This is the fourth article in a seven-part series examining the changing dynamics of the oil and energy industry: Introduction | BP | Exxon | Chevron | Shell | Total | Statoil

Like ExxonMobil, Chevron Corporation was formed out of the ashes of the breakup of Rockefeller's Standard Oil Company into 34 companies in 1911. However, the California-based major has not positioned itself as well as its larger competitor to face the current crisis, following years of heavy investments and cost overruns on massive projects like the Gorgon and Wheatstone LNG projects in Australia.

Chevron is the second-largest oil company in the U.S., after Exxon. It entered the realm of the supermajors when it absorbed Texaco in October 2000, spurred on by the marriage of Exxon and Mobil. Initially, Chevron and Texaco CEOs Kenneth Derr and Peter Bijur were unable to put aside personal differences to survive through scale, but the merger was finally completed once Chevron's newly appointed Irish CEO David O'Reilly relaunched negotiations.

Problems at Gorgon

With demand for LNG surging in Asia, O'Reilly's successor and "good friend" John Watson has poured billions into its Australian LNG projects Gorgon and Wheatstone since 2009. The massive Gorgon project, which came online in March and boasts the world's biggest carbon dioxide storage facility, has cost $54 billion over six years, including cost overruns of $17 billion.

Embarassingly, Chevron was forced to halt production at Gorgon only three weeks after shipping its first cargo. The delays were blamed on the propane refrigerant unit, central to the gas-cooling process, and came as a heavy blow to the company.

Little did Chevron know back in 2009 that the first production and export from Gorgon would coincide with plummeting output prices, as oil-indexed LNG prices tracked the descent of global oil. In April, the benchmark Platts JKM Index for LNG was priced at $4.46 per million Btu, down more than 35 percent from last year.

As these projects come online — along with others Chevron operates in the Gulf of Mexico, China, Nigeria, Angola and Canada — the company's production profile is set to rise. Management expects output to rise from 2.6 million barrels per day (bpd) in 2015 to 3 million bpd in 2016 (link), outpacing its rivals and providing some relief from the economic environment.

But purse strings now need to be tightened.

Tightening the purse strings

Watson, who helped steer the 2000 merger before taking over as CEO and chairman in 2010, is a highly visible actor in oil and gas policy. Until recently, he served as chairman of the powerful industry lobbying group the American Petroleum Institute (API), where he supported Exxon's Rex Tillerson's calls for market-based solutions to supporting environmental objectives.

With a strong financial background, it was hoped Watson would bring financial discipline to management. He is now leading a series of cuts to the capital budget, described as a more "selective approach" to new investments. Capital spending will be cut from $26.6 billion in 2016 to $22 billion in 2017 and $17 billion in 2018. Assets in Indonesia and the Philippines are being offloaded.

Plans to cut 20 to 25 percent of upstream workforce will bring further job cuts of 4,000 this year, on top of 3,000 last year, hitting oil towns like Houston hard. Given financial realities, M&A has been ruled out as an immediate focus. However, a major strategy being pursued it a pivot from Big Oil to "small oil" back in the U.S.

Chevron already has a footprint in Texas' Permian basin. The company has also been dedicating research efforts toward new shale technologies, teaming up in a technology alliance with General Electric in 2014 to develop and commercialize technologies such as flow analysis in U.S. fields.

Watson has promised to boost efficiency through leveraging new technologies like this so the major is able to compete with innovative independents like EOG Resources. He even suggested that by the middle of next decade, 20 to 25 percent of Chevron's production could be in short-cycle shale and tight plays.

Dividend aristocrats

Despite cash-flow problems, Chevron remains a member of the elite club of so-called "dividend aristocrats," keeping ExxonMobil company. It has been increasing dividends for the last 28 years, and Watson recently reassured investors that he understands "continuity in the dividend is important to them, and we're confident we can maintain and grow it." However, much of that dividend is being paid out of debt, given the current price environment.

Chevron may have been overoptimistic in its investment decisions in recent years, but its problems are by no means unique. Watson frankly told investors that "a lot of the projects that the industry started at the beginning of the decade were premised on higher prices."

Gorgon may be one of the last Big Oil spectacular megaprojects we see for some time, but Chevron will have its work cut out trying to compete with the notoriously innovative smaller shale players.