Of ConocoPhillips & the integrated model

Is the integrated model of operations incorporating a mixed bag of upstream, midstream and downstream assets ‘dead’ for oil & gas majors given that so many of them have put refining & marketing (R&M) assets up for sale in the last half decade? The question of raises some fierce emotions! Some say it’s not dead, some (including the Oilholic) say it is and others simply say it is on “life support.” The wider market and quite a few delegates here at the 20th WPC point to one company's move which typifies the market dilemma – that's ConocoPhillips.

The US major's announcement in July that it will be pursuing the separation of its exploration and production (E&P) and R&M businesses into two separate publicly traded corporations via a tax-free spin-off R&M to its shareholders did not surprise the Oilholic and those who think the integrated model is no longer in vogue.

As many are watching what unfolds at ConocoPhillips, it is worth turning one’s attention to what its Chief Executive Jim Mulva had to say amid a cacophony of soundbites in Doha. Mulva intends to retire once his company’s split is complete and will be replaced by Ryan Lance as head of the split upstream business.

He notes that ConocoPhillips will spend close to US$14 billion on E&P in 2012 with the majority of the stated capital invested in unconventional projects in North America – namely the Canadian oil sands and liquids rich shale plays (Eagle Ford shale, Permian, Bakken and Barnett prospection fields). From these, the outgoing Chief Executive expects “competitive returns”. The company also hopes to remain active in Indonesia, Malaysia and Kazakhstan and is not giving up on the North Sea.

In fact, it will invest more on existing and new prospects in the North Sea’s Greater Britannia, Greater Ekofisk fields and Jasmine and Clair ridge projects. However, moving away from E&P, ConocoPhillips will divest between US$15 to US$20 billion in assets by Q4 2012. Some, but not all, proceeds will be used to finance a recently announced US$10 billion share buy-back.

Mulva has been as clear as he can be on his company's forward planning. The wider market will now be watching how things pan out for the split companies. However, nothing the Oilholic has heard at the 20th WPC fundamentally alters his initial thoughts - that the integrated model is in deep trouble in Western jurisdictions.

© Gaurav Sharma 2011. Photo: ConocoPhillips exhibition stand at the 20th Petroleum Congress © Gaurav Sharma 2011.