Deepwater projects are not aligned with our new long-term strategy of pursuing low cost of supply opportunities. The cost and risk associated with deepwater activity are relatively high.

David HENDICOTT President CONOCOPHILLIPS Malaysia

Slow and steady wins the race

March 17, 2017

TOGY talks to David Hendicott, president of ConocoPhillips in Malaysia, about ramping up production, introducing enhanced seismic acquisition techniques and opportunities for exploration activity in Malaysia. The company produced a net average of around 50,000 boepd in Malaysia in 2016, and is looking forward to further growth in 2017 as production continues to ramp up.

ConocoPhillips is the world’s largest independent E&P company based on proven reserves and production of liquids and natural gas. Headquartered in Houston, the company has been present in Malaysia since 2000 through its subsidiary ConocoPhillips Malaysia.
In 2016, ConocoPhillips produced 40 million bopd of crude and 1.33 mcm (47 mcf) of gas per day in Malaysia, averaging a net production of 50,000 boepd by the beginning of 2017. Net production of crude in the country is expected to climb to 80,000-90,000 bopd by 2018.
In December 2014, 2016, production began at Shell’s deepwater tension-leg platform on the Mailkai deepwater project on Block G, of which ConocoPhillips holds a 35% share. Peak production is expected to reach 60,000 bopd. The firm is also involved in the Gumusut-Kakap, Kebabangan and Siakep North-Petai offshore developments in Sabah and Sarwak states.

• On giving back to Malaysia: “We have got a lot to bring to Malaysia, including expertise with large-scale operations, subsurface activities, major project execution, field development as well as drilling and completions.”

• On surviving low oil prices: “We’ve focused strongly on a low-cost-of-supply portfolio, which will be robust even in the most demanding price environments. Low cost of supply means that we’ve built an asset and opportunity base in which we can invest capital, cover operating costs and still achieve an attractive rate of return, all at a modest oil price level.”

• On deepwater developments: “Deepwater projects are not aligned with our new long-term strategy of pursuing low cost of supply opportunities. The cost and risk associated with deepwater activity are relatively high. Wells and developments are expensive, risk is high and there’s usually a long gap of ten years or more between significant initial expenditures and first revenue. This long timeline erodes returns and exposes us to price uncertainty in the interim.”

• On the rise of oil prices: “Although we’re cautious and humble about making any oil price predictions, we suspect prices are likely to remain restrained in years to come. When prices do rise, we’ll probably see a significant and relatively quick production response, particularly in North America where new volumes can be brought on stream quickly from vast unconventional resources.”

 

Besides touching on these subjects, David Hendicott gives an overview of the company’s current local deepwater operations. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with David Hendicott below.

When did ConocoPhillips enter Malaysia?
We entered Malaysia in 2000 during a period when access to hydrocarbon resources around the globe was a growing concern for international oil companies, since the vast majority of global production and reserves at that time was controlled by NOCs. We felt that there was real potential in Malaysia.
Since then, we have made significant investments in exploration and development. These led to our current position, with production from the Kebabangan, Gumusut-Kakap, Malikai and Siakap North-Petai fields, and other promising growth opportunities. We’ve built strong relationships here in Malaysia through the years, and now have a firm foothold and a material business here. We’re looking forward to further growth.

Could you describe your production activity in the upstream sector?
We have production from four fields. The Gumusut-Kakap field has reached plateau production and is producing steadily. We’ve been producing for a while from the Kebabangan gas-condensate field, which is operated by the Kebabangan Petroleum Operating Company, an asset-specific joint venture set up to develop and operate the Kebabangan cluster area. Production at Kebabangan increased during the second half of 2016 and we expect further ramp-up during 2017.
In addition, we have a stake in the Malikai development, which started producing in December 2016. We’re also producing from the Siakap North-Petai field. These developments are all coming to fruition quite nicely.

How will production be boosted in 2017?

We expect to continue to grow our Malaysian production strongly during 2017. Continued ramp up at Kebabangan and investment in a full 12 months of development drilling at Malikai will account for the majority of the production increase.

How would you characterise ConocoPhillips’ exploration portfolio in Malaysia?
We have operatorship of several PSCs in Sarawak. We will drill a deepwater well in Block DW-3E starting in Q1 2017. This will be an important well for ConocoPhillips and for Malaysia, testing a new play concept. We’ll be drilling in water depth of around 1,600 meters.
We have also been looking for further new opportunities to grow in the right areas, and have recently secured two new PSCs in shallow water offshore Sarawak. We’re partnering with Petronas Carigali and we will be [the] operator for both blocks.
We will be bringing ConocoPhillips’ proprietary seismic acquisition technology to these blocks, Compressed Seismic Imaging. This uses a combination of new acquisition techniques and revolutionary new processing algorithms to significantly improve seismic imaging quality. We are excited about the results we are seeing after the company used this technology in Australia and Norway. This will be the first time we apply it in Malaysia.
We’re now in the early stages of growing an operated position in Malaysia, which will enable us to leverage skills and experience ConocoPhillips has developed in other parts of the world. We have got a lot to bring to Malaysia, including expertise with large-scale operations, subsurface activities, major project execution, field development as well as drilling and completions.

How has the drop in oil prices affected the company?
Revenues effectively dropped by more than half for the E&P industry when the oil price fell from USD 110 per barrel to USD 30 before recovering somewhat to the current level of around USD 50. We have had to make significant changes at a global level, reducing capital and operating expenditures significantly and aligning the organisation to a new, reduced activity level in a much lower, more volatile price environment. The process has been demanding for us as well as for the entire industry, but we’ve made a successful transition and are now well positioned for a profitable, sustainable future at current prices.
We’ve focused strongly on a low-cost-of-supply portfolio, which will be robust even in the most demanding price environments. Low cost of supply means that we’ve built an asset and opportunity base in which we can invest capital, cover operating costs and still achieve an attractive rate of return, all at a modest oil price level.
We’ve also built a portfolio with inherent strong capital flexibility – we can control our capital spend rate, ramping up or down as market conditions dictate. As a company, we are tending to move away from mega-projects that need ongoing capital commitments over many years, regardless of price levels and price volatility. Instead, we’re now well set up to invest selectively in bite-sized chunks.

Why has ConocoPhillips withdrawn from deepwater activity in other countries?
In short, deepwater projects are not aligned with our new long-term strategy of pursuing low cost of supply opportunities. The cost and risk associated with deepwater activity are relatively high. Wells and developments are expensive, risk is high and there’s usually a long gap of ten years or more between significant initial expenditures and first revenue. This long timeline erodes returns and exposes us to price uncertainty in the interim.
We’re focusing on opportunities offering better predictability in our investments, often shorter-cycle projects with greater flexibility over capital spend. We’ve elected to withdraw from deepwater activity globally, including from areas such as the Gulf of Mexico and West Africa. However, we are still looking forward to our deepwater well in Block 3E in Malaysia and are keenly awaiting results.

What is the preferred length of shorter-cycle projects today?

With all else equal, the shorter the better. Achieving production shortly after investment drives strong returns. Our industry-leading position in US’ unconventional development is an excellent example, in that capital spend can respond quickly to price opportunities and thus achieve production quickly when prices are favourable.
For larger projects, a four-year to six-year period between investment and production may be more typical. The new PSCs we have entered into in Malaysia offer a series of fields and prospects that constitute a nice portfolio of discrete investments, allowing us to invest incrementally in one, and then maybe another.

What is ConocoPhillips’ global long-term strategy?

Although we’re cautious and humble about making any oil price predictions, we suspect prices are likely to remain restrained in years to come. When prices do rise, we’ll probably see a significant and relatively quick production response, particularly in North America where new volumes can be brought on stream quickly from vast unconventional resources.
Our long-term strategy is therefore to ensure that we have a robust asset base that can be developed profitably and sustainably at even below today’s lower oil prices. Focus on lower cost of supply and capital flexibility are key pillars in this strategy.
In exploration, we’re exercising discipline in our spending. We’re currently focusing our exploration activities primarily in the following four areas of the globe: Malaysia, Norway, the “lower 48” US states and Alaska. We’re keen to grow further in Malaysia if we can create the right opportunities. The company is executing its strategy successfully and I find the future encouraging. We’re watching conditions closely and adapting as they change.

For more information on ConocoPhillips, such as the details of its other offshore projects, see our business intelligence platform TOGYiN.
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