Sheila McNulty Anadarko’s discoveries create challenges

Anadarko Petroleum’s unprecedented exploration success has left the US oil and gas producer with the challenge of developing a string of big projects on time and on budget. The company announced nine deepwater discoveries in 2009 – big discoveries in key areas, such as the US Gulf of Mexico, Brazil and along the newly found oil coast stretching from Ghana to Sierra Leone.

Each of these could easily cost billions of dollars to bring on production if appraisal activity determines they are large enough to be commercially developed.  They are the long-life assets coveted by the world’s biggest oil companies, who have pulled back from exploration to focus on managing big projects, such as liquefied natural gas, or buying assets discovered by others.

This has stoked rumors Anadarko is being targeted by companies such as Royal Dutch Shell and Chevron looking to acquire future production, following ExxonMobil’s decision in December to buy XTO Energy for $31bn in stock and $10 in XTO debt.

Benjamin Dell, senior analyst at Bernstein Research, says:

Their (Anadarko’s) exploration programme over the last 18 months is unprecedented in the industry. Both Anadarko’s success rate and size of discoveries is significant.

They include two new discoveries in Ghana in 2009, on top of the massive Jubilee field, which is expected to begin producing this year. The Venus Discovery in Sierra Leone; the Itaipu well in Brazil; as well as five in the Gulf of Mexico. The company is planning this year capital expenditures of  $5.3bn to $5.6bn, up from planned spending in 2009 of between $4bn and $4.5bn.

It plans to grow production 7 to 9 per cent through 2014, as it transitions its world-class deepwater discoveries into the next generation of mega projects, targeting six new such projects on line by 2016.

At the least, the majors will seek partnerships with Anadarko to help develop these projects – a common way to spread  financial, operational and political risk. But with the opportunities found by Anadarko increasingly hard to come by in a world of peak oil and resource nationalism, analysts say they position the company as a potential takeover candidate.

While Anadarko would have a responsibility to shareholders to evaluate any offers, it is not seeking to sell the company. The company believes it has the financial and technical wherewithal to handle its production portfolio.

Jim Hackett, Anadarko’s chief executive, said in an interview he welcomes partners in developing projects after a focused effort that began in 2004 to grow the company’s international portfolio so that it now holds 10bn barrels of what he calls opportunities, including 2.3bn of proved reserves:

You have an idea, and you pursue it. Then you need a bit of luck and a bit of science. This is the fruition.

Raoul LeBlanc, director at PFC Energy, the consultancy, said Anadarko was a first mover in some of these countries, such as Ghana and Mozambique, which resulted in good terms.

The ensuing battle for Exxon to get into Ghana’s Jubilee field this past year is why Anadarko’s early push into what Anadarko and others believe is a newly discovered oil coast that stretches off West Africa, from Sierra Leone to Ghana, was worth the risk. Since Exxon announced it would buy Kosmos’ stake in the field, where Anadarko is a partner, Ghana has held talks with at least three foreign companies for the stake. Now that resources have been found, the country wants better terms.

Mr LeBlanc says such political risk remains a challenge in some countries in which Anadarko is exploring.

Yet Mr Hackett says that the company is not a major means it is more nimble, makes decisions faster and concentrates on fewer areas, which aids in relationship building. He can, for example, travel two or three times a year to a country like Ghana. In his own words:

The CEOs of Chevron or Exxon, they can’t show up in that country as frequently as we do. That personal connection can be a bit stronger.

But it will not bring those projects onstream. That requires big project management expertise and billions of dollars, something the majors could readily provide. Analysts believe the company can handle the financial burden. It’s cash flow from continuing operations in the third quarter of 2009, the last reported, was over $1bn, and discretionary cash flow totaled $1.26bn.

Anadarko’s net income was $200m, down sharply from the $2.2bn in the year-earlier quarter, but that was due to the drop in commodity prices from 2008′s highs. That also pushed down revenue to $$2.7bn, from $6.2bn. Anadarko’s finding and development costs are considered among the best in the industry, as underlined by its projections of sales volumes growth of about 7 per cent in 2009, from 2008, despite a drop in spending.

But does Anadarko have the expertise to manage multiple major projects while drilling from Africa to China in 2010?

Mr Hackett notes Anadarko has hired this past year, as others have cut staff and has the expertise. He points to years of experience, capped by the success of Independence Hub, as proof it can bring a major project online, on time and within budget.

Anadarko was operator on the project, which came online in 2007 off Mississippi as the then deepest production platform ever installed and the world’s largest offshore natural gas processing facility.

Mr Dell said Anadarko’s success will depend upon how it staggers projects while growing its portfolio, noting, these are good problems to have.