Following a rough and tumble year that led to declining production and a slew of asset sales, Anadarko Petroleum Corp. is forecasting better fortunes in 2005, with 7-11% growth in oil and natural gas volumes, the CEO said Friday.

Jim Hackett, who presided over a conference call to discuss the 2005 budget, said the board approved a $2.9-3.1 billion capital budget for next year, with a program that is expected to deliver 160-165 MMboe, up from 2004’s pro forma performance of 148-151 MMboe. The budget also includes increased spending on exploration to sustain volume growth beyond the next five years.

“Anadarko expects to achieve sustainable, profitable growth by leveraging our skill sets on the things we do well — developing unconventional resources and exploring in high-potential basins — while regularly high-grading our portfolio and maintaining financial discipline,” said Hackett.

Anadarko implemented a refocused strategy in June by balancing the portfolio through $3.3 billion worth of asset sales, repurchasing 12.9 million outstanding shares at a cost of $819 million and retiring about $1.2 billion of debt.

“Our 2005 capital budget is essentially unchanged from 2004 capital expenditures, despite the asset divestitures,” Hackett said. “That’s largely because we decided to exercise the strategic option to accelerate drilling certain PUDs — or proven undeveloped locations — primarily on our low-risk North American unconventional gas properties. This $200 million program is designed to capitalize on today’s high commodity price environment, adding about $150 million of net asset value with a payback period of just over two years, while increasing our 2005 production volume growth by about 2.5 MMboe. In addition, while we intend to drive down costs where possible, we have budgeted $400 million for potential increases in oil field services and materials.”

About 64% of the total budget is planned for development activities, 25% will go to exploration and the remaining 11% is set aside for capitalized interest, overhead and other items.

Development spending to generate volume growth in 2005 will focus on Anadarko’s continued success in unconventional tight gas plays in the Vernon field in North Louisiana and Wild River in Alberta, and on delineating new plays in Texas and Louisiana. Production also will continue to ramp up at the company’s enhanced oil recovery operations at the Salt Creek and Monell fields in Wyoming.

In the Gulf of Mexico (GOM), Anadarko plans to focus next year on delineation drilling and facilities installation in the deepwater at K2, K2 North and the Eastern GOM, which are expected to be significant contributors to the company’s volume growth through 2008. In Alaska, Anadarko is expanding its Alpine facility to increase capacity.

“As always, exploration is a cornerstone of Anadarko’s strategy and we intend to carry that commitment forward in 2005 by allocating a quarter of our capital budget to find new sources of energy for the world’s needs,” Hackett said.

The exploration budget will focus on several key areas in the deepwater GOM, including Genghis Khan, Knotty Head and Mondo Northwest in the Eastern GOM. In addition, the company will explore for deep gas onshore in the United States and Canada.

International exploration will focus on drilling programs in Algeria, Qatar, Tunisia and Indonesia, as well as activities within our targeted new venture areas.

Percentage-wise, Anadarko will spend 46% of its budget onshore in the United States, 23% in the deepwater GOM, 13% in Canada and 9% on international plays. Another 9% is set aside for corporate purposes. By play, Anadarko will spend 34% on tight gas, 23% on deepwater GOM, 12% on conventional exploration and production, 9% on enhanced oil recovery, 5% on fractured reservoirs and 2% on coalbed methane. For international and corporate purposes, Anadarko will spend a combined 18%.

The company’s capital program is expected to “more than replace annual production for the 24th consecutive year and increase proved reserves by 4-7% in 2005,” said Hackett. Finding and development (F&D) costs for 2005 are expected to be between $9 and $12 per BOE.

“With commodity prices substantially above mid-cycle levels, we expect F&D costs to be higher,” he said. “But more importantly, our cash margins have risen more than F&D costs, so returns have improved significantly. We expect a reserve replacement of 150 to 200% and a reserve replacement efficiency of 1.8 to 2.2. So, in this price environment it makes perfect sense to accelerate development projects to get volumes on-line sooner, even if these strategic decisions drive up a single-point metric such as F&D.”

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