Lower Spending By ConocoPhillips May Mean Higher Oil Prices

The six-month slide in oil prices has driven Houston-based oil and gas giant ConocoPhillips to reduce its capital budget by 20 percent for 2015. The result was an immediate, if small, rise in the price of oil.

The company's spending will be cut to $13.5 billion as it plans to postpone major investments in two Canadian oil fields, Duvernay and Montney, Texas’ Permian Basin and the shale field Niobrara in regions of Colorado, Kansas, Nebraska and Wyoming.

“We are setting our 2015 capital budget at a level that we believe is prudent given the current environment,” the company’s CEO Ryan Lance said Dec. 8. That environment includes a 16 percent drop in the value of ConocoPhillips’ shares since prices began falling in mid-June.

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“This plan demonstrates our focus on cash flow neutrality and a competitive dividend, while maintaining our financial strength,” Lance said. “We are fortunate to have significant flexibility in our capital program.”

Early the very next day, two leading benchmark oils, Brent and West Texas Intermediate, rose from their lowest prices in more than five years. The feeling among buyers evidently was that ConocoPhillips isn’t alone in planning to cut budgets – and therefore production – thereby reducing the global oil glut.

Early on Dec. 9, Brent for January delivery rose by 45 cents to $66.64 a barrel on the London-based ICE Futures Europe exchange. Only a day before it had fallen $2.88 to $66.19, its worst showing since September 2009.

Part of ConocoPhillips’ flexibility is that several of its major projects are nearly complete, allowing the company to taper spending on them. In the meantime, the company said, it will keep up its work at the Bakken shale field in North Dakota and the Eagle Ford shale in Texas. The company cited further flexibility in adjusting activity at its shale oil and gas fields, as conditions warrant.

Part of next year’s budget, about $1.9 billion, will be spent on corporate expenditures and base maintenance, a slight decline from the levels in 2014. Another $5 billion is earmarked for development drilling, down from $6.5 billion this year.

Related: Oil Majors Face Long-Term Challenges

About $4.8 billion will go to ConocoPhillips’ leading projects, including the Australia Pacific liquid natural gas project and the Surmont Phase 2 enterprise for extracting Canadian oil sands. Part of this segment of funding also will go to several projects in Malaysia, Europe and Alaska.

Beyond that, the company will spend about $1.8 billion on appraisal and exploration programs that include conventional activity off the West African shore, off Nova Scotia and in the Gulf of Mexico. Also targeted are shale deposits in North America.

Some of the details of the cuts were not available in ConocoPhillips’ announcement on Dec. 8, but the company said it would fill in those gaps during a conference call on its performance during the fourth quarter of 2014 on Jan. 29 and at its analyst meeting in New York on April 8.

By Andy Tully of Oilprice.com

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