Chevron's (NYSE:CVX) joint venture with PetroChina (NYSE:PTR), one of China's state-run oil companies, hasn't gone nearly as planned. The JV is exploring and developing the Chuandongbei natural gas area in the Sichuan Basin. Originally, Chevron and PetroChina had planned to bring the Chuandongbei project online in 2010, but the complexity of the field and disagreements over how to develop it got in the way. Now Chevron, as the operator of the JV with a 49% interest in the project, doesn't see the development coming online until at least 2015.
Largely due to the delays, the cost of the project has shot up by 36.2% to $6.4 billion (estimate as of the end of 2013), versus the initial guidance of $4.7 billion. The natural gas that will be produced in the area will have high levels of hydrogen sulfide, which has to be processed out. To do so, Chevron is building two sour gas processing plants in the region. An extensive gathering system will connect production from the five fields Chevron and PetroChina are developing to the processing plants.
The Chuandongbei development is targeting 176 billion cubic meters, equivalent to 6.2 trillion cubic feet, of proven natural gas reserves, according to both Chevron and PetroChina. Combined, the five fields will have a peak production rate of 558 MMcf/d of natural gas. In 2013, Chevron pumped out just 19,000 bpd of oil/condensate and 6 MMcf/d of natural gas from its Chinese operations.
Shale ambitions being scaled back
A few years ago, many were touting how China holds the largest technically recoverable reserves of shale gas. China has over 30 trillion cubic meters of technically recoverable shale gas reserves, ~70% more than the United States. This prompted Chinese government officials to put forward very bullish estimates for shale gas production.
Back in 2012, China's National Development and Reform Commission predicted that China would produce 60 Bcm - 100 Bcm of shale gas a year by 2020. Since then, China has been forced to scale down its shale ambitions. Recently, the director of China's National Energy Administration forecasted that China will pump out only 30 Bcm of shale gas a year by 2020.
On the plus side, that would be a major improvement relative to current production levels. In 2013, China produced only 0.2 Bcm of natural gas from shale operations. That is just a fraction of the 117 Bcm of natural gas China produced last year. If China meets its new guidance, that would still represent an 150-fold increase in shale gas production.
As China scaled back on its shale growth ambitions, so did Chevron. So far Chevron's search for large shale gas reserves in China hasn't turned up any major discoveries. Last year, Chevron drilled two wells targeting shale gas in the Qiannan Basin, and both of those wells were disappointing. On a side note, Chevron also completed two exploration wells in the South China Sea over the past year. Unfortunately, those wells were also unsuccessful.
It doesn't look like China will be a major source of production growth for Chevron anytime soon. Turning the Chuandongbei development online will remove a major headache for the company, but the start up date keeps getting pushed back. Chevron and PetroChina will be lucky to complete the first phase of the Chuandongbei project in 2015. The first phase involves completing three trains that will have a combined 258 MMcf/d of processing capacity, and so far only one of those trains has been completed.
Don't get me wrong, I'm still bullish on Chevron. There is a lot to like about this oil major, especially as it prepares to reverse the multi-year decline in its production base next year. Even so, it is always good to be aware of any possible downsides that an investment might have. In Chevron's case, there is still a good chance that there will be more bad news in regards to its Chuandongbei project.
On a positive note, strong production growth out of the Permian Basin and the Gulf of Mexico will help turn Chevron's upstream operations around. As investors watch Chevron boost its production base to 3.1 million BOE/d by 2017, versus 2.568 million BOE/d in the Q3 2014, they can pocket Chevron's 3.8% dividend yield. To read about why Chevron is a good investment, take a look at the articles below.
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