ARCO is sporting a new look upstream.
Pres. Mike R. Bowlin, who succeeded Lodwrick Cook as ARCO's chief executive officer July 1, outlined the company's new upstream strategy in an interview with Oil & Gas Journal. Downstream, the company plans to stay on course with a proven successful strategy.
Capitalizing on stronger natural gas prices and optimistic projections for continued demand growth, ARCO is focusing its U.S. Lower 48 exploration efforts on a search for more gas reserves, mainly in the Gulf of Mexico. The company also is giving new emphasis to exploration outside the U.S. and reevaluating its outlook on the Alaskan front.
The refocusing of strategic objectives is reflected in ARCO's 5 year capital spending plan, disclosed last month (OGJ, Aug. 15, p. 46).
Like other major oil companies, ARCO is in the midst of restructuring to stay competitive amid uncertain oil prices.
Shortly after Bowlin assumed his new post, ARCO's board approved a comprehensive cost cutting plan designed to eliminate 3,300 jobs, including 25% of Los Angeles headquarters positions (OGJ, July 25, Newsletter). It may not be the last realignment at ARCO, a process Bowlin indicates may stretch over the full year, but it will be among the bigger steps the company has taken.
UPSTREAM FOCUS
Emerging from what Bowlin admits was a disappointing 1993 in Alaska, ARCO is continuing efforts to diversify and broaden its upstream operations.
Last year, the company formed a new Lower 48 exploration and production subsidiary, Vastar Resources Inc., that concentrates on finding and developing significant natural gas reserves, mainly in the Gulf of Mexico.
In a sign of the times, the search for oil in the Lower 48 no longer plays a significant part in the company's strategy. Rather, ARCO is focusing on boosting oil production from its major existing properties in the Permian basin of West Texas and in California's San Joaquin Valley and Long Beach areas.
Changes at ARCO Alaska Inc. underscore another element of the parent company's revamped E&P focus.
While ARCO Alaska remains a separate operating unit, it comes under the supervision of ARCO International based at Plano, Tex., and headed by Senior Vice Pres. Marlan Downey. Essentially, this means Alaska will have to compete increasingly with ARCO's other exploration efforts worldwide.
There also have been some noteworthy changes in ARCO Alaska's management structure. Among them, the former position of senior vice-president of exploration and land for the Alaska unit, previously held by James M. Davis, has been retitled Alaska exploration manager and will be headed by James P. Strode, previously exploration manager for North Alaska. Davis in turn was named president of ARCO Long Beach Inc.
The Alaska unit's new president, J. K. (Ken) Thompson, comes up from the Plano, Tex., ARCO Exploration & Production Technology (AEPT) unit he formerly headed. Former ARCO Alaska Pres. H.L. (Skip) Bilhartz will become president of AEPT.
ALASKA DISAPPOINTMENTS
ARCO is at a point at which it will have to reevaluate 2 years of exploration results in Alaska, Bowlin said.
During 1993, ARCO participated in 13 exploratory and delineation wells in Alaska. Of those, only one discovery resulted, the 3 North Prudhoe Bay State well.
Among the company's disappointments were two delineation wells in the Kuvlum prospect, where a discovery well was drilled in 1992. Although the follow up wells confirmed significant volumes of oil, they were too small for stand alone development.
ARCO last week said it will not develop its 1991 Sunfish discovery.
Two wells drilled in the southern portion of the Sunfish structure in the Cook Inlet were unsuccessful, prompting ARCO to focus on the northern portion of the structure. After drilling one delineation well there in 1993, ARCO earlier this summer said at least one more season of drilling would be needed to determine the volume of reserves in the field.
However, ARCO said last week analysis of new well and 3D seismic data indicate Sunfish is not a candidate for commercial development for the company on a stand alone basis. Strode said, "Further drilling and our interpretation of 3D seismic data revealed that the reservoir was thinner and more discontinuous than our original interpretation."
The company won't conduct further exploration or delineation work on the prospect and will take a $30 million charge against earnings in the third quarter for the 1 Sunfish discovery well, 1 North Foreland well, and 3 Sunfish well.
ARCO is continuing negotiations with Phillips Petroleum Co. and other companies for a trade of its 60% interest in the prospect. Phillips holds 40% interest in Sunfish.
WHERE THE MONEY ID
Pressed, like its rivals, to go where the money is, ARCO is stepping up activities outside the U.S. that show the potential to generate healthy cash flow. As in the U.S., gas is the prime order of the day especially in Asia, where new energy supplies are critically needed to generate electricity.
Bowlin admits that ARCO is somewhat of an "international Johnny come lately." Nevertheless, he anticipates that non U.S. E&P efforts will become a "significant earner in the next year or two."
Although it has hardly been a fast-money deal, ARCO gained significant new exposure in the Far East through its giant Yacheng natural gas project in the South China Sea. In 1983, ARCO China Inc. discovered 3 tcf of gas reserves about 60 miles off Hainan Island. The company then spent the better part of the next decade trying to find a market.
In 1992, agreements were reached to deliver most Yacheng gas, with peak production forecast at about 350 MMcfd, to a power plant in Hong Kong to be built by China Power & Light Co. and Exxon Energy Ltd. starting in 1996. An additional 50 MMcfd of dry gas and natural gas liquids will be shipped to Hainan Island, where the gas will fuel local industries and liquids sold for export markets.
The project involves construction of the world's second largest subsea pipeline system, with the major leg stretching 480 miles from the Yacheng 13 1 platform to Hong Kong and a second leg crossing 60 miles from the platform to Hainan Island.
"It's not what we originally had in mind," Bowlin said, but it's been an "excellent project for us and the Chinese" in more respects than one.
SELLING EXPERTISE ABROAD
ARCO has since expanded its interests in Asia, signing contracts for additional projects in the South and East China seas.
However, Bowlin notes that ARCO's involvement with China could become more diverse.
The company has begun talks with the Chinese government on a variety of other joint venture projects that would essentially capitalize on ARCO's downstream expertise. Among the projects being discussed are assisting the Chinese to develop low cost, reduced emissions gasoline.
Earlier, ARCO agreed to provide China's Huaneng Coal Corp. consulting services to examine investment opportunities in coal mining and possibly cofiring coal and natural gas in power plants.
Joint ventures tapping ARCO's refining, distribution, and marketing expertise elsewhere in the world may become a new area of focus in years to come, Bowlin said, cautioning that the idea is still in the conceptual stage of evaluation.
OTHER NON-U.S. PROSPECTS
ARCO International also has broadened its activity in Indonesia, completing development of two major gas fields in 1993.
An oil producer off Java for 25 years, ARCO last year began moving gas from the Java Sea to Jakarta for electrical power generation. ARCO, a 43% interest holder in the project, holds a contract to deliver 260 MMcfd for the next 11 years.
In early 1994, gas deliveries also began from Pagerungan field off Bali, where as much as 300 MMcfd will be delivered to a plant in East Java. In addition, the company increased its interest in the Malacca Straits area.
Elsewhere in Southeast Asia, ARCO signed a letter of intent for an exploration program in Philippines and purchased a 50% interest in Offshore Viet Nam Block 4.1 from operator British Gas plc.
ARCO also has stepped up efforts in the North Sea, completing two gas development projects and starting the second phase of a third in 1993.
All told, the company expects to drill as many as 35 wildcats around the world in 1994.
Bowlin isn't the only one optimistic that international efforts will pay off for ARCO. Analyst Mary K. Quinn of S.G. Warburg, in reports earlier this year, wrote, "ARCO would be a primary beneficiary of a recovery in crude prices, particularly if the international divisions begin to perform as expected throughout the year...
"International operations will be the key growth driver. New gas projects in the Far East and the North Sea will result in a near quadrupling of gas production in 1993 97."
Like other elements of the strategy that's been unfolding in recent years, the international drive was in place well before Bowlin was tapped to replace Cook. Far from coming in to set new directions for the company, Bowlin signaled that he's very much in step with the courses ARCO has charted.
"Lod and I are different people with different personalities," Bowlin said. I've been with this company for 25 years. I don't think there will be significant differences in philosophy. We haven't changed the basic strategies for success."
DOWNSTREAM STRATEGY
Integral to ARCO's recipe for success are its refining and marketing operations.
The company's aggressive forays in marketing a high volume, low price strategy combined with addition of convenience stores at retail outlets-have secured ARCO the largest share of California's gasoline market.
"We'll maintain our No. 1 market share," Bowlin predicted.
In recent years, ARCO has been equally aggressive in jumping to the forefront of the quest to produce cleaner burning gasoline. The first to bring reformulated gasoline to market in 1990, ARCO later developed an advanced formula that became the model for California Air Resource Board's (CARB) Phase II low emission gasoline, which the state's largest refiners will be required to start selling in 1996.
Unlike some other majors, ARCO is eager to see CARB stay on course with the reformulated gasoline timetable. One of only two California refiners ready when new CARB and U.S. Environmental Protection Agency diesel specifications came into play in October 1993, ARCO has challenged CARB in court for granting some companies a temporary reprieve in meeting the specifications.
"We're committed to retrofitting our refineries and hope there will not be drastic changes in the rules," Bowlin said.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
