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Vol. 18, No. 3 Week of January 20, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Conoco: $1B in 2013

Budget reflects spending on Alpine satellite and Chukchi, not on legacy fields

Eric Lidji

For Petroleum News

ConocoPhillips plans to spend “about 1 billion” in Alaska this year, ConocoPhillips Alaska President Trond-Erik Johansen told an audience in Anchorage recently.

The projection is a slight increase over the 2012 budget, but Johansen warned against viewing the bump as sign ConocoPhillips suddenly approves of the investment climate in Alaska, after years of complaining about its tax burden. “When you look at the base development speed and pace in the legacy fields, it’s the same (budget) as 2006,” he said Jan. 11 at the Alaska Support Industry Alliance’s annual conference, Meet Alaska.

The date is not an arbitrary one, Johansen noted. In 2006, the state passed the Petroleum Profits Tax, which it revised in 2007 with Alaska’s Clear and Equitable Share. The major oil companies have been pushing lawmakers for years to change the current system.

The increase, according to Johansen, will primarily accommodate construction of the CD-5 satellite of the Alpine field and preparations for Chukchi Sea drilling 2014.

Although ConocoPhillips’ budget estimates are often higher or lower than its actual spending, the figures provide a sense of what the company expects from the year ahead.

Fluctuation in spending

ConocoPhillips’ spending in Alaska has fluctuated greatly from year to year: $746 million in 2005, $820 million in 2006, $666 million in 2007, $1.4 billion in 2008, $810 million in 2009, $730 million in 2010 and $775 million in 2011. The company budgeted $900 million for Alaska in 2012, but its actual spending figures are not yet available.

Because ConocoPhillips does not break down spending by exploration and development, it is difficult to gauge the “base development speed and pace in the legacy fields.” The peak in 2008 came largely from ConocoPhillips’ bids in a record breaking federal lease sale in the Chukchi Sea, while the decline in 2010 and 2011 is likely the result of ConocoPhillips taking a break from exploration drilling after years of high activity.

Johansen did not say whether the budget included money for two wells in the National Petroleum Reserve-Alaska that ConocoPhillips recently asked for permission to drill.

In December, the U.S. Bureau of Land Management gave the company permits to drill the Cassin No. 1 and Cassin No. 6 wells in the Bear Tooth unit. While the permits are valid until December 2014 and January 2015, respectively, ConocoPhillips must drill at least one well in the unit by this June to meet its work commitments or get an extension.

Pushing the legacy fields

What is irrefutable is the declining throughput volume on the trans-Alaska oil pipeline, and while Johansen said the days of 2 million barrels per day are “probably gone,” he believes legacy fields are the only way to stem the decline. “If we want more oil coming through the pipeline, we need to work more on Prudhoe Bay, Kuparuk and Alpine.”

To get the estimated 4.5 billion barrels remaining in those fields, though, requires technology, which requires investment, which requires a better fiscal system, he said.

To highlight his point that North Slope oil is increasingly elusive, Johansen pointed to Alpine. When a ConocoPhillips predecessor brought CD-1 online in 2000, it spent $1 billion in return for 80,000 barrels per day, he said. Now ConocoPhillips plans to spend $1 billion on CD-5 in return for 18,000 bpd. “If you go back to 2000, when we did Alpine, guess what? The tax system was much more favorable than it is today, and you got five times the production for the investment you spent. So let’s get real,” he said.

While ConocoPhillips may have gotten five times the oil for its money in 2000 that it expects to get in 2013 — and the actual figure is closer to four and a half times — the oil is worth much more today. The delivered price for Alaska oil hovered between $20 and $30 per barrel in 2000, but the state expects it to be around $108 in the coming year.

Of course, oil prices are highly internationally.

Lure of the Lower 48

“The bizarre thing in Alaska is: the higher to oil price gets, the less we get. So, of course, when the prices go up we’d rather invest somewhere else,” Johansen said. And right now, “somewhere else” is the Lower 48, particularly the Bakken and Eagle Ford plays.

In two years, ConocoPhillips went from producing nothing at the two plays to some 125,000 bpd, according to Johansen. “That’s a revolution. It’s fantastic news for the United States of America,” he said. “Not so good news for Alaska.” While the growth of unconventional oil is often seen as a technological advancement, Johansen said the plays, which are largely on private land, also have better fiscal terms than Alaska.

With the Alaska Legislature gaveling in for its regular session on Jan. 15, the investment climate is sure to be a primary debate among lawmakers once again, especially given that Gov. Sean Parnell recently released a new proposal for revising the tax code and that ConocoPhillips will release its annual earnings figures at the end of January. As it has said in the past, ConocoPhillips believes it can increase production under different terms.

“We are really committed to Alaska, and we would like to do more here,” Johansen said.

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