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Apache Taking Land (U.S.) Over Sea (LNG)

Apache Corp. management has decided to take heed of the adage, a bird in the hand is worth two in the bush, by pouring most of its capital into the U.S. onshore and selling down investments in potential liquefied natural gas (LNG) exports.

CEO G. Steven Farris laid out the strategy on Wednesday at an investor conference in Houston.

The big news is a decision to reduce its half-ownership stake in the proposed Kitimat LNG project that would be sited on British Columbia's west coast. Apache was the leader of the Kitimat endeavor until late 2012, when Chevron Corp. took over operatorship and bought a 50% interest (see Daily GPI, Dec. 26, 2012).

"In 2014, we need to right-size it for us," Farris said of Kitimat. "This is not a project Apache can afford..."

Apache has been shrinking its portfolio over the past couple of years, in part on shareholder concerns that the super independent's reach was too unwieldy. Last year the operator sold about $8 billion of assets in its portfolio, including the entire Gulf of Mexico portfolio, multiple North American onshore projects and overseas assets, sales that impacted profits in the final quarter (see Daily GPI, Feb. 13).

The slim down was to pour more capital into the Permian and Anadarko basins, which are key to future production and growth, Farris asserted once again this week.

If it weren't to sell off some of its Kitimat interest, Apache would have to spend about $1 billion this year on the joint project. Already there have been some serious discussions with Asia-Pacific players that might take a bigger role in the facility, Farris said.

No details were revealed about how much of the Kitimat interest might be sold nor how much Apache expects to recoup. Preliminary construction cost estimates in 2010 were about $2.7 billion. Contracts also have to be secured before anything could move forward.

It's not that the LNG export project now on the table wouldn't be sound, the CEO said. Most of the dozen or so proposed projects now on the table, he said, won't be built, and Kitimat already has secured many of the required permits.

Better to take advantage of the well-stocked U.S. portfolio now in hand, Farris said. It's the reverse of Apache's strategy in the late 1990s to around 2009, when it invested nearly all of its spending on prospective international targets that included Egypt and Argentina. However, like many U.S.-based independents, no matter the size, Apache began about four years ago to fund more North American legacy assets.

Today, North American onshore oil and gas production accounts for more than half (60%) of the company's output. The United States and Canada in 2009 only got about one-third of the capital spending. However, solid liquids growth in the Permian and Anadarko basins is about four times what it was five years ago, Farris told analysts.

"We really had to resize the portfolio in order to make North America big enough to count..."

Total production from the Permian and Central (Anadarko) regions regions increased 32,000 b/d in 4Q2013 from a year earlier, with total year-end production of 227,000 boe/d almost one-third of worldwide output. The leaseholds include about 850,000 net acres on the Central Basin Platform and more than 500,000 net acres each in the Permian's Marmaton, Cline Shale and Midland Basin.

The Permian achieved record output in 4Q2013 that averaged 134,000 boe/d, 13% higher year/year. Organic drilling replaced 323% of production, with proved reserves nearly 14% higher to 910 million boe. The Central region replaced 195% of production and lifted proved reserves nearly 14% to 304 million boe. Average production in the Central region properties was 93,000 boe/d in 4Q2013, 18% more than in 4Q2012, with liquids output 57% higher.

Apache is cutting its capital spending program on the tighter program to a worldwide exploration and production budget of $8.5 billion, close to annual cash flow. That much spending should result in production growth of 5-8%, mostly on gains in North America.

Around two-thirds of the this year's capital is to be directed to onshore North America. Close to $1.4 billion also would be directed to the Wheatstone LNG project in Australia, another export project to Asian markets that Apache shares with Chevron. Interest in other overseas projects, such as in Egypt and the North Sea, are worth keeping in the portfolio because they should generate about $1 billion in cash flow this year, Farris said.

The biggest growth is forecast to be U.S. onshore liquids,  expected to climb 15-18% from 2013.

In addition, Egypt has unconventional opportunities that appear similar to the geology of the diverse Permian Basin. To date Apache has drilled eight horizontal wells on its 6.5 million-acre leasehold in Egypt with promising results. However, transferring drilling techniques from the United States to overseas areas is difficult for both logistical and political reasons. There's a lack of infrastructure and political will to get things done in a timely manner.

"Getting that technology into a country takes time...but I think it has tremendous potential" in certain geologic formations, such as the desert areas of Egypt.

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