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Apache Eyes Expanded Gas, Oil Opportunities

Apache Corp. is pouring more money into its upstream projects this year to advance a backlog of North American and overseas opportunities, CEO Steve Farris said Tuesday.

Farris and his management team held a rare Investor Day for financial analysts in New York City to fill in the blanks on Apache's exploration and development plans for North America and around the world.

Only a month ago Apache set a capital spending plan for 2011 of $7.5 billion, but based on plans to increase natural gas and oil production by 13-17% this year, the company revised spending plans upward by 8.3% to $8.12 billion. The additional spending, among other things, will accelerate development of the $11 billion-plus of assets acquired in the last year that include:

With an enviable balance sheet and a portfolio concentrated in some of the richest onshore and offshore basins of North America and overseas, Apache's inventory could achieve annual production growth of 6-12% from 2012 to 2015, CFO Tom Chambers told an Investor Day audience.

Over the next four years the Houston-based independent has penciled in a capital budget of $8-10 billion a year, with $1 billion a year earmarked for liquefied natural gas (LNG) projects in British Columbia (BC) and Australia.

What will determine the spending levels going forward are natural gas and oil commodity prices, said Farris. Rates of return, not growth, are to guide Apache's decisions, he said.

"We truly allocate capital quarterly," Farris told the audience.

Natural gas, which not too long ago had been Apache's primary focus, isn't being overlooked, but because of current pricing, oil and liquids will take precedence while gas projects, like two LNG projects in Kitimat, BC, and in Australia, are geared for long-term returns.

A big chunk of the 2011 budget will go to Canadian shale and conventional gas and oil projects, with spending set to almost double (48%) from 2010 to $1.18 billion. (The proposed BC LNG project is not included in that portion of the spending.)

In the United States the capital outlay is 7.6% higher year/year at $3.39 billion, with priority spending on gas and oil prospects in the GOM, as well as liquids and oil prospects in the Permian Basin and Midcontinent.

Don't look for a push to develop Apache's substantial onshore gas assets.

"The North American natural gas market is more challenging with abundant shale resources," Apache Canada President Tim Wall said. Because of the challenges, Apache looked for opportunities, and its "response is the Kitimat LNG project," which is being built with subsidiaries of partners EOG Resources Inc. and Encana Corp.

"We have such a large reserve base that it made a project like Kitimat extremely important," Wall said. "Now Canada exports half of its gas to the United States. Kitimat provides another outlet for that...

"With an average 11-day voyage to Asian LNG markets, it provides one of the shortest shipping routes" and allows Asian utilities to "diversify their portfolio with one of the largest natural gas supplies in the world."

Coincidentally Apache is one of the biggest leaseholders in BC's Horn River Basin, where the company estimates that it has around 10 Tcf of "net marketable gas." Several multi-well drilling pads were completed last year by Apache and partner Encana. This year completion activities are planned.

"We expect quite a big boost in our production base [in the Horn River] over the next few months as wells come online," said Wall.

Apache's Horn River recovery rates per well are set at about 15 Bcf, based on tests with longer horizontals and more hydraulic fracturing, said Wall. "We think 15 Bcf is a representative well. It's still a moving target and we're testing in other areas, but we believe that's a real number."

The Horn River gas reserves, as well as gassy production from the Montney formation and other nearby plays, "gives us an option to market [gas] via Kitimat LNG," he noted.

The proposed facility has yet to receive required export permits from the National Energy Board (NEB), but site clearing already is under way, Wall noted. The facility would be powered primary by hydroelectric power, which is in abundant supply in British Columbia.

"Kitimat...completes the picture," said Wall. "All the gas we have in Canada, and being able to export that, offers a lot of avenues to take it internationally. More likely than not, it will be to the Asia Pacific." Up to 700 MMcf/d could be shipped from the proposed facility.

Apache, which would operate Kitimat and hold a 40% stake, expects to receive an LNG export license from the NEB "later this year," said Wall. Contracts negotiated with Asian Pacific buyers could be in place as soon as the end of the year. "We'll make a final investment decision late next year...First gas is still scheduled for late 2015 or early 2016."

However, the LNG export facility shouldn't be considered a "slam dunk," Farris told investors. He gave the odds of starting up a completed facility at around 80%.

At the other end of North America, the GOM remains a top priority for Apache, which is the No. 1 leaseholder on the Outer Continental Shelf. Last year's merger with Mariner, as well as its Devon acquisition, gave it a more solid presence in the deepwater as well.

Apache "basically reloaded our gun...with years of inventory..." in the U.S. offshore, said GOM chief Jon A. Jeppesen. The GOM has become a "drilling returns machine" for the company in part because of Apache's extensive infrastructure and long-term holdings. It routinely schedules 50-60 new wells every year, and even though development has been curtailed for a year, "we hope to get back up to that level when the permitting situation is eased."

Apache is "here to stay in the deepwater," he said, but the management team has become acutely aware of how tenuous "partner issues" may be, as the deepwater Macondo well blowout last year demonstrated. "Anytime there is a situation like Macondo, it's clear that we need to be selective in choosing partners...and ensuring they are financially secure..."

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