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CNBC Exclusive: CNBC Excerpts: Chevron CEO John Watson Speaks with CNBC’s Brian Sullivan on “Power Lunch” Today

WHEN: Today, Tuesday, December 8th

WHERE: CNBC's "Power Lunch"

Following are excerpts from the unofficial transcript of a CNBC EXCLUSIVE interview with Chevron CEO John Watson with CNBC's Brian Sullivan on "Power Lunch" (M-F, 1PM-3PM ET) today. Following are links to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000464085, http://video.cnbc.com/gallery/?video=3000462803, http://video.cnbc.com/gallery/?video=3000464083 and http://video.cnbc.com/gallery/?video=3000464084.

All references must be sourced to CNBC.

WATSON ON A TURBULENT TIME

JOHN WATSON: THIS IS A VERY TURBULENT TIME IN OUR BUSINESS AND IT'S NOT UNCOMMON. WE SEE THESE BIG EXCURSIONS UP AND DOWN IN PRICES. WE'VE GOT TOO MUCH OIL IN THE MARKET, PRICES ARE COMING DOWN AND IT'S GOING TO TAKE SOME TIME FOR THAT MARKET TO CORRECT. WE ARE PRODUCING MORE THAN WE NEED IN SIMPLE TERMS.

BRIAN SULLIVAN: DO PRICES DESERVE TO BE AT $38 A BARREL FOR WEST TEXAS INTERMEDIATE?

WATSON: WELL, THE MARKET DETERMINES WHAT THOSE PRICES ARE. WHAT WE'VE SEEN OVER THE LAST COUPLE OF YEARS IS SAUDI ARABIA HAS INCREASED THEIR PRODUCTION. WE HAVE THE MIRACLE OF HYDRAULIC FRACTURING HAS EXPANDED OIL PRODUCTION IN THE U.S. WE HAVE IRAN GROWING PRODUCTION. WE HAVE IRAQ GROWING PRODUCTION. AND WE, AS AN INDUSTRY, WE'RE PRODUCING MORE THAN MARKET IS DEMANDING. CHINA HAS SLOWED DOWN A LITTLE BIT. AND SO WE'VE GOT A SLIGHT IMBALANCE IN DEMAND AND IT'S GOING TO TAKE SOME TIME TO WORK THAT OFF.

WATSON ON ADJUSTMENTS

WATSON: THERE ARE ADJUSTMENTS THAT ARE TAKING PLACE IN THE BUSINESS. IF YOU LOOK IN THE UNITED STATES, PRODUCTION HAS FALLEN 500,000 BARRELS A DAY IN THE LAST SIX MONTHS. IF YOU LOOK AT THE CAPITAL THAT IS BEING WITHDRAWN FROM THE BUSINESS. HUNDREDS OF BILLIONS OF DOLLARS ARE BEING TAKEN OUT OF THE BUSINESS RIGHT NOW. BUT WHAT YOU'RE ALSO SEEING IS SOME COMPANIES ARE FINISHING PROJECTS THAT ARE UNDER CONSTRUCTION. SO THAT'S TEMPORARILY ADDING TO SUPPLY. BUT ONCE THOSE PROJECTS COME ON LINE AND AS PEOPLE ABSORB THE CURRENT PRICES, YOU ARE GOING TO SEE PRODUCTION DROP IN MANY PARTS OF THE WORLD.

SULLIVAN: DO YOU BELIEVE THAT? I MEAN, BECAUSE EVERY TIME THE U.S. COMES DOWN, MAYBE IRAQ GOES UP. OR IRAN GOES UP OR RUSSIA GOES UP. WE'VE GOT 11 MILLION COMING OUT OF SAUDI ARABIA THAT WE KNOW OF. THERE ARE COUNTRIES AND COMPANIES, JOHN, AS YOU KNOW, THAT NEED TO KEEP PRODUCING. WHY ARE YOU SO CONFIDENT THAT WELL SEE SUPPLY DROP?

WATSON: WELL, THERE IS A NATURAL DECLINE THAT TAKES PLACE IN OUR BUSINESS. SO AS YOU PULL INVESTMENT OUT, OIL FIELDS DECLINE OVER TIME. AND EVERY COUNTRY IS GOING TO HAVE TO MAKE CHOICES. MANY OF THE DEVELOPING COUNTRIES OF THE WORLD THAT PRODUCE OIL HAVE A CHOICE BETWEEN MEETING THE FISCAL NEEDS AND INTERNAL NEEDS WITH REVENUE VERSUS REINVESTING IN THE BUSINESS. AND I THINK YOU WILL SEE THAT CAPITAL IS GRADUALLY WITHDRAWN. WE'VE SEEN THAT HAPPEN IN SOME COMPANIES IN THE MIDDLE EAST AND WE'VE SEEN THAT HAPPEN IN THE UNITED STATES. THE MARKET AND INVESTORS DO RESPOND TO THE PRICE INCENTIVES THAT ARE OUT THERE. AND WE WILL SEE PRODUCTION COME INTO BALANCE.

WATSON ON OIL PRICES A YEAR FROM TODAY

SULLIVAN: ONE YEAR FROM TODAY, OIL PRICES – WHERE?

WATSON: I BELIEVE IT WILL BE HIGHER THAN IT IS TODAY, BUT THAT'S A VERY TOUGH PREDICTION.

SULLIVAN: THAT'S NOT SAYING MUCH, JOHN.

WATSON: WELL, I THINK WE SEE THE FORCES AT WORK. IF YOU LOOK AT RIG COUNTS IN THE UNITED STATES AND YOU LOOK AT WHAT IS HAPPENING IN THE UNITED STATES, WHICH HAS BEEN A BIG SOURCE OF THE INCREASE SUPPLY WORLDWIDE, IT IS NOW DECLINING IN THE U.S. AND I THINK YOU'LL SEE THAT TAKE HOLD ELSEWHERE AS GOVERNMENTS ARE STRESSED WITH THEIR FINANCIALS.

WATSON ON U.S. PRODUCTION DECLINING

WE'RE SEEING IT NOW IN THE BAKKEN. WE'RE SEEING IT IN THE EAGLE FORD. THE PERMIAN IS STILL GROWING, BUT IN AGGREGATE, U.S. PRODUCTION IS DECLINING. SO WE ARE SEEING IT TAKE PLACE TODAY. AND I EXPECT YOU'LL SEE THE U.S., WHICH IS PRODUCING MAYBE A LITTLE BIT OVER NINE MILLION BARRELS A DAY NOW, DOWN FROM 9.6 EARLIER IN THE YEAR, IT WILL BE SOMEWHERE IN THE EIGHTS NEXT YEAR. AND SO THAT WILL HELP THE MARKET BALANCE. MEANWHILE, DEMAND IS GROWING. SO WHAT I KNOW IS THAT THERE AREN'T VERY MANY INVESTMENTS THAT ARE ECONOMIC AT $40 TODAY. AND SO NATURAL DECLINE WILL TAKE OVER. AND YOU CAN DEBATE WHEN MARKETS WILL COME INTO BALANCE AND THERE IS SOME SPARE CAPACITY THAT COULD BE PUT ON THE MARKET IN IRAN AND SAUDI ARABIA. BUT IF YOU LOOK AT A WORLDWIDE LEVEL, SPARE CAPACITY WORLDWIDE IS AT ONE OF ITS LOWEST LEVELS IN 30 OR 40 YEARS. THE ISSUE RIGHT NOW IS THAT SOME OF THAT SPARE CAPACITY IS BEING DISCRETIONARILY PRODUCED. AND SO IT'S GOING TO TAKE A LITTLE BIT MORE TIME FOR MARKETS TO COME INTO BALANCE.

WATSON ON BEING PREPARED FOR PRICE

WE ARE PREPARED TO LIVE WITH WHATEVER PRICES THE MARKET GIVES. WE DON'T PUBLISH OUR FORECAST FOR PRICES. WE HAVE A RANGE OF PRICES THAT WE LOOK AT. WE ARE PREPARING TO LIVE WITH PRICES AT WHATEVER LEVEL. WE HAVE MADE SOME SHARP REDUCTION IN OUR CAPITAL SPENDING FOR 2016. AND WE EXPECT IT WILL GO LOWER IN 2017 AND 2018. SO WE'LL FINISH THE PROJECTS WE HAVE. WE WON'T START MANY NEW LONG-CYCLE PROJECTS RIGHT NOW AND WE'LL FUND SHORT-CYCLE INVESTMENTS THAT HAVE A GOOD RETURN AT WHATEVER PRICES ARE TODAY. AND THAT WILL ENABLE US TO PAY OUR DIVIDEND AND GET OUR FINANCIAL HOUSE IN ORDER.

WATSON ON DIVIDEND

THAT IS OUR NUMBER ONE PRIORITY IS TO PAY THE DIVIDEND. I HAVE MADE THAT VERY CLEAR TO THE FINANCIAL COMMITTEE. OUR SHAREHOLDERS VALUE THAT DIVIDEND. WE GENERATE ENORMOUS CASH FLOW EVEN AT LOW PRICES. SO WE'RE GOING TO DO WHAT WE CAN TO CUT FUTURE SPENDING, BUT THE DIVIDEND IS SOMETHING – IN FACT, WE'VE INCREASED AT 28 YEARS IN A ROW. SO PAYING AN INCREASE IN THE DIVIDEND IS A PRIORITY. CERTAINLY A PRIORITY FOR ME, BUT WE HAVE GOT TO LIVE WITHIN OUR MEANS.

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