Anadarko's Advocate

Mention U.S. energy policy and the role of natural gas and you’ll hear passion in the voice of James T. Hackett:, chairman, president and chief executive officer of Anadarko Petroleum Corp. Ask about world-class discoveries made here and abroad by the company, and you’ll hear an equally enthusiastic response.

Hackett: joined Anadarko in December 2003 as president and CEO. Since then, the Harvard MBA has revamped the asset mix, acquiring Kerr-McGee Corp. and Western Gas Resources Inc. in 2006, and divesting other assets. Today, Houston-based Anadarko produces about 600,000 barrels of oil equivalent (BOE) per day. It’s active from the deepwater Gulf of Mexico to the Rockies, Alaska, and the Marcellus, Haynesville and other shales. More than 10% of its total production comes from international assets in Algeria and China, and the company has significant additional exploration activities in Brazil, West Africa, Mozambique and Indonesia. At press time it announced Samurai, its third discovery in the deepwater Gulf of Mexico this year.

Anadarko is chasing exploration ideas in several other places. It recently finished a geologic study on behalf of the Iraqi government, but chose not to bid in that country’s late-June round because it has three mega development projects and high-impact exploration opportunities elsewhere that demand attention. These include fast-track development of Jubilee, which holds an estimated 500 million to 1.8 billion barrels (recoverable) offshore Ghana. Anadarko holds an approximate 25% working interest in the blocks alongside partners Kosmos Energy Inc. and Tullow Oil & Gas Plc. First production is expected late next year.

Before joining Anadarko, Hackett: was briefly president and chief operating officer of Devon Energy Corp. following its merger with Ocean Energy, where he was chairman, president and CEO. He also was president of Duke Energy Services, and held positions in engineering, finance and marketing with NGC Corp., Burlington Resources and Amoco Oil Co.

Today, Hackett: is on the executive committee of America’s Natural Gas Alliance (ANGA, a newly formed group of 27 natural gas producers) and is a director of Fluor Corp. and Halliburton Co. He serves as chairman of the board of the Federal Reserve Bank of Dallas and is on the boards of the Business Roundtable and the Trilateral Commission. He shares his business insights as an adjunct professor at Rice University as well.

We had a conversation with Hackett: just as the U.S. House was passing an energy and climate-change bill that could affect the company and its peers, not to mention energy consumers, for years to come.

Investor: You have such a wide-reaching portfolio. Which projects may create the most excitement in 2009?

Hackett: We have a lot of drilling, exploration and development work to do internationally. Our first well offshore Sierra Leone is going down in August at the Venus prospect, and then we’ll move the rig to drill in the Cretaceous fan play offshore Cote d’Ivoire, with a rig that’s coming over from the Gulf of Mexico, and we may drill another well in West Africa. We also plan to drill our first deepwater well in Mozambique in 2009.

We have a number of mega projects in development around the world. We have a major multibillion-dollar project in the remote desert of Algeria called El Merk. In Ghana, there’s the Jubilee field development, and we still have exploration potential on two other blocks in Ghana. There’s a lot of drilling and project work that is very exciting for our employees and Investor:s this year.

In the Gulf of Mexico, we still have work to do to develop the Caesar-Tonga complex [200- to 400 million BOE of resource] that will be tied back to our Constitution spar. All of these deepwater wells have a great deal of potential.

Onshore, we are working in the Marcellus shale in Pennsylvania, the Eagle Ford shale in South Texas and we’re doing some additional testing in the Haynesville.

We have about 4,300 employees and well over 1,000 contractors.

Investor: And no downsizing?

Hackett: No, fortunately. This is the first time in my career, which began in the 1970s, that we’ve seen a cycle like this, with the depth of commodity-price drop, where we have not seen the same broad-based layoffs in E&P. We are seeing them in the service sector, which is understandable with the rig count down so much. But at Anadarko, we didn’t ramp up our spending to reflect the high cash flows we saw in 2007 and 2008. That’s protected us a bit, and proved to be a good thing. We have reduced our rig count by two-thirds in the Lower 48, but we’ve been able to reassign people.

To occasionally have a respite like this is not a bad thing…we’re able to do more technical background work and some administrative clean-up that positions us well for the rebound. We have the staff in place still and our scientific work will be in a good place.

There’s a huge element of land administration in this business [Anadarko has 15 million acres onshore the U.S. alone]. For example, this respite gives our land department time to get the records in better shape, while allowing the G&G and engineering folks to high-grade or get more prospects drill-ready, instead of chasing more acreage and rigs. Everything is more well-paced.

Investor: Why didn’t you bid in Iraq?

Hackett: We’re still looking at the general Iraq geography, and we’ve done a lot of geological work on specific properties there on behalf of the Iraqi government, that we completed last year. We looked hard at Kurdistan. We chose not to participate in the [June 30] bidding round. We’re still interested in the right opportunity, but we have so many opportunities elsewhere in the world right now, that in this price environment, we don’t feel we have to stretch the envelope. It just doesn’t make the cut today, but it may in the future. We certainly wish them well.

Investor: Here at home, you’re in some shale plays, but we don’t hear much about it.

Hackett: In the Haynesville, we’ve got a lot of acreage held by production so we are in a bit of a different boat than others. We have 75,000 to 80,000 acres there, so we’re not the biggest player. The good thing is we have a lot of time to develop it, and we can go at a paced approach. We have a much bigger position in the Eagle Ford in the Maverick Basin. It has the potential to be more of a Wattenberg-type play—it has condensate, so that’s intriguing to us.

In the Marcellus, we have two joint ventures: one we operate and have a private partner, and the other is operated by Chesapeake. We’ve seen very good results so far. We think the economics are good at sub-$3 per dekatherm Nymex prices. We got in there early, starting in 2005, so we have a good land position and low land costs, so we think the economics will be quite compelling. We have 600,000 acres gross; net is about half that.

We think we can drive well costs down to $3- or $4 million. The EURs are going to be 3- to 6 Bcf and the IPs range from 4.5- to 8 million a day. We are slowly ramping up our activity in the Marcellus. We don’t want to get too far ahead of the gas market, and we want to establish enough science to take full advantage of the price recovery in the future.

Investor: Will your midstream MLP, Western Gas, be involved in the Marcellus?

Hackett: We’re continuing to evaluate that, to see whether we do some infrastructure on our own or let third parties handle most of it, where we’d handle only the gathering and compression side. We’re indifferent on this as long as the third parties build out infrastructure as timely as we would have. In the Rockies we’ve taken a much more proprietary interest in the infrastructure to get our gas to market.

Investor: Will rising shale production put a permanent cap on gas prices?

Hackett: I don’t think so. Gas may not trade at a 6-to-1 ratio to oil in the near term. But I think supply and demand will balance out this tremendous resource play with the right pricing. I’m actually quite hopeful that our country will have a much greater interest in natural gas, not only for power generation but for transportation fuel as well.

Clearly LNG will be a factor, but it’s actually quite good that we have this long-dated domestic gas source. We’re going to need it, and now we truly have it for the first time in my career.

I do think the build-out of these shale plays will take longer than people anticipate, but unlike other domestic fuel sources, with the exception of uranium, I think we can grow deliverability now. The length of the supply is over 100 years and we think we can grow it beyond that.

We’ve given the market a reason to believe in natural gas. We think that it can displace foreign oil in transportation use, if the political will is there. It backs up wind and solar through its electric-generation-peaking capability.

Investor: Anadarko is a co-founder of ANGA. What has the group done so far?

Hackett: We have done quite a bit to develop materials for our initial lobbying efforts. We’re using print ads in targeted decision-making areas such as D.C. We have a large number of company representatives focused on communications, technical research and government affairs efforts as we try to analyze legislative and administrative programs, like the Waxman-Markey bill.

It’s early days, but there is real passion and involvement on the part of our 27 members. Many of the CEOs are directly engaged in lobbying, not just their staff members. And, the natural gas story is actually starting to gain a lot of traction. In my first visits up there I didn’t hear a lot about natural gas, but that’s starting to change. More recently we met with some NGOs and Democratic congressmen and people are starting to get the message.

Investor: But what about their threat to regulate fracturing?

Hackett: This attempt to federalize frac regulation is another example of government overreacting. Congress is suggesting they ought to preempt states’ rights, when states have properly regulated fracing for approximately 60 years and millions of reservoirs have been stimulated. Nine-tenths of the content is water, sand or silica, and the kind of chemical that we’d put in chewing gum. We’re injecting it anywhere from half a mile to five miles below the water-bearing zones. There has not been a single issue with regard to potable water, as attested to by Carole Browner, who ran the EPA under the Clinton Administration.

We’re going to need more domestic, clean-burning natural gas, so more regulation, especially federally, is not the thing we need to do—you don’t fix what isn’t broken. If they do decide to regulate fracs…our group thinks it will have a significant negative impact on the amount of gas wells drilled. There would be a correspondingly harmful impact on the cost of energy for consumers. The framers of the Constitution wanted less government, and we seem to be moving in the opposite direction.

Investor: Getting back to Anadarko, you’ve successfully gone to the capital markets three times this year.

Hackett: We just did the largest overnight bought-equity deal ever done in the energy sector. We raised $1.3 billion of equity and we are very pleased with the post-issue trading. We did this not out of necessity, but out of an abundance of caution (since two-thirds of our production is natural gas and yet gas prices are low) for funding our various megaprojects in 2010. This takes the execution risk off the table. We raised $900 million of debt a couple weeks after the equity issuance, and that was also very well received—about a third of that was a 30-year tranche for less than an 8% coupon. It was issued at a lower interest rate than the debt we issued back in March, when long-term treasury yields were lower. All three transactions were oversubscribed and we are glad to have the dry powder.

Investor: Dry powder? Are you thinking about acquisitions again?

Hackett: We don’t view those as our primary focus at this point, because our current opportunity set is so strong, but you may see us do some bolt-on, smaller property acquisitions.

Investor: Such as in the eastern Gulf of Mexico, where you’ve been a pioneer?

Hackett: Some new acreage has been opened up, but we didn’t find as many prospective areas as we had thought. We do have some more drilling to do around our Independence Hub production facility to maximize its capacity. But we pinch ourselves every day to see the technical and operational success we’ve had there, including that we’re producing 1.5% of all U.S. gas production from Independence Hub, the deepest-water producing facility in the world. The platform’s environmental footprint is the same footprint as our headquarters building in Houston. You’d have to bury Harris County, Texas in wind farms to match that kind of production capability.

We would be interested in bidding on the new blocks opened up in the eastern Gulf, but we have so many opportunities relative to our cash income…we’ve got to be very prudent in where we choose to invest. And frankly, the American government’s recent actions don’t give us any more comfort than what we’re looking at in West Africa. Our government discourages the very thing it says it wants to encourage, which is more domestic production of oil and gas.

Investor: Despite your rich opportunity set, you drastically cut spending this year. What would make you bump up your rig count?

Hackett: We cut spending by 15% to 25%, which is less than the average of our peers. We have bumped that spending up a bit, because we’ve done some hedging. But you need gas prices to be in the $6-plus range for the rig market to come back for the industry. It’s not that the wells are uneconomic, it’s that you can’t drill all you want to drill and prudently manage your balance sheet, so you cut back and make choices. Anadarko has 23 rigs onshore the Lower 48 right now.