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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Why Chevron Is Investing $37B In The World’s ‘’Most Difficult Oil’’

I wrote Wednesday about Australia’s Oil Search making a major $2.2 billion investment in Papua New Guinea natural gas. Noting this as a sign the right projects are still getting financed in the global oil and gas space.

And later that day, we got news of a new mega-deal in the petroleum investment space. One that comes at a ten-fold larger scale.

That came from U.S. major Chevron. Which the Wall Street Journal reported Wednesday will lead a consortium investing a stunning $37 billion in one single project — located in a completely unexpected part of the world.

Offshore Kazakhstan.

Related: Why $50 Oil Is Here To Stay

The Journal cited Kazakhstan’s energy minister, Kanat Bozumbayev, as saying the massive investment will come from Chevron and partners ExxonMobil, Lukoil and Kazakhstan state firm KazMunaiGas. With the target being an expansion of the Tengiz oil field, located in the Kazakh Caspian Sea.

Energy minister Bozumbayev said that recent meetings with Chevron had confirmed the investment at Tengiz. Which is already producing 500,000 barrels per day of oil under the Chevron-led consortium.

The fresh $37 billion program will be aimed at expanding that output. With production now expected to rise to 760,000 barrels per day by 2021.

The move is surprising for a number of reasons. First for its shear size — at a time when most E&Ps are cutting back capital expenses.

The deal is also surprising given the extreme challenges involved with Tengiz. As the figure below shows, the field (circled in white) lies at the remote northern reaches of the Caspian Sea — where conditions like cold weather and ice flows make development extremely challenging.

(Click to enlarge)

Source: WorldPower Map

In addition, oil produced from Tengiz is extremely sour — requiring specialized infrastructure to process sulphur. A fact that has led to considerable delays in development of the neighbouring Kashagan mega-field. Related: Why Canada’s Oil Sand Producers Will Recover Quickly From The Wildfires

But Chevron and partners are pushing ahead with a huge investment here, despite these challenges. Because the field provides one thing most other projects don’t — big upside, with lower risk.

Being an expansion project, Tengiz has a clear path to adding hundreds of thousands of barrels in daily production. With a fraction of the risk that exploration or new development projects bring.

Clearly, majors like Chevron and Exxon are willing to pay top dollar for that certainty. Giving them a reliable source of growth that’s unlikely to experience hiccups.

The message being: oil and gas firms are still looking to expand, and they still have cash to invest. What they don’t want in today’s choppy markets is anything unexpected. Watch for brownfields expansions and bolt-on acquisitions becoming an important petro-investment trend.

Here’s to being reliable

By Dave Forest

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Leave a comment
  • Steve on May 27 2016 said:
    Tengiz is neither offshore nor in the Caspian sea. It is a land location which does not have the inherent added difficulties of an offshore location.

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