Occidental Petroleum continues to refocus operations worldwide

Maureen Lorenzetti
OGJ Online

Occidental Petroleum Corp. is a much changed company from 4 years ago.

"It's different in terms of focus; different in terms of asset mix; and different in terms of sustainable earnings power," Chairman and CEO Ray Irani told investors at the recent Lehman Brothers CEO Energy conference in New York City.

"Our earnings per barrel were the best in the industry for the past 39 months," he said. Our return on equity is in the top quartile and our return on capital is in the second quartile."

Irani said that those results come from a 20% average return on capital employed from their key assets.

In 1997 the company went through a major corporate restructuring. On the upstream side, it has shifted its corporate assets to three core areas: the US, Latin America, and the Middle East, reducing its international presence from 26 countries to 9.

It also walked away from the midstream part of the business by selling the MidCon interstate natural gas pipeline network and buying oil and gas assets in California and Texas. When the gas pipeline business was sold, it used the proceeds for the 1998 purchase of Elk Hills field from the federal government for $3.5 billion. In April 2000, it bought Altura Energy Ltd. in Texas for $3.6 billion. Another purchase in California, the $110 million THUMS property, paid for itself in 14 months.

"The net result is that income from our oil and gas business accounted for 89% of the company's total recurring income in the first half of 2001, compared to 47% in 1997."

Those numbers help solidify the company's reputation as an efficient and very profitable producer.

"Unlike exploration projects of comparable size that often take 5 or more years to begin producing returns, these acquisitions have been generating cash and income from day one," Irani said.

Irani has also told Wall Street investors that the company has been working to pay down its debt from the Elk Hills and Altura purchases, and is aiming to have a debt to capitalization ratio in the 40% range. Debt reduction remains a priority for the remainder of this year and in 2002, company officials say. Recent second quarter earnings released in July showed the total debt to capitalization ratio was down to 51%, compared to 57% at the end of last year.

What next?

In oil and gas, the company says it will remain focused on large, long-lived cost competitive "legacy" assets that will yield stable production, strong earnings, cash flow, and a solid platform for new growth initiatives.

"No matter how good the technical data appear, we're prepared to walk away if we can't strike a deal that is consistent with our goal of top quartile performance," Irani said.

Occidental also plans to harvest cash from its chemical business to fund more exploration.

About 75% of the company's $1 billion capital budget this year will be spent on domestic projects, and Irani said in an interview that he expects spending levels to remain about the same in 2002.

In the near to mid term, the company expects California's gas market to remain strong.

"That's why we are moving aggressively with our California exploration program that targets high potential gas prospects in both the San Joaquin and Sacramento valleys."

After the company bought Elk Hills, it bought a substantial acreage position in California through a combination of purchases and asset swaps. As a result Occidental has the largest holdings of mineral interests in the state, about 850,000 acres. Most of the land is held in fee rather than leased.

"We are a significant player there not just in production. And we were there long before there were price increases or shortages. It was by design not by accident," Irani said.

This year and next the company will be drilling multiple shallow to medium depth prospects in the 5-50 bcf range.

But the real potential prize is farther beneath the San Joaquin Valley where the company has identified a number of deep gas prospects in the 200 to 500 bcf range.

"We began drilling the first deep gas well, called Thunderball, in the Elk Hills area on Aug. 8," Irani said. The estimated cost of the 20,000 ft well is 20 million and it will take about 6 months to complete.

Occidental expects to drill five or six deep gas wells over the next few years in California.

Overseas

In the past few years, most of the company's 4-6%/year production growth has come from outside the US, including Latin America, and the Middle East. As a member of the new Saudi gas joint venture, Oxy's said its investments in the Middle East will remain a corporate focus.

Occidental is a member of the "Core Venture 2" consortium, which will invest in the Red Sea area. Occidental and Marathon each will have a 20% interest in the multi-billion project with ExxonMobil Corp. the lead partner with a 60% interest.

The project calls for onshore and offshore exploration and success in those blocks "will lay the foundation" for additional investment opportunities in power generation, water desalination, and petrochemicals in the western part of the kingdom.

Occidental's project in Saudi Arabia is the first of several new projects it expects to land in the Middle East over the next few years, Irani said. The company has sizeable investments in Qatar, Yemen, and Oman. Occidental is also one of five companies under consideration to be a joint-venture partner with the UAE government on the Dolphin project.

The $3.5 billion project, which will deliver 2 bcfd from Qatar's North Field to UAE markets though a subsea pipeline, is scheduled to start up by early 2005.

Longer term, the company also has not forgotten its holdings in Libya, despite US sanctions that prevent American companies from investing overseas.

Occidental, Marathon Oil Co. and Conoco Inc. have fields which the Libyan government intends to sell if the US companies are not allowed to claim them. Complicating the picture is the recent 5-year renewal of the Iran Libya Sanctions Act.

Ecuador is considered another "important" near-term growth project, according to Irani. Construction has begun on a pipeline to move oil from Eden-Yuturi field in 2003. The field is expected to boost production 20,000 b/d. Occidental is also expanding its exploration program in Block 15 with a 3D seismic program.

Colombia is a different story. The company's worldwide production is expected to be flat at 465 MMboe/d this year because civil unrest in Columbia has disrupted operations for Oxy (and other production companies) there.

Irani did not disclose plans for Colombia although the company has cautioned that security problems will have "an important" bearing on future investment decisions.

Contact Maureen Lorenzetti@[email protected]