Dear Colleagues,
In 2016 we’ll continue our work to position the company to compete in a lower-price environment. Last year we made progress bringing major capital projects to completion, reducing project spending and improving efficiency in the organization. But our transition to a business that is sustainable in a lower-price environment has just begun. With crude oil and natural gas prices continuing to trend down in December, we’ll be looking for opportunities to further drive down costs and generate cash.
In December we announced a $26.6 billion capital and exploratory budget for 2016, which is down about 25 percent from 2015. And we anticipate further reductions of up to another 25 percent as we move into 2017 and 2018. Successful completion, startup and ramp-up of Gorgon, Wheatstone, Mafumeira Sul, Chuandongbei and other projects will be instrumental to generating cash from higher production and winding down our spending.
Strong project performance is necessary, but getting better at what we do everywhere and operating reliably and without incident are key to reducing costs. We’ve built into this year’s business plan efficiencies and improvements across the enterprise. I’ll give you two examples.
Our unconventional oil and gas businesses in Appalachia, Mid-Continent, Canada and Argentina have advanced our horizontal drilling and related capabilities by increasing the number of wells per pad, growing lateral lengths, and improving water and other infrastructure. Gains in drilling efficiencies have been as high as 50 percent in some areas. We intend to continue this progress to realize consistently lower costs per barrel recovered.
Our procurement groups continue to work to unlock efficiencies and cost savings from vendors and suppliers. About half of the $4 billion spend reduction reflected in our business plan has come from this effort. For example, we recently conducted marine vessel negotiations across multiple business units and countries to achieve over $20 million in annualized savings and enable additional flexibility in our operations. I expect more successes like this during the year.
The next time you’ll hear from me will be at our annual Worldwide Employee Town Hall, which is Feb. 3 in Houston. Not everyone can be there to ask a question, so I invite you to email me ahead of time at ceoconnection@chevron.com. I’ll take your questions into account when developing my presentation.
Until next month,
John