Anadarko's Production in Wattenberg Field Powers Third-Quarter 2014 Results

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Anadarko Petroleum Corporation (NYSE:APC) (The Woodlands, Texas) turned in another strong operating performance during the third quarter, paced by continued crude-oil production gains in Northern Colorado's Wattenberg Field.

Moving from the oil field to the courtroom, last week, a federal judge accepted resolution of a multi-billion-dollar settlement that Anadarko reached with titanium dioxide (TiO2) producer Tronox (NYSE:TROX) (Stamford, Connecticut). The litigation stemmed from actions by Kerr-McGee, a company that Anadarko purchased nearly a decade ago. The $5.15 billion settlement is the largest environmental settlement on record, according to the U.S. Department of Justice. Anadarko's future appears brighter today, because of its strong operational performance and because it put litigation with Tronox behind it.

Industrial Info is tracking almost $11 billion in active projects involving Anadarko.

In the just-completed third quarter, Anadarko's crude-oil production in the Wattenberg Field surged 95% to 82,000 barrels per day (BBL/d), from 42,000 BBL/d in third-quarter 2013. Natural gas liquid (NGL) production rose even more dramatically to 50,000 BBL/d, from 16,000 BBL/d in the year-earlier quarter, a gain of 212%. The company also reported natural gas production in that field rose to an average of 340 million cubic feet per day (MMCF/d) from 258 MMCF/d in the third quarter of 2013, a 32% increase.

During the just-completed quarter, Anadarko continued to reduce drilling cycle times in the Wattenberg Field, to an average of eight days for short laterals from spud-to-rig-release. That is a 56% improvement over early 2012 performance, the company recently told investors.

Also in the Wattenberg, Anadarko's recently completed cryogenic gas-processing plant, Lancaster, reached its capacity of 300 MMCF/d during the third quarter, producing an average of 39,000 BBL/d of NGLs. Across the Wattenberg Field, Anadarko is extracting an average of 106 barrels of NGLs from each million cubic feet (MMCF) of gas, a significant increase over the 65 barrels per MMCF the company recorded during the first quarter of this year.

Anadarko also increased field compression in the Wattenberg during the third quarter, and expects to add even more compression in the current quarter, to maintain system pressures that will support an anticipated increase in gas production.

Results in the Wattenberg and Rockies region were boosted by Anadarko's holding so much acreage under a land grant from the federal government. Under an arrangement dating back to the Civil War, railroads were given alternating 64-acre sections of land alongside their tracks. That acreage included mineral rights that were free and clear of any lease or royalty obligation. Some years ago, Anadarko purchased a railroad, and those rights passed to the oil company.

Today, Anadarko's land-grant acreage totals about 8 million acres in Colorado, Wyoming and Utah. If Anadarko drills on land-grant acreage it owns, it makes no lease or royalty payments. If other companies drill on land-grant acreage Anadarko owns, that operator must pay Anadarko a fee.

For the first nine months of 2014, those fees amounted to about $600 million, Anadarko spokesman John Christiansen said in an interview. Last year, Anadarko reaped about $675 million in land-grant fees, and Christiansen projected the company was on track to exceed that in 2014. He declined to estimate the amount of fees Anadarko had avoided this year when it drilled on land-grant acreage it owned.

"We have land-grant advantages throughout the Wattenberg and the Rockies, and they're a tremendous benefit to our economics," he said. "The Wattenberg is one of the best onshore producing areas in our portfolio."

The price of West Texas Intermediate (WTI) crude oil has dropped nearly 30% since the summer, to a four-year low of about $77 per barrel. But Christiansen said Anadarko had no plans to scale back its activities in Northern Colorado: "We're continuing to run 12 rigs there. It's an awesome field with a tremendous amount of life still in it." Overall, Anadarko's capital budget for 2014 in the Wattenberg Field will be about $2.5 billion, Christiansen estimated.

The company also reported good news for another U.S. area where it operates--the Eagle Ford Shale. In the third quarter, crude-oil production there rose 61% to 29,000 BBL/d, from 18,000 BBL/d in third-quarter 2013. NGL production rose to 25,000 BBL/d, up 67% from the 15,000 BBL/d level recorded in the year-earlier quarter. And gas production in the Eagle Ford increased about 33% in the third quarter to an average of 134 MMCF/d, from 101 MMCF/d in third-quarter 2013.

In announcing the company's third-quarter results, Al Walker, Anadarko's chairman, president and chief executive officer, said: "Anadarko delivered another outstanding quarter. ... The significant liquids sales-volume growth was primarily driven by the excellent results of our Wattenberg horizontal program, where oil volumes doubled relative to the third quarter of last year."

Earlier this year, Anadarko and other Oil & Gas Producers in Colorado dodged a bullet when Governor John Hickenlooper was able to broker a deal that kept anti-hydraulic fracturing voter initiatives off the November ballot. For more on that issue, see August 7, 2014, article - Oil & Gas Industry Sees Brisk Business in Colorado after Withdrawal of Voter Initiatives.

Over the last several months, Anadarko has ramped up its stakeholder engagement activities, in an effort to allay citizen concerns over the potential health implications of hydraulic fracturing.

The Oil & Gas Industry has a $15.5 billion annual impact on the Centennial State, and about 240,000 people are directly or indirectly employed in producing, processing, transporting and storing oil & gas, according to Kelly Brough, president and chief executive of the Denver Metro Chamber of Commerce. Brough and industry insiders see steadily rising oil and gas investments in Colorado, assuming drillers operate safely and producers succeed at convincing wary Coloradans that hydraulic fracturing is safe. For more on that issue, see August 11, 2014, article - Billions of Dollars at Risk if Oil & Gas Industry Can't Do a Better Job Telling its Story.

If the 18-member commission, which Hickenlooper appointed to advise the legislature on ways to ease the public's concerns over hydraulic fracturing, is unsuccessful, most observers see a surge of anti-fraccing voter initiatives coming in the 2016 election cycle.

As it works to secure continued development of the Wattenberg Field, Anadarko is accentuating its environmental stewardship. Since 2012, the company said, Anadarko's oil-gathering systems have eliminated 146,000 truckloads of oil, which equates to 25 million fewer miles driven and 5 million fewer gallons of diesel fuel consumed. The company is emphasizing the environmental and safety benefits of building crude-oil gathering systems, rather than relying on trucks, to transport crude oil out of that field.

Anadarko operates globally, and Walker said strong results in the Wattenberg and elsewhere caused the company to raise for the third time this year its full-year sales volume estimates, to a range of 304 million barrels of oil equivalent (BOE) to 306 million BOE.

The federal judge's acceptance last week of the $5.15 billion settlement in environmental litigation with Tronox removed a significant cloud that has been hanging over Anadarko for years. The parties in the litigation reached a settlement earlier this year, but that had to be reviewed and approved by multiple courts.

When Anadarko reached that settlement this past April, CEO Walker said: "This settlement agreement ... eliminates the uncertainty this dispute has created, and the proceeds will fund the remediation and cleanup of the legacy environmental liabilities and tort claims. Investor focus can now return to the tremendous value embedded in Anadarko's asset base, allowing our peer-leading operational and exploration results to again become the basis for valuation. We are grateful to our stakeholders who have maintained their confidence and trust in our people and our assets."

"Anadarko's employees have continued to deliver remarkable results that have not been fully recognized by the equity markets due to the potential implications of this case," Walker said last April. With the resolution of the Tronox litigation, Walker said Anadarko will "look forward to having our exceptional results become the foundation for even greater operating and share-price performance through the balance of this decade and beyond."

"The federal court's approval of the Tronox settlement means Anadarko's management and shareholders don't have that hanging over their heads anymore. Now, the company can focus on operational excellence in oil, gas and NGL production," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "Anadarko is one of the industry's most efficient producers, and its emphasis on safety should help it build bridges with Coloradans who are not used to seeing drilling rigs in their communities. We don't know when global oil demand will pick up, but even in the current price environment, Anadarko looks to be well positioned to operate profitably. Perhaps not as profitably as when WTI was selling for $107 per barrel, but profitably nonetheless."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.