Legislative report misleads on ConocoPhillips profits

The Anchorage Daily News reported on May 6 about a report by Legislative Research Services comparing ConocoPhillips' Alaska profits with profits elsewhere.

Suppose you had a company that produced diamonds and gravel, and in some places, you produced more of one and less of another. Diamonds are, of course, much more valuable than gravel.

And suppose you reported your profits from each place in terms of dollars per pound produced. So the places that produced relatively more diamonds would be relatively more profitable.

But if you wanted to know which place was more profitable for diamonds, you would not look at profit per pound of combined gravel and diamonds produced.

And yet this is exactly the mistake LRS made in their report, and the results are very misleading.

[ConocoPhillips claims North American record for horizontal drilling]

There are about 5.8 million BTUs in a barrel of oil. On May 1, the date of the report, Alaska oil was selling for $72.18 per barrel, or $12.44 per million BTUs. Natural gas was selling for $2.80 per million BTUs. So a BTU of oil was worth 4.4 times as much as a BTU of gas. Oil is the diamonds and natural gas is the gravel.

ConocoPhillips is an oil and natural gas company. Oil and gas are frequently found together; they are produced together, and their combined financial results are reported together, on a barrel of oil/cubic foot of natural gas, BTU equivalent  basis. But in Alaska, the company's operations are nearly all oil, and elsewhere they are about a 50/50 split between oil and natural gas.

In fact, worldwide, as oil prices have increased, and oil production has intensified, more related natural gas has been produced. This has increased the existing natural gas supply surplus and depressed the price of natural gas even more, widening the profitability spread between oil and natural gas.

Per ConocoPhillips' 2017 annual report, Alaskan operations were 92 percent oil. In the Lower 48, they were only 45 percent oil. Worldwide, they were only 44 percent oil.

[ConocoPhillips plans largest exploration season in 15 years]

The Leg Research report is not reporting per-barrel oil profits. It is reporting the combined oil and natural gas profits. It compares essentially the oil operations in Alaska with the combined oil and natural gas operations everywhere else. It is not the place to look if you want to compare oil profitability in Alaska with oil profitability elsewhere.

If the joint production costs could be allocated separately between oil and gas, and the distinct profits reported, the results would be much different than what Legislative Research reported.

What is disturbing is that most legislators should know this. It has been explained to them several times. And all that can result from deceptive data is dysfunctional public policy.

Roger Marks is a petroleum economist in private practice in Anchorage, specializing in petroleum economics and taxation. Between 1983-2008 he was a senior petroleum economist with the Tax Division of the Alaska Department of Revenue.

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