Anadarko Petroleum Corporation is among the largest independent oil and gas exploration and production companies in the world, with 2.3 billion barrels of oil equivalent (BOE) of proved reserves as of December 31, 2009. Anadarko’s primary business segments are managed separately due to the nature of the products and services, as well as to the unique technology, distribution and marketing requirements. The Company’s three operating segments are:
Oil and gas exploration and production – This segment explores for and produces natural gas, crude oil, condensate and natural gas liquids (NGLs). The Company’s operations are located onshore United States and in the deepwater Gulf of Mexico, as well as in Algeria, Brazil, China, Cote d’Ivoire, Ghana, Indonesia, Mozambique, Sierra Leone and other countries.
Midstream – This segment provides gathering, processing, treating and transportation services to Anadarko and third-party oil and gas producers. The Company owns and operates natural-gas gathering, processing, treating and transportation systems in the United States.
Marketing – This segment sells much of Anadarko’s production, as well as hydrocarbons purchased from third parties. The Company actively markets oil, natural gas and NGLs in the United States, and actively markets oil from Algeria and China.
The Company owns interests in several coal, trona (natural soda ash) and industrial mineral properties through non-operated joint ventures and royalty arrangements within and adjacent to its land grant acreage position (Land Grant). The Land Grant consists of land granted by the federal government in the mid-1800s, which passes through Colorado and Wyoming and into Utah. Within the Land Grant, the Company has fee ownership of the mineral rights under approximately 8 million acres.
OIL AND GAS PROPERTIES AND ACTIVITIES
The map below illustrates the locations of Anadarko’s domestic and international oil and gas exploration and production operations. The Company plans to allocate approximately 90% of its 2010 capital budget to the oil and gas exploration and production segment.
Properties and Activities—United States
Overview Anadarko’s active areas in the United States include onshore in the Lower 48 states and Alaska, and the deepwater Gulf of Mexico. Proved reserves in the United States comprised 89% of Anadarko’s total proved reserves at year-end 2009. During 2009, the Company’s drilling efforts in the United States resulted in 979 natural-gas wells, 40 oil wells and 21 dry holes. The Company plans to allocate approximately 65% of its 2010 oil and gas exploration and production segment capital budget to properties in the United States.
Onshore The Company plans to allocate approximately 45% of its 2010 oil and gas exploration and production segment capital budget to onshore properties.
Rocky Mountain Region Anadarko’s Rocky Mountain Region (Rockies) properties are located in Colorado, Utah and Wyoming with a primary focus on natural-gas plays. Anadarko operates approximately 13,000 wells and has an interest in approximately 9,400 non-operated wells in the Rockies. Anadarko is an operator of tight gas and coalbed methane (CBM) natural-gas assets, as well as enhanced oil recovery (EOR) projects within the region. Tight gas is found in low-permeability reservoirs containing natural gas. The Company also earns royalty revenues from many operated and non-operated wells located within its Land Grant acreage. Activities in the Rockies focus on expanding the potential of mature fields to increase production and add proved reserves through infill drilling operations, re-completions and re-fracture stimulations of pre-existing wells. In 2009, the Company drilled 724 wells in the Rockies and plans to maintain an active drilling program in the region in 2010.
The Company’s operated tight gas assets are located in the Greater Natural Buttes, Wattenberg, Wamsutter and Moxa fields. Pinedale is a non-operated asset within Anadarko’s tight gas portfolio. Anadarko uses fracture-stimulation technology to create an enhanced migration pathway for the natural gas to flow to the wellhead. Anadarko operates 7,000 wells and has an interest in 4,000 non-operated wells in these tight gas areas. The Company also benefits from third-party-operator success in the Wyoming portion of its Land Grant acreage and actively pursues farm-out projects to capture incremental royalty revenues from exploration and development activity in the area. In 2010, Anadarko plans to maintain an active drilling program in these tight gas areas.
Anadarko also operates multiple CBM properties in the Rockies. CBM is natural gas that is stored in coal seams. To produce it, water is extracted from the coal seam, which reduces pressure and releases natural gas which then flows to the wellhead. Anadarko’s primary CBM properties are located in the Powder River Basin and Atlantic Rim areas in Wyoming and the Helper, Clawson and Cardinal Draw areas in Utah. Anadarko operates approximately 4,600 shallow, low-cost CBM wells and has an interest in approximately 5,200 outside-operated CBM wells in the Rockies. In 2010, Anadarko will continue its active CBM development program primarily in the Powder River Basin of Wyoming.
The Company’s EOR operations increase the amount of oil that can be produced from mature reservoirs after primary recovery methods have been completed. During 2009, the Company continued to pursue phased development of its Rockies EOR assets at the Salt Creek and Monell areas in Wyoming. Each area has experienced year-over-year increases in production due to CO 2 injection operations. The Company expects the phased development to continue throughout 2010 for these assets.
Southern Region Anadarko’s Southern Region properties are primarily natural-gas plays located in Texas, Pennsylvania and Kansas. Operations in these areas are focused on finding and producing natural-gas resources from tight sands, naturally fractured carbonates and emerging shale plays.
Anadarko is active in the Bossier, Haley, Carthage, Chalk, South Texas and Ozona areas of Texas, where the Company employs vertical and horizontal drilling programs. In 2009, the Company drilled 166 development wells in these areas. Early in 2009, Anadarko reduced its activity in the Bossier and Carthage areas due to a then-existing misalignment between high service costs and low commodity prices. During the course of 2009, drilling efficiency improved in every actively developed field in these areas with almost 30% of all wells drilled setting field records for cycle time. These efficiency gains, combined with lower service costs during the second half of 2009, resulted in a significant improvement in capital efficiency. As a result, increased activity is expected in Carthage in 2010. Although the Hugoton area in Southern Kansas has historically been a long-life, slow-decline asset for Anadarko, the Company expects an increased activity level in the area in 2010 due to recent changes in local regulations controlling the number of wells that may be drilled in a given area.
Anadarko’s 2009 onshore exploration program focused primarily on testing and developing emerging shale plays. Anadarko conducted successful exploratory tests in Pennsylvania’s Marcellus shale play as well as in Texas’ Eagleford, Pearsall and Haynesville shale plays. In the Appalachian basin, where the Marcellus shale is being developed, 11 operated horizontal wells were spud and six of the wells were completed in 2009. As a non-operating partner, Anadarko also participated in 40 new horizontal wells and 12 wells were completed in 2009. As of December 31, 2009, Anadarko held interests in approximately 716,000 gross acres (approximately 350,000 net acres) in the Marcellus shale play and operated about half of the acreage with an average working interest of approximately 50%. In February 2010, the Company announced a joint-venture agreement which permits a third party to participate with the Company as a 32.5% partner in the Company’s Marcellus Shale assets, primarily located in north-central Pennsylvania, for approximately $1.4 billion. The third party will earn an interest in approximately 100,000 net acres in exchange for funding 100% of the Company’s share of 2010 development costs, and 90% of these costs thereafter, with an estimated funding-completion date of 2013. The third party will also have the opportunity to purchase a 32.5% share of the Company’s existing wells and additional acreage acquisitions by reimbursing a proportionate share of the Company’s prior expenditures. Closing of this transaction is subject to applicable regulatory approvals and other contractual conditions.
In the Maverick basin, where the Eagleford and Pearsall shale plays are being developed, 15 wells were spud and 10 wells were completed in 2009. As of December 31, 2009, Anadarko held approximately 380,000 gross acres (approximately 180,000 net acres) with an average working interest of approximately 50% in this area. Anadarko is also focusing on the Haynesville shale play in Texas where it currently has eight producing wells. Anadarko drilled six wells and completed five wells in 2009 and is transitioning to a development program. The Company plans to increase its activity in each of these areas in 2010.
Alaska Anadarko’s activity in Alaska is concentrated primarily on the North Slope. Development activity continued at the Colville River Unit through 2009 with seven wells drilled. In 2010, the Company anticipates sanctioning of the Alpine West satellite project and participating in approximately 10 development wells.
Gulf of Mexico In the Gulf of Mexico, Anadarko owns an average 66% working interest in 575 blocks and has access to an additional six blocks through participation agreements. The Company operates eight floating platforms, holds interests in 26 producing fields and is in the process of delineating and developing seven additional fields in the area. Anadarko plans to allocate approximately 20% of its 2010 oil and gas exploration and production segment capital budget to the deepwater Gulf of Mexico.
In 2009, Anadarko drilled seven development wells in the Gulf of Mexico. The Company plans to drill nine development wells in the area in 2010. Anadarko utilizes a hub-and-spoke infrastructure in the Gulf of Mexico in order to develop resources more quickly and at a substantial cost savings. In September 2008, Hurricane Ike damaged third-party-owned export pipelines downstream of the Marco Polo complex and the Constitution/Ticonderoga fields, thereby limiting production from certain Anadarko fields. Production from these fields returned to full capacity in the third quarter of 2009 as repairs to the third-party-owned infrastructure were completed.
In 2009, Anadarko is continuing to make progress on the Caesar Tonga development project, which is on schedule for first production in early 2011. The field is a sub-sea tieback to the Anadarko-operated and owned Constitution spar. This project is being accelerated by two years through a hub-and-spoke strategy utilizing the existing spar. In 2009, topside construction, modification and installation began on the Constitution spar. Construction, installation, drilling and completion activities will continue to advance the project in 2010.
Anadarko’s Gulf of Mexico exploration program is currently focused in the deepwaters of the extensive middle-to-lower Miocene play in the central Gulf of Mexico and the developing lower-Tertiary play in the western Gulf of Mexico. During 2009, Anadarko participated in five successful deepwater wells (Heidelberg, Shenandoah, Samurai, Vito and Lucius) and two delineation wells, at Lucius and Vito, which were still drilling at the end of 2009. Anadarko also drilled four unsuccessful wells in the Gulf of Mexico in 2009. The Company expects to participate in approximately two to four exploration wells and several delineation wells in the area in 2010.
Properties and Activities—International
Overview The Company’s international oil and gas production and development operations are located primarily in Algeria, China and Ghana. The Company also has exploration acreage in Brazil, Cote d’Ivoire, Ghana, Liberia, Sierra Leone, Mozambique, Indonesia and other countries. Approximately 11% of the Company’s proved reserves were located in these international locations at year-end 2009. Anadarko drilled 44 wells in international areas in 2009. In 2010, the Company expects to drill approximately 24 development and 20 exploration wells at various international locations. Anadarko plans to allocate approximately 35% of its 2010 oil and gas exploration and production segment capital budget to international areas.
Algeria Anadarko is engaged in development and production activities in Algeria’s Sahara Desert in Blocks 404 and 208. Currently, all production is from fields in Block 404, which produce through the Hassi Berkine South and Ourhoud Central Production Facilities (CPF). Anadarko reached a major milestone during the year with the awarding of all major contracts for the construction of the CPF and associated infrastructure for the El Merk development project in Block 208. At December 31, 2009, site preparation was well advanced, contractor personnel were being mobilized to the site and long-lead items had been ordered. Initial production is scheduled for late 2011. During 2009, six development wells were drilled in Blocks 404 and 208. During 2010, the Company expects to drill approximately 10 development wells in the two blocks, with a focus on El Merk drilling.
Contracts and Partners Since October 1989, the Company’s operations in Algeria have been governed by a Production Sharing Agreement (PSA) between Anadarko, two third parties, and Sonatrach, the national oil and gas company of Algeria. Anadarko’s interest in the PSA for Blocks 404 and 208 is 50% before participation at the exploitation stage by Sonatrach. The Company has two partners, each with a 25% interest, also prior to participation by Sonatrach. Under the terms of the PSA, oil reserves that are discovered, developed and produced are shared by Sonatrach, Anadarko and its two partners. Sonatrach is responsible for 51% of the development and production costs. Anadarko and its partners have completed the exploration program on Blocks 404 and 208 and now participate only in development activity on these blocks. Anadarko and its joint-venture partners funded Sonatrach’s share of exploration costs and are entitled to recover these exploration costs from production during the development phase.
In March 2006, Anadarko received a letter from Sonatrach purporting to give notice under the PSA that enactment of a law in 2005 (2005 Law), relating to hydrocarbons, triggered Sonatrach’s right under the PSA to renegotiate the PSA in order to re-establish the equilibrium of Anadarko’s and Sonatrach’s interests. Anadarko and Sonatrach reached an impasse over whether Sonatrach had a right to renegotiate the PSA based on the 2005 Law and entered into a formal non-binding conciliation process under the terms of the PSA in an attempt to resolve this dispute. The conciliation on the 2005 Law dispute was concluded in 2007 without a definitive resolution. There have been no further developments on the 2005 Law dispute. At this time, Anadarko is unable to reasonably estimate the economic impact under the PSA if Sonatrach were to succeed in modifying the PSA.
Exceptional Profits Tax In July 2006, the Algerian parliament approved legislation establishing an exceptional profits tax on foreign companies’ Algerian oil production and issued regulations implementing this legislation. These regulations provide for an exceptional profits tax imposed on gross production at rates of taxation ranging from 5% to 50% based on average daily production volumes for each calendar month in which the price of Brent crude averages over $30 per barrel. Based on the Application Procedure issued in April 2007 by ALNAFT, an agency under the control of the Algerian Ministry of Energy and Mines, the exceptional profits tax is applied to the full value of production and not just to the amount in excess of $30 per barrel.
In January 2007, Sonatrach advised Anadarko that it would begin collecting the exceptional profits tax from Anadarko’s share of production commencing with March 2007 liftings, including for the prior months since the new tax went into effect. In response to the Algerian government’s imposition of the exceptional profits tax, the Company notified Sonatrach of its disagreement with the collection of the exceptional profits tax. The Company believes that the PSA provides fiscal stability through several of its provisions that require Sonatrach to pay all taxes and royalties. To facilitate discussions between the parties in an effort to resolve the dispute, on October 31, 2007, the Company initiated a conciliation proceeding on the exceptional profits tax as provided in the PSA. Any recommendation issued by a conciliation board (Conciliation Board) arising out of the conciliation proceeding is non-binding on the parties. The Conciliation Board issued its non-binding recommendation on November 26, 2008, which the Company received on December 1, 2008. On February 15, 2009, the Company initiated arbitration against Sonatrach with regard to the exceptional profits tax. In conformance with the terms of the PSA, a notice of arbitration was submitted to Sonatrach. For additional information, see Note 15—Other Taxes in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
China Anadarko’s development and production activities in China are located offshore in Bohai Bay. Development drilling and recompletion activity was ongoing throughout 2009, and Anadarko drilled 14 wells during the year. Development continued during 2009 with the approval of a facility expansion and an infill drilling program implemented in order to sustain current-level production. Development drilling activity in 2010 is expected to be similar to 2009 levels. Anadarko drilled one unsuccessful exploration well in Bohai Bay in 2009. During 2010, the Company plans to drill one deepwater exploration well in the South China Sea.
Ghana Anadarko’s exploration and development activities in Ghana are located offshore in the West Cape Three Points block and the Deepwater Tano block. A significant milestone was achieved in 2009 with the Ghanaian government formally approving the Jubilee field Phase I Plan of Development and Unitization Agreement. During 2009, the Company and its partners drilled six development wells in the field and awarded all contracts. Approximately 84% of the construction work on a floating production, storage and offloading vessel had been completed by a third-party shipbuilder at December 31, 2009. Anadarko expects initial production from the Jubilee field in late 2010. During 2009, the Company also participated in four successful exploration and appraisal wells. The Tweneboa discovery was announced in early 2009 and an appraisal well was drilling at December 31, 2009. In 2010, the Company plans to participate in five to seven exploration and appraisal wells in the two blocks.
Brazil Anadarko holds exploration interests in seven blocks located offshore Brazil in the Campos and Espírito Santo basins. In these areas, Anadarko drilled three exploration wells and one appraisal well in 2009, including three successful wells at Coalho, Itaipu and Wahoo North. In 2010, Anadarko expects to participate in three to four deepwater exploration and appraisal wells.
Indonesia Anadarko has participating interests in approximately 4.5 million exploration acres in Indonesia through a combination of several operated and non-operated Production Sharing Contracts. The Company participated in two unsuccessful exploration wells in 2009 and plans to participate in two to four exploration wells in 2010.
Mozambique The Company has participating interests in two blocks (one onshore and one offshore) totaling approximately 6.4 million acres. During 2009, Anadarko participated in one offshore exploration well that was drilling at December 31, 2009. Anadarko also drilled one unsuccessful onshore exploration well in 2009. In 2010, the Company plans to drill two to four deepwater exploration wells in this area.
Sierra Leone Anadarko’s exploration activities in Sierra Leone are located in blocks 6 and 7 in the Liberian basin. In 2009, Anadarko announced a deepwater discovery at the Venus prospect, which confirmed the presence of an active petroleum system in this frontier basin. In 2010, the Company plans to drill one to three exploration and appraisal wells in the Liberian basin.
Cote d’Ivoire Anadarko holds interests in two blocks located in the Ivorian basin. The Company participated in one unsuccessful well offshore Cote d’Ivoire in 2009. In 2010, Anadarko expects to drill one to two exploration wells in the area.
Other Anadarko also has active exploration projects in Liberia and Kenya as well as activities in other potential exploration and new venture areas overseas.
In December 2008, the SEC released the final rule for “Modernization of Oil and Gas Reporting.” The new rule requires disclosure of oil and gas proved reserves by significant geographic area, using the 12-month average beginning-of-month price for the year, rather than year-end prices, and allows the use of reliable technologies to estimate proved oil and gas reserves, if those technologies have been demonstrated to result in reliable conclusions about reserves volumes. In addition, companies are required to report on the independence and qualifications of its reserves preparer or auditor, and file reports when a third party is relied upon to prepare reserves estimates or conduct a reserves audit.
Reserve and related information for 2009 is presented consistent with the requirements of the new rule. The new rule does not allow prior-year reserve information to be restated, so all information related to periods prior to 2009 is presented consistent with prior SEC rules for the estimation of proved reserves. Prior years have been reclassified to conform to the current-year presentation of significant geographic areas.
Estimates of volumes of proved reserves, net of royalty interests, of natural gas, oil, condensate and NGLs owned at year end are presented in billions of cubic feet (Bcf) at a pressure base of 14.73 pounds per square inch for natural gas and in millions of barrels (MMBbls) for oil, condensate and NGLs. Total volumes are presented in millions of barrels of oil equivalent (MMBOE). For this computation, one barrel is the equivalent of 6,000 cubic feet of gas. NGLs are included with oil and condensate reserves and any associated shrinkage has been deducted from the gas reserves.
The Company’s 2009 drilling program focused on proven and emerging oil and natural-gas basins in the United States (onshore and deepwater Gulf of Mexico), and various international locations. Exploration activity consisted of 67 gross completed wells, including 54 onshore U.S. wells, six offshore Gulf of Mexico wells, and seven international wells. Development activity consisted of 1,020 gross completed wells, which included 974 onshore wells, six offshore Gulf of Mexico wells, and 40 international wells.
MIDSTREAM PROPERTIES AND ACTIVITIES
Anadarko invests in midstream (gathering, processing, treating and transporting) systems to complement its oil and gas operations in regions where the Company has natural-gas production. Through ownership and operation of these facilities, the Company is better able to manage its costs associated with, and value received for gathering, processing, treating and transporting natural gas. In addition, Anadarko’s midstream business also provides midstream services to third-party customers, including major and independent producers. Anadarko generates revenues from its midstream activities through fixed-fee, percent-of-proceeds, and keep-whole agreements. For 2010, Anadarko plans to allocate approximately 8% of the Company’s capital budget to the midstream segment.
Anadarko significantly increased the size and scope of its midstream business through its 2006 acquisitions of Western Gas Resources, Inc. (Western) and Kerr-McGee Corporation (Kerr-McGee). At the end of 2009, Anadarko had 28 systems located throughout major onshore producing basins in Wyoming, Colorado, Utah, New Mexico, Kansas, Oklahoma and Texas.
In 2008, Western Gas Partners, LP (WES), a subsidiary of Anadarko, completed its initial public offering of 20.8 million common units for net proceeds of $321 million ($343 million less $22 million for underwriting discounts and structuring fees). WES is a Delaware publicly traded limited partnership formed by Anadarko to own, operate, acquire and develop midstream assets. Anadarko contributed assets to WES in exchange for an aggregate 59.6% limited partner interest (consisting of common and subordinated limited partner units) in WES, a 2% general partner interest and incentive distribution rights (IDRs). IDRs entitle the holder to specified increasing percentages of cash distributions as WES’s per-unit cash distributions increase. In addition, Anadarko maintains control over the assets owned by WES through its ownership of the general partner. Anadarko holds an aggregate 54.8% limited partner interest in WES, a 2% general partner interest and IDRs as of December 31, 2009.
As of December 31, 2009, the Company had approximately 4,300 employees. Anadarko considers its relations with its employees to be satisfactory. The Company’s employees are not represented by any union. The Company has had no significant work stoppages or strikes associated with its employees.