name is Sean, and I will be your conference facilitator today. Welcome to Chevron's Third Quarter 20 10 Earnings Conference Call. As a reminder, this conference call is being I will now turn the conference call over to the Vice President and Chief Financial Officer of Chevron Corporation, Ms. Pat Yerington.
Please go ahead.
Thank you, Sean. Welcome to Chevron's 3rd quarter earnings conference call and webcast. On the call with me today are Mike Wirth, Executive Vice President of Downstream and Chemicals and Jeanette Arata, General Manager of Investor Relations. Our focus today is on Chevron's financial and operating results for the Q3 of 2010. We'll refer to the slides that are available on Chevron's website.
Before we get started, please be reminded that this presentation contains estimates, projections and other forward looking statements, and I ask that you review the cautionary statement on Slide 2. Slide 3 provides an overview of our financial performance. The The company's 3rd quarter earnings were $3,800,000,000 or $1.87 per diluted share. Our 3rd quarter 20 discuss the sequential earnings variance shortly. Return on capital employed for the trailing 12 months was about 16%.
Total debt at the end of the quarter was $10,600,000,000 and our debt ratio was 9.4%. Total cash at the end of the quarter was 14 point $5,000,000,000 and this was after a $550,000,000 pension contribution. 3rd quarter was our strongest cash generation quarter since Q3 2008. As you will see in the remainder of our presentation, our 3rd quarter earnings were negatively impacted by several large items, which had no corresponding impact on cash. A prime example here is foreign exchange.
The quarter's earnings included almost 370,000,000 in foreign exchange losses, which were simply balance sheet translation effects. In July, our Board of Directors approved a new share repurchase program. As previously announced, we will begin repurchases in the Q4 here. We are targeting a repurchase rate between $500,000,000 and $1,000,000,000 per quarter. And in the Q4, we expect to repurchase $750,000,000 of our shares.
Jeanette will now take us through the quarterly comparison. Thanks, Pat. Turning to Slide 4. I will compare results of 3rd quarter 2010 with 2nd quarter 2010. As a reminder, our earnings release compares Q3 2010 with the same quarter a year ago.
3rd quarter earnings decreased $1,600,000,000 from the 2nd quarter. Results for all segments dropped between periods. Upstream earnings were $978,000,000 lower, largely due to unfavorable foreign currency foreign On Slide 5, our U. S. Upstream earnings for the Q4 3rd quarter were 100 and $44,000,000 lower than the 2nd quarter's results.
Crude oil realizations reduced earnings by 55,000,000 dollars Chevron's U. S. Crude realizations fell about $2 per barrel between consecutive quarters, slightly more than the 2% change in WTI spot prices. Natural gas realizations were flat between periods. Higher operating expenses decreased earnings by $35,000,000 between periods, primarily due to impacts from the Gulf of Mexico drilling moratorium.
The other bar represents a decrease of $54,000,000 which is comprised of a number of unrelated items, International Upstream earnings were down $834,000,000 compared with the 2nd quarter. Realizations reduced earnings by 40,000,000 dollars with lower liquids realizations partially offset by higher natural gas realizations. Our average liquids realizations decreased 2 percent between quarters, in line with the decrease in average Brent spot prices. Natural gas realizations improved 8% dollars For the 3rd quarter, we were underlifted by over 3%, bringing the year to date position to slightly over 1% underlifted. Higher exploration expense reduced earnings by 2 $10,000,000 due to well write offs in Turkey and Canada.
An unfavorable swing in foreign currency effects lowered earnings between quarters by CAD 350,000,000 The second quarter had a gain of about $100,000,000 compared to a $250,000,000 loss in the 3rd quarter. The other bar reflects a number of In the interim update, we forecast $200,000,000 of discrete items in the international Upstream segment. These items include an out of period depreciation adjustment and an equity redetermination of a field covering multiple leases. The depreciation adjustment covered multiple years and was not material in any year. These items were either noncash wide net oil equivalent production.
Production decreased 8,000 barrels per day between quarters. Price changes had a modest effect on volumes under production sharing and variable royalty contracts in the 3rd quarter, increasing production about 2,000 barrels per day. The average WTI price declined about $1.75 per barrel between quarters. Base Base declines, partly offset by higher demand in Thailand. As shown in the green bar, contributions from major capital projects increased 3rd quarter production by 20,000 barrels per day, the downstream results, I'd like to note that our upstream adjusted earnings for the quarter were 14 point $6.5 per barrel.
Based on preliminary competitor results announced to date, we continue to lead our peer group on this metric for the 5th consecutive quarter. Turning to Slide 8. US downstream earnings fell $84,000,000 in the 3rd quarter. Indicator margins reduced earnings by 60,000,000 dollars Gulf Coast refining indicator margins fell by 20% due to tempered demand growth and high inventories. West Coast refining indicator margins were relatively flat.
Actual margin capture and higher volumes added a small increase to earnings. The other bar consists of several unrelated items, including unfavorable mark to market effects on open paper, partly offset by better core trading results. International Downstream earnings were also lower, decreasing $326,000,000 from 2nd quarter's results. Higher margins and volumes benefited earnings by with each contributing about half the variance. Improved margins in Asia and Canada were partly offset by declines in Europe.
Volumes were also higher in the 3rd quarter, in part due to the absence of 2nd quarter planned maintenance at our Cape Town refinery. An adverse swing in foreign currency effects reduced earnings by CAD250 1,000,000. 2nd quarter included a CAD130 1,000,000 gain, while 3rd quarter had a $120,000,000 loss. Timing effects represented $180,000,000 negative variance between quarters, reflecting inventory revaluation and unfavorable mark to market effects on open paper tied to underlying gain. In the Q3, WTI prices moved up from the beginning to the end of the quarter, generating a paper loss.
The other bar is comprised of several unrelated items, including better core trading results and a favorable OpEx variance due to the absence of the 2nd quarter planned turnaround at Capetown. Slide 10 covers all other. 3rd quarter net charges were $361,000,000 compared to a net $108,000,000 charge in the 2nd quarter, an increase of $253,000,000 between quarters. An unfavorable swing in corporate tax items resulted in a $259,000,000 variance. Corporate charges were modestly lower in the 3rd quarter.
On a year to date basis, this segment has net charges of approximately $850,000,000 We believe our quarterly guidance range of $250,000,000 to 3 $50,000,000 for net charges in the all other segment is still appropriate going forward. Mike is now going to Mike is now going to provide an update on our
downstream business. Mike? Thanks, Jeanette. I'm pleased to have the opportunity to update everyone on the progress we've made in restructuring downstream and improving performance. Just a quick comment on the results Jeanette just covered.
We've had a good quarter and in fact a good 9 months, especially given the amount of change underway. Our financial results have improved markedly from last year due to good execution in the base business and steady progress on the improvement initiatives we've undertaken. And while the benefits from some of those improvements are only beginning to appear now and the full effects should be seen in the coming quarters. I'm especially proud of our continued strong performance in the areas of safety and reliability. Through 9 months, Downstream is experiencing its safest year ever.
In terms of reliability, the utilization of our refinery units continues to be high as it has been for the last several years. I'd like to share some details on our restructuring efforts and major capital projects, both of which are right on track. Please turn to Slide 12. As I told you in March, our focus is on improving returns. I committed to delivering operational excellence in our base business, while high grading our portfolio, reducing costs and improving revenues.
At the end of September, a new leaner organizational structure was in place. Every employee knows their status in the new organization. We expect to meet our target of 2,000 workforce reductions by the end of 2010. We've captured $275,000,000 in improvement in our refining system versus our 2,008 Solomon baseline. Most of this comes through cost reductions, including reduced contractor counts and less employee overtime due to increased work productivity and efficiency, better yield optimization and tighter blending tolerances to reduce specification giveaway.
Turning to Slide the way. Turning to Slide 13. Oops, excuse me, I've got a little more here. We've also taken action to high grade our portfolio to create a simpler footprint and improve focus and efficiency. We completed the previously announced market exit from 12 states in the Eastern U.
S. We've closed the sale and transitioned operations of 4 terminals and are continuing negotiations on 9 others. Sales agreements have been signed for our businesses in 8 African countries. Some of these could close as early as the Q4 and the balance will close in 2011. Earlier this month, we announced the sale of our minority interest in the Colonial Pipeline Company to KKR.
You'll see the financial impact of this sale in 4th quarter results. And divestiture efforts are in progress for assets in Europe, the Caribbean and selected countries in Central America. Data rooms are currently open and are being accessed by potential bidders. And we're close to finalizing a sales agreement for our businesses in the Western Caribbean and parts of Central America. We'll continue to keep you advised as these transactions materialize.
Now turning to Slide 13. Capital discipline is an essential part of our commitment to improve returns. Our 20 23% lower than it was in 2,009 and I expect we'll come in even further below that number. Having said that, we do have a few key projects underway that I'd like to update you on. The Rosslafon Olefins complex, which is a greenfield world scale ethylene cracker in Qatar was started up successfully in the Q2 of this year.
In Yeosu, South Korea, a new heavy oil hydrocracker will lower feedstock costs and increase high value product yield. This project was mechanically complete in June, 2 months ahead of schedule and came on stream in the Q3. The Pascagoula continuous catalytic reformer project, which another greenfield world scale ethylene cracker with derivative units is on track for startup in 2011. I'd like to say a few words about the 2 chemical projects. Chevron Phillips Chemical Company has developed these Middle East Ventures based on attractive feedstock terms, world class economies of scale, strong partner relations and excellent project execution.
They'll be coming online into what we expect to be the beginning of an up cycle and they should perform well in the years ahead. So in summary, I'm pleased to report the progress we've made on our commitment to improve returns. With that, I'd like to turn it back over to Pat.
Thanks, Mike. Now turning to Slide 14. I'd like to close with a recap of Chevron's strategic highlights during the Q3. We continued our record setting trend in safety performance. Mike provided you with an update of our downstream restructuring, which is on track and progressing well.
In our upstream business, we had a number of accomplishments in the Q3. We continued our exploration success in Australia with natural gas discoveries at Acme and Breder Road. These discoveries will further contribute to expansion opportunities for Gorgon and Wheatstone. We acquired exploration acreage in several new prospective deepwater basins, offshore Liberia, China's Pearl River mouth basin and the Turkish sector of the Black Sea. These are large blocks and the combined total acreage exploratory acreage exceeds 20,000 square miles or 53,000 square kilometers.
And finally, we sanctioned 2 deepwater projects in the Gulf of Mexico. The Tahiti II project will drill 2 additional producing wells and 3 additional water injection wells to extend Tahiti's peak production and increase ultimate recovery. We received a permit to drill a water injection well at Tahiti and began drilling there with the Discoverer Clear Leader in late September. We also authorized the $7,500,000,000 Jack St. Malo development.
This will be Chevron's operated project in the lower tertiary. The development is a semisubmersible floating production facility hub and 7,000 feet of water with multiple subsea tiebacks. The Jack St. Malo fields are estimated to contain combined total recoverable resources in excess of 500 1,000,000 oil equivalent barrels. We do not expect to book crude reserves for this project in 2010.
We are pleased that the drilling moratorium has been lifted. This is the first step needed to return thousands of people to work and to begin drilling back in the Gulf. The second step is reemergence of an efficient permitting process. We have submitted 1 deepwater drilling permit and we have an active exploration and development drilling program planned for 2011. We are actively trying to understand and address any remaining issues and the regulators may have.
We remain hopeful that drilling approvals will be received in a timely manner. In summary, our base business is healthy and robust. We're on track to meet our revised production target for the year. We're meeting key milestones in progressing our major capital projects, and our downstream is delivering on its restructuring commitments. Our cash generation is superb, giving us the flexibility to reinvest in our business and return immediate value to our shareholders through a growing dividend stream and share repurchases.
We are certainly executing on all of Sean, please open up the line.
Thank you. Comes from Evan Kallo with Morgan Stanley.
Hi, good morning guys. Thanks for taking my call. Since Mike this quarter's special guest, we'll start with a question on the downstream. Mike, could you update us on the sale process for Pembroke or how it's shaping up interest level exceed expectations? And when you expect it might close?
And then any update on Hawaii, you mentioned Hawaii in terms of either sale closure or kind of renegotiation of that contract there?
Okay. You bet, Evan. I'll start with Pembroke and remind you that there are also additional European assets included with that, some fuels marketing in the UK, Ireland, Spain, the Canary Islands, aviation, etcetera. We started out with a long list of bidders earlier this year and got some strong indications of interest. We subsequently narrowed that to a deep into their due diligence.
We expect to see their deep into their due diligence. We expect to see their final proposals later here in the 4th I can tell you the interest has been strong. This is a good refinery. It's a 210,000 barrel a day facility with good complexity, a natural deepwater port that makes the logistics just excellent for bringing in advantaged crude and also for exporting products into global markets and the marketing assets are attractive as well. So it's a good asset and a good package.
It doesn't fit with our portfolio, which is really focused into North America and Asia. But for others who have a better fit, it's attractive. And we've got an excellent workforce there. So we've seen strong interest from what I consider to be good quality bidders and the process continues. So we'll have more to say on that as we receive final bids and then move into negotiations.
Relative to Hawaii, as I think I mentioned in March, we had reviewed the continued operation of that facility alternatives to convert it to a terminal. We concluded that there wasn't really a value creating move in conversion to a terminal. So we've continued to operate as a refinery. We have restructured several contracts including one critical large fuel oil contract there to improve the profitability of the facility and we found more optimization opportunities within our system. So the performance of the refinery has improved since I saw you in March.
Having said that, we're still looking at our alternatives here to return the maximum value to our shareholders. And so other alternatives are still under consideration. We'll have more to say about that as we reach any critical decisions. That's great. Thanks, Mike.
If I could one more question moving to the upstream. I know the CapEx level elevated in 'twenty nine when you brought on a series of material projects that were almost 500 1,000 barrels a day in Blind Faith, Agbami, Tengiz, Tahiti Freight and a few others. Should we I mean, should we expect another CapEx increase off your 21.6 year on year with the big project Q into 20 13 through 2015?
Yes. I mean, it's a good question. And we're not prepared at this point to give you a new number for 20 11. We customarily do that. We're reviewing the plans right now, and we do that.
We're reviewing the plans right now, and we do that after we have Board approval for the plans. And so that will be sometime later this year or early in January. But it's clear, we are investing at a healthy pace. We do have strong cash flows, and we have low leverage. And the breadth and depth of our queue is extraordinary, and this gives us a lot of flexibility.
Those factors combined give us a lot of flexibility in project selection. You mentioned and we do have these large projects on the horizon, gorgon, Wheatstone, Deepwater. And we do we were successful here in this last quarter, in particular, in picking up some new resource opportunities. And those resource opportunities will require further And as we sift through our opportunities, we always do an affordability overlay. And in that overlay, we take into account commodity prices, industry costs and different scenarios.
And so this assures in the end that our C and E program is affordable even in less robust scenario situation and that only the best projects get funded.
Okay. That's great. I'll leave it there for some fun or so. Thanks.
Our next question comes from Doug Leggate with Bank of America Merrill Lynch.
Thank you. Good morning, everybody.
Good morning. Good morning, Doug.
Mike, I'm also going
to take advantage of you being there. And if part of it is okay, I have a follow-up for you also. Mike, on the your comments about expecting the beginning of an upcycle, I'm just kind of curious if you could give us a little bit of color as to where your head is on the environment right now. And if I may just jump on the Hawaii question. Could you elaborate a little bit on the fuel oil contract?
I think I heard you say you've already secured it. I was not aware the regulator has approved it yet, but if you could give some color on that. And as I say, I have a follow-up for Pat, please.
Okay. Yes. So my reference to projects coming on into an up cycle was specifically directed at the 2 chemicals projects that I made reference to. And we've actually seen a pretty good chemicals market this year more so in the first half than in the second half where margins have been softening as we've seen some additional capacity come online. But as we move through the next few quarters where we could continue to see that softening trend hold as economies really gain traction.
Out into the medium term, the chemicals cycle looks as if it's poised for an upturn. And so we're very pleased with the performance of our chemicals affiliates, both at Chevron Phillips Chemical and also in Korea with GS Caltex and our wholly owned specialty additive chemical company. And we think the fundamentals in that sector are encouraging out into the medium term. If you're I want to be sure that I differentiate that from the refining segment where I don't share nearly as a bullish view. In the refining sector, we continue to see pretty tepid demand growth.
Some parts of the world certainly showing decent demand growth, others are not. And the continued incursion of mandated alternative fuels, fuel efficiency and the addition of refining capacity particularly in Asia and the Middle East will contribute we believe to an overhang in refining capacity for years to come. And so on the refining side of our business, we are prepared for tough conditions for several years out into the future. And that's why the focus on self help that I've been talking about in recent discussions with you. In Hawaii, the contract, the fuel oil contract has been renegotiated.
I have to tell you, Doug, I'm not current on the state of regulatory approval. I know it's been submitted for regulatory approval, but I'll have to have Jeanette get back to you with a specific answer on that because I just don't recall.
Thanks, Mike. A quick one, what's Chevron's stance on Prop 23?
Well, we have a we've taken a neutral stance on Prop 23, Doug. It's an interesting question. I mean, this is the first time to my knowledge that voters are actually going to speak on climate regulation. I think the proposition really raises a legitimate a economic challenges and California cannot materially impact global CO2 emissions on its own. So I think it's a very legitimate question that's been put forward through this proposition.
Having said that, we have taken a neutral position on Prop 23. We have a different footprint in this state than perhaps some others do and this is our home. We continue to work closely with the Air Resources Board and the Governor's staff to seek reasonable market based solutions for carbon reduction in California. And we're looking at how we would meet AB32 in the most technically feasible and cost effective manner. It's tough because the final regulations are not complete.
So there is still some uncertainty out there. But in the broader context, we've been working to address climate change really through a variety of different strategies, higher energy efficiency, which we've been working on really for the last 2 decades. We spend a lot of money on R and D and improved technologies focused on renewables and energy efficiency, looking for promising and profitable opportunities in things like our Weyerhaeuser Venture, and then supporting flexible and sound policies. So we're preparing ourselves to deal then supporting flexible and sound policies. So we're preparing ourselves to deal with climate regulation and deal within a business context,
3rd quarter. If you could it seemed to be lightening Exploration spend was up in the Q3. If you could it seemed to be light in the first half of the year. If you could give us an idea how you would expect to trend? And also DD and A stepped up in the Q3.
If you could help us understand what was going on there, that would be great. Thank you.
Sure, Doug. The exploration expense certainly did move up in the Q3. Jeanette referenced 2 significant well write offs in Turkey and Canada. I think if you look at us year to date 2010 versus year to date 2009, you will still find, however, that our 20 10 expense factor is about 25% or so lower than year to date 2,009. This tends to be a very lumpy item for us.
Some of these wells are very expensive wells. In some of these circumstances, it is pure wildcatting. And so it's very hard for us to predict. On DD and A, you also saw a step up. Jeanette also mentioned some of the retroactive adjustments that we had there.
Again, year to date, 2010 versus 2,009, we're seeing higher impacts associated with rates, but also higher production.
Okay. So that DD and A rate is probably a go forward a go forward number, Prada? Or is the trend still higher?
Well, we did mention the it was not a period adjustment. Right, right. So the vast majority of that increase would not be going forward. Great. Thanks a lot.
Bank. Please go ahead.
Hi, guys. Again, I'd like to echo Mike, thanks for making the effort to come on the call and we appreciate Chevron tending always to have an executive available to answer questions. Thank you. Mike is very specific on having said that, which is how much CO2 do you emit in California, I wondered? And secondly, could you talk a little bit more about the Asian oil market I of refining capacity availability and crude use and also on the demand side?
Thanks.
Yes. Paul, I would on your first question on carbon emissions in California, I'd point you to our corporate responsibility report where we make a lot of disclosures and everything that we publicly disclose on carbon is in there. And I don't have a copy in front of me right now. We've got both upstream and downstream operations here. So I'd just point you to that.
On Asia, it is certainly the most optimistic part of the world in terms of economic growth. I've recently been over there and visited multiple countries. I will tell you it is not homogeneous by any means. There is a strongly growing Asia that is really represented by China primarily, but also a number of other economies. Singapore is exceptionally strong.
Vietnam is strong. So there's a very rapidly growing Asia where we see strong demand for our products. There's a modestly growing Asia, which is still pretty attractive and that markets like Malaysia, Pakistan, Taiwan, where we see growth and it's good growth, but it's not as strong as you would see in China and some of the others. And then there's a part of Asia that doesn't look a heck of a lot better than the U. S.
And growth is negative still in Japan and fairly flattish in places like South Korea or the Philippines or Thailand. And so we really have exposure to a number of those markets and we have the ability to try to optimize our refinery production and our supply activities into those markets that have the strongest growth characteristics, the best margin opportunities and try to mitigate some of the exposure to the weaker markets and optimize there. And so, I think increasingly, we all need to be paying attention to Asia in our business because it is really where the growth will occur. But the key point I think is that there are many different countries in Asia and their economic circumstances vary pretty dramatically.
How are you finding the supply side in terms of shutdowns? I'm thinking of Japan, maybe some lost capacity in China and also low utilization rates perhaps among some of the players?
Yes. We certainly have seen some announced intentions to shut in capacity in the countries you referenced Japan and China. Frankly, I think these tend to occur at the margin. And as you look at some of the tea kettle refineries in China or some of the changes in Japan. You also have to look at some of the big new builds in China.
The capacity that's fresh new in India, Vietnam has brought on new refining capacity. And so net the capacity is going up not down in Asia. And even with some economic utilization cutbacks and turnarounds, Asia is long the way and the world is long. And so I think we really do need demand growth to steadily chew into that. Perhaps some projects be delayed that haven't started construction at this point and some slow and gradual rationalization.
But as I mentioned earlier, we're not banking on a rapid rationalization of the industry and a return to tighter supply and demand balances anytime soon.
Great. Thanks. And then if I could have an upstream one. You mentioned there's an impact obviously from the moratorium in the Gulf of Mexico, but you've submitted a permit. I was wondering if you could be a little bit more specific about the volume impact that that's having right now.
I guess it's an accelerating effect with decline rates. And I just wondered if we could somehow get a sense of when you may be able to resume, for example, how long it would be before you resumed activity after you received the permit? Or if there's any way you can frame for us how long you think it will be before you resume? Thanks a lot.
Sure, Paul. In terms of the impact in the quarter, really, let me just talk about second half of the year. We are estimating a volume impact somewhere less than 10,000 barrels a day. And of course, we've got operating expense impacts that Jeanette referenced as well. Those with the moratorium lifted as soon as we get back to having permits actually authorized, then of course effects become muted.
It's very hard, Paul, for us to say exactly how long a return to how long it will take for the permits to be authorized. We're working very aggressively with the BOEM to understand what their uncertainties are and to try to work through that very, very quickly. As I did mention, we did we are doing the Tahiti water injection well. So there's some progress, but I think it's going to be slow. And hopeful in the next several weeks, few weeks, couple of months that we'll have a better indication of how long exactly it will take to get through the permitting process.
Is there a very serious potential impact on volumes for next year, at least the portion of your Gulf of Mexico volume, say for example, if there was no more activity in the next year?
Yes. Paul, it's really too early for us to give an indication of that. I mean, we're right in the midst of trying to get things back to work.
Yes. Good luck with that. Thank you.
Thank you.
Our next question comes from Al Shang with Barclays
Capital. Hey, guys.
Good morning, Paul. Good morning. If I could have two questions on my end, maybe one for either Jeanette or Pat. My one I think historically you guys looking at Asia as a major core market for you because of the growth. But on the other hand, as you indicate, there's a lot of new capacity coming up and a lot of time that may be driven by certain national priority.
And so while that demand is growing, capacity seems to be growing even at a faster clip. And so does change your view of the attractiveness of Asia as your core market? And that the second question is on the chemical. Saudi Arabia, it looks like now they are already short in the domestic gas supply. Do you have a long term feedstock gas price contract for the next 20 years or that if you I don't need to know the exact term, but you can give us some idea that I mean how sustainable is your cost advantage on there?
And also in chemical, do you believe that the joint venture structure is the best on the going forward or that it will be better off that to be owned by the single
Okay. That was well done, Paul. On the attractiveness of Asia, I think you really have to look at this in a broad sweep of time. And long term, this is the next several decades, I think are the decades where Asia will move into a very prominent role in the global economy. And there will be attractive opportunities to participate in that.
We aren't going to jump into projects just to be in Asia and invest there. We need to have profitable investments and particularly in the Downstream and Chemicals business, we are keenly aware of the realities of a margin based business and supply and demand. And so we'll be very thoughtful in terms of anything we would do. And certainly as I said over the near to medium term, we're expecting some pretty tough sledding and frankly you're seeing others say the same things and some begin to behave that way as projects have slowed down and the like. And so, we're not going to plow into things just to be there.
We've got a good strong position right now. We can optimize that position and look for the right kinds of opportunities over time to profitably participate in that growth. And so I think it's still an attractive market to us, but we're going to prudent in terms of how we participate in growth. On your question relative to Saudi Arabia and feedstock for our ethylene cracker, I can tell you we do have a long term feedstock arrangement that underpins that investment and I won't go into the specifics on that, but we do indeed have an agreement there that gives us attractive feedstock economics. And finally on your question on the joint venture structure, as I said, we've been very pleased with the performance of Chevron Phillips Chemical Company.
They have, I think, a very strong track record in their sector and have been one of the steadily improving performers in that segment and we're happy with that. In terms of any alternative structures, we don't comment on M and A or things like that. And so I'll stay consistent with our practice and not saying anything more.
Okay. Very quick one on the upstream, Jeanette. For the underleaked in this quarter, say RMB115 1,000,000, it looks like 2nd quarter was pretty flat in terms of or pretty balanced and you didn't really have an open lever underlift. So we assume the RMB515 1,000,000 is a result of the Q3 of the under lift?
So Paul, the bar that shows on that graph is comparing absolute liftings in the Q2 to Q3. So it's the value differential between those 2.
Right.
My comment about the underlift in the quarter, so compared to production in the quarter, we were underlifted by 3% in the 3rd quarter. I think I told you on last quarter's call in the second quarter, we were about 1% over lifted. So definitely a swing between quarters.
I see. Okay, very good. Thank
you. Paul, this is Pat. Just wanted to go back and add one thought to the question on the joint venture structure. We have tremendous alignment between ourselves and Conoco. And usually, when you have good alignment between the partners, things work out really quite well.
And the structure doesn't become as big an issue.
Thank you, Pat.
Our next question comes from Mark Gillman with The Benchmark
Company. Good morning, guys. 2 parter for Mike and then one upstream question. Mike, I was wondering if you could give me some ideas to the total cost of the Yahsu hydrocracker and what kind of return you expect there and also address what you're likely or may be considering doing with your West Coast problem child, which I call Richmond. On the upstream side of the business, Pat, you might be able to respond to this.
With the success that you continue to have in terms of exploration for Australia and Northwestern Shell, is any consideration being given to scaling up Wheatstone, not just in terms of potential down the road expansion opportunities, but to go with a much larger project right upfront similar to what happened with respect to the progression of the Gorgon project?
All right, Paul. Well, I'll start out. On Iosu, it's actually a question that I'm not going to give you the total cost on it because actually there's some portion of the projects that are not yet completed. So there's an FCC that's the second part of this to take some of the gas oil off the new vacuum column there that was started up a couple of years back. So we don't have costs all in, but I can tell you it's below budget and very competitive as we benchmark through IPA in the industry benchmarking processes.
They have a consistent history of delivering projects at very strong capital efficiency. The other thing I will tell you is it's completely funded out of their cash flow and from their balance sheet. We don't inject any cash into GS Caltex. Relative to your question on Richmond, we love all our children, whether they're problem children or not. And we're continuing to work to try to find a solution there.
I think since the last time that we were together in March, the California appeals court has ruled on the lower court ruling on the EIR. At the time we were together in March, we had our we'd made our appeal, but had not heard back. They ruled in favor of the plaintiffs, which we continue to disagree with, but that is the ruling of the court. Where we are right now is in discussions with various stakeholders to see if we can find some sort of a reasonable solution here. The stakeholders include the City of Richmond, senior representatives from both the legislature and other political officials in the state and the plaintiffs on this thing.
I can't predict the outcome of the discussions. We're trying to find a reasonable solution that allows us to maintain a competitive facility in Richmond. We've been operating there for more than 100 years and we hope to continue to do so competitively, but there are some realities that we have to face as well. And so the discussions have been ongoing for some time and we're still hopeful that we'll find a solution there through that path.
Okay. And just on the Wheatstone question, as you know, we've got project underway for capacity of about 2 trains of 4,300,000 tonnes per year. So that gives you 8,600,000 tonnes. We actually have plot space at Wheatstone for maybe 5 to 6 trains. But in addition to just having the plot space, we obviously have to go after the environmental permits as well.
So I think the best answer to your question, Mark, really is that our team will be looking at what looking at the gas availability that we have, the plot space that we have, the economics environmental issues, that will really that combination of factors will really dictate optimum expansion at Wheatstone. Okay. Thanks guys.
Our next question comes from Faisal Khan with Citigroup.
Hi, good morning.
Good morning.
Mike, on the chemical business, I was curious given what's going on in U. S. Natural gas prices, Would you guys be reinvesting to process kind of more lighter end products? And I guess how do you think about that across your whole global portfolio given where U. S.
Domestic natural gas prices are in the advantaged feedstock you have here now?
Yes, it's a great question Faisal. I mean U. S. Ethane crackers have a nice advantage right now over other U. S.
Feed Chemicals U. S. Assets can crack a lot of Chemicals U. S. Assets can crack a lot of ethane.
They're really geared towards a gas feedstock and they are differentially advantaged in that regard versus other U. S. Competitors who as a group have lower ability to crack ethane. So what we see right now are the light crackers are really running full and the derivatives out of those units can compete pretty favorably in export markets. And those markets have been growing.
So I think in the near term, we certainly see strong utilization and really good performance out of our existing assets. The question as to whether or not there's a long term sustained investment case for new capacity is a different question. And I think that that's one that we need to see more evidence on the long term sustainability and cost structure of the shale gas industry in this country and it's one that's being watched very closely. But I would say that the near term effects have been very positive for light crackers and the question about future investment is one that is clearly on people's minds, but I don't know that I'm ready to say anything more than that at this point.
Okay. And then if you're looking at your global portfolio, have you shifted more production to the U. S. In a way from other parts of the world because of this lower feedstock environment?
Well, if you were to look at the portfolio ex the startup and gutter that I talked about and you see the stronger utilization in the U. S, I think the answer to that would be yes. But we do have the new capacity that's coming on in the Middle East, which is a very large it's a 1,300,000 ton per annum cracker. And I think net net, you wouldn't necessarily see that shift because of the impact of the new capacity in the Middle East.
Okay, got you. Now an upstream question if I can. Can you just give us repeat your comments on JAK same model? You say you would or would not book reserves at the end of this year?
We will not be booking reserves at the end of this year.
Okay. Got you. And then what's the status of Bigfoot?
We're still hopeful of going to FID before the end of this year.
Okay, great. Thank you very much.
Our next question comes from Pavel Molchanov with Raymond James.
Thanks for taking my question. Just one kind of conceptual, anybody would falter for that at all. But my question is, anybody would falter for that at all. But my question is, what would you like to see change before pulling the trigger on some of those opportunities? Or is that just completely off the table for the foreseeable future?
We're not opposed to shale because it's shale gas. I think we have expressed that because we've been out picking up acreage in Canada and poll that to be the case in the U. S. Market. That's not to say that, that will never be the case, but we haven't found it to be the case right now.
As you know, there are a lot of there's a lot of spread between quality of shale properties. And so it really is important, the asset quality that you're acquiring.
Absolutely. And then a quick follow-up on that. In your European shale opportunities, I guess, Poland in particular, what kind of timeline do you see for development into 2011 in terms of how many rigs you'll allocate, etcetera?
We don't I don't have the full plan on this. We're just in the acquiring seismic, shooting seismic at this point in time. It's just very early days for Poland. Okay. Thanks.
Our next question comes from John Herrlin with Societe Generale.
Yes. Hi. Just some quick ones. With the sale of
the Colonial Pipeline, will you be booking a gain? And if so, how much?
We will be booking a gain. We'll indicate when we get to it on our interim update, but certainly it will be a material item for us, and we'll call it out.
Okay. That's what I
was wondering. With Jackson Malo, I know you're not going to be booking any reserves, but regarding the development, are you going to be fracking the wells before you flow them and then
frac them? That sounds like a great question for George. We'll have to get back to you on that.
Okay. All right. Then last one for me. You're just starting back up again in the Gulf of Mexico. Things are going to go slow.
The BOEM said that cost would rise for the industry about $183,000,000 I know it's probably too early to assess it. I was wondering time wise whether you thought it would be kind of a 2012 event or a late 2011 event before you get a kind of PD sense of how projects will be
unfolds. What I would say is that a lot of the recommended changes in procedures and process, Chevron already had and was operating to a very high standard and already had those costs essentially as part of our way of doing business. So while there could be some incremental costs, I think of it in terms more in terms of delay and a little bit of overhead burden than really anything more substantial than that. When we look at our projects, of course, we take into account a variety of scenarios on commodity prices, but also on costs. And our view of this cost increment that may come from the moratorium will be very and certainly well within the bounds of the project economics that we already evaluate.
Thank you.
I'm not showing any other questions in the queue at this time. I'd like to turn it over to Pat Yarrington for closing comments.
All right. Well, I want to thank everybody for being on the call today. We do appreciate everyone's participation. And I especially want to thank the analysts who on behalf of all the participants for their questions. Thanks very much.
Appreciate your interest in Chevron. Goodbye.
Thank you. Ladies and gentlemen, this concludes Chevron's 3rd quarter 20