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Talisman Boosts Spending to Accelerate Shale Development

Calgary's Talisman Energy Inc. last week boosted its 2010 capital spending by 10% over 2009 levels to accelerate development in North American natural gas plays, including the Marcellus and Montney shales.

Total capital spending by Talisman this year was set at C$5.2 billion worldwide, with 85% of its North American budget allocated toward shale drilling, primarily the Pennsylvania Marcellus acreage and northeast British Columbia's Montney Shale. A top priority for 2010 is to expand onshore shale opportunities while maintaining stable cash generation, said CEO John Manzoni.

Talisman's global capital spending plan "has a strong development bias, with approximately 85% directed toward development programs and 15% toward international exploration," said Manzoni. "North American shale emerges as the main near-term production growth engine...Having built an inventory of 10 years' worth of shale gas drilling locations, this year the focus will shift to commercial development and drilling. Drilling in the Marcellus and Montney shale plays is expected to more than double, from roughly 70 development and pilot wells in 2009 to over 200 this year."

Manzoni was an executive at BP plc until he took the reins at Talisman, itself a BP spin-off, in 2007 (see NGI, June 4, 2007). Since Manzoni took over, the company has sold near C$1 billion worth of legacy assets and bulked up on its North American shale acreage as it shifts to more unconventional output. Last year Talisman opened an office in Pittsburgh to handle its growing presence in Pennsylvania, and this year the company wants to double its development in the Marcellus play.

North American capital spending in 2009 "included significant spending on shale land acquisitions," said the CEO. As a result of these purchases, Talisman now has an inventory of 4,800 net drilling locations on Tier 1 acreage within its Pennsylvania Marcellus and Montney shale plays, and the focus this year shifts to drilling.

In Pennsylvania Talisman expects to exit the year at 250-300 MMcf/d, up from 65 MMcf/d at the end of 2009. Plans are built on an expected ultimate recovery of 3.5 Bcf/well, with 30-day initial production (IP) rates of 3 MMcf/d. Most of the Marcellus wells have been permitted and the company has secured sufficient egress capacity, water access and disposal for its 2010 plans, said Manzoni.

In the Montney Shale, Talisman is moving the Farrell Creek and Greater Cypress areas into commercial development with around 25 horizontal development wells expected in 2010 with plans to complete 17 of these this year. In addition, 10-15 Montney Shale pilot wells are to be drilled, including the first multi-lateral well. As many as nine rigs will be run in the Canadian play this year from its current three-rig program.

"We expect to exit the Montney Shale in 2010 at between 40-60 MMcf/d, based on expected ultimate recoveries of around 5 Bcf/well and 30-day IP rates of 4.5 MMcf/d," said the CEO.

In Quebec a horizontal well started in 2009 is to be completed, and two additional horizontal wells are planned for this year to further derisk the play. Another C$270 million is budgeted for Canadian conventional programs in 2010. Most of the conventional oil and gas spending is to focus on Chauvin oil development, with most of the remainder slated for tight gas drilling in the Ojay and Wild River areas.

Talisman also is eyeing more asset sales -- some gas-weighted properties in North America are for sale, said Manzoni. The properties, which currently produce 40,000 boe/d, are "high-quality assets," but "they cannot effectively compete for capital within Talisman's portfolio." Money from the sales would be shifted to the shale business, "which, within our portfolio, generates higher returns."

If Talisman's 2010 program is successful and the noncore assets are sold, "we expect to have 'rebased' the company by the end of this year, set to drive sustainable and visible growth from that point forward," he said.

Talisman's streamlined focus in 2009 resulted in lower finding and development (F&D) costs, and costs are forecast to drop even more this year.

"We expect returns to increase as we successfully cycle capital into higher-value investments, which should also lead to continued improvement in our F&D costs," Manzoni. "We have put processes in place to manage our capital programs more efficiently; we are reviewing costs across the organization, and implementing performance management tools throughout the business. Third, we will continue to build our organizational capability...We will continue to upgrade our capabilities and processes, and develop our talent across the organization in 2010."

Several "key outcomes" are to result from Talisman's 2010 plans, said the CEO.

"We will maintain balance sheet strength and flexibility," Manzoni said. "The C$4.9 billion in cash spending will be funded from operating cash flow, noncore asset sales and balance sheet strength. We have designed the program to be robust at US$60/bbl oil prices and US$3.50/MMBtu natural gas prices, with considerable flexibility to adjust the capital program up or down in light of conditions throughout the year. We will also remain vigilant for strategic acquisition opportunities."

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