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Phillips focuses on exploration and production, looks for legacy assets CEO Jim Mulva tells “Meet Alaska” the company is planning to prosper as a worldwide independent Kristen Nelson PNA News Editor
In January, before becoming the owner-apparent of ARCO’s Alaska assets, Phillips Petroleum Co. chairman, president and CEO Jim Mulva told the Alaska Support Industry Alliance’s “Meet Alaska” conference that the company was positioning itself to be a successful contender in the changing oil industry.
That industry is very different than it was in the 1970s, Mulva said. Thirty years ago there were more companies, competition wasn’t as fierce, technological changes came more slowly, companies had lower debt ratios and the financial markets were slower paced.
Companies were also less disparate in size: independents; mid-sized fully integrated companies like Phillips; and the largest companies, then called the seven sisters.
Today, Mulva said, the former mid-sized companies — except for Phillips — have reconfigured or disappeared.
“Some are now strictly exploration and production companies,” he said. Others have reduced their downstream presence. Perhaps the biggest change is in relative size: “Twenty-five years ago, Exxon was about five times larger than Phillips Petroleum. And that’s based on market capitalization. Today, ExxonMobil is more than 20 times our size,” Mulva said.
Phillips positions itself to survive
Phillips has been positioning itself for this new environment, Mulva said, addressing the question: “How can we remain an independent, fully integrated company and compete against the super majors?”
“From our perspective, it’s very clear that we cannot operate as we have done in the past,” he said.
“Given our competitors’ size and strength we can no longer adequately fund all four of our business lines,” Mulva said.
Phillips wants to focus capital and commitment primarily in exploration and production, Mulva said, “where we see the greatest opportunities for growth and where we have the resources — human, technological and financial — to remain a strong competitor.”
But at the same time, Phillips believes in integration. The solution, Mulva said, is to “allow our midstream and our downstream businesses to grow through joint venture arrangements. We plan for them to become part of larger and more efficient self-funded enterprises. This is not a long-range plan that I’m describing. It’s an immediate one and we’ve already begun to execute on it.”
Phillips has negotiated joint ventures in two of its business lines (domestic natural gas gathering, processing and marketing and worldwide chemicals production and distribution) in the last few months (see related story), realizing $2 billion in cash to put against exploration and production.
Mulva emphasized that Phillips is not exiting its midstream or downstream businesses. “Host governments want partners who not only can help them develop their petroleum resource, but also to upgrade into the market... And Phillips has expertise throughout the integration chain.”
Legacy assets the goal The opportunities, Mulva said, are greater than he or Phillips have seen in the last 15 or 20 years, and over the next five years Phillips wants to “significantly increase our hydrocarbon reserves and our production” by creating a portfolio of legacy assets, assets of size, quality and long-term duration.
Assets like the company’s Ekofisk development in the Norwegian sector of the North Sea; assets like the company’s Kenai liquefied natural gas plant. He noted that the new LNG facility in Trinidad uses Phillips’ technology, “the same technology that we have in our Kenai, Alaska, plant.”
Phillips is working on three other projects that could potentially be legacy assets: Offshore China in Bohai Bay Phillips is completing an eight-well appraisal program and hopes to be ready to begin commercial development within the next few months. Mulva said a number of other prospects on the block also look good and Phillips will be drilling those this year.
In the Timor Sea, Phillips has taken the lead on the $1.4 billion gas recycle project for the Bayu-Undan field, a very large gas to gas condensate field where Phillips has a 50 percent interest.
In Venezuela Phillips has a 40 percent interest in the Hamaca heavy oil project where 2 billion barrels are believed recoverable with convention production; drilling is expected to begin in the second quarter of this year with first production in early 2001.
Exploration to be more focused Over the past two years Phillips has drilled in some 28 countries, and Mulva said that the company is “going to reduce the number of countries that we drill in and concentrate on fewer, higher potential areas, many of them in frontier regions.”
In North America those areas include the deepwater Gulf of Mexico and Alaska. In Alaska, he said, the company has 13 tracts covering the Pike prospect in the Beaufort Sea. “We’ve acquired seismic and expect to drill our first well this next year.” Phillips is also working with partners to develop three satellite fields near the main Prudhoe Bay field, with possible first commercial production within the next year or two.
Phillips is continuing to work to develop the Point Thomson field, acquired tracts in the National Petroleum Reserve-Alaska and wants to continue to be a major player in Cook Inlet, he said.
Outside the United States, Phillips is focusing on the Atlantic margin, the offshore area west of Ireland and the United Kingdom and the former Soviet Union where the company is drilling its first well in the Caspian region. Phillips is also looking for prospects in less explored areas such as Amman and South Africa and considering investment opportunities in Kuwait and Saudi Arabia.
Strong relationships crucial Long-lasting partnerships are a key to future success, Mulva said, citing partnerships with Norway, the United Kingdom and China. Areas where Phillips is building relationships include Venezuela, Australia and several Middle Eastern nations.
“And of course one of our longest and strongest partnerships is with Alaska and Japan through our LNG venture.”
Phillips is known, he said, as a company that monitors its investments and responds quickly to opportunities or problems “as a company that can handle some of the biggest, most complex projects such as the Ekofisk field in the Norwegian sector of the North Sea.”
While Phillips “won’t be able to take on as many projects in as many parts of the world as the super majors,” Mulva said, “we can, and we well, compete with them on a geographic and a project-by-project basis.”
Phillips will be more selective in what it pursues “and we’ll have to do everything well because in today’s environment there’s not a great deal of room for error.”
And, Mulva said, the company is “small enough to make decisions and move quickly, but we’re large enough to do the most difficult, complex project.”
While merging with another company is one answer to the question of how to survive — and an option that Phillips won’t take away from its shareholders — “it’s not the only answer. And I want you to know that it’s not our long-term strategy for the growth and development of Phillips Petroleum Co.,” Mulva said.
“We see tremendous upside potential for a company like Phillips” where “a single project done well can have a significant impact… and proportionately it can have a far greater impact on us than potentially on a much larger competitor.”
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