erik: from west texas shale to drilling rigs far offshore -- >> offshore rules -- we need a hand on the handrail. ok? erik: from angola to australia -- >> you're looking at the inside of an lng tank. erik: our thirst for energy has pushed chevron to almost every corner of the globe. >> we believe there's opportunity to progress. >> good job, erik. erik: the giant company is active in 180 countries. >> it is the largest resource project in australia. erik: pumping almost 2.6 million barrels every day. these are challenging times for big oil. fracking has upended the global market. renewables like solar and wind power are getting cheaper, and no one knows when or even if crude prices will rebound.

>> at the end of the day, this is a commodity business. erik: yet chevron is doubling down on fossil fuels, investing tens of billions on a bet the world will guzzle oil and gas for decades to come. we take you inside chevron in this bloomberg special report. ♪ erik: this is midland, texas. in the mid-1980's, it lived through an oil price collapse. on the main street downtown, you can still see the impact. 30 years later, midland is caught up in another bust. prices have plunged by 60% in just nine months.

drilling rigs are being idled. jobs, more than 50,000 to date, are disappearing across the country. fracking is why this is happening. hydraulic fracturing is the technology that has unlocked billions of barrels of american crude. the biggest producers are holding up better in the slump than the wildcatters are, but they are still feeling the pain. look at chevron. the company had to stop buying back stock and slash capital spending by $5 billion. ceo john watson did not have a choice. john: when a good chunk of your revenue disappears overnight, you do have to take stock of that. and we are taking actions to reduce our spending profile. finish projects under construction. pace the others to see if we can bring costs down. we keep a very strong balance sheet so we can withstand the ups and downs of the commodity market. there are some that have not been in the business as long, that have not seen price

excursions down that we have. i have seen five drops of 50% or more in the price of oil in my 35 years. >> it is impossible for oil companies today to thrive in $60 oil. they can withstand the pressure for longer than most of their peers. they will be hurt, but the smaller guys will be killed. horizontal drilling and hydraulic fracturing has completely changed the energy mix, the outlook and the perception. that is a game changer that will likely change the industry forever. erik: fracking is why america now produces 70% more oil than it did five years ago and almost as much as saudi arabia. it is why opec cannot control prices anymore. it is why the u.s. may lift a

40-year-old ban on crude exports. here's how fracking works. a well is drilled into sedimentary rock, typically shale. water, chemicals, and sand are injected at high pressure, fracturing the rock and freeing trapped oil and natural gas. the government estimates that the u.s. has 48 billion to 58 billion barrels of recoverable shale oil. that is enough to produce at current rates for at least 14 years. and those estimates are probably conservative. america has a lot of shale formation. the bakken in north dakota, the marcellus in pennsylvania and new york, the woodford in oklahoma, and in texas, the barnett, the eagle ford, and the permian basin. >> chevron's history in this basin goes back to the early 1920's. almost at the start of the basin. we are fortunate that we have been here for a long time and have been here consistently. this basin has seen a lot of ups and downs in terms of production. it had been on a gradual and kind of slow decline.

and then a number in the industry recognized that unconventional development that had started in the barnett outside of fort worth and dallas could maybe be applied here. and it turned out that was exactly right. and we are in a renaissance in the permian basin today. erik: no oil company has more land in the permian basin than chevron. yet chevron missed the first wave of fracking success. the independent producers were faster and more aggressive. >> the shale revolution came on so fast. let's be clear -- so far, the majors have not played well. but i think we have to think about how the large, integrated oil companies work in the time horizon in which they think, vis a vis or compared to smaller independent companies. and it comes down to long-term versus short-term. the major integrated oil companies are superb at managing for the long-term.

they think about things in 25 to 50 year time segments. erik: now chevron is finally catching up. it is building a new headquarters in midland after outgrowing the one that has been there for decades. and it is developing almost 2 million acres in the area. >> the shales in the permian basin are prolific. but they are complex. they are stacked, what we call "stacked pays." and we have wanted to understand those pays and produce them as efficiently as we can. we have learned a lot from the wells we have drilled and some of the wells our competitors have drilled. >> because we have been here so long, we are not in a "drill or drop" situation. we do not have a clock ticking on our activity. we have the ability to be disciplined in our approach. erik: why is discipline more important than maximum production? >> discipline is important because at the end of the day, this is a commodity business. and in order to create high

earnings, you have to have a high margin, you have to be disciplined in where you place wells. the cost of execution of associated with doing that and what you ultimately recover out of the wells. what this basin offers is short investments. so the wells that we drill here are drilled in a matter of days, put into production in a matter of weeks. so the cycle time associated is a little different than our major capital projects. erik: but fracking has its own set of challenges. >> on shore shale has an enormously rapid decline rate, upwards of 50% in the first year. and when you have to keep increasing your drilling to maintain a production rate with a decline rate at that level, you are going to drill and drill and drill and never keep up. erik: unlike the gushers of years past, shale wells run dry

quickly. that is why no major oil company can depend on fracking alone. they need bigger, more reliable deposits like the one in the gulf of mexico. in december 2014, just as oil prices were plunging, chevron began pumping oil at jack/st. malo, a $7.5 billion project a few miles offshore. at the same time -- >> offshore rules. we need a hand on a handrail. erik: they were putting finishing touches on bigfoot at a shipyard in corpus christi. >> it is the biggest thing i have been on. i do not know of anything that has more engineering, more technical from the design to the power generation, than what we have out here. erik: bigfoot is 450 feet tall, kind of like a floating skyscraper. in march, it was towed into position 225 miles south of new orleans. >> this is our drilling rig. it has a 2 million pound hook capacity.

erik: then something went wrong. chevron planned to anchor bigfoot with 16 yellow cable-like tendons. in may, six of them lost buoyancy. then another three sank. all nine are sitting one mile down on the ocean floor. >> if you are into the long-term deep water offshore, let's say, that is a different business. a much higher set of technical requirements. higher risk. and you'd better operate to manage the risks you face in deep water offshore or you end up with a bp macondo disaster. erik: now chevron is towing bigfoot back to shallow water. the company cannot say when it will start pumping oil or reach capacity of 75,000 barrels a day. only that it will not meet the startup target of september 2015. next, what john d. rockefeller did for chevron and why it is different than other oil giants. >> we are underweighted for example in russia and the middle east relative to some of our competitors. erik: when "inside chevron" returns.

erik: it started out as a gusher in the hills northwest of los angeles almost 140 years ago. today, chevron is america's second-largest oil company with a global reach and operations in everything from deep-water drilling to pipelines. well number 4 at pico canyon was drilled in 1876. three years later, it was acquired by pacific coast oil. enter john d. rockefeller. his standard oil company was an industrial empire that controlled 90% of america's oil production and 85% of its sales. standard bought pacific at the turn of the century. in 1901, the richmond refinery in san francisco bay was completed. now the west coast had its own supply of gasoline, lubricants, and petroleum products. in 1907, standard oil opened its first drive-in gas station in seattle. but the u.s. government dubbed standard oil too powerful and accused it of running an illegal monopoly.

a supreme court ruling in 1911 broke the company into 34 parts. one, standard oil of california, or socal, borrowed the three v-shaped stripes from a sergeant's uniform and turned them into a brand -- chevron. in the 1930's, socal discovered oil in bahrain and saudi arabia and formed a marketing venture with texaco. they called it caltex. this was the pre-opec era, when seven private oil companies, the seven sisters, controlled most of the world's crude reserves and productions. in 1984, with the industry's big players starting to consolidate, socal bought gulf oil in what was the largest takeover ever. the new company took its name from the old socal brand -- chevron. before long, megamergers were the norm. bp snapped up amaco and arco. exxon acquired mobil. chevron purchased texaco in 2001 and unocal in 2005. now it is one of the world's most profitable companies, with earnings of almost $20 billion year and a market cap of $200 billion. there is a lot that chevron shares with the other major producers beyond profits and a standard oil ancestry.

it is frequently the target of protests over climate change, environmental damage, and human rights violations in developing countries. [chanting] >> chevron. >> guilty. >> chevron. >> guilty. erik: there is even an international anti-chevron day. plus, chevron ranks up there among the industry's top spenders on government lobbying, raising concerns about the influence it wields over politicians and regulators. what divides chevron from the rest of the pack is strategy. >> they did a lot better than their peers. because they made a bet on oil, not natural gas. exxon and royal dutch, for example, made huge bets on natural gas, which, unfortunately for them, has not really lived up to expectations. chevron, on the other hand, made a bet on oil, and it has worked in their favor very well over the last 10 or 15 years. >> we are a little bit different. we are more upstream-weighted

than some other companies. so more oil and gas production relative to downstream in chemicals. we have recognized expertise in deep water development and dealing with lng development. there are certain portfolio characteristics and technologies that we have pursued that make us i think very unique. erik: chevron produces about 2.6 million barrels a day of oil and natural gas, most of it in 11 countries on five continents. over the past decade, crudes and other liquids have consistently made up about 2/3 of the total while accounting for less and less at shell and exxon mobil. >> the geography is different from competitors in the downstream and where we have chosen to invest. we are underweighted for example in russia and the middle east relative to some of our competitors. so there are some differences in strategy and direction. we have had to make choices based on the investment returns we see. we have chosen not to be a part of southern iraq, even though we

have done a lot of work to be prepared to participate. but we did not see economic returns. we have not seen economic returns in russia just yet. but i don't necessarily regret those decisions. erik: john watson joined chevron 35 years ago, right out of business school. he started as a financial analyst and rose to become cfo and executive vice president of strategy before being made chairman in 2010. >> he is very intense. he is a quick study. he is not an engineer by trade, which is different. everyone that runs exxon must be an engineer. having said that, he made good decisions. served shareholders well. sometimes, it is luck. sometimes it is brains. but at the end of the day, it is results that count. erik: next, chevron makes its biggest bet ever in australia.

that is big. and overspends by the billions. plus, why there is a future for big oil >> we are going to need energy. erik: "inside chevron" returns. ♪

>> it is the biggest project of its kind in the world. erik: 37 miles off the coast of northwest australia, here, on a remote island with no full-time residents, chevron is building a $54 billion liquefied natural gas plant. the gas comes out of the storage tank. everything about gorgon is on a

scale that defies description. >> this stuff is massive, enormous. >> gorgon is the largest project that chevron has undertaken. it is the largest resource project in australia. and one of the largest resource projects in the entire world. erik: gorgon is on barrow island, about 700 miles north of perth. its sister development, wheatstone, is on the mainland. on the australian outback. together they will produce 4 billion cubic feet of natural gas a day, enough to fuel new york with plenty to spare. but the u.s. has more gas than it needs. which is why chevron came to australia. >> i see what is happening in the developing world. i see what their needs are. they need power, for example. where is it going to come from? it is going to come from natural gas. we have had prolific discoveries of natural gas in australia. the gorgon and wheatstone

developments, the combined spending by us and our partners on those projects is about $85 billion. that reflects a significant amount of natural gas we have found in the area and the opportunity to develop it in proximity to the asian markets which it will serve just has created a very good investment opportunity for us. erik: both projects take gas pumped from undersea deposits, clean it, freeze it, and load it onto tankers bound for japan and elsewhere in asia. wheatstone is about 2/3 the size of gorgon. even if it does not feel any smaller. where are we and where are we going? >> we are at the north side. the second of two lng tanks we are building. we are going up top so you can get an overview of the entire operation we have going on here. so this is one of the two lng tanks that make up the side. this is where it will be cooled before it is moved to the loading jet out there.

erik: what are we looking at? >> you are looking at the inside of an lng tank. 92 meters in diameter, 47 meters tall. it will be full of natural gas every couple days. erik: that is big. that is very big. wheatstone is set to start production in 2016. so far, it is on target. gorgon, which was greenlighted at $37 billion, is wildly over budget and a year behind schedule. >> it was one of the worst in the industry. it is going to probably -- if the harvard business school wanted a case study of what not to do, it would be gorgon. chevron as the operator has 50% interest. and they just bit something that they couldn't chew.

it was too big. whether they want to admit it is too big for us, maybe we should ask companies that have better experience, more experience and have been through this before. unfortunately, they did not ask for help. they did not get help. and they got clobbered. >> the gorgon project, the whole industry has been stressed in the last two years. the cost of goods and services has more than doubled. and we saw the australian dollar grow rapidly. and certainly there were labor -- the cost of labor were higher than expected. more cyclones that went through. so, yes, costs went up. but we think the gorgon project will be a nice contributor. remember, when we took final investment decision on gorgon, it was way back in 2009. it has taken five years to move it forward. oil prices were in the $60's at that time. the price enviornment has gone up and down. we think gorgon will be a good contributor over many years.

erik: part of the challenge at gorgon is location. barrow island is not just a remote patch of dirt in a cyclone alley off the west coast. it is a high-priority nature reserve and a sanctuary for some of the country's most endangered species, like the flatback turtle and the golden bandicoot. how does one of the dirtiest industries on the planet operate in one of its most sensitive ecosystems? >> we have got a world class quarantine management system. but you know what makes it work though is the people. we have a culture that will defend barrow island and not let any kind of nonindigenous species on the island. flora or fauna. we made these commitments to key stakeholders that this was our license to operate, if you will, on the island. erik: every person that lands on barrow island is inspected for potential contaminants. right here? >> all good?

>> yes, all good. erik: every piece of equipment is sprayed and shrink-wrapped to avoid contact with insects or bacteria. they are the right protocols. but chevron has a lot to prove. everyone remembers the bp disaster in the gulf, and the exxon valdez. plus, chevron is still fighting lawsuits over decades-old oil spills in the amazon. >> the public has high expectations around our environmental objectives. i think there has been a concern for many years about our industry and the impact it has on the environment. erik: chevron's bet on australia faces an even bigger test -- the lng market. watson is staking his legacy on lng. gorgon and wheatstone are years ahead of other lng megaprojects, some of which may never be developed. >> the question is, how large really will the lng market be? and that is a question no one

has the answer to yet. i think we will see a glut, we will see the price drop precipitously. and i think a lot of projects will get canceled. the market for lng looks big now, but if everybody gets into it, you know, it will be a famine rather than a feast. and i think there will be too much and the price will drop so that a lot of people lose a lot of money. >> the gorgon and wheatstone projects are 30 or 40 years. and so they are not premised on what prices are going to be today. they are premised on a long-term view. and we are comfortable that the price-cost equation will come into good balance. erik: here is why john watson is confident about the future. it will be decades before wind and solar power are cheap enough and plentiful enough to rewrite the rules of the global economy built on fossil fuels. oil and gas are here to stay. >> one thing is for sure. we are energy intensive today, both in transportation and in power generation.

we will be energy intensive tomorrow in transportation and in power generation. that is not going to change. >> it is hard to convey the scope and scale of the energy system that has been built over the last 150 years. and it is not that renewables do not have a place. it is not that it is one or the other. and i think what has been gradually realized is, just as the energy system is diverse, so will be the players in the business. there's a role for oil companies, independents, national oil companies over the next 20 years. we see a 40% increase in energy consumption tied to urbanization economic growth, and prosperity for people who previously did not participate in the economy. if you look at what is happening around the world, we are seeing unprecedented breadth of economic growth. if you go back many years, the

economic growth took place in the u.s. and europe. and as more people enter the middle class, they will need energy. ♪

emily: he is tech's biggest outlaw, under house arrest after a massive raid by new zealand commandos. kim dotcom is known for his outrageous personality as he has trotted the globe from germany, to hong kong, to new zealand. now he is the target of the biggest copyright case in history, accused of trafficking in pirated music, movies, and tv shows, as he awaits an extradition hearing to decide his fate. joining me on this special edition of "studio 1.0" from auckland, new zealand, megaupload founder and self-proclaimed ruler of the kimpire, kim dotcom.