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Sunday, April 23, 2006

Memo To Alaskans: Don't Worry, ConocoPhillips Won't Leave.

Sky high oil prices spell continued record profits for the Multinational Oil Companies that control the American Market. Awash in all of this cash, ConocoPhillips is nevertheless, in full pitch battle with the legislature of the State of Alaska fighting an increase in production taxes ob Alaska's oil field. COP (as it is called by Wall Street) is taking out full page ads whining and writhing in public pain over the few percentage increase in tax revenues from productive wells. Oh the weeping, Oh the wailing, Oh the gnashing of teeth. Prominant Alaskan supplicants are trotted out on the editorial pages of the state newspapers, echoing COP's talking points. Recently, however, the ultimate threat was made before a Fairbanks, Alaska audience by COP representatives. They just might, they said, leave Alaska for other, more profitable opportunities in the world.

My reaction: GO! SCRAM! GET THE HELL OUT! Don't let the screen door hit you in the ass, etc.

There are plenty of partners who would gladly assume a development partnership with Alaska. But...of course...ConocoPhillips has NO intention of leaving Alaska.

I have reviewed the April, 2006 10K filing for ConocoPhillips. There is nothing in the 10K report that indicates departure from Alaska would make any economic sense. Quite the contrary. As of December 31, 2005, the Exploration and Production segment of ConocoPhillips (COP) represents 57 percent of the company's assets and contributes 62 percent of net income. This segment excludes LUKOIL, COP's Russian holdings, which is organized into a separate segment. Alaskan holdings are a significant portion of the E&P segment. E & P is roughly 1.5 Million barrels per day (bpd) divided between Foreign (910,000 bpd) and Domestic (633,000 bpd) with nearly half the Domestic production coming from Alaska.
More interesting, from Alaska's point-of-view, is ConocoPhillip's tolerance for a strong state partnership outside the United States.

The following comes from COP's current 10-K:
Petrozuata and Hamaca
Petrozuata is a Venezuelan Corporation formed under an Association Agreement between a wholly owned subsidiary of ConocoPhillips that has a 50.1 percent non-controlling equity interest and a subsidiary of Petroleos de Venezuela S.A. (PDVSA), the national oil company of Venezuela.

The project is an integrated operation that produces heavy crude oil from reserves in the Orinoco Oil Belt, transports it to the Jose industrial complex on the north coast of Venezuela, and upgrades it into heavy, processed crude oil and light, processed crude oil. Associated products produced are liquefied petroleum gas, sulfur, petroleum coke and heavy gas oil. The processed crude oil produced by Petrozuata is used as a feedstock for our Lake Charles, Louisiana, refinery, as well as the Cardon refinery operated by PDVSA in Venezuela. Our net production was 50,200 barrels of heavy crude oil per day in 2005, compared with 59,600 barrels per day in 2004, and is included in equity affiliate production.

The Hamaca project also involves the development of heavy-oil reserves from the Orinoco Oil Belt. We own a 40 percent interest in the Hamaca project, which is operated by Petrolera Ameriven on behalf of the owners. The other participants in Hamaca are PDVSA and Chevron Corporation, each owning 30 percent. Our interest is held through a joint limited liability company, Hamaca Holding LLC, for which we use the equity method of accounting. Net production averaged 56,100 barrels per day of heavy crude oil in 2005, compared with 32,600 barrels per day in 2004, and is included in equity affiliate production.

Construction of the heavy-oil upgrader, pipelines and associated production facilities for the Hamaca project at the Jose industrial complex began in 2000. In the fourth quarter of 2004, we began producing on-specification medium-grade crude oil for export at the planned ramp-up capacity of the plant.

Gulf of Paria
In March 2005, a development plan addendum for Phase I of the Corocoro field in the Gulf of Paria was approved by the Venezuelan government. This addendum addressed revisions to the original development plan approved in 2003. The wellhead platform was installed in late 2005, and the drilling program is expected to begin in the second quarter of 2006. First production from the central processing facility is targeted for 2008, with the possibility of production from an interim processing facility in 2007. We operate the field with a 32.2 percent interest.

Plataforma Deltana Block 2
We have a 40 percent interest in Plataforma Deltana Block 2. The block is operated by our co-venturer and holds a gas discovery made by PDVSA in 1983. Two appraisal wells were completed in 2004, and a third was completed in January 2005. All appraisal wells indicated that the target zones were natural gas bearing. In addition, a new natural gas/condensate discovery was made in a deeper zone. Development of the field may include a well platform, a 170-mile pipeline to shore, and an LNG plant. PDVSA has the option to enter the project with a 35 percent interest, which would proportionately reduce our interest in the project to 26 percent.

It seems clear to me that ConocoPhillips appears to work well with a significantly reduced equity and the strongly managed regulatory environment of the Chavez regime. I think that is fine. I wish Venezuela well. But I also think that the whining and foot-stamping by COP's Alaska Representatives is both disingenuous and insulting to the owners of "Big Dipper Oil"

On another point:
The Alpine expansion being developed by the field's owners, ConocoPhillips (COP.N) and Anadarko Petroleum (APC.N) is significant. They envision commercialization of five discoveries within a 20-mile radius of Alpine, a field that holds 430 million recoverable barrels.
There is no foreseeable reduction in the average price of oil below $50 a barrel. Given the volatility of supply and global market competition for oil from China and India, the average price of oil could range upward to $75 a barrel by 2010. That means that the value of the Alpine fields over the next 20 years will range from $21.5 Billion to $32.3 Billion to COP-APC.
That is hardly the profile of a company willing to leave Alaska.

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