Independent company ranking confirms Conoco's E&P revitalization

Conoco ranked first in exploration and production results in a comparative-performance analysis of 13 major integrated energy companies by Prudential Securities for 1995-99, company officials reported Tuesday. The Prudential study ranked Conoco in the highest tiers for, among other things: production income, along with BP Amoco (now BP) and TotalFina (now TotalFinaElf); production replacement ratios, along with Royal Dutch/Shell Group and TotalFina; and upstream returns, along with Shell.

Sam Fletcher
OGJ Online

Conoco Inc. ranked first in exploration and production results in a comprehensive comparative-performance analysis of 13 major integrated energy companies by Prudential Securities Inc. for 1995-99, company officials reported Tuesday. It was the second consecutive win for Conoco, after placing first in an identical 1998 study by Schroder & Co., company officials said.

The Prudential study ranked Conoco in the highest tiers for:

� Production income, along with BP Amoco PLC (now BP) and TotalFina SA (now TotalFinaElf SA).

� Quality of earnings, along with ExxonMobil Corp., Amerada Hess Corp., and Unocal Corp.

� Cash flow, along with Amerada Hess.

� Production replacement ratios, along with Royal Dutch/Shell Group and TotalFina.

� Upstream returns, along with Shell.

Prudential officials also rated Conoco above-average for finding and development costs, including acquisitions and divestments. In that category, Conoco was behind BP, Shell, Texaco Inc., and the former Elf Aquitaine SA, but on a par with TotalFina and ExxonMobil.

Conoco ranked average for the group in the categories of adjusted production; depreciation, depletion, and amortization expenses; and discounted future net cash flow.

"If we can't be the biggest�and we can't�then we'll be the best that we can be. We can't always be No. 1, but our objective is to stay in the top quartile," said Robert E. (Rob) McKee III, executive vice-president of exploration and production for Houston-based Conoco.

"We started from the tail end of the pack 5-6 years ago, and we said we were going to manage this business back to health," he told reporters Tuesday.

Under McKee's direction, Conoco has reduced its number of producing fields by 65% and cut its upstream overhead and operating costs by about 20% since 1992. During the same period, the company has grown its total reserves by 53% and boosted production 19% from operations in the US Gulf of Mexico, the UK North Sea, Venezuela, Viet Nam, Canada, and Russia. At the end of 1999, its global proved reserves totaled 2.6 billion boe, with total production of 636,000 boe/d.

Conoco's drilling success rate also has improved to 50% of the 20 wildcat wells it drilled last year, primarily in its target areas of the deepwater gulf, the North Sea, and Indonesia, up from a 30% success rate in 1998. The company has slashed its finding and development costs by 36% to a 5-year average of less than $4.50/boe in 1999, from a 1998 5-year average of $7/boe.

As a result, Conoco's upstream operations earned a record $845 million before special items last year.

Conoco's rise
McKee credits Conoco's team approach for that success, including the upstream finding team that he formed to evaluate all exploration options and allocate resources with a global perspective in place of the regional approach the company employed in the past.

"We're pretty proud of our capital spending discipline. We have to spend money to grow, but we watch that closely," McKee said.

International upstream operations will get more of Conoco's capital in the future, he said. One upstream market that McKee hopes to re-enter soon is Libya. Conoco had a 40% interest in the old Oasis group of US producers, including Marathon Oil Co. and Amerada Hess, that were operating in Libya before 1986 when the US government imposed a raft of trade sanctions that forced their withdrawal.

Libya's National Oil Co. has since changed the Oasis name to Waha Oil Co. and taken over operation of those oil fields, marketing the US companies' share of production on its own account (OGJ, June 18, 1990, p. 23). "But we kept the right to come back and re-enter the country once the political dispute is settled," said McKee.

He thinks a political reconciliation may come soon, now that Libya has met some of the US demands by turning over suspected terrorists for trial in an international court. The move toward normalizing US relations with Libya is on track, regardless of who is elected president this fall, he said.

Conoco officials have since been back to Libya, with the US government's blessing, to look at those properties and to talk with Libyan officials about eventually resuming operations there. "One team returned about a week ago," McKee said.

The former Oasis fields are still producing about 300,000 b/d, with the possibility of being increased to more than 400,000 b/d, he said. "They need our expertise and our investment," said McKee.

International oil companies voted Libya as their top choice area for new exploration, development, and production ventures this year in a recent survey by Robertson Research International Ltd. (OGJ Online, May 24, 2000). The changing political environment and prospects for world-class production plays vaulted Libya to the top spot from 20th position in Robertson's previous survey in 1998.

That same poll picked Iran as the second most attractive country for E&P opportunities. An earlier deal by Conoco to develop Iran's offshore Sirri field was torpedoed by President Bill Clinton in a political move that allowed Total to step in (OGJ, Oct. 6, 1997, p. 31). However, McKee said, "We have kept up a constant dialogue with the Iranians. They have told us that, when it's okay for us to come back, they'll talk seriously with us about new opportunities there."

He said, "Up until 2 years ago, 90% of our earnings and 75% of our production came from North America and Northwest Europe. But we knew we didn't have the growth opportunities we needed in those two core areas."

Venezuela "undoubtedly" will be Conoco's third area of core operations, said McKee, with Southeast Asia "likely" to emerge as the fourth.

Beyond that, the company is looking to develop opportunities in Russia, Nigeria, and the Middle East. Conoco Energy Nigeria is negotiating to participate in development of two oil fields in the Niger Delta (OGJ Online, Aug. 17, 2000).

"Nigeria is still a region where you've got to watch your P's and Q's, but there has been a sea-change of difference with the new regime there. They're really trying to change that culture," said McKee.

Conoco also plans to use the expertise that it has quietly acquired in gas-to-liquids (GTL) technology as a key to enter new markets (OGJ Online, June 28, 2000). Although the company has "no significant stranded gas reserves at the moment," McKee said its GTL capabilities are part of ongoing negotiations in several countries, including Russia, Algeria, Nigeria, and Venezuela.

He offered a "guesstimation" that the technology is only "a couple of years away" from the effective cost levels required for commercial operation. Conoco is likely to license that technology, McKee said.

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