Talisman Energy Inc. said Tuesday it will cut capital spending in its North American dry gas plays by 35% year/year to capitalize on higher oil prices.

Instead of spending money in its considerable U.S. and Canadian dry gas portfolio, Talisman instead will spend the bulk of its US$1.7 billion North American capital budget on increased activity in liquids-rich shales and conventional oil properties.

High on the list of spending priorities is the liquids-rich Eagle Ford and Farrell Creek shale plays. Last month Talisman sold a half-stake in the Farrell Creek properties, which are in northeastern British Columbia, to Sasol Ltd. for C$1.05 billion (see Shale Daily, Dec. 21, 2010). Also last year Talisman and Norway’s Statoil ASA formed a joint venture to acquire 97,000 net acres in the Eagle Ford (see Daily GPI, Oct. 12, 2010).

“In North America our emphasis will shift to liquids, and we will reduce gas-directed spending by 35%,” said CEO John Manzoni. “Our reduced gas-directed drilling remains profitable at US$4 prices and our land retention commitments are relatively minor.

“We will slow the Marcellus program, with plans to move from 12 rigs at year-end to nine over the course of this year. However, upon completion of the recently announced deal with Sasol, we expect to increase drilling activity at Farrell Creek, where our partner is carrying the majority of the capital costs.”

Eight rigs are to be built in the Eagle Ford play by year’s end, with “net Talisman production expected to average 55-65 MMcfe/d, just under half of which will be liquids,” said Manzoni. “We will also direct investment in our conventional portfolio toward expanded oil development programs at Shaunavon and Chauvin” in Canada.

By revving up its liquids development, Talisman expects 5-10% production growth this year. However, cash spending on exploration and development is expected to be relatively flat from 2010 at about US$4 billion.

“2010 was an important transition year for Talisman,” Manzoni said. “Talisman’s 2011 plan is expected to deliver strong production growth and improving profitability, based on a continuing track record of project execution, capital discipline, and improving replacement costs. We have repositioned the portfolio and our company is now set to deliver sustainable, profitable growth.”

The 2011 plans reflect “a cautious view of both North American natural gas prices and global oil prices,” said the CEO. Talisman sees “continuing weakness in gas prices this year,” but “oil prices have remained very robust, in-line with the growing global recovery, and our planning assumption of approximately US$75.00/bbl [West Texas Intermediate] for 2011 may be conservative.”

About one-half of Talisman’s total volume growth in 2011 will be liquids, balanced between North America, the North Sea and Colombia, said Manzoni.

“This growth projection is consistent with the promise of 5-10% medium-term growth, which we made at our investor open house in May, although the base 2010 number of approximately 415,000 boe/d is significantly higher than we were projecting at that time. Overall growth in 2011 will be broad-based, deriving from our shale properties, including the liquids-rich Eagle Ford shale, and a number of project start-ups in the North Sea.”

With capital discipline “a priority…we will be very mindful of North American gas prices as we move through the year.”

Reserve replacement costs improved in 2010 from 2009 by an estimated 25-30%. Replacement costs related to proved developed production were 45-50% lower in 2010 year/year.

“We should look for further improvement of proved developed producing replacement costs in 2011, as an important driver in increasing the profitability of the company,” said Manzoni.

“Overall we have repositioned the portfolio for sustainable, profitable growth in the future. We have a balanced portfolio, with the flexibility to adjust spending towards liquids opportunities while gas prices remain low, and an exciting set of exploration opportunities.”

Beginning this year Talisman will be reporting in U.S. dollars “to reflect the fact that the majority of company transactions occur in U.S. dollars,” the company said. Encana Corp., also based in Calgary, reports in U.S. dollars. However, Talisman’s 2010 year-end results, which the company plans to issue on Feb. 16, will be reported in Canadian dollars.

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