Chevron's first deal in a US gas shale play dovetails nicely with the company's plans to increase its proportion of gas production from 31% of total output currently to 41% in the next seven years, Watson told Bank of America Merrill Lynch's Global Energy Conference.
The bulk of that new gas will be coming from Chevron's liquefied natural gas projects in Australia, Africa, and the Caribbean, Watson said, but the purchase of Pittsburgh-based Atlas Energy and its 486,000 acres in the core of the Marcellus Shale came because of the low operating costs in the play and because Atlas' already existing joint venture with Reliance supplied working capital to exploit the play.
Watson said he expects Chevron's Marcellus Shale production to grow from Atlas' 63,300 Mcf/d to more than 500,000 Mcf/d in the next decade and that, combined with the play's proximity to premium markets in the northeastern US made it fit into Chevron's plans.
The cost per well in the Marcellus Shale are about half that in other major shale plays such as the Louisiana's Haynesville and Texas' Eagle Ford because vertical drilling distances in Appalachia are about half those in rival plays.
Atlas wasn't the first shale producer Chevron looked at and it probably won't be the last, Watson said.
"We've been looking for [these type of] assets for a long time," Watson said. "We bought this for the resource base in a low-cost basin."
"If we see an opportunity, we'll look at it," he said. "We looked at a lot of opportunities," before agreeing to buy Atlas for $3.2 billion and assuming $1.1 billion debt, a 37% premium to its market capitalization Monday, the day before the deal was announced.
US shale drillers have been under some pressure, Watson said, as extremely profitable hedges for the production are rolling off the board at the same time as the companies need to keep drilling to hold acreage by production or meet commitments to their joint venture partners.
"All these things will have an effect," Watson said. "Some chose early [to get into shale]. We chose to get the kind of terms we wanted. We're not in a position where we have to do an acquisition."
Questioned by the audience, Watson wouldn't rule out more US shale buys if it fit Chevron's strategy. "We're going to acquire leases and companies over time," he said.
While Watson said Chevron's efforts going forward "tilts towards upstream and tilts towards oil," he said the company projects it will increase its LNG production and sales from 6% to nearly 20% of total production in the next seven years and that Chevron will climb into the top 10 LNG producers based on liquefaction capacity, trailing only Qatar, Shell, and Algeria's Sonatrach.
