ConocoPhillips: In Search Of More Hydrocarbons And Cash Flow

Jan. 7.14 | About: ConocoPhillips (COP)

Greenland has potential for further discovery of oil and natural gas. According to estimates, around 13% of the world's conventional oil reservoirs and 35% of the conventional natural-gas reservoir lie in this region. In fact, the Arctic region is estimated to contain around 90 billion barrels of oil, 1,669 trillion cubic feet of gas, and 44 billion barrels of natural-gas liquids. Of the 412 billion barrels of oil equivalent, or bboe, around 84% is expected to be in the offshore regions. This immense reserve potential is an incentive for ConocoPhillips (NYSE:COP) to explore in the Arctic region, where Greenland has significant access.

To capitalize on this, the company just secured a key exploration licence in the region. In December, a consortium led by ConocoPhillips, Statoil (NYSE:STO) and Nunaoil was awarded a 16-year licence to explore north-eastern Greenland. Statoil has a 52.5% stake in this partnership, ConocoPhillips a 35% stake, and Nunaoil the rest. Nunaoil is the national oil company of Greenland and holds interest in all exploration blocks in the region.

An important aspect of the exploration program for ConocoPhillips is that it has Statoil as a partner. Statoil has been operating in the Norwegian continental shelf, which is located closer to the Arctic exploration region, and has a success rate there over the last five years of 70% compared to the industry rate of 49%. The company plans to extend its drilling experience in the Norwegian continental shelf to drill in the Arctic region and will likely provide its technical expertise of drilling in the Arctic region to the partnership with ConocoPhillips.

The following chart shows Greenland's position in terms of oil and natural gas reserves in the Arctic region.

Click to enlarge

Source: Ernst and Young

In addition to the Arctic region's reserve potential, the government in Greenland has pushed for exploration drilling to gain economic independence. This focus on exploration has resulted in the increase in oil and natural gas licenses, which are issued by the Bureau of Minerals and Petroleum. The following chart shows the trend in licence grants.

Click to enlarge

Source: Natural Gas Europe

As can be seen from the chart above, exploration licenses have increased since 2006. This increase is likely to create competition in the exploration programs. As such, ConocoPhillips has made a timely entry in oil-and-gas exploration in the Arctic region.

One more in the Gulf of Mexico

ConocoPhillips and BP plc. (NYSE:BP) together announced the discovery of the Gila reservoir in the Gulf of Mexico. BP and ConocoPhillips have stakes in the reservoir of 80% and 20%, respectively. This is the fourth discovery of ConocoPhillips from the Lower Tertiary of the Gulf of Mexico region and the third for BP. The drilling depth of the Gila field is approximately 29,000 feet. One advantage for ConocoPhillips is that BP is the leading operator in the Gulf of Mexico region. BP has nine rigs operating in the region and has also initiated Project 20K, which is aimed at drilling at pressures of 20,000 psi. This program will develop new designs for rigs, risers, blowout preventers, and other equipment that are likely to operate at huge depths. So the partnership also provides a technological advantage to ConocoPhillips.

ConocoPhillips has three other reservoirs -- Tiber, Shenandoah, and Coronado -- in the Lower Tertiary region in the Gulf of Mexico. This discovery of the Gila reservoir will help ConocoPhillps further build up its acreage position and drilling inventory in the region. ConocoPhillips has more than 2.5 million net acres there with major operations in the Lower Tertiary region. The Lower Tertiary region is estimated to have around 15 billion barrels of oil. The Shenandoah field in which ConocoPhillips has 31% of working interest is expected to hold more than 300 million barrels of oil; Tiber in which ConocoPhillips has around 18% is estimated to have 4 billion to 6 billion barrels of oil in place. Thus, these fields in the Lower Tertiary will build up a large inventory for ConocoPhillips in the coming quarters.

With an eye keeping firm on its target

ConocoPhillips' venture for Arctic oil and natural gas could give the company an advantage through early entry in the exploration program in that region. In addition, the company's joint venture with Statoil will provide a technical advantage, increasing the probability of successful exploration. Also, the company's new discovery of the Gila reservoir is likely to propel growth of hydrocarbon production in the coming quarters. Finally, the partnership with BP is going to provide ConocoPhillips with a technological edge compared to other operators in the region.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.