Competitive worldConocoPhillips executive says Alaska has much potential but must compete Alan Bailey Petroleum News
Saying that his company is excited about Alaska, both in terms of future oil potential and the possibility of exporting liquefied natural gas, Matt Fox, ConocoPhillips executive vice president, exploration and production, told the Alaska Support Industry Alliance Meet Alaska conference on Jan. 10 that the Alaska oil industry must compete for investment capital in a world that is seeing a shale oil revolution and where multiple gas projects are lining up to vie for business.
Fox said that Alaska represents about 16 percent of ConocoPhillips’ worldwide production.
“At ConocoPhillips we’re very committed to Alaska,” Fox said. “It’s strategically very important to us. … There is a lot of development potential remaining.”
But Fox attributed a new upsurge in ConocoPhillips’ investment in Alaska to recent reform in the state’s oil production tax.
“This is very much a response to the change in the fiscal regime,” Fox said.
The ConocoPhillips capital budget for 2014 in Alaska is $1.7 billion, a $600 million increase over the previous year and the highest level of investment since the 1980s, he said.
“We’re putting out money where our mouth is,” he quipped, referencing ConocoPhillips’ advocacy for Alaska tax reform.
Worldwide strategy Characterizing his company’s overall worldwide strategy as consisting of a portfolio of oil and gas opportunities coupled with decisions over how to allocate capital between those opportunities, Fox said that ConocoPhillips will spend a total of $16 billion worldwide in 2014. About 10 percent of that money will be spent on maintaining the integrity of the company’s operating assets, improving operational efficiency and reducing operational costs. Another 45 percent of the spend will pay for development programs, such as the type of infill drilling using coiled tubing that is done in Alaska. Development projects will lift what would otherwise be a worldwide production decline rate of about 10 percent per year to total production that remains approximately constant. And then about another 30 percent of the investment will be channeled into major infrastructure-led projects, such as the new CD-5 development in the National Petroleum Reserve-Alaska, Fox said. These major projects should lead to a compound growth rate of 3 to 5 percent in ConocoPhillips’ production over the next five years, he said.
The remaining 15 percent of capital investment will go into exploration, seeking new oil and gas resources to develop.
Shale oil In terms of oil development, Alaska now faces significant competition for investment dollars from the rapidly growing shale oil industry in places such as Texas and North Dakota.
“There really is a revolution going on in U.S. oil production,” Fox said, showing a graph depicting Texas oil production rocketing up in the past couple of years, North Dakota production increasing rapidly and California production overtaking that of Alaska.
Fox said that ConocoPhillips is heavily involved in both the Eagle Ford play in Texas and the Bakken play in North Dakota, the two plays that have led the shale oil revolution. Wells in the Eagle Ford can achieve initial oil flow rates of 1,000 barrels per day, with up to 1 million barrels of oil ultimately flowing from each well. The finding and development costs run to about $20 per barrel, with cost of oil supply from the plays being in the range of $40 to $50 per barrel, Fox said.
“We didn’t even know this play existed five years ago,” Fox said, commenting that his company will likely spend $8 billion in the Eagle Ford and $4 billion in the Bakken over the next five years. In addition to several other shale oil provinces, the Permian basin play is growing fast, with its production possibly overtaking that of the Eagle Ford and the Bakken in the next five years, Fox said. And then there are other oil development opportunities, such as in offshore deep-water situations.
“That is the context in which we have to look at Alaska’s competitive situation,” Fox said.
LNG market When it comes to the market for liquefied natural gas, or LNG, there are currently wide disparities in gas prices around the world, Fox said. Following the shale gas revolution, gas sells in the United States at a price in the range of $3.50 to $4.50 per million British thermal units, a price range that seems likely to prevail for some time to come. By comparison, gas is priced at around $10 in Europe. In Japan, where gas prices are indexed to oil prices and nuclear power issues have caused a faster-than-expected increase in demand, the price is around $16.
“There’s clearly a prize in trying to access and take advantage of this (price) differential,” Fox said. “Everybody in the industry knows there’s a prize there. … The global LNG business is shaping up to be really very, very competitive.”
And as LNG projects around the world line up to meet the future LNG demand, so-called “brown-field sites,” sites with an existing gas infrastructure that can be expanded at relatively low cost, appear to have a significant competitive advantage. Fox showed a graph indicating that sites like this, in places such as Qatar, Indonesia, Malaysia and Papua New Guinea, can cover their outlay in capital invested at gas prices somewhere in the range of $4 to $8 per million Btu.
Competitive landscape On the other hand, “green-field sites,” where wholly new infrastructure is needed, require significantly higher priced gas. These sites, in regions such as western Canada, the U.S. Gulf Coast, East Africa and Arctic Alaska, all appear to need broadly similar gas prices, somewhere around $11 or $12.
“The key is that there’s an enormous amount of gas that can come to the market at the same cost of supply,” Fox said. “The competitive landscape for LNG is going to be really fierce.”
In this environment an Alaska LNG project will have to make sure that it controls its costs, working within an appropriate fiscal regime — investment also requires long-term confidence in that fiscal regime, he said.
But, with 24 trillion cubic feet of natural gas in just the Prudhoe Bay field gas cap, Alaska gas definitely presents an opportunity.
“There is definitely potential for us to develop LNG here in Alaska,” Fox said.
Tax change At the same time, the recent change in the Alaska oil production tax is a key to new oil exploration and development, he said, commenting that ConocoPhillips has already added a new drilling rig to the Kuparuk unit and is the process of bringing in a second new rig to the unit. The company is laying gravel for a new Kuparuk drill site and is permitting for a potential Greater Mooses Tooth project that the company hopes will follow its CD-5 development in the National Petroleum Reserve-Alaska — the company is also conducting exploration in the reserve.
The major increase in capital investment in Alaska this year is going into development drilling, development projects, major projects and exploration, those components of ConocoPhillips’ overall strategy that target increased oil production, Fox said.
“It’s a step change,” he said.
And, to address the need to tackle production decline in what are now old fields on the North Slope, ConocoPhillips has a really committed Alaska work force, including some of the company’s most creative people, he said. Past achievements include the use of 4-D seismic data to find new oil in old fields; taking a world leadership position in the use of coiled tubing drilling and steerable drilling; running one of the largest miscible gas flood operations in the world; and experimenting with other enhanced oil recovery techniques, Fox said.
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