Phillips/Conoco Merger a Go for Second Half of 2002
Will the union of two oil
giants be good for Alaska? It depends on who you ask.
By Patricia Jones
Ask 10
different individuals how the proposed business merger between Phillips
Petroleum Co. and Conoco Inc. will affect Alaska’s oil and gas industry, and
you’re likely to hear 10 different answers.
Of course,
that’s nothing new in Alaska, where opinions on controversial issues can be as
divergent as the individuals who make their home in the Last Frontier.
“There’s some speculating that it will be good for Alaska, and some saying it
might be bad,” said Bob Stinson, president of the Alaska Support Industry
Alliance, and also president of CONAM Construction Co. “The jury is still out on
this one.”
Alaska’s oil and gas industry, and those businesses that support exploration,
development and operations on the North Slope and in Cook Inlet are closely
watching as Phillips and Conoco take steps to combine the companies.
Although the heads of both companies assure continued growth once the merger is
complete, what the structural change means for Alaska is anybody’s guess.
Yet most views
tend to focus on these few, related points: A combined company provides stronger
finances for future development, but competition for those capital dollars is
greater. Alaska offers some rich resources for future development, but costs are
typically higher here. And finally, the state’s uncertain financial condition
provides an increased amount of concern for oil companies, which provide about
80 percent of Alaska’s annual governmental revenues.
“Shareholders
don’t care where the oil comes from,” said Larry Houle, general manager of the
Alliance. “Bottom line: The barrel of oil that wins at the end of the day is the
one that provides the most margin for the company.”
Merger Plans
Phillips and Conoco board of directors announced last November plans to combine
worldwide operations of the two oil and gas companies, calling it a merger of
equals. Shareholders of both companies approved the deal this spring. Provided
that regulatory agencies give the necessary approvals, the deal should be
completed by the end of 2002.
Structured as a
tax-free exchange, shareholders in each company will receive stock in the new
company, called ConocoPhillips. Phillips shareholders will receive one share of
new ConocoPhillips common stock for each share of Phillips they own and Conoco
shareholders will receive 0.4677 shares. At inception, Phillips shareholders
will own about 56.6 percent and Conoco shareholders will own about 43.4 percent
of the new company.
The combined
company, with an estimated value of $53.5 billion, will be the third-largest
integrated U.S. energy company based on market capitalization and oil and gas
reserves and production. Worldwide, it will be the sixth-largest energy company
based on hydrocarbon reserves and the fifth-largest global refiner.
Savings of $750
million annually in operations is one of the motivating factors for the merger,
according to a statement released by the two companies. Those savings will come
from more efficient exploration, production and downstream activities, and the
elimination of duplicate corporate and administrative positions, programs and
operating offices.
“It will
position ConocoPhillips as a stronger U.S.-based, global energy producer by
significantly enhancing its capability and growth prospects on five continents
in both current and prospective ventures, while generating major synergies,”
said Archie W. Dunham, Conoco chairman and CEO, who is based out of Houston,
Texas. “It will create significant long-term value for the shareholders of both
companies, partly through cost savings, but also because of a significantly
larger portfolio of global assets, skills and opportunities.”
James Mulva,
chairman and CEO of Phillips, who is based out of Oklahoma, said combining the
two companies is the “ideal way to be competitive in the reshaped energy
industry,” adding that the new company will “deliver on our legacy growth
projects, develop new opportunities in existing and emerging business lines ….
“With our greater
financial strength and flexibility, we will be able to fund these capital
programs while also reducing our debt-to-capitalization ratio, repurchasing
shares and providing a competitive dividend,” he added.
Currently, as a
stand-alone company, Phillips receives about half of its annual production from
assets in Alaska. That includes both the company’s 30-year-plus history of
development and operation in Cook Inlet gas and oil fields, and Phillips’ recent
purchase of North Slope assets from ARCO Alaska, during BP Amoco’s acquisition
of Atlantic Richfield Co. in the late 1990s.
“Before we acquired the Alaska (North Slope) business, we were at 420,000 to
430,000 barrels a day equivalent, and now we’re up to 820,000,” said Phillips’
Mulva.
The
merger with Conoco creates the potential of again doubling production, Mulva
said. “Frankly, we like to under promise and over deliver.”
Daily production
of ConocoPhillips will be 1.7 million barrels of oil equivalent, with reserves
totalling 8.7 billion BOE.
Alaska’s presence
in the combined portfolio becomes watered down, several in the state’s oil and
gas industry say.
“Phillips is a
company strongly dependent on Alaska, and you sort of dilute that with a larger
company,” said Roger Marks, a petroleum economist with the state of Alaska.
“There could be less emphasis on Alaska with a larger company.”
That could have
some benefits, he added. “The old ARCO model was too dependent on Alaska–it’s a
good place to do business when prices are high, but a bad place when prices are
low … diversity allows a company to withstand hard times.”
A larger company
could create more demand for future growth, suggested Howard “Buzz” Otis,
president of Great Northwest Inc., in Fairbanks.
“The stronger the company is, the more exploration and development they’ll need
to do to stay large and to grow their business,” he said. “Alaska is one of
their legacy assets and Phillips is doing well in the state with their assets.”
In the combined
company, Alaska assets would make up about 25 percent of the production
portfolio, a possible downside to the merger, Houle pointed out.
“They have much
greater financial resources–a much bigger pool to draw from,” he added. “There’s
more capital dollars on the table, but more worldwide projects to compete with.”
More Competition
for Capital
The combined
company will hold assets across the globe, including those in Alaska, Canada,
the Lower 48, the North Sea, Venezuela, China, the Timor Sea, Indonesia,
Vietnam, the Middle East, Russia and the Caspian area.
“ConocoPhillips’
global scale and presence will allow for increased efficiency in core areas and
delivery of legacy growth projects,” the two companies said.
Alaska’s North
Slope resources, while certainly large on a global scale, contain extra
transportation costs–shipping crude oil through the 800-mile transAlaska oil
pipeline and then by tanker to the West Coast refineries.
In a highly
competitive realm, those extra expenses add up.
“Alaska falls
behind because of the huge transportation costs,” said Houle. “We need to do a
really good evaluation of how to create incentives to level the playing field …
to compete with these projects in Indonesia that do not have an 800-mile
pipeline or tanker costs.”
Otis also expressed concern about capital spending being diverted from Alaska to
other worldwide assets. “Alaska needs to be able to compete against those
assets, so the boards can have confidence in investing in Alaska, and see that
there’s a return on their investment.”
In fact, paying
those transportation costs to the owners/operators of the trans-Alaska oil
pipeline could have been one reason for Conoco’s exodus from the North Slope in
the mid-1990s. The company developed and operated Milne Point, eventually
selling those assets to BP Exploration.
“They were
trying to make Milne Point competitive, and they had a harder time because they
weren’t part of the operatorship of the infrastructure at Prudhoe Bay and of
TAPS,” said Stinson, whose company did work for Conoco back then. “That made
their costs higher, with no ownership in TAPS.”
State Taxes, Fiscal Gap
In addition to
transportation costs, Alaska’s oil and gas producers pay royalties and taxes on
their operations, funds that make up about 80 percent of the state’s
governmental operating revenue.
That existing tax structure is another negative factor in the realm of
competitive oil development projects, said Marks, with the state of Alaska.
“It’s no secret
that our whole tax and royalty structure is regressive–companies pay a big
percentage when prices are low, and a much lower percentage when prices are
higher,” he said. “One would think about a change in the tax system to make it
less onerous when prices are low.”
In addition to
the existing tax structure, uncertainty about how lawmakers will address the
state’s estimated $1 billion fiscal gap creates an air of concern in the oil and
gas industry.
“The biggest
threat is the existing fiscal gap, including investment from little independent
operators,” said Houle. “There’s an ever increasing hesitancy to come to Alaska
because of concern about political action to solve the state’s fiscal problems
on the back of oil companies.”
Companies fear
spending millions of dollars on infrastructure to tap pools of oil and gas, only
to find that once the flow starts, “they change the rules of the game,” Houle
added.
Marks also
pointed to the state’s financial situation as a hindrance to future oil and gas
development in Alaska.
“Someone who is ready to invest looks at this as a place where they absolutely
have no idea how they will run their fiscal environment in three years,” he
said. “That can do nothing but hinder business investment.
“Uncertainty in the business environment is worse than bad news. You can hedge
bad news with other things, but if you are risk at all, you avoid situations
with uncertainty,” Marks added. “The fiscal situation in the state certainly
creates a large amount of uncertainty.”
Natural Gas Project
Of interest to
all segments of Alaska’s economy is the proposed natural gas pipeline project.
How the Phillips and Conoco merger will play into that development is, again, up
in the air.
Some say that
the combined company brings a stronger financial resource to developing the
project, estimated to cost somewhere between $15 billion and $20 billion.
Debate ranges
about the construction route for such a pipeline, with some producers appearing
to lean toward a less costly northern route through Canada, while many in the
state want the gas line to track the Alaska Highway.
“Phillips seems
more committed to the Alaska route to get to market, but they’re a smart
company–they are looking at the costs. It has got to be an economic project,”
Houle said.
In addition,
Phillips and partners Anadarko and Alberta Energy have been exploring in the
foothills of the Brooks Range, many miles from existing Prudhoe Bay
infrastructure.
“If
you look at a lease map, Phillips has leases all over the underbelly of the
North Slope,” Houle said.
A
northern pipeline route into Canada could leave those potential gas resources
stranded, he added.
But
Conoco, Phillips’ new partner, has significant holdings in Canada’s Mackenzie
Delta, where a northern gas pipeline would pass through to connect to existing
infrastructure in northern Alberta.
That Mackenzie gas resource is estimated at 9 trillion cubic feet. Conoco, as a
member of the Mackenzie Delta Producers Group, began work last year on a
regulatory application to eventually develop 5.8 trillion cubic feet, of which
1.4 TCF would go to Conoco.
“I think the only
concern the state has is that Conoco has a gas presence
in the Mackenzie, which may dampen the Phillips appetite for the Alcan
route,” Marks said.
Yet Alaska still
has a lot to offer producers, Stinson pointed out.
“As a combined
company, they will see Alaska as just one asset of many after the merger, but it
still jumps out,” he said. “You can’t deny 35 trillion cubic feet of gas at
Prudhoe Bay as small. Alaska will still remain important to Phillips.”
And in the months since the merger announcement, the company has continued to
press forward with aggressive exploration and development plans for 2002, and
into the future, he added.
“I have seen
that for the last few months, they have been a more aggressive producer as far
as commercializing their part of gas at Prudhoe Bay,” Stinson said. “There’s
been no change, and all indications are still real positive about Alaska.”
