Oil Patch Insider: ConocoPhillips wants to reduce costs in Alaska; Alliance moves offices downtown

The rapidly changing economic climate is forcing oil companies to reassess spending plans, but as the year winds down it remains unclear how those reassessments will impact Alaska in 2009.

ConocoPhillips Alaska recently warned employees that uncertainty in oil prices would force cost cutting, according to a report on Dec. 11 from NBC-affiliate KTUU news in Anchorage.

“Our entire business plan was discussed in a broad sense, and was not focused only on employees,” company spokeswoman Natalie Lowman told KTUU and later confirmed with Petroleum News.

While the announcement might have caused anxiety around the oil patch, the report lacked a bit of moderately reassuring context: ConocoPhillips makes similar warnings every year at this time.

Every December, as ConocoPhillips crafts its global spending plan, the heads of the company’s Alaska subsidiary call employees to a “town hall” meeting to talk about the company’s business and Alaska — and to warn about the need to cut costs.

The difference this year is the global spending plan got sidetracked by an economic landscape proving to be more unpredictable than even the oil patch is accustomed to seeing. On Dec. 15, ConocoPhillips decided to postpone the release of its 2009 worldwide budget from mid-December to January, hoping to get a better handle on how oil and natural gas prices could impact operations.

ConocoPhillips is the second major oil company to hold off announcing its 2009 capital program due to the changing economic environment. Chevron also recently said it would wait until the end of January, rather than December, to release official spending plans.

Fortunately for Alaska, the other major players appear to be taking a longer-range view of prices.

In late November, BP announced an increase to planned spending for Alaska, around $1.2 billion for 2009 compared to $900 million spent in 2008. ExxonMobil is expected to unveil its capital program in March, but analysts say the company doesn’t appear to be scaling back.

Over the past few months, ConocoPhillips has suggested its 2009 capital budget wouldn’t change much from spending planned for the current year. ConocoPhillips budgeted $15 billion in capital projects for 2008, including $1 billion for projects in Alaska.

But if ConocoPhillips reduces its capital budget for Alaska, its partners at the Prudhoe Bay and Kuparuk River units might be forced to follow suit.

That’s the bad news.

The good news is that while ConocoPhillips is asking its employees to reduce costs and negotiating for lower prices from its Alaska contractors, a trend playing out between producers and contractors around the world, the company appears to be moving ahead with its 2009 exploration and development plans for Alaska, suggesting its capital expenses for the state might be the same as in 2008.

ConocoPhillips’ stock continues to receive positive ratings in financial markets, ratings supported by the company’s size, strong cash flow, and the diversification of its integrated business model.

For the 12-month period ending Sept. 30, ConocoPhillips generated record pre-tax earnings of $39.3 billion and free cash flow of $9.2 billion. More importantly, the company’s debt-to-capitalization ratio at the end of the third quarter was down to 19 percent; its operational performance remained strong, and its assets were a healthy $184.6 billion.

But analysts have expressed some concern about the company’s high level of planned capital expenditures, the political risk associated with its Russia assets, rising oilfield service and supply costs, large global E&P development program and substantial commitments to its share repurchase and dividend programs, all of which could place additional pressure on cash flow.

The credit crunch and falling commodity prices have forced some oil and gas producers to scale back capital spending for 2009, but analysts believe major oil companies doing business in Alaska, such as BP, ConocoPhillips, ExxonMobil, Shell, Eni and Chevron, can afford to take a longer view because of the extraordinary profits they have reaped from high prices over the past four years.

For now, Petroleum News’ sources indicate 2009 capital and operating expenditures in Alaska look much the same as 2008. But the landscape changes daily and, ultimately, only time will tell.

Alliance office moving in December

Effective Dec. 29 the Alliance will be at 646 W. 4th Ave., Suite 200, Anchorage, Alaska 99501.

The association’s phone, fax and e-mail contact information will not change.

The Alliance office will be closed from Dec. 19 to Dec. 29.

ExxonMobil completes world’s largest LNG carrier

The first of six Q-Max carriers, called the ‘Mozah,’ represents “an industry breakthrough in carrier design and size, enabling the more efficient transport of natural gas” to worldwide markets, ExxonMobil said.

It “marks a step change in LNG shipping,” the company said.

Q-Max ships will carry up to 80 percent more cargo, yet require approximately 40 percent less energy per unit of cargo than conventional LNG carriers due to economies of scale and efficiency of the engines.

“The Q-Max carriers break the LNG shipping mold in nearly every way,” said Neil Duffin, president of ExxonMobil Development Co.

The large LNG ship technologies, developed in conjunction with joint venture partner Qatar Petroleum, include “increased ship size, onboard reliquefaction units, slow-speed diesel engines, twin propellers and rudders, largest ship-board LNG tanks ever built, the latest in hull antifouling protection and improved fire-protection systems. The end result of these new generation ships is a 20-30 percent reduction in transportation cost,” ExxonMobil said.

“Shipping is a critical link in the LNG value chain that extends from Qatar’s North Field, the largest non-associated gas field in the world with recoverable resources of more than 900 trillion cubic feet, to homes in Asia, Europe, and the Americas. With our innovative technology, we have effectively transformed the LNG business and opened up more of the world for Qatar LNG,” said Faisal Al Suwaidi, Qatargas chief executive officer.

With a total capacity of up to 266,000 cubic meters, each ship carries enough natural gas to meet the energy needs of 70,000 U.S. homes for one year, ExxonMobil said.

—Kay Cashman