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Vol. 14, No. 4 Week of January 25, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Conoco cuts 20%

Falling oil prices take spending with it; Pioneer postpones Cosmopolitan

Eric Lidji

Petroleum News

In the most significant response yet to the recent drop in oil prices, ConocoPhillips is budgeting a 20 percent reduction in capital spending in Alaska for this coming year.

The reductions are not expected to impact major programs or exploration drilling, though, and ConocoPhillips has not yet determined whether a staffing cut will extend to Alaska.

On Jan. 16, the Houston-based oil company unveiled a $12.5 billion capital-spending program for 2009, an 18 percent reduction from the $15.3 billion budgeted for 2008.

Although ConocoPhillips did not give a dollar amount for the spending planned in Alaska, spokeswoman Natalie Lowman said the company expects it to be “about 20 percent less than our 2008 capital budget,” which came to a little more than $1 billion.

The reduction in spending will most likely curtail developmental drilling, as opposed to the exploration program planned for this winter, or continued work in the Chukchi Sea.

“Drilling will be reduced. That’s going to be kind of the general decline,” Lowman said.

The spending plan released by ConocoPhillips specifically mentions a focus on “continued development” of the Prudhoe Bay and Kuparuk units, and the Alpine field and satellites, but leaves out the West Sak heavy oil deposit, included in recent budgets. “We have slowed work at West Sak,” Lowman said, adding that the sharp decline in oil prices over the past few months forced the company to focus on “high-margin light oil.”

ConocoPhillips still plans on drilling two exploration wells in the National Petroleum Reserve-Alaska this winter, and recently applied for drilling permits for the program. (See story, page 6.)

Along with reduced spending, ConocoPhillips plans to cut 1,300 jobs companywide.

Asked if those job cuts would reach Alaska, Lowman said, “We are looking at our overall cost structure to determine ways to reduce costs — including staffing reductions — but right now we do not have specifics on what projects or areas will have reductions. Details of staffing reductions are still being worked and will be communicated when available.”

ConocoPhillips directly employed around 1,000 people in Alaska in 2007.

Previous signs of trouble

The news from ConocoPhillips is the biggest indication yet that global financial turmoil and low oil prices have reverberated to Alaska, but it isn’t the first sign of trouble.

In November, BP Exploration (Alaska) Inc. announced a $1.2 billion spending plan for Alaska in 2009, a 33 percent increase from 2008 spending, but also said it would reduce development drilling by around 10 percent, and postpone several large capital projects.

BP has not announced any changes to that plan, according to spokesman Steve Rinehart.

In December, low oil prices and uncertain financial markets forced two partners in a four-company joint venture to pull back from a three-well exploration program this winter.

Those decisions led to lawsuits and quick business deals, but so far the operator of the program, Brooks Range Petroleum Corp., is moving forward with its planned workload.

Earlier in January, federal land managers announced that Dallas-based Petro-Hunt LLC had relinquished all of its high bids and a $2.75 million deposit from a September 2008 federal lease sale in the NPR-A because “falling oil prices made it uneconomical for it to pursue oil production at this time within the National Petroleum Reserve-Alaska.”

Pioneer Natural Resources is postponing an appraisal well at the Cosmopolitan unit in the Cook Inlet because of low oil prices, company spokesman Tadd Owens said Jan. 19.

“Pioneer’s 2009 capital budget has been reduced significantly due to the fall in commodity prices,” Owens told Petroleum News in an e-mail. “However, the company is well positioned to ramp back up when prices recover.”

After an initial well at Cosmopolitan in 2007 offered “encouraging” results, Pioneer made plans to drill another well this year. The company is now waiting until 2010.

In early November, Pioneer said it might postpone the well as part of a companywide reduction in spending, but wanted to monitor oil prices for several months before making a final decision. Since then, prices have dropped from $63 a barrel to around $35 a barrel.

Pioneer is planning to significantly reduce drilling activity across its global portfolio.

Over the coming year, though, Pioneer will continue to increase drilling and ramp up production at the Oooguruk unit in the Beaufort Sea. Pioneer brought the offshore unit into operation last April, making it the first independent producer on the North Slope.

Most work still on track

ConocoPhillips usually releases its spending plan in mid-December, but this year the company delayed its budget to get a better sense on the direction of the economy.

After a $100 decline between July and December, oil prices over the past month have hovered around $35 a barrel. Alaska North Slope crude hit a low of $25.81 on Dec. 22.

While those prices have started to cut into record profits from earlier in the year, the deep pockets of the majors have protected them from the pain felt by many smaller companies.

Some companies in Alaska still seem to be relatively undeterred by low prices.

ExxonMobil continues to aggressively promote a major drilling program at the Point Thomson unit on the North Slope. The program is burdened by legal troubles, though.

Chevron has already received three drilling permits this winter from the Alaska Oil and Gas Conservation Commission to continue exploring for oil and gas in the White Hills.

Anadarko continues to press ahead on plans to complete three wells this winter in its far-reaching and expensive search for natural gas in the foothills of the Brooks Range.

Denver-based Savant Alaska plans to drill a well and a sidetrack at the Badami unit on the eastern North Slope, through a partnership with BP and Arctic Slope Regional Corp.

Even ConocoPhillips says the cuts won’t cause a major change in strategy this year.

“Our planned 2009 capital program is structured to continue funding significant projects that will grow and develop the company, while deferring or slowing some projects and other programs,” said Jim Mulva, ConocoPhillips chairman and chief executive officer.

Speaking in November before the Resource Development Council, an advocacy group of resource extraction industries in the state, ConocoPhillips Alaska President Jim Bowles said companies and the state needed to focus on near-term work on the North Slope.

“We cannot lose sight of where we are in oil prices today, and that will dictate and point directions to where we go and what our level of spending will be into the future,” he said.

2008 spending still unknown

ConocoPhillips has generally increased spending in Alaska each year since 2003, but the percentage of total exploration spending directed toward Alaska keeps falling annually.

The company spent $570 million in Alaska in 2003, which represented 12.6 percent of total exploration spending that year. But the $666 million the company spent in Alaska in 2007 accounted for only 6.7 percent of total companywide exploration spending.

Since 2003, the company has spent almost $3.5 billion on exploration and production in Alaska, or nearly 10 percent of total companywide exploration and production spending.

Although ConocoPhillips budgeted some $1 billion for projects in Alaska last year, the company repeatedly said recent production tax changes could lead to reduced spending.

ConocoPhillips won’t have exact figures on 2008 spending for a few months.

The final spending figure for Alaska will almost certainly top $1 billion to account for the roughly $500 million the company spent last February for leases in the Chukchi Sea.

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