ConocoPhillips, Oil Search cutting Alaska spending by $270M
ConocoPhillips and Oil Search announced early Wednesday that they will be scaling back their North Slope operations in response to the collapsed global oil market.
For ConocoPhillips, which has the largest share of overall oil production in the state, the belt-tightening will result in a roughly $200 million reduction to the company’s capital spending plan in Alaska for the year through “laying down a couple of (drilling) rigs” at the Alpine and Kuparuk fields, Chief Operating Officer Matt Fox said in a conference call with investors.
According to Fox, the Houston-based company expects to see a production impact of about 2,000 barrels per day on the Slope from less development drilling the remainder of the year.
ConocoPhillips produced nearly 130,000 barrels per day from Kuparuk and 56,000 barrels per day from Alpine in February, according to state Revenue Department figures.
Alaska North Slope crude sold for $27.73 per barrel on March 17, according to the Revenue Department.
According to aggregated figures provided by Revenue, Alaska companies currently spend nearly $39 per barrel, on average, to produce oil and ship it to West Coast refineries.
Papua New Guinea-based Oil Search, a relative newcomer to the Slope, announced in a lengthy statement from its Sydney office Wednesday that it would be slowing work on its large Pikka Unit oil development until more favorable market conditions return.
The slowdown amounts to a roughly $70 million pullback in Alaska for the rest of the year. Oil Search had previously expected to spend about $230 million in the state for the remainder of 2020; that’s now been revised to the $160 million range, according to the statement.
ConocoPhillips Alaska spokeswoman Natalie Lowman wrote in an email that she couldn’t provide any further details to what was discussed in the conference call at this point.
The Alaska reduction is part of a $700 million pullback to the company’s global 2020 capital program, CEO Ryan Lance said, which amounts to a 10 percent curb in spending overall. The company spent approximately $1.5 billion on North Slope capital investments last year, according to its 2019 earnings report.
ConocoPhillips executives also said they will be cutting the company’s share repurchase program from $750 million to $250 million per quarter starting April 1. It all amounts to $2.2 billion less in spending for the rest of 2020.
Lance said the moves to limit spending immediately are meant to stabilize cash flow, while stressing ConocoPhillips is much better prepared to weather this price downturn than it was in 2015-16.
ConocoPhillips leaders have said they restructured their operations in response to the 2015-16 price collapse — which bottomed out at $26 per barrel for Alaska crude — to be profitable at prevailing prices of $40 per barrel.
“Today, we believe we are in a strong position to take this methodical approach because ConocoPhillips is in a relatively advantaged position compared to the rest of the industry,” he said.
The company ended 2019 with roughly $14 billion in liquid reserves, according to Lance.
He also didn’t rule out making acquisitions while oil prices are low, but acknowledged that the combination of a pandemic-induced demand drop for oil and a surge in supply from the price war between Russia and Saudi Arabia is an unprecedented situation.
“We know in our minds that it will pass but it doesn’t bring much comfort at the moment,” he said.
Oil prices began falling in early February from a long run in the mid-$60s per barrel as traders reacted to lower demand forecasts from China due to the country’s reaction to COVID-19.
That price decline accelerated earlier this month when Saudi and Russian officials could not agree on curbing production rates to stabilize oil markets in the face of less demand due to the virus curtailing economic activity worldwide. That disagreement quickly turned into a price war, with officials from each side refusing to cut production on the premise they can outlast the other in a time of painfully low prices for each oil-dependent government.
The Energy Information Administration earlier this month forecasted that Brent benchmark crude — which Alaska oil follows closely — will average $43 per barrel in 2020 and return to $55 per barrel in 2021, but those projections could change along with the global response to COVID-19.
Fox said ConocoPhillips is checking the temperatures of its North Slope employees and asking them to fill out a health questionnaire before they begin their work rotations. The company is also reducing staffing levels at its remote operations — which include parts of Norway and China in addition to Alaska — to provide space for quarantining workers that might contract COVID-19, but so far no cases of the virus have been indentified amongst employees in those locations.
Lance added that the global response to the virus has not impacted oil or gas production so far.
BP Alaska spokeswoman Meg Baldino wrote via email that the company is focused on "safe, reliable and compliant operations" until the pending $5.6 billion sale of its Alaska assets to Hilcorp Energy, which includes the large Prudhoe Bay oil field, is complete. A spokesman for Hilcorp Alaska did not immediatley respond to a request for comment.
According to its statement, Oil Search will continue early development activities at Pikka, such as laying gravel roads, to meet its state and federal permitting requirements but work on production facilities and other aspects of the complex project “will be placed on hold.” The statement also says that some engineering work towards full field development at Pikka will continue so the company is ready to make a final investment decision on the project when market conditions improve.
Oil Search will also complete testing of the two exploration wells it drilled this winter, which both encountered oil, the company noted.
Oil Search has significant producing operations in Papua New Guinea, but the Pikka development is its first foray into the United States.
“While Oil Search is fortunate to have world-class assets, these unprecedented times require us to take immediate and decisive steps to position us for a potentially extended period of lower oil prices and business uncertainty,” Managing Director Keiran Wulff said.
Spokeswoman Amy Burnett said she could not offer any further details at this time.
Oil Search completed an $850 million buyout of Armstrong Energy and a silent owner in Pikka in 2018 to take a 51 percent operating stake in the unit. Spanish major Repsol holds a 49 percent interest in the Pikka Unit and its Nanushuk oil project.
As recently as October the company was working to move up its initial production target on the nearly $5 billion project roughly a year from late 2023 to 2022. Oil Search received its record of decision on the Nanushuk project from the U.S. Army Corps of Engineers last spring.
Once fully developed, its expected the Pikka Unit will produce upwards of 120,000 barrels of oil per day at its peak.
Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected].