Saturday, April 28, 2012

Production bump probably result of 2011 TAPS shutdown; prices drive profitability

Eric Lidji
For Petroleum News

ConocoPhillips earned $616 million in Alaska in the first quarter of the year, as a rare combination of rising oil prices and production bumped profits 12 percent year over year.

The unusual uptick in Alaska oil production volumes, though, is caused in part by a four-day shutdown of the trans-Alaska oil pipeline in January 2011 and not necessarily increasing activity this year. And the slight bump comes as ConocoPhillips is rapidly increasing its liquids output from the Lower 48, particularly from unconventional plays.

The largest operator in Alaska produced 226,000 barrels of oil and natural gas liquids per day in the state in the first three months of the year, up 5 percent from 214,000 bpd in the first quarter of 2011 and down slightly from 227,000 bpd in the fourth quarter of 2011.

By comparison, ConocoPhillips produced 201,000 bpd of liquids from its Lower 48 portfolio, up 34 percent year over year and 8 percent quarter over quarter, where the company operates in the Eagle Ford, Bakken and Permian resource plays.

For natural gas, ConocoPhillips produced 59 million cubic feet per day in Alaska in the first quarter, down 12 percent year over year. The company produced 1.5 billion cubic feet per day in the Lower 48, down slightly year over year and quarter over quarter.

ConocoPhillips said second quarter production would be down between 50,000 and 60,000 barrels of oil equivalent per day, companywide, because of maintenance work in Alaska, as well as in Australia, the United Kingdom and two projects in Canada.

When asked by Citigroup Inc. analyst Faisel Khan why the quarterly earnings for Alaska were higher than usual, Chief Financial Officer Jeff Sheets mentioned “a bit of a pricing lag on some of the crude” that can impact quarterly comparisons “in a rising market.” On two occasions, Sheets pointed to the fiscal system in Alaska, specifically pointing out that Alaska has “a pretty progressive tax regime at the current price environments.”

ConocoPhillips and other companies want the state to change its tax code.

Alaska price premium

While Lower 48 production is gaining on Alaska, Alaska remains the more profitable play for now, largely because of a major pricing disparity between the two regions.

Although ConocoPhillips produced only slightly lower liquids volumes and far higher natural gas volumes in the Lower 48 than in Alaska during the quarter, the company earned only $254 million from the Lower 48, compared to $616 million in Alaska.

That’s because ConocoPhillips realized an average sales price of $112.20 per barrel for Alaska crude oil but only earned $76.40 per barrel for Lower 48 crude during the quarter.

Additionally, ConocoPhillips reported an average price of $4.68 per thousand cubic feet for Alaska natural gas compared to $2.65 per mcf for its Lower 48 volumes. While Alaska natural gas is traded on long-term contracts in a relatively tight market, Lower 48 prices are highly liquid and being kept down by a surplus of supply from shale plays.

In a sign of the times, ConocoPhillips did not post any sales from its liquefied natural gas export facility in Kenai, perhaps for the first time in the nearly 45-year history of the pioneering plant. ConocoPhillips announced plans in early 2011 to mothball the plant because it couldn’t secure contracts overseas, but a series of unexpected events allowed the company to continue making shipments to Japan and China throughout the year.

During the quarter, ConocoPhillips also reported $9 million in exploration expenses and $135 million in depletion, depreciation and amortization expenses in Alaska.

Companywide $2.9B in earnings

Companywide, ConocoPhillips earned $2.9 billion during the quarter, down from $3 billion in the first quarter of last year. The company produced 1.64 million barrels of oil equivalent per day worldwide during the quarter, its last as an integrated company.

Going forward, ConocoPhillips will become one of the largest independent exploration and production companies in the world and Phillips 66 will become a downstream company managing refining and marketing, midstream and chemicals operations.

ConocoPhillips said the Arctic, particularly Greenland, the Chukchi Sea in Alaska and the Barents Sea in Norway would continue to remain a focus for the upstream player.