西方石油 (OXY) 2013 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good morning.

  • My name is Christy and I will be your conference operator today.

  • At this time I would like to welcome everyone to the Occidental Petroleum second quarter 2013 earnings release conference call.

  • All lines have been placed on mute to prevent any background noise.

  • After the speakers' remarks there will be a question-and-answer session.

  • (Operator Instructions)

  • Thank you.

  • I would now like to turn the call over to Christopher Stavros.

  • Please go ahead, sir.

  • Christopher Stavros - VP & Treasurer

  • Thank you, Christy.

  • Good morning, everyone and thank you for participating in Occidental Petroleum's second quarter 2013 earnings conference call.

  • Joining us on the call this morning from Los Angeles are Steve Chazen, Oxy's President and Chief Executive Officer; Cynthia Walker, our Chief Financial Officer; Vicki Hollub, Executive Vice President and Head of our California Oil and Gas Operations; Willie Chiang, Oxy's EVP of Operations and Head of our Midstream Business; Bill Albrecht, the President of Oxy's Oil and Gas Operations in the Americas; and Sandy Lowe, President of our International Oil and Gas business.

  • In just a moment I'll turn the call over to our EVP & CFO, Cynthia Walker, who will review our financial and operating results for this year's second quarter.

  • Steve Chazen will then follow with an update on our production growth strategy, progress on our operating costs and capital efficiency initiatives, and guidance on our production and capital program for the back half of the year.

  • Certainly the highlight of this quarter's conference call will come from Vicki Hollub who will provide a thorough review of our California Oil and Gas Operations, including the abundant opportunities we have to grow that business over the long term while providing strong financial returns.

  • As a reminder, today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws.

  • These statements are subject to risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements and our filings.

  • Our second quarter 2013 conference call press release, Investor Relations supplemental schedules and conference call presentation slides which refer to our prepared remarks can be downloaded off of our website at www.oxy.com.

  • I'll now turn the call over to Cynthia Walker.

  • Cynthia, please go ahead.

  • Cynthia Walker - CFO, EVP

  • Thank you, Chris.

  • And good morning, everyone.

  • Thank you for taking the time to join us on our call today.

  • During my comments I'll reference several slides in the conference call materials that, as Chris mentioned, are available on our website.

  • Overall in the second quarter, we continued the trend of solid execution seen in the first quarter.

  • We produced 772,000 barrels per day, essentially in line with our expectation adjusting for certain events during the quarter.

  • Our operating costs and capital efficiency programs remain on track.

  • We had core earnings of $1.3 billion, or $1.58 per diluted share.

  • For the six months of 2013, we generated $6.4 billion of cash flow from operations before changes in working capital and we ended the quarter with $3.1 billion of cash on our balance sheet.

  • If you turn to Slide 3 you'll see a summary of our earnings for the quarter.

  • As I just mentioned, core income was slightly under $1.3 billion, or $1.58 per diluted share.

  • Compared to the first quarter of 2013, the current quarter reflected improved oil and gas results driven by higher oil volumes, offset by lower earnings in the marketing and trading businesses largely due to commodity price movements during the quarter, and higher equity compensation expense resulting from an improved stock price.

  • I'll now discuss the segment performance for the oil and gas business and begin with earnings on Slide 4. Oil and gas earnings for the second quarter of 2013 were $2.1 billion, and as you can see this was an increase over both the first quarter of 2013 and the second quarter of 2012.

  • On a sequential quarter-over-quarter basis, improvements came from higher oil volumes in particular in the Middle East and North Africa business following the resumption of production after facility turnarounds in Qatar and Dolphin.

  • We also experienced better realized domestic oil and gas prices, although they were offset by lower realized international oil prices.

  • Improvement in domestic realized prices is mainly attributable to the easing of over supply in the Permian.

  • This significantly improved differentials for our Permian oil production.

  • There was also a modest increase in exploration expense.

  • Moving to Slide 5 you'll see a breakdown of production changes during the quarter.

  • As I mentioned, production was 772,000 barrels per day.

  • This was an increase of 9,000 barrels over the first quarter, and 6,000 barrels over the year-ago quarter.

  • On a sequential quarterly basis these results reflect the resumption of production in Qatar and Dolphin and growth in our California business as a result of our drilling program.

  • Elsewhere domestically we saw the impact of natural decline due to our reduced natural gas drilling activity.

  • Also reflected are the impacts of weather and planned gas plant turnarounds in our Permian business, as well as insurgent activity in Colombia.

  • These events combined to reduce production by about 7,000 barrels per day during the quarter.

  • Also, on a year-over-year basis, full cost recovery and other adjustments under our production sharing and similar contracts reduced production by about 8,000 barrels per day.

  • The impact on a sequential quarterly basis was not significant.

  • Overall, while there were a number of events that impacted production this quarter, we see the underlying business as performing essentially as we expected.

  • If you turn to Slide 6 we'll discuss our domestic production in a bit more detail.

  • Our domestic production was 470,000 barrels per day, a decrease of 8,000 barrels per day from the first quarter of 2013 driven by the factors illustrated on the previous slide.

  • This was an increase of 8,000 barrels per day from the second quarter of 2012.

  • Focusing on our commodity composition, our oil production was essentially flat versus the first quarter adjusting for the effects of the severe weather in the Permian.

  • Our natural gas and NGL volumes were 5,000 barrels per day lower than the first quarter, excluding the impact of planned gas plant turnarounds.

  • This reduction primarily reflects natural decline in the Mid-Continent due to lower drilling activity, and third party processing bottlenecks in the Permian.

  • In total, sales volumes were 764,000 barrels per day in the second quarter of 2013, compared to 746,000 barrels per day in the first quarter.

  • Middle East, North Africa sales volumes were 31,000 barrels per day higher, mostly due you to the timing of liftings as well as the effects of the first quarter maintenance turnarounds.

  • Our overall sales volumes were lower than production volumes during the quarter due to the timing of liftings.

  • The pickup in insurgent activity in Colombia caused a delay in two large liftings scheduled around the end of June.

  • In total, delayed liftings reduced the second quarter pre-tax earnings by approximately $75 million, or about $0.06 per diluted share on an after tax basis.

  • We expect the third quarter liftings in Colombia to be at their normalized level barring any pickup in insurgent activity in the third quarter.

  • Our realized prices for the quarter and the comparison to benchmark prices are summarized on Slide 7. Compared to the first quarter, our worldwide crude oil realized price was almost flat, as you can see the reduction in Brent was offset by improved realizations for our Permian production.

  • We continue to experience weakness in NGL pricing domestically which contributed to a 4% decrease in worldwide NGL realized prices.

  • While domestic natural gas realized prices experienced a 24% increase driven by improvement in the benchmark.

  • You'll also note that we updated our price sensitivities.

  • Next I will cover production costs on Slide 8. Oil and gas production costs were $13.40 per barrel in the second quarter.

  • For the first six months of 2013, production costs were $13.66 per barrel, compared to $14.99 per barrel for the full year of 2012.

  • The largest improvement was seen in our domestic operations where production costs were $3.26 per barrel lower in the first six months of 2013, from the full year of 2012.

  • This represents annualized cost savings of over $500 million, exceeding our previously stated goals.

  • International production costs have remained fairly consistent with 2012 levels, excluding the impact of facility turnarounds in Qatar and Dolphin which affected the first quarter.

  • Taxes other than on income, which generally relate to product prices, were $2.66 per barrel for the first six months of 2013, compared with $2.39 per barrel for the full year of 2012.

  • Second quarter exploration expense was $78 million.

  • We expect third quarter exploration expense to be about $90 million for seismic and drilling in our exploration programs.

  • Now turning to the chemical segment core earnings on Slide 9. Second quarter earnings were $15 million lower than the first quarter.

  • This is primarily the result of lower caustic soda export volumes due to weak economic conditions in Europe, slowing demand in Asia and reduced demand for alumina in South America.

  • We expect third quarter 2013 earnings to improve to approximately $170 million, benefiting from the higher seasonal demand and continued strong PVC sales into construction markets.

  • On Slide 10, as a summary of the Midstream segment earnings, they were $48 million for the second quarter of 2013, compared to $215 million in the first quarter of 2013 and $77 million the second quarter of 2012.

  • The sequential quarterly and year-over-year decrease in earnings resulted mainly from lower marketing and trading performance, driven by commodity price movements during the quarter.

  • Our worldwide effective tax rate on core income was 41% for the second quarter of 2013, and we would expect that our combined worldwide tax rate in the third quarter will remain at about the 41% level.

  • And finally, on Slide 11 I'll discuss our year-to-date cash flow performance.

  • For the first six months we generated $6.4 billion of cash flow from operations before changes in working capital.

  • This amount includes an approximate $380 million cash in-flow for the collection of a tax receivable.

  • Working capital changes decreased our cash flow from operations by about $200 million, to $6.4 billion.

  • Net capital expenditures for the first six months of 2013 were $4.2 billion.

  • Of which, $2.2 billion was spent in the second quarter.

  • We generated approximately $270 million with the sale of our investment in Carbocloro in the quarter and we used $225 million for acquisitions of domestic oil and gas assets.

  • Of which, about $125 million was during the quarter.

  • After paying dividends and other net outflows, our cash balance was about $3.1 billion, as of June 30.

  • Our debt balance remains unchanged.

  • And our debt to capitalization ratio was 15% at the end of the quarter.

  • Our annualized return on equity for the first six months of 2013 was 13% and our return on capital employed was 11%.

  • I'll now turn the call over to Steve Chazen to discuss other aspects of our operations and provide some additional guidance for the third quarter.

  • Steve Chazen - President and CEO

  • Thank you, Cynthia.

  • Occidental's domestic oil and gas segment continued to execute in our liquids production growth strategy.

  • Our first half domestic oil production of 262,000 barrels a day was an increase of about 7% from the first half of 2012 production of 246,000 barrels a day.

  • Second quarter domestic production of 470,000-barrel equivalents per day consisted of 338,000 barrels of liquids and 792 million cubic feet of gas, a decrease of about 8,000-barrel equivalents per day compared to the first quarter.

  • Liquids production decreased slightly due to planned gas maintenance turnarounds in the Permian which impacted natural gas liquids production.

  • Plant turnarounds also impacted our gas production which, coupled with lower drilling on gas properties, natural decline comprised the bulk of the total domestic production decline.

  • A number of severe storms affecting the Permian region also lowered our domestic production.

  • Second quarter domestic production was generally in line with our expectations, except for the impact of storms.

  • We're executing a focused drilling program in our core areas.

  • To date we're running ahead of our full year objectives to improve domestic operational and capital efficiencies.

  • For example, we have reduced our domestic well cost by 21%, and our operating costs by about 19% relative to 2012.

  • This is ahead of our previously stated targets of 15% well cost improvement and total oil and gas operating costs below $14 a barrel for 2013.

  • We believe we can sustain the benefits realized to date, achieve additional savings in our drilling costs and reach our 2011 operating cost levels over time without a loss in production or sacrificing safety.

  • The purpose of these initiatives is to improve our return on capital.

  • I will now turn the discussion over to Vicki Hollub, our Executive Vice President in charge of our California operations.

  • Prior to her current role she ran our Permian enhanced oil recovery, or CO2 business.

  • She will provide details of our strategies for the next couple of years considering the current California operating environment.

  • She will also discuss the results of our capital and operational efficiency improvement programs.

  • Vicki?

  • Vicki Hollub - EVP and Head of California Oil and Gas

  • Thank you, Steve.

  • We are a California company and we are committed to being a responsible partner in the numerous communities in which we operate, spanning from north of Sacramento to south of Long Beach.

  • We're the states largest producer of natural gas and the largest oil and gas producer on a gross operated barrels of oil equivalent basis.

  • We provide locally sourced energy to help Californian's cool their homes and drive their cars.

  • Since 2010 we have created 3,000 new jobs, invested over $8.5 billion in the state and paid $900 million in state and local taxes.

  • We're also the largest oil and gas mineral acreage holder in California with more than 2.1 million net acres in some of the most prolific hydrocarbon producing areas of the state.

  • Our vast acreage position has diverse geologic characteristics and numerous reservoir targets, providing us with development opportunities that range from conventional to steam and water floods and unconventional.

  • We plan to continue investing and providing energy for the state for decades to come.

  • This morning I would like to give you a look at the progress we have made in California this year.

  • When we started the year our overall objective was to position our portfolio for long-term profitable growth while achieving immediate wins to have a successful year.

  • Our specific goals were deliver a predictable outcome for this year, given the constraints of working in California; advance projects with solid returns, low execution risk and long-term growth; reduce our drilling and completion cost to improve our finding and development costs and our project economics; reduce our operating costs without affecting production to improve our current earnings and free cash flow; build a growing and highly predictable lower decline base of production; test out various exploration development concepts, both from a cost improvement and execution predictability perspective.

  • In 2012, we restructured our business units to create teams organized around the unique characteristics of each of our asset groups, resulting in a fifth business unit dedicated to managing our heavy oil properties.

  • This heavy oil team has added the expertise necessary to accelerate the development of our existing steam floods and to evaluate new opportunities.

  • In addition, we created three technical teams to better manage the complex geology of the reservoirs in California.

  • One team is dedicated to the design of new water floods or the optimization of existing floods.

  • Another will look exclusively at the aggressive application of EOR technologies, including team floods where they are technically and economically feasible.

  • The third team will focus on unconventional development opportunities to optimize recoveries from the Monterey and other key shale plays in California.

  • We believe this structure gives us the ability to grow our California operations more efficiently, maximize the benefits from the improvement in operating and capital costs that we've already achieved, and drive additional improvements in our cost structure.

  • As you know, we're engaged in a company-wide effort to reduce our operating costs and improve capital efficiency in order to improve our returns.

  • In California we have significantly reduced operating as well as drilling costs, exceeding our targets.

  • And we expect to save at least $175 million this year in operating costs through these efforts.

  • On the last call we provided a thorough breakdown of the efforts being made in all domestic assets and we have achieved similar success in California.

  • We reduced our overall operating expenses by $3.50 per BOE from $23.20 in 2012 to an expected average of $19.70 for all of 2013.

  • Almost half of these reductions have been in well servicing as a result of high grading our well service rigs and eliminating less efficient ones, better planning and scheduling of jobs, producing lower value adding jobs and adding Oxy supervision through reduction of contract well side operators.

  • Improvements in innovations in surface operations account for another 35% of the reduction.

  • Activities contributing to these reductions include optimization of the use of chemicals, improved water handling, fuel and power cost reductions and lower rental equipment use.

  • In capital efficiency we've also improved by about 15% year-to-date compared to the full year 2012.

  • This success was achieved by focusing on four key elements of our capital program.

  • First, we have locked in our drilling programs for a minimum of two months and in some areas up to nine months.

  • This reduced our non-productive times associated with rig moves and third party services and helped to reduce our equipment rental costs.

  • Second, we have revised well designs to more appropriately fit the well bore characteristics and production expectations for each well.

  • Third, we have optimized drilling equipment and fluids to reduce the time required to drill wells.

  • Finally, we have improved our contracting strategies to incentivize our service providers to optimize overall performance through integrated service applications while reducing unit costs.

  • In many instances, such as in the Rose Field, we've been able to generate significant savings through the application of one or more of these concepts I just mentioned.

  • Then apply those same concepts to other wells across the state which has allowed us to duplicate the savings.

  • Many innovative ideas are being generated and implemented by our California teams across the state.

  • As we have stated several times before, many of these ideas are being generated by our people at the grass roots level which tend to generate individually modest cost improvements that accumulate to significant amounts across all of our projects as successes are replicated.

  • Our people have embraced this effort and are committed to improve operations of our assets at every level by reducing costs and continuing to improve safety everywhere we operate.

  • While the results we have seen so far are very positive and impressive, we believe that we can achieve even more improvements in both operating and capital costs going forward.

  • After reviewing our California assets as a whole and taking into consideration market conditions, we adjusted our capital strategy at the start of the year to allocate a higher percentage of our annual budget to lower decline projects such as our water floods and steam floods.

  • For this year we plan to spend almost 65% of our capital program on water and steam floods, or approximately $625 million on water floods, $370 million on steam floods, out of the total $1.5 billion capital.

  • We will spend about 25% of the capital on unconventional projects and the remaining 10% on primarily drilling projects.

  • Further, given the market conditions, we have increased a portion of our capital on oil and gas liquids development which represent about 99% of our California capital for this year.

  • California has unique opportunities with diverse and complex geology.

  • This geologic complexity leads to a broad spectrum of hydrocarbon fields and reservoir types.

  • The depth, quality and drive mechanisms of the reservoirs vary across many of the producing basins and within individual basins as well.

  • Those varied characteristics, along with product prices, cost and returns, determine the mix of the type of projects to be included in our program each year.

  • The significant strides we have made in reducing our capital and operating costs that I described have given us the flexibility to include a large number of potential projects in our development pipeline.

  • For example, depending on the type of project and location, our drilling costs in California, including completion and hook-up costs, range from $250,000 to $7 million, with expected ultimate recoveries of 30,000 BOE to 550,000 BOE per well, giving us a wide range of opportunities and variability.

  • Given our diverse portfolio of opportunities in California, we have sufficient inventory to sustain the strategy in the future for at least another 5 years, and probably even for 10 years or more, while adjusting the liquids versus gas mix as conditions warrant.

  • We believe this approach will provide the best opportunity for growth of the California operations and make it a significant growth engine for Oxy.

  • Now we'd like to share some highlights about each of those project types, beginning with water floods.

  • Water floods are among our core competencies.

  • We have several new water flood projects in progress this year at various stages from screening to implementation, in addition to a number of floods where we are engaged in redevelopment, expansion or optimization activities.

  • We will spend most of our water flood capital to further optimize our most developed project, the giant Wilmington Field, where our Long Beach business unit is continuing to have success in reserves recovery.

  • Wilmington is a long-standing water flood where the keys to redevelopment success are effective reservoir characterization, performance surveillance, reservoir modeling and advances in directional drilling technology.

  • This year we will drill 135 new wells, including 35 horizontal wells, targeting attic oil and fault isolated zones within this multi-play reservoir.

  • In Wilmington we have used a combination of vertical and horizontal wells depending on the location.

  • Vertical or slant wells can be cost effective in certain locations.

  • And in others, horizontal wells are drilled to target specific sand intervals within the larger water flood zones which have not been effectively swept by the injected water.

  • These wells have an average initial production or IP rates of over three times higher than similar vertical wells at a cost of just 20% more than comparable wells.

  • We believe there's still significant potential to be realized in the Wilmington Field.

  • For example, since we have acquired this asset in 2000, proven reserves have steadily grown.

  • In fact, year end 2012 proved reserves remain slightly higher than 2000 levels despite 12 years of production, resulting in more than a two-fold proved reserve increase during this period.

  • We currently have an inventory of over 1,000 future well locations in the Wilmington Field.

  • We believe that a successful development program focused on these wells over the next seven years will deliver reserves of up to 100 million BOE.

  • Just south of Wilmington we're starting the redevelopment of the Huntington Beach field with two new fit for purpose rigs, an on-shore rig which has an enclosure specifically designed for drilling in urban areas and an offshore rig.

  • We expect both of those rigs to arrive and start drilling toward the end of the year.

  • So far, we have identified 128 well locations to drill which will take four to five years using the two rigs we currently have committed.

  • We expect to add more well locations as we learn more through our reservoir modeling and surveillance as we have done in the analog Wilmington Field.

  • We believe we can increase our production from this field by 10,000 BOE per day and develop reserves of at least 50 million BOE.

  • Another significant project for us is the water flood expansion at Buena Vista field where we expect to drill more than 150 wells over the next five years.

  • We believe we can increase Buena Vista production by 4,000 BOE per day and deliver reserves of 28 million BOE.

  • In addition, our vintage unit, which is the team that manages our San Joaquin Valley and Ventura County water floods, gas properties in the Sacramento Valley and unconventional projects outside of Elk Hills, they have several water floods in the pilot phase this year, several under evaluation for redevelopment and a long list of potential projects going through the water flood screening process.

  • In total, we will spend around 40% of our 2013 California capital on water flood projects that are expected to generate returns exceeding 20% on average.

  • In addition to water floods, our steam flood activities have also been a sizable focus for us this year.

  • Our steam floods in California are highly profitable, taking advantage of the gas versus oil price spread, allowing us to use cheap gas to generate steam, which is then used to inject into the reservoir to produce oil.

  • We believe these projects can deliver attractive returns with a combination of gas prices as high at $6 per Mcf and oil prices as low as $80 per barrel.

  • Typical rates of return for these projects are expected to be 25% or better.

  • The two largest steam flood projects for 2013 are in the Kern Front and Lost Hills fields being managed by our newly formed heavy oil team.

  • These two fields contain over 1 billion barrels of oil, original oil in place on a combined basis with an estimated 870 million barrels remaining in place.

  • We're in the process of expanding our steam generation capacity in both fields and these projects are progressing as expected.

  • We have drilled 100 wells in these two areas year-to-date and with the recent addition of two rigs, we expect to drill an additional 200 wells in the second half of this year.

  • As a result of our activity in these projects, production from our heavy oil business unit is expected to increase by around 3,000 BOE per day, by the end of this year, over our 2013 entry rate.

  • Full development of these steam floods is a multi-year endeavor and we believe that over time we can increase our heavy oil production by 15 BOE per day, developing reserves of 120 million BOE.

  • We're also preparing to pilot two smaller steam floods in Oxnard and the Midway Sunset area by the beginning of next year.

  • With the success of these projects we expect to be able to develop an additional 45 million BOE of reserves.

  • Our total steam flood spending will constitute about 25% of our total California capital in 2013.

  • Over the next five years we expect to drill 1,500 steam flood wells.

  • As we shift capital to greater water and steam flood opportunities, we expect a lag of about six to nine months before we see sustained production growth as the flow of new projects reaches a steady level.

  • We are in this transition period but are now beginning to see the initial phases of growth from these projects.

  • In addition to shale plays, our unconventional opportunities include those reservoirs that have low permeability and require special recovery process flow.

  • Currently about one-third of our California production is from unconventional reservoirs.

  • This year we plan to drill more than 70 unconventional wells.

  • We have more than 1 million prospective acres for unconventional resources which we believe contain up to 7 billion BOE of recoverable reserves.

  • We've drilled approximately 1,300 unconventional wells in California since 1998.

  • More than 1,000 of these have been in and around Elk Hills, including the Monterey and other key shale plays.

  • Our current plan includes 53 unconventional wells from multiple shale plays around Elk Hills with varying costs and expected performance depending on the well's location and its particular structure.

  • All of these 53 wells are part of a continuing development program that are delivering better than 20% rate of return.

  • Our ongoing program around Elk Hills is expected to increase our ultimate recovery by about 150 million BOE.

  • An example of unconventional opportunities we are pursuing outside of Elk Hills includes drilling and development of the Rose Field.

  • We purchased this field in late 2009 and drilled one appraisal well in 2011, eight development wells in 2012, and six horizontal wells this year with plans to continue drilling.

  • Results have been very good with average IP rates exceeding our expectations and estimated ultimate recoveries of approximately 155,000 BOE per well on average.

  • We believe our returns from this field will be around 25% over the course of the development program.

  • We also plan to drill an additional unconventional wells in South Belridge and the Buena Vista areas this year.

  • Success in these areas could ultimately provide more than 100 well locations and up to 35 million BOE of net reserves.

  • A discussion of the future potential of California would not be complete without a separate discussion of Elk Hills, which we acquired in 1998.

  • At that time, Elk Hills had gross proved reserves of 545 million BOE, 424.5 million BOE net to Oxy.

  • Our cumulative production since our acquisition in 1998 combined with our current proved reserves is almost double the proved reserves for Elk Hills at the time of the acquisition, which shows that we continue to generate ways to get more out of these reservoirs.

  • We're not done with Elk Hills.

  • In recent years our growth in California has come from projects outside of Elk Hills.

  • This is due to our big challenge at Elk Hills where the underlying base decline without any capital expenditures would be around 25%.

  • However, we are now looking at additional opportunities which we expect will further increase the reserves at Elk Hills and help to mitigate the decline rate, possibly reducing it by as much at 50%.

  • These opportunities include water floods, steam floods, as well as potential polymer and CO2 floods that could be implemented over the next 3 to 10 years.

  • These significant operating and capital efficiency improvements made by the Elk Hills team will improve the profitability of these water floods and the EOR opportunities.

  • I would also like to point out that our plant operations team at Elk Hills has done a great job of optimizing run time and reliability from our new cryogenic gas plant.

  • Currently the team is operating the plant at greater than 90% uptime and they've extracted record volumes of NGLs from the gas stream this year.

  • Elk Hills still has more than 900 million BOE of remaining reserves and resources that can be recovered through water flooding and current proven EOR technologies in which we have considerable expertise.

  • We're going to continue our development efforts at Elk Hills.

  • Our California exploration program has delivered solid results over the last five years since we ramped it up.

  • From 2007 through 2012 we have drilled over 100 exploration wells across the California basins in both conventional and unconventional plays.

  • A full two thirds of our wells have found hydrocarbons and a large portion of these successful wells resulted in commercial production.

  • We have been busy over the last few years acquiring 3D seismic over a significant portion of our acreage and this has contributed to our high rate of success.

  • Access to this new seismic data and working closely with our operating groups has allowed our exploration staff to build creative and innovative programs.

  • Last year for instance, we made a significant unconventional discovery in the San Joaquin basin.

  • Continued appraisal and drilling and testing this year established reserves and resources of approximately 50 million BOE.

  • The full development of this discovery is expected to require drilling 100 wells.

  • In addition to the 50 million BOE we have established, we are testing and, or planning wells in late 2013 and 2014 that, if successful, will double this volume.

  • Further, this concept has repeatability.

  • We plan to extend this play through much of our California acreage.

  • Our 2013 exploration program, which includes 15 wells, is on track to deliver results consistent with prior years and we continue to build inventory to ensure we have a robust exploration program going forward into 2014 and beyond.

  • Finally, I would like to briefly touch on our gas development prospects in the state.

  • In the Sacramento Basin of Northern California we have established a sizable natural gas position with over 318,000 net acres and 66 million cubic feet a day of dry gas production.

  • We estimate that we operate through our vintage business over 80% of all production in the region.

  • Our current focus in the area is to optimize our current production mostly with inexpensive work overs and a modest drilling program of eight new wells in 2013 and 14 wells in 2014.

  • We believe that the range of possible projects that are available in our acreage gives us the ability to ramp up our development efforts with attractive returns at prices around $5 per Mcf.

  • Currently we have identified total reserves and continued resources of about 300 Bcf.

  • We believe that our acreage held about 10 Tcf of original gas in place with about 2 Tcf currently remaining.

  • As you can see, we have a large inventory of water floods, steam floods and EOR opportunities in California in and outside of Elk Hills, as wells as significant upside in unconventional opportunities.

  • All of these opportunities will continue to be an important part of our California development plans for the future and will make California a significant growth asset for Oxy.

  • The mix of projects in the next couple of years will be similar to this year as we continue to commit a larger portion of our capital to lower decline projects to manage our capital program more effectively and controlled escalation in spending while achieving healthy production growth.

  • In closing, I would like to summarize the progress we made against the goals we established at the beginning of the year.

  • We are executing a $1.5 billion capital program this year which takes into account the constraints of working in California.

  • We expect to generate free cash flow after capital in excess of $1 billion.

  • Our program incorporates opportunities, resulting from improvements we are already seeing regarding permitting in the state.

  • We shifted our development program towards a higher percentage of low decline projects such as our water and steam floods.

  • With continued improvements in permitting we should be able to grow our capital spend to around $2 billion in 2014, with further increases beyond that reaching around $2.5 billion annually on a sustainable basis.

  • For this program we expect to grow at least within the corporate target rates of 5% to 8% annually over the next 10 years, while earning returns of better than 20%.

  • We've improved our capital efficiency by about 15% year-to-date compared to the full year 2012.

  • We expect to further improve on these results going forward which will improve our finding and development costs and returns.

  • We have reduced our overall operating expenses by $3.50 a BOE from $23.20 in 2012 to an expected average of $19.70 for all of 2013.

  • This reduction translates to cost savings of over $175 million for the year contributing to our earnings and cash flow.

  • We have identified at least 5,500 well locations and will add more as we continue to evaluate additional acreage and project opportunities.

  • We are working on several new water flood projects in addition to a number of floods where we are engaged in redevelopment, expansion or optimization activities.

  • We're taking advantage of the gas versus oil price differences and expanding our steam flood opportunities, giving us a highly profitable set of projects to work with going forward.

  • We are continuing our focus on a number of unconventional opportunities across the state, including the Monterey shale to give us further growth prospects.

  • And finally, we are continuing our focused exploration in 3D seismic acquisition program which has delivered a high percentage of commercially successful projects.

  • The most recent example being our significant unconventional discovery in the San Joaquin Basin.

  • We have a large and diverse portfolio of opportunities available to us across the state.

  • We are very excited about the future of our California operations and the role it will play in contributing to the Company's overall growth.

  • I will now turn the call back to Steve Chazen.

  • Steve Chazen - President and CEO

  • Thank you, Vicki.

  • I'll now turn to our third quarter outlook.

  • Domestically we continue to expect solid growth in our oil production for the year.

  • Based on nature and timing of our drilling programs this year, the steam floods in California, the timing of several gas plant maintenance turnarounds in the Permian, we expect production growth to occur in the second half of the year.

  • We have achieved the drilling targets we set in the first half of the year.

  • As a result, we expect our second half average domestic oil production will be about 6,000 to 8,000 barrels a day higher than the first half average.

  • The increase coming mainly from the Permian and California.

  • We expect modest declines in our domestic gas and NGL production that we have seen in the second quarter to continue as a result of our reduced drilling on gas properties and natural decline, as well as additional gas plant turnarounds scheduled in our Permian business the rest of the year.

  • Internationally, we expect more cost pool depletions in our contracts in Qatar and Yemen, which will result in less cost recovery barrels from those locations.

  • However, we expect total international production will be about flat in the second half of the year, compared to the second quarter volumes assuming no renewed pickup in insurgent activity in Colombia and stable spending in Iraq.

  • We expect international sales volumes to increase in the second half of the year, and recoup well over half the under lift we've expected in the first half.

  • In the first six months capital spending was $4.2 billion with $2.2 billion spent in the second quarter.

  • We expect second half of the year spending rate to be higher.

  • Our annual spending level is expected to be generally in line with the $9.6 billion program we have previously discussed.

  • The positive effect of our capital efficiency efforts is starting to become noticeable in our spending patterns.

  • As a result, we believe there's a reasonable possibility our total spending may be somewhat lower than the program amount I just mentioned, while still drilling the number of wells we set out as a goal in the beginning of the year.

  • As can you see, the business is doing well and we're continuing to make progress on our operational goals.

  • With regard to our strategic business review, we have presented various options to our Board of Directors.

  • A review of these operations is progressing well.

  • Although it is not yet complete, so the Board will continue to evaluate the alternatives.

  • We expect to have additional information regarding our plans towards the end of the year.

  • Finally, an affiliate of Plains All-American filed a registration statement yesterday with the SEC for a public offering of interest in Plains General Partner.

  • We own 35% of the General Partner's interest and we expect to monetize a portion as a part of our proposed offering.

  • Now we're ready to take your questions.

  • Operator

  • (Operator Instructions)

  • Leo Mariani, RBC.

  • Leo Mariani - Analyst

  • Hi, guys.

  • Just quick question overall on production.

  • Looks like just kind of looking at overall company, going to be sort of flattish in 2013 versus 2012.

  • Obviously you've got a lot a new initiatives in California going here.

  • Looks like that's going to accelerate next year.

  • I know you guys also increased your Permian rig count earlier in the year.

  • Should we expect much better growth on production overall for Oxy in 2014 and maybe any kind of ballpark number we could look for growth next year?

  • Steve Chazen - President and CEO

  • Well, of course I think the oil production will continue to do well in the back half of the year and into next year, because almost all of the drilling is focused on oil.

  • California will do much better as the year progresses and into next year.

  • International production, Iraq aside, sort of flattish because of the cost recovery issues.

  • So if you look at just the oil, I think you'll see reasonable growth and better growth next year.

  • Some of the turnaround -- we won't have the turnarounds we had this year in the plants so we should do better that way.

  • Gas is a different issue.

  • Gas production, it's hard to justify spending a lot of money on gas production.

  • So on a BOE basis I think you won't see much out of the gas, probably some decline.

  • But I don't think spending money on gas is money well spent at this point.

  • Leo Mariani - Analyst

  • Any price out there you think you need to spend money on gas?

  • Steve Chazen - President and CEO

  • Vicki talked about $5 in California.

  • California's probably the -- California, maybe South Texas and maybe a little bit in Piceance are the highest return, but I think you probably need around $5 to excite us.

  • The margin's are pretty good in oil right now.

  • I think you're looking at sort of $100 oil, you make these huge margins and so trying to squeeze a few more bucks out of gas just to make some BOEs strike me as not money well spent.

  • Leo Mariani - Analyst

  • Okay.

  • How about the Bakken, is that an area where you guys have started to pick up at all given the strength in oil?

  • Steve Chazen - President and CEO

  • I think Bill can answer that.

  • Bill Albrecht - President, Domestic Oil & Gas Operations

  • Leo, right now we're running five rigs in the Bakken and adding another rig in August.

  • So we'll go up to six.

  • But I don't see much of an increase beyond six rigs for the rest of the year.

  • Leo Mariani - Analyst

  • How about Al Hosn, is that still on track for production, late 2014?

  • Steve Chazen - President and CEO

  • Sandy can answer that.

  • Sandy Lowe - President, International Oil & Gas Operations

  • The Shah Field gas will come on at the end of 2014.

  • We expect to see pretty much full production in 2015.

  • Leo Mariani - Analyst

  • Okay.

  • Thanks, guys.

  • Operator

  • Paul Sankey, Deutsche Bank.

  • Paul Sankey - Analyst

  • Hi, good morning everyone.

  • Steve, the comment you made on the strategic business review seems to indicate that, directly indicates, that we won't get the plans until later, much later this year.

  • I was thinking we would have more of an update on, for example, the Middle Eastern sales process.

  • Potentially it seems to be that you're teeing up for a California spin here and ultimately I thought there were some fairly clear plans about your intentions for the remaining co.

  • Could you sort of go back through how we have ended up here with you saying a number of different options and where things may be different from the way I perceived them to be potentially?

  • Thanks.

  • Steve Chazen - President and CEO

  • One of the things that was easiest was the Plains partial sale and ultimately full sale.

  • So there's a fairly large number in that.

  • We didn't say anything had changed.

  • I think as you enter in discussions with people about various things, I think it's best that those discussions not be in the public domain and rather be handled privately.

  • So when we have definitive thing to talk about in the Middle East, we'll talk about that when it's definitive.

  • As far as the rest of it goes, you can make your own judgments about California based on what Vicki said.

  • Paul Sankey - Analyst

  • Yes, so we could continue to consider that will become a separate standalone company.

  • That seems to be the way --

  • Steve Chazen - President and CEO

  • It's certainly one of the options.

  • I didn't mean too imply that there were now 400 options.

  • Just considering various options.

  • The Board has really just been exposed to this in detail at one meeting, and so it will take a little while and we want to consult fully with them and weigh all the alternatives for them.

  • But clearly some things are going ahead quickly.

  • Paul Sankey - Analyst

  • And we still assume that the overall process needs to be complete before you close your career at Oxy at the end of '14?

  • Steve Chazen - President and CEO

  • That would be my hope.

  • Paul Sankey - Analyst

  • Okay.

  • Just my final question on this would be towards the end of the year timing, that's conservative, it seems you don't have a huge amount of time to complete this process.

  • Steve Chazen - President and CEO

  • Doesn't mean that the process wouldn't proceed without an announcement.

  • So some things we could do -- I prefer to announce things that are not ideas but well along in the process.

  • So you could move ahead on any of this without some formal announcement.

  • Paul Sankey - Analyst

  • Right.

  • My understanding is that things -- you visited the Middle East, things went well.

  • You may be selling more of the Middle East business than previously I think it had been the idea of 20% to 30% sale, for not less than $25 billion total value.

  • Are those reasonable?

  • Steve Chazen - President and CEO

  • I don't want to comment on discussions we might have over there.

  • The trip went well.

  • The trip went well and they were very pleased with our people and our operations and they want us to stay in the region and want to do things to help us stay in the region.

  • Paul Sankey - Analyst

  • Right.

  • And then my final question is just as regards California, it feels a little bit like the movie we saw in 2010.

  • You described a lot of upside and potential in California around that analyst meeting.

  • It didn't really deliver.

  • We've seen volumes down here sequentially in California.

  • How can we get conviction that this enormous upside potential will be delivered when the recent track record has been --

  • Steve Chazen - President and CEO

  • I think actually we're up sequentially this quarter, but you'll just have to see the production as it goes.

  • Paul Sankey - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Ed Westlake, Credit Suisse.

  • Ed Westlake - Analyst

  • Yes, good morning, and thanks for all the additional information around California.

  • My first question's just on breakeven.

  • You gave some numbers for the steam floods.

  • But just on sort of --

  • Steve Chazen - President and CEO

  • Steam floods, you should use that as a ratio.

  • Ed Westlake - Analyst

  • Yes.

  • Yes.

  • Steve Chazen - President and CEO

  • Rather than exactly those numbers.

  • Ed Westlake - Analyst

  • But on --

  • Steve Chazen - President and CEO

  • That wasn't breakeven.

  • That's what economically works.

  • So that's different than breakeven.

  • I don't know what the breakeven number -- so basically what we're saying in California is that those are -- that ratio works and we would continue to exploit that ratio.

  • Ed Westlake - Analyst

  • Right.

  • What about the non-conventional wells and the water flood, any sort of rough range for sort of economically working oil prices?

  • Steve Chazen - President and CEO

  • Vicki?

  • Vicki Hollub - EVP and Head of California Oil and Gas

  • I would say that for the water floods, certainly we -- those are some of our better margin productions and projects, so our breakeven prices on the water floods could go down as oil prices down to probably the $60, $65 range.

  • Ed Westlake - Analyst

  • Right.

  • And then just on the non-conventional side, obviously 7 billion barrels of reserves sounds like a great number.

  • At the current rate, probably takes about 200 years to drill that.

  • So when you're looking --

  • Steve Chazen - President and CEO

  • 199, I thought.

  • Ed Westlake - Analyst

  • Okay.

  • Great.

  • When you're looking at the types of fields that that's contained, is it fields like Rose, and North Shafter that area, is it in-field drilling around Elk Hills or is it the deep basin?

  • Just trying to get an understanding of what the technical break throughs are to actually unlock that to an oil price that works.

  • Steve Chazen - President and CEO

  • First, before Vicki answers, I think you need to understand that we've couched this entire discussion around in the current environment.

  • And those are things other than just oil and gas prices.

  • So Vicki, you can answer.

  • Vicki Hollub - EVP and Head of California Oil and Gas

  • Currently we only drilled and developed on less than 5% of our unconventional prospective acres, so we're still learning a lot about the Monterey shale.

  • We're in the -- what I would still say is even though we've drilled 1,300 wells, we're learning a lot about the Elk Hills area and the Rose and North Shafter areas.

  • We're taking those learnings and applying those to our evaluations of the remaining potential.

  • And the creation of this technical team that we have and working with our groups, we expect to be able to start expanding out beyond those areas and expect to see some variability but we'll be able to apply a lot of what we've learned thus far.

  • Ed Westlake - Analyst

  • Right.

  • I mean --

  • Steve Chazen - President and CEO

  • I think the short answer is for the next year or two you'll see the areas that she's pointed out and then as this thing -- we're looking for a high predictability and so what you'll see is this thing will build out over time, rather than sort of leap over time.

  • Again, we're looking for predictability and outcome here.

  • So their cash flows would be predictable going forward.

  • Ed Westlake - Analyst

  • Thanks very much.

  • Operator

  • Arjun Murti, Goldman Sachs.

  • Arjun Murti - Analyst

  • Thank you.

  • Apologies if I'm simply repeating the questions here.

  • You do talk about 7 billion barrels of opportunity in California.

  • But it sounds like there's still a lot to study over such a large acreage position.

  • How do we think about how risked that 7 billion is?

  • Is the issue in the pace and I know the regulatory constraints is one of them, that's sort of an unrisked number and you just have to do a lot more work on it?

  • Just kind of putting these things together here.

  • Steve Chazen - President and CEO

  • Vicki?

  • Vicki Hollub - EVP and Head of California Oil and Gas

  • That number is based pretty much on what we've seen in the areas that we've been developing thus far.

  • So that number is taken from the actual performance we've seen in the Elk Hills area with respect to our shale play there.

  • And also taking into account what we've learned in the Rose and North Shafter area.

  • So we feel comfortable about that number.

  • What we are trying to do is work on techniques to actually improve the percent recovery of the oil in place and there's some techniques that we think we can start to apply and we're starting to see some success on things that we're implementing thus far, and those are results that we hope to be able to share with you in the next -- in the coming quarters.

  • Arjun Murti - Analyst

  • That's great.

  • Steve Chazen - President and CEO

  • I think her answer is that it's a risked number.

  • Arjun Murti - Analyst

  • Yes.

  • I got that.

  • So then the pace on the one hand there can be regulatory constraints, on the other hand you're still trying to learn more.

  • I don't know how you can wait between these two things.

  • I think there is an ongoing question of why not go faster in these areas?

  • Steve Chazen - President and CEO

  • We want to make sure the California company has stable, solid cash flow going forward and the regulatory environment will take a while to develop.

  • This is not North Dakota.

  • Arjun Murti - Analyst

  • Thank you.

  • And then just a follow-up on the strategic business reviews.

  • I think you said it, Steve, but a lot of companies when they announce these things do present basically ideas of what they then want to accomplish.

  • It sounds like, whether it's before year end or some other time frame, it will be much more conclusionary for you or perhaps much more concrete in terms of what you'll actually be announcing at that time.

  • Steve Chazen - President and CEO

  • If you look at the PAA action, we could have said something about that a year ago or six months ago or something like that.

  • We said it when it was concrete.

  • The problem with ideas is that you telegraph your attentions to other parties and -- without -- I don't think that's necessarily the right thing to do.

  • Arjun Murti - Analyst

  • Steve, of your 35% of PAA, GP, how much is going as part of this IPO?

  • Steve Chazen - President and CEO

  • I've been told I can't answer that.

  • Arjun Murti - Analyst

  • Got it.

  • Steve Chazen - President and CEO

  • You have to call Barclays to get the prospectus.

  • Maybe they'll send you one.

  • Arjun Murti - Analyst

  • We'll ask them.

  • Thank you very much.

  • Steve Chazen - President and CEO

  • Okay.

  • Operator

  • Doug Leggate, Bank of America.

  • Doug Leggate - Analyst

  • Good morning, Steve.

  • Good morning, everybody.

  • Steve, back to California.

  • So it sounds like what you're saying by you want the California business to have stable cash flows, is you've got --

  • Steve Chazen - President and CEO

  • Stable and growing cash flows.

  • Doug Leggate - Analyst

  • Right.

  • If you go drill a bunch of wells and then you don't have the permitting rights assumed, is that really what's holding you back from stepping up the programs, is it still permitting?

  • Steve Chazen - President and CEO

  • It's a combination of permitting and technical evaluation.

  • We could certainly, if we had a different permitting environment, we could spend a lot more money.

  • Probably not enough to satisfy you but certainly spend more money.

  • And so I think that it's just not -- it's still a very difficult environment.

  • There are bills in the legislature that will have a negative impact on us and so I think we want to be cautious about what we promise.

  • Doug Leggate - Analyst

  • So looking at your slide presentation, you're indicating a $500 million step-up in spending, maybe going all the way up to --

  • Steve Chazen - President and CEO

  • Next year.

  • Doug Leggate - Analyst

  • Maybe going all the way up to spending your cash flow.

  • Steve Chazen - President and CEO

  • Hopefully the money we invest will generate more cash flow so we really won't spend the cash flow.

  • Doug Leggate - Analyst

  • Where is that incremental activity, is it water flood, steam flood or is it unconventional?

  • Steve Chazen - President and CEO

  • It's probably going to be mostly unconventional.

  • Doug Leggate - Analyst

  • Okay.

  • Thanks.

  • Final one on California.

  • The rates of return, 25 -- 20%, 25%, I think that's what you said in the slide pack.

  • Considering you have the royalty and given the numbers you've given to us before like 250,000 barrels a day -- sorry, 250 barrels a day with 250,000 EUR on the costs you gave us, those returns sound a little conservative.

  • Is that -- am I reading something wrong there or are those numbers -- has something changed?

  • Steve Chazen - President and CEO

  • I think first of all, it's not IRRs.

  • It's basically accounting returns.

  • So it's the -- it would show up on our financial statements as opposed to what shows up in our imagination as IRRs.

  • The IRRs are a lot higher because you get your money back real quick.

  • Probably not exactly comparable.

  • We didn't write those numbers to be exact.

  • We just said well, those are what we're pretty confident of being able to deliver.

  • Doug Leggate - Analyst

  • I see.

  • So it's more like a return on capital type of number.

  • Steve Chazen - President and CEO

  • That's right.

  • Doug Leggate - Analyst

  • Very last one from me.

  • I know you don't want to elaborate probably on the restructuring at this point but can you help us with frame on order of magnitude for how you see share buybacks when you do get to the point where you are going to do a Dutch option?

  • Order of magnitude would be great.

  • Steve Chazen - President and CEO

  • Depends on how much is raised.

  • Clearly, as we raise money as a sizable share buyback is in order.

  • I don't think -- I think under 10% wouldn't be viewed as sizable.

  • Doug Leggate - Analyst

  • All right.

  • I'll leave it there.

  • Thanks very much.

  • Operator

  • Roger Read, Wells Fargo.

  • Roger Read - Analyst

  • Good morning.

  • Just following up on California.

  • Given the commentary about spending in terms of the, call it more the conventional, the water flood, the EOR side, focusing on lower decline rates yet the incremental spending will be on the unconventional side.

  • How exactly does that reconcile in terms of production growth and expectations?

  • Steve Chazen - President and CEO

  • You build the base from your steam floods and your water floods.

  • That's what the 1.5 billion area does.

  • Once you've got the base, you can afford to step up the higher decline drilling.

  • Roger Read - Analyst

  • Okay.

  • So that's how California ultimately is going to fund itself?

  • Steve Chazen - President and CEO

  • That's how you would expect California to fund itself.

  • Roger Read - Analyst

  • Would California -- if put as a separate unit, however it does occur, would it be -- would it take a percentage of the debt?

  • Would it take on new debt and that would be a way to raise cash for the parent corporation?

  • Any kind of light you can shine on that?

  • Steve Chazen - President and CEO

  • I think it's premature to speculate about what we might do there.

  • Roger Read - Analyst

  • Okay.

  • Steve Chazen - President and CEO

  • That's something that you roll out near the end rather than you start with.

  • Roger Read - Analyst

  • Okay.

  • I was just trying to get kind of a feeling for where it could all come from.

  • Steve Chazen - President and CEO

  • It isn't going to -- if it were separated, it would have the capital structure similar to E&Ps, not a capital structure similar to ours.

  • Roger Read - Analyst

  • And then my final question, as you've made progress on lowering the OpEx, is there any help you can give us in terms of understanding how much of that is a function of maybe not spending on the natural gas side as opposed -- and NGLs as opposed to spending on the crude side, just given that the overall investment in drilling is clearly continuing to grow on the crude oil here in the US?

  • Steve Chazen - President and CEO

  • Gas work overs are cheaper.

  • So it's more of a struggle to lower it given how oily we are than say somebody who's real gassy.

  • I think on a BOE basis, gas would clearly be cheaper.

  • So I think it's more of a structural.

  • Even this quarter, the increase is almost entirely due to energy price increases, electricity and that sort of thing.

  • So to do this, very oily company is much more a struggle than it is, say, a gas company.

  • If we look at our pure gas production, the areas that are almost pure gas, they're doing great on this.

  • They've got really low numbers.

  • They still don't make a lot of money because the gas price is low.

  • Their operating costs are really nothing.

  • But it's the oil stuff where you struggle because you've got electricity and other costs that make it really out of your control.

  • So I think given the oily nature of the Company, I think the people in the field have done a great job.

  • Roger Read - Analyst

  • Okay.

  • And then how much more progress do you expect at this point on the cost reduction front?

  • Steve Chazen - President and CEO

  • We show you the targets in one of the slides.

  • It can always be lumpy in any quarter.

  • You could have a few more work overs or you could have a field problem.

  • So operating costs can be lumpy in any one quarter and again, there's electricity costs really out of our control.

  • Roger Read - Analyst

  • That's kind of what I was kind of getting -- that's what I was trying to get to.

  • If you've got some of the items are out of your control, with what's within your control, how does that line up with the target?

  • Steve Chazen - President and CEO

  • We continue to do better on the items in our control.

  • If we broke out the stuff in our control, you'd see even more sharp improvement.

  • Roger Read - Analyst

  • That's helpful.

  • Thank you.

  • Operator

  • Faisel Khan, Citigroup.

  • Faisel Khan - Analyst

  • Thank you.

  • Thank you for the detail on California.

  • Just have a few follow-up questions.

  • On Slide 31, you guys talk about the significant discovery in the San Joaquin basis.

  • I just want to understand the full development you guys talk about 100 wells, what would be the cost of each one of these wells, just the sort of $250,000 per well or is it the $7 million per well sort of cost that you guys talked about?

  • Steve Chazen - President and CEO

  • It's probably neither.

  • Vicki?

  • Vicki Hollub - EVP and Head of California Oil and Gas

  • Yes, it's more in the $2.5 million to $3 million range for that development.

  • And we're starting to drill toward the end of this year, we'll be drilling more appraisal wells.

  • Faisel Khan - Analyst

  • Okay.

  • And if you could help me a little bit understand how the permitting process kind of works for all these different play types you've discussed in California.

  • I suppose that when you're drilling in areas you're already producing from those are sort of easier permits to get.

  • But then as you move out of these areas, it is more difficult to get those permits.

  • For this particular discovery, is it pretty easy to get the permits you need to drill up this inventory and realize this discovery or how does that work from play to play?

  • Steve Chazen - President and CEO

  • Vicki, why don't you tell him where you are in the permitting process there.

  • Vicki Hollub - EVP and Head of California Oil and Gas

  • For that particular area, because it is a new area, we are in the permitting process and you're correct, for new areas it takes longer, a little more difficult, and that's why our current appraisal program has not already begun.

  • However, we're in that process now.

  • We've submitted our permit applications and expect to have the approvals of those by the end of Q3.

  • Worst case we're thinking Q4.

  • So we should be able to proceed as we expect but you're right, it's in the new areas that we have the delays.

  • Steve Chazen - President and CEO

  • We started this a year ago, so gives you a feel.

  • So we've got to permit to drill a well or two and so once we decided we needed to expand it, it's been more than a year.

  • Faisel Khan - Analyst

  • So to give it kind of a general sort of rule of thumb, is it from discovery to production of -- or realization of the discovery to production it's kind of like a year or two?

  • Steve Chazen - President and CEO

  • Year before you can start.

  • Faisel Khan - Analyst

  • Okay.

  • Steve Chazen - President and CEO

  • Yes.

  • Faisel Khan - Analyst

  • Then another year before you get to full production?

  • Steve Chazen - President and CEO

  • Well, no.

  • You got a year of doing nothing.

  • Faisel Khan - Analyst

  • Okay.

  • Steve Chazen - President and CEO

  • Or very little.

  • Testing the wells that you've got.

  • Then you get -- hopefully get your permit in a year, a little more than a year, and even that isn't necessarily the full field development but it might be close to where you are.

  • You have maybe some air quality issues that you have to deal with depending on the size of facilities you want to build.

  • This can stretch on for a while.

  • Faisel Khan - Analyst

  • Okay.

  • So sounds like the incubation period is like about two to three years from --

  • Steve Chazen - President and CEO

  • I think from when you start, and as you -- as the field -- if you're unlucky enough in some ways to find more than you thought, you need to go back for more permits because your production facilities aren't big enough.

  • And that will start another period of study by the state.

  • I think the state's doing the best it can, given the environment and the state political environment in the state, the state government's doing what it can.

  • But no one should underestimate, even when you're successful, how long it takes to convert it into production.

  • Faisel Khan - Analyst

  • Okay.

  • Understood.

  • Thank you for the time.

  • Steve Chazen - President and CEO

  • Sure.

  • Operator

  • John Herrlin, Societe Generale.

  • John Herrlin - Analyst

  • How much were the well costs at Rose?

  • Vicki Hollub - EVP and Head of California Oil and Gas

  • The well cost at Rose was $3.9 million.

  • John Herrlin - Analyst

  • Okay.

  • With respect to your water floods, why are you not doing polymer at Wilmington or Huntington Beach or you didn't mention it, anyway?

  • Vicki Hollub - EVP and Head of California Oil and Gas

  • That's under consideration.

  • Our EOR technical team is looking at the possibility of polymer flooding, not only at Wilmington, but also at Elk Hills.

  • John Herrlin - Analyst

  • Okay.

  • Steve Chazen - President and CEO

  • The answer is the plain water flood at Wilmington is working great and there's no real -- a true technological victory here over the years and so I think it's -- before you do heroic things you ought to do stuff that's sort of simple.

  • John Herrlin - Analyst

  • Okay.

  • That's fine, Steve.

  • With respect to response time, you said six to nine months.

  • I assume water is more -- is later is more protracted than steam or is that incorrect?

  • Vicki Hollub - EVP and Head of California Oil and Gas

  • Depends on the type of water flood.

  • Some are quicker responders than others but based on what we're trying to develop now, it's looking like six to nine months.

  • In some areas we're seeing responses already.

  • John Herrlin - Analyst

  • Okay.

  • Great.

  • Steve Chazen - President and CEO

  • His question really is about water versus steam, is there any difference?

  • John Herrlin - Analyst

  • Exactly.

  • Vicki Hollub - EVP and Head of California Oil and Gas

  • The steam there is a lag there too because you've got to heat up the reservoir so that does take a while.

  • John Herrlin - Analyst

  • Correct.

  • All right.

  • Last one from me.

  • Steve, acquisitions, you haven't spent that much this year versus the not too recent past.

  • Is it issue of price or dirt at the properties or just your current strategic review?

  • Steve Chazen - President and CEO

  • I think all three.

  • There are not a lot of properties for sale.

  • You got a curve, oil price curve, I think the average oil price in the curve is like $85 for the next three years.

  • Meanwhile, the current price is $105 or $104 or whatever it is.

  • So that doesn't actually lead to a lot of deals because as you look forward you're talking about at least the market's expecting $85.

  • The seller's looking at checks for $105.

  • That doesn't actually lead to a lot of closure.

  • There's really not a lot of oil properties or properties that we would be interested in for sale.

  • And given where we are in the overall process, we're building cash for other uses.

  • John Herrlin - Analyst

  • Okay.

  • That's great.

  • Thank you.

  • Operator

  • Thank you.

  • At this time I will turn the floor back over to Christopher Stavros for any final comments.

  • Christopher Stavros - VP & Treasurer

  • Thanks for joining us today and please call us in New York with any follow-up questions from the call.

  • Thanks again.

  • Operator

  • Thank you.

  • This does conclude today's conference.

  • You may now disconnect.