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Vol. 19, No. 6 Week of February 09, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

$2.3B for Conoco in 2013

Company reports flat income in state despite falling Alaska production, prices

Eric Lidji

For Petroleum News

ConocoPhillips earned nearly $2.3 billion in Alaska in 2013.

The company saw its Alaska earnings stay relatively flat year over year despite production declines, in part because of a lower production tax rate under ACES as oil prices dropped. Even so, ConocoPhillips paid nearly $4 billion in taxes and royalties on its Alaska operations.

For the fourth quarter, ConocoPhillips earned $555 million in Alaska, up from the seasonally lower third quarter, but down from the same period during the previous year on declining production. The company paid nearly $1 billion in obligations during the quarter, which vice president finance, ConocoPhillips Alaska Vice President of Finance Bob Heinrich attributed to the outgoing Alaska’s Clear and Equitable Share fiscal system.

“The fourth quarter of 2013 is similar to what we have seen historically under ACES where we pay about twice as much in taxes as we keep,” Heinrich said in a statement, attributing a planned increase in spending this year to recent tax code revisions under the More Alaska Production Act which went into effect Jan. 1. Voters will decide in August whether to keep the changes.

Companywide, ConocoPhillips earned $9.1 billion in 2013.

Profits steady

ConocoPhillips saw steady profits year over year for Alaska.

The company reportedly earned $3.549 billion in income before income taxes from its Alaska operations in 2013, up slightly from $3.541 billion for 2012. By comparison, the company earned $1.614 billion in the Lower 48 and Latin America, $674 million in Canada, $3,523 billion in Europe and $5,102 billion in the Asia Pacific and Middle East.

After taxes, ConocoPhillips earned $2.274 billion in Alaska in 2013, compared to $2.276 billion 2012. A $97 million write down early in the year adjusted earnings downward.

The steady profits came amid higher spending.

ConocoPhillips reported $1.14 billion in capital expenditures in Alaska in 2013, up from $828 million in 2012. The company spent $304 million in Alaska in the fourth quarter, up from $291 million in the third quarter and $232 million in the fourth quarter of 2012.

ConocoPhillips also reported a small increase in depreciation, depletion and amortization expenses for Alaska, some $530 million in 2013 compared to $516 million in 2012.

ConocoPhillips budgeted $1.7 billion for Alaska this year, up $600 million from the 2013 budget and nearly double what the company set aside for 2012, according to the company. The budget will accommodate work on the Alpine CD-5 satellite, facility upgrades, increased development drilling and work on an Alaska natural gas pipeline.

The company is also in the early stages of two North Slope development projects, Drill Site 2-S at the Kuparuk River unit and GMT-1 at the Greater Mooses Tooth unit.

Lower tax rate

The year-end figures come as voters are deciding whether to keep the More Alaska Production Act, which significantly changed the fiscal system for oil production.

ConocoPhillips likes the changes, saying they make Alaska more competitive and will encourage several big investment decisions in the years to come on the North Slope, while opponents believe the changes unnecessarily relinquish significant state revenues.

ConocoPhillips reported an average effective income tax rate of 35.9 percent for Alaska for 2013, roughly even with what the company reported for 2012. The rate is slightly higher than the 33.1 percent reported for the Lower 48 and Latin America, and the 29.6 percent reported for the Asia Pacific and Middle East, but lower than the 66 percent reported for Europe and the 44.4 percent average for the entire consolidated portfolio.

Including taxes other than income taxes, ConocoPhillips reported an average rate of 57.1 percent for its Alaska operations in 2013, down from an average rate of 62.5 percent for 2012. ConocoPhillips only breaks out the non-income tax rate for its Alaska segment.

The ACES tax system contained a progressive element that increased with oil prices.

ConocoPhillips reported average crude oil price of $107.83 per barrel for Alaska for 2013, down from $109.62 per barrel for 2012. The Alaska crude oil price includes some natural gas liquids, which is part of the reason why it is higher than the average Lower 48 price of $93.79 per barrel and the average Canada price of $79.73 per barrel for 2013.

Even with the lower oil price, ConocoPhillips said it paid some $4 billion in state and federal taxes and royalties in 2013, of which $2.9 billion went to the state. The company paid $1 billion in obligations during the fourth quarter, including some $700 million to the state.

ConocoPhillips said it has paid more than $30.6 billion in taxes and royalties for its Alaska operations since 2007, including some $23.5 billion to the State of Alaska.

While ConocoPhillips is crediting the More Alaska Production Act with inducing the company to increase its Alaska budget, the company still sees advantages in the Lower 48. “Even with the tax improvements in Alaska” there is a “higher tax regime in Alaska than there is in the Lower 48,” ConocoPhillips Chief Financial Officer Jeff Sheets said.

The Alaska operation is largely oil, which could improve cash flows more than Lower 48 oil plays that have large natural gas components, according to Sheets. An increase in Lower 48 oil production, though, might ultimately improve company cash flows more than Alaska production. That said, “We could see a slowing of decline in Alaska, but overall that’s probably not going to cause margins to move significantly,” Sheets said.

Production down

ConocoPhillips saw production decline in all commodities in Alaska.

The company produced 200,000 barrels of oil equivalent per day in Alaska in 2013, down some 6 percent from 213,000 boe per day in 2012. For the fourth quarter of 2013, the company produced 205,000 boe per day, up 15 percent from 178,000 boe per day in the seasonally low third quarter but down 7.6 percent from the fourth quarter of 2012.

For oil, ConocoPhillips produced 178,000 barrels per day in 2013, down 5.3 percent from 188,000 bpd in 2012. The company produced 152,000 bpd in the Lower 48 in 2013, up 23 percent over 2012, and 92,000 bpd in Norway in 2013, down 13 percent over 2012.

For the fourth quarter, the company produced 182,000 bpd in Alaska, up 13 percent from 161,000 bpd in the third quarter but down 7.1 percent from the fourth quarter of 2012.

For natural gas liquids, ConocoPhillips produced 15,000 bpd in Alaska in 2013, down 6.2 percent from 16,000 bpd in 2012. The fourth quarter rate of 16,000 bpd was up from 11,000 bpd in the third quarter, but down from 17,000 bpd in the fourth quarter of 2012.

ConocoPhillips saw its greatest declines in gas, presumably because of the end of the exporting operations from its Kenai Peninsula liquefied natural gas facility. The company produced 43 million cubic feet of per day in Alaska in 2013, down nearly 22 percent from 55 mmcf per day in 2012. The fourth quarter rate of 43 mmcf per day was up nearly 23 percent quarter over quarter, but down some 23 percent year over year.

ConocoPhillips is looking to resume exports in the near future.

ConocoPhillips produced 91 mmcf per day in the Lower 48 and 25 mmcf per day in Canada in 2013, up from 85 mmcf per day and 24 mmcf per day in 2012, respectively.

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The decision for industry on the pipeline

A major topic before Alaska policymakers this year is a natural gas pipeline.

The state and the major industry players recently signed a Heads of Agreement that structures a process for starting early engineering work by the second quarter. The conclusions of the engineering will determine whether the investment goes forward.

“The timeline that we’re working with just now is that we would make that final investment decision in 2016 or 2017,” ConocoPhillips Executive Vice President of Exploration and Production Matt Fox said during a Jan. 30 call. “There’s quite a bit of FEED (Front End Engineering and Design) required for a project of this scale and between the pre-FEED and the FEED, it’ll be 2016 or 2017 before we make a final investment decision. … That’s the range that we’re thinking about just now for the project.”

With the project estimated to cost between $45 billion and $65 billion, the decision is a big one. When one analyst asked whether the company was weary of “the elephant hunt,” or the search for big projects, ConocoPhillips CEO Ryan Lance said, “We still look at returns and cost of supply and try to ask ourselves: is it competitive in the portfolio.”

Lance acknowledged that major projects have a “different return profile than unconventionals in North America,” but, he added, “There’s a place in the portfolio for some of those projects to balance it out over time. They reduce capital intensity, and they have a place in the portfolio. But we have to be careful. We have to look at the other alternative investments and other options and choices we have in the portfolio.”

He said, “We haven’t made that decision on Alaska gas because we’re still studying it. We’re still trying to understand what that cost is going to look like … how it competes in the global market place for (liquefied natural gas), and how it competes in our portfolio.”

—Eric Lidji