Providing coverage of Alaska and northern Canada's oil and gas industry
February 2018

Vol. 23, No.6 Week of February 11, 2018

Upbeat on Alaska

ConocoPhillips buys Anadarko position; sees much opportunity in state

Alan Bailey

Petroleum News

On Feb. 1 during ConocoPhillips’ fourth quarter 2017 earnings call Ryan Lance, the company’s chairman and CEO, characterized his company’s purchase of Anadarko Petroleum Corp.’s western North Slope lease positions as an expression of confidence in ConocoPhillips’ Alaska operations. As reported in the Feb. 4 issue of Petroleum News, ConocoPhillips is acquiring Anadarko’s 22 percent non-operated interest in the western North Slope of Alaska, as well as its interest in the Alpine pipeline, for $400 million in cash, before customary adjustments. The acquisition will give ConocoPhillips a 100 percent interest in about 1.2 million acres of exploration and development lands, including the company’s major oil discovery at Willow.

Asked about skepticism around a potential Willow development because of high oil production costs in Alaska, Lance commented that ConocoPhillips has succeeded in reducing the cost of supply from its Alaska assets and sees its production in the state as flat to growing in the coming years.

“Alaska’s been one of our legacy areas for a long time for the company,” Lance said. “Alaska’s made some tremendous progress in lowering the cost of supply for the base business up there, as well as when we look at the opportunity set for investments to grow and develop. So, despite us being in Alaska for 40 years and the largest producer up there, we still see a lot of opportunity.”

Opportunities in Alaska

Questioned about what appears to be a bargain price for the Anadarko assets, Lance commented that, while ConocoPhillips sees continuing opportunities in Alaska, Anadarko has different priorities. With more than a million acres under lease, ConocoPhillips sees much prospectivity, Lance said, adding that his company has scheduled a seismic survey using its new high-resolution compressive seismic technique for this winter.

“So there’s a lot of interesting things that we see as upside that are core to us,” Lance said. “I think for Anadarko it just wasn’t a core asset for them, so just a little different view of the property.”

Lance characterized the deal with Anadarko as a “bolt-on” opportunistic purchase, rather than a signal of expanding capital investment. ConocoPhillips is sticking with its base strategy, making a continuing oil price assumption of about $50 per barrel for West Texas Intermediate, and with an annual capital expenditure program of some $5.5 billion.

ConocoPhillips’ 100 percent ownership of the western North Slope assets will result in access to about 200 million barrels of gross reserves and about 900 million barrels of risked, gross resource, said Al Hirshberg, ConocoPhillips executive vice president for drilling and projects.

Exceptional year

Reflecting on ConocoPhillips overall global performance, Hirshberg commented that 2017 had been an exceptional year operationally.

“We had our best year ever on safety and environmental performance, while delivering 3 percent underlying production growth for $4.6 billion of capital,” Hirshberg said.

The company as a whole saw an increase in earnings to $740 million in 2017 from a loss of $3.3 billion in 2016, with the increase in earnings primarily resulting from rising oil prices coupled with higher production volumes, partly offset by higher production costs, said Don Wallette, ConocoPhillips chief financial officer and executive vice president for finance and commercial.

And a ConocoPhillips Securities and Exchange Commission report indicates that ConocoPhillips Alaska saw earnings triple from $233 million in 2016 to $652 million in 2017.

“ConocoPhillips Alaska’s realized oil price in the fourth quarter averaged $61 per barrel, up from $51 per barrel in the third quarter of 2017,” ConocoPhillips Alaska spokeswoman Amy Burnett has told Petroleum News. Moreover, despite the low oil price environment, ConocoPhillips Alaska’s liquids production on the North Slope increased by 3.4 percent in 2017 relative to 2016, primarily because of investments made since the passage of the Senate Bill 21 tax legislation, Burnett said.

During the earnings call Hirshberg commented that the 1H NEWS development in the Kuparuk River unit achieved first oil in November.

Core investments

Wallette commented that unconventional oil and gas together with development in Alaska remain core to Conoco Phillips’ capital program. The new lower U.S. tax rate and improved capital recovery will enhance the attractiveness of these investment programs, he said.

Hirshberg said ConocoPhillips expects to bring its Greater Mooses Tooth 1 development in the National Petroleum Reserve-Alaska online this year, as well as progressing Alaska exploration opportunities. The company has been permitting five exploration wells for drilling this winter. In the Lower 48 unconventional production saw a dip in 2017 but rebounded later in the year. ConocoPhillips acquired an additional 245,000 acres of unconventional exploration leases in the Lower 48 in the fourth quarter of 2017.

However, Wallette emphasized that ConocoPhillips will not become overly excited about the current higher oil price. There is much volatility in the market and it has only been 50 or 60 days since Brent crude broke through $60 per barrel, he said. ConocoPhillips is sticking with its $50 oil price discipline, with any buildup of surplus cash going into increased shareholder dividends and share buy backs, he said.

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