Upstream: Focusing On Long-Term Growth

By David J. O'Reilly, Vice Chairman of the Board
Chevron Corporation

Annual Meeting of Stockholders

San Ramon, California

Also see a press release regarding this speech.

I'm pleased to tell you of the tremendous opportunities we have in oil and gas exploration and production -- even in the current business climate.

The "upstream," as this part of our business is called, is the company's main growth engine.

Throughout Chevron, our goal is to balance short-term earnings with long-term growth by reducing costs, making the most efficient use of capital, and minimizing investments except in key growth areas. This allows us to focus on large, low-cost producing assets that create value.

Our goal also is to be the partner of choice around the world. Our international ad campaign "Symbol of Partnership" stresses our uncompromising business ethics, sound environmental practices, our skilled work force, advanced technologies and a deep respect for host countries.

West Africa is one of our most important areas of operation. I was in Nigeria recently, and there are some very positive things going on.

For the first time in 20 years, the country has a democratically elected president, who is addressing Nigeria's most serious problems, including unemployment and ethnic rivalries. We applaud those efforts.

Of the 10 new fields Chevron brought on stream in 1998, three were in Nigeria. We currently produce about 440,000 barrels a day and expect that figure to rise to more than 600,000 in four years.

I'm especially proud of the Escravos Gas Project, the first of its kind in Nigeria. This project gathers natural gas that previously was burned into the atmosphere and sends it by pipeline to power plants. It not only reduces greenhouse gases but helps develop new markets.

Also moving ahead is the West African Pipeline that will deliver gas to nearby countries.

In Angola, we're currently producing almost 500,000 barrels of oil a day. We aim to increase production to more than 600,000 in the next few years.

Offshore we've recently discovered four deepwater fields estimated to contain 3 billion barrels of reserves. The first of these — Kuito — will begin producing later this year.

Production continues to expand at the Tengiz oil field in Kazakhstan. Output was up more than 20 percent in 1998 to 188,000 barrels a day, and we're currently producing more than 200,000.

A breakthrough occurred in November, when the Russian and Kazakh governments approved plans to build an export pipeline from Tengiz to the Black Sea.

Most construction contracts have been signed, and groundbreaking is set for May 12. We expect the pipeline to be completed in 2001, providing additional growth opportunities for Tengiz production.

The North Sea's Britannia Field began production in August nearly 20 percent under budget. Production will be sufficient to meet 8 percent of the United Kingdom's natural gas needs.

Current Indonesian production is 765,000 barrels a day. The giant Duri Field is the largest steamflood operation in the world. Steam from generators, such as those shown here, help increase oil production.

In Australia, we've joined with other members of the North West Shelf liquefied natural gas project to expand sales in Asia.

Since mid-1996, we've been operating Venezuela's Boscan Field, where production has climbed to more than 100,000 barrels a day. Last May, we also began operating a second Venezuelan field.

In March, we acquired Rutherford-Moran Oil Corp. This gave us a majority interest in a large gas project in the Gulf of Thailand, an important long-term growth market.

We've been expanding our presence in the Middle East.

We're providing technical services for the continued development of Kuwait's enormous Burgan Field. We've signed an agreement with Bahrain to explore for oil and gas offshore. And we're planning to explore in Qatar.

Not all the excitement is overseas. We're focusing on two major growth areas in North America. Offshore eastern Canada, production from the Hibernia oil field should exceed 100,000 barrels a day this year. And we continue to pursue other opportunities in the area.

Our first deepwater project in the Gulf of Mexico, Genesis, began producing oil in January, marking the start of an exciting new era. Gemini, our second deepwater project, is due to start midyear, and development of a third, called Typhoon, is being evaluated.

In the more mature areas, including the Gulf of Mexico's shallow waters, we're focusing on controlling costs, maximizing production and generating cash.

We're also consolidating activities in the San Joaquin Valley and looking at ways to further reduce costs in West Texas and New Mexico.

We're capitalizing on opportunities in the power business through our affiliate Dynegy, a leading marketer and trader of energy products and services. Dynegy plans to double its power-generation capacity over the next three years.

Before closing, I'd like to touch on some of the technologies that are improving our ability to find and develop oil and gas.

Deepwater drilling requires special drill ships. This is the Glomar Explorer, which is outfitted with state-of-the-art drilling and positioning technology. With it, we drilled a well in 7,700 feet of water last year, setting a world record.

You don't have to go to Silicon Valley for high-tech wizardry. Just down the hall, we have a new visualization center where our earth scientists can project 3-D images of seismic data onto a huge curving screen. This allows them to better interpret underground formations and improve our ability to discover and produce oil and gas.

Finally, I'd like to emphasize that in this tough environment, we are carefully controlling costs and cash flow to fund our most attractive long-term growth projects. I'm confident we'll be successful.

Thank you very much.

Updated: April 1999