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Providing coverage of Alaska and northern Canada's oil and gas industry
March 2008

Vol. 13, No. 9 Week of March 02, 2008

Conoco budgets $1B capex for 2008

Maintains figure still doesn’t account for ACES increases; capital and exploration spending in Alaska in 2007 was $622 million

Eric Lidji

Petroleum News

After flirting with the figure late in 2007, ConocoPhillips once again signaled plans to spend more than $1 billion on capital projects and exploration in Alaska this year, but insisted the recent production tax increases will keep actual spending below the budget.

The $1 billion figure comes from a year-end financial report filed with the U.S. Securities and Exchange Commission on Feb. 22, which shows an E&P capital budget of $1.007 billion for Alaska this year as part of an $11.1 billion companywide campaign.

With the initial release of a companywide budget back in early December, ConocoPhillips announced plans to spend $1 billion on capital projects and exploration in Alaska for the first time in company history, but soon stepped back from that figure.

On Dec. 11, the company’s Alaska spokeswoman, Natalie Knox Lowman, told Petroleum News that “the capital budget for Alaska was developed based on the production tax law as it existed on Nov. 1, prior to adoption of the latest production tax increase.”

Furthermore, Lowman said, Conoco’s actual capital expenditures during 2008 will “depend on various factors,” including the company’s “evaluation of the economics” of its projects “under the new production tax rates.”

On Dec. 13, speaking before the Alaska Support Industry Alliance, ConocoPhillips Alaska President Jim Bowles confirmed what Lowman told Petroleum News. He said the company’s capital and exploration budget for Alaska had to be revised to reflect increases to the state production tax, or ACES, passed in mid-November.

Bowles and other industry leaders had argued those tax increases would harm investment in the state and other major oil companies have highlighted budget reductions in response to higher taxes.

In late January 2008, Doug Suttles, president of BP (Exploration) Alaska, said his company alone dropped $100 million from its 2008 Alaskan capital budget because of the tax increase.

Still expect less to be spent

In the SEC filing, ConocoPhillips took measures to temper any excitement about increased spending despite the tax increase.

“As a result of increased production taxes enacted by the State of Alaska in the fourth quarter of 2007, we anticipate our 2008 capital expenditures will be less than originally planned, mainly related to reduced project funding on the North Slope of Alaska,” the filing said, which PN sources say could reflect cuts by Kuparuk and Prudhoe Bay field partner BP that would have to be matched by ConocoPhillips

The year-end filing also mentions “An abandoned project in Alaska resulting from increased taxes, totaling $28 million,” referring to the 2008 share of a $300 million upgrade to allow the Kuparuk diesel plant to produce Ultra Low Sulfur Diesel.

Following the tax increase in November, ConocoPhillips chose to cancel the upgrade and truck the Ultra Low Sulfur Diesel up to the North Slope along the Haul Road.

The state has challenged any connection between the tax and the cancellation.

Budgets rarely match actual spending

Capital budgets rarely reflect the actual spending an oil company will do in a given year, which can change based on numerous unforeseen factors.

ConocoPhillips originally budgeted $783 million for exploration and production activities in Alaska in 2007, but only spent $622 million in the state last year, a 24 percent decline from the $820 million ConocoPhillips spent in Alaska in 2006.

ConocoPhillips’ $1 billion capital budget for 2008 is currently focused toward further production of Prudhoe Bay, Greater Kuparuk and Alpine satellite fields, as well as exploration activities and “further development spending in our Cook Inlet Area.”

In January 2008, the State of Alaska signed a deal with ConocoPhillips and Marathon Oil to support an extension of the export license for liquefied natural gas leaving Cook Inlet. The deal required ConocoPhillips to drill two wells in Cook Inlet this year.

PN sources say ConocoPhillips will take some of its North Slope budget cuts and spend even more than it originally planned on its Cook Inlet assets, but the company has not yet confirmed that information.






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