WHEN: TODAY, FRIDAY, MARCH 27
WHERE: CNBC'S "CLOSING BELL"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Chevron Chairman & CEO John Watson today on CNBC's "Closing Bell." Following are links to clips of the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000366242 and http://video.cnbc.com/gallery/?video=3000366246.
All references must be sourced to CNBC.
KELLY EVANS: John Watson, the oil prices snapped back this week on the back of some unrest in Yemen, actually. Is it your anticipation that Middle East violence could keep pushing the oil price higher? Or will we then see the market readjust to what looks like this new normal at lower prices?
JOHN WATSON: I think we're gonna see a very choppy year in 2015. And so I believe prices will respond to physical things that are happening in the marketplace and political events all around the world. Over time, I know market forces are going to determine where prices go. Right now we got surplus oil. I expect it to be a choppy year around the range that we're in today.
KELLY EVANS: You sound like Bob Dudley at BP who said he sees volatility ahead and says that's actually more normal. What does it mean, though, for you guys-- if we're in a choppy price environment and you have to think through capital expenditures-- keeping your dividend funded, looking at acquisitions?
JOHN WATSON: Well, certainly for us, it means you'd better be very flexible and you'd be adaptable. We've kept a very strong balance sheet so that we can continue to invest through the business cycle on some of our key developments, such as our big LNG projects in Australia, our big deep water developments in the U.S. At the same time, we're committed to continuing to grow the dividend over time. And so we can handle both of those things with the capacity that we have on our balance sheet, and we'll adjust the spend down over time and we'll also adjust to the expense environment that I expect to be somewhat better than it's been in the recent past.
KELLY EVANS: How much down? So, if you got $35 billion in capital expenditures-- and I bring it up 'cause you're one of the biggest investors in this country frankly -- how much might that decline if oil prices stay at current levels?
JOHN WATSON: We told the finance community, as we finish our big projects under construction such as go around Gorgon and Wheatstone in Australia, we'll go from $8 billion in spend in this year on those two projects to one in 2017. And so that gives us a lot of flexibility. I expect that our flexibility by 2017 will be $8 billion or more less than we're spending today. So, from 35 down to 27 or lower, as conditions warrant.
KELLY EVANS: And so you've looked to maintain that dividend, drawing, as you mentioned, on some of the cash levels you've built up in the past or maybe capping debt markets?
JOHN WATSON: Absolutely. We have significant debt capacity. We're committed to the dividend. Our shareholders very much want us to continue the dividend. And we have the capacity to get through the cycle of big projects. And, in fact, we've told the financial community that we would be spending at a high rate for the next couple of years, and then we'll be in a position in 2017 to be balanced, where our spending and dividend is covered by the cash flow that we generate from these new projects and our ongoing business.
KELLY EVANS: Did you see the drop in oil prices coming?
JOHN WATSON: Well-- we've seen a lot over my lifetime. I've seen oil prices drop 50%. I can't say that we expected this size of a price drop that we've seen this time. It's not unusual to see some weakness, but to see a 50% drop in prices, that's, I think, surprised a lot of us.
KELLY EVANS: Would you argue that it's better for it to happen all at once as opposed to taking a couple of decades to play out? And how does the speed of this particular decline stack up against what else you've experienced?
JOHN WATSON: Well, this has been very rapid, because as we make big investments, if we have a little bit too much supply relevant to demand, prices can drop very rapidly. And we've seen that. This downturn is a little bit different than others in that we don't have a lot of surplus capacity in the world. We have perhaps three million barrels a day of spare capacity in the world. And some of those being produced which has the imbalance. But we're in a resource business that declines over time without spend. And so markets will balance and spending is reduced, both here in the U.S. and internationally.
KELLY EVANS: And that excess capacity is largely in Saudi Arabia, where you guys have a long history. Obviously, Yemen is raising people's concern as well, not because itself, it's a big producer, but because it's seen as a proxy off of what's happening with Saudi Arabia and perhaps Iran across the Middle East. What's your anticipation of what the Saudi government is able or trying to accomplish here and how much they may draw down or increase their reserves to try and bolster or just respond to some of the movements in the oil markets?
JOHN WATSON: Well, OPEC has gradually reduced its market share over time. They produce about 30 million barrels today as they did 30 years go, but demand has grown. And so they've seen their market share erode over time. And I think what the Saudis are saying is, "We want to keep our market share and we're gonna continue to produce the roughly nine million barrels a day. And we know we're not the high-cost producer. We'll continue to produce. And we'll let others adjust so that the markets stay in balance," rather than trying to engineer more spare capacity through its relationship with OPEC.
KELLY EVANS: Is OPEC still relevant?
JOHN WATSON: Well, OPEC is an organization that's a forum of producers that are members that gather and talk about supply and demand. And they have the wherewithal if they choose to reduce capacity and to try to influence the price of the marketplace. They still can have significant influence. They aren't choosing to exercise that now.
KELLY EVANS: And it sounds like what you're saying is that they kinda don't have the bite that they might have had in the past. Responding actually to lower oil prices, that's when the need for this collaboration becomes more important.
KELLY EVANS: Do you anticipate more collaboration within your industry-- you know, traditional rivals having to come together on some projects now?
JOHN WATSON: Well, there there is more competition for OPEC oil. For example, the shale oil that's being produced in the U.S. is a great benefit to the U.S. economy, but it's a new source of competition for OPEC and other producers. The energy industry has many diverse suppliers. And now there's another one. And so there's more competition and it's going to force more creativity on to companies like ours and others to see if there are opportunities to work to meet the resource demands that we're going to have going forward so that we can move projects forward while dealing with the low-price environment that we're in.
KELLY EVANS: What kind of policy response do you think we need here from the U.S. government, if any? I mean, there's been a lot of things currently working their way through Washington, whether it's the Keystone Pipeline-- whether it's relaxed rules on exporting some of the crude in this country. Which of these would be most beneficial right now?
JOHN WATSON: Well, the two things you mentioned, I think, are very straightforward arguments. If we put more oil on more markets, it will benefit consumers. If we artificially constrain light oil that's being produced in the United States-- ultimately, there will be less oil on the market 'cause prices will be too low for investors to invest to build capacity. So, I think exporting oil is a very straightforward argument. Similarly, permanent pipelines is also very straightforward. We have oil that's available from Canada. We need to move natural gas. It's the cheapest and environmentally safest way to move oil. So, to me, building that infrastructure and enabling the development of oil by allowing exports, it's the right thing to do.
KELLY EVANS: Would you ever move oil on train cars, on rail cars, if you didn't have to?
JOHN WATSON: Well, general rail cars provide some flexibility. We happen to be a very small mover of oil and other products by rail. But in new development areas, before pipelines are built or for logistical reasons they're a nice add to the available transportation. But in general where you have significant supplies and you know the destination-- pipelines make the most sense.
KELLY EVANS: And as we see activity decline along with prices in some of the parts of the country that were booming because of oil, what impact is that having on your cost of labor, on the cost of rigs and other inputs for you?
JOHN WATSON: Well, as we've seen lower prices-- many companies have had to cut back activity. And when you cut back activity-- we're seeing rigs that are released and we're seeing pricing soften, somewhat, certainly in the rig market and some specialized labor markets. So this is the natural cycle of our business. It's not unusual for that to happen. I think you'll see lower cost throughout the industry. But remember, costs have more than doubled over the last ten years. So this represents a moderation where we've seen a very high-cost environment, both here and around the United States and around the world over the last decade.
KELLY EVANS: Because there's a lot of focus on what the breakeven cost is for-- you know, the big producers here. What would you say, given your huge presence in the Permian in Texas, for example, what is your breakeven cost there right now?
JOHN WATSON: Well, the breakeven varies by producer and by your land position and by your royalty position, which is a cost to some producers. We happen to be in some very good locations in the Permian Basin. We have a low cost of doing business—
KELLY EVANS: Lower than where the oil price is today?
JOHN WATSON: Oh, we certainly are continuing to invest in the Permian and can make a good return at the kind of prices that we're seeing today in most areas where we operate within the Permian. That's why we're continuing to operate. But certainly-- we're trying to extract more in the way of lower cost so that we can continue to invest for the long term.
KELLY EVANS: Are you going to continue investing in fracking and those kind of projects? Or are you going to look to a deep water and other ways of extracting oil?
JOHN WATSON: Well, I think one of the benefits of a company like ours is, we have a broad portfolio, so we have two million acres, roughly, in the Permian Basin. And that represents a wonderful opportunity for us. And we will continue to grow production through the end of the decade in the Permian Basin. But we are also one of the largest and most effective producers in the deep water Gulf of Mexico, here in the United States. We have a big business in Australia for liquefied natural gas, Thailand, Kazakhstan, many areas around the world. We produce oil in 23 countries around the world. So, we are effective in many places in the business. And the diversity in our portfolio gives us opportunity, really, around the world.
KELLY EVANS: And you bring up the international portfolio at a time when actually a lot of the places you're operating has significant domestic pressure. So, whether it's Venezuela-- Brazil-- we've discussed the Middle East-- how has that changed your productivity?
JOHN WATSON: Political turmoil is not new to our business. It's really a part of doing business internationally. So, we pride ourselves on having people in country that work closely with whomever is in power, whatever the turmoil might be, to try to produce energy either for local consumption or for export. And we try to navigate through the tough times that we see-- really, in many countries around the world over the long cycle time of our business.
KELLY EVANS: Will you be investing, concentrating more in the U.S. as a result of all this? Or no?
JOHN WATSON: We still have big investments going on around the world. But certainly, with the shale revolution that's taken place in this country-- the prospects that we have in the Gulf of Mexico, we'll still investing in a very big way here in the United States. So we go where the opportunities are best, where the fiscal terms and costs make the most sense. And the U.S. has a a very bright future.
KELLY EVANS: When we look at the industry today, excess capacity that may be a result of the boom we've seen, how much consolidation do you think might occur across your space?
JOHN WATSON: Well, there're players of all sizes and people that have taken different kinds of risks in terms of how much debt they've taken on and certainly, with prices dropping 50%, we're seeing companies that are under pressure. So, it would be natural to expect some consolidation in the business. From our point of view, we have a portfolio where we don't need to do an acquisition. If there's an opportunity, we can take a look. But certainly, there're gonna be some tough times. And that'll force some rationalization or consolidation in the business.
KELLY EVANS: We heard David Rubenstein of Carlyle tell CNBC this week that he thinks energy is one of the brightest prospects for deal-making, if you will, and for investment. How are these flows from private equity or from retail investors, investors of all stripes, affecting the industry's needed consolidation? In other words, is it almost making it harder? Or is it going to spark some of the needed consolidation?
JOHN WATSON: Well, I think the combination of low interest rates and a lot of liquidity out there is really creating opportunity for those that have difficulties, to solve their problems, either through recapitalization in some form, including private equity money coming in. So, I think it will facilitate some stability in the business. And really, for the industry, it's probably a good thing so that people can get back to business instead of worrying about the balance sheet and perhaps the stresses they're under.
KELLY EVANS: Do you think we're in a new normal environment for the oil price here at around the $50 level?
JOHN WATSON: I think this year will be a tough year. And I think prices will be lower than what we've seen over the last few years for the next couple years. But I do think in due course we will see some rise in prices, because—
KELLY EVANS: Will we ever see $100 again?
JOHN WATSON: Well, never is a long time. And so it may take some time to get back to that kind of a level. But one thing I know is demand for energy is growing. Oil demand is growing about a million barrels a day per year. And there's a big decline. Oil fields decline over time. We need to invest in new big fields, not just shale, over time. And our costs will need to come down. Our prices will need to come up in order for some of those big investments to be made by all the players in the business around the world.
KELLY EVANS: And we've discussed two of the major policy hurdles, export regulations, pipeline regulations. What else keeps you up or frustrates you or impedes business at this point, given the current administration? Or what opportunity do you see if there were a change in leadership in 2016?
JOHN WATSON: Well, there's certain political turmoil and many challenges in my business around the world. I think the opportunity for us going forward is to make sure we're taking advantage of all the sources of energy that we have in this country including more opportunity that we have in oil and gas. So, for example, we need to continue lease sales on public land. Or we need to be sure that if we put in place environmental standards, that we've done a thorough cost-benefit analysis.
KELLY EVANS: Like the ozone standards?
JOHN WATSON: Well, that's one that I think is under a lot of scrutiny right now for a good reason. It will put—if implemented amendment as planned, it could make most of the United States, including national parks in non-attainment. And that would make it very difficult to take advantage of the low cost of energy for that manufacturing dividend that everybody is expecting. So, you have to have policy that's well-coordinated. You have to be sure that the environmental benefits, that we are not diminishing returns at huge costs, both in terms of foregone opportunity and the costs that are put on existing businesses today.
KELLY EVANS: John Watson, CEO of Chevron, thank you so much for your time.
JOHN WATSON: Thanks, Kelly.
KELLY EVANS: Appreciate it.
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