ConocoPhillips cuts 2016 capital budget to $7.7 billion

ConocoPhillips foresees a 2016 capital budget of $7.7 billion, down 55% compared with 2014 capital spending and down 25% compared with expected 2015 capital spending.

Reductions compared with expected 2015 capital spending of $10.2 billion come primarily from lower major project spending, deflation capture, and efficiency improvements.

Capital is allocated with $1.2 billion to base maintenance and corporate expenditures, $3 billion to development drilling programs, $2.1 billion to major projects, and $1.4 billion to exploration and appraisal.

The company also expects to close $2.3 billion of noncore asset sales, including $600 million from transactions that closed through the first three quarters of 2015. The remaining $1.7 billion represents deals with agreements in place that are expected to close in fourth-quarter 2015 or first-quarter 2016.

ConocoPhillips says it continues to pursue ongoing, noncore asset sales across its portfolio.

“We’re setting an operating plan for 2016 that recognizes the current environment, which remains challenging,” explained Ryan Lance, ConocoPhillips chairman and chief executive officer. “We are significantly reducing capital and operating costs, while maintaining our commitment to safety and asset integrity. We also retain the flexibility to adjust capital spending in response to market factors.

Budget distribution

The company plans to allocate $2.6 billion to the US Lower 48. This is a reduction of about 30% compared with 2015 expected spending, primarily reflecting improved efficiencies, a lower average rig count, lower infrastructure spending in the unconventionals, and deflation.

Capital spending in 2016 will focus predominantly on the unconventionals where the company plans to maintain current activity levels with 13 rigs across the Eagle Ford, Bakken, and Permian, with ongoing flexibility to ramp up or down activity in these plays. Other spending will target exploration and appraisal activity in the Gulf of Mexico, base maintenance, and conventional drilling program.

Canada is expected to receive $800 million. This reduction of about 30% compared with 2015 expected spending is primarily due to the roll off of spending at Surmont 2, where production started in September (OGJ Online, Sept. 1, 2015). Capital will focus on development drilling and appraisal in the unconventionals, continued ramp up at Surmont 2, and two exploration wells offshore Nova Scotia.

The company plans to distribute $1.3 billion toward its Alaska operations. This reduction of about 5% compared with 2015 expected spending is predominantly the result of reduced major project spending in the region following the October-reported startups of Drill Site 2S (OGJ Online, Oct. 13, 2015) and CD5 (OGJ Online, Oct. 28, 2015). Capital in 2016 will mostly target development drilling, base maintenance, and the progression of several major projects.

Europe’s allocation is $1.3 billion. This reduction of about 15% compared with 2015 expected spending is primarily the result of reduced conventional drilling and lower major project spending across the region. Capital will focus on major projects across the region, development drilling in the Greater Ekofisk Area, and base maintenance.

ConocoPhillips plans to distribute $1.4 billion to Asia-Pacific and Middle East. This reduction of roughly 30% compared with 2015 expected spending is largely the result of reduced major project spending at the Australia Pacific LNG (APLNG) project, which received first gas early in 2015 (OGJ Online, Feb. 12, 2015). The budget includes about $600 million of capital at APLNG to achieve the startup of Train 2 and complete deferred activity from 2015. The remainder of 2016 capital will primarily fund major projects in Malaysia and China, as well as development drilling around legacy assets.

2016 production outlook

The company’s full-year 2015 production guidance remains unchanged at 1.585-1.595 million boe/d, excluding dispositions. Full-year 2015 production associated with $2.3 billion of divestitures is 70,000 boe/d, of which 80% is natural gas.

Adjusted for these volumes, 2015 production guidance would be 1.515-1.525 million boe/d. This is the new baseline from which the company expects to grow 1-3% in 2016. All guidance excludes Libya.

Production growth in 2016 will come primarily from the startup of APLNG in Australia, continued ramp up of oil sands production in Canada, and recent project startups in Alaska. Growth from these areas will be partially offset by decline in Europe and Lower 48.

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