ConocoPhillips Negotiating for Larger Share of Duke Energy Field Services

ConocoPhillips is negotiating to increase its share of Duke Energy Field Services to 50%, DEFS Chairman Jim Mogg said during an investors' conference call Friday.

Mogg said he was not involved in the negotiations, but "I don't think it's any secret, and I don't know if it will be successful." Currently ConocoPhillips owns 30.1% of the joint venture and ConocoPhillips owns 69.7%. The venture was put together with midstream assets from Phillips and Duke in late 1999 and the transaction was completed in April 2000, before the ConocoPhillips merger.

Now ConocoPhillips has some gathering and processing assets it could add to the mix in exchange for an increased ownership share. Mogg responded to questioning that he believed the discussion was ranging from a half billion to a billion dollar transaction.

"They're debating value and governance." Mogg said he expected the negotiations would either succeed or fail within the next 90 days.

Looking at the market for 2003, Mogg said he was "bullish about gas demand in North America and the ability of producers to find it." While the rig count is going up, he's not looking for a material change in gas volumes until near the end of the year or early next year. As it stands, gas plant inlet volumes are down 5%. And while the rig count at 776 is 136 over last year at this time, it will take time for production to catch up.

"Producers are being more disciplined this time," Mogg said, "They're making sure the price is not going back under $3 as they return to the gas patch." He noted that producers had rushed into extra drilling as prices rose in 2000, only to see them come crashing down again. The first quarter 2001 gas price of $2.32 "is too low for finding gas in North America. I don't think it takes $5, but $2.32 doesn't do it." He speculated the price that will propel producers and keep end users on board is somewhere between $3.50 and $4.00/MMBtu.

Questioned as to why, as prices went up last year, drilling didn't also rise, Mogg said that producers's perception through most of the year was that prices would go down again, the same way they did in 2001. He also noted that the industry had come out of the 2001-2002 winter with very high volumes in storage, which producers believed would keep prices low.

Mogg said DEFS was positioned to take advantage of an upswing. "We have the most geographic diversity, the most critical mass and we're in all right places." Plus, the correlation between natural gas liquids and crude oil has returned to historical norms. In the first quarter of 2002 NGLs were only about 60% of crude, while in January and February of this year they were at 72% of crude.

In March they have risen to 73%, but the problem here has been the high natural gas prices which led to a negative frac spread of $2.12 at the beginning of the month. DEFS turned it around to a positive $1.14 through ethane rejection, going to fee-based payments with producers on keep whole contracts, and buying and selling PBR to manage the frac spread.

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