Not so fast, Alaska
Reports about increase in ConocoPhillips’ 2008 capital budget misleading
A recent press release from ConocoPhillips about its worldwide 2008 E&P capital budget contained information about the company’s plans for Alaska that some observers took at face value. They assumed the Houston-based mega-major increased spending by 22 percent over 2007, despite a recent increase in state taxes on the oil and gas industry. Some accounts went so far as to remind their audience that Conoco had predicted industry investment in the state would decrease if the tax burden on oil and gas companies was increased.
To their credit, some reports did say that the $1 billion budgeted for Alaska in 2008 was subject to change, and that actual spending often differs greatly from budgeted amounts. (In February, Conoco will release its actual 2007 spending, which was budgeted at $783 million.)
The crucial question is: Which tax regime was in place when the budget for Alaska was filed with headquarters?
According to the company’s Alaska spokeswoman, Natalie Knox Lowman, “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, 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.”
So the jury on the investment impact of Alaska’s new fiscal regime is still out.
$1B does not include operating budgetConoco said its 2008 E&P capital spending in Alaska was “expected to be primarily directed toward the development of the Alpine satellites and the West Sak heavy oil field, as well as continued development within the existing Prudhoe Bay and Kuparuk areas.”
In addition to its E&P capital budget, Conoco spends another billion or so operating existing fields on the North Slope. The company did not release the exact amount for 2008.
Worldwide E&P capital budget $11 billionAltogether, Conoco set aside $11 billion for its E&P capital investments in seven regions around the world, part of its $14.3 billion total capital budget for 2008, including cash capital expenditures and capitalized interest. The company said loans to affiliates and contributions to fund its upstream business venture with EnCana add an additional $1 billion, bringing the total capital program to $15.3 billion.
The seven regions did not include any South America projects next year, as the company was forced out of Venezuela this past summer.
Approximately 80 percent of Conoco’s 2008 capital budget will be allocated to exploration and production, 18 percent to refining and marketing and 2 percent to “emerging businesses and corporate,” the majority of which is earmarked for power generation, “primarily for the second phase of an expansion project at Conoco’s Immingham Combined Heat and Power plant in the United Kingdom,” the company said.
Corporate capital expenditures are expected to be primarily for global information systems and services projects, Conoco said.
In addition to the research and development funds already dedicated to projects as part of the 2008 capital program, Conoco said it had also allocated “more than $150 million for research efforts focused on the development of unconventional oil and gas resources and the development of new energy sources, such as alternatives and renewables.”
Jim Mulva, Conoco’s chairman and chief executive officer, said Conoco is “committed to diversifying our energy resource development and improving energy efficiency, and doing so in an environmentally responsible manner.”
Lower 48 states get $3.3B, Canada $2.2BIn the U.S. Lower 48, the company intends to spend about $3.3 billion, primarily on its ongoing development programs, including those in the Bossier and Lobo trends and the San Juan, Permian, Fort Worth and Piceance basins. Funds also will be spent on the development of new projects, including the Rockies Express natural gas pipeline project.
Spending of $2.2 billion in Canada will primarily focus on ongoing development programs in the Western Canada gas basins and progression of heavy oil projects, including those associated with the EnCana business venture.
About $1.8 billion has been allocated for projects in the North Sea, including the continued development of the J-Block fields, Britannia and its satellite fields, and existing and new opportunities in the Ekofisk area.
Conoco allocated approximately $1.7 billion for the Asia-Pacific region, with the majority of the funding going to support the continued development of Bohai Bay in China; oil and gas reserves offshore in Block B and onshore South Sumatra in Indonesia; and fields offshore Malaysia and Vietnam.
In the Russia and Caspian Sea region, about $1.3 billion of the company’s capital spending will go to support the continued development of the Kashagan field in the Caspian Sea and the Yuzhno Khylchuyu field in northern Russia.
In the Middle East and Africa, Conoco said it would spend approximately $700 million on the continued development of the Qatargas 3 project in Qatar, the Waha concessions in Libya, and several onshore developments in Nigeria.
“Our 2008 planned capital program enables us to continue pursuing strategies for value-generating growth,” Mulva said. “The business environment remains challenging, with inflation in materials and services impacting both project investment and day-to-day operating costs. We have, however, built a strong foundation of assets that enables us to generate competitive investment opportunities. We will continue to exercise capital discipline and selectively invest in projects that add production and increase our capability to add value over the long term. This capital program will permit us to pursue a complementary financial strategy designed to strengthen distributions to shareholders through increased dividends and continued share repurchases.”
In regard to Conoco’s asset rationalization program, Mulva said it is “expected to generate proceeds of approximately $3.1 billion during 2007. In 2008, we anticipate completing the disposition of our U.S. retail assets, and we will continue to evaluate additional opportunities to optimize and strengthen our asset portfolio.”
Editor’s note: Conoco’s $1 billion 2008 E&P budget does not include the recently canceled $300 million upgrade to a North Slope topping plant to produce ultra-low sulfur diesel. Conoco announced it was building the plant in 2006.