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ConocoPhillips: Lean, legacy-focused in 2010 Company plans to spend more on E&P, while cutting costs in the short term, planning $340 million program on Western North Slope; exploitation dollars on infield, peripheral drilling Eric Lidji For Petroleum News
Everyone always wants to know where Alaska fits in ConocoPhillips’ global strategy, and the company gave some clues in presentations and documents in late March.
In short: ConocoPhillips plans to focus on “legacy assets” in the developed world, company Chairman and Chief Executive Officer Jim Mulva said during an analyst meeting in New York on March 24.
That bodes well for Alaska.
In its 2009 annual report, a publication for investors that is distinct from year-end financial filings, ConocoPhillips includes the North Slope among its “core oil-producing assets,” alongside the Lower 48, the Canadian oil sands and the North Sea.
Alaska accounted for 15 percent of the 1.85 billion barrels of oil equivalent ConocoPhillips produced worldwide in 2009 and 20 percent of its 10.3 billion BOE of proved reserves. Those figures put Alaska behind Canada, the Lower 48 and Europe.
Generally speaking, ConocoPhillips wants to convert an estimated 10 billion barrel global resource base into proven reserves over the next 10 years, Mulva said.
Mulva said ConocoPhillips would hit those numbers by increasing exploration and development spending, and selling assets. While the company is not announcing sales, Mulva named U.S. downstream marketing, the Rockies Express pipeline, its stake in Syncrude and 10 percent of its Lower 48 and Western Canada portfolio as potential sales.
The increase in E&P spending will comes by shifting dollars to upstream operations.
Currently, between 65 and 70 percent of ConocoPhillips’ assets are connected with upstream operations. The company wants that to be closer to 85 percent, Mulva said.
$340 million to North Slope That falls in line with ConocoPhillips’ stated desire to be a leaner company.
The company decreased operational costs by 7 percent in 2009 and wants to cut them another 5 percent this year, according to President and Chief Operating Officer John Carrig. The overall goal is to get back to the spending levels of 2005 and 2006 (a time, incidentally, of roughly $60-a-barrel oil prices, compared with $80 oil today.)
ConocoPhillips saved $500 million in operating and capital costs in 2009 and is looking to save more than $400 million this year, Carrig said. Some of those reductions will come from “overall maintenance programs,” “procurement savings,” “optimized turnarounds,” “lower corporate overhead,” “emphasis on unit costs” and “increased accountability.”
ConocoPhillips budgeted an $11.2 billion capital program for 2010, about 87 percent of which is set aside for exploration and production projects. That won’t necessarily mean an immediate increase in production, though. Instead, in the near term, ConocoPhillips expects a “production plateau” at 2008 levels while it focuses on integrity, planning and maintenance of existing assets followed by production growth in 2014 and beyond.
About half of the planned capital-spending program this year is for North American projects, Carrig said, including “about $1 billion in downstream, $1 billion for oil sands, $1 billion or so in Alaska, and the balance in Lower 48 and Western Canada gas.”
In annual financial filings, ConocoPhillips projected spending $854 million on E&P work in Alaska this year. Because of permitting obstacles, though, ConocoPhillips deferred around $60 million of that spending directed at a planning Alpine satellite, bringing 2010 spending approximately in line with 2009 levels, the company has said.
“So, what are we doing here? If you look at the overall program, what we’re doing is we are constraining capital. That’s generating cash. We are disposing of assets. That’s generating cash. We’re maintaining our overall production level volumes consistent with 2008 volumes. We’re taking the excess cash and we’re buying shares back,” Carrig said.
On a more detailed level, ConocoPhillips plans to spend about $340 million on North Slope development this year, focused on the Western North Slope, Prudhoe Bay satellites and a five-year program to improve Kuparuk recovery rates using a new coil-tubing rig.
“Whether it be Alaska or Australia or the North Sea, you see some common themes that emerge. We are spending our exploitation dollars on infield drilling opportunities, on peripheral drilling opportunities, and on technology — application of technology to improve recovery in these legacy assets,” said Kevin Meyers, senior vice president for exploration and production in the Americas and former head of ConocoPhillips Alaska.
Kuparuk is one example of ConocoPhillips applying technology to legacy assets, Meyers said. The company is using its new “state-of-the-art” coil-tubing rig “in conjunction with 3-D seismic and multilateral sidetracks to go out and access literally hundreds of drill opportunities that wouldn’t be economic otherwise without this technology.”
If certainty, then certainly ConocoPhillips executives also briefly touched on North Slope natural gas, positioning it as a longer-term investment in the goal of increasing production by the end of the decade.
“Are we moving that forward?” Ryan Lance, senior vice president for international exploration and production, said about Alaska North Slope natural gas. “We need some more fiscal certainty. We need more, probably, regulatory certainty. But certainly, that’s in our plans to try to move that Alaskan resource forward as well.”
Mulva said ConocoPhillips expects natural gas demand to rise in the coming decade, requiring all forms of conventional and unconventional production, from shale gas and tight sands, to coalbed methane, Canadian imports, liquefied natural gas and Alaska gas.
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