As ConocoPhillips ramps up capital spending in Alaska, the company is scaling back its overall capital spending plans, the company said in a recent budgetary announcement.
The $13.5 billion capital program for 2015 is a 20 percent reduction from 2014. The drop comes as some major projects near completion and as the company defers some spending set aside for unconventional plays in North America, according to CEO Ryan Lance.
ConocoPhillips’s 2014 budget was $16.7 billion.
“We are setting our 2015 capital budget at a level that we believe is prudent given the current environment,” Lance said in a prepared statement on Dec. 8. He added: “We are fortunate to have significant flexibility in our capital program. Spending on several major projects has peaked and we will get the benefit of production uplift from those projects over the next few years. In addition, we have significant identified inventory in the unconventionals, where we also retain a high degree of capital flexibility.”
Crude oil prices have declined dramatically within the past six months. The spot price of Alaska North Slope crude oil on the West Coast went from a monthly average of $110.75 per barrel in June 2014 to some $66 per barrel in December 2014, according to the state.
Unconventionals hit
The details of the budget suggest delayed expansion.
ConocoPhillips is setting aside some $5 billion in 2015 for development drilling programs, down from a budget of $6.5 billion this year. The money is primarily set aside for activities in the Eagle Ford shale in Texas and the Bakken formation in North Dakota, which are the two strongest unconventional oil plays in the ConocoPhillips portfolio.
The budget defers “significant investment” in development drilling activities the Permian, Niobrara, Montney and Duvernay basins, with the caveat that ConocoPhillips “retains the flexibility to ramp up or down activity in the unconventionals.”
The budget also sets aside some $1.8 billion for exploration and appraisal work, which the company described as “down slightly” compared to the 2014 budget. The spending will primarily go toward conventional programs in the U.S. Gulf of Mexico, offshore West Africa and Nova Scotia, as well as unconventional activity in North America.
The 2015 budget sets aside some $4.8 billion for “major projects,” an amount that the company described as “a significant reduction to 2014.” The 2014 budget included the high-water marks for spending on the Australia Pacific LNG project and the Surmont Phase 2 in Canada. The budget for the coming year aims to complete those two projects, and “multiple projects in Alaska, Europe and Malaysia,” according to ConocoPhillips.
The budget sets aside some $1.9 billion for “base maintenance and corporate expenditures,” a “slight reduction” from 2014. Given that some expenses come from activity, the reduction is inherent in the overall reduction in spending companywide.
Even with the reduction, ConocoPhillips expects 3 percent production growth in 2015.
Alaska on track
Even though the price of Alaska North Slope crude oil is declining, ConocoPhillips announced several large capital programs for Alaska during the course of 2014.
Those projects include the sanctioned construction of the CD-5 satellite at the Colville River unit, the sanctioned construction of Drill Site 2S at the Kuparuk River unit, the as-yet-unsanctioned expansion of activities at Drill Site IH at Northeast West Sak at Kuparuk and the as-yet-unsanctioned construction of GMT-1 at the Greater Mooses Tooth unit.
Speaking at the Resource Development Council annual meeting in November, ConocoPhillips Alaska Inc. President Trond-Erik Johansen predicted a decline in companywide spending for 2015 but said the Alaska projects would remain on track.
Within the past two years, ConocoPhillips also added two rigs to its fleet - Nabors 7ES and Nabors 9ES - and contracted two additional drilling rigs for Kuparuk activities.
Doyon Drilling Inc. is currently building Doyon 142, the first new-build rotary rig added to the ConocoPhillips fleet since 2000. The rig is slated for early 2016.
And ConocoPhillips recently contracted with Nabors Alaska Drilling Inc. for Nabors CDR3, a coiled tubing rig that will double the company’s coiled tubing drilling capacity.
With all those projects, ConocoPhillips’s Alaska capital budget for 2014 was up 50 percent over 2013 and double the average budgets from 2008 to 2012, according to the company.
The budget announcement each December precedes a more thorough outlook offered each January in fourth quarter earnings and each April during an annual analyst meeting.
