Forest Oil will put less capital into frontier exploration

Kristen Nelson

Petroleum News Editor-in-Chief

Forest Oil will reduce capital expenditures on frontier exploration and development from the 20 percent range to the 5-10 percent range, Craig Clark, the company’s president and chief executive officer, told an analysts conference call Aug. 7.

What’s frontier? Clark was asked.

It’s most of the company’s international portfolio of exploration prospects, he said, including “a bunch of the Cook Inlet, Alaska, the Northwest Territories of Canada and the foothills of Canada. …” It’s the areas in the company’s exploration portfolio where infrastructure and/or markets are lacking, he said.

The company is going to cut its frontier exploration exposure because that program in “the last decade has produced rates of return that were not consistent.” Rates of return, Clark said, “have been hampered by a strategy which allocated large amounts of capital for frontier exploration.” While “Forest has one of the finest collections of frontier assets of a company its size,” he said, “frontier exploration not only presents hydrocarbon risk, but as we’ve experienced, significant development risk.”

The company had good discoveries in Canada and Alaska, but returns from those discoveries “were impaired by embarking on an aggressive development plan that could not be altered” when results changed. The downside was not protected, Clark said.

“As a result, we may have spent too much money on frontier development, capital allocation was incorrect and growth was not achieved: and that’s our number one goal, profitable growth.”

Clark said capital has been spent “on frontier investments at rates of return less than our expectations and our cost of debt. This cannot, and will not, continue,” he said. “The status quo is not acceptable.”

For the future, 5-10 percent of capital employed will be the limit for frontier investment, “instead of 20 today.”

In Cook Inlet, Clark said, Forest will “work to create a ‘go forward’ development plan for Redoubt Shoal that makes financial sense based on the knowledge gained — but we won’t be gaining more knowledge.

“Further capital will not be invested without a clear view to acceptable returns,” he said.

He cited successful international exploration ventures with partners, and said Forest will be looking for a joint venture partner for identified oil and gas prospects in Cook Inlet, and hopes to kick off its drilling program in 2004.