Digging Into ConocoPhillips Plans for 2013

Conoco Phillips (NYSE: COP  ) has had a busy 2012. Not only has the company divested itself of about $12 billion in assets including the spinoff of Phillips 66, but it also announced plans to invest $15.6 billion back into the company throughout 2013. The company plans to spread this money around several aspects of the business, but it plans to spend about 35% of their capital expenditures budget in three major areas. Let's take a deeper look at what these projects are, and how they will help the company's bottom line.

Not exactly black sand beaches
Starting here in North America, ConocoPhillips intends to spend a large amount of capital on its Oil Sands projects in the Athabasca Region of northeastern Alberta. The company has two major partnerships in the region, a 50/50 joint venture with the Canadian arm of Total (NYSE: TOT  ) for its Surmont Steam-Assisted Gravity Drainage System project, and a 50/50 partnership with Cenovus Energy (NYSE: CVE  ) for its Foster Creek/Christina Lake (FCCL) project.  

All images courtesy of ConocoPhillips 

While the projects differ in their methods of extraction, the driving economics for both of these projects is the same. Canadian oil sands are the second largest recoverable oil source in the world, but this type of oil is very expensive to extract. The Canadian Energy Board estimates that it costs about $28CAD to $36CAD in operating and supply costs to extract one barrel of oil from the sands . So, for Canadian oil sand to make sense, the price per barrel of oil must remain high.

This doesn't seem to bother ConocoPhillips and its partners, though. The company has permits to extract 428,000 barrels per day from the FCCL project, and it plans to expand Surmont production from its current levels of 27,000 bpd to 110,000 bpd. Such a large bet on a high cost source shows that these companies believe oil prices will remain high for quite some time.

Keeping up appearances in Europe
To bolster its European production, ConocoPhillips company intends to expand production at its Eldfisk ii, Ekofisk, Jasmine, and Clair Ridge fields in the North Sea. While the North Sea has been producing oil since the early 1970s, there is still plenty of production to be had in the company's positions in the region.

Field

Operators (% interest)

Estimated Reserves

Production

Ekofisk and Eldfisk

Total (39.9), ConocoPhillips (35.11), Eni SPA (12.4), Statoil ( 7.6), Petoro(5)

450 million barrels of oil equivalent

260,000 boepd  

Jasmine

ConocoPhillips (36.5), Eni SPA (33), BG Group (30.5)

100 million barrels of oil equivalent

Clair Ridge

BP (28.6), ConocoPhillips (24), Chevron (19.4), Enterprise Oil (18.7), Hess (9.3)

1.75 billion barrels in place, 250 million recoverable

50,000 barrels per day 

The biggest hurdle with drilling in the North Sea is the quality of crude. At around 22° API gravity , most of the oil from the region is considered heavy oil, so there's a lower percentage of high-priced distillates, like gasoline, in each barrel. What it lacks in type, though, it makes it up in location. Pipelines from the platforms provide a direct outlet to European markets. Without any major oil production in Europe outside the North Sea, companies in the region can command a high price for heavier type crude.

Feeding the Asian tigers
While two of these projects are in mature, proven fields, its major projects in the Asia-Pacific region are certainly more speculative. ConocoPhillips and its partners Royal Dutch Shell (NYSE: RDS-B  ) , Petronas, and Murphy Oil (NYSE: MUR  ) have all taken a large position in some speculative fields off the Eastern Malaysian coast. According to Petronas, the region will be capable of producing 300,000 barrels of oil, and 1 billion cubic feet of gas per day . Production has yet to come online for any of these facilities, though. Although ConocoPhillips is not the primary operator on these fields (Shell is the operator of record for three of the fields, Murphy for one), it does expect production for these facilities to begin this year.  

ConocoPhillips also plans on getting into the LNG export craze, as well. In 2013, the company will make a big push to bring its Australia-Pacific LNG terminal online. The company has signed a 20-year contract with Sinopec to deliver 4.5 million metric tons per year (MTA) of LNG to the China. This facility, plus the 3 MTA the company already exports from its Darwin LNG facility, combines for some of the largest LNG facilities in the Asia Pacific region.

What a Fool believes
There appears to be two major forces driving the decision to invest in these projects: oil prices will remain high, and spot price differentials for natural gas will stay wide enough that LNG exports remains an attractive venture. While the possibility of high oil prices is likely, the possibilities to export LNG may not be as great as originally thought. Overall, though, a clear plan to invest in these projects, and put money back into some of its other holdings, is a sign that the company wants to get more bang for its buck. The year 2013 may not be the best production year for ConocoPhillips as they further develop their assets, but these moves should encourage long-term investors for down the road.

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