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ConocoPhillips outlines 10-year plan, reduces 2021 capex 4% to $5.3 billion

Highlights

Will grow production roughly 3%/year over a decade

Capital spend to average $7 billion/year, higher than in 2021

Capex for 2021 reduced $200 million on efficient operations

Nearly six months after closing its acquisition of Permian Basin operator Concho Resources, ConocoPhillips June 30 set out an ambitious 10-year operating plan June 30 that aims to grow oil production about 3%/year and deliver superior returns at an average breakeven cost slightly under $30/b.

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The company plans to achieve that with capital spending of roughly $7 billion/year – more than its 2021 capital spending program, which it also reduced June 30 by $200 million to $5.3 billion owing to stronger-than-expected operational efficiencies.

ConocoPhillips, like most of industry, is not focused on production growth, but returns, its CEO Ryan Lance said during the company's annual market update presentation which was webcast.

Annual growth in production, which in Q1 2021 pro forma was just shy of 1.5 million boe/d and should be roughly 2 million boe/d by 2031 – is an outcome of a number of combined important financial metrics, Lance said.

"It's not only about how we allocate capital at the asset level, but about returning [cash] to shareholders and advancing the return on capital we're getting," he said. "We balance all those things."

Moreover, following ConocoPhillips' $9.7 billion acquisition of Concho in January 2021, cost savings and synergies of $1 billion/year are expected from the deal – double the amount targeted when the transaction was announced in late 2020, Lance said.

And at the same time, the company has increased its planned 2021 return of capital to shareholders by an additional $1 billion of share buybacks, for a total of about $6 billion, or roughly 8%, of its current market cap.

Returns grow 1%-2%/year

Moreover, returns on capital under the decade-long 2022-2031 plan are estimated to grow 1%-2%/year, company executives said.

The long-term vision assumes an oil price of $50/b WTI and a average 50% reinvestment rate. That compares to oil and gas industry reinvestment that at one time exceeded 100%/year, but has dropped as E&P operators have become more efficient and no longer chase output – a consequence of several recent boom-and-bust cycles that resulted in volatile commodity prices.

ConocoPhillips has what Lance called a "triple mandate" – meeting demand on any energy transition scenario via disciplined capital spending, delivering "compelling" returns both on and of capital and achieving net-zero emissions goals.

Those include net zero flaring and 10% lower methane intensity by 2025, reduced greenhouse gas intensity 35%-40% by 2035 and net zero emissions by 2050.

During the company's annual meeting in May, a shareholder proposal was approved to reduce Scope 3 emissions – long-range targets for products for direct consumer end-use. ExxonMobil and Chevron shareholders also approved similar proposals at their respective annual meetings.

But Scope 3 doesn't apply to ConocoPhillips since it is an upstream operator, Dominic Macklon, senior vice president of strategy and technology, said.

ConocoPhillips has long believed that if all operators reduced Scope 1 and 2 emissions, "Scope 3 would also be addressed," Macklon said.

"We acknowledge majority support for [the] advisory shareholder proposal that included a Scope 3 target. In the coming months, we'll be engaging further with our shareholders for alignment around our climate and energy transition plans and related targets," he said.

ConocoPhillips has over 100 identified emission reduction projects, about half of which generate an economic return, and the other half have the potential to do so over time, Macklon said. About $80 million of capital is allocated to that activity in 2021.

Low-carbon technology unit

He added ConocoPhillips has formed a low-carbon technology organization charged with identifying global emissions reduction initiatives and potentially developing energy transition opportunities that could include carbon capture use and storage, and blue and green hydrogen.

Operationally, the company runs a tight ship dedicated to pushing down its cost of supply and sharpening efficiencies throughout its arenas. For example, its Alaska and international unit has a breakeven price averaging below $25/b WTI.

Total segment production is projected to remain flat at about 770,000 boe/d over 10 years from global operations that include Alaska, Norway, Asia, Canada, and LNG businesses in Qatar and Australia, Nick Olds, senior vice president-global operations, said.

In the Permian Basin of West Texas/New Mexico, the Concho acquisition is paying off as current drilling days are down 30%, hydraulic fracking "stages" per day (intervals between fracks) are up 30% and operating costs are down 15%, all since 2019, Tim Leach, ConocoPhillips' executive vice president-Lower 48 and former Concho CEO, said.

Improvements stem from technology and applied technical learnings of the combined operators, increasing efficiencies and predictability, Leach said.

Moreover, in the Eagle Ford Shale of South Texas, ConocoPhillips – the second-largest producer in that basin with 187,000 boe/d and industry's second-highest ultimate recoveries of oil and gas per well -former – just brought on its milestone 1,500th well in the play.

Production from its "big four" unconventional plays, including the Bakken Shale in North Dakota/Montana and two separate Permian plays in the Delaware and Midland sub-basins, are expected to total around 800,000 boe/d in 2022 but rise to upwards of 1.2 million boe/d by 2031, a presentation slide showed. Q1 2021 production totaled 715,000 boe/d from the Lower 48.

In addition, further upside opportunities exist from commercial opportunities not included in the 10-year plan, for products previously produced by Concho, Leach said.

"Heritage ConocoPhillips assets have often seen a sales premium on Delaware [basin] production of up to $1/boe ... versus heritage Concho netbacks" from access to diverse markets that include Gulf Coast for oil and West Coast for gas, Leach said.

"This advantage can now be applied to the much bigger post-Concho position," he said. "We're just getting started on looking for uplift opportunities from improved contract terms and optimizing commercial offtake options."