Sunday, October 28, 2012

CD-5 is alive; Conoco sanctions Alpine West; now needs partner approval; first oil by 2016

Eric Lidji
For Petroleum News

After years of permitting delays, ConocoPhillips Co. is moving ahead on CD-5, the fourth satellite of its Alpine field on the North Slope, the company announced Oct. 25.

The ConocoPhillips board sanctioned the project in October, Executive Vice President Exploration and Production Matt Fox said during a third quarter earnings call. “The project is now pending partner approval, which is expected in November,” Fox said.

ConocoPhillips expects CD-5 production to begin in 2016, Fox said. The company previously estimated construction would begin in 2014 with first oil in late 2015.

After bringing the Alpine field at the Colville River unit into production in 2000, ConocoPhillips and its partner Anadarko brought three Alpine satellites online over the following decade: Fiord in August 2006, Nanuq in December 2006 and Qannik in 2008.

Also known as Alpine West, the CD-5 satellite would be the first development in the National Petroleum Reserve-Alaska, located just across the Colville River from Alpine.

The plans for how best to cross the river caused major delays.

In 2005, ConocoPhillips applied for a permit to build a utility bridge across the Nigliq Channel of the Colville, but withdrew the application in early 2008 after officials in Nuiqsut and the North Slope Borough questioned the proposed location of the bridge.

Once the parties agreed on a new location, ConocoPhillips resubmitted its application in 2009, but the U.S. Army Corps of Engineers denied the permit in early 2010, suggesting that ConocoPhillips use horizontal directional drilling to go under the Nigliq Channel.

Backed by state and congressional leaders, ConocoPhillips appealed the ruling. In late 2011 the Corps approved the bridge “with special conditions to ensure that all appropriate and practicable steps to minimize potential adverse impacts to the aquatic ecosystem have been taken, and to ensure the project would not be contrary to the public interest.”

Earnings up over 2011

ConocoPhillips Co. reported net earnings of $535 million from its Alaska operations in the third quarter, up 6.5 percent year-over-year but down 3 percent quarter-over-quarter.

With its effective tax rate down year-over-year, Alaska’s largest producer saw its earnings increase over last year despite declining production, steady or falling commodity prices and increased spending. However, ConocoPhillips notes it is currently paying more than twice as much in state and federal taxes in Alaska as it earns from operations in the state.

Therefore, the quarterly figures are likely to re-ignite a long-running debate about the competitiveness of the Alaska fiscal regime compared to other oil-producing regions. The Alaska Legislature has been tangling over revisions to that system for years and is almost certain to keep tangling over them again when it convenes its regular session in January.

“We hope that the 2013 state legislature will enact meaningful severance tax reform to attract more capital investment in key legacy fields,” Bob Heinrich, vice president of finance for ConocoPhillips Alaska, said in a prepared statement. “It will take more investment than we see today to stem the North Slope’s continuing decline.”

Companywide, ConocoPhillips earned nearly $1.8 billion in the third quarter, down considerably from nearly $2.6 billion earned during the same period last year.

Before income taxes, ConocoPhillips earned $820 million from its Alaska operations in the third quarter, up 4 percent from $789 million earned during the same period last year.

Those revenues place Alaska fourth in the ConocoPhillips upstream portfolio, following the Asia Pacific and Middle East ($1.1 billion), other international projects ($963 million) and Europe ($962 million). But Alaska brought in more than the Lower 48 and Latin America ($250 million), and Canada (which posted a $39 million loss in the quarter).

After taxes, the $535 million in adjusted earning ConocoPhillips reported for Alaska during the third quarter placed the state second only to the Asia Pacific and Middle East segment ($802 million). ConocoPhillips reported adjusted earnings of $145 million from its Lower 48 operations and reported a $31 million loss from its operations in Canada.

The Alaska unit said “inventory sales” added some $120 million in earnings this quarter.

The tax burden

Taxation provides another point of comparison.

ConocoPhillips paid some $917 million in taxes and royalties to Alaska and the federal governments during the third quarter, including $651 million for “severance taxes, royalties, property taxes and state income tax” in Alaska, according to the company.

Those payments are down $332 million from the second quarter, a drop ConocoPhillips attributed to a production decline of 39,000 barrels of oil equivalent quarter-to-quarter.

Comparing this year to last year, ConocoPhillips paid an effective income tax rate of 34.8 percent in Alaska in the third quarter, compared to a 36.3 percent tax rate during the same period in 2011. Including non-income taxes, ConocoPhillips paid a 56.7 percent tax rate in Alaska in the third quarter compared to 64.4 percent during the same period last year.

ConocoPhillips points to the difference between its earnings and its obligations in Alaska.

While the company has paid $3.7 billion in state and federal obligations on its operations in Alaska through the first nine months of the year — including $2.8 billion in state taxes and royalties — it has earned only $1.7 billion in profits, according to the company.

In 2011, ConocoPhillips paid $5 billion in state and federal taxes on its Alaska operations — including $4.1 billion in state taxes and royalties — and earned $2 billion in profits.

Companywide, ConocoPhillips reported a 51.8 percent effective income tax rate in the third quarter, down from 58.5 percent during the same period last year. In Europe, ConocoPhillips paid an 86.3 percent tax rate during the quarter. In the Lower 48 and Latin America, the company paid a 26.9 percent and in Canada it paid 19.2 percent.

Increased spending

The rising profits and falling tax rate came as ConocoPhillips increased spending in Alaska, reporting a $208 million capital program for the third quarter, up from $194 million in the third quarter of 2011 and $202 million in the second quarter of 2011.

The spending in Alaska, though, is the smallest for any ConocoPhillips business unit. Of its nearly $3.7 billion capital program for the quarter, ConocoPhillips spent $1.3 billion in the Lower 48 and Latin America, $738 million in Europe and $493 million in Canada.

ConocoPhillips’ quarterly depreciation, depletion and amortization expenses in Alaska fell to $117 million from the third quarter of this year, down from $134 million during the same period last year and down from $133 million during the second quarter of 2012.

Declining production

The financial figures mask increased production declines. ConocoPhillips produced some 176,000 barrels of oil equivalent per day in Alaska during the third quarter, down some 32,000 barrels of oil equivalent per day from the same period last year. This 15 percent year-over-year drop reflects “normal field decline and increased turnaround activity in the current quarter,” according to the company.

The declines hit all products. Crude oil production fell 16 percent year-over-year to 157,000 barrels per day, while natural gas liquids production fell 17 percent to 10,000 barrels per day and natural gas production fell 9 percent to 51 million cubic feet per day.

As Alaska production falls it also continues to lag behind other units. During the third quarter, ConocoPhillips produced 462,000 boe per day in the Lower 48 (up 6 percent year over year) and 197,000 boe per day in Canada (down nearly 3 percent year over year).

In the Lower 48, ConocoPhillips produced 124,000 barrels per day of crude oil during the quarter, up from 95,000 barrels per day last year, an increase credited to the ramp up of activities in the Bakken play of North Dakota and the Eagle Ford play of south Texas.

Commodity prices dropped as well.

ConocoPhillips reported an average realized price of $106.53 per barrel for Alaska liquids in the third quarter, down from $107.26 during the third quarter of 2011. Over the same period, Alaska natural gas prices fell to $3.97 per thousand cubic feet from $5.04.

In the Lower 48, ConocoPhillips reported an average realized price of $90.06 per barrel for oil, $31.40 per barrel for natural gas liquids and $2.64 per mcf for natural gas.

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