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ConocoPhillips spending cuts not expected to impact Alaska Company is emphasizing big operations; pulling back from marginal investments Allen Baker PNA Contributing Writer
Alaska likely won’t feel much of a pinch next year as ConocoPhillips cuts capital spending by $2 billion next year and sells off $3 billion to $4 billion in assets.
Big ‘legacy’ areas such as Alaska’s North Slope and the North Sea are the future focus for ConocoPhillips, CEO James J. Mulva explained in his part of a half-day presentation to analysts on Nov. 22. He wants lower debt, better return on equity, and lower costs per barrel of oil produced.
To achieve that, the company is willing to let production numbers slide, at least in the short run.
But while Kevin Meyers of ConocoPhillips Alaska noted in his presentation that there are plans for upstream asset sales in western Canada and Europe, he didn’t mention divestments in Alaska and indicated that the company will be putting money into the five satellite fields near Alpine, as well as heavy oil development at West Sak.
Optimism on Arctic gas Meyers and other executives remain optimistic that the company’s huge gas reserves on the North Slope and in the Mackenzie Delta will get to market and produce big returns.
“When you look at the Arctic gas bottom line, we have a big resource position in these two areas, both Alaska and Canada,” Meyers said, “over 11 TCF plus exploration potential. We are a really significant player in Arctic gas. We have about a third of the resource.
“We believe the market needs both of these projects. We believe the market needs both of these pipelines,” he said, “The question is when, not if.”
Higher Alaska production In the meantime, ConocoPhillips plans to continue aggressive exploration and development in Alaska. Even with Prudhoe Bay declining, the company expects overall Alaska production to rise to 390,000 barrels daily in 2006 from 378,000 estimated for 2003, he said.
“The key to the growth of production, or maintaining production, is exploration.” Meyers said. “We believe what distinguishes us from our competitors in Alaska is that we have had exploration success.” The company will continue to look for satellites to existing fields, and also go after wildcat fields, he said.
Alpine satellites The western North Slope, the region around the Alpine field, is expected to be an area of growth, Meyers said, with Alpine providing the production facilities for several satellites.
The next phase of expansion at Alpine should be sanctioned sometime next year, he said, to service the drill sites the company has identified nearby.
At Kuparuk, the plan is to maintain production, develop the heavy oil at West Sak, and bring on new satellites, he said.
As for Prudhoe Bay, it’s a mature and declining asset, but still has a lot of potential, Meyers said.
Flat production costs For all of Alaska, the goal is to maintain production costs flat per barrel, he said, calling that “no easy feat.”
“But I will tell you that we achieved that in 2002 and plan to keep that going in future years. When we look to Alaska, we have a significant investment in infrastructure, and that gives us opportunities to create more value,” Meyers said.
Contrast that with Meyers’ comments on Canada, where he said the company was planning $300 million to $500 million in asset sales.
High-grading portfolio Repeating the theme that echoed through the various executives’ presentations, Meyers said that the company is working to “high-grade” the portfolio. “What we’re doing here is focusing on value, not volume,” he said.
As for the Lower 48 assets, Meyers says the mature onshore gas fields will get about $225 million less in capital spending, with that money redirected to deepwater projects in the Gulf of Mexico.
He also outlined some cutbacks in the company’s European operations, where the focus again is on the big fields, Ekofisk and Brittania.
$1.2 billion less for E&P For 2003, ConocoPhillips is cutting overall capital spending by $2 billion, or 25 percent, compared with what Conoco and Phillips had planned, Mulva said, with $1.2 billion of the cuts coming out of the upstream end. Some of those reductions will be essentially automatic as assets are sold.
The company will put three fourths of its capital spending, $4.4 billion, into upstream next year. That’s still half a billion dollars less than the combined spending in the current year, said Rob McKee, the executive vice president in charge of upstream businesses.
About 80 percent of that will be spent on production improvements and other projects in the “legacy” fields, with 10 percent going to exploration and 10 percent to other upgrades.
Cutting per-barrel costs Overall, production costs are too high compared with the other big players, he said, at about $6.60 a barrel in 2002. By 2006, he said, “we want to drop that to $5.25. And we are going to achieve that goal.”
For exploration, McKee said the goal there was $4.75 per barrel, bringing the overall cost per barrel to about $10. That would put ConocoPhillips in the top quartile of oil producers, he said.
The company is planning about 60 exploration wells in 2003, about the same as this year, and about 150 exploitation wells in mature areas.
For the overall E&P business, McKee said, executives want to raise the return on capital to 15 percent from the current figure of 9.2 percent.
That’s a bit higher than Mulva’s goal of 12 to 14 percent for the company as a whole.
Meeting the goal means looking at the company holdings and deciding which assets can be developed into larger units, and which aren’t needed.
Small assets on the block “We are going to undertake a process to figure out if we can move them up the ladder, or move them out of the portfolio,” said McKee.
About $2 billion worth of assets have been identified for sale so far, and $600 million worth has already been sold. He wouldn’t identify the sale candidates specifically.
“We’re taking out barrels that just don’t have a lot of value attached to them,” McKee said. “The portfolio is going to get a lot stronger over the coming years.”
Meanwhile, though, production is being hurt by the asset disposals and other factors, such as the Alaska earthquake and storms in the Gulf of Mexico.
ConocoPhillips will fall well short of the target of 606 million barrels of oil equivalent for 2002, bringing in about 590 million barrels. And in 2003, that number is likely to dip to 572 million before it turns around later in the decade, McKee said.
Reserve additions fall short For the current year, ConocoPhillips failed to add reserves to replace the oil and gas that was produced, McKee admitted, partly due to the sales. But he said that Conoco and Phillips had replaced 160 percent of reserves over the last five years. And the company is expecting better results in that area in future years as new fields are added, including a projected 200 percent increase in 2005, when the company is planning to book the Mackenzie Delta gas.
Most of the growth, however, will be in the further reaches of the globe.
Currently, 80 percent of production comes from politically stable North America and Western Europe, which also represents 70 percent of reserves.
But the company is using those mature fields to provide cash flow to put into developing new projects in Asia, South America, and other far-flung regions, expecting to add 250,000 barrels a day to production by 2006 from seven major projects.
More focus upstream As the executives examine ConocoPhillips’ assets and its future, CEO Mulva says the plan is to boost upstream to 65 percent of the company’s assets, from the current 57 percent, while downstream slims down to 30 percent from the current 37 percent. Chemicals and other businesses make up the rest.
The emphasis is on better returns, not growth for its own sake, Mulva told the analysts. He said the company was aiming to nearly double its return on capital to 14 percent by focusing on costs.
“Everything we do we want to benchmark and move our operation to top-drawer,” he said.
Meanwhile, the company plans to pay down its debt to reach a debt-to-capital ratio of 34 percent by 2004, down from the current 39 percent. In the long run, Mulva says, the aim is to get the ratio down to 30 percent, boosting the company’s credit rating in the process.
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