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ConocoPhillips bets on US shale for growth

ConocoPhillips is looking to US shale oil for growth during a period of low and volatile oil prices, bucking an industry trend that has seen many cut their exposure to the US shale patch

“We’re planning on lower more volatile prices over the next three years, but we think we have a way to win in that environment” Ryan Lance, ConocoPhillips’ chief executive, told analysts. 

Like most in the industry, ConocoPhillips is cutting spending sharply. It will reduce capital expenditure (capex) by around 30% from a planned $16 billion dollars a year to around $11.5 billion a year from 2015 to 2017. The company expects savings of around $1 billion a year from lower oilfield service costs, wage freezes, and reduced staff to help cushion the blow. But spending is being slashed across its portfolio, including US shale, Canadian oil sands, Australian liquefied natural gas (LNG) and frontier exploration.

Within this smaller portfolio, however, US shale will play an increasingly prominent role as the company shifts the focus of its spending away from Canadian oil sands and Australian LNG towards US tight oil. This year, ConocoPhillips will spend around $2.2 billion on shale development, around 20% of its capital budget. But by 2017 that will rise to around $4.5 billion, around 40% of the budget. 

The company says the focus on US shale will allow it to increase production by around 2% to 3%, from around 1.5 million barrels of oil equivalent per day (boe/d) to around 1.7 million boe/d, in spite of the lower spending levels. However, the company says it will focus on profitability over production growth and likes US shale because it provides a unique level of flexibility in the industry to adjust to changes in the oil price. “We are not going to chase growth just for growth’s sake,” Lance said.

Unlike the sort of large-scale deep-water and LNG projects that the majors have focused on in recent years that require high levels of of sustained spending, the nature of US shale projects means drilling can quickly be ramped up or scaled back in response to oil price movements. It is an attractive model for companies worried about low and volatile oil prices. 

“An important thing about this is that we can adjust the pace [of development] if we need to depending on the macro environment that we find ourselves in,” said Matt Fox, a senior executive at the company. If oil prices fall again, the company reckons it can respond by scaling back shale activity and keeping production flat with a budget around $9 billion. Conversely, development could quickly be ramped up if oil prices recover in the coming months.

US shale’s flexibility has been in evidence recently as the industry’s landscape has quickly been re-shaped in response to low oil prices. Companies have retreated to drilling only in their most productive acreage in the core of the US’ largest shale plays such as the Bakken and Eagle Ford. In just six months, the oil-directed rig count has fallen by around half in response to falling oil prices. Other companies have reduced spending by drilling wells but delaying the more expensive fracking and completion activities until prices recover. The US Energy Information Administration analysis has that US tight oil production growth has quickly come to a halt after several years of torrid growth. However, all indications are that supply would respond just as quickly to a rise in the oil price.

ConocoPhillips, for its part, plans to focus on the Eagle Ford, where it holds a large position, and to a lesser extent the Bakken and Permian basins. In the Eagle Ford, the company plans to increase its rig count from around seven in 2015 to around 12 by 2017, and plans to increase Eagle Ford production from about 150,000 boe/d in 2015 to around 225,000 boe/d by 2017. The company says that its breakeven in the Eagle Ford is around $40 per barrel, making it an attractive prospect even at today’s oil price of around $50/b. 

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