(The opinions expressed here are those of the author, a

columnist for Reuters.)

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Chevron ( CVX ) makes modest spending cuts of $1 bln per year

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US company plans to grow production by 2% to 3% per year

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It's also investing heavily in exploration, a long-term

activity

By Ron Bousso

LONDON, Nov 13 (Reuters) - When warnings abound about an

imminent collapse in oil prices, one would not expect the CEO of

a major oil company to boast that he has never been more

confident.

Yet that was precisely the message conveyed in Chevron's ( CVX )

updated strategy, unveiled by CEO Mike Wirth on

Wednesday. He shrugged off concerns about oversupply in the near

term and exuded confidence in the sector's long-term outlook,

brushing aside doubts that hovered over the industry only a few

years ago as momentum built for the transition away from fossil

fuels toward low-carbon energy.

It appears that U.S. President Donald Trump's strong support

of the fossil fuel industry and his "energy dominance" agenda

have provided Chevron ( CVX ) - like its Big Oil peers - with a

meaningful tailwind.

"Never in my career have I seen a higher confidence

outlook," Wirth told investors. "The best is yet to come."

Such confidence is striking when the U.S. Energy Information

Administration expects oil prices to average $55 a barrel next

year, down from $69 this year.

NEAR-TERM RETRENCHMENT

What a company says is one thing, though. What it does is

far more important.

Oil and gas companies' spending plans are a strong gauge for

their near- and long-term risk appetite as many energy projects

such as offshore oilfields or liquefied natural gas (LNG) plants

require billions of dollars and years to develop, and many more

years to generate returns.

It is therefore notable that Chevron ( CVX ) is paring back its

capital expenditures by $1 billion from previous guidance to a

range of $18 billion to $21 billion per year into 2030.

The U.S.'s second-largest oil company also appears to be

retrenching - albeit modestly - in the face of significant

uncertainty over the supply and demand balance in the global oil

market.

The International Energy Agency is currently forecasting a

huge oversupply next year of 4 million barrels per day, around

4% of global supply, which, if accurate, could cause oil prices

to crater.

Chevron's ( CVX ) minor pullback, however, suggests its thinking may

be more aligned with OPEC analysts, who expect supply to roughly

match demand next year, or others who believe any oversupply

will be modest and short-lived.

LONG-TERM BOOM

Further out, Chevron's ( CVX ) actions seem to more closely match

its messaging, as the company is clearly betting on continued

growth in oil demand and a race to offset shrinking supplies.

Chevron ( CVX ) plans to grow oil and gas production by 2% to 3% per

year through 2030. It currently produces around 4 million

barrels of oil equivalent per day.

"There is need for significant investment to close the oil

supply gap, equivalent to five Saudi Arabias" over the next

decade, Wirth said.

Crucially, Chevron ( CVX ) noted it plans to keep production in the

U.S. Permian shale basin stable at 1 million bpd through 2040

while also reducing investment to around $3.5 billion per year

from $4.5 billion to $5 billion currently.

Chevron ( CVX ) argues that improved drilling techniques will enable

it to maintain production without having to drill new wells at

the current pace - a fairly bold forecast given standard

practices for shale oil drilling, also known as fracking.

Chevron ( CVX ) is not the only big shale producer to indicate that

it can profitably sustain and even grow shale production for

many more years. Both ExxonMobil ( XOM ) and ConocoPhillips ( COP )

suggest they can do the same, another indication of the

industry's growing confidence.

EXPLORATION BET

What perhaps best highlights Chevron's ( CVX ) long-term bullishness

is its increasing investments in oil and gas exploration. This

high-risk, high-reward business requires heavy investment, and

it often takes over a decade or more to move from first drilling

to the start of production.

In recent months, Chevron ( CVX ) expanded its exploration activity

in several basins including Namibia, Egypt and South America.

The company plans to increase its annual exploration budget by

50% over the next few years. What's more, it poached

TotalEnergies' exploration chief, Kevin McLachlan, in

October to lead its exploration programme.

Does this mean we should expect a repeat of the start of

this century, when huge, almost unimpeded investments in new oil

and gas resources led to massive overspending and poor returns?

Probably not, as Big Oil companies are now hyper-focused on

profitability and have instituted cost-saving practices that can

allow them to generate profit even if oil prices hit $50 or

below. Chevron ( CVX ) aims to reduce structural costs by $3 billion to

$4 billion by the end of 2026, including by laying off over 15%

of its global workforce.

This spending discipline should enable Chevron ( CVX ) and its peers

to continue investing with greater confidence through peaks and

troughs in the market over the coming years. That, in turn, also

indicates that the market is apt to remain well supplied for the

foreseeable future.

What is missing from all of this is a serious consideration

of the energy transition. It is perhaps fitting that Chevron's ( CVX )

strategy update came on the day the IEA published a new

long-term outlook that suggests oil demand may continue rising

into 2050, having previously suggested it would begin to plateau

in 2030.

This may be music to Big Oil's ears, but if the energy

transition picks up steam again - as many expect it will -

Chevron ( CVX ) and the rest of the industry could be in for a harsh

reality check.

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