Chevron (CVX 0.52%) has released its 2023 capital spending plans. The oil company sees its capital budget surging 25% over the coming year. That's a notable increase, considering that the oil industry has been keeping a tight lid on investment spending.

The company's big spending boost might set off an alarm. Here's a closer look at Chevron's plan and whether it should concern investors.

Drilling down into Chevron's 2023 capital plans

Management plans to invest a total of $17 billion on capital projects in 2023, 25% higher than in 2022. The company will spend $14 billion across its consolidated subsidiaries and invest another $3 billion across its equity affiliates. That combined spending level is at the top end of its $15 billion to $17 billion guidance range. 

It will invest the lion's share in its U.S. oil and gas production assets. Chevron will spend $8 billion, with half of that money going toward growing its Permian Basin production. The company will also invest $2 billion in its other U.S. assets and allocate about 20% of its upstream capital for projects in the Gulf of Mexico.

Chevron also plans to invest $2 billion in lower-carbon projects. This spending includes $500 million to lower the carbon intensity of its traditional operations and $1 billion to increase its renewable fuels production capacity.

Meanwhile, half of its affiliate capital will go toward projects in Kazakhstan, and a third is for its chemicals joint venture with Phillips 66 (PSX 0.34%), called CP Chem. Chevron and Phillips 66 recently partnered with QatarEnergy to build an $8.5 billion petrochemical facility in Texas that should start up by 2026. 

What's driving Chevron's spending increase?

Two notable factors are fueling the higher capital spending plan: inflation and lower-carbon investments. The company pointed out that its budget assumes mid-single-digit cost inflation in most areas, though it expects low double-digit cost inflation in the Permian Basin.

A big driver is higher service costs. With the oil market improving over the past year, oil companies are drilling more wells, boosting demand for drilling rigs and other equipment. That's leading oil-field service companies to raise rates as they capitalize on surging demand.

Despite the higher inflation, Chevron still expects to earn attractive investment returns. That's because energy prices have also risen, and it's investing in its highest-return opportunities. So while the inflationary impact is somewhat concerning, it's not a reason for investors to consider selling the stock.

The other notable driver of the company's budget increase is a big ramp-up in lower-carbon investments. Chevron will spend more than double its 2022 budget on projects to reduce its carbon emissions and grow its lower-carbon energy production, with half that spending going toward increasing its renewable fuels production capacity.

Chevron made two notable renewable fuels investments this year. It spent $3.15 billion to acquire Renewable Energy Group -- which made Chevron the second-largest biorenewable fuels producer in the country -- and formed a 50-50 joint venture with Bunge (BG 1.37%) to develop feedstock to produce renewable fuels. Chevon will invest $600 million into the Bunge joint venture, aiming to double their combined capacity to 7,000 tons per day by the end of 2024. 

The energy giant set bold goals to reduce its emissions and grow its lower-carbon businesses over the next several years. Thanks to its renewable fuels and Bunge deals, it has made significant strides in its plan to increase its renewable fuels capacity to 100,000 barrels per day by 2030. These investments put Chevron in a better position to capitalize on the potentially enormous market opportunity for lower-carbon energy. 

No need to worry

Chevron CEO Mike Wirth summed up the company's budget strategy in the press release announcing its plans, saying, "Our 2023 [capital expenditure] budgets are consistent with our long-term plans to safely deliver higher returns and lower carbon." Wirth said that even with inflation, it's in line with its prior outlook. Because of that, investors shouldn't be concerned about the spending increase since a noticeable driver is a big ramp-up in lower-carbon investments. 

And Chevron's budget won't affect its ability to return more capital to shareholders. It ended last quarter with a fortresslike balance sheet, with its net debt under 5% and well below its 20% to 25% target range. Because of that, it has the flexibility to increase spending while growing its dividend and buying back stock even if oil prices cool off next year.

That combination of financial strength, traditional and low-carbon energy growth, and shareholder returns makes Chevron a great oil stock to own for 2023 and beyond.