Conoco cuts costs

Cites CD-5 40% cost of service drop as example of strategy for low prices

ERIC LIDJI

For Petroleum News

ConocoPhillips is presenting Alaska as a key part of its international strategy.

In a meeting for analysts and investors on Nov. 10, the largest independent oil company in the world used its Alaska segment as a leading example of its current approach to operating at a time of declining oil prices and increasing costs. “Not long ago, we enjoyed as an industry pretty high and stable prices, but that world has changed. Here’s what that means to us strategically,” Chairman and CEO Ryan Lance said. “You can’t count on rising commodity prices to bail out your business model. You have to position the business for the cycles. You can’t chase them up, and you can’t chase them down.”

As a result, Lance said, ConocoPhillips is “shifting our mindset to be a business that is managed for free cash flow,” and focusing on its balance sheet, costs and flexibility.

The company has significantly shrunk its global operations in recent years, relinquishing projects throughout parts of Europe, Africa, South America and the Arctic. While those changes also included the end of exploration efforts in the Beaufort and Chukchi seas in Alaska, the company is continuing to invest heavily in its onshore activities in the state.

Lance said the company expects “lower, more volatile prices going forward.

CD-5 costs

Those projects include the CD-5 pad at the Colville River unit and the Drill Site 2S project at the Kuparuk River unit that the company brought into production over the past year, as well as the recently sanctioned 1H NEWS project at Kuparuk and the GMT-1 project at the Greater Mooses Tooth unit. The company always touted the GMT-2 project, which is currently in the early stages of permitting and has yet to be sanctioned but could theoretically come online as early as 2020, according to a company timeline.

Along with a slate of conventional projects at its remaining properties in its European segment and its considerable portfolio in its Asia Pacific and Middle East segment, ConocoPhillips believes it can add approximately 130,000 barrels of oil equivalent per day of incremental production by 2021. Of those three regions, Alaska is expected to be the least productive and receive the second largest budget over the next five years.

One reason Alaska remains competitive, according to the company, is a concerted effort to reduce costs. The company claims to have achieved a 40 percent decline in cost of service at the CD-5 project between 2012 and 2016 through a combination of development optimization, well performance and cost efficiencies including performance-based contracts, “collaborating with other operators to maximize utilization of shared resources” and a development program focused on multilateral wells.

Those efforts reduced the cost of service at the CD-5 project from $66 per barrel when the company sanctioned the project in 2012 to $40 per barrel when it conducted an audit of the project this year. The figure measures “the Brent equivalent price that generates a 10 percent return on a full-cycle and fully burdened basis,” according to the company.

“These are not cyclical savings,” Executive Vice President for Production, Drilling & Projects Al Hirshberg said. “Our drilling and operating teams were able to achieve cost efficiencies through innovations like performance-based contracts. We also changed to multilateral wells to unlock additional resource, and we’ve continued to push the envelope on the length of these laterals. These longer wells have resulted in improved well performance over what we expected at FID (Final Investment Decision).”

The Alaska segment, though, is part of a larger global portfolio, some of which seem to be performing as well or better when it comes to managing costs. ConocoPhillips reported a 50 percent decline in cost of service for projects in both Norway and China - to approximately $33 per barrel - during roughly the same period of time as CD-5.

Although ConocoPhillips is planning a smaller capital program for the coming year - to $5 billion from $5.2 billion - Alaska appears to be on track for a similar capital program as this year, while Canada is expected to shrink and the Lower 48 is expected to grow.