http://www.ft.com/intl/cms/s/0/a3f5c112-4768-11e1-b646-00144feabdc0...

ConocoPhillips, the third-largest US oil and gas group by  market capitalisation, has said it plans to cut its North American gas  production this year as it shifts to more profitable oil reserves, becoming the  latest group to announce output reductions after gas  prices fell to a 10-year low.

The company suggested that a high single-digit decline in its US gas  production was possible, following a 9 per cent drop last year. It made the  prediction as it reported a 38 per cent rise in underlying earnings for the  final quarter of 2011, thanks to the rise in oil prices.

The boom in shale gas production and weak demand caused by the sluggish  economy and warm weather have sent US gas prices plunging. On Monday, one of the  largest gas producers in the US, Chesapeake  Energy announced a planned production cut of 8 per cent, which was  interpreted by analysts as an attempt to stabilise the market.

Like Chesapeake , Conoco said it was diverting drilling rigs away  from gas and towards oil reserves such as the Eagle Ford shale and Permian  Basin, both in Texas. Of the 35-40 rigs that Conoco had running in the “lower  48” states, it said, fewer than five were drilling for gas, and production was  likely to continue to decline.

The plan is to shut about 4 per cent of its North American gas production,  but the company added that there were limits to how far its gas output could  fall. About two-thirds of its gas comes as a byproduct from wells for oil or  natural gas liquids, which earn much higher returns and so are worth keeping  open.

Many of the other wells are jointly owned, and the partners will want to keep  them open because they need the cash.

In its fourth-quarter results statement, Conoco said it was on track to spin  off its downstream refining and marketing operations into a new company,  Phillips 66, as planned, in the second quarter of this year, possibly in May.

Conoco is splitting to allow the two sides of the group to focus on their own  businesses, and plans to sell $5bn-$10bn worth of assets this year. It also has  a $10bn  share buy-back programme.

Its oil and gas production fell 8 per cent to 1.6m barrels of oil equivalent  per day in the quarter, hit  by the Libyan civil war and disruption  in China following an offshore oil spill from a platform it part-owns.

However, a rise in the average price of Conoco’s oil sales from $78.76 per  barrel in the fourth quarter of 2010 to $109.31 in the equivalent period of 2011  lifted underlying earnings in its exploration and production division 27 per  cent to $2.35bn.