Apache Corp. has begun to see its drilling and well completion costs coming down, which may help to start some delayed North American projects, including some key prospects in Canada.

Successful exploration in the United States and the addition of some Permian Basin prospects pushed the Houston-based producer to gains in its quarterly natural gas and oil production worldwide, which was up 14% from a year ago and 7% from the first three months of 2007.

“We had production growth in nearly every region…and we are well on our way to 9-12% production growth this year,” said CEO G. Steven Farris, who delivered 2Q2007 earnings during a conference call Thursday. He said Apache is “very comfortable” with its forecast to build its production base by 6-10% in 2008, and some of those gains are expected to come from Canadian operations.

“In Canada, we are starting to see meaningful reductions in costs in our core areas, and we expect to increase spending in the second half of 2007,” Farris said. Apache has begun testing a 22-well pilot coalbed methane play in Mannville, which, if successful, could produce “an excess of a Tcf.” Farris said, “We are seeing a little bit of gas, which is a little early in the program. So far, so good. We just have to see how it waters down. We’re excited about it.”

An emerging Canadian gas shale play also is being explored, but Farris offered few details.

“We have drilled some wells, some horizontal wells, and I expect we’ll hear more and more on this in the coming quarters,” Farris said. “This is a very competitive area,” but he added that the area Apache is testing has similar characteristics to some U.S. gas shale plays. “Obviously, we have compared this to a number of shale plays in the U.S. and elsewhere,” he said. “The rocks, the amount of gas per section compare very favorably to the U.S.”

Apache cut Canadian spending by 35% earlier this year to $800 million, but now says it could increase Canadian spending to as much as $920 million.

“We are going back to accelerating our drilling, and doing normal shallow gas stuff,” Farris said. “Any spending increases wouldn’t be significant this year, but the shale play in Canada over the coming 18 months could be significant.”

Apache’s U.S. Gulf of Mexico exploration program had its “highest point of production in history” during 2Q2007. “It surpasses what we were producing there prior to the hurricanes [in 2005],” said Farris. Production grew 35% in the quarter, and it was up 9% from 1Q2007.

“We’ve got 11 rigs running in the Gulf of Mexico right now,” he said. “It’s amazing what you can do when you get back to work after cleaning up from the hurricanes.” Apache still has “a number of downed platform expenses” from its Grand Isle 40 block, but he said, “we will have a steady to upward movement in the second half of the year.”

Apache has grown from production and through a steady stream of bolt-on acquisitions, but it is not poised to make any major mergers or acquisitions (M&A) in the near term, Farris told analysts. He also doesn’t think the rest of the exploration and production sector will see many big deals in the near term because costs are still too high.

“As far as M&A, other than Pogo [Producing Co.], which everybody expected, I haven’t heard an awful lot of whispers,” he said. Plains Exploration & Production Co. agreed to buy Pogo earlier this month in a $3.6 billion deal (see NGI, July 23). “Maybe I’m not in the loop.” Apache will continue to acquire assets, but “our appetite for going forward is what makes sense for us over the long term other than just making an acquisition. We have 46 million acres across the globe, and we have the resources we need to continue to grow internally in the U.S. and internationally…”

If Apache were to consider a purchase, it would likely be internationally instead of in the United States. Canadian assets also may be promising down the road, said the CEO.

“I will say I personally believe that the Western Canadian Sedimentary Basin has more gas than anyplace else in North America. If you look at the drilling density, the amount of gas that you find. It’s still a very good area. I know that a number of large independents cut back their capital spending, and we have also. But long term, Canada is still going to be a very good area.”

In 2Q2007, Apache’s U.S. exploration spending totaled $641,261, up from $544,822 for the same period of 2006. U.S. gas volume was 801.78 MMcf/d, compared with 638.47 MMcf/d. And in Canada, gas volume was 389.22 MMcf/d, down from 417.49 MMcf/d in 2Q2006. Apache’s U.S. gas prices averaged $7.29/Mcf in the quarter, ahead of $6.29 a year ago; in Canada, gas prices averaged $6.79/Mcf, ahead of $5.69.

Reported 2Q2007 net earnings were $632 million ($1.89/share), down from $722 million ($2.17) in 2Q2006. Excluding a nonrecurring benefit of $132 million (39 cent/share) for a reduction in Canadian tax rates, Apache earned $590 million ($1.78) in 2Q2006.

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