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 a listen only mode. After the speakers' remarks, there will be a question and answer session and instructions will be given at that time.
As 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 3rd quarter earnings conference call and webcast. On the call with me today are Pat Yerington, our Vice President and Chief Financial 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 2. Turn to Slide 3. Let me start by revisiting the 3 messages we delivered in March at our Analyst Day. First, we are growing free cash flow. 3rd quarter cash flow after dividends, excluding asset sales proceeds, was approximately 500,000,000 dollars As shown in the chart, including asset sales proceeds, we generated $2,800,000,000 2nd, 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. We'll follow I will follow her up with some operational updates and a few closing thoughts.
Okay. Thanks, John. Starting with Slide 4, an overview of our financial performance. 3rd quarter earnings were $2,000,000,000 or $1.03 per diluted share. Included in the quarter was a gain on the sale of our Canadian refining and fuels marketing business of 675,000,000 and charges associated with the project write off of $220,000,000 Foreign exchange losses for the quarter were $112,000,000 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 $1,600,000,000 or $0.85 per share. Included in this total was a catch up depreciation adjustment of about $220,000,000 related to our Bangladesh upstream business, which we have decided to retain. Cash from operations for the quarter was $5,400,000,000 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, but 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 Q3, we paid $2,000,000,000 in dividends. Earlier in the week, we declared $1.08 per share dividend payable in the 4th quarter. We currently yield 3.6%. Turning to Slide 5.
During the quarter, net cash generated after C and E and dividends was $2,800,000,000 including $2,300,000,000 in proceeds from asset sales. Year to date, net cash generation after dividends stands at $3,800,000,000 Cash flow from operations was $5,400,000,000 during the Q3. It was a strong quarter despite approximately $600,000,000 in pension contributions and affiliate dividends being the lowest we've had this year. Year to date, cash from operations has totaled 14,300,000,000 dollars Lower affiliate dividends and earnings, working capital consumption of funds and deferred tax effects in the aggregate totaled nearly $3,300,000,000 through the 1st 9 months. Cash capital expenditures were $3,200,000,000 for the quarter, approximately $800,000,000 lower than the Q3 of 2016.
Year to date cash capital expenditures were 9,800,000,000 dollars over 30% lower than the same period a year ago. 3rd quarter asset sale proceeds were approximately $2,300,000,000 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 and Indonesia and gas assets in Trinidad and Tobago. Year to date asset sale proceeds now total $4,900,000,000 We are confident that we will exceed our objective of being cash balanced this year, including asset sales. Turning to Slide 6 now. Slide 6 compares current quarter earnings with the same period last year.
3rd quarter 2017 earnings were approximately $700,000,000 higher than Q3 2016 results. Special items, primarily a $675,000,000 gain on the sale of our Canadian Refining and Fuels Marketing business, offset by a project write off of $220,000,000 and the absence of special items in the Q3 of 2016, increased earnings by $165,000,000 A swing in foreign exchange impacts reduced earnings between the periods by 184,000,000 dollars Upstream earnings, excluding special items and foreign exchange, increased by about $800,000,000 between periods. Higher realizations and increased volumes were partially offset by higher DD and A, both from the increased production and, as previously mentioned, from the catch up adjustment in Bangor DASH. Downstream results, excluding special items and foreign exchange, increased by 55,000,000 dollars Higher global refining margins were partially offset by a swing in timing effects resulting from rising prices. If we turn now to Slide 7.
Slide 7 compares the change in Chevron's worldwide net oil equivalent production between the Q3 of 2017 and Q3 of 20 16. Q3 2017 production was 2,720,000 barrels per day, an increase of more than 200,000 barrels per day over the Q3 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 3rd quarter production. Overall, production increases were partially offset by normal field declines and PSC effects.
So I'll now turn it back to John.
Okay. Thanks, Pat. Turning to Slide 8. 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% to 9% from 2016.
At 9 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% to 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 interest in Trinidad and the Natuna Sea in 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 9. Gorgon continues to ramp up. Total production was more than 400,000 barrels a day in the Q3.
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 plans 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 9 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. 1st LNG for Wheatstone Train 2 is scheduled for the Q2 next year. Now let's turn to the Permian on Slide 10.
Unconventional production in the Permian continues to exceed expectation. Volume was 187,000 barrels a day in the 3rd quarter, up 30% from Q3 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 5,000,000 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'd 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 3 pads currently being developed with 10,000 foot laterals. Based on our type curves and cost, we expect to recover an average of about 1,900,000 barrels per well with $14 per barrel capital, operating and overhead expenditures. At $50 a barrel WTI, $2.50 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 2 times the capital costs. This is very good use of your money. Capital and operating expenses continue to trend down. Capital expenditures averaged $4,500,000,000 per quarter this year, down by more than half from 3 years ago. Following the normal intra year pattern, 4th quarter spend will be higher, but we expect full year capital expenditures will be less than $19,000,000,000 We're also controlling operating and administrative expense as well.
Average quarterly costs are down again this year, about $450,000,000 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 $5,000,000,000 to $10,000,000,000 worth of assets in 2016 2017 combined. Through 7 quarters, we've sold $7,700,000,000 squarely in the middle of the range.
In the Q3, 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 Q4. 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 hasn't changed and is listed on the chart.
Before taking your question, I'll offer a few closing thoughts. As you know, I've announced my retirement effective February 1, so this will be my last earnings call. The financial community judges CEOs by TSR, and I'm gratified that we outperformed our peers during my tenure. That's an outcome my 2 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've seen tremendous volatility in price and cost conditions.
On my first day in 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's impacted industry results and produced TSRs that have lagged the S and P 500 index. But the company has weathered the downturn, adjusted rapidly to new conditions and is well positioned for the future. Including our Q4 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 the Q4 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 questions.
So Jonathan, please open the lines for those questions.
Thank Our first question comes from the line of James Campbell from Jefferies. Your question please.
Yes, I think that's me folks. Hi everyone. Good morning, guys. 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. So best wishes in all your future endeavors.
Thank you much, Jason.
First question, John, pretty significant major milestones achieved over the quarter with the first LNG startup at Wheat Stone, Gorgon to 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 2,009 on this project and a lot of the engineering work was done 10 years ago, a lot of project planning work was done 10 years ago. And I think it's fair to say we and 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 that of say Gorgon when we started and it was labeled by independent reviewers the best prepared mega project out there. And 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. So 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. So 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. So if a vendor or a 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. And 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 the strong balance sheet give you relative to smaller competitors?
Sure. When you look at the Permian and you look at Chevron, we have a portfolio of products. So we're generating cash flow from each individual investment that we make in the Permian. But that's a team effort really. We have a strong procurement organization.
We have a technical organization that supports our people in the Permian. And we have learnings that we're generating. We've talked a lot about data science, but there's more to it than that 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 with the learning curve pretty fast with drilling fewer wells. And it's that kind of capability that I think is advantageous to us.
Also, we have a portfolio that 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, but 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. And 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. Good
morning Paul.
John, we first met a long time ago when you were the CFO and just want to thank you for the time and patience you showed in dealing with guys like me and congratulate you on your retirement. You know, we really can't argue with shareholder return as a measure. So enjoy. You got me slightly fantasizing about retiring myself, but 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 and by the way, there was a tremendous positive element here, which was the Permian slide. But 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? Because I think we were a bit negatively surprised, quite frankly.
Yes. I saw how the stock opened and I must say I was surprised because underneath that I think we're doing pretty well. And so I 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. So let me talk through a couple of things and I'll also let Pat make comment.
On earnings, 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. So that was some $220,000,000 We terminated a rig contract, which was $150,000,000 before tax.
And so that appeared in the numbers. We've also got some things going on in working capital that don't impact earnings per se. Let me let Pat walk you through a couple of those. Yes.
I mean, 2 things on the cash flow side I would mention is, 1, the pension contribution. I called out a number of 600,000,000 dollars in total, but $500,000,000 of that was discretionary and the first one that we've made in the in all year. So that is a quarterly impact, dollars 600,000,000 in total, dollars 500,000,000 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 3 years, there's been some difficulty in some of our partners actually paying us what they owe us. So during the quarter, we were successful in negotiating, more security around that ultimate payment, but it meant having, a swap between what was a current receivable into a notes receivable.
So you ended up having an adverse working capital effect or positive working capital effect in the quarter of about $600,000,000 as we recognized this reclassification from accounts receivable to a notes receivable. So when you look at our 10 Q statements and you look at what's happened in notes receivable, you will see there was no cash flow impact during the quarter for that. It did impact working capital, however.
So what you're saying is the working capital adjustment is a touch misleading during the quarter. And really the news was good because we were able to secure provide better security around arrear and arrear from 1 of our national company partners.
So if you kind of look through that, you're really talking about our cash from operations, I think, on a headline basis and adding back the $500,000,000 discretionary pension contribution. That gets you close to a $6,000,000,000 figure.
Great. And John, in all sincerity, thanks and congratulations.
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 and John congratulations. Thank you. John, first a big picture question, the energy sector broadly hasn't created a lot of value over the last 10 years. Now 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.
So sort of 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 you've come from downstream or the shale Ian piece?
Yes. If you look at our TSR, since I started, it was just under 10 percent, but that's lagged the S and P, which of course gets heavily weighted by the FANG stocks. But 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. And so I think the message really is that we're a pretty resilient bunch in this business.
And when prices go up, technology keeps moving and we're able to respond to that very well as an industry. So never underestimate that ingenuity, if you will, because we're very, very good at what we do. We don't our industry doesn't get a lot of attention as a technology industry, but clearly we have been. And that results in a transition. So we are in a commodity price business.
We have to 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 performed a lot better. And 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. And 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 4 big shale opportunities that are very low cost. We've got continuing base business opportunities and we're trying to drive down the costs in some of the longer cycle time projects. But 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.
Appreciate that, John. And 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 20 18 relative to the 'seventeen to 'twenty two band that's out there?
Yes. We indicated that if prices stayed in the kind of near $50 range that we would be toward the bottom of that $17,000,000,000 to $22,000,000,000 range. And I see no reason to modify that guidance. That will certainly be the case. A couple of things I'll highlight for next year and it will be we got our plan approved in early December, I expect, and we'd put out a C and E release after that.
Next year will be the peak year next year, 20 eighteen-twenty nineteen will be the peak spending time for the future growth project in Kazakhstan. And of course, we'll continue to fund the Permian, but nothing has changed that will drive us away from the bottom toward the bottom of that range.
Thanks, John. Good luck with your handicap.
Thanks. Thanks, Neil. Appreciate it, Neil.
Our next question comes from the line of Phil Gresh from JPMorgan.
I echo everybody's sentiments. Congratulations, John. 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. And I think at the Analyst Day, you actually expected it to be more like -2% this year. And it would take a couple of years for that to get to kind of a 0% to plus 1% trend line.
So maybe you could just elaborate on why you've been able to outperform that base plus shale expectation and how do you roll that forward and think about the outlook for the next
few years? Well, 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. So certainly that has been a positive. And so infill drilling program, development well drilling off of our hosts in deepwater etcetera has been very successful for us.
So that is certainly a positive. And you see the Permian and shale results have been good. So I made a comment in my closing remarks that I think we're sustainable for a good period of time at lower prices and 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. So I think that's very positive.
We'll go through our normal cycle with you where on the Q4 earnings call, we'll give you an estimate for production for next year. But 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 will 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 Q4 as we lap last year's Q4 tweak up. So maybe you can 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. And you've heard me over time, we've said we'll increase it as a 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 only increase the dividend if I didn't think we could sustain in perpetuity. So we put a high bar on increases. And 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 Q4 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. But the great thing about the dividend is we get an opportunity to reconsider it every 90 days. And so 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 will 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. And John, I'm going to add my congratulations also. I'm in the same generation as the Sankey CFO timeline.
So thanks for putting up with us for the last 15 years. We really appreciate it.
All good, congrats. It looks like you're going out on a
high with oil like above 60, but anyway relatively speaking anyway. All right. So 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 be the you kind of manage through the establishment of a very large legacy asset base.
That's obviously driving this inflation in cash flow. Mike Worth's track record has been something of a cost cutting asset sales generally 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? And what I'm really getting at is, do you think there's an follow-up, please.
Yes, 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. So what do I mean by that?
What it means is, Gorgon and Wheatstone, for example, we have to ramp up ramp those up, fine tune them, get the most out of those young assets and then debottleneck them over time. So I would describe that as sort of base business type activity. We have a Permian business that has a lot of momentum behind it. And we have other assets, other fresh assets that have been or are coming will be coming online that will give us a lot to work on for incremental returns over time. And 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 exceptional job is really, they've did an exceptional job is really they've been penny pinchers in that sense and they've learned how to eat more out of the refineries.
And I think that's exactly what we want to do with our assets. But 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. And 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. So 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.
But 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 got a chance to talk to him, he's a very broad guy.
We're looking forward to it, but I want to see just the same, John. So 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. And I am an unabashed advocate for our industry. Our industry is responsible for the greatest advancements in living standard in recorded history. And 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.
So that's the context in the statements that I make. And the comments on demand are simply, I'm just repeating what the International Energy Administration and others state. In fact, if you look at our demand forecast going forward, they're very similar to those of our competitors. So 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.
But I think good debate on energy policy starts with a good grounding of the facts. And 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, 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 100,000,000 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. But we really ought to have deeper debate on these subjects based on a well grounded set of facts. And so 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. John, I want to add my congratulations. I think that you make me feel really old because I think I met you more than 20 years ago. So that has been a wild wild, so that we really appreciate that.
You're seasoned. You're seasoned, Paul. You're not old.
Old. That is a very nice term. But anyway, we really want to say congratulations and thank you that putting up with all the nasty sales side and the nice nice stuff that we do appreciate. So with that, maybe I have 2 questions. First, if we look at the industry, we've been nearly constantly go through the boom and bust.
Partly, it's probably related to the normal commodity cycle, which naturally that is going to have volatility like that. But I'm wondering that you said also partly is because the industry, how it is being managed or that is being compensated. So I mean, as you're departing and go to the retirement joint, when you look at the industry, do you think the way that how it is being managed or how it is being compensated need to be changed or that 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. And for those that aren't aware, there are really 4 big components to it. 1 is a salary that's based on competitive data. 2 is a current year cash bonus, which is based on a scorecard. And 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.
And so 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. So that's for the current year cash bonus. And then we've had we have 2 other long term components that really are 100% aligned with shareholder return. The first is a relative TSR performance units.
And this last year, we added the S and P 500 as one of our competitors. But that is married up with what for the most part in the past has been options that have been given, which again is lined with shareholder performance, absolute shareholder performance over time. And the thinking behind those components for us has been that you will have these ups and downs. And so 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, but we but if it's downtime for the industry, you won't realize value from the options.
And so 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 $26,000,000,000 when oil was high and we make nothing when oil was 42. And so it's been a volatile ride. But 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. And look, I read the same articles you do and I've read some of proxies and some of the information that other companies put out there. And 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 I mean, not to mention how oil revenue is being managed inside the debt, how that relationship with the oil industry and how they can do better in terms of attracting the investment dollar?
Well, Paul, as you know, I mean, 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. And 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. And so they're wrestling with lower revenues. They've made commitments to their people and they've got trade offs to make.
And so 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. And so when I talk to heads of state or governments, we are economic agents and we respond to the incentives that are out there. So putting in place a system that's going to draw capital, be viewed as stable over time is very important. And we're seeing some countries that are responding to that.
We're seeing others that aren't. And when they don't respond, when it's not economic, private companies walk with their feet. And so 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 will deliver benefits over a longer period of time for their country. And so those are the things that I think have to be considered and most governments eventually gets there.
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 and over 5 10 years. But I don't think you need any help with your handicap. I think that's pretty good. But so my question is, Chevron had this pledge to focus on returns on capital employed and free cash flow, which you guys highlight on Page 3 and it's had a long history of positive shareholder outcomes. Simultaneously though, a lot of times investment discipline will falter as surplus capital materializes and Chevron looks likely to have lot of surplus capital during the next couple of years.
So my question is, how significant do you consider the challenge to manage this transition to be? And 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 success. I'm going to have an easy time because there will be challenges that the industry will face going forward. But I think we're in a good place right now because we have 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.
1, the opportunity set that we have tends to be shorter cycle opportunities that we've highlighted by the shale. 2nd, 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 we're in the hopper. And 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. But 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. But 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 $20,000,000,000 or $30,000,000,000 project expenditure that's progressed to the point that would likely get funded during this period. So I think the discipline will be pretty clear. And in fact, Michael will have the opportunity to give you an update on that capital spending range at our normal meeting in March.
Okay. Well, 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 Kallo 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.
Yes, my first question, bigger picture. I know, John, you've been a strategic thinker. You've been involved in acquisitions of Unical 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. And my question is, what do you think that the U.
S. Shale industry structure looks like in 5 years? I know it's less necessary for Chevron, but do you think that that industry will significantly consolidate over time or 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. And so I do think that there will be that focus and we're engaged in a number of different I mean, frankly, we've 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. Now valuations have come back into line recently, so it may create some of that opportunity.
From our way of thinking when it comes to M and 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. But at the same time, I've also said that we're in a resource business. And so whether it's adding volume through exploration, discovered resource or M and A, we'll likely participate in all of those things. And so if there were a bolt on opportunity, we'd consider it.
But it really would be driven by the how does it fit? I mean, the question I always ask our people when we do M and A is what do we know that the market doesn't? And what how can we add value that wasn't contemplated here? And so 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 and 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 percentage of your 2017 or 2018 programs will be this new well design and any indication on how that affects your guidance, which I presume is predicated on the prior completion design?
I think it's 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 3 pads that we've had. And 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, Adam.
Thank you. Our next question comes from the line of Roger Read from Wells Fargo Securities. Your question please.
Yes. 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 Wheat stone. Is that accurate? And is that the right way to think about the obviously a little less large, but the impacts of wheat coming forward as well?
Yes. 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 220,000,000 dollars But 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. 3rd to 3rd, of course, up significantly.
2nd to 3rd is not exactly the same scenario, but that's where the Bangladesh catch up shows itself.
Okay, great. And then as a follow-up to that, as we think about the slide on the Permian and all, and D and ultimate depreciation costs there, does that trend down overall for the company? Or is the Permian not likely to be large enough to for that to be the case over the next couple of years?
Yes. Let me think. Overall, there's a balance between depreciation that's coming on from the new projects from Gorgon and Wheatstone, which we said are largely between $20 $25 a barrel. And then the ramping down of depreciation that's taking place in the Permian and unconventional business. And 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 base 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 a little bit of guidance in that way. We haven't finalized our plan, but it's you're correct that it's a weight between those 2.
Okay. That's great. Thank you.
Thanks, Roger. Thanks, Roger.
Thank you. Our next question comes from the line of Guy Baber from Simmons. Your question please.
Good morning everybody. And 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. But as we think about the level of spending right now going to your base upstream assets, so setting aside your shale and tight 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? And 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, it's been we've categorized it excluding the major capital projects that are part of that base, it's been about $6,000,000,000 a year. So we've been kind of at the bottom of that range. And our guidance going forward, we will have projects that will be associated with some of these new assets. So you'll call that base there will be base level of spend. Some of these base projects are not trivial in the sense that some of the deepwater well programs that are off existing hosts and things like that are there.
But 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 until we give you that we'll give you that usual split that we do in March. But the general trend is in the direction that you described and it's certainly it's driven by economics.
Okay, that's great. And then 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? And 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 even maybe even a step down in pension payments year given the discretionary contribution. But just wondering if you could put any color there?
Yes. 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 $350,000,000 per dollar. But the devil is 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. So I think that's part of why we've said that we are exposed to the upside to commodity prices. But we do have 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 impacts that can impact dividend or capital contributions to that company. It's not the normal consolidated operation. So, those kinds of things can impact us.
And Pat can make a couple of other comments.
Yes. I'd just say, if you're thinking about the future, I mean, pension contributions we look at every year. We're not in at least in terms of the U. S. Pension plan, we're not in a statutory requirement to make a funding.
But in the past, you will see over time that we have up to $500,000,000 or healthier days spend $1,000,000,000 per year. So 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've been we have been in a position where deferred tax has 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.
But if you look at reasonable price ranges around what we've had here in the $50,000,000 say, I think you should anticipate that that will take some time for that cash benefit to come back into our actual cash coffers. So it will be a bleed out over time, where the net operating losses that are creating these tax cash carry forwards in fact get monetized. But it's a pretty slow bleed off if you're looking at prices around today.
Thanks, guys. Thank
you. Yes. Thank you all.
Thank you. Our next question comes from the line of Ryan Tan from Deutsche Bank. Your question please.
Great. Thanks. And I'll echo all those before me and pass it on my congratulations, John. It's been great and good luck with what's next. Okay.
Maybe a question, you've touched a little bit on this and 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 markets acquiring Resource and Global LNG, Brazil or various locations. You guys have remained relatively on the silence through most of this. I mean, 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 is it just portfolio position 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 a a portfolio. We've got a very good portfolio. We've got 1,500,000 acres in the Permian. We've got a lot to do and to digest there and the other unconventional positions.
So we have a good resource base position and we have a lot of we have growth ahead over the next few years as we continue to bring on these projects and develop them and grow the shale. So 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. But I'll tell you, we look at what's going to compete for capital in the portfolio against the opportunities that we have. And 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.
And so you can't always reach you can't always reach commercial agreement or you may just see things that are out of the money. And so 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. And so we do watch that very carefully and over time we do need to add assets to our portfolio. But we made some choices based on costs.
We exited the Australian Bight, difficult decision. We've got a good relationship with the government, but that wasn't going to compete for capital going forward. So 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. And then maybe a follow-up on the chemical side of the business. I mean, 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, but can you talk about maybe what you view as future growth opportunities 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?
Yes. As all of you know, we've got a good relationship with Phillips and Chevron Phillips Chemical Company is the primary vehicle through which we invest in petrochemicals. And so that relationship is good. We do have the plant that's the derivatives are on stream and the ethylene plants coming on early next year. So 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, but 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. But with the overall drop in prices that we've seen and the impact on naphtha, it's a little it's tighter than it was previously. But I expect I mean, our focus right now is getting the project we've got online, getting through that storm damage and bringing the 2nd phase of the project up. And then we'll consider the other opportunities. Great.
Thanks, Ryan. Thank you. Okay.
Thank you. Our last question comes from the line of Anish Kapadia from TPH.
My first question was on exploration. You've pulled out sort of some frontier areas. You mentioned the by, I think, 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 mine resource in the current market?
Yes. I think you'll see us putting more money into existing basins where we have a lot of expertise. So for example, there is 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.
But 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 4 unconventional businesses going forward.
Thank you. And then I have one follow-up. So it feels like we're bottoming out in terms of costs in the international market to some extent as well. So 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 in 2018?
Have you kind of got the costs where you want them? And do you have a capital availability to do that?
Yes, that's a good question. I think we've gotten we're working very hard. For example, Anchor and Tigris in the Gulf of Mexico, those are in the concept development stage. So we're not in FEED yet with those projects. And a lot of the work that we're doing, for example, is to qualify equipment for the pressure regimes that we'll see.
So there's industry work to achieve some of the milestones in that area. At the same time, we are we have really joint teams that are working those two developments see if we can really design once and have enough commonality and 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 to better standardize the development schemes to bring the cost down. That work continues on those projects. And so they're not in FEED yet, so 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 on the cost and they continue to make good progress.
But I think it's fair to say that in a $50 world, we've got strong opportunities in the unconventional space and elsewhere. And so we're continuing to work that project. It's a good opportunity for us, but there's more work yet to do.
Thanks, Anish.
Okay. I think that concludes my prepared remarks for today. Certainly appreciate the very kind words that all of you stated. I've enjoyed my coming up on 8 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.
So I wish you all the best. Thank you very much.
Ladies and gentlemen, this concludes Chevron's 3rd quarter 2017 earnings conference call. You may now disconnect.