Good morning. My name is Sean, and I will be your conference facilitator today. Welcome to Chevron's fourth quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session, and instructions will be given at that time. If anyone should require assistance during the conference call, please press star and then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the call over to the Chairman and Chief Executive Officer of Chevron Corporation, Mr. John Watson. Please go ahead, sir.
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 Gustafson, who's the General Manager of Investor Relations. We'll 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, with 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 data is finalized, we expect to again lead the industry for the second consecutive year on this measure. We're 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, too, will be the best in the industry. Having said this, it was not a perfect year. We do believe that zero incidents is attainable. We're not there yet, but we're striving to learn and improve to get to incident-free operations. Our financial performance in 2012 was quite strong. We expect when all the 2012 results are in to again post the highest upstream earnings per barrel by a significant margin, and to be very near the top in 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 are 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 offtake commitments through several new long-term LNG supply agreements. We've just posted a short video of recent Gorgon construction progress on our webpage, 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 startup in 2014. We achieved startup 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, including the Kurdistan region of Iraq, Suriname, Sierra Leone, Lithuania, and the Ukraine. Our reserve replacement ratio was 112%, with adds distributed broadly across our upstream portfolio. In our downstream business, we completed our three-year restructuring plan and have delivered on the commitments made when we first began simplifying our business, streamlining our portfolio, reducing costs, and improving returns, all while retaining scale 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?
Okay. Thank you, John. Slide four 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%.
You probably noticed we are also off to a strong TSR start so far this year. Turning to Slide five. 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 continue to be a competitive advantage. On slide six, 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 seven, our U.S. upstream earnings for the fourth quarter were $241 million higher than the 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 and 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. On slide eight, 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 U.K. 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 realization, mainly 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 sale 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 nine 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 U.K., 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 from 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 field declines, 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 from major capital projects contributed 85,000 barrels a day, driven by the ramp-up of Platong II gas project in Thailand and Perdido in the Gulf of Mexico, as well as the startup of Usan in Nigeria. Our original production guidance for 2012 was 2.68 million barrels of oil equivalent per day. We fell short of that guidance by 70,000 barrels per day, predominantly due to the shut-in of Frade and the delays experienced with the startup 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 effects. Operating expenses increased to $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 of 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 a 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 impacts. Slide 13 covers all other. Fourth quarter net charges were $538 million, compared to a net $575 million charge in the third quarter, so a decrease of $37 million between periods. A favorable swing in corporate tax items resulted in a $99 million benefit to earnings, while corporate costs were $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-$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-$500 million per quarter to reflect several miscellaneous items, including increased environmental 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.
Okay, thanks, Pat. Let's turn to slide 14. In early December, we announced a $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 deep water 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 plays, 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 price as 2012. 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 startup of Angola LNG, as well as increased production from the deep water Gulf of Mexico, Thailand, and Nigeria are expected to roughly offset base business decline and normal turnaround activities later in the year. We expect 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 be about 4%. Our 2017 production target remains intact at 3.3 million barrels per day. Over 90% of the volume contributing to the target is either currently producing or under construction, with the remaining volume well understood. We will keep you posted through the year on developments in progress in both our upstream and downstream businesses. We also plan to provide a great amount of additional detail at our upcoming security analyst meeting in early March. That concludes our prepared remarks.
We now welcome your questions. We do have a full queue, please limit yourself to one question and a single follow-up if necessary. We will do our best to see that we get your questions answered. Sean, please open the lines for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, press *1 on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. If you are listening on a speakerphone, we ask that you please lift your handset before asking your question to provide optimum sound quality. Again, if you have a question, please press *1 on your touch-tone telephone. Our first question comes from Evan Calio with Morgan Stanley. Please go ahead with your question.
Hi. Yeah, good morning, everybody.
Hey, Evan.
Hey, John. I believe you guys hold over 950,000 acres in the Delaware Basin, inclusive of last year's asset acquisition and a larger position in the Permian. Total, making Chevron one of the larger acreage holders, yet running fewer rigs than some of the peers. How many unconventional rigs are you running, and maybe you could discuss planned activity ramp in 2013 and whether or not there's any internal constraints for you, whether you're limited at all on the people side to accelerating this NAV realization? I have a second question, please.
Yeah. 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, we'll give you actually some pretty good rig count data. What you'll see is we are ramping up rapidly in the Delaware Basin as you would expect. We've got really over 20 in the Permian region that are running right now. We'll give you more specifics about the ramp up that is headed there. A fewer number of rigs are running up in the Marcellus region, that too has been gradually ramping up. 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 with precision on the number of rigs.
We are seeing volume growth in both of these areas that are a part of the plan going forward. You got a follow-up?
Yep. I just was curious within that, if you saw any internal constraints, meaning you're able to organically to ramp those volumes.
Well, we are. Having said that, I think the industry is very focused on building organizational capability, we've added a significant number of new people and added to our drilling training programs that we have in place, both in the U.S. and overseas. Organizational capability, we're not going to operate if we don't have people that we think are trained and capable, I think there are pressures on the industry.
When we plan to ramp up, we only plan to ramp up if we have the right people.
Understood. My second question was, John, I know it's one of your favorite topics, as well as Pat, is the Ecuador litigation. I know there's been some positive movement there in the most recent quarter. We've read the judge directly implicating himself in improper conduct as well as plaintiff. Your legal involvement is spreading across the globe now in Argentina and Brazilian courts as well as U.S. and Canada and The Hague. 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.
Sure. That's a broad question. I'll try to do it succinctly. First, your premise is correct. We continue to uncover evidence of quite profound fraud in the case. You mentioned that a judge that was actually involved in ghostwriting the opinions based on bribes he was receiving from the plaintiff's lawyers has come forward and given a statement in U.S. courts and has provided corroborating physical evidence to support his allegations that he ghostwrote the opinion for the plaintiff's lawyers. You now have a circumstance where we have, through videos, through sworn testimony, through emails 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?
I would say that we're moving forward in several areas. The RICO case, the wheels of justice move at a certain pace. We've been moving our RICO case forward. It'll go to trial in New York in October of this year. We're actively in the courts in The Hague, and we expect there are a series of rulings that will take place over time. We've won virtually every procedural ruling there and expect that we will see some. There've already been some judgments that have been put out indicating, for example, that the government of Ecuador should do everything in their power to prevent this false judgment from being enforced, which, of course, they've ignored. We do expect that there will be possible rulings out of that panel as well, there are multiple stages to those cases.
We've had multiple discovery proceedings in the U.S. The area that you're probably interested in is 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 honors rule of law will not uphold this verdict and, in fact, will throw it out. Having said that, we have to defend ourselves.
We're doing it in Canada, Argentina, and Brazil. You should know that these cases take time. There are a number of procedural steps that take place. 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. 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. The countries where these enforcement actions have been filed, we think, ultimately, will support rule of law. We have to fight it every step of the way. I can't put a timeline on that. What I can tell you is we're not going to reward people that have committed crimes against us.
Oh, I appreciate it. Thank you for the update.
Sure.
Our next question comes from Paul Sankey of Deutsche Bank. Please go ahead with your question.
Hi, good morning.
Hey, Paul.
Again, on the cash pile. I'm still perplexed by why it's so large subsequent to the Gorgon CapEx announcement. John and Pat, could you just remind us again why we're holding so much cash on the balance sheet in this interest rate environment? Thank you.
Sure, Paul. We've talked about the priorities for our cash. For the benefit of everyone on the line, I'll just repeat them. Our uses of cash are 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. Finally, returning cash to shareholders through repurchases. That's been our strategy for a long time. You're correct, we have more cash than debt on our balance sheet. 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, you can use your own estimate of what commodity prices and margins are going to be, it'd 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, it will come down through a combination of significant capital spending, which we have underway this year and next, dividends and repurchases that 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, we know that there are uncertainties out there, we think that's the best way to run our balances at this point.
Thank you, John. John, you said you're relatively bullish on oil prices, you like the shape of your portfolio. There is a U.S. oil revolution underway, you do seem relatively underweight 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.
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, again, we've had a long-standing position in California that produces oil. We've had a mature business and a lot of acreage in West Texas. Then we've recently added to that with the acquisition where 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 will be 175,000 barrels a day by 2017, that it was a not insignificant portion of the increase in our production between now and 2017 would be in the unconventional area, a lot of that's in the United States.
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. I'll tell you, we tend to be returns-focused when we make investments. 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 cost, we can generate solid returns. Right now, there are assets that are selling that we think are very pricey. We feel very good about the acquisition of acreage from Chesapeake. That was a complex transaction.
We think we negotiated a good deal there. Although it's not oil, we feel particularly good about the transaction in Canada. It's an enormous resource that we've picked up that ultimately will produce LNG for export that will be at oil-linked pricing. We feel pretty good about the way we've added to our portfolio given all the opportunities that we have around the world.
Sure. Conceptually, would you prefer the Bakken or the Permian?
Well, I 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 could wind back the clock and see that well, it'd be nice to have a position, but it's very pricey right now. To just pour a bunch of capital in there and enter that fray, I don't know that we could make the full-cycle economics look very good.
Thank you, John.
Sure.
Our next question comes from Jason Gammel of Macquarie. Please go ahead with your question.
Thanks very much. I just had a couple questions on LNG, if I could, please.
Sure.
First of all, revisions to the Gorgon budget are now out in the marketplace. 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 project more in line with the original budget?
Yeah. 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 I think 86 or so. We don't hedge foreign exchange exposure because we think the Australian dollar is pretty well hedged to commodity prices. That actually has proven to be accurate. Part of the increase that 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, where some of the quantities of materials proved to be larger than expected. The logistics, there's a large fleet of vessels moving goods and materials onto Barrow Island, and we have learned from that.
I think in terms of things that triggered the cost increases at Gorgon, I think we've learned well about the logistics. 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. 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 and infrastructure in the early days of Gorgon. There were a number of cyclones that went through the area, and that impacted us. We know that infrastructure is critical path, and we're working very hard there.
There are a number of other learnings 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. We're doing our best to learn from Gorgon and other projects as we move forward. Remember, Wheatstone went 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.
Sure. John, if I could just follow up please on the comment that you made about oil link pricing for the Kitimat Project. That might be considered somewhat of a controversial remark in that some buyers are 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 sustain that oil linkage?
Well, as soon as it was announced that we were coming into that project, our phone started ringing. Buyers, we're a credible buyer in the marketplace, I think buyers throughout Asia, Japan, Korea, et cetera, 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's a lot of talk about the different pricing for LNG. There's always a balance between supply and demand, what we see is continuing growth in demand. There's 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.
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. That pricing is going to need to be something close to oil parity or the projects won't get built. We'll talk more about that. I know that there are different contract negotiations going on in the industry, and talk of S-curves and things of that sort, but so far, we've 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. That's the best way I can answer that.
Okay. I appreciate the comments, and I look forward to seeing you all in March.
Thank you.
Douglas Leggate of Bank of America Merrill Lynch is on the line with a question. Please go ahead with your question.
Thanks. Good morning, everybody. Good morning, John.
Hey, Doug.
Got a couple of quick ones, hopefully. First of all, a follow-up to Jason's question. It was weakened the price debate in the Pacific Rim, anyway. We didn't talk on Apache originally, since it's obviously.
Hey, Doug? You're cutting out, we can't hear your question.
Doug.
Could you try again or maybe?
Yeah, let me dial back in. Let me try one more time.
Okay. Thanks, Doug.
Okay. Thank you. We'll go to another question. Yeah.
Okay, our next question.
One moment.
Oh, go ahead.
Just one moment.
Okay. Our next question comes from Faisel Khan of Citigroup. Please go ahead with your question.
Yeah. Hi, good morning.
Morning.
On the downstream side, could you give us an update on the Richmond Refinery and when it will return to full operation, and what regulatory approvals and permits are required to bring all the units back up and running?
Sure. We had the 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. 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. We're really targeting first quarter, and I have no reason to think it will be other than that at this time. The repair work is going well. 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.
Okay, great. Thanks. 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?
Let me just look here for a moment here.
Thank you.
Well, actually, no. I mean, we did have a third quarter. There was the asset transaction, a negative impact associated with the Australia restructuring.
Okay.
The variance is what we were talking about. It's a relatively small amount that you're talking about altogether.
Okay, fair enough. Thank you.
In terms of an absolute in the quarter.
The absolute number is fairly small or de minimis in the quarter.
Right.
Okay.
The variance does take into account the Australia Kurnell Refinery restructuring in third quarter.
Okay, got you. Perfect. Thank you.
I have Doug back on the line. Douglas Leggate, please go ahead with your question.
Hey, Doug.
Hi, guys. Can you hear me now?
Gotcha.
Much better.
Great. Excellent. Thank you. We kind of picked a phone call or something over here. John, the question was on the timing of Kitimat and the FEED work that Apache has already done. What do you expect happens now in the timeline of that project? I do have a follow-up if you can hear me. Thanks.
You know what? I better wait till we close the transaction before I comment. Apache and partners have been doing the work thus far, we hope to close the transaction soon, we'll become the operator at the plant and pick up where they've left off. They have done quite a bit of work, it's too early for me to talk about the specifics because, frankly, we're not yet in the project per se. Give us a pass for now as we close the transaction 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.
Great. Thanks. My follow-up is going back to our lunch in December. You'd 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 how it may or may not impact to the development? Thanks.
Yeah. I wish I could give you an update, there's been a Petroleum Bill in progress in Nigeria for several years now. Frankly, I don't have any particular update on it right now.
Yeah, I was just going to say the bill's currently in the National Assembly, and as John says, 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.
Agbami Phase 2 is pretty far along, though. I would assume that wouldn't be affected.
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. They do need to come to resolution, but I'm not going to predict how or when that's going to happen.
All right, folks. Thanks for the answers. Appreciate it.
Sure.
Paul Cheng of Barclays is on the line. Please go ahead with your question.
Thank you. Good morning.
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 the host government, believe the resources become more scarce. Easy oil has already been tapped, and so they've been pushing tougher and tougher terms. With the last several year of the new fund opportunity set in North America, and quite frankly, that I think the budget cost and the host government has continued to go up. 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 accommodative or that the balance of power start to shifting more back into a neutral zone?
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. We can be a little bit choosy. 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're not going to go where they don't have the certainty of the returns or fiscal environment and other conditions necessary to invest. 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. I can't say that I've seen a wholesale change in-
Can I ask that as a follow-up then? 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 accepting 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 opportunity set than, say, in the past, so that they are not going to be as maybe that accepting those unreasonable term as likely as in the past?
Well, if I understand your question, you're asking me to comment on the foolishness of my competitors and-
Have you seen a change that?
I'm not going to.
In a commodity business, sometimes unfortunately, that you are only as good as your next dumbest guy.
I'm not going to comment on our competitors. What I'll 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, was in 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. 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're not barrel-focused per se. Those are great resources, but we didn't see an opportunity to make money. 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. I think host governments are getting better at recognizing that. I assume our partners have similar criteria. They may come to different judgments on these things, that's what we're all trying to do.
Thank you.
Sure.
Our next question comes from Iain Reid of Jefferies. Please go ahead with your question.
Hi, John. Couple of questions, please. Firstly, I was a bit surprised you said that there's only going to be minimal production from Angola LNG this year. Is there still issues with that plant that are going to delay it into, say, the second half of the year? Maybe you could just expand a little bit on what the situation is there.
I hope I said that there will be minimal production from Frade this year. Frade will be shut down on a precautionary basis early in 2012. We're 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. 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. 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'll start up in the second quarter and 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. There will be a ramp up-
Several years out
that will happen over time.
Okay. My follow-up is on your 2017 production. You said that you had 90% of the volumes ongoing in order to meet that. What's the extra 10%? I'm just wondering, you still got the fairly low price assumption on that. Do you want to give us any sort of sensitivity on what it would be at, say, current prices?
Sure. Yeah. We categorize our projects into several different categories. We have producing assets today, so we have assets that are online today, and there's a natural decline to those, but a significant number of those are producing today and will 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. 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. Then we have that will come to a final investment decision, investments will be made, and they will start up. Then we have other smaller capital projects that have a shorter cycle time to them.
That remaining 10% are typically shorter cycle time projects that we know are coming, or projects that are not yet under construction. An example of some of the projects that will ramp up are some of the very activities in the Permian and elsewhere in the United States, smaller projects in Thailand and Indonesia, places like that. We have good knowledge of what's in there. What we're saying is the project itself may not be under construction right now on that remaining 10%. We're going to give you a 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 we did a year ago on that 2017 target. We have work to do, but we know where the barrels are coming from.
You don't need Tengiz future growth?
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, 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, we expect that startup will be in 2018. We've been able to replace the barrels that we had previously earmarked for 2017 from Tengiz with other opportunities. 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.
Any chance you can give us the target at today's prices?
The volume target?
Yeah.
That's something we can do at the SAM.
Okay.
We don't have the number here right now with us.
I mean
You understand why we keep it at the $79 rate, correct?
Yeah.
Correct? Yeah.
Yeah.
The 3.3 million barrel a day target for 2017 hasn't changed.
Yeah.
We'll talk more about some of the projects that will contribute. I don't think we've made a secret of it. The next project at Tengiz is a 250,000 barrel a day-300,000 barrel a day growth project, and we have about half of that. It's a significant contributor, there are other changes that have taken place in the portfolio. There are other opportunities as well. Essentially, as that project moved out just a little bit, we've replaced it with unconventional and other opportunities.
Okay, thanks very much, guys.
Our next question comes from Ed Westlake of Credit Suisse. Please go ahead with your question.
Good morning. Thanks for the call so far. Coming back to the Gulf of Mexico, obviously that's still an area with a lot of spend going on. Any update on projects on time, on budget?
Yeah. Actually, just had a review recently. Both Jack/St. Malo and Big Foot are on schedule for startup next year. They're both going well. They're both over 50% complete. Big Foot's some two-thirds of the way along. Jack/St. Malo is close to 60% along. We've got development drilling that's taking place, a couple rigs that are working Jack/St. Malo now. The progress is good. We'll give you a little more color around that next month at the SAM meeting. The progress is good. 2014 will be a good year for us production-wise. In addition to those projects coming on during the year, we'll have a full year of activity from Angola LNG. We'll have a substantial contribution from Papa-Terra, Escravos GTL and others.
We expect 2014 to be a pretty good year, pretty consistent with what we've talked to you about before, where on this 2017 pathway, the growth would be back-end loaded. 2014 is when you'll start to see most of that come to pass.
Just switching to shale, you mentioned 175,000 barrels a day contribution to 2017. You may not have the numbers, just maybe a rough sense of how much of that 175 comes from, say, the Permian, the Duvernay, the liquid-rich Utica?
Tell you what, we'll 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?
I could have answered the question more simply. Thanks very much.
Okay.
Our next question comes from Allen Good of Morningstar. Please go ahead with your question.
Good morning.
Good morning.
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 unconventional in Gulf of Mexico, some of these volumes that may trade at a discount to global world 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 just on the chemical side for your downstream?
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 that the chemical company has discussed. That's the primary way that we'll take advantage of it. 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. 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'll be able to take advantage of it in that way. We've got quite a bit of effort, really. We're pretty full up on what we think are some good investments in the upstream end of the business. Over time, I think these markets will equalize, 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 really isn't something we're looking to do.
Okay, thanks. 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 maybe internationally where the market's 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 where you may be able to leverage your deep water expertise like in the Arctic or East Africa or maybe even in Russia?
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's a lot of money that's looking for opportunities, and if it's not a particularly difficult entry for a party, it means there'll be a lot of bidders and prices get bid up. 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. We have made selective entries in the U.S. We feel good about those entries. Done well in Canada.
We've picked up 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 significant capital commitments, but the upside, if they're successful, will be significant. We think we'll be able to add value. Similarly, in more conventional exploration, there are parties that come to us because of our knowledge and expertise in deep water that 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'll work with smaller companies that may have accumulated acreage over time. That's why you've seen we've added acreage in Sierra Leone, Suriname, and other locations.
Okay, great. Thanks.
Sure.
Our next question comes from John Herrlin with Societe Generale. Please go ahead with your question.
Yeah. Hi. Just two quick ones for you, John. You mentioned at the beginning that you had signed new LNG contracts in Australia. Are those incremental to what was discussed last September on the tour?
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.
Right.
So I don't-
Okay. I just wanted to make sure I didn't miss something. That's fine.
No, John, we were just commenting that that was an accomplishment for the year, for 2012.
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 changed your development costs given the new regulations in the Gulf? That's it.
Yeah. 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, obviously there's a great deal of attention to the regulatory environment. The permitting process itself takes time. The number of inspections that takes place is significant. There are extra casing strings that can be required at time, added BOP inspections, added costs for being a part of the Marine Well Containment Company, et cetera, plus other cost pressures that you're seeing in the business. We have seen some cost increases in addition to that rig rate. Over the past several years, it's not unusual to say 20%-25% increase in costs have been seen by the industry. That's just the reality of doing business today. Of course, we've got over $100 oil, too.
Great. Thank you.
Yes.
Our final question comes from Pavel Molchanov with Raymond James. Please go ahead with your question.
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 a kind of a delinking of LNG and crude in Asia Pacific?
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's a difference between the two. I said earlier on the call that I don't think that you'll see what I would call speculative development of LNG sites without some certainty around contracts and sales prices. My view 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. 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. 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 the point that it's pretty close to six years. You can see these projects coming, and there may be announcements made, but until you see FID and until you see construction happen, you have to be somewhat circumspect about which projects will actually contribute to supply. I think that's it. 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.
Thank you, ladies and gentlemen. This concludes Chevron's fourth quarter 2012 earnings conference call. You may now disconnect.