Gas tops in Phillips, Conoco future

PHOTO/Ed Bennett/AJOC
If the latest oil company merger goes through, in late 2002, the name on the Phillips Alaska Inc. building in downtown Anchorage will change once again, becoming ConocoPhillips.

Phillips Petroleum Co. and Conoco Inc. agreed Nov. 18 to merge, combining two medium-size petroleum companies into what will be the third largest U.S. oil and gas company and the sixth largest in the world.

Phillips itself acquired ARCO Alaska Inc., the Alaska operating subsidiary of Atlantic Richfield Co., when that company was acquired by British Petroleum.

There are important implications for Alaska in the Phillips-Conoco merger.

One is that the combined companies will place a major emphasis on natural gas. Conoco Chairman Archie W. Dunham said gas represents 38 percent of the combined companies’ holdings, and the goal is to increase that to 50 percent.

The new company will put more emphasis on exploration and production generally, Dunham said. About 57 percent of the combined companies’ business is from these so-called "upstream" activities, and the goal is to increase that to between 60 percent and 70 percent.

If a North Slope gas pipeline is built or some other way is found to commercialize stranded gas in northern Alaska, the new company will be able to add those reserves to its assets, immediately strengthening the financial position of the company.

The combined ConocoPhillips would be a financially stronger partner in a possible North Slope natural gas pipeline. Some analysts have expressed concern over whether Phillips, still debt-laden from its acquisition of ARCO Alaska, could handle its share of financing a possible $17 billion gas pipeline project.

The priority on gas would also strengthen Phillips’ already strong exploration program in northern Alaska, where many unexplored areas are expected to yield natural gas.

A question, however, is whether combining with Conoco will cause Phillips to shift its strategy of favoring a southern, Alaska Highway route for a North Slope gas pipeline to favoring a shorter northern, offshore route that is also preferred by ExxonMobil Production Co., another North Slope producer.

Conoco, after acquiring Gulf Canada last July, has large gas holdings in the Mackenzie Delta. Phillips has large gas holdings on the North Slope. This puts the merged company in the same position as ExxonMobil, which also has undeveloped gas holdings in both Alaska and the Mackenzie Delta.

A single pipeline following a northern route would connect the two gas-producing regions, carrying gas from both to market more economically, preliminary findings by a study group of North Slope gas producers show.

An alternate scenario is for two stand-alone pipelines, a southern route from the North Slope through Interior Alaska and into the Yukon Territory and Alberta, and a second from the Mackenzie Delta south to Alberta.

In recent testimony before the Senate Energy Committee in Washington, D.C., Phillips said it favored the southern route, which is also backed by the State of Alaska.

Another aspect of the merger is that Conoco has moved aggressively into gas-to-liquids development, with a $75 million test facility now under development in Ponca City, Okla., to commercialize proprietary GTL technology. Conoco has said that it intends to build its first commercial GTL plant in 2004. Phillips has no gas-to-liquids development program.

Phillips, for its part, has major expertise in liquefied natural gas, or LNG, and developed proprietary LNG technology for the Kenai plant it owns with Marathon Oil. Kenai is only U.S. plant to export LNG.

The combined company’s emphasis on gas liquefaction technologies will mean all three major North Slope producers, including ExxonMobil and BP, will have strong GTL development programs.

Gas-to-liquids plants, which would produce high-value liquids that could be shipped through the existing trans-Alaska oil pipeline, are seen as an alternative to a conventional natural gas pipeline if a pipeline is found to be uneconomic.

Conoco is no stranger to Alaska. The company was an aggressive explorer on the North Slope and discovered and developed the Milne Point field, the first of a series of smaller fields on the North Slope.

In 1994 Conoco withdrew from Alaska and sold Milne Point and other holdings to BP, including a discovery in what is now the Badami field.

The company was an early pioneer in development of the large viscous oil resource on the Slope, investing substantially in an early experimental production program in the large Schrader Bluff deposit, which is part of the Milne Point field.

Phillips has been in Alaska for decades and was an early explorer in the Cook Inlet region. It was not prominent on the North Slope, however, until the company acquired ARCO Alaska Inc. and became an operating company on the Slope.

On a national level, the merger will make the combined ConocoPhillips into the nation’s largest refiner and gasoline retailer, combining pump brands like Conoco, Phillips 66, Union 76 and Circle K.

Analysts have pointed out that both companies do well playing niche markets and can now enjoy the benefits of larger economies. The estimated savings in the merger is $750 million yearly.

Both companies have made recent acquisitions. Phillips bought Tosco, the nation’s largest independent refiner, last spring, and in July Conoco closed a deal to acquire Gulf Canada, which added major reserves of oil and gas in northern Canada to its own holdings in the Canadian north.

Both companies are strong in the North Sea and both were pioneers there, developing new, deep-water technologies. Conoco was the first company to use a new type of one-leg platform concept in the area, while Phillips was the first company to develop an offshore platform that can be reused.

Both are also part of new consortiums formed to develop large gas fields in Saudi Arabia.

Phillips has a stake in the big Kashagan field in the Caspian region of Kazakhstan, a discovery some oil analysts think could rival Prudhoe Bay. Conoco has ventures in Russia, Venezuela and Vietnam.

The two companies also said they will continue Phillips’ joint-venture with Chevron in chemicals and plastics, Chevron Phillips Chemicals. A natural gas gathering and processing joint venture, Duke Energy Field Service, will also be continued.

Updated: 
12/02/2001 - 8:00pm

Comments