Management for Houston-based ConocoPhillips during a quarterly earnings call highlighted the independent’s progress as it expanded its LNG activities while achieving record production.

ConocoPhillips

CEO Ryan Lance told investors “the world is going to need investments in medium- and long-term production in addition to U.S. shale plays.” ConocoPhillips’ portfolio is “well positioned to meet these long-term supply challenges.”

Lance also noted that “a successful energy transition” for the world would require an “all-of-the-above approach,” complete with U.S. unconventional production and liquefied natural gas. 

[Want today’s Henry Hub, Houston Ship Channel and Chicago Citygate prices? Check out NGI’s daily natural gas price snapshot now.]

“When you look at the transactions that we’ve done over the last couple of years, we have a growing resource position in the U.S., so creating more demand just makes a lot of sense,” Lance said, speaking to the company’s LNG strategy

“…Combined with our views of the energy transition in the view that LNG is going to be a necessary fuel…we think this is something the globe is going to be needing as we go through the energy transition.”

Last month, ConocoPhillips became the third company to sign on to a two-train, 16 million metric ton/year (mmty) capacity LNG project at Qatar’s North Field South. ConocoPhillips earlier in the year also signed on to participate in Qatar’s North Field East. In addition, the exploration and production (E&P) independent in August agreed to terminal services for a 15-year period at the prospective Brunsbuettel LNG import terminal in Germany

Domestically, Lance highlighted progress on the Port Arthur LNG partnership with San Diego-based Sempra Infrastructure. Sempra last week said it is targeting a final investment decision for Port Arthur in early 2023. 

Lance said with a “plentiful” gas resource in the United States, the Port Arthur project is an opportunity for “…creating some of this more demand to exploit the resource in the U.S. is a good thing…We want to be involved in the liquefaction of that resource and the shipping and then the regasification as we move it to higher-value markets around the world.”

The project with Sempra gives ConocoPhillips “some optionality also on their…west coast of Mexico opportunity that they have as well,” Lance said. Sempra is working on a potential LNG terminal in Salina Cruz, Oaxaca

The Mexico project “is longer-dated, and that’s an option we have to participate in expansion of that facility that is currently operating there today,” Lance said. “I think they’re converting the regas portion of that into a small liquefaction plant and looking at some expansion opportunities;” however, any participation would be “down the road, if, and when they decide to build another train at that facility.”

ConocoPhillips’ LNG activities have picked up this year, as the LNG sector “is going to be a business that’s going to be long-term and going to be substantial well into the future…

“There’s going to be periods of time when supply exceeds demand and when demand exceeds supply…but again, we’re entering into these 10- to 30-year contracts. So we just have a long-term view that this is going to be a really good business,” Lance said.

Inflation’s Impact

Moving into 2023, production and capital spending in the Lower 48 could remain stable relative to the second half of 2022. 

“We’re not looking at trying to add scope into our Lower 48 operations, given the kind of environment on inflation that we see. So starting there, we’ll assess what we think inflation looks like for next year,” Lance said. 

Regarding oil prices, the CEO said, “We know it’s going to be volatile; we could wake up, it could be $80, it could be $120/bbl.”

Lance noted that “inflation and supply chain constraints continued across the entire economy and our industry” during 3Q2022. “This is particularly true in the U.S. shale, with rapidly escalating costs combined with extremely tight supplies that are limiting the space of industry-wide production growth.”

Permian And Pricing

ConocoPhillips reported record production in the Lower 48 during the quarter. Average production was 1.013 million boe/d, up from 790,000 boe/d in 3Q2021. For 3Q2022, ConocoPhillips produced 668,000 boe/d from the Permian Basin, 224,000 boe/d from the Eagle Ford Shale and 96,000 boe/d from the Bakken Shale. 

Globally, the E&P produced 1.75 million boe/d, up 210,000 boe/d from 3Q2021.

The U.S. growth primarily was driven by “partners targeting longer laterals than we first anticipated, which, of course, yields a lower cost of supply and more economic return,” said Executive Vice President Jack Harper, who oversees the Lower 48 operations.

During the fourth quarter, Harper said the company “expects to see continued growth…The Permian should mostly exceed that kind of low single-digits that we expect out of the Lower 48 in terms of well productivity, and our plans are progressing as we have planned.”

ConocoPhillips increased its full year 2022 adjusted operating cost guidance from $7.5 billion to $7.7 billion. The independent is also increasing its full year capital expenditures to $8.1 billion from $7.8 billion, “also driven by inflationary impacts and partner operator working interests,” Bullock said.

In the natural gas market, Bullock said that ConocoPhillips saw “relatively immaterial” cash flow impacts from Waha pricing differentials in 3Q2022. However, ConocoPhillips’ realizations in the Lower 48 relative to the Henry Hub benchmark have decreased from 96% in the second quarter to 90% in the third quarter, “and that’s primarily driven by lower Permian Basin average prices in September relative to Henry Hub.

“…There’s a lot of volatility around that with what we’re seeing in the market right now, and I’d expect that volatility is going to continue until we see the additional premium takeaway capacity come online later in 2023,” Bullock said. 

“We’ve worked hard to build our gas marketing capability in the Permian, following our acquisitions, and we leverage that to ensure we’ve got flow assurance through these pricing events…For ConocoPhillips, this is essentially a price issue, not a flow issue,” Bullock said. 

The independent fetched a total average realized price of $97.56/bbl for crude oil, $35.47/bbl for natural gas liquids (NGL), $49.77/bbl for bitumen and $13.04/Mcf for natural gas in 3Q2022. This compared with a total average realized price of $70.43/bbl for crude, $$34.79/bbl for NGLs, $41.19/bbl for bitumen and $5.94/Mcf for natural gas.

Windfall Tax: ‘Not A Helpful Conversation’

Meanwhile, the Biden administration is floating a windfall tax on corporate profits as energy operators have posted surging third quarter earnings

Lance said, “The whole conversation around windfall profit taxes is not a helpful conversation right now…I think we’re faced with some other issues in the short term around labor shortages, supply chain and inflation. They’re probably dictating the pace of the industry.”

For 3Q2022, net income was $4.53 billion ($3.56/share), up more than 50% from year-ago earnings of $2.38 billion ($1.78).