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ConocoPhillips Shuts In More Gas

ConocoPhillips, which early this year curtailed about 100 MMcf/d of domestic natural gas, continues to shut in "around 9,000 boe/d" in North America's onshore because of low gas prices and more may be curtailed following further evaluation, CFO Jeffrey Sheets said last week. Encana Corp. also said last week it was curtailing more onshore gas (see related story).

Sheets, who talked with financial analysts about the company's operational and financial performance in 1Q2012 during a conference call, said the curtailed gas volumes would vary "from place to place" in the United States and Canada. As he had said in late January, the gas production reductions are to occur only in places where ConocoPhillips manages the operations or where partners also agree to the shut ins (see NGI, Jan. 30).

"Probably two-thirds to 70%" of ConocoPhillips' U.S. and Canadian gas output economics "are driven by liquids prices," said Sheets. "So...there's no real reason for shutting in. Gas production still has strong economics. Of the 30% to one-third that's left of that, we operate about one-half of that production. Generally, our partners have not wanted to shut in production," and "we'll continue to monitor the balance of what we operate. That isn't where there is more dry gas for potential additional shut-ins. But right now, we wouldn't expect to be remarkably different than what we saw in the first quarter."

ConocoPhillips, which is to become a pure exploration and production (E&P) company on Tuesday when the refining unit splits off as Phillips 66, sees many growth opportunities in North America's Eagle Ford, Bakken, Permian and oilsands plays "Our unconventional plays have contributed 85,000 boe/d, compared to one year ago," Sheets said of the upstream company's quarterly performance.

In the first three months of this year, the E&P results "benefited from strong crude prices," but their strength was offset not only by weak North American gas markets, but also by weaker than expected natural gas liquids (NGL) prices." Henry Hub gas prices averaged $2.72/MMBtu in 1Q2012, down 34% from the year-ago period.

"We produced around 110,000 b/d of NGLs in North America in the first quarter, and margins on this production were impacted by the fact that NGL prices did not move up as crude prices moved up," said Sheets. "In addition, our first quarter results were adversely impacted by about $85 million after-tax from differences between production and sales volumes and some other timing impacts. So year-over-year, these timing impacts and the weakness in natural gas and the relative weakness of NGLs and bitumen prices, along with some higher taxes, kept per-barrel margins flat with the same quarter one year ago."

"Although we saw this disconnect between NGL and bitumen prices and crude prices in the recent quarter, this doesn't change our long-term view about our ability to grow cash margins as we shift the capital toward higher margin production...We expect cash margins to grow 3-5% per year over the next five years in a flat price environment."

"At Eagle Ford, we expect to maintain a 16-rig average and drill about 180 wells in 2012. First quarter production averaged 54,000 boe/d, and current production capacity is around 60,000. It will be our priority to stay ahead of condensate to takeaway capacity to reduce any further curtailments. And system constraints are now primarily related to gas takeaway capacity and construction in some other infrastructure."

In the Permian Basin and Bakken Shale, ConocoPhillips is running a total of 13 rigs -- five more than at this time a year ago, and the company expects to average 16 rigs in the two plays this year. In the first three months of this year output in the Permian averaged 51,000 boe/d, while in the Bakken production averaged 24,000 boe/d.

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