Chevron Slims Down to Put Its Money On Asia and Natural Gas

By the end of year, Chevron (CVX) should be a leaner oil and gas company, shorn of some refineries and focused on its two best bets for growth: Asia and natural gas. But none of this will come without pain.

Chevron will cut 2,000 jobs in its refining and marketing division, the company said during a security analyst meeting Tuesday. That's on top of 1,900 job cuts announced last year. That means the company's global downstream business, which employs 19,000 people, will be 20 percent smaller within two years. Chevron will have severance charges between $150 million and $200 million on an after-tax basis in the first quarter this year as a result of the job cuts.

Chevron is left with little choice but to cut and run from the weakest areas of its refinery, marketing and transportation division. The company's refining business -- along with virtually every other U.S. refiner -- suffered in 2009. The recession sapped demand for fuel and at the same time more refiners came on line, which led to an overload of capacity and weak margins. In short, it was hard to make buck refining and selling fuel products.

And the future doesn't look much better. More refineries are expected to come on line this year and demand in Europe and North America is still stagnant. Chevron's not waiting around to see if it recovers. Instead, it will sell its 210,000 barrels per day Pembroke refinery in the U.K., perhaps the only area with worse demand than the U.S. It also will sell its fuels marketing, aviation and lubricants businesses in the Caribbean and in some parts of Central America. In the end, Chevron will exit 53 markets in its refining business and sell 1,300 of its filling stations.

But it's not all about making cuts. Chevron will keep refining operations in North America and the Asia-Pacific region, its best performing markets. Asia, with its ever-increasing appetite for energy, is a huge opportunity for Chevron. The demand for gas in Asia is expected to more than double between 2005 and 2030, according to the Energy Information Administration. Based on those numbers, Asia's demand will outpace global demand by more than 2 to 1.

It's not that Chevron has ditched oil. The company is still fully committed to the fossil fuel. But like other oil majors, gas has become the darling of the decade. And that's because many believe the world, especially developing nations, will turn to natural gas to meet their power generation needs. As global demand for electricity rises, oil majors like Chevron are betting that natural gas -- not coal -- will be the best fuel source to meet those needs.

Unlike other oil majors, Chevron has focused on liquefied natural gas in the Asia-Pacific, and not unconventional shale gas in North America. Chevron has 30 natural gas projects and more than 48 percent of its gas resources are concentrated in the Asia Pacific region.

Majors like Exxon (XOM) also have LNG projects in the Asia Pacific, but have been more aggressive in the unconventional North America market as well. Exxon, for example, acquired XTO Energy (XTO), an independent producer that specializes in unconventional gas, for $41 billion last year.

Chevron does have a number of unconventional gas plays in the U.S., including about 35,000 acres in the Piceance Basin in Colorado and Haynesville in Texas. But it's not drilling there because of low gas prices. And there are no plans to start back up any time soon, George Kirkland, vice president for global upstream and gas, said during the investor conference.

There is a big opportunity for us both in the Piceance and Haynesville if gas prices would come back ... It's very attractive unconventional gas in comparison, I think, with many. But with U.S. gas prices being so low, it just doesn't make a lot of sense to spend the money there.

With so many other small and major oil companies jumping on the unconventional gas band wagon, this is a smart move. Chevron is poised to ramp up production fairly quickly if it needs too. So there's no reason to waste money drilling in the U.S. until prices rise.

See additional BNET Energy coverage of Chevron:

• Chevron-Concentrix Project Shows Why Big Oil and Solar Need Each Other
• Chevron's Big Bet on Crazy Chavez Pays Off -- For Now
• Refining Exodus: Chevron to Slash Jobs, Exit Some Markets
• Asia's LNG Appetite: Chevron's Share of Gorgon Gas Going Fast
• Chevron's Acquisition Strategy: Small companies Need Not Apply
• Chevron CEO O'Reilly: Refining Outlook Looks Sloppy Through 2011
• Chevron Backs Off Natural Gas Drilling in U.S.

Photo of natural gas flame by Flickr user Dobrych, CC 2.0