The upcoming winter of 2020-21 on Alaska’s North Slope could be the first exploration season since 1973 with no new wells drilled. The only company that is possibly prepared to drill during the off-road season - meaning it has rigs under contract, available camps, easy access to funding, and the necessary permits - is ConocoPhillips. The company drilled three of its planned six to seven exploration wells last winter before it cut the season short because of concerns about COVID-19.
As first reported by Petroleum News’ bulletin service, in July ConocoPhillips is restoring the North Slope oil production it curtailed in June (approximately 100,000 barrels a day), but the company has no plans through the end of 2020 to restart development drilling in its Alaska oil fields or initiate exploration drilling. (Exploration drilling activities, such as building ice roads, often begin in December.)
When asked whether ConocoPhillips will restart development drilling and drill exploration wells this coming winter on the North Slope, John Roper, director of media relations and crisis communications for ConocoPhillips out of Houston, said “the capital reductions we announced in March and April assumed we don’t resume drilling activity at our North Slope operations for the remainder of 2020. We haven’t yet set our capital plans for 2021.”
Those plans “will depend on our outlook for prices and, specifically in Alaska, the outcome of the tax initiative," Roper said.
This last comment came as no surprise since Scott Jepsen, ConocoPhillips Alaska’s vice president of external affairs and transportation, said May 8 that while the company’s goal is to “weather the storm” and get North Slope jobs and production back online, getting back to a normal level of activity in Alaska is partly dependent on the investment climate, “and by that, I mean on whether or not the oil tax initiative passes,” noting it calls for “a significant tax increase” which “will put a brake on future investment.”
Above-ground risk in Alaska
PN’s questions to Roper were triggered by a June 4 CERA Week interview/discussion between Daniel Yergin, vice chairman of IHS Markit, and Ryan Lance, ConocoPhillips chairman and CEO.
“We’ve got about a third of our production shut-in as a company - 400,000 barrels a day. But we see some strengthening in the market so we are in the process of thinking about under what circumstances should we start coming back into the market and then start selling our product,” Lance told Yergin.
Roper was not asked for, nor did he offer, information about ConocoPhillips’ resumption of Lower 48 production, where the company has been a shale producer for about 10 years.
When asked by Yergin about the new potential in Alaska, Lance talked about the company’s big North Slope Narwhal and Willow oil discoveries. Those “new petroleum systems” offered Alaska the opportunity to “stabilize production going through TAPS,” the trans-Alaska pipeline system.
“We see a lot of opportunity in Alaska, Lance said, noting ConocoPhillips “took some of our partners out” and now “own a 100% position.”
But if the new tax initiative passes, it increases the “above-ground risk.” The North Slope is already a “high cost area,” he said.
And although ConocoPhillips has operated in Alaska for "a long time … if the tax rate goes up, cash flows go down and we have to manage in a rational environment,” Lance said.
ConocoPhillips’ strategy
ConocoPhillips revised its corporate strategy four years ago in 2016 after the oil price downturn that began in 2014.
“We basically said you’ve got to give a fair amount back to the shareholder - in our case it’s greater than 30% of our cash. … But more importantly grow our company on 70% of the cash,” Lance said.
Growing modestly with “a real hyper-focus on cost, low cost of supply” and generating competitive returns is critical, he said.
“The world needs to transition to lower carbon fuels over time. But even then, there’s space for oil and gas because it’s so important for cheap reliable energy in all four corners of the world,” Lance said, adding that against that backdrop, it’s a “rational decision to say, ‘you need to keep the shareholder.’”
