Good morning, my name is Audra and I will be your conference facilitator today. Welcome to Chevron's Third Quarter 2020 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.
[Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the conference call over to the General Manager of Investor Relations of Chevron Corporation, Mr. Wayne Borduin. Please go ahead, sir..
Thank you, Audra. Welcome to Chevron's Third Quarter Earnings Conference Call and Webcast. I'm Wayne Borduin, General Manager of Investor Relations and on the call with me today are Mark Nelson, EVP of Downstream and Chemicals; and Pierre Breber, CFO. We'll 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. Please review the cautionary statement on Slide 2. Now, I'll turn it over to Pierre..
Thanks, Wayne. Third-quarter earnings were about breakeven, improved from last quarter, but reflecting continued challenging market conditions. A reconciliation of non-GAAP measures can be found in the appendix to this presentation.
Special items totaled $220 million, including a tax charge related to a settlement agreement on asset retirement funding and other items tied to the expiration next August of the Rokan production sharing contract in Indonesia. Free cash flow was almost $2 billion, and the dividend was flat with last quarter. Turning to Slide 4.
Cash flow from operations improved as commodity prices increased from their lows in the second quarter. Included this quarter was a $265 million cash payment related to the Rokan settlement agreement. Our cash flow dividend breakeven was under $50 Brent due to improved downstream performance and our strong capital and operating cost management.
We ended the quarter with a net debt ratio over 17%, well below our competitors. Even after closing the Noble acquisition and stepping up its debt to fair value, we expect to maintain the leading balance sheet among the peer group. We're committed to protecting our financial strength during this ongoing crisis.
Turning to the next slide, our 2020 capital spending is trending below our latest guidance. Looking ahead, we expect next year's capital budget to be $14 billion below the combined 2020 guidance from Chevron and Noble, and well below Chevron's five-year guidance from our March Investor Day.
Our 2021 capital budget will continue to prioritize investments that drive long-term value and shows the capital flexibility in our portfolio, including assets recently added from Noble. We'll share additional details in December after formal approval.
Operating expenditures in the quarter were more than 10% lower than our 2019 quarterly average ahead of our guidance.
Turning to Slide 6, relative to the same period last year, third quarter adjusted upstream earnings decreased due to lower realizations and reduced liftings, primarily due to curtailments, partially offset by lower depreciation and operating expenses. Adjusted downstream earnings decreased primarily due to lower sales volumes and margins.
The other segment was higher, primarily due to various corporate charges. Turning to Slide 7, compared to the second quarter, third quarter earnings increased by about $8 billion, more than half due to the absence of second quarter special items. Adjusted upstream earnings were up almost $2 billion, primarily due to higher liquids realizations.
Adjusted downstream earnings increased by over $1 billion, primarily due to higher sales volumes and margins and favorable swings in both timing effects and lower cost to market inventory adjustments at CPChem. The other segment charges decreased primarily due to a favorable swing in accruals for stock-based compensation.
Turning to production, third quarter oil equivalent production excluding asset sales was 3% lower than a year ago. During the past 12 months, we closed a number of asset sales all signed pre-pandemic. Increased Permian production and higher entitlement effects were offset primarily by curtailments and higher turnarounds.
The curtailments were in line with our guidance range and reflect mostly OPEC plus reductions in Kazakhstan and Africa and market-driven constraints in Thailand. Now, I'll turn it over to Mark..
Thanks, Pierre. As shown on Slide 9, the operating environment has improved from the lows in the second quarter, but it's still challenged. Some products like diesel and petrochemicals have been more resilient during the pandemic, and we've been able to develop new customer channels. Conversely, jet demand has only modestly recovered.
The jet demand picture has resulted in weak product margins well below cyclical averages. Since the crisis started, we've been focused on what we can control; safe and reliable operations, cost management, and value chain optimization.
In the third quarter, our financial results improved due to strong performance in these areas along with some margin improvement in polyethylene and West Coast fuels. Turning to the next slide. Our focus on cost management is delivering results. The third quarter operating expenses are nearly 20% lower than pre-pandemic levels in the first quarter.
I'm proud of how our employees have risen to this challenge. Streamlining work processes, reducing contractor costs, and adapting activity levels to a lower-margin environment. Our teams have also delivered on more than 90% of the planned scope of our 2020 turnaround program, deferring only a minor amount of activity.
This is a tremendous accomplishment and positions our refinery network to be ready without a backlog when the economy is back to pre-pandemic levels. Optimization activities further reduce the cost of this year's planned work, contributing to lower operating expenses. Turning to the next slide.
As always, we're focused on safe and reliable operations keeping our employees safe, being a good neighbor, and delivering the products that the world needs are all part of our license to operate. Since the economic slowdown began, we’ve balanced efficient refinery utilization with the highest margin sales channels for our products.
We’ve consistently placed more than 90% of our high-value products into our contracted sales channels despite volatility in demand. This generates the best margins across our value chains.
The recent acquisitions of marketing assets in Australia in the Pasadena Refinery in the US Gulf Coast further extends our value chains in those regions, giving us more opportunities to improve profitability and returns. Turning to chemicals, GS Caltex continues to make good progress on their new mixed feed cracker.
We expect the project to be under budget and months ahead of schedule. Our local team has done a remarkable job safely progressing the project despite the challenges of COVID-19. At CPChem, we've completed feed at our US Gulf Coast cracker II project and have placed it on hold as we assess market conditions.
We continue to believe in the long-term fundamentals of chemicals and the importance of world-scale facilities with access to low cost feedstock. At the same time, any new investment needs to be supported by project economics that will generate strong returns through the price cycle.
Also, CPChem began producing circular polyethylene at scale, an industry first in the United States. The production of PE from plastic waste is an important milestone, and it underscores our commitment to finding innovative ways to deliver sustainable products to our customers. Now turning to renewable fuels.
The future of energy is lower carbon, and we're delivering more alternative products to our customers. Recently, we announced first gas at our CalBio renewable natural gas joint venture in California and a new partnership with Brightmark. Our capital committed to RNG ventures is over $200 million.
In renewable diesel, we are leveraging existing infrastructure to co-process biofeed at our El Segundo Refinery, with startup is expected in the first half of next year. Also, we sell a range of branded biodiesels and are piloting the sale of R99 in Southern California.
Through Novvi, we recently announced the first production of renewable base oil at our 500 barrel a day plant in Texas. This leading technology partnership is developing, innovative and sustainable products with future expansion potential. And lastly, our GS Caltex hydrogen testing site in South Korea has opened.
The first of its kind in Seoul where customers convergence traditional fuels as well as hydrogen and electricity. All of these efforts align with how we're increasing renewables in support of our business. Part of our approach to the energy transition which Pierre will now further discuss..
Thanks, Mark. We continue to make good progress in our energy transition focus areas. Next year we expect to find $100 million of projects identified with our Marginal Abatement Cost Curve. The MACC tool helps to select the most cost efficient projects to reduce carbon intensity across our operations.
As Mark noted, we announced a new joint venture with Brightmark, extending our renewable natural gas portfolio. Finally, in our partnership with Svante, we're pleased to have been awarded a US DOE grant to help fund the construction of a demonstration carbon capture plant in our California upstream operations.
The project is expected to start up in 2022. These projects reflect Chevron's commitment to low carbon solutions that are both good for the environment and good for our shareholders. Turning to the next slide, we closed the Noble Energy acquisition earlier this month, and integration is on track.
We've completed employee selections at some early quick wins like paying off the revolver and selling its plane and assessment of operational opportunities is well on its way. In the third quarter, Noble generated positive free cash flow primarily due to ongoing capital and cost management and strong sales in the Eastern Med.
We're pleased to add Noble assets and welcome it's talented employees to Chevron. Our internal transformation launched late last year is mostly complete with the new organization in place November, 1st.
This was an enterprise-wide change effort, the largest since our Texaco merger that modernizes how we work, leveraging digital tools and empowered teams. Lastly, we recently signed an agreement to sell our Appalachia natural gas business. We expect to close the transaction before the end of the year.
Now looking forward, in the fourth quarter, we expect Noble production to be lower, primarily due to seasonal demands in the Eastern Med. Curtailments and planned downtime are both lower than last quarter. Production this quarter may include additional cost recovery barrels related to the RioCan settlement.
At Gorgon Train 2 well repairs are now complete and we have started commissioning in preparation for LNG production. We expect Train 1 to be taken out of service after Train 2 is back online. At TCO, remobilization continues.
We successfully increased the project workforce to near 15,000 and our plans are to end the year with the project team over 20,000. Earlier this week, we completed our final sealift on schedule. All modules are now in Kazakhstan, a significant project milestone. And finally we expect severance payments to lower cash flow.
With that, I'll turn it over to Wayne..
Thanks, Pierre. That concludes our prepared remarks. We're now ready to take your questions. Keep in mind that we do have a full queue. So please try to limit yourself to one question and one follow-up. We'll do our best to get all of your questions answered. Audra, please open the lines..
Thank you. [Operator Instructions] We'll go first to Neil Mehta at Goldman Sachs..
Good morning. I have one upstream question here and one downstream question. Maybe, Mark sort of a downstream question, which is it looked like that the downstream results and particularly refining, surprised relative to our expectations.
Was there anything that you would call out here in the third quarter as many of the independent refiners had very tough third quarters including on the West Coast, and just can you then step back and talk about your big picture outlook for the refining sector in that part of your business?.
Thanks for the question, Neil.
First, if I step back and look operationally at the third quarter performance overall, I would say that operationally it was first driven by our continued cost management efforts across the downstream chemicals portfolio, much of which is actually focused in our manufacturing sector, also some polyethylene in West Coast fuels margin improvement and then contribution from our lubricants and additives business.
Yes, if I step back and look at the refining sector in general, I would say that the pre-pandemic demand shock clearly has retested margin lows. There is not a real analog for the pace of recovery, but the three things are required, I think to have sustainable improved refining margins.
First, demand recovery for all high-value products in our materials, we certainly indicated that as an industry we're within 5% to 10% of 2019 motor [ph] gasoline, diesel levels, but the jet is still only half of 2019, and so we need continued recovery there.
Second, we need inventory reduction, and we're beginning to see some of that in different parts of the world. And finally, refinery rationalization, and this is the part that's interesting for us because we've rationalized our portfolio over the past decade and we're now seeing competitors start to do that.
In some of the regions of the world like Southeast Asia, Australia, and the US Coast, you're hearing people talk about rationalization, which certainly creates an opportunity for us going forward as the supply and demand balance tightens a bit over time. Thanks for the question, Neil..
Thanks. Thanks, Mark. And then, Pierre a follow-up for you, it's on Gorgon.
Where do we stand with Train 2, and what do we know about Train 1 and Train 3 in terms of managing the downtime there?.
Yes. Thanks, Neil. As I said the well repairs are complete. We verified them with non-destructive testing. We've also completed pressure testing of the kettle. So, we're now in the process of getting back online. So, we've started the recommissioning process from the turnaround and the extended turnaround.
The next steps are to dry out the systems and then we'll begin cool down. We expect this to take several weeks, which will put first LNG production in the second half of November. In terms of Train 1, as I said, we expect that to be taken down soon after Train 2 is back online.
And then we would inspect Train 1 and depending on whether repairs are required or not that will determine how long Train 1 is down, and then sequentially then we would look to Train 3 after that one..
Okay. Thanks, guys..
We'll move next to Jeanine Wai at Barclays..
Hi, good morning everyone, thanks for taking my questions. My first question is on....
Good morning, Jeanine..
Good morning. My first question is on sustaining CapEx and the second one is on the upstream with Eastern Med. So the second half 2020 CapEx run rate that's below your multi-year sustaining upstream capital estimate of $10 billion. You've accomplished a lot this year with cost reductions and efficiency improvements.
So, my first question is whether there is an update to that $10 billion in sustaining capital number that you provided a few quarters ago, and I know we've got Noble in the mix now too..
Thanks, Jeanine. No, there isn't. I mean the $10 billion is really an estimate, right. It's based on our, again Chevron only, how to sustain production in the short term. Noble gave out an equivalent number around $800 million for that. To be clear, we're not trying to sustain short term production.
Mark just talked about we're in an economy that's impacted by pandemic and demand for our products is below normal levels in pre-pandemic levels, and therefore we have oversupplied markets. We are trying to sustain the long-term value of the enterprise.
So, if you look to our 2021 capital guidance of $14 billion, it includes an upstream capital of around 11 billion or so sort of higher than the sustaining level, but not all of it is going to short-term production.
Some of it is going to long-term production like our project at Tengiz, so we're focused on sustaining long-term value, not short-term production. That's true in combination with Noble, but there is no real update to those numbers.
Efficiency improvements are rolling through, but this is an estimate, an analytical estimate that's not so precise that we're going to be updating it frequently..
Okay, great. Thank you. Understood.
My second question is on the Eastern Med, could you provide any initial indications or thoughts on how you expect to monetize Leviathan and a lot of the other discovered resource in the area, I guess specifically, do you think that regional demand growth could be strong enough in the medium-term or longer-term to avoid either a greenfield LNG or a pipeline to Europe, and then I guess one more in there, if there is any commentary on the headlines on the pricing dynamics that would be helpful.
Thank you..
Hey, I won't comment on some of the headlines you've read, those are commercial matters that we'll discuss in private with our partners and with our customers. We've had a very smooth transition with our operations in Eastern Med and all across the Noble assets. Our integration is on track.
Employee selections in the United States have already happened, we feel really good. We're pleased with the people who are joining us in the Eastern Med included, so Noble employees are top quality and we're very pleased to be welcoming them to Chevron. As you know, it's a good resource. At free cash flow positive, the project has been completed.
It's in an area where there is demand opportunities and in particular backing out call, but it's only been a few weeks. So, our focus right now is to have a smooth integration with Noble, we're pleased again with the operations and the free cash flow generation.
We're going to work with potential customers, existing customers, future customers to find the most cost-efficient way to develop that resource. There is upside to it and again there is market, but we will determine that all-in time..
Thanks, Jeanine..
We'll move next to Phil Gresh at JPMorgan..
Yes, hi, good morning. First question here. If I look at the third quarter, it looks like your Brent based breakeven price is somewhere in the order of $50 a barrel.
And if you're talking about this restructuring plan that's been underway and kind of completing here, so I was just curious how you think about the cost side of the equation and the ability to further lower the operating costs and the breakeven moving forward, given that you've given us the capital number here already..
Yes, the breakeven and again, we would have it a little bit below $50.
It's important that it doesn't factor in downstream margins or chemical margins and other parts of our business, which Mark has addressed and those can vary, and they can make a difference obviously on where the breakeven is, I mean margins in that sector are pretty low and as they recover that lowers our breakeven because again it's holding, it's just looking at the oil price and not all the other assumptions.
In terms of cost, look our costs were down more than 10%. This quarter, we provided guidance that we expect to end the year on a Chevron-only basis here because fourth quarter will have Noble operating expenses.
But if you just looked at Chevron only, we will be down a $1 billion, again we've characterized that as activity related and other actions that we've taken to manage through the pandemic and the crisis that we're in. We've also provided guidance and we've completed our transformation.
So we launched that transformation, which is an enterprise-wide restructuring, we started that almost 12 months ago and we just are completing our employee selections right now, it's a tough time for our employees, as they are being notified and will have the new organization in place, November 1.
We've talked about $1 billion of OpEx reductions from the transformation. And then finally, we have the Noble synergies and we've talked about $300 million of total Noble synergies, not all of that is operating expense.
So all of that is rolling through, we will bring that together for you likely at our Investor Day on any kind of updated guidance, but it's all consistent with your question, which is we're working hard to get our breakeven down.
We've sustained our dividend, so the comparisons are consistent and we continue to make progress, both through capital discipline, and cost management to lower our breakeven preserve. Our balance sheet strength right ending the quarter with the leading balance sheet in the industry, and net debt ratio of 17%.
That's essentially what we're doing and we'll continue to do it as we're in these challenging times..
Okay, great. Thank you. My second question would be, just as it relates to 2021 production.
Obviously, you gave us a CapEx number here, on the last call you talked about the Permian potentially declining high single-digit rate year-over-year in '21 on an organic basis, obviously, you're layering in Noble here, so I didn't know if maybe you could provide any early read on '21 production, whether it's standalone or pro forma or if not a hard number, maybe some moving pieces around it..
Yes, we'll provide our production guidance as we normally do. That will be on our fourth quarter call at the end of January. We did provide guidance for the fourth quarter. So we do a quarter ahead. I think you've hit some of the pieces there.
Again, I would add the Rokan PSC exploration, which I referred to and we had a settlement agreement, which is a really good agreement that ensures the uncertainty around the funding for abandonment and adds a little drilling activity to keep production managed heading into that contract expiration, but that's going to be in August of 2021, so I'll point that out.
And again our efforts at Permian, which Jay talked about is a potential decline of 6% to 7% if we stay at those activity level. So I don't really have more to say Phil to you. We'll provide that guidance when we finalize our plans, get formal approval of our capital budget and we'll do it at our regular time during the fourth quarter earnings call..
Okay, thank you..
Thanks, Phil..
Next, we'll move to Devin McDermott of Morgan Stanley..
Hey, good morning. Thanks for taking the question..
Hi, Devin..
Hey.
So the first one I wanted to ask on is actually around some of the latest investments and momentum you made on emissions reductions and there's been some positive announcements here over the last few months and I think the disclosure on this marginal abatement cost curve is interesting and that it shows there is opportunities to potentially reduce emissions while also boosting returns of the negative plan cost of carbon that you have there.
The question specifically as we think about over the next few years here, any sense of the depth of opportunities where you can actually have this nice win-win of driving down cost, while also reducing carbon intensity.
And then as you think about planning longer-term, any intention of expanding your emission production goals that already exist perhaps post-2023 in the Paris Climate like some of your peers have done and just how you're thinking about that longer-term?.
Sure. On the second question, as you said, we have four carbon intensity reduction metrics, they go out to 2023, 2023 was chosen because that's the first stocktake date under the Paris agreement and so we're aligned with those.
We are the only company, first company, only company in our sector to do it on an equity basis, many do on an operatorship basis and then we do oil and gas metrics separately because they serve a different market. So the $100 million that you're referring to is, it's something that we expect will be recurring.
So we see opportunities for a number of years to be able to invest that kind of expenditure and achieve what we'll call cost-efficient carbon reductions.
But if I because -- and yes, will we extend at some point in time, I think, yes, the answer is yes, it would be logical for us to go to the next Paris stocktake date, but we're right now focused on delivering on those 2023 targets. We also have those as part of the incentive pay almost all every Chevron employee. So we're making good progress on that.
But I would think, all of our energy transition activities, and Mark referred to a number in his business. They really support making our business more sustainable in a lower carbon future and they do it in a way where we earn return. So the renewable natural gas that Mark was talking about also generates returns.
And then of course then we're looking at some of the new technologies and those obviously are at a different stage of maturity. So we're taking a number of actions that we believe address climate change, that lowers carbon and does it in a way that's good for the environment and good for our shareholders..
Right, that makes a lot of sense. And then my second question is on the portfolio composition, post the Noble transaction. So you recently executed on the Appalachia sale, you're doing a good job under the kind of pruning the portfolio in investing the non-core assets over time.
As we look forward here post this transaction, any updated thoughts on further opportunities for the best features and whether or not space as part of the question if you could address things like Noble Midstream or anything within our portfolio that might be non-core.
And then lastly, whether not as part of the Noble transaction guaranteeing Noble's outstanding debt is part of what your vision..
Okay, Devin, I got the asset sales, what was the question about Noble debt at the end?.
Whether or not that will be guaranteed by Chevron?.
All right, thanks. Well, let me just address Noble -- Noble debt. We're reviewing options, we haven't made a decision and again will notify bondholders when we make that decision and you should expect that in the next couple of months.
In terms of asset sales, we are on track to complete the program that we talked about it was 2018 to 2020, a three year program of $5 billion to $10 billion and before tax proceeds. We expect to close our US natural gas sale here before year-end and when we complete that will be right in the middle of that range.
In terms of what else is in the public domain, the most significant ownership interest that we've talked about is selling our interest in North West Shelf and that's the commercial matter and we just -- we won't comment on, but I guess I would just say, we're in a different place than many of our competitors, right.
Mark referred to the rationalization we've done on our refining network over the last decade and even before, I referred to the number of asset sales that we've completed in the last 12 months. You saw that in our production chart, all of that where signed pre-pandemic at good values.
Obviously, we just bought a bunch of a, sorry, a company that comes with high-quality assets and I won't comment on any specific assets in the Noble portfolio. So we are very value-driven. The gas assets that we have that we're planning to close here before the year-end and our interest in North West Shelf held up better in this post-pandemic world.
Also, if you think of North West Shelf, it's more almost like an infrastructure investment as the resource behind the plant comes down and it becomes more of a tolling facility going forward. So you'll continue to see us to be disciplined in how we manage our portfolio.
I would not expect us to have any kind of big program announcement, we'll have the ongoing portfolio rationalization that's been part of the Chevron approach to management for a long time..
Thank you very much..
We'll go next to Paul Cheng of Scotiabank..
Thank you. Good morning..
Hi, Paul..
Yes, thank you. Two questions, I think one is for Mark and one is for Pierre.
Pierre, what would be a reasonable allocation of future capital in the Neil, we know about low carbon initiative and two, let's assume that at some point, you probably will set up a target to be net carbon zero on at least one [ph] scoop one or two, maybe over the next 15 years, 20 years.
Do you need other new businesses like some of your peers go into, the renewable power business in order to achieve that? So that's the first question. The second question is for Mark. If I look at over the last couple of quarters.
One of the big performance differences between you guys in the US comparing to your customers in Europe, they have far stronger Downstream results, mainly because of their marketing assets and also their trading operation.
On that basis, do you think for Chevron that is the why rest of P, so that you may want to further boost your marketing? I mean you've been selling down your marketing assets both at the past 10 plus years.
And for trading historically, you guys took out a facilitation call center, while your European peers are looking at the 4% [indiscernible] around the asset. So is that the right approach for you or that you don't think is fit for you. Thank you..
Okay. Paul, I'll start. Look, we're going to be disciplined with our capital, that's true in our conventional business and you've seen that with the announcement of our organic capital budget that's true and our acquisitions, you saw that when we walked away from Anadarko and collected a billion dollar termination fee.
And I think you've seen that and how we executed the Noble transaction being the first to announce and complete that as acquisition and it's going to be true in energy transition there. No one in Chevron has an open checkbook and, again that's true in our conventional business, that's true in our M&A, and that's true in energy transition.
What you have seen is investments now that are on the order of hundreds of millions of dollars, we talked about $100 million into our marginal driven cost, curve investments $200 million in renewable natural gas.
So the investments really are limited by what we believe or reflect what we believe are the opportunities that are again good for the environment, address climate change and good for our shareholders.
In terms of, do we need to adopt this change in strategy, I think we've been pretty clear that we're not going to diversify away or divest from our core business.
The actions we're taking around the energy transition are geared to making these businesses that are good businesses that play an important role in society and making them more sustainable in a lower carbon future. So I think you should expect us to continue to do that.
We are going to operate in businesses where we have a competitive advantage, where we have a value proposition for shareholders that is advantage relative to other alternatives and again we're going to do that in a way that is part of a lower apartment future. So, maybe we'll go to Mark on the downstream question..
Thanks for the question, Paul. On the marketing question, we've consistently indicated that we are interested in strengthening our value chains.
In fact, you could say that here in the third quarter that we've demonstrated the benefit of linking our refinery production to higher margin product placement and that's kind of our view of the value chain and I could -- I would suggest that the recent coolant transaction is an example of us strengthening our value chain in Asia, where we have essentially added terminals in retail stations in Australia where we can now place our Asian joint venture refinery production in a very strong market, where we own the strongest brand and we acquired that on June 30 and it's first three months and it's working just as we would have expected.
So I think that goes to the concept of strengthening our value chain.
To your comment on the trading portion of our portfolio, our trading businesses is designed first to ensure that we flow product, second that we optimize around those value chains and then we trade in those areas where we have demonstrated considerable expertise and it's vital to our downstream business, they are critical partners with regard to how we run our business and make those value chains work and they continue to look for opportunities to increase their impact.
So I appreciate the question because the way we think about our value chains is important to us..
Okay. I'll just add, I think our shareholders support our approach to trading because I think they understand the other risk and volatility that can come to trading earnings and it generally attracts a little multiple because of that, in particular in a resource company, Paul, thanks for your questions. We appreciate it..
Thank you..
We'll go next to Doug Leggate at Bank of America..
Thank you. Good morning, everyone. Mark, maybe I could take advantage of you being on the call. I just wonder if you could offer some perspectives on how you see this bottoming process of the downstream cycle playing out.
What same process are you seeing in any of your markets in terms of any green shoots or any expectations that are going to be here for a while and I guess what's behind my question is, is Chevron totally done with rationalization in your downstream portfolio?.
Well, I think it's a thoughtful question, you've given the unique situation. We're in the -- If I go back to the question, Neil asked about it relates to margins in general.
I mentioned three things that we have to see to feel like we are on a path for greater sustainable margins in the downstream business, and it is that demand recovery for all high value products and you can see some of those things happening in our Asian markets where we see Australia past it's 2019 levels and we see certain Southeast Asian markets going beyond their levels and with our strong brand, we've been able to go past industry rates of growth in some of our areas.
So I think those are opportunities that will help us on the demand side of the equation. The inventory reduction, I think the industry has demonstrated over time that we'll work through that, but that will take a little bit of time.
And finally, as I mentioned earlier, the refinery rationalization as an industry, while we've done the predominance of our rationalization, we're always looking at strengthening the value chains in which we've chosen to compete and we'll continue to look at that over time, but the green shoot, I would say is the amount of companies that are announcing, suggested rationalizations and I think if those come through we might see getting to those recovered margins sooner than maybe -- we would naturally expect, we will presume that.
We will stay focused on the self-help side of the equation and things that we can control like lowering our operating costs, certainly running efficiently with the desired yields and then using data analytics to place and price our products. So, we'll focus on what we can control.
But we're hoping at some of those green shoots actually come to fruition..
Thank you. My follow-up is, for Pierre, if I may. Pierre, just some clarification on the CapEx, what is the cash CapEx number and related given the headcount reduction, and so on, what should we think as apples for apples operating cost reductions as we look at '21 versus '20, I'll leave it there. Thank you..
Yes. So again, we'll give all the details on our capital program when it's formally approved, but a cash equivalent excluding affiliates of about $10 billion is a good number to use right now.
Well, I'm not sure I can say much more on OpEx, OpEx I think Devin asked that question, again, we have $1 billion of reductions we've seen this year, a 1 billion that we'll see next year through transformation, Noble synergies and as I said, we'll put that all together and provide some guidance here in the first quarter..
Thanks, Doug..
Thanks..
We'll take our next question is from Paul Sankey from Sankey Research..
Morning, everyone.
Can you hear me?.
Yes. We hear you, Paul..
Hi. You've talked about your industry-leading balance sheet and we've seen some incredible deterioration in values around various other oils, even globally. In terms of acquisitions, I assume that you're now very happy with your Permian position it feels as it's difficult to find anything that would improve your position.
Can you talk a little bit about that and I assume that you don't want to add debt without there being a compelling opportunity, which I assume that kind of isn't globally, it just seems that you're in such a strong competitive position, I wonder if you're thinking about actually doing some more deals? Thanks..
Thanks, Paul. Look, we're focused on integrating Noble's successively and we're off to a really good start. I also talked about our transformation again as enterprise wide restructuring that we've been working on for almost a year now and will go in effect November 1 and so those are really our priorities.
As we've said, we have a high bar for M&A and Noble cleared that bar and so it's quality assets, it meets our criteria of quality assets at a good value at the right time. I'm just not going to speculate about future M&A.
If I do talk about our financial priorities, I mean, I think we've been pretty consistent and clear on what they are, to sustain and grow the dividend.
We've done that for three straight years, invest to support long-term value and we're doing that in organic program and of course, we've done that through our Noble acquisition and maintain a strong balance sheet, which we've been able to do with a net debt ratio of 17.5%.
In terms of the Permian, I think when you think you said it very well, we have a leading position, Noble provides a nice bolt-on, again our M&A is not focused necessarily on the Permian, it's focused on assets that are accretive to our shareholders, that are good value for our shareholders that add quality assets..
Thanks, Paul..
Any follow-up,.
I do actually, it's totally different subject. Could you talk about your OpEx curtailments and anything you can add on the neutral zone? Thank you..
Yes, in terms of the neutral zone, the production was about 30,000 barrels a day, our share in the third quarter. So that start-up is going well. In terms of our curtailments overall, the guidance we provided was about 100,000 barrels of oil equivalent. So that's oil and gas equivalent and the majority of that is OPEC plus related.
So 80% and 90% of that is OPEC plus related and that's again in countries like Kazakhstan, Nigeria and Angola..
Thanks, Paul..
Just quickly, where you are headed on the neutral zone, just quickly, well go to?.
We haven't provided any guidance. We're focused on continuing to have a safe and gradual ramp-up. So again we are at near 30,000 barrels a day Chevron share and we'll update you at year-end..
Thank you, sir..
Thanks..
We'll go next to Biraj Borkhataria at RBC..
Hi, thanks for taking my questions. The first one I had was on just a clarification on TCO, the co-lending figure has gone down in the last couple of successive quarters.
Is it safe to assume given you had issues mobilizing the workforce that's missing from 2020 just gets pushed 2021, that will be the first question?.
Yes, so there are two parts to that. I mean, let me just address TCO project spending is about down 1 billion or share this year relative to what we had planned, in part due to the demobilization, but we've said about half of that are true cost efficiency savings and about half will be deferred to next year and future years.
That's sort of related to the lending, but not entirely right. The lending is also dependent on dividend policy and prices, but you're correct that you've seen that the lending has come down, our guidance on it has come down during the course of the year, which is again a combination of lower project spending, but also where prices have gone..
Got it. Makes sense. And then the second question on a slightly different topic.
But when you're looking at project sanctions and just in the context of your kind of energy transition approach, do you currently assume a carbon price even where countries themselves do not have a sort of fiscal framework in place, and if so can you kind of tell us what the carbon price you're using as?.
Yes, we don't disclose our price forecast for oil and gas prices, we think it's commercially sensitive. We don't disclose our carbon price forecast.
We look at it under a variety of scenarios for both commodity prices and carbon pricing and we look at it by jurisdiction because it can vary, the investments that Mark referred to, certainly they are our policy supported, so they generate in some cases, low carbon fuel credits or Renewable Fuel Standard, the federal standard. And so again.
It really varies by jurisdiction. We are looking at returns, again, we're trying to make investments in energy transition that are both good for the environment and good for shareholders and some of that return is policy enabled, but it really does vary by jurisdiction..
Thanks Biraj..
Thank you Pierre. Thanks.
We'll go next to Roger Read at Wells Fargo..
Thank you. Good morning..
Good morning, Roger..
Yes. Two questions I have for you. The first.
I know you said all the modules are in Kazakhstan now but any more update you can provide like how many people are actually able to muster to the site and kind of thought process as we head into the typically slower winter season for what this might imply for budgetary and timeframe of a start-up on the next pages..
Yes. Thanks, Roger. Look the remobilization is going well and I said we're near 15,000 of workforce on the project and we're heading to end the year above 20. So far our safeguards are working well, we've kept the rate of infection, very low and we're seeing our work progress in line with expectations.
So the key for us going forward to holding cost and schedule is to complete the remobilization, sustain a full workforce during the pandemic using our safeguards and achieve our progress milestone. So we're -- as you say, we're in the, I would say early days.
We're in the middle of the remobilization, we're heading into winter, we need to see how this all progresses and we'll know more by our Investor Day, and we plan to provide an update there. Having all material and modules, on the ground is a really important milestone.
It doesn't mean that we are now can just address all of the work in place and so that's -- those are really the keys for us going forward in terms of again maintaining cost and schedule..
Okay, great. And then a quick unrelated follow-up, what could, as you look across your various operations leave Noble out of this, but when it comes, getting everybody's pad drilling.
Just curious if you see anything in the way of decline rates that are either better or worse than what you would have anticipated thinking whether it's Permian or The Gulf of Mexico or just International..
The short answer is no, we're not seeing any surprises. I mean the Permian, is a little bit higher than our early guidance if you recall at our market response press release, I think it was March 24 to March 25, we guided to the exit rate on the Permian being down 20%, it will be a little bit better than that.
So our production in the Permian was 565,000 barrels oil equivalent. We think our exit rate that's a Chevron only. We think our exit rate will be around 550 and again that's a little better than we had guided to back in March. Now we'll have the Noble Permian production on top of that, that's about 50. So we expect to be near 600.
So we're managing, again we're sustaining, we are managing declines very well. We are not putting a lot of capital to add short-term production because of oversupplied markets, but we're pleased with how we're operating upstream just like Mark has talked about safe and reliable operations, we're seeing the same on our upstream operations..
Thanks, Roger..
Great, thanks..
We'll move next to Sam Margolin at Wolfe Research..
Hey, good morning, everybody. Thank you..
Good morning, Sam..
My question is about your renewable gas business. If you look at the California Air Resource Board carbon intensity scores, actually, when I first saw it, I thought it was a mistake because renewable gases like a negative 400 or something, totally off the charts.
I guess you're constrained by the CNG market, which I don't know how big it is, but given the emissions benefits of this product, are you able to offset all or at least a significant amount of your obligations from the refining business under the LCFS..
Hey, Sam, this is Mark. Thank you. Thank you for the question and the kind of recognition of why we would be considering the renewable natural gas as part of our value chain. I mean we should expect us to be a strong player in the RNG space and policy enabled markets like the West.
As you've indicated, it is the most cost and carbon efficient fuel from an LCFS and RFS perspective and it's actually low execution risk and so it leverages our strength, our ability to partner with folks, especially the feedstock side and then our ability to place the product, we've got to your second element that you need to put this over time and so we're excited about the CalBio and the CalBio and even the adopter ports announcements that we've made, and I think you'll see us continue to wisely grow here..
Thanks for the questions..
Sure. Okay. And I mean, I guess just it's a related follow-up.
But one of the things that you've said that I think is differentiated from a corporate level is that you manage your capital planning not really on the basis of prices, but on how you see the demand outlook shaking out or directionally because you know the price can change and it might not necessarily reflect actual conditions, but so in light of that, you mentioned that we're transitioning to a low carbon world.
Some things could change depending on the election, but can this renewable gas business if there really is market share to be had, can it scale beyond California, what other geographic footprints are out there for you and basically just in terms of scope what are you thinking here..
Yes, the short answer is growth is clearly plausible. We tend to look at this in regard to our existing value chains, where we have our strengths and where we can execute well and we'll consider growth in that context, but there is certainly upside potential..
Okay, thank you so much..
Thanks, Sam..
Thanks, Sam..
Next we'll go to Manav Gupta at Credit Suisse..
Thank you for taking my question.
You have two high-class refining assets in California and we saw that the earnings are stronger in the downstream as Neil pointed out, the governor over there is indicating that he wants to ban the internal combustion engine in 2035, the sale of new vehicles, is that any way changing the way you plan your business in California, or you think that he does not have the legal authority as many legal experts are pointing out..
Well, thanks for the -- thank you for the question. I'm actually a native of California when I think about California, I think of generally under normal conditions, a very strong economy and a tremendous desire for affordable mobility.
And with that backdrop for the foreseeable future, to be successful in California from a fuels perspective, I think you have to have reliable refineries, a strong brand to both the place the product and to keep a connection with the customer and an ability to participate in California's lower-carbon future.
And we've been here in California, for over 100 years and I think we are well positioned to engage with the government to build a path towards a lower carbon future and we will actively participate that and believe we can do so..
Okay. A quick follow-up is, you have had two Noble assets for about a month is, are there any upside surprises, thoughts like synergies that you think you can do better on any integration, you think you can do better on since you acquired those assets..
Yes, thanks Manav. Look it is going very well and again we're pleased to have been the first to announce a transaction and to complete it, it's a good fit, and I won't go through all of that, again, a very successful first month. Synergies are on track, we expect that there will be more as we operate as one company.
In the first few weeks, we've been able, for example, to see contracts and look at procurement opportunities. We're also starting to see operational synergies, we'll update you sometime in the first quarter, just let us, give us some time to fully assess the opportunities. We expect the synergy number to be higher. I don't have a number for you.
We're going to do that work and will advise you in due course..
Thank you..
We take our next question from Jason Gabelman at Cowen..
Yes, hey, I wanted to circle back to this Marginal Abatement Cost Curve, which it seems like a useful framework to use moving forward.
Two kind of related questions on it, one does this enables you to kind of get to net zero by 2030, it seems like your European peers are pushing towards that and I'm assuming the US is going to ultimately face pressure to hit net zero on its own emissions by 2030.
And do you have any sense of what you'd be able, what do you need to spend to achieve that now that you have this kind of cost curve model and does Algonquin, the partnership with Algonquin, how does that kind of figure into this, I think you've been a partner with them for a couple of quarters, just wondering if that unlocks some of the opportunities within the goal of reducing carbon intensity? Thanks..
Yes, Jason, look we support the Paris Agreement and as Mark says, we're going to be part of the lower carbon energy future. Our focus is on results not pledges. And so what you're seeing at our actions today and that are addressing carbon intensity, I'm just not going to get further.
We have our 2023 carbon intensity metrics I referred to earlier that we're likely to update those in time to get them the next stock take periods, but our approach again is really focused on delivering results that we think address climate change and are good for the environment.
In terms of Algonquin, it's early days, but yes, we see opportunities there, that does both, right, it sort of increases renewables and support of our business.
You've seen us do that in the Permian and in Bakersfield with wind and solar projects that are providing power to our operations that we otherwise are buying off the grid and Algonquin is working on opportunities in other areas of Chevron operations. It does take a little bit of time.
Yes, I do some of the engineering work in the development work, but so far that joint venture is going well..
All right. And just a clarification, I appreciate on slide 9 you included downstream earnings excluding timing effects, which is definitely useful, was that a disclosure you plan on including going forward and 3Q '20 does imply kind of no timing effects this quarter, just looking at where the graph, where the bar is on the graph. Thanks..
Yes, Jason. So in the very, the last slide in the appendix, you see that we actually give the absolute timing effects for US International Downstream. So for a long time, we've been showing the variance. But as you said, you can figure out the absolutes in each quarter. So now we've shown that for going back to 2017.
And, Yes, you should expect us to continue to do that going forward..
Great. That's helpful, thanks a lot..
Thanks, Jason..
Thanks, Jason..
We'll go next to Pavel Molchanov at Raymond James..
Thanks for taking my question.
You do not have a massive footprint in Europe compared to just about all the other supermajors, but I am curious, your thought on another regulatory issue, the European Climate law, getting ready to be passed five weeks from now and what the impact on your upstream and or Downstream operations might be?.
Well, as you say Pavel although we've operated in Europe upstream and downstream for many decades and I worked there in Aberdeen when the first carbon tax was enacted. We sold the majority of our upstream operations, we have a little non-op position still, and again no large-scale refining or marketing.
We do have some lubricants and additives businesses in there. So I think again we support the Paris accord, we believe the future of energy is lower carbon, we expect more policy.
I think it gets to what Mark was trying to, was addressing is getting the balance between those worthwhile policy goals and providing affordable reliable energy that the world economies need..
Two quick follow-ups, since we're a week ahead of the election.
Can you remind us on the combined Chevron but Noble, Permian acreage position? How much of the acreage is federal?.
Yes, it's about 10% is federal in terms of total Permian acreage..
Thanks, Pavel..
Thanks very much..
We'll go next to Neil Dingman at Trust Securities..
Good morning -- afternoon now, guys.
I was hoping just you've talked a lot about these details on the renewables, but my question was more particularly on the Novvi partnership, I'm just wondering, again on that out of your facilities, can you talk about maybe some details on what industries you all might target once that starts rolling out of that facility?.
Well, so the concept for our downstream business is to provide a renewable base oil to round out our base oil offering both for our own business and for the business of others, the product itself, which is a technology partnership between ourselves leveraging our ISODEWAXING technology and some other patented solutions allows us to create, to take multiple types of bio feedstocks internally into what I would consider higher-performing base oils.
There are other applications, even in cosmetics and things like that, that will be investigated over time, but we do see an opportunity for expansion of that joint venture should be as economics continue to warranted. Thank you. Thanks for the question..
Sure. And then one maybe just quick follow-up on that, it was you certainly are doing a great job of continuing to move not only Novvi but CalBioGas and just continue to move in the renewables in general.
Do you all have sort of any target or kind of metrics on where you would like to be as far as what you think renewables might be is a part of your potential total part of your business, two or three years from now, or is it just too early to determine that?.
I'll give the first answer on this, then maybe Pierre can build on this. I think it's too early for us to say about how big it could become. But we do intend to continue to grow it as part of our -- as part of our business. I think we can do that successfully. While we return -- while we improve returns as well. Pierre, would you add anything..
Yes, this was well said. So again, I think I addressed earlier. No one has an open checkbook in Chevron to spend money on, that's true in the conventional business and acquisitions and energy transition. We're going to pursue the opportunities that are good for the environment, good for our shareholders, and it will grow over time..
Thanks, Neil..
Thanks for your time guys..
We've got through all the questions in the queue. And I want to thank everyone for your time today. We do appreciate your interest in Chevron and everyone's participation on today's call. Please stay safe and healthy. Audra, back to you..
Thank you. Ladies and gentlemen, this concludes Chevron's third quarter 2020 earnings conference call. You may now disconnect..