ConocoPhillips agreed Thursday to buy 2.2 million metric tons/year (mmty) of LNG from Mexico Pacific Ltd.’s (MPL) Saguaro Energia export terminal planned for the country’s west coast, pushing the project closer to a final investment decision (FID).
MPL CEO Ivan Van der Walt said ConocoPhillips’s commitment pushed the company’s sales volumes for trains one and two past what's required to sanction them and puts the project in “oversubscribed territory.” Management said it would continue working on contracting for train three ahead of a FID on the project that is expected this year.
ConocoPhillips agreed to buy liquefied natural gas from the project for a 20-year term on a free-on-board basis. The sales and purchase agreement also gives ConocoPhillips an option to contract for expansion volumes in the future. The company joins majors ExxonMobil and Shell plc in anchoring the Saguaro Energia project planned for Puerto Libertad in Sonora state.
ConocoPhillips, the world’s largest independent exploration and production (E&P) company, has focused on building a strong international LNG portfolio. It has been busy securing offtake and equity positions in projects across the globe, including those in the United States and Qatar.
It has focused on locking in low-cost LNG supplies. MPL plans to re-export U.S. gas imported from the Permian Basin, with the Asia-Pacific region as the primary target market.
MPL’s Ana Procuna, director of gas transportation and marketing, said earlier this year that due to the Saguaro project’s proximity to the Permian, offtakers would have the option to index their offtake agreements to the Waha hub. The deal also ties MPL to the Permian’s second largest producer in ConocoPhillips.
Waha prices averaged $2.295/MMBtu in July bidweek trading, according to NGI’s Bidweek Survey, versus $2.480 for Henry Hub.
ConocoPhillips management also told analysts during a call to discuss second quarter earnings on Thursday that they’ve spent $700 million for the Port Arthur LNG project in Texas, which the company took a stake in earlier this year. It plans to invest $1.1 billion for the project in 2023, which was sanctioned by Sempra in March.
ConocoPhillips CEO Ryan Lance added that the company continues to work on securing import capacity to move its LNG volumes into downstream markets. He said the company was exploring further opportunities in Europe and Asia. The company already has 2.8 mmty of regasification capacity secured in Germany that is slated to start in 2026 when a new import terminal comes online there.
E&P Growth
Growth in the company’s exploration and production (E&P) operations is also expected to be fueled by its move in May to take full ownership of the 140,000 b/d Surmont oil site in Alberta, Canada.
“Surmont is a long-life, low-decline and low-capital-intensity asset we know very well,” Lance told analysts.
In the current $80/bbl price environment for West Texas Intermediate, Lance said the company expects incremental free cash flow from its additional 50% ownership interest in Surmont to near $1 billion next year. The company also plans to debottleneck the field to further enhance returns.
Despite volatile commodity prices during the second quarter, ConocoPhillips reported record production across its global and Lower 48 assets. Company-wide production was 1.8 million boe/d, up by 113,000 boe/d from the year-ago period.
Lower 48 production jumped 4% year/year to 1.06 million boe/d in the second quarter. Lower 48 volumes included 709,000 boe/d from the Permian, 235,000 boe/d from the Eagle Ford Shale and 104,000 boe/d from the Bakken Shale.
Lance attributed the production gains to “continued capital efficiency improvements.”
The company again raised its production guidance for the second consecutive quarter. ConocoPhillips is now guiding for company-wide, full-year production of 1.80-1.81 million boe/d, up from the prior range of 1.78-1.80 million boe/d.
While the company has increased adjusted operating costs by $100 million to $8.3 billion for the year on a jump in production guidance, the outlook for overall capital spending has narrowed. CFO W.L. Bullock said the company’s capital guidance is now expected to range from $10.8 billion to $11.2 billion, compared to $10.7 billion to $11.3 billion previously, as spending is expected to decline slightly in the second half of the year.
The company’s earnings declined in the second quarter mainly due to lower commodity prices. ConocoPhillips’ average realized price was $54.50/boe during the period, or 38% lower than the same time last year.
In the U.S. gas market, strong storage inventories and robust production have offset extreme heat and held prices back. However, the long-term outlook for natural gas remains positive. NGI’s Forward Look shows Henry Hub prices rising above $3.00 by November and remaining at that level throughout most of next year.
ConocoPhillips reported second quarter net income of $2.2 billion ($1.84/share), compared to net income of $5.1 billion ($3.96) in the year-ago period.
