. The projects increased TCO's daily production capacity to 540,000 barrels of crude oil, 760 million cubic feet of natural gas and 46,000 barrels of natural gas liquids.

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Source: Chevron and TCO annual reports, author calculation

The Future Growth Project-Wellhead Pressure Management Project (FGP-WPMP) is based on the highly successful Sour Gas Injection-Second Generation (SGI-SGP) Expansion Project, which has proven the benefits of gas injection to the Tengiz reservoir.

The Wellhead Pressure Management Project (WPMP) is designed to maintain production capacity and extend the production plateau from existing assets. The Future Growth Project (FGP) is designed to increase total daily production by 250,000 to 300,000 barrels of liquids and to increase ultimate recovery from the reservoir.

The project will raise TCO's total production to approximately 1 million barrels of oil equivalent per day. WPMP maximizes the value of existing TCO facilities by extending the production plateau and keeping existing plants producing at full capacity. First oil is planned for 2022.

FGP-WPMP is currently estimated to cost $36.8 billion, which includes $27.1 billion for facilities, $3.5 billion for wells and $6.2 billion for contingency and escalation.

Source: Chevron presentation

Revenue and Expenses.

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Source: TCO annual reports, author calculation

Base Royalty was calculated at the rate of 25% revenue from crude oil and other product sales after deducting transportation and marketing expenses.

Cash from operating activities is used to finance capital expenditures and distribution of retained earnings to partners.

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Source: TCO annual reports, author calculation

Tengizchevroil expansion project will result in a zero dividend stream to Chevron and Exxon corporation during 2016-2022 years. Operational cash flow will increase significant after 2023. Operational cash flow will be sufficient to finance FGP-WPMP project.

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Source: TCO annual reports, author calculation

Click to enlarge

Source: TCO annual reports, author calculation

Conclusion:

  • Tengizchevroil expansion project will result in a lower dividend stream to Chevron and Exxon corporation during 2016-2022 years.
  • Operational cash flow will be sufficient to finance FGP-WPMP project.
  • Operational cash flow will increase significantly after 2023.

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