El Paso Corp.’s oil and natural gas production business will pull out of some riskier ventures and return its underperforming “base” U.S. assets to profitability, the unit’s president said last week. With a tighter focus, and assuming natural gas prices hold at or above $4.25/MMBtu, El Paso Production Co. President Lisa Stewart forecast the business will “turn the corner in 2004.”

However, with the production unit no longer looking for new pools of oil and gas, Stewart said the remaining properties will be constantly monitored, and some will be put up for sale if they no longer generate strong returns.

The plan, announced Tuesday during a conference call with financial analysts, is based on several key elements, including a strict capital discipline program, which Stewart defined as applying “consistent” risk and economic methods to investments. “A stringent evaluation of past investments is an important part of that process,” she said.

Stewart, an Apache Corp. veteran who took over the ailing operation in January, said each of the regions where El Paso operates will become a separate business unit, each responsible for generating production returns. Also, a “pay-for-performance” compensation program has been put in place to “hire and retain talented employees…that rewards employees who deliver excellent results.”

Overall, there will be no drastic changes going forward on the production mix where El Paso already operates, but output now is forecast to be lower than the company predicted just weeks ago. Oil and gas production in 2004 now is expected to average 825-875 MMcfe/d, down from the 850-950 MMcfe/d forecast in late May (see NGI, May 31). And next year, volumes are expected to be flat, also down from an earlier prediction of 900 MMcfe/d-1.0 Bcfe/d.

El Paso’s “base” production program was defined as the Texas and Louisiana Gulf of Mexico (GOM) regions, the Rocky Mountains, Arklatex (where Arkansas, Louisiana and Texas meet), the coalbed methane fields in the Raton, Arkoma and Black Warrior basins, and offshore Brazil.

Going forward, Stewart said Brazil will be the producer’s only international venture, responsible for about 8% of overall oil and gas production in 2005. Early last week, El Paso began the Brazilian business in earnest, announcing it would buy out Unocal Corp.’s stake in a joint oil and gas joint venture for $65 million.

Overall, there will be no drastic changes going forward on the production mix where El Paso already operates, but total output now is forecast to be lower than the company predicted just weeks ago. Oil and gas production in 2004 now is expected to average 825-875 MMcfe/d, down from the 850-950 MMcfe/d forecast in late May. And next year, volumes are expected to be flat, also down from an earlier prediction of 900 MMcfe/d-1.0 Bcfe/d.

Capital spending at the company in 2005 will be the same rate as this year — $850 million — but in 2005, El Paso is forecasting a 2-4% jump in reserve growth, and it will come at a lower price. This year, reserve growth is estimated at flat to 2%, and finding and development (F&D) costs are estimated at $2.25-2.75. In 2005, the F&D estimate will drop to $1.90-2.25. As of Jan. 1, 2004, El Paso’s total domestic reserves were 2.4 Tcfe.

Where the output comes from will change slightly in 2005. This year, GOM production will be 34% of total output, 33% will come from the Texas Gulf Coast, 28% will be from onshore assets and 5% will be international. However, in 2005, the company expects 33% of output to come from onshore assets, 32% from the Texas Gulf Coast, 27% from GOM assets, and 8% from international properties.

The heightened focus on cost control coincided with Stewart’s employment. Since she joined El Paso in January, the production unit has fired 17% of its 1,000-member workforce. In late March, the corporation announced it had cut 40% of its corporate officers, 21% of its directors and 9% of the rest of its organization, but it did not elaborate on who was laid off or from what business units (see NGI, April 5).

All of these changes followed El Paso’s stunning news in February, when it reduced its proven oil and gas reserves by 41% (see NGI, Feb. 23). The announcement triggered a formal inquiry by the Securities and Exchange Commission, which is still ongoing, and an internal re-audit of the books from 1999 through 2003.

CEO Doug Foshee said Tuesday that the audit has not been completed, and the company will not release its 4Q2003, year-end 2003 or 1Q2004 reports before Aug. 15. An internal audit by El Paso, which was completed in late April, found that certain employees of the company had used “unsupportable methods” over a four-year period, which resulted in the drastic overbooking of reserves (see NGI, May 10).

Because of the internal problems, Foshee said the company has formed a central reserves and evaluation group to estimate and report proved reserves. A corporate reserves committee will monitor the work of the group and then interface with the board of directors. Also, El Paso’s board member audit committee will hire an outside reservoir engineering firm to complete a year-end audit.

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