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Anadarko Turns Focus to Low-Risk Shale, GOM Deepwater

With the "right kind of prices, the right kind of drilling," natural gas shale could be the "long-dated fuel" for North America, Anadarko Petroleum CEO Jim Hackett said Tuesday. "But people shouldn't get stars in their eyes without gas prices getting back pretty high," he said at the company's annual investor conference.

Hackett and his management team shared their outlook and the opportunities awaiting The Woodlands, TX-based independent in a half-day get-together. In response to low gas prices and the faltering economy, Anadarko earlier this year cut its domestic rig count in half and trimmed its production plans (see Daily GPI, Feb. 12).

However, the company is well stocked with oil and gas sites around the world. Prospects for its vast holdings in the deepwater Gulf of Mexico (GOM) appear limitless, and this year Anadarko plans to drill 12 exploration wells. Three low-risk onshore shale plays -- the Marcellus, Eagleford and Haynesville -- also will move to development stage, Hackett said. Hopes are high for solid drilling returns, but Anadarko isn't counting on a big payback from the shale assets any time soon.

"I don't think gas shales have forever changed the market," Hackett said. "What we've seen is a reaction to what we need to have to continue to drill some in this country. But companies won't spend like they spent before. And that's driving costs down...there's less drilling. Supplies will drop, and we'll see them drop quickly, and then it will be back to drilling, but it's got to be economic drilling. But if we're just swapping spit on the returns, no one wants to do that in this industry. Some may, but we're not driven that way. We'd rather save our capital."

Anadarko plans to methodically develop some of its onshore shale acreage this year. It has 675,000 acres (gross) in the Pennsylvania fairway of the Marcellus Shale, with 30 Tcf of risked resource potential. In the Eagleford Shale and the adjacent Pearsall acreage in South Texas, the company has around 345,000 acres (gross), with 6 Tcf of potential. It also has 80,000 acres (net) in a legacy position in the Cotton Valley of East Texas, which extends into the Haynesville Shale.

Because of what it is learning from other producers, Anadarko's chief thinks the company will be able to develop its shale assets at a lower cost and at a lower risk than some of its other prospects. However, the CEO doesn't expect to see as big a return from the plays as some in the industry believe.

If onshore producers hadn't reduced their capital expenditures (capex) this year, the U.S. gas prices might be even lower, he said. And he thinks there are more hurdles ahead.

"It's our view that LNG [liquefied natural gas] is really the wildcard here," said Hackett. "I always felt that way, even when some last summer were all about the shales...When people were talking up the Haynesville, I said then that people were going to regret it...This was the first time in decades that we'd grown natural gas, and we did it for all of about 14 months...and we see where it's gotten us now."

He reminded the audience that producers weren't interested in pursuing gas shale development until gas prices moved higher. "In the Haynesville Shale they said it wouldn't work without $9/Mcf gas, and now they say it will work at $5, right? Well, the good news is, it's a great domestic resource base in our country that provides us with energy security...

"A group of us, as an industry group, we think natural gas is the best answer as a bridging fuel," Hackett said. The American Natural Gas Alliance, which includes Chesapeake Energy Corp., Devon Energy Corp. and Newfield Exploration Co., was announced last month to improve the public's perception of domestic gas supplies (see Daily GPI, Feb. 26). The group is expected to unveil more detailed plans later this month. Hackett said the industry group wants to ensure that natural gas is seen as the bridging fuel.

"Politicians don't seem to want coal, they don't seem to want nuclear, and that may be right, but that's purely political," said Hackett. "If that's the case, and we don't want to wait 20 years for science to lead us somewhere, then we've got to have natural gas as the answer."

Some industry players have "overemphasized that [U.S.] gas could grow to the moon, but the infrastructure was always underestimated," said Hackett. "Then prices dropped, and people cut back. The only thing left to wrestle with is LNG along with the extra production that will come in 2011 and 2012...We'll have additional supplies, and at the right price, with additional markets, we may see a balance...But we'll wait to see what's brought onstream versus what's demanded..."

Anadarko "has got so much upside organically today" that it won't have to dip into its capex for new assets to build production, said the CEO. Still, he said buying a choice asset or bolt-on acquisition is a possibility. "In the long term, we will definitely keep it as one of the arrows in the quiver."

The company's capex this year is set at $4-4.5 billion, which is down from the $4.88 billion spent in 2008. In the past year Anadarko has added 1 billion boe of net risk captured resources. This year most of the capex is earmarked for the Lower 48 states and in the deepwater GOM, where Anadarko expects to drill 12 deepwater exploration wells this year, "each targeting 100-plus million boe," Hackett said.

Total capex spending will be "prudent" in 2009, and Anadarko's managers are attempting to ferret out only the "best drilling prospects and the best returns," said the CEO. U.S. onshore drilling will be focused on lower-risk, lower-cost endeavors.

Hackett took a few minutes to take issue with some of the Obama administration's plans for the energy sector. Among other things, he criticized plans by Department of Interior Secretary Ken Salazar, who plans to forward a royalty reform package to Congress that resets the royalty rates for oil and gas produced on public lands (see Daily GPI, March 9).

"It's unfortunate that [the Obama] administration had a great opportunity to help consumers with efficiency and energy proposals, and instead they submitted proposals that are very constituent-specific," Hackett said. "This disappoints me as a citizen. They actually have a program that penalizes us, and it's a bad policy at this particular time...

"I have confidence that as we start speaking about these issues, as people start judging these issues, that the representatives in the oil and gas states, the congressmen in those states, will make the legislation very different from what is now proposed. If you add all of the states involved, not just the producing states, but those with upstream and downstream operations, we stand the chance to have very good success on a number of fronts..."

The Anadarko chief said that "when people think of the oil industry, they think of the majors, of the national oil companies, and they don't necessarily think about the independents, the smaller producers...It's remarkable to me that this administration will be penalizing the domestic champions and at the same time say it wants energy security...that doesn't hunt at all..."

The energy proposals being considered by the administration are "not size-specific, it doesn't make a distinction about how big an oil company is, but that doesn't mean Exxon should be penalized...neither should the independents..."

The industry has "to impress on everyone who does most of the drilling in this country," said Hackett. "I think that's going to result in a good, reasonable outcome for us. In my view, it's easy when you are making legislation that appeals to the constituents who wanted you to do this...As citizens, we need to be careful to see it for what it is. It's for specific constituents; this isn't the majority opinion. If [the administration] was brave, it should be telling us...what it will cost, be specific and be narrow...It will be exposed over time...that real economics do matter..."

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