Anadarko Petroleum Corporation (APC)
2013 UBS Global Oil and Gas Conference Call
May 22, 2013 8:30 am ET
Frank J. Patterson – Vice President-Exploration
Okay, if I could ask everyone to get seated, we’re going to get started, and we’ve a very exciting presentation to kickoff the second day. Anadarko Petroleum, whose terrific growth story from a combination of shale growth in the U.S., and deepwater developments internationally, from arguably one of the best exploration programs in the energy sector. And here to tell us about it is, Frank Patterson, Vice President of Exploration. Frank?
Frank J. Patterson
Thank you. Good morning. So for those of you in the back that haven’t found seats yet, I think there’s some up here to the left. I know it’s a crowded room this morning, so let’s see if we can get people livened up.
First off, this is an important slide for me, because I’m the exploration guy, I’m going to talk about the company, and legal want to just to be in really bold, because I might say something that you guys might write down, and I got to be careful about what I say up here. So this is the obligatory, we’re looking at forward statements here. So we’ll give you a little bit of color around the Company, give you a picture of what’s going on all way through our portfolio, really excited about our portfolio.
At Anadarko, we’ve been basically on the same strategy for numerous years now. And I think that’s really important for us, because we’ve been able to basically get something going here, that’s pretty special. So we have a great culture. We have great values within the company, and all that sits on top of what I think is probably one of the best portfolios in the industry. And I kind of like to walk you through it. I’ve only got about 20 minutes this morning. So I really can’t go into a lot of depth for you, I would love to tell you a lot about it, because we can talk for hours about this stuff. So let’s talk a little bit about the portfolio.
So if I were to rebuild the slide, I would do it a little bit differently, and I’d tell you, how I’d do it. First, we have a really awesome onshore group. We have a position in some really great unconventional plays. We’ll talk a little bit about there are some slides coming down the road here. That’s the base of the portfolio, it’s predictable, it delivers. We have a clear growth story associated with those plays. And that is kind of the basis of the portfolio. If I were to rebuild the slide, I would put exploration second, because we have a fantastic exploration program. We have a lot of experienced people. We have a lot of great plays that we’re in. We have a clear line of site for the next four or five years on our drilling program as far as what we want to do on the exploration side. And that really delivers what is the other part of our growth story, which is our mega projects.
And our mega projects, as you’re aware; we just came on with El Merk. So that’s one coming on. We have Lucius, we have Heidelberg. We’re working on really big projects around the world. We have a great project management team, and we can deliver these projects on time and on budget. So we’re only going to look back for just a minute.
In 2012, what we were able to do; well, we told you we would deliver our volumes and our reserves. We did that. Not only do we do that, but we did that at a very competitive cost. Very efficiently, we drove a lot of efficiencies into the drilling program. We continue the exploration program. We are very active, both onshore, Gulf of Mexico and internationally, and we have some great discoveries last year. We had some great appraisal work last year. They’re going to lead to the next mega projects. We continue to work really hard to deliver value. Our entire company, our culture is based on value.
And we continue to work our portfolio and find ways to create value where there might be an opportunity. These are the things like our Lucius sell down, where we’re basically carried to first production. We’ve done that now again in the Heidelberg. We’re working to do that in Mozambique as you’re all aware. There’s a lot of value that gets generated that you didn’t see on the front-end of exploration. We do a lot of works associated with trying to find a way to mitigate our exposure, maybe mitigate our risk a little bit by bringing in partners early. So, all the way through the food chain in our portfolio, we’re looking to increase value. and on top of that, what we’ve done is we’ve dedicated you, we’re going to work our program within our cash flow and we’ve done that. so we have one of our basic tenants is financial discipline within the company.
So that’s what we did. so what are we going to do porting now? We’re going to continue to grow the sales volumes. we’re going to continue to live within cash flow, so that’s really important to us and we’re going to deliver those volumes, those reserves at a very competitive cost.
so we continue to find ways to drive value within our organization, within our portfolio. And then on top of that, a few years ago, we committed that we saw that gas prices were going to be a challenge. we have a tremendous gas portfolio. But we committed several years ago that we were going to shift a little bit and move more towards liquid volumes. So we’re moving towards a 50% oil content or liquids content. So that’s really, and that’s paid dividends as far as our cash flow as you guys are all aware.
On the budget side, we’ll continue to spend significant amount of money onshore U.S. to build that base I talked about, because that base is really important for us to make sure that we have that predictable growth that the investors like. But we’re also continued to spend about 20% of our capital budget on exploration. And that will be spread across both onshore Gulf of Mexico and International; we’re not just loading up in one area, because we know that is important to continue to grow in all areas.
What we’ve told we would deliver is, 5% to 7% production growth, and that is primarily oil. As you can see from the graph, there is not much gas growth in there. These are very – this is very clear, and we can see out five, six years now on our production volumes. These are tangible, these are things we can touch, these are projects we know we have high confidence that we’re going to be able to deliver that base case.
In the event that gas prices kick up above $4.50 and we see they’re going to maintain above $4.50, it creates a lever for us, and we can actually increase our activity level in the dry gas fields, and we’ve got tens of thousands of locations that we could kick in to gear and increase that production growth.
Now this also doesn’t have a lot of the recent exploration success, and that we could move forward, okay? This does have Lucius and Heidelberg, it does not have Phobos, it does not have Shenandoah, it does not have Paon.
And then in the out years, if you look beyond this graph, this has two trains in Mozambique, and as you’re aware we have found significant amount of gas in Mozambique with additional trains to come in the future. So not only does this graph go to 2020, we could look out further, and we could say we’re pretty good, we look pretty good going out to future, we’re comfortable where we’re headed, and we can feel comfortable that we have line of sight on this growth that we’re looking for. John is writing note here, so I probably just assume, it’s something he wants us to say.
Onshore U.S., again, very, very critical to us, it’s the base of our company’s portfolio. We’re going to continue to grow those oil volumes in those oil areas; we’re going to step on the accelerator. I’m going to tell you about two of them here in a minute on a couple of more slides, but we have great potential to grow these and we’re going to continue to invest heavily in these fields because that’s where the volumes, that’s where the reserves are going to come from in the near-term.
As we move forward though, there’s also going to be about $300 million to $400 million spent in the onshore looking for accelerating those new plays that might not be on this graph today. So we have a growth story. It’s really underpinned by the onshore in the near term, and the mega projects in the long haul.
So I’ll dive a little deeper to talk about a couple of the opportunities, Wattenberg. A couple of years ago, we talked about Wattenberg, and it was a very important field to us, now it’s just an incredibly important asset, and a very valuable asset, probably our most valuable onshore field; big, big opportunities here to accelerate. We have permitting out for our program. We’re staring to ramp up rigs. We have the opportunity hear to increase our horizontal program in the Wattenberg field. And we’re working in the core of Wattenberg.
And the numbers you see are really around that black box. One of the things that we have is a big advantage in the Anadarko is that, we have the fee lands. We actually own about 60% of the fee associated with the drilling location. So we have an accelerator on the economics, that other companies don’t have, and we control a lot of the activity in the area.
And then outside the box, that actually gives us an advantage as well, because not only do we have a concentrate if we’re inside the box, but we actually have a equity or a royalty interest in lot of the activity going on outside of the box.
So this has a lot of potential to continue to grow, and it’s primarily oil, and we’re focused on the oil part of this field. In Wattenberg, as in other resource plays, we’re very focused as I said on value, the way that you drive value, not only you create efficiencies in your drilling program, but you need to be on top of the midstream and the build out. So you have takeaway capacity, because what we don’t want to do is, go out and hammer down on these fields, get a lot of wells that need to be completed in waiting on pipeline. So we are working hand-in-hand with our midstream group, and building out in front of the Wattenberg expansion.
And as you can see, we’re going to see step changes as we go, as plants are put online, as pipelines are put online, our takeaway capacity, our capacity to develop the field and accelerate the field continues to grow. And we’re focused on this, because what we don’t want to do is, end up with a significant number of wells that either are choked back or not able to produce, because it’s just not good to have the fellow capital that we’re seeing in some of the big resource plays.
So at Anadarko, in our big resource plays, we work hand-in-hand with the midstream team to make sure that, as we’re drilling, they’re building out. And so we basically drill, complete and turn on wells as we can. And we’re going to see these step function changes as we go forward as these plants, and as these pipelines become available. The same thing happens in Eagleford.
In Eagleford, we continue to see a significant growth in Eagleford, it basically was nothing a few years ago, and now it’s one of our major fields in the company. This is really an incredible story, the ramp up of the Eagleford, and it continues to ramp up. The Brasada plant will be available to us in the next month or so, and that will help us ramp up, take some pressure off the system.
Right now, we’re trying to move gas and oil through every nook and cranny available to us, that will allow us to streamline some of the off take and move more liquids and gas out of the system, allowing us to ramp up more and then you’ll see us increase the rig count. So we’re going to increase the rig count and it will be basically regulated by the midstream in all these fields.
So the next box, if you remember our slide to begin with where we talked about, we had a good onshore position. We had a great base built there and then the mega projects. And the mega projects are the big changes in the company’s production profile. These are big. They’re primarily oil or, if not oil, they’re oil indexed as in Mozambique. And we have these projects layered in and we’ve already brought on Caesar/Tonga, Jubilee; these are all layered in. We have projects on line. Our projects lined out, Lucius shale ways already occurred. So the hull is on its way over here.
It will be made and Lucius will come online. Right behind that will be Heidelberg. And then we’ll have the TEN complex and then somewhere out in about 2018, Mozambique. What I like about this slide is the fact that basically they become free cash flow. They pay for themselves in the coming years. So these projects basically pay their own way as we go forward and they’ll put a lot of pressure on the company.
The other thing I like about this slide is you don’t see Shenandoah, you don’t see Phobos, you don’t see Paon. We have more of these type of projects in the queue. But we also have the opportunity to potentially leverage some of those opportunities that are in the queue and maybe sell down on a few or sell out of the few because we have a certain number of mega projects that we know we can manage and we’re going to stay within where we’re comfortable managing these large projects. So if we make discoveries in the future, we have to make a decision and we’ll have a slide that talks about how we do that in a moment, but we have a lot of optionality associated with our megas, so down or so up or keep them in the portfolio. And so they are great optionality for us.
The earliest megas that we’re working on now will come about would be in the Gulf of Mexico. In the Gulf of Mexico, we have significant amount of infrastructure. When we make a discovery that allows us to move very quickly. We understand how the Gulf of Mexico works, the permitting process is very known. We have different philosophy than a lot of companies. And that we’re very comfortable with what we know. So when we make a discovery, it’s not, okay, how do we engineer specific solutions for that discovery, we take a look at our portfolio and say what have we done before that looks kind of like this and let’s do it again.
And in the case of Lucius, we knew that it look like it would be a great spar development, so we moved ahead with the spar. We didn’t go and redesign a complete new spar. We have multiple spars in the water, so we took what we already have and we moved forward with that. So we basically shorten the engineering time on that.
Then we made the Heidelberg discovery and we saw that, that facility looks pretty good for that. So we basically built two back-to-back, saving a significant amount of time, significant amount of capital on that process. So the Gulf of Mexico is a great place for us as far as these big projects, because we can move fast, we can move safely, and we know how to enhance the value this through some of the promos that you’re seeing us do, where we’re now carried forward on our cost on Lucius to first production, and we’ve done the same now on Heidelberg.
Big projects in the international arena, give you a quick update on the Ghana and Jubilee, where we’ve been running about 110,000 barrels a day for the year. And we’ve actually tested the facility now up to 125,000 barrels a day. We’re kind of capped at 110,000 barrels a day right now, because of gas exploration capacity. We’re waiting on a pipeline to take the gas out of the field.
We’re able to inject a significant amount of gas, but we’re out of our injection limit. So until we get that export line or we drill another injection well and realign our injection, we’re kind of at 110,000, but now, we have a significant amount of volumes behind the Chalk, so if we can get debottleneck here on the gas, we’ll be able to get the volumes up to the nameplate capacity up here, and then start talking about debottlenecking.
On the TEN development, Telo was our operator, and they’re working hard with the government of Ghana to get the necessary approvals. The big hang-up right now is again the gas. How is the gas going to be handled, how is it going to be priced. So we’re working through that process, but TEN is going to be another big FPSO development in Ghana for us, and we’re anxiously awaiting approval there, so we can get moving on building out and getting ready to go.
We’re going to focus on TEN, the initial development will be focused on the oil, and there’s a significant amount of oil here. In the desert in Algeria, we’ve now ramped up and are ramping up final ramp up on the first train in El Merk. And as we continue to ramp up through the year, we anticipate exiting the year at about 30,000 barrels a day net. So that’s a significant piece of business for us, and we see additional opportunities in the desert as a result of our TPE negotiations. It’s opened up some new opportunities for us to continue to develop in the desert. So Algeria is going to continue to be a big piece of business for Anadarko.
Mozambique big, really big. It’s probably one of the biggest and best gas fields discovered in the last decade, if not longer. The geology there is fantastic. Where we are today, we’re going to continue to move to FID or we anticipate to FID in 2014. We’ve received reserve recertification for the first two trains. We’ve signed an HOA with Eni who operates the other side of the field, which is called Mamba. It’s the eastern portion of the Prosperidade field, there are competitive reservoirs there. One of the important pieces of the HOA is that, we have agreed the unitization will take place after the first four trains, which will allow us to continue to move down the road. We’ve also agreed that we’ll operate our portions of the field; they’ll operate their portion of the field. And then Anadarko will be the project manager of the onshore LNG facility.
So all that’s moving forward. We’re in feed for both onshore and offshore for the LNG facility. That will all be ready to go for FID, and then we’re in the process of working with the government on a Decree-Law approval, and an investment agreement approval, which are all going to be required to get to FID. FID in 2014, first volumes in 2018, and that’s just the first four trains. We have enough gas here to probably underpin 10 to 12 trains. So this is going to be one of the largest gas facilities in the world. So big project and working great.
Exploration; we’re going to continue to explore in areas. I’m getting my – I got to start moving faster here. We are active in many places, overall West Africa we’re playing the Cretaceous fan play, East Africa; we opened the play in East Africa with the Windjammer discovery, and we’ll continue to explore both in Mozambique, and in Kenya. And then, we’re going to start our exploration program in the Northern part of South America in Colombia in our new acreage as well as New Zealand.
So a lot of activity internationally in the Gulf of Mexico, Ernie Leyendecker’s team is going to continue to drill these really solid large prospects, good drilling program, several wells every year plus OBO activity. So we have a really good exploration program, continued exploration program this year, next year and we can actually now see into 2015 pretty clearly. So we feel great about this. We’re in trends. We are in plays. We are not just in prospects.
So that’s very important for the growth of the company. In Mozambique, we’re going to continue the exploration part of the program. We’ll focus on the northern part Block 1. We’ve been to the south. We have some geological issues in the south as far as breaching of traps, and we’ll go back to that later on in the year or early next year or we’re going to focus in the north. And so, our first shot of the box in the north was the Orca discovery. This is a fairly seen discovery underneath the Prosperidade field, and back up, up towards the coast. We don’t know how big that is, we’re going to continue to appraise that for the year, and then we’re going to drill additional prospects that we’re going to add volumes into the LNG facility.
In Kenya, up the coast, we drilled the initial well, Tubla, I know a lot of people who are disappointed, because we didn’t make a discovery. We’re kind of excited about what we found. We found great reservoir sands where we predicted we would find great reservoir sands with the seismic. We found oil shells in the deepest of the sands. So what we did was, we basically de-risked the basin from our perspective on a couple of things. One, we know we have great reservoirs. Secondly, it appears that we have an oil system working.
So the Tubarao well is drilling now. It’s drilling to the south on the southern part of the block, and it’s testing older sands, the sands that we found the oil shells in deeper. So this will give us additional information to understand this 5 million acre position. So we’re just getting started, and pretty excited about what we see.
In the Gulf of Mexico, Ernie is very excited about the Gulf of Mexico. How can you not get excited when you start the year with a well, the Shenandoah appraisal well where you have over 1000 fee to pay. Shenandoah could end up being one of the largest discoveries in the Gulf of Mexico. We don’t know, we have appraisal work that we have to do. So we’re pretty excited about that. This is the lower tertiary play, a lot of people are talking about the inboard lower tertiary where the rock quality is much higher, and the fluid properties are much better.
So much more like a lower (inaudible) we know how to develop these things. We think our high rates, potential wells, so this could be a very, very commercial opportunity the basin has given again. The Coronado discoveries are found (inaudible) again in great rocks, great fluid properties, so we’re drilling the Yucatan well now with Shell, and that well should be down in the next few weeks, and then we can talk about, well how do we appraise all these activities.
Chevron has already come back and started the appraisal process on Coronado, a rig is on location today, so that’s doing great. Phobos, just south of Lucius, good Wilcox discovery needs appraisal, lots of options there. We can talk about that, but it’s close to the Lucius infrastructure, and we’re drilling Raptor today. As soon as the rig is done with Raptor, it’s going to go through Nansen Deep, which is another inboard lower tertiary test.
So lots of drilling opportunities, lots of planning going on, especially a lot of appraisal around some exciting discoveries. So we have these discoveries and how do we handle these? We talked about these a few years ago, we told you that we had spent x number of dollars, I think at the time it was $5 billion, and we had sold $8 million worth of deals or actual outright sales of exploration activity.
Now we’re up to eight on eight, but not only are we eight on eight, but we’ve retained over 200,000 barrels a day of production volumes, and 4 billion barrels of reserve resources.
So we basically pay for ourselves on the exploration side as well as retaining the very large company, and we think this model really works, and we’re going to continue this model, and you’re seeing us do it with Lucius sell downs, with the Heidelberg sell downs with our activity in Mozambique and Brazil on the sales of either part of our equity or our entire position, and we continually look at our opportunities set. and make sure that we’re making the best value decisions for the company. As we’ve moved forward, we continue to dedicate to you that we would stay within cash flow. We continue to dedicate to you that we would start paying down debt. And so our balance sheet is in great shape.
We feel really good about this. we worked really hard on this, and we’re going to continue to work on this, and that gives us a lot of optionality as we move forward especially on these big projects. So it’s really important that we continue to focus on keeping our balance sheet strong.
So I’m going to wrap up where we started. Basically, we have strategy in place that everybody understands that’s working. So we’re not changing our strategy in midstream. We have great people, we have oil finders, all the way through some of the best project management team out there, and that includes in between the best, some of the best operating teams that are driving down the cost in all of our fields, and the drilling teams that are driving these incredible efficiencies onshore and operating these very complex wells in the deepwater, both in the Gulf of Mexico and international. So we’re very proud of our people, and those people basically drive what I think is probably the best portfolio in the industry today.
And with that, I think I’ll take questions.
Unidentified Company Representative
All right, any questions for Anadarko.
I’ll start with one, Frank you showed that slide that has tremendous amount of free cash flow building from the mega projects, over the next seven or eight years on the one hand, and then your growth forecast doesn’t include Shenandoah, Phobos and Coronado. But you have lower working interest there, should we think you’re going to continue to do those JVs from a 30% working interest down or increased CapEx in the growth rate, how should we think about the longer-term balance there?
Frank J. Patterson
Yeah. And that’s a great question; I mean you’re always looking at materiality versus sell down. and so, we haven’t made decisions on some of the opportunities that we have in front of us. but that’s a continuous attention in the company, that’s a very healthy attention in the company. Is it a key hold fund, is it a – do we have enough working interest or we could sell down a piece, the market is very receptive to discoveries that have been made, and kind of planned, are appraised out, and well understood and there’s a premium associated with that.
So do we have enough interest so we can peel off and get these carry forwards or as in some cases, it might be okay, it doesn’t really fit the portfolio, because it’s either, it loads us up with too many megas or it puts pressure on the capital program. And then, at some point, you might decide to sell an entire asset.
So we always have that discussion, we always have that attention, I think it’s something different that we do. And it starts from the first time you see the log on an exploratory well. It’s a continuum throughout the process. So I can’t tell you where we’re going on the new discoveries, but I would tell you, they’re in the queue being looked at in the same way, everything else has been looked at.
To be honest, Mozambique, it’s a great big field, and it’d be great, and it’d be nice to keep 36% of it. But at the end of the day, when you look at the growth value of it, it’s about from the market, almost a third of the value of our company, between a quarter and a third of the company. That’s a lot of concentration. And so we made the decision to sell down 10%, but we’re retaining still a material position in a very, very large, probably the biggest gas field in the last 15 or 20 years.
Other questions for Frank?
Frank J. Patterson
That’s a great question. The question was, how much more cost can we shave off the drilling in the Eagleford and the Marcellus, I would assume Wattenberg is probably the same question.
One of the things that our drilling team has done, and I think this is kind of – it’s very unique and very clever. When we started drilling these wells, and we have enough history, they basically create a type well, they take the best section of every well, and they say, that’s the type well we want to achieve. And so they drive the process to get to every well to be the best of the best, and that’s gone on now at Eagleford, it’s gone on somewhat in Marcellus, still working on that, and it’s being done now on Wattenberg.
They’ve really driven the cost down on all these fields. I think there are still small gains to be made, but a lot of the big gains are made in those fields, but that process is now being done in the Avalon and Bone Spring and the Wolfcamp and other places. So it’s a process that we’ve adopted, it’s a best practice that we believe is a differentiator for us.
So the answer to question is, I can’t give you a number, I think there are still gains to be made, but the big gains in some of the fields have been made, and now we’re working on internal gains.
Can I just ask a very specific question about Ghana, the negotiations would resolve the gas prices, which is going on for quite a long time, what is it thinking for, what are you asking for from what they’re offering, how far are the negotiations at the moment?
Frank J. Patterson
Yeah. And to be fair, Telo is the operator. And they are in charge of the negotiations. Where we are is, we’re negotiating basically the prices of products, and understand that, the TEN Complex is Tweneboa, Enyenra and Ntomme. While in Enyenra and Ntomme, our oil, so there is just associated gas with those, but Tweneboa it does have a reservoir size gas accumulation condensate.
So what we’re looking at is, okay, what is the absolute price going to be for an Mcf coming out of the facility, and that’s where the negotiations gone. Of course, the government wants it to be as low as possible, and we would like to be – we’re at least it stays the positive; we get a profit out of it. So it’s just a negotiation.
Unfortunately we have to stop here to keep the schedule. But please join me in thanking Frank for the contribution.
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