Chevron's Gulf Of Mexico Growth Runway

About: Chevron Corporation (CVX)
by: Callum Turcan

Summary of Chevron Corporation's near-term growth catalysts in the Gulf of Mexico.

Big Foot finally reaches first-oil.

Noteworthy non-operated upside.

All about growing Chevron Corporation's crude oil production.

Around 30% of Chevron Corporation’s (NYSE:CVX) American upstream production comes from producing properties in the Gulf of Mexico. Last year, the company pumped out 165,000 barrels of crude per day, 13,000 bpd of natural gas liquids, and 122 MMcf/d of natural gas net from the region. That is equal to roughly a tenth of the GoM’s oil production, according to the EIA. While Chevron Corporation has divested some of its legacy GoM assets over the past few years, the company will continue to grow its production base in the region as new upstream oil projects come online. Let’s dig in.

Chevron Corporation In Gulf of Mexico

Source: Chevron Corporation

Big Foot finally good to go

Originally, the Big Foot project was slated to reach first-oil in 2015. Due to many of the project's tendons losing buoyancy back in 2015, which caused them to float down to the bottom of the Gulf, Chevron was forced to scrap its Big Foot timetable. Those tendons would have connected the tension leg platform with the seafloor. Chevron is the operator of the project with a 60% interest in the venture.

It wasn’t until November 2018 that Chevron was able to declare first-oil at the project, which will recover 200 million barrels of oil equivalent over its lifetime (mostly crude oil). With peak production capacity pegged at 75,000 bo/d and 25 MMcf/d of natural gas (note that on a barrel of oil equivalent basis, this peak production stream weighted 95% towards oil), this endeavor is big enough to have a nice uplift on Chevron’s oil production.

Readers should note that conventional upstream projects take between 12 and 24 months to ramp up to their peak production levels. Output plateaus near that rate for a few years, and then moves steadily lower. The production profiles of oil fields can be managed by drilling new producing wells, investing in additional water and/or gas injection capacity, upgrading existing production facilities, and by tapping into different reservoirs (which also involves drilling new production wells).

Tahiti project

Chevron owns 58% of the Tahiti Field in the GoM and is the operator of the oilfield. The Tahiti Vertical Expansion Project is expected to be completed by the second half of this year, which will see Chevron target shallower reservoirs in the area by drilling four new wells. More importantly, this is one of the ways Chevron makes the most out of its existing infrastructure in the region.

The Tahiti Field can handle up to 125,000 bo/d and 70 MMcf/d of natural gas production, but the field was producing significantly below that level as of 2017. On a gross basis, the Tahiti Field produced just 77,600 bo/d, 5,200 bpd of NGLs, and 31 MMcf/d of natural gas last year. This is due to natural production declines which is common for fields that have been producing for more than a couple of years. While base maintenance projects aren’t exiting, they are an essential way large energy firms manage their upstream production volumes. In 2017, the Tahiti Field produced 45,000 bo/d, 3,000 bpd of NGLs, and 18 MMcf/d of natural gas net to Chevron.

Non-operated upside

Hess Corporation (NYSE:HES) reached first-oil at the Stampede project back in January 2018, which is material to Chevron because the energy giant has a 25% non-operated stake in this development. At its peak, the Stampede project has the capacity to produce 80,000 bo/d along with 40 MMcf/d of natural gas. Water injection wells are being utilized to maintain reservoir pressure and protect base production levels at the Knotty Head and Pony fields (which are the two oilfields being developed as part of the Big Foot project).

Hess plans to ramp up production through the middle of 2019, with output from the field expected to last for 30 years. Six production wells and four water injection wells were completed as part of this development. This is an easy win for Chevron, as Hess has shown itself to be a capable GoM operator. Over the lifetime of this development, Hess will extract around 350 million BOE from both fields, most of which will be crude oil.

Mad Dog 2

Chevron has a 15.6% non-operated working interest in the Mad Dog oilfield, which is operated by BP plc (NYSE:BP). The field is expected to house up to 4 billion BOE in recoverable resources. Last year, the field produced around 51,300 barrels of liquids per day gross (mostly oil with some NGLs) and 6.4 MMcf/d of natural gas gross (8,000 BBLs/day, 1 MMcf/d net to Chevron).

In December 2016, BP sanctioned the Mad Dog 2 project after expected development costs plunged by 60% from its initial expectations to "just" $9 billion. The development is expected to produce 140,000 bo/d gross at its peak, which will be supported by a new floating production platform that will initially handle up to 14 producing wells. First-oil is targeted by late-2021. BP has been on fire when it comes to bringing upstream developments on-time and on-budget, and Chevron is along for the ride.

Final thoughts

As production from recently completed (or soon to be completed) developments in the Gulf of Mexico ramp up to their peak capacity over the next 18 months, Chevron Corporation is set to materially grow its oil production in the region. The Big Foot, Stampede, and Tahiti developments all offer Chevron Corporation upside in the near-term. Farther out, the Mad Dog 2 development is large enough to have a powerful impact on Chevron Corporation’s GoM performance, but more projects will need to get sanctioned if the firm wants to keep growing. As Chevron Corporation already has identified several promising prospects in the area to possibly develop (including the recent Ballymore discovery), that shouldn’t be a problem. Thanks for reading.

Disclosure: I am/we are long BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.