Why the Gulf of Mexico Is Crucial to Chevron's Upstream Portfolio

These days, it's critical for integrated majors such as Chevron (NYSE: CVX  ) to put up strong upstream results. Exploration and production are crucial for integrated energy companies in light of the extremely difficult operating conditions on the downstream side of the business. Poor downstream profits last year, driven by shrinking margins on refined products, place even greater pressure on Chevron's upstream portfolio in 2014.

Fortunately, Chevron has several projects that should drive solid exploration and production results in the years ahead. One major area of focus will be the deepwater Gulf of Mexico, where Chevron along with peers BP (NYSE: BP  ) and ConocoPhillips (NYSE: COP  ) are placing added focus this year.

The Gulf of Mexico is back
Seeing as how we're just four years removed from the Gulf of Mexico oil spill, it seems unlikely that the Gulf of Mexico would see a rapid recovery in oil production. That's exactly what has occurred, however, and a slew of integrated oil majors are making even greater commitments to deepwater oil production. There's good reason for this, since the Gulf of Mexico remains one of the most promising oil-producing areas in North America.

Consider the massive production that takes place in the Gulf. According to the U.S. Energy Information Administration, offshore oil production in the Gulf accounts for 23% of total U.S. crude oil production. In addition, the Gulf holds 30% of total U.S. natural gas processing plant capacity.

This is why BP and ConocoPhillips are teaming up in the Gulf as well as Chevron. ConocoPhillips recently announced its fourth major discovery at the Gila well, where it owns a 20% interest in the project. BP operates the Gila well, which it believes to hold a significant amount of reserves, although a specific calculation has yet to be released.

Chevron is placing its bets on the Gulf of Mexico
Chevron's Gulf of Mexico operations focus on two key regions: shelf and deepwater. Total Gulf of Mexico production is currently split between the two. The company's shelf production totaled 105,000 barrels of oil equivalent per day and deepwater production clocked in at 111,000 barrels per day last year. While its Gulf of Mexico production is currently even between shelf and deepwater, Chevron is in the midst of a shift toward deepwater production in the years ahead.

In deepwater, Chevron has a very strong project queue. There are a number of specific projects set to come on-line over the next two years. Chevron has four deepwater drill ships working the offshore deepwater with another one on the way. A sixth will be added in 2015. In the deepwater Gulf, one specific project that shows promise is the Jack/St. Malo region, which should begin start-up in 2014. Production capacity is pegged at 177,000 barrels of oil equivalent per day.

Next year, Chevron expects to begin production at Big Foot in the Gulf of Mexico. Production capacity at Big Foot stands at an estimated 79,000 barrels per day. Progress there is proceeding smoothly, as the company already has two wells pre-drilled. Chevron plans to install a hull tow offshore later this year, and if all goes according to plan, production is set to begin next year.

These would represent significant additions to Chevron's upstream production, since it produced a total of 657,000 barrels of oil equivalent per day in 2013.

Chevron's Gulf portfolio is all systems go
After seeing downstream profits collapse last year due to extremely difficult refining conditions, integrated major Chevron is sincerely hoping to do better this year. Such poor performance on the downstream side of the business places added emphasis on upstream activities to boost cash flow in the year ahead.

Fortunately, Chevron expects to reap strong results from its exploration and production activities. That stands to reason, since a full 90% of Chevron's $40 billion 2014 capital expenditure budget will be allocated toward upstream crude oil and natural gas projects. Continued investments in the company's core upstream assets, including the Gulf of Mexico, should keep production and cash flow going in the right direction.

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