Copyright of the Daily Oil Bulletin 2017
ConocoPhillips Accelerating Montney Appraisal After ‘Massive Transformation’ In Canada
It’s a good thing there is the Montney play — otherwise Canada wouldn’t feature very prominently in ConocoPhillips’s go-forward investment plans.
Canada has undergone a “massive transformation” for ConocoPhillips this year, following its US$13.3 billion sale of oilsands and Deep Basin assets to Cenovus Energy Inc. This transaction represents more than 80 per cent of proceeds from the company’s divestitures in 2017, and no major further asset sales are anticipated in the near term.
In addition to enabling ConocoPhillips to pay down debt, the deal also had important impacts on its product mix, noted chief financial officer Don Wallette.
“The actions that we’ve taken this year to high-grade our portfolio have significantly reset our margins,” Wallette told the company’s annual analyst and investor day this morning.
“In 2016, North America natural gas and bitumen represented over 30 per cent of our sales volumes. As we go into 2018, those products represent less than 15 per cent. As a result, our realizations have increased by about $5/boe.”
North American natural gas and bitumen will be further reduced as a percentage of the product set going forward as volumes from unconventionals grows.
Montney in the three-year plan
ConocoPhillips’s three-year plan targets annual growth capital investment of US$2 billion per year, divided between short-cycle unconventionals (US$1.2 billion per year), future major projects (US$500 million per year) and exploration (US$300 million per year). Thanks to the Montney, Canada will hold a piece of both the US$1.2 billion and US$300 million annual outlays.
Surmont, the company’s remaining operating oilsands asset, is part of the company’s sustaining capital spend, which across operations is forecast to total US$3.5 billion per year between 2018-2020. “LNG and oilsands” sustaining capital is expected to average US$300 million per year.
“These are the low- to no-decline assets, and the role they have in our strategy is to lower our capital intensity of our overall asset base,” said executive vice-president Al Hirshberg.
“Within this asset class we find three billion barrels of resource with a less than US$35 average cost of supply.”
In the Montney, which is in the appraisal phase, he said the average cost of supply is US$30 per bbl.
“Our Montney position is a great example of adding a new position in a play for a low cost of entry that is very flexible and has a low cost of supply.
“Back in the beginning of 2013, we only had 14,000 acres in this area. Over the past few years we’ve very quietly built a 106,000 acre position, and it’s all 100 per cent working interest in what we believe is the sweet spot of the play where we have high liquids yields. The best part of the whole thing though is that we acquired this acreage for about $1,000 an acre,” Hirshberg said.
The company recently drilled, completed and flow-tested two wells that produced at double the average 30 day rates of competitor wells across the play, and in the 50 to 60 per cent range for liquids, he added.
“I think you can see now why we didn't include this Montney acreage in our Canadian transaction earlier this year….Our Montney acreage has the potential to be a significant contributor to future cash flows for our company.”
While large volumes are not expected from the Montney play over the next three years, ConocoPhillips is accelerating its appraisal activities, including plans for a new 12-well pad in 2018.
“We’ll be starting next year and out into 2019 building the first tranche in the Montney of our infrastructure needs that will get us up to that first level of production,” Hirshberg said.
“That’s still not going to be big numbers in that time period compared to the kind of production that you will see from our big three, the Bakken, the Delaware and from the Eagle Ford.”
It will be “an important stage” in the Montney, added chief executive officer Ryan Lance.
“We want to get in there and do a judicious sort of appraisal activity to understand stacking and spacing requirements. We’ve learned how important that is before you launch off on your manufacturing, to know exactly what you’re going to go do. It does represent a bit of an acceleration over what we thought maybe a year ago.”
Meanwhile, at Surmont, ConocoPhillips said it has been on an “all-out effort to lower cost of supply and increase margins.” The company highlighted two initiatives underway to support this: an alternative diluent strategy and testing of non-condensable gas (NCG) co-injection.
The alternative diluent strategy, which is currently underway, will modify facilities to create synbit/dilbit flexibility versus the synbit mix the project currently uses. ConocoPhillips said this will provide optionality that is expected to improve netbacks and reduce exposure to disruptions in diluent supplies.
Earlier this year production was curtailed at Surmont following a fire at Syncrude, which reduced the project’s access to synthetic crude oil for its bitumen blending.
ConocoPhillips said it is also realizing success with its NCG testing. In the third quarter the company expanded its NCG pilot to nine wells from three. So far, the test has achieved a steam to oil ratio reduction of about 20 per cent, the company said, and the technology has potential to reduce GHGs by 10 to 15 per cent field-wide.