ConocoPhillips posts biggest quarterly profit since 2014

This spring turned out to be ConocoPhillips’ best quarter in nearly four years as the oil major reported a profit of more than $1.6 billion in its second quarter earnings report released Thursday morning. The $1.6 billion of net income was accomplished on the back of more than $9.2 billion in revenue for the quarter. The last time ConocoPhillips had a higher revenue quarter was the fourth quarter of 2014 when it brought in $11.8 billion but still lost $39 million overall. The last time the company managed better quarter earnings was the third quarter of 2014 when oil prices averaged $97 per barrel and it netted $2.7 billion. In Alaska, ConocoPhillips had a second quarter profit of $418 million, compared to $445 million in the first quarter and a $167 million profit a year ago. The company paid $291 million in taxes and royalties to the State of Alaska during the quarter, according to spokeswoman Natalie Lowman. The companywide profit translates to earnings of $1.40 per share, compared with second quarter 2017 adjusted earnings of 14 cents per share. The company paid a dividend of 28.5 cents per share last quarter, which it announced July 11 it will pay again in the third quarter. The adjusted earnings per share of $1.09 beat Wall Street expectations of $1.08 per share. CEO Ryan Lance said in a formal statement that the company is now positioned for high performance during industry cycles by focusing on free cash flow generation. “We’re benefiting from higher oil prices, but also driving underlying cash flow expansion. In accordance with our priorities, we’ve differentially allocated excess cash towards debt reduction and distributions, while continuing to grown our diversified, low cost of supply resource base,” Lance said. “Since we launched our disciplined strategy almost two years ago we’ve met or exceeded all our key strategic milestones. We achieved our debt target 18 months ahead of plan; we’ve outperformed on our target payout to shareholders; we’re executing or operating plan and remain committed to our disciplined approach to the business.” ConocoPhillips repurchased $600 million worth of stock during the quarter and increased its 2018 repurchase plan by 50 percent to $3 billion. It additionally paid down $2.1 billion of debt and hit a $15 billion debt target mentioned by Lance while ending the quarter with $4.1 billion in cash and short-term investments. BP and ConocoPhillips announced a deal July 3 that ostensibly amounted to a trade, in which ConocoPhillips will acquire BP’s 39 percent stake in the large, North Slope Kuparuk River oil field and BP will add 16 percent ownership in the U.K. Clair field, which it operates. The deal will give ConocoPhillips 93 percent ownership in Kuparuk, which it operates and produces roughly 140,000 barrels of oil per day. It is also expected to be a cash-neutral transaction for both companies, according to a statement from BP. ConocoPhillips also made capital investments totaling $581 million in Alaska out of its worldwide capital spend of nearly $2 billion during the quarter. The company has put $844 million towards its Alaska projects so far this year, according to the earnings report. ConocoPhillips’ crude production in the state averaged 170,000 barrels per day during the quarter, down slightly from 174,000 barrels per day in the first quarter of 2018 but just more than the 169,000 barrels per day it extracted a year ago. It announced July 16 that the six exploration and appraisal wells drilled on the North Slope last winter added up to 1.4 billion barrels of oil and gas to its resource portfolio. ConocoPhillips’ Alaska oil and gas production accounted for 15 percent of its worldwide production for the quarter; its $418 million net income in the state accounted for 25 percent of its overall quarterly profit. Elwood Brehmer can be reached at [email protected]

Christening for Tazlina; funeral for Juneau Access

The Alaska Department of Transportation has pegged Aug. 11 for christening the M/V Tazlina as the newest state ferry. The 280-foot Tazlina and its twin sister ship the M/V Hubbard, known as Alaska class ferries or day boats, are destined to start service in Lynn Canal next May, a mission they were specifically designed for. But it’s in winter when the benefits of the Tazlina and Hubbard will be fully realized, according to DOT spokeswoman Aurah Landau, when smaller ferries that are less costly to operate are currently tasked with making the Lynn Canal runs. “The new Alaska class ferries are bigger boats than some of the small boats running in Lynn Canal. They should be able to run in the kind of weather that sometimes forces ferry trip cancellations. These boats are bigger, they’re longer, deeper, heavier, so they can handle much higher winds and seas,” Landau said. “So bringing those boats online should offer much more reliable service in Lynn Canal. The Tazlina and the Hubbard are not only the largest vessels ever built in Alaska — at Vigor Industrial’s Ketchikan shipyard — they are also the first state ferries built here as well. Vigor Alaska Development Manager Doug Ward said the $101 million contract price agreed to in 2014 still stands, but added there is still a lot of work to do on the Hubbard, which is scheduled for completion next spring. The completion is a few months behind the original target to have both ships done by this October. “This is a big project, but we managed to get through the thing and the Hubbard is coming along really well. A good part of the structural steel work is complete now,” Ward said. Meanwhile, Landau said the Alaska Marine Highway System is still waiting to hear back on its request for a waiver from the Buy America Act for a $222 million, 330-foot ferry to replace the aging Tustumena. The federal law requires steel and other primary components for American vessels be sourced domestically even if no one in the country is producing them. The state has been waiting to hear back from the FHWA on the waiver for more than a year. “We’re just waiting for the Buy America waiver to come back and then we can begin the bid process. (The waiver) will affect if we have to go back and redesign and it will affect construction costs and abilities,” Landau said. Once the vessel, which has been designed, goes out to bid it should be ready for service after a few years of construction, she added. State ferry construction is eligible for federal money similar to highway projects, but accepting the funding means bidding must be open to all shipyards nationwide. The state self-funded the Tazlina and Hubbard in an effort to make sure they could be built in Alaska. Ward said it is too early to say whether or not Vigor, which owns other shipyards in the Pacific Northwest, will bid on the Tustumena replacement project or even if it could be built in Ketchikan at all, given it will be a much larger vessel than the Alaska class ferries. “We’re going to look at (the Tustumena replacement) and of course we won’t know until we see the request for proposal,” Ward said. Feds close out Juneau Access The Federal Highway Administration has closed out the controversial Juneau Access road project as state transportation managers prepare to christen the first of two new ferries that will serve as the primary road link of the future to the capital city. The Alaska Department of Transportation announced July 19 that FHWA Alaska Division Administrator Sandra Garcia-Aline signed a record of decision affirming Gov. Bill Walker’s decision to not have the state extend the Glacier Highway up to 50 miles north of Juneau. In 2016 Walker chose the “no action” alternative from seven options evaluated in the environmental impact statement, or EIS, for the long-running Juneau Access Improvement project, largely in response to the $3 billion-plus budget deficits the state was facing at the time. In May the Legislature moved $21 million left over from other DOT projects to Juneau Access. Landau said the money will sit in the project account at least for the time being. “It can remain in the account until acceptable alternative concepts are proposed and agreed upon by stakeholders, (or) the Legislature can always make a change to the funding status,” Landau said. The annual budget shortfall was reduced to about $700 million this year but Walker said the project still faced several challenges in a prepared statement. “Improving Juneau access continues to be a priority for us. But the practicality of this project — a road extended to a yet-to-be-built ferry terminal through more than 40 avalanche zones, with a history of litigation — that makes it difficult to justify these kinds of expenditures as we focus on a sustainable fiscal future for Alaska.” In 2006 the FHWA identified the 50-mile Glacier Highway extension amongst several other road options up either side of Lynn Canal as its preference for the project. That decision was eventually thrown out in U.S. District Court after a group led by the Juneau-based Southeast Alaska Conservation Council sued the federal agency contending the original Juneau Access EIS did not adequately evaluate other options and environmental impacts of the chosen plan. The State of Alaska appealed the decision and eventually lost the case in the 9th Circuit Court of Appeals, which led to the drafting of a supplemental EIS. Former Gov. Sean Parnell’s administration again selected the 50-mile highway extension in 2014 while the supplemental EIS was in draft form, but Walker reversed the state’s choice during development of the final supplemental EIS. Republican gubernatorial candidate Mike Dunleavy criticized Walker’s decision in a press release from his campaign that alleges not building the road leaves Juneau — the only state capital outside Hawaii inaccessible by land — without a sustainable transportation plan. “Alaska continues to rank at the bottom of the states in economic performance. We need to get our state moving and we need leadership that will work to create jobs and economic prosperity,” Dunleavy said in a formal statement. “Juneau Access is a project which will employ hundreds of Alaskans in the construction phase, and provide lasting economic opportunity.” Landau said all of the alternatives reviewed in the Juneau Access EIS have sufficient capacity to meet current transportation demands in and out of the northern end of the city, but noted every mode of transportation has inherent factors that can limit expressed demand. The Glacier Highway extension was estimated to cost $680 million in the final EIS and record of decision signed in June. That is roughly a $100 million increase in the expected cost from previously published versions of the EIS. Because it is a project eligible for federal funding, FHWA could have funded up to about 90 percent of the construction costs, as is common for highway projects nationwide. However, the project would not actually link Juneau to either Haines or Skagway — the communities at the northern end of Lynn Canal — as the road would dead-end about 20 miles south of Skagway. Shuttle ferry service between Haines, Skagway and a new ferry terminal at the end of the highway would increase daily ferry capacity, but many objected to that plan because it would leave ferry passengers who are traveling without a vehicle more than 50 miles from Juneau at the new terminal. The existing Auke Bay ferry terminal just north of Juneau would have been closed under that plan. ^ Elwood Brehmer can be reached at [email protected]

AGDC says Port MacKenzie ‘not feasible’ for LNG terminal

Several months of additional review did not change the opinion of the state’s North Slope natural gas project development team that Nikiski is a better site than the Matanuska-Susitna Borough-promoted Port MacKenzie for a multibillion-dollar gas liquefaction plant and marine terminal. The Federal Energy Regulatory Commission had instructed the state team to conduct a more thorough analysis of the borough site on Knik Arm as an alternative to the project’s preferred choice of Nikiski, on the east side of Cook Inlet about 65 air miles southwest of Port MacKenzie. The analysis will be incorporated into FERC’s environmental impact statement for the proposed Alaska LNG project. The Alaska Gasline Development Corp. responded to federal regulators July 13 that it would not be possible to build and operate the LNG plant and marine terminal at Port MacKenzie “without constraining either existing or planned uses of the complex, or of the proposed LNG facility and its marine terminal.” The Alaska LNG project team in 2013, when it was led by North Slope oil and gas producers, selected an industrial area of Nikiski as the best location, a decision which the state stuck with for its 2017 application to FERC after the producers left the project. The producer-led team acquired more than 600 acres of private land at the site — about two-thirds of the acreage required for construction of the LNG plant, dock and freight landing facility. The Matanuska-Susitna Borough in January 2018 filed a formal complaint and request with federal regulators, pressing for a better look at Port MacKenzie, which the municipality has long promoted for industrial development. The borough owns the port property. AGDC cites beluga habitat, currents, tide “Significant issues have been identified which make the Port MacKenzie site not favorable over the proposed … site in Nikiski,” AGDC said in its July 13 filing with FERC. Those include: • Work restrictions during construction and terminal operations because of the site’s location within Cook Inlet’s most protected beluga whale critical habitat area. The upper Cook Inlet area provides foraging and calving habitat for the endangered species. • Conflicts with other actual and proposed uses of the port, and the need to move the access road and proposed railroad extension away from the LNG plant site. “The area identified by the borough currently used for port operations is not feasible in conjunction with existing facility operations,” AGDC reported. • Wind, current and sea-ice conditions could hamper winter operations at the port site. • The wider tidal range at Port MacKenzie — with an average difference between high and low tides of 26.2 feet, as opposed to Nikiski’s 17.7-foot average range — would reduce by 25 percent the opportunities for unloading construction barges, adding a full work season to the project, AGDC said. • Twice the current dredging volume would be required to widen the shipping channel through the Knik Arm Shoal to allow safe two-way ship traffic through the area. Strong currents in the area necessitate a wide berth for ships to move safely in and out of the port, AGDC said. Even with the additional dredging and wider channel, LNG carriers still would be limited to crossing the shoal only at high tides, AGDC said. • The longer travel distance for LNG carriers to reach Port MacKenzie would add 12 voyages per year, requiring an additional ship — and higher costs — to move the same volume of LNG as the shorter route to and from Nikiski. Reaching Port MacKenzie instead of Nikiski, however, would save 55 miles of pipeline, AGDC said. Although Port MacKenzie offers an existing dock and barge landing, AGDC said the deep-water dock at the site is inadequate for berthing and loading LNG carriers, and would have to be demolished and replaced. In addition, the barge dock would be unable to accommodate the heavy demand of offloading construction materials, the state team said, requiring a new facility. The Nikiski site also would require construction of a new deep-water dock for LNG carrier loading, and a roll-on/roll-off barge and freight dock for delivering plant modules and construction equipment. However, AGDC said, winter sea ice at Port MacKenzie is thicker and builds up in heavier concentrations than at Nikiski, requiring construction of “ice mitigation structures” — large concrete structures (95 feet across) set on the seabed and reaching to the surface — to protect the dock and LNG carriers from ice damage. Borough says AGDC is wrong The Matanuska-Susitna Borough does not accept AGDC’s analysis, writing to FERC on July 20 that the borough “has already identified several aspects of AGDC’s response with which it disagrees.” The borough did not provide any details in its one-page letter but said it “intends to file substantive comments to highlight the incorrect information.” It said it would provide the information by Sept. 1, just six months before FERC is scheduled to release its draft environmental impact statement, or EIS, for the Alaska project on March 8, 2019. In addition to reviewing a project’s effects on the environment and communities, a federal EIS is used to determine the “least environmentally damaging practicable alternative” for multiple decisions in project construction. As such, the Alaska LNG impact statement is required to consider not only the location of the LNG plant but also pipeline routing, river crossings and other environmentally sensitive project decisions. The proposed Alaska LNG project includes 62 miles of pipeline to move gas from the Point Thomson field west to a gas treatment plant at Prudhoe Bay, where gas from the two fields would be cleaned before going into an 807-mile pipeline running through the middle of the state to Cook Inlet. The design capacity for the plant is 20 million tonnes of LNG per year, or about 7 percent of total LNG worldwide trade last year of 293 million tonnes, according to the International Gas Union’s June 28 annual report. AGDC met with borough representatives in February, May and June during its review of Port MacKenzie. The state team analyzed two possible locations for the LNG plant on borough property: One on the waterfront, and an option almost 1.5 miles inland. AGDC said the waterfront property “is not feasible in conjunction with existing facility operations” at the site. Because of federally required safety zones required around the plant, the state said, the LNG project would need to control even more property, displacing the proposed railroad extension to the waterfront and an access road. And while the inland property would solve the problem of a buffer zone displacing other users, it would complicate the project by separating the liquefaction plant and its LNG storage tanks from the loading dock and would require a 1,400-foot-wide exclusive safety corridor between the plant and the dock. The state team, in its filing with FERC, pointed to planned and proposed uses for the port area as possibly incompatible with construction or operation of the LNG terminal, including a five-year contract for loading timber at the port under a harvest contract and port lease the borough approved in April. AGDC has said it wants to start construction in 2020, though it is not scheduled to see a final EIS until December 2019, and lacks firm customers for the LNG, financing for the $43 billion project, and binding contracts to buy gas from North Slope producers. The state corporation told Alaska legislators July 11 that is spending about $3 million a month on permitting, finance, commercial negotiations and promotion, with expenses to move closer to $4 million a month next year. AGDC’s July 13 filing also responded to several other questions and data requests from FERC. AGDC prefers modeling over drilling Regulators had recommended the state team collect sediment cores from a sampling of 15 rivers and creeks that the 807-mile pipeline would cross to help in determining the environmental risks of open-cut trenching AGDC has proposed for waterbody crossings. AGDC has balked at that recommendation. “To achieve the requisite core depth to match pipeline burial depth, such sampling would require the use of drilling equipment in the anadromous stream, and permitting requirements would likely place operation of the drilling equipment in the winter of 2018/2019,” the state team told federal regulators. “To avoid such delays, transport of such equipment into remote sites, and impacts to spawning or juvenile fish,” AGDC said, the project team has decided to use terrain mapping and modeling, which includes data from more than 3,000 boreholes along or near the pipeline route. “A final report detailing the methods, data inputs, results and application to other crossings will be prepared and submitted to FERC on or before Aug. 30,” AGDC said. The state team also responded July 13 to several questions federal regulators had asked about how the pipeline and its compressor stations, LNG plant and vessel traffic could affect air quality along the route, including in Cook Inlet. The approximately 250 LNG carrier calls per year at Nikiski would add about 50 percent to large-vessel traffic in the inlet, AGDC said. “The increase in vessel traffic that would occur due to the project is not expected to substantially increase regional haze levels in the Cook Inlet region or cause a violation” of air-quality standards, according to its response. Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide.


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