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ConocoPhillips CEO Warns Rising Costs May Impact Output

ConocoPhillips has slashed its capital budget for 2007, and it warned that if service costs continue to escalate, its medium-term oil and natural gas production likely will be impacted.

On Thursday, the Houston-based major cut its 2007 capital expenditure budget to $11.8 billion, well short of a previous estimate of $15-16 billion. Total cash spending in 2007 is estimated at $13 billion, down from the $18 billion the producer is likely to spend in 2006.

The reduced budget reflects the completion of ConocoPhillips' planned 20% equity investment in Russia's OAO Lukoil Holdings. However, CEO Jim Mulva said escalating costs may impact new oil and gas developments planned worldwide.

"Given the increasingly challenging business environment, which has been marked by rising costs, greater discipline in capital spending is warranted to better ensure value delivery over the long term," Mulva said in a statement. "Accordingly, we have prioritized our capital projects in 2007." Mulva warned that "assuming continuation of the current cost environment, this capital program is expected to result in a slight reduction to the company's medium-term production growth rate."

About 84% of the total capital program will be directed to the exploration and production (E&P) segment. The refining and marketing segment will receive 13%, with the remaining budget will be spent in Emerging Businesses and Corporate endeavors.

E&P's 2007 capital budget, including capitalized interest of $0.5 billion, is set at $10.2 billion. Combined with $0.6 billion for loans to affiliates and a planned $0.6 billion contribution to a transaction with EnCana Corp., the total E&P capital budget is $11.4 billion. Worldwide exploration activities of $1.5 billion and global gas activities of about $0.4 billion are included.

In North and South America, the E&P capital program is expected to be about $6.5 billion, which will be spent on:

"In addition to the capital budgeted in 2007 for projects that will provide needed energy supplies in the near- and long-term, the company also will increase research and development spending on technology by 50% to more than $150 million annually," said Mulva. "Research and development efforts will focus on projects that aid the development of unconventional oil and gas resources, such as Canadian oil sands, as well as the development of new energy sources, such as alternatives and renewables.

Mulva said ConocoPhillips "intends to become a leader in new energy resource development," and "is committed to diversifying its energy resource development, significantly enhancing the efficiency of energy use, and doing so in a way that addresses climate change and other environmental concerns." ConocoPhillips "believes a number of sources of energy are necessary to meet the demands of consumers, including fossil fuels, unconventional sources like oil shale and heavy oil, and alternatives like biofuels."

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