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Vol. 15, No. 10 Week of March 07, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

A strange year

ConocoPhillips’ year-end filings make 2009 in Alaska hard to pin down

Eric Lidji

For Petroleum News

ConocoPhillips’ annual report usually arrives in the middle of the Alaska Legislative session, providing plenty of fodder for lawmakers arguing about the state’s policy toward the oil industry. This year, though, the year-end filing is a complicated package.

Alaska profits dropped, but less than in other regions. Alaska taxes also dropped, but remain higher than in other regions. Oil prices dropped, but so did production costs.

ConocoPhillips, the largest producer and most active explorer in the state, reports spending increases for Alaska this year, but recent news makes those figures outdated.

Exploration drilling last year yielded a promising find, but also an expensive dry well.

Proved reserves declined, but mainly due to the wild swing in oil prices in recent years.

The best way to make sense of all those seeming contradictions is to go to the numbers.

Spending up, but on what?

ConocoPhillips reports plans to spend $854 million on exploration and production work in Alaska this year, up 5.5 percent from the $810 million the company spent in 2009.

Budget projections at the beginning of the year rarely match actual spending, though.

One factor that may change spending totals is CD-5, the Alpine satellite known as Alpine West. ConocoPhillips initially issued its spending plan last December, but in February the U.S. Army Corps of Engineers denied the company a key permit needed for Alpine West.

Without the permit, Alpine expansion is stalled, and ConocoPhillips anticipates “spending approximately $60 million less in 2010 on Alpine satellite activity. Therefore, ConocoPhillips Alaska’s 2010 budget for capital spending will be basically the same as in 2009,” spokeswoman Natalie Lowman told Petroleum News in a March 4 e-mail.

ConocoPhillips is focusing more attention internationally. While Alaska spending appears somewhat uncertain, the company is cutting its Lower 48 exploration and production budget by 39 percent and increasing its international budget by 19 percent.

Alaska remains a near-term priority, though. In 2008, 8.5 percent of ConocoPhillips’ E&P spending went to Alaska, but Alaska generated 14 percent of E&P profits. In 2009, Alaska took 9.1 percent of the budget, but accounted for 28.6 percent of net income.

With Alpine expansion still on the books, ConocoPhillips budgeted 9.5 percent of E&P spending on Alaska, but after that $60 million cut the percentage is closer to 9 percent.

No exploration wells

ConocoPhillips said Alaska spending would go toward “the Prudhoe Bay and Kuparuk fields, as well as the Alpine field and satellites on the Western North Slope.” That list is standard in ConocoPhillips’ annual reports, but not always identical from year to year. In 2008 and 2007 filings, it also included “exploratory drilling” or “exploration activities.”

In recent years, ConocoPhillips has devoted between 13 and 16 percent of its Alaska budget to exploration work, but the company did not drill exploration wells this winter. In theory, that should make the 2010 budget radically smaller than the 2009 budget, but Lowman said, “Maintenance, replacement and repair activities are taking a large percentage of our total capital and operating budget in Alaska,” in addition to ongoing development at major fields and preparation work for exploration in the Chukchi Sea.

The annual report shows the 2009 exploration season was only marginally successful.

Early last year, ConocoPhillips drilled the Grandview No. 1 and Pioneer No. 1 wells in the federal Greater Mooses Tooth unit of the National Petroleum Reserve-Alaska.

In May 2009, ConocoPhillips announced an oil discovery at Pioneer No. 1 and from a nearby 2001 well, but did not offer any information about Grandview No. 1.

In its year-end filings, the company noted that of its two Alaska exploration wells in 2009, one was “expensed as a dry hole” while the other “encountered hydrocarbons.”

Although Grandview appears uneconomic, ConocoPhillips seems interested in Pioneer, saying, “We are evaluating the potential for future development of this latest discovery.”

That could prove difficult, though, because of the holdup at Alpine West.

So what is ConocoPhillips spending on? As usual, most of the money will go toward the aging giants on the North Slope and in Cook Inlet. In recent years, around 85 percent of ConocoPhillips’ spending in Alaska went to development, rather than exploration.

ConocoPhillips also faces regular maintenance expenses unique to northern provinces.

Although no cost is estimated, ConocoPhillips lists the removal of Alaska production facilities and pipelines and local remediation efforts, both required by state and federal regulations for environmental reasons, among its largest “asset removal obligations.”

Costs and taxes down, high

The jump in spending follows a drop in the cost of doing business in Alaska.

ConocoPhillips spent $8.84 in production costs last year to produce each barrel of oil equivalent in Alaska, making the state the second most expensive region in ConocoPhillips’ portfolio. Canada, home to the notoriously expensive Alberta oil sands, topped the list, costing ConocoPhillips $11.21 per barrel in production costs.

The gap between Canada and Alaska grew by more than a dollar between 2008 and 2009, as Canadian production got more expensive and Alaska production got cheaper.

Another cost of doing business, taxes, presents a more complicated picture.

Alaska remains the highest tax burden for ConocoPhillips.

ConocoPhillips paid $11.62 in taxes for each barrel of oil equivalent it produced in Alaska in 2009. The next highest region is the Lower 48, where it paid $2.37 per BOE.

Those reported figures, though, only reflect “non-income taxes.”

European fiscal regimes, by comparison, tilt toward income taxes. Across its European prospects, ConocoPhillips paid only $3 million in non-income taxes in 2009, compared with the $1.1 billion it paid in Alaska. But ConocoPhillips paid $2.3 billion in income taxes in Europe, compared with $716 million in Alaska. Under these figures, Alaska is still the largest tax burden for ConocoPhillips, but the gap is considerably smaller.

Alaska taxes also fell considerably in 2009. ConocoPhillips paid $33.83 per BOE in taxes in 2008, nearly three times what in paid last year. That’s the result of a progressivity feature in the state tax code, which moves the tax rate up and down with the price of oil.

ConocoPhillips reported an average sales price of $59.23 a barrel from Alaska in 2009, down from $69.79 a barrel in 2007 and a record high of $99.10 a barrel in 2008.

Oil prices the biggest factor

The price of oil, obviously, drives many other figures in the annual report.

As well as decreasing taxes, lower prices also decreased profits. As previously reported, ConocoPhillips earned $1.54 billion in Alaska last year, down 33 percent from 2008.

Still, ConocoPhillips lost money in the Lower 48 last year after earning $2.67 billion in 2008, and E&P profits internationally fell nearly 70 percent from record highs in 2008.

Oil prices also helped shift proved reserves.

ConocoPhillips booked 1.7 billion BOE from developed and undeveloped fields in Alaska at the end of 2009, up 4 percent from 2008, but down 18 percent from 2006.

Alaska currently accounts for about 23 percent of ConocoPhillips’ total proved reserves globally, roughly equal with 2008, but down a few percentage points from recent years.

Companies annually revise their reserve estimates, which are based in large part on the economic viability of known oil and gas prospects, based on federal accounting rules.

ConocoPhillips noted that Alaska saw big losses between 2007 and 2008 and minor gains between 2008 and 2009 because of the swing in the price of oil over that time period.

New accounting rules in place this year should temper the impact of price swings some.

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