Good morning. My name is Jonathan, and I will be your conference facilitator today. Welcome to Chevron's third quarter 2017 earnings conference call. At this time, all participants are in listen only mode. After the speaker's remarks, there will be a question and answer session. Instructions will be given at that time. If anyone should require assistance during the conference call, please press star then zero on your touchtone telephone. A reminder, this conference call is being recorded. I will now turn the conference call over to the Chairman and Chief Executive Officer of Chevron Corporation, Mr. John Watson. Please go ahead.
Thank you, Jonathan. Welcome to Chevron's third quarter earnings conference call and webcast. On the call with me today are Pat Yarrington, our Vice President and Chief Financial Officer, and Frank Mount, our General Manager of Investor Relations. We will 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. We ask that you review the cautionary statement on slide two. Turn to slide three. Let me start by revisiting the three messages we delivered in March at our Analyst Day. First, we are growing free cash flow. Third quarter cash flow after dividends, excluding asset sales proceeds, was approximately $500 million. As shown in the chart, including asset sales proceeds, we generated $2.8 billion. Second, we're focused on improving project, book, and cash returns on investment.
Projects are coming online, reducing pre-productive capital, and revenue is being realized from growing volumes. Spend is shifting to shorter cycle time, high return investments in base business and shale, and our cost structure is lower. Finally, we're focused on unlocking value from our advantaged and balanced portfolio of opportunities highlighted by legacy positions in Australia, Kazakhstan, and the Permian. Let me now turn the call over to Pat, who will take you through the financials. I will follow her up with some operational updates and a few closing thoughts.
Okay. Thanks, John. Starting with slide four, an overview of our financial performance. Third quarter earnings were $2 billion, or $1.3 per diluted share. Included in the quarter was a gain on the sale of our Canadian refining and fuels marketing business of $675 million and charges associated with a project write-off of $220 million. Foreign exchange losses for the quarter were $112 million. A detailed reconciliation of special items and foreign exchange is included in the appendix to this presentation. Excluding these special items and foreign exchange impacts, earnings totaled $1.6 billion or $0.85 per share. Included in this total was a catch-up depreciation adjustment of about $220 million related to our Bangladesh upstream business, which we have decided to retain. Cash from operations for the quarter was $5.4 billion, reflecting continued strong downstream performance and the impact of growing volumes and higher realizations in our upstream business.
A working capital draw benefited the quarter, was mostly offset by an increase in notes receivable. Our debt ratio at quarter end was just over 22%. Our net debt ratio was approximately 19%. During the third quarter, we paid $2 billion in dividends. Earlier in the week, we declared a $1.08 per share dividend payable in the fourth quarter. We currently yield 3.6%. Turning to slide five. During the quarter, net cash generated after C&E dividends was $2.8 billion, including $2.3 billion in proceeds from asset sales. Year to date, net cash generation after dividends stands at $3.8 billion. Cash flow from operations was $5.4 billion during the third quarter. It was a strong quarter, despite approximately $600 million in pension contributions and affiliate dividends being the lowest we've had this year. Year to date, cash from operations has totaled $14.3 billion.
Lower affiliate dividends than earnings, working capital consumption of funds, and deferred tax effects in the aggregate totaled nearly $3.3 billion through the first nine months. Cash capital expenditures were $3.2 billion for the quarter, approximately $800 million lower than the third quarter of 2016. Year to date, cash capital expenditures were $9.8 billion, over 30% lower than the same period a year ago. Third quarter asset sale proceeds were approximately $2.3 billion, reflecting the sale of our Canadian refining and fuels marketing business, select Central Basin Platform assets in the Permian, international interest in the Natuna Sea in Indonesia, and gas assets in Trinidad and Tobago. Year to date asset sale proceeds now total $4.9 billion. We are confident that we will exceed our objective of being cash balanced this year, including asset sales. Turning to slide six now.
Slide six compares current quarter earnings with the same period last year. Third quarter 2017 earnings were approximately $700 million higher than third quarter 2016 results. Special items, primarily a $675 million gain on the sale of our Canadian refining and fuels marketing business, offset by a project write-off of $220 million and the absence of special items in the third quarter of 2016 increased earnings by $165 million. A swing in foreign exchange impacts reduced earnings between the periods by $184 million. Upstream earnings, excluding special items and foreign exchange, increased by about $800 million between periods. Higher realizations and increased volumes were partially offset by higher DD&A, both from the increased production and, as previously mentioned, from the catch-up adjustment in Bangladesh.
Downstream results, excluding special items and foreign exchange, increased by $55 million. Higher global refining margins were partially offset by a swing in timing effects resulting from rising prices. We turn now to slide seven. Slide seven compares the change in Chevron's worldwide net oil equivalent production between the third quarter of 2017 and third quarter of 2016. Third quarter 2017 production was 2.72 million barrels per day, an increase of more than 200,000 barrels per day over the third quarter of 2016. Major capital projects increased production by 263,000 barrels per day as we started and ramped up multiple projects such as Gorgon and Angola LNG. Shale and tight production increased 39,000 barrels per day, primarily due to the growth in the Midland and Delaware basins in the Permian. Lower planned turnaround effects, primarily at Tengiz, favorably impacted production between periods by 54,000 barrels per day.
Base business growth of 44,000 barrels per day reflected additions from new wells, mostly in the U.S. Gulf of Mexico and Nigeria. The impact of asset sales reduced production by 76,000 barrels per day, approximately 45,000 of which were due to 2017 asset sales that impacted third quarter production. Overall, production increases were partially offset by normal field declines and PSC effects. I'll now turn it back to John.
Okay, thanks, Pat. Turning to slide eight. Our production is growing as major capital projects come online, the Permian ramps up, and we manage declines in our base operations. At the beginning of the year, we said that production, excluding the effects of 2017 asset sales, would be up 4%-9% from 2016. At nine months, production before current year asset sales is up approximately 6% in the middle of the range. We now expect the full year growth to be in the range of 6%-8%. The bar on the right shows year-to-date production, including the impact of 15,000 barrels a day in 2017 asset sales. We completed our final shallow water GOM transaction that's in the Gulf of Mexico. We sold certain Permian properties and divested international interests in Trinidad and in Tunisia and Indonesia.
We now expect the impact of 2017 asset sales for the full year to be 30,000 barrels a day. As Pat noted, we canceled the sale of our Bangladesh gas business. Turning to slide nine. Gorgon continues to ramp up. Total production was more than 400,000 barrels a day in the third quarter. We finished a successful maintenance pit stop on train 1 in early October. The 3 trains are currently averaging well above nameplate capacity. As we fine-tune the plants to enhance reliability and improve volumes, we'll likely have intermittent downtime on other occasions. At Wheatstone, we announced first LNG production from train 1 on October 9th and are currently ramping up at 65% of capacity. Loading arms are connected, and we're in the process of loading the first cargo. We expect production to ramp up to full rates over the quarter.
We have scheduled downtime to remove temporary strainers in December. Upstream well performance for both projects is at or above expectations. First LNG for Wheatstone train 2 is scheduled for the second quarter next year. Let's turn to the Permian on slide 10. Unconventional production in the Permian continues to exceed expectations. Volume was 187,000 barrels a day in the third quarter, up 30% from third quarter a year ago. Our new basis of design is proving quite effective, and we're standing up our 15th operated rig. Our proprietary database contains over 5 million well attributes encompassing most Permian wells. We continue to apply data analytics and petrophysical technology to that information to drive improvements in well targets and performance. Volume growth is one outcome of our activity. Of course, the more important outcome is the return we generate on the money spent to achieve this volume growth.
Earlier this year, we indicated our IRRs on Permian investments were more than 30% at $50 a barrel WTI. I thought it would be helpful to share information from some recent appropriation requests approved under the new basis of design, and we show that on slide 11. These are fully loaded cost economics. On the left are the operating and financial parameters for three pads currently being developed with 10,000-foot laterals. Based on our type curves and costs, we expect to recover an average of about 1.9 million barrels per well, with $14 per barrel capital, operating, and overhead expenditures. At $50 a barrel WTI, $250 Henry Hub, and $25 a barrel NGLs, revenue from oil condensate and gas streams will weight average $33 per barrel. Our realizations are advantaged by our legacy royalty position and add to strong returns.
As you can see by the chart on the right, the typical profile of cumulative cash flow from production allows capital to be recovered very quickly. We expect the average time from initial investment to payback to be about 28 months, and cumulative cash flow over the life of the pad to be nearly two times the capital costs. This is a very good use of your money. Capital operating expenses continue to trend down. Capital expenditures averaged $4.5 billion per quarter this year, down by more than half from three years ago. Following the normal intra-year pattern, fourth quarter spend will be higher, but we expect full-year capital expenditures will be less than $19 billion. We are also controlling operating and administrative expenses well. Average quarterly costs are down again this year, about $450 million per quarter lower than last year, despite higher upstream production and 22% lower than 2014.
We expect unit costs in the upstream to continue the downward trend. Turning to slide 13. Last year, I indicated we plan to sell $5 billion-$10 billion worth of assets in 2016 and 2017 combined. Through seven quarters, we have sold $7.7 billion, squarely in the middle of the range. In the third quarter, we closed the sale of our Canadian refining and fuels marketing business and the upstream assets I noted earlier. We expect no significant asset sales in the fourth quarter. In South Africa, our minority shareholders exercised their right of first refusal and plan to purchase our refining and marketing assets there. We now expect this sale to close in 2018. Our criteria for asset sales has not changed and is listed on the chart. Before taking your question, I will offer a few closing thoughts.
As you know, I have announced my retirement effective February 1, this will be my last earnings call. The financial community judges CEOs by TSR, and I am gratified that we outperformed our peers during my tenure. That is an outcome my two predecessors established as a precedent, and we certainly owe much of our success in this long cycle time business to those that came before us. During my time, we have seen tremendous volatility in price and cost conditions. On my first day on the job back in 2010, oil was $80 a barrel, and Henry Hub was over $6 per Mcf. Today, of course, prices are much lower, and that has impacted industry results and produced TSRs that have lagged the S&P 500 index. The company has weathered the downturn, adjusted rapidly to new conditions, and is well-positioned for the future.
Including our fourth quarter declared dividend of $1.08, we've now increased the annual per share cash payout 30 years in a row, a record that is very important to us. We've also repurchased shares when it was prudent and have been conscious not to dilute the share count. As you've seen in the results, we're at a cash flow inflection point with spending coming down and revenue from growing production going up. With a fourth quarter at current prices, we should be close to cash balance without asset sales proceeds this year. We have an upstream business that I believe can sustain itself at current prices, thanks to an enviable unconventional position highlighted but not limited to the Permian. I expect Australia will deliver earnings and cash flow for decades, and we've had a successful record developing a huge resource base in Kazakhstan.
We have a tightly configured high return downstream and chemical business that complements the upstream. Most importantly, we've got a wonderful management team, organization, and culture. You know Mike Wirth and his team well. They're typical of the talented and effective people that make up our 50,000 employees. Mike has a track record of success, and I know he'll do an outstanding job for you. With that, I'll take your question. Jonathan, please open the lines for those questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. If you're 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 star then one on your touchtone telephone. Our first question comes from the line of Jason Gabelman from Jefferies. Your question please.
Yeah, I think that's me, folks. Hi, everyone.
Jason.
John, I'd like to congratulate you. Thanks. First of all, John, I'd like to congratulate you on your highly successful tenure as CEO. You left things in great shape for Mike, and as a former Chevron guy, I've got a strong appreciation for the mark you've left on the company. Best wishes in all your future endeavors.
Thank you much, Jason.
First question, John. Pretty significant major milestones achieved over the quarter with first LNG startup at Wheatstone, Gorgon at full economic capacity. Now that you're transitioning from construction to operation, can you talk a little bit about some of the lessons that you've learned since you embarked on this big expansion in Australia, given that it spanned most of your tenure?
Sure. Jason, there are a lot of lessons we've learned. We went to FID back in 2009 on this project, and a lot of the engineering work was done 10 years ago. A lot of the project planning work was done 10 years ago. I think it's fair to say we in the industry have learned a number of things during that time. I think the real lessons are around the assurance work we need to do and the preparatory work. We had a lot of reviews of, say, Gorgon when we started, and it was labeled by independent reviewers the best prepared mega project out there. It's pretty clear that we needed to do more engineering in advance, and we needed to have better assurance work on some of the project planning and other aspects of the project.
It's a complex project on Barrow Island, and if you miss a few things, you're going to incur some additional costs. We've learned from that and learned from what we've done and what others have done, and we've tried to make some of those changes going forward on projects like FGP and elsewhere. There certainly have been learnings, and I think in a broad sense, we have to verify every single aspect of these projects in advance because we're on the hook for them regardless of the kind of contract that we sign. If a vendor or contractor doesn't perform or there's some element that we've not thoroughly vetted and during construction, we have to verify these things. We have to be sure that what we order gets delivered. We have to be sure that the designs are robust. We have to be sure of everything.
I think we had a different mindset going back a decade ago.
That's great, and it's actually a good segue to my follow-up question. Thanks for the financial data on the Permian. With the basin moving into more of a manufacturing mode, can you talk a little bit about the advantages that scale and a strong balance sheet give you relative to smaller competitors?
Oh, sure. When you look at the Permian and you look at Chevron, we have a portfolio approach, so we're generating cash flow from each individual investment that we make in the Permian. That's a team effort, really. We have a strong procurement organization. We have a technical organization that supports our people in the Permian. We have learnings that we're generating. We've talked a lot about data science, but there's more to it than that's enabling us to learn from others, so that we can really spend our money very efficiently. We showed some charts last quarter that showed how we process the information from others, and we think we came up the learning curve pretty fast with drilling fewer wells. It's that kind of capability that I think is advantageous to us. Also, we have a portfolio where different assets have different roles.
For example, right now we can choose to pace how much we spend in the Permian. I showed you a chart that showed the kinds of returns that we have there, so we can scale that. We're continuing on our ramp up to 20 rigs. We have the ability to ramp that up and really manage the cash flow as a portfolio. Overall, my view is the work we do, whether it's procurement, our advantage royalty position, the integration that we have with our supply and trading organization, the technology, all those things are something that a big company can bring. I think we're showing that in the results that we've been metering out to you guys every quarter.
Thanks, Jason.
I agree with that. All the best, John.
Thank you.
Thank you. Our next question comes from the line of Paul Sankey from Wolfe Research. Your question, please.
Good morning, everyone.
Hey, Paul.
John, we first met a long time ago when you were the CFO. I just want to thank you for the time and patience you showed in dealing with guys like me and congratulate you on your retirement. We really can't argue with shareholder return as a measure. Enjoy. You got me slightly fantasizing about retiring myself. Unfortunately, it's a long way off. With all that said, John, this result was pretty weak. If we look at cash flow, if we look at EPS, if we look at volumes, if we could just focus perhaps. By the way, there was a tremendous positive element here, which was the Permian slide. If we could just focus on the cash flow, is there anything that you would highlight that made it look as weak as it did?
I think we were a bit negatively surprised, quite frankly.
Yeah. I saw how the stock opened, I must say I was surprised because underneath that, I think we're doing pretty well. It won't surprise you, Paul, if we have a little bit of a disagreement on this, but in fairness, not all of it was apparent to you in the numbers. Let me talk through a couple things, and I'll also let Pat make a comment. On earnings.
Thanks
Earnings were $0.85 a share. We didn't call the Bangladesh catch-up depreciation adjustment a special item. Basically, what happens here is when you declare an asset is going to be sold, you suspend depreciation. When you decide not to sell it, you have to reinstate it. That was some $220 million. We terminated a rig contract, which was $150 million before tax. That appeared in the numbers. We've also got some things going on in working capital that don't impact earnings per se. I'm going to let Pat walk you through a couple of those.
Yeah. Two things on the cash flow side I would mention is one, the pension contribution. I called out a number of $600 million in total, but $500 million of that was discretionary, and the first one that we've made in all year. That is a quarterly impact. $600 million in total, $500 discretionary. The second thing I would mention is, and we did mention it here, but we did have a circumstance where one of our partners, as you might expect over the last three years, there's been some difficulty in some of our partners actually paying us what they owe us. During the quarter, we were successful in negotiating more security around that ultimate payment. It meant having a swap between what was a current receivable into a notes receivable.
You ended up having a positive working capital effect in the quarter of about $600 million as we recognized this reclassification from an accounts receivable to a notes receivable. When you look at our 10-Q statements and you look at what's happened in notes receivable, you'll see there was no cash flow impact during the quarter for that. It did impact working capital, however.
What she's saying is the working capital adjustment is a touch misleading.
It is.
During the quarter. Really the news was good because we were able to provide better security around arrears from one of our national company partners.
if you look through that, you're really talking about our cash from operations, I think, on a headline basis and adding back the $500 million discretionary pension contribution. That gets you close to a $6 billion figure.
Great. John, in all sincerity, thanks and congratulations.
Paul, thank you very much. I appreciate it.
Thank you. Our next question comes from the line of Neil Mehta from Goldman Sachs. Your question, please.
Good morning, team. John, congratulations.
Thanks, Neil.
John, first a big picture question. The energy sector broadly hasn't created a lot of value over the last 10 years. A lot of that has to do with commodity price, but a lot of that has to do with capital allocation. Your stock has been one of the better performers. Sort of a handing off of the baton question, what's your message to the CEOs of the energy industry, whether it's the next generation of major CEOs, many of which who've come from downstream or the shale piece?
Yeah. If you look at our TSR since I started, it was just under 10%, but that's lagged the S&P, which of course gets heavily weighted by the FAANG stocks. There's no getting away from the fact that I think we missed on the commodity side, which was largely a miss on technology. If you look at the miracle of hydraulic fracturing that's taken place really since 2010, that's put supply on the market that we didn't anticipate. I think the message really is that we're a pretty resilient bunch in this business. When prices go up, technology keeps moving, and we're able to respond to that very well as an industry. Never underestimate that ingenuity, if you will, because we're very good at what we do.
Our industry doesn't get a lot of attention as a technology industry, but clearly we have been, and that results in a transition. We are in a commodity price business. We really have to focus on the lowest cost projects and opportunities that we have, regardless of the ups and downs that we'll see on a transitory basis in the commodity market. I suspect, Neil, that if we had commodity prices that were in the range that most of us anticipated, we would all have performed a lot better. The message is be a little bit wiser about the quantity of projects that you take on. Be very wary of the capabilities in the supply chain during those busy times that I commented on earlier, and pursue your best opportunities. That's what we're doing right now.
You know well, we talk a lot about the Permian, but Vaca Muerta, you've seen a little bit in the press, is performing very well. The Duvernay for us is good. The Marcellus. We've got four big shale opportunities that are very low cost. We've got continuing base business opportunities, we're trying to drive down the costs in some of the longer cycle time projects. The emphasis will be on getting a lot out of the assets that we have, particularly during this period where commodity prices are maybe lower than many have anticipated.
I appreciate that, John. The follow-up is just around 2018 CapEx, recognizing you're going to give us more color here in a couple of weeks with the December capital spending release, but just how you're thinking about the drivers going into 2018 relative to the $17 billion-$22 billion band that's out there.
Yeah. We indicated that if prices stayed in the near $50 range, that we would be toward the bottom of that $17 billion-$22 billion range, I see no reason to modify that guidance. That will certainly be the case. A couple of things I'll highlight for next year, We get our plan approved in early December, I expect, we'd put out a C&E release after that. Next year, 2018, 2019, will be the peak spending time for the future growth project in Kazakhstan. Of course, we'll continue to fund the Permian. Nothing has changed that will drive us away from toward the bottom of that range.
Thanks, John. Good luck with your handicap.
Thanks.
Thanks, Neil.
Appreciate it.
Thank you. Our next question comes from the line of Phil Gresh from J.P. Morgan. Your question, please.
Good morning, I echo everybody's sentiments. Congratulations, John.
Thank you, Phil.
First question is just as I look at the production trends over the past couple of quarters, if you look at that base plus shale piece, it's been pretty flattish. I think at the Analyst Day, you had actually expected it to be more like -2% this year, it would take a couple of years for that to get to kind of a 0 to +1% trend line. Maybe you could just elaborate on why you've been able to outperform that base plus shale expectation, how do you roll that forward and think about the outlook for the next few years?
I think the outlook is nothing but good. If I think about first the base business, our people are very focused on getting the most out of the assets that they have. Certainly, that has been a positive. Infill drilling program, development well drilling off of our hosts in deep water, et cetera, has been very successful for us. That is certainly a positive. You see the Permian and shale results have been good. I made a comment in my closing remarks that I think we're sustainable for a good period of time at lower prices, that was sort of a code for what you're describing. I think we'll be in a position to grow production for a period of years just from the shale, frankly, and the projects that are continuing to come online and ramp up.
I think that's very positive. We'll go through our normal cycle with you where on the fourth quarter earnings call, we'll give you an estimate for production for next year. I think looking forward with the continuing ramp-up of major capital projects and the success we're seeing in the Permian and elsewhere, it'll be a good news story.
Okay, thanks. Second question, just on the dividend, obviously acknowledging the long-term track record. I think some investors maybe were a little bit surprised not to see a modest bump with the dividend in the fourth quarter as we lap last year's fourth quarter tweak up. Maybe you could just share your thoughts on that in the context of the broader picture.
Sure. I said in my closing remarks, we like the dividend, and we like it a lot. The board likes it, and every member of management that I know likes increasing the dividend. You've heard me over time, we've said we'll increase it as the pattern of earnings and cash flow permit. I've also said that we want to be sure that any increase in the dividend is ultimately sustainable. I said I wouldn't knowingly increase the dividend if I didn't think we could sustain it in perpetuity. We put a high bar on increases. I'll say, the story inside the company is very good. We chose not to increase the dividend this quarter, in large part based on the time of year that it is and the potential risks that we see in the marketplace in the fourth quarter and early part of next year.
There's uncertainty around OPEC, and there's just always uncertainty in the marketplace. Having said that, if you look at where prices are today, it may have been a conservative call, to be honest. The great thing about the dividend is we get an opportunity to reconsider it every 90 days. Our board will take a close look at it every quarter, and I'll remind everyone that we've increased it 30 years in a row, the annual per share cash payout, and I expect that that'll be a priority going forward.
Thanks, John. Congratulations.
Sure. Thank you.
Thank you. Our next question comes from the line of Doug Leggate from Bank of America Merrill Lynch. Your question, please.
Thank you. Good morning, John. Good morning, everybody. John, I'm going to add my congratulations also. I'm in the same generation as the Sankey CFO timeline. Thanks for putting up with us for the last 15 years. We really appreciate it.
All good, Doug. Thanks.
It looks like you're going out on a high with oil back above $60. Anyway, relatively speaking anyway. All right, two questions, both high level, John. I'm going to apologize for not asking any specifics about the quarter, but your legacy has been to establish or maybe you managed through the establishment of a very large legacy asset base that's obviously driving this inflation in cash flow. Mike Wirth's track record has been something of a cost-cutting asset sales in the downstream. I'm just wondering, given the succession planning and the continuity of strategy, with the flexibility in the Permian, how do you see those two things coming together as Mike steps in? What I'm really getting at is, do you think there's an opportunity for a more aggressive resizing of Chevron's portfolio given that those major changes have taken place? I've got a follow-up, please.
Yeah, Doug, that is a broad question, and I think it's certainly true that during my tenure, we've had some significant capital projects, and we've seen a wild ride in the commodity cycle markets. I do think those investments give Chevron a lot to work on. I've described it internally as we have a lot to chew on over the next few years. What do I mean by that? What it means is Gorgon and Wheatstone, for example, we have to ramp those up, fine-tune them, get the most out of those young assets, and then debottleneck them over time. I would describe that as sort of base business type activity. We have a Permian business that has a lot of momentum behind it.
We have other fresh assets that have been or will be coming online that will give us a lot to work on for incremental returns over time. Those incremental efforts and outlays of capital will, in general, be smaller, and they'll likely have higher returns because they're building off existing infrastructure. I think it's a wonderful opportunity. Certainly, Mike is very familiar with that because one of the things the downstream business has done well, all downstreamers have done, and Mike did an exceptional job, is really they've been penny pinchers in that sense, and they've learned how to eke more out of the refineries. I think that's exactly what we want to do with our assets.
I think it undersells Mike to describe him as just a cost cutter because actually, there have been opportunities to grow in the downstream business that we've taken advantage of over time. I think that Mike has been a part of our leadership team, my leadership team, for a long time. He's been in leadership positions elsewhere. There will be elements of growth likely over his period of time, but I don't think it will be, whether it was Mike or somebody else, I don't think it would be this big period of additions to the capital base that I went through. I would encourage you to think about Mike as being certainly great at grinding returns out of the business, but also very balanced in his capabilities. You've had a chance to talk to him. He's a very broad guy.
Well, we're looking forward to it, but we'll miss you just the same, John. My follow-up is I'm going to have a little fun with you now because I think as you walk away, I think you've been quoted multiple times as the prospect of peak oil demand. I think wishful thinking is probably putting it kindly as to what your response was. I wonder if I could just ask you as you walk away to offer your thoughts on the commodity outlook and this concept of peak oil demand that seems to be current fashion.
Sure. Well, I just try to speak factually about what I see out there. I am an unabashed advocate for our industry. Our industry is responsible for the greatest advancements in living standard in recorded history. Literally light, heat, mobility, mechanized agriculture, everything that we have, every shred of our standard of living has been provided by our industry if you look back 100 years ago. That's the context in the statements that I make. The comments on demand are simply, I'm just repeating what the International Energy Agency and others state. In fact, if you look at our demand forecast going forward, they're very similar to those of our competitors. When people talk about peak oil, they're simply not looking at facts and data for the foreseeable future.
Now technology advances, and that's a good thing, and there will be other forms of energy that will come into the energy mix. I think good debate on energy policy starts with a good grounding of the facts. Peak oil will happen at some point, but for the foreseeable future, as the developing world puts in place economic systems to generate the kind of standard of living that we have and the infrastructure that's associated with it's pretty clear that oil demand is going to grow. In fact, demand estimates for next year are up again. We're getting close to 100 million barrels a day. Natural gas demand is growing, and our products are needed, and we have to be able to provide them in an environmentally safe way and in an environmentally responsible way.
We really ought to have deeper debate on these subjects based on a well-grounded set of facts. That's where I come from when I make the kind of comments that I do.
I appreciate your viewpoint. Thanks again. Good luck, John.
Thank you.
Thank you. Our next question comes from the line of Paul Cheng from Barclays Capital. Your question, please.
Hey, guys. Good morning.
Good morning.
John, I want to add my congratulations.
Thank you.
It make me feel really old because I think I met you more than 20 years ago. That has been a while. That really appreciate that.
You're seasoned, Paul. You're not old.
That is a very nice term. Anyway, that really want to say congratulations and thank you.
Thank you.
putting up with all the nasty sales guy and others like us, so that really appreciate. With that, maybe I have two questions. First, if we look at the industry, we've been nearly constantly going through the boom and bust, partly is probably related to the normal commodity cycle, which naturally is going to have volatility like that. I'm wondering that is that also partly because the industry, how it's being managed, or that is being compensated. I mean, as you departing and go to the retirement, John, when you look at the industry, do you think the way that how it's being managed or how it's being compensated needs to be changed? That the cycle is just naturally going to be here and not much can be done?
Well, I think that's, in many ways, a company-specific question, because if you look at our comp system, we've had a pretty balanced compensation system for a long time. For those that aren't aware, there are really four big components to it. One is a salary that's based on competitive data. Two is a current year cash bonus, which is based on a scorecard. I would invite anyone to take a look at Chevron's scorecard, and it has a variety of things in it, including returns in that scorecard. Whether it's health, environment and safety, project progress and things of that sort. Now we've enhanced our disclosure on that in recent years, but I think it sets a standard. That's for the current year cash bonus. We have two other long-term components that really are 100% aligned with shareholder return.
The first is a relative TSR performance units. This last year, we added the S&P 500 as one of our competitors. That is married up with what for the most part in the past has been options that have been given, which again, is aligned with shareholder performance, absolute shareholder performance over time. The thinking behind those components for us has been that you will have these ups and downs. If in an absolute sense we don't perform well, options won't return much. If in a relative way we outperform all of our competitors, we'll get that component. If it's downtime for the industry, you won't realize value from the options. It's really quite balanced, but it's very returns-focused, whether it's TSR-focused or returns-focused in the scorecard for the current year, along with other current year performance information.
The outcomes that we've achieved have largely been a function of the commodity price environment. We made $26 billion when oil was high, and we make nothing when oil was $42. It's been a volatile ride. If you look at those components together over time, I think ours has been a good system. I think there's a wide range out there in industry. Look, I read the same articles you do, and I've read some of the proxies and some of the information that other companies put out there. I think you're seeing a response to that by shareholders and by management.
The second one, don't know whether you want to comment, but since that you're retiring, you may. What will be your advice to the high official in a number of the oil producing countries, the way that how they manage the industry and that or that how the oil revenue is being managed inside, but that how that their relationship with the oil industry and how they can do better in terms of attracting the investment dollar?
Well, Paul, as you know, we talk a lot about the strain on the private companies like Chevron during this period of lower prices and the adjustment we've had to make. I've said on previous calls. Host governments are going through the exact same type of change. The difference is we have dividends, they have social spending as commitments that they have. They're wrestling with lower revenues. They've made commitments to their people, and they've got trade-offs to make. I think they're in the process of making those trade-offs. The advice would only be that it's a competitive world out there. When I talk to heads of state or governments, we are economic agents, and we respond to the incentives that are out there.
Putting in place a system that's going to draw capital, be viewed as stable over time is very important. We're seeing some countries that are responding to that. We're seeing others that aren't. When they don't respond, when it's not economic, private companies walk with their feet. These transitions can take time because of these trade-offs that governments have between keeping the cash and not adjusting the fiscal terms, and adjusting the terms to draw capital so that we can make the kind of long-term investments that'll deliver benefits over a longer period of time for their country. Those are the things that I think have to be considered, and most governments eventually gets there.
Well, congratulations, and hope you have a lot of fun in your retirement.
Thank you. Appreciate it, Paul.
Thank you. Our next question comes from the line of Doug Terreson from Evercore ISI. Your question, please.
Well, first, John, congratulations on your stock beating every peer during your tenure.
Thank you.
Over five and 10 years. I don't think you need any help with your handicap.
Thanks, Doug.
I think that's pretty good. My question is, Chevron had this pledge to focus on returns on capital employed and free cash flow, which you guys highlight on page three, it's had a long history of positive shareholder outcomes. Simultaneously, though, a lot of times investment discipline will falter as surplus capital materializes, Chevron looks likely to have a lot of surplus capital during the next couple of years. My question is, how significant do you consider the challenge to manage this transition to be? Besides some of the commentary that you and Pat made on spending and distributions, are there any other things that we should focus on which underscore Chevron's commitment to value creation going forward?
I don't want to advertise my successor's going to have an easy time because there will be challenges that the industry will face going forward. I think we're in a good place right now because we do have projects coming online and more that are coming. They are going to deliver cash flow. I actually think that there's a very high chance that we'll be very disciplined for a whole variety of reasons. One, the opportunity set that we have tends to be shorter cycle opportunities that we've highlighted by the shale. Second, if you compare the current period with the period, say, 10 years ago, we knew we had a number of major capital project opportunities coming up and that were in the hopper. I won't relive all the history of timing of funding of Gorgon and Wheatstone, Jack/St.
Malo, and some of the other large projects that we have had. We clearly don't have that array of gigantic projects coming up. We are funding in a countercyclical way the FGP project in a place we've been very successful in, Kazakhstan. The number of projects that we have going forward, the die is reasonably well cast over the next few years. In other words, there's not some $20 billion or $30 billion project expenditure that's progressed to the point that would likely get funded during this period. I think the discipline will be pretty clear. In fact, Mike will have the opportunity to give you an update on that capital spending range at our normal meeting in March.
Listen, Chevron has set up well. Congratulations again, John.
Thank you very much, Doug.
Thanks, Doug. Thank you. Our next question comes from the line of Evan Calio from Morgan Stanley. Your question, please.
Hey, good afternoon. I want to congratulate both Mike, I'm sure he is listening, and echo the congratulations, John, on your tenure. It's been a pleasure working with you, and I wish you the best.
Thank you, Evan.
Yeah. My first question, bigger picture. I know, John, you've been a strategic thinker. You've been involved in acquisitions of Unocal as well as the Chesapeake acreage and others. I think last month Chevron made a compelling case that the majors can really win in unconventionals. My question is, what do you think that the U.S. shale industry structure looks like in five years? I know it's less necessary for Chevron, but do you think that that industry will significantly consolidate over time? Any thoughts there would be interesting.
I do expect there to be some consolidation. I think a lot of the work that's going on now, a lot of the land work that's taking place certainly for us, but for many others as well, is we call it coring up, but it's really making sure that you've got contiguous acreage positions so that you can drill the kinds of laterals that you want to drill, put in place the infrastructure that you want, so that you can deliver good returns very efficiently. I do think that there will be that focus, and we're engaged in a number of different, I mean, frankly, we got dozens of different transactions that are underway to do just that, and we've highlighted that. Whether there will be broader consolidation, I think depends a lot on valuations.
Valuations have come back into line recently, it may create some of that opportunity. From our way of thinking when it comes to M&A, we like the positions we've had. I've made it pretty clear in the past that we don't have to do any particular acquisition at this time. At the same time, I've also said that we're in a resource business. Whether it's adding volume through exploration, discovered resource or M&A, we'll likely participate in all of those things. If there were a bolt-on opportunity, we'd consider it. It really would be driven by how does it fit. I mean, the question I always ask our people when we do M&A is, what do we know that the market doesn't? How can we add value that wasn't contemplated here?
Anytime we would engage in a transaction, I would encourage you to ask us that question because that's the question that we ask ourselves.
Great. John, there's always room for a Watson SPAC out there if you choose to follow your peers and not work on the handicap. My second question is on the Permian, more detailed, new slide 11. Can you give any color on what % of your 17 or 18 programs will be this new well design and any indication on how that affects your guidance, which I presume was predicated on the prior completion design?
I think virtually all of it is under this new design. We've been migrating to that design. This chart I hope was helpful to you because it's really three paths that we've had.
We monitor the type curves and the performance against them. These are 10,000-foot laterals. There are some that won't necessarily be 10,000-foot laterals, but that's certainly what we're striving for in most areas.
Got it. Good luck. Thank you.
Okay. Thank you, Evan.
Thank you. Our next question comes from the line of Roger Read from Wells Fargo Securities. Your question please.
Yeah, good morning and congratulations, John. It's certainly been a solid run.
Thanks, Roger.
Hey, I just wanted to follow up. Pat, this actually may be a question more for you. In the presentation, the change in depreciation, which I'm sure is driven mostly by Gorgon and the coming Wheatstone, is that accurate, and is that the right way to think about the, obviously a little less large, but the impacts of Wheatstone coming forward as well?
Yeah. I mean, a lot of it would be production volumetrically related. I do call you back to the Bangladesh depreciation catch-up component that was in there in this quarter for $220 million. The fundamental underlying components are going to be related to volumetric increases that we've had quarter to quarter. Depends on which period you're looking at. Third to third, of course, up significantly. Second to third is not exactly the same scenario, but that's where the Bangladesh catch-up shows itself.
Okay, great. As a follow-up to that, as we think about the slide on the Permian and all, obviously very attractive F&D and ultimate depreciation cost there, does that trend down overall for the company? Is the Permian not likely to be large enough for that to be the case over the next couple of years?
Yeah. Let me think. Overall, there's a balance between depreciation that's coming on from the new projects from Gorgon and Wheatstone, which we've said are largely between $20-$25 a barrel. The ramping down of depreciation that's taking place in the Permian and unconventional business. I flagged that last quarter as going down from, say, $19 a barrel down to $13, and frankly, even lower than that as we move forward with this new basis of design and more volumes at lower cost come into the mix. Maybe I'll defer on what the exact number will be each year, and we can come back to you with a little bit of guidance in that way. We haven't-
Finished our plan
We haven't finalized our plan, you're correct that it's a weight between those two.
Okay. That's great. Thank you.
Yeah.
Thanks, Roger.
Thanks, Roger.
Thank you. Our next question comes from the line of Guy Baber from Simmons. Your question, please.
Good morning, everybody.
Hey, Guy.
John, just echoing everyone else's comments, congrats on a great run here.
Thank you much.
I wanted to circle back to the CapEx kind of framework. As we think about the level of spending right now going to your base upstream assets, so setting aside your shale and type program and the spending associated with major projects, how comfortable are you with the current spending level for those assets, just in terms of sufficiency to sustain the base? Really just trying to understand if you see a need to step up that base spending level or not, given the efficiencies which you seem to continue to realize, and maybe how much flexibility there might be with oil prices where they are right now.
Well, if you look at the base level spend, we've categorized it excluding the major capital projects that are part of that base. It's been about $6 billion a year. We've been kind of at the bottom of that range. Our guidance going forward, we will have projects that will be associated with some of these new assets. There will be base level of spend. Some of these base projects are not trivial in the sense that some of the deep water well programs that are off existing hosts and things like that are there. I think what you'll see is a higher component, a higher percentage of our spend will be in the category of basin shale type spend going forward. In terms of the precise number, maybe we'll defer till we give you that usual split that we do in March.
The general trend is in the direction that you describe, certainly it's driven by economics.
Okay. That's great. At the risk of getting into the weeds here, on cash flow, as we dial in our 2018 cash flow and free cash flow expectations, just in light of some of the year-to-date headwinds, can you speak at all to some of those less obvious drivers of free cash flow next year that might be hard for us to see but important to consider? Just thinking if there's any high level observations, perhaps around the evolution of deferred tax or potential tax refunds, given where oil prices are right now, necessary contributions to TCO that might or may not be needed, and then maybe even a step down in pension payments next year given the discretionary contribution. Just wondering if you could put any color there.
Yeah. Let me make an overall comment about cash flow. There often are some things that are difficult to see. We've given you guidance on how sensitive we are to oil prices, for example. We said it's $350 million per dollar. The devil's in the detail on that, and particularly depending upon the range of prices that it's covering. For example, right now, if we happen to have negative taxable income, the leverage is higher in a particular jurisdiction. I think that's part of why we've said that we are exposed to the upside to commodity prices. I do urge some caution in the sense that we have a major affiliate, for example, in Kazakhstan, that is incurring spending that runs through the affiliate, and that can impact dividend or capital contributions to that company. It's not the normal consolidated operation.
Those kinds of things can impact us, and Pat can make a couple of other comments.
Yeah. I'd just say, if you're thinking about the future, pension contributions we look at every year. At least in terms of the U.S. pension plan, we're not in a statutory requirement to make a funding. In the past, you will see over time that we have up to $500 million, or in healthier days, spent $1 billion per year. That is a consideration that we will look at every year, but it's completely discretionary. John mentioned the affiliate component of things. The other one that I would highlight on a deferred tax basis, we have been in a position where deferred tax have been a headwind for us this year and in the last couple of years. As I look forward, obviously prices will be a huge impact as to when those in fact reverse.
If you look at reasonable price ranges around what we've had here in the 50s, say, I think you should anticipate that that will take some time for that cash benefit to come back into our actual cash coffers. It will be a bleed-out over time where the net operating losses that are creating these tax loss carryforwards in fact get monetized. It's a pretty slow bleed off if you're looking at prices around today's.
Thanks, guys.
Yeah. Thank you all.
Thank you. Our next question comes from the line of Ryan Todd from Deutsche Bank. Your question please.
Great. Thanks. I'll echo all those before me and pass on all my congratulations, John. It's been great, and good luck with what's next.
Thanks, Ryan.
Maybe a question, you've touched a little bit on this on various questions earlier, but a number of your integrated peers including your U.S. peer who also reported this morning, have been relatively active over the last couple of years in global asset markets, acquiring resource and global LNG, Brazil or various locations. You guys have remained relatively on the sidelines through most of this. Can you talk about how you're thinking about managing investment priorities not just for the next few years, but also how you view in terms of how your portfolio is positioned post 2020, and whether your decision to kind of stay on the sidelines through much of this over the last couple of years represents a, is it just portfolio positioning relative to what you think you have or is it a slight shift in investment philosophy longer term?
Well, I think it's been a couple of things, Ryan. One is, as you say, it's the portfolio. We've got a very good portfolio. We've got a million and a half acres in the Permian. We've got a lot to do and to digest there, and the other unconventional positions. We have a good resource base position. We have growth ahead over the next few years as we continue to bring on these projects and develop them and grow the shale. One, we do have a good position. As you point out, you do have to add resource over time, and that's why I made the comment that I did earlier. I'll tell you, we look at what's going to compete for capital in the portfolio against the opportunities that we have.
For much of this time period over the last few years, there's been, let's say, an imbalance between the expectations of buyers and sellers. You can't always reach commercial agreement, or you may just see things that are out of the money. We've been very cognizant of that. Now I highlighted earlier that, and I've said in previous calls, that we have a watching brief on a lot of different opportunities, whether they're asset-level transactions or companies. We do watch that very carefully, and over time, we do need to add assets to our portfolio. We've made some choices based on costs. We exited the Australian Bight, a difficult decision. We've got a good relationship with the government, that wasn't going to compete for capital going forward.
We're really trying to be true to what we told you, where we're being returns-focused and we're spending our money on what we think will be most economic.
Great. Thanks. That's helpful. Then maybe a follow-up on the chemical side of the business. You continue to see potential expansions talked about in the chemicals industry, particularly in the U.S. Gulf Coast. I know you guys have a cracker starting up here early next year, can you talk about maybe what you view as future growth opportunities and on that side of the business within CPChem? How aggressive you'd like to be and whether your Permian position, whether you think it allows for a certain amount of integration across the value chain there.
Yeah. As all of you know, we've got a good relationship with Phillips and Chevron Phillips Chemical Company as the primary vehicle through which we invest in petrochemicals. That relationship is good. We do have the plant that the derivatives are on stream and the ethylene plant's coming on early next year. We do have that, and we have contemplated other expansions with them. I think it's fair to say that the economics of those have the potential to be good, and certainly the continued growth of NGLs and the growth in the Permian, I think is going to contribute to an advantage feedstock position for a long time to come. With the overall drop in prices that we've seen and the impact on naphtha, it's tighter than it was previously.
Our focus right now is getting the project we've got online, getting through that storm damage and bringing the second phase of the project up.
Okay.
And then we'll-
Is it playing?
-consider the other opportunities.
Okay. Great.
Thanks, Ryan.
Thank you.
Okay.
Thank you. Our last question comes from the line of Anish Kapadia from TPH. Your question, please.
Hi. Yeah, my first question was on exploration. You've pulled out of some frontier areas. You mentioned the Bight, I think the Senegal-Mauritania area as well. I just wondered, how do you think about the role of exploration and resource replenishment going forward, and how do you see exploration stacking up relative to buying resources in the current market?
Yeah. I think you'll see us putting more money into existing basins where we have a lot of expertise. For example, there will be a focus for us on the Gulf of Mexico pending conditions, Nigeria's perspective, and some of our existing basins, I think. Look, remote areas, whether it's Arctic or Australian Bight or others, are just not likely to compete for capital. Believe it or not, we do have a little bit of exploration work that we'll do to continue our appraisal and assessment of some of our unconventional positions that are out there. If you look at where resource adds are coming from and where reserve adds are coming from, I think you're going to continue to see strong contributions from our four unconventional businesses going forward.
Thank you. I had one follow-up. It feels like we're bottoming out in terms of costs in the international market to some extent as well. From that regard, I was wondering if you can give some kind of update on the potential FIDs that you've got to take. I'm thinking about Rosebank, Tigris, Anchor in the Gulf of Mexico, and some projects in Indonesia. Are any of these likely to be FID-ed in 2018? Have you kind of got the costs where you want them, and do you have the capital availability to do it?
Yeah, that's a good question. I think we're working very hard. For example, Anchor and Tigris in the Gulf of Mexico, those are in the concept development stage, we're not in feed yet with those projects. A lot of the work that we're doing, for example, is to qualify equipment for the pressure regimes that we'll see. There's industry work to achieve some of the milestones in that area. At the same time, we have joint teams that are working those two developments to see if we can really design once and have enough commonality in design for not only those two projects, but for others in the industry, working with vendors to try to really do what we've talked about for a long time, which is to better standardize the development schemes to bring the cost down.
That work continues on those projects, they're not in feed yet, you wouldn't expect to see FID. Rosebank has been in feed and has been working very hard and diligently on both the concept and the cost, and they continue to make good progress. I think it's fair to say that in a $50 world, we've got strong opportunities in the unconventional space and elsewhere. We're continuing to work that project. It's a good opportunity for us, there's more work yet to do.
Thanks, Anish.
Okay. I think that concludes my prepared remarks for today. I certainly appreciate the very kind words that all of you stated. I've enjoyed my coming up on eight years in the role. I appreciate the dialogue that I've had with both the sell side and the buy side, and I'll look forward to the afterlife. I wish you all the best. Thank you very much.
Ladies and gentlemen, this concludes Chevron's third quarter 2017 earnings conference call. You may now disconnect.