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Executives

Jay Wilson – VP of IR

John Hess – Chairman and CEO

John Rielly – SVP and CFO

John O'Connor – EVP and President, Worldwide Exploration and Production

Analysts

Mark Flannery – Credit Suisse First Boston

Arjun Murti – Goldman Sachs & Co.

Paul Sankey – Deutsche Bank North America

Paul Cheng – Barclays Capital

Mark Gilman – The Benchmark Co.

Sarah Hunt – Alpine

Hess Corporation (HES) Q3 2008 Earnings Call Transcript October 29, 2008 10:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the third quarter 2008 Hess Corporation earnings conference call. My name is Katina and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this presentation. (Operator instructions) As a reminder, this conference is being recorded for play purposes.

I would now like to turn the presentation over to our host for today's call, Mr. Jay Wilson, Vice President of Investor Relations. Please proceed.

Jay Wilson

Thank you, Katina. Good morning, everyone, and thank you for participating in our third quarter earnings conference all. Earnings release was issued this morning and appears on our Web site, www.hess.com.

Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements.

With me today are John Hess, Chairman of the Board and Chief Executive Officer; John O'Connor, President, Worldwide Exploration & Production; and John Rielly, Senior Vice President and Chief Financial Officer.

I'll now turn the call over to John Hess.

John Hess

Thank you, Jay, and welcome to our third quarter conference call. I will make a few brief comments after which John Rielly will review our financial results.

Net income for the third quarter of 2008 was $775 million, up from $395 million a year ago. Our results benefited from higher crude oil and natural gas selling prices and stronger refining and marketing margins, which more than offset the impact of higher upstream costs compared to those in the year ago quarter.

For the third quarter of 2008, Exploration and Production earned $699 million. Crude oil and natural gas production averaged 361,000 barrels of oil equivalent per day, which was 1% above the year ago period. Facilities downtime associated with Hurricanes Gustav and Ike in the Gulf of Mexico had the effect of reducing our third quarter production by an average of 11,000 barrels of oil equivalent per day. In the deepwater Gulf of Mexico, delays from the hurricanes in bringing back the operations of third party transportation infrastructure have curtailed full resumption of our production. We have thus far restored 4,000 barrels of oil equivalent per day and the remaining 30,000 barrels of oil equivalent per day is expected to be back on stream by January. Including the impact of the hurricanes, we expect that full year

2008 production will be approximately 380,000 barrels of oil equivalent per day, which is within our original range of our guidance.

With regard to our field developments, we continue to make good progress. JDA Phase 2 in the Gulf of Thailand and the Shenzi Field in the deepwater Gulf of Mexico are on track to start up in early 2009 and oil production from the Ujung Pangkah Field in Indonesia is on schedule to commence in mid-2009.

With regard to exploration, we have successfully completed our initial four well drilling campaign on Permit WA-390-P in the Northwest Shelf of Australia, in which Hess has a 100% working interest. Following the Glencoe and Briseis discoveries, we announced in September that our third well, Nimblefoot-1 was also a discovery and had encountered 93 feet of net gas pay. In October, we completed operations on our fourth well, Warrior-1, which had gas shows but failed to find commercial quantities of hydrocarbons. While additional drilling is required to delineate the block, we are encouraged by the results of the drilling program to date. Earlier in the year, we acquired a 3-D seismic survey over the WA-390-P Permit. We will now integrate this data with the recent well results to remap the block and define our 2009 drilling campaign that is currently scheduled to resume in the second half of next year. In September, we spudded deepwater exploration wells on Block 54 in Libya and Cape Three Points in Ghana. Drilling operations are ongoing and we expect to have results from both wells during the fourth quarter. Hess has a 100% interest in Block 54 and Cape Three Points. In Brazil, drilling operations recently commenced on Block BM-S-22, in which Hess has a 40% working interest. Results of this well are expected in the first quarter of 2009.

Turning to Marketing and Refining, we reported a profit of $161 million for the third quarter of 2008. Both our HOVENSA joint venture refinery and our Port Reading New Jersey facility posted higher earnings than a year ago as refinery problems in the Gulf Coast following Hurricanes Gustav and Ike resulted in higher refining margins. Marketing earnings were also higher than the year ago quarter primarily as a result of improvement in margins. Retail Marketing margins strengthened during the quarter while fuel volumes, on a per site basis, were down 7% reflecting weaker economic conditions. Year over year convenience store sales were flat, after being lower during the first half of this year. In Energy Marketing, sales volumes of fuel oil, natural gas and electricity all grew versus last year.

Finally, we are facing a global financial crisis that has decreased the demand for energy resulting in significant decreases in crude oil and natural gas prices. Crude oil, which was priced at over $140 per barrel in July, is now in the $60 per barrel range. Based upon this uncertain economic environment, we will make an appropriate reduction in our 2009 capital and exploratory expenditures to maintain our financial strength.

I will now turn the call over to John Rielly.

John Rielly

Thanks, John. Hello everyone. In my remarks today, I will compare third quarter 2008 results to the second quarter.

Net income for the third quarter of 2008 was $775 million compared with $900 million in the second quarter. Turning to Exploration and Production, income from Exploration and Production operations in the third quarter of 2008 was $699 million compared with $1,025 million in the second quarter. The after-tax components of the decrease are as follows, lower selling prices decreased earnings by $103 million, decreased sales volumes reduced earnings by $213 million. All other items net to a decrease in earnings of $10 million for an overall decrease in third quarter income $326 million. In the third quarter of 2008, our E&P operations were underlifted compared with production, resulting in decreased income in the quarter of approximately $25 million.

Turning to Marketing and Refining, the results of Marketing and Refining operations amounted to income of $161 million in the third quarter of 2008 compared with a loss of $52 million in the second quarter. Results of refining operations amounted to income of $46 million in the third quarter of 2008 compared with $3 million in the second quarter. The Corporation’s share of HOVENSA’s results, after income taxes, amounted to income of $32 million in the third quarter compared with a loss of $12 million in the second quarter, primarily reflecting higher margins. Port Reading earnings were $14 million in both the third and second quarters of 2008. Marketing results amounted to income of $110 million in the third quarter of 2008 compared with a loss of $40 million in the second quarter. Third quarter 2008 marketing results reflect higher margins in retail gasoline operations and energy marketing activities. Trading activities generated income of $5 million in the third quarter compared with a loss of $15 million in the second quarter.

Turning to Corporate, net corporate expenses amounted to $42 million in the third quarter of 2008 compared with $33 million in the second quarter, principally reflecting losses on pension related investments in the third quarter. After tax interest expense was $43 million in the third quarter compared with $40 million in the second quarter.

Turning to cash flow, net cash provided by operating activities in the third quarter, including a decrease of $211 million from changes in working capital was $1,205. The principal use of cash was capital expenditures of $1,277 million. All other items amounted to a decrease in cash flow of $27 million resulting in a net decrease in cash and cash equivalents in the third quarter of $99 million. At September 30, 2008, we had $1,380 million of cash and cash equivalents. Our available revolving credit capacity was $2,683 million at quarter end. Total debt was $3,932 million at September 30, 2008 and $3,980 million at December 31, 2007. The Corporation’s debt to capitalization ratio at September 30, 2008 was 24.3% compared with 28.9% at the end of 2007.

Turning to other matters, as noted on page 10 of our earnings release, subsequent to quarter end the Corporation closed its Brent crude oil hedge positions by entering into offsetting contracts covering 24,000 barrels per day of production from 2009 through 2012 at a per barrel price of $86.95 each year. The fourth quarter 2008 hedges were not affected by these transactions and are still open. The deferred after-tax loss as of the date the positions were closed will be reflected in earnings as the contracts mature. The estimated annual after tax loss from the closed positions will be approximately $335 million from 2009 through 2012. The pretax amounts will continue to be recorded as a reduction of revenue and allocated to the selling prices of our African production.

This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Mark Flannery representing Credit Suisse First Boston. Please proceed.

Mark Flannery – Credit Suisse First Boston

Thanks. I have got two questions very loosely related. Firstly on CapEx, you mentioned that you will make some appropriate adjustments to the 2009 CapEx, I suspect you are not going to give me a number for 2009, but can you help us think about that, what does that mean in terms of how you are approaching the ’09 capital budget either in terms of lower oil price expectation or just how should we think about that? My second question is on press reports regarding new refinery and solutions.

John Rielly

Okay Mark I will start with your first question and you are right, we are still in the middle of our 2009 budget process and we will give everyone an update on our January conference call going over our fourth quarter earnings and set up our budget for next year but there is no question that the global financial crisis has clearly impacted the performance of the economy and has led to significant decreases in commodity prices. So, as a result, we are looking at a lower price environment going into 2009 and as a result we will be reducing our 2009 capital and exploratory program to live within our means, but having said that we will still be focusing on the growth projects that we have. We are in a fortunate position that Shenzi, the project – we will be starting our production in 2009 and will be completing that project. Pangkah oil that will be completing here, through the end of this year and into mid 2009 and start up on production, we will obviously be completing that. JDA Phase 2 actually is complete on our end; we are just waiting for the buyers to complete the hook-up of the gas pipeline. So, we do have some of our growth projects, they will be funded as part of our program. So we have flexibility in our portfolio to maintain growth maybe at the lower end of our ranges here going forward but we do have that flexibility in the program and what we will do is go through our normal process. We are ranking all our discretionary projects as they rank according to economic returns. We will pick the highest ranked projects and there will be some then that we either maybe need to pull out more depending on what happens in prices in 2009 or could bring back in as we see what happens with commodity prices. Then, as for your next question, I will turn it to John Hess.

John Hess

Yes, St. Lucia Mark, while we have the option to build a refinery in St. Lucia, we have no current plans to do so. So, I think I would be very definitive about that answer.

Mark Flannery – Credit Suisse First Boston

Okay. What is the option then, can you just –

John Hess

We just have the option to build a refinery there when we think the economic conditions are right and as strategically it made sense we had that option. We have had that option going back to the ‘70s when we did the concession agreement and that concession agreement has been extended. So, that’s the option but at the same time I want to be very clear here, we have no current plans to build a refinery in St. Lucia.

Mark Flannery – Credit Suisse First Boston

Okay. Thank you very much.

Operator

Your next question comes from the line of Arjun Murti representing Goldman Sachs & Co. Please proceed.

Arjun Murti – Goldman Sachs & Co

Thank you, John. Just a follow up on the hedging close, just curious from an accounting standpoint, I think when others have done this they have tended to take the charge all in one quarter, it sounds like yours will be spread out, why is that and then I guess the related question is I assume the sketch with the issue of the times having to post letters to credit and maybe you might have said in your prepared remarks, if you did I apologize, but just could you review your revolving credit capacity, what’s borrowed, what’s outstanding and that kind of thing as well. Thank you.

John Rielly

Sure. Just to go over the various background of it, we like stability in times of uncertainty in the credit market, so with the recent drop in crude oil prices it seemed like a good time to close out positions by entering into offsetting contracts. The hedge positions were not a significant amount of our production but the liability was significant and we needed to manage it as you said with letters of credit. So, now that we have entered into these offsetting contracts, we have locked in that liability, it will benefit our financial flexibility going forward by limiting our exposure to any increased margin requirements. And so by entering the offsetting contract it also gets into the accounting there is no change to the payment terms and therefore the contracts will continue to be paid monthly through 2012 and by entering into these offsetting contracts what we have done is already get into a little accounting technical framework but we de-designated the contracts. They end up just going through and since the probable transactions will still happen, the production will still happen, you defer that and take those losses in as the contracts mature. So, again, from our standpoint, we just thought it was a prudent measure in these uncertain times to lock-in that liability. Then as for our credit facility, our liquidity is strong. We have the majority of our $3 billion revolving credit facility available to us and as I said in our prepared remarks that is about $2.7 billion was available as of September 30, the line does not mature until 2012 and also just to add on we have very minimal near-term debt maturities, less than $200 million over the next two years. So, we feel we are in a good position now to operate in these difficult credit markets.

Arjun Murti – Goldman Sachs & Co

That’s really helpful. Just a follow-up and I appreciate your comments on sort of the offsetting transactions live at the accounting month the way it does, I probably never thought I would ask this but are the current parties the same on both sides of the transaction, the original hedge and now the offsetting transaction or do you have some sort of counterparty uncertainty in terms of any future need to both letters of credit or anything else of that nature?

John Rielly

No, we would not do that. There is one counterpart on the site of the original hedges and we entered into the offsetting contracts with the same counterparty.

Arjun Murti – Goldman Sachs & Co

That’s terrific. Then just one final one, in the 380,000 full-year guidance, did that contemplate the Gulf of Mexico production coming back progressively or do you assume it is out for the fourth quarter, any additional color on that?

John Hess

Arjun, it’s going to be a gradual approach. We think we will get about 10,000 to 15,000 barrels a day between now and the middle of November and the residual 15,000 barrels a day is probably going to be at year end, early January I imagine.

Arjun Murti – Goldman Sachs & Co

That’s great. Thank you very much.

John Hess

Thank you.

Operator

Your next question comes from the line of Paul Sankey representing Deutsche Bank North America. Please proceed.

Paul Sankey – Deutsche Bank North America

Hi everyone. You have outlined how strong you are financially really but at the same time saying you will live within your means so if you go back to the CapEx question, can you just address how low you will go? Will you absolutely stay within your means if we say for example stay at $64 barrels or for example, in terms of your rigged commitments and if you can talk a little bit more about that would you prepared to really maintain your programs that are above your means given that you are financially strong?

John Hess

Paul very good question and this is always a matter of degree in how you get the balance right. Obviously the specifics that you are looking for and others are looking for, we will give you on the January conference call, but right now just to help you understand how we think about it, we will make appropriate reductions in our capital and exploratory spending in 2009 to reflect the decrease in prices and obviously they are moving around but we will do it in such a way that we maintain our financial strength and flexibility while still protecting our growth options and we will be as prudent as we can be getting that balance right.

Paul Sankey – Deutsche Bank North America

I think it is sad to say that you are kind of a bit short rigs aren’t you, I mean you are certainly not long.

John O'Connor

I think that is the point, I think that’s implicit in John Hess’ answer Paul. We had always talked about having essentially a (inaudible) program to drill the wild cards [ph] between the fourth quarter this year through the 2009 period and we are still within the constraint of capital environment regarding the funds, the rig commitments that we have. I would add that in the event that things change more favorably it might be a benign environment in terms of picking up occasional rays of opportunity. We will have a program capable of pursing those opportunities should the opportunities arise.

Paul Sankey – Deutsche Bank North America

Great. One separate question but related to cash, it is pension funding, can you talk a little bit about whether there is going to be any issues that we might expect going forward? Thank you.

John Rielly

Sure. If you looked at our 2007 10-K on our – I will call it our qualified pension plans, when you look at it as compared to our cumulative benefit obligation, we were actually over a 100% funded on those plans. We do have a supplemental plan and on that plan we were just under 75% funded. So, in 2007, 2008, we have been funding the plans at around the level of $80 million. So, yes with asset values decreasing as a result of the market decline, clearly we will be less funded but we were in a good position before. So, yes I could see some increases in contributions but from a significant standpoint it won’t be material to our cash.

Paul Sankey – Deutsche Bank North America

Yes, it feels like it will be $20 million type numbers, do you mean that the market stays where it is?

John Rielly

That would not be unreasonable.

Paul Sankey – Deutsche Bank North America

Okay, great, thanks a lot. Finally John Hess, you just mentioned volumes down 7% I am getting down 3% in the release in terms of the sales that you announced, could you just clarify the difference there that I am getting between what looks like a 3% decline, I think you mentioned in your comments that you were down 7% same store sales.

John Hess

Yes, the same store sales that we are talking about is for the – I just want to make sure our numbers are the same ones that we are talking about, in terms of site versus site, I believe the third quarter is about 7%, the North East is actually a little less than that, in places that actually is closer to 9% same site sales on gasoline volumes we are talking about here is (inaudible) which is up a little higher than that reflecting the real estate problems and the economic problems that they have in the state. So, when you add it all up it is about 7% in terms of the third quarter. In terms of convenient store, our store sales are about flat. If you look at same store sales they are actually down quarter versus quarter a year ago about 2%. So, that is a whole dollar number that we show in the press release. So, overall there is a message here that consumers are cutting back on their spending even more at our sites in gasoline and a little less in the C stores.

Operator

Your next question comes from the line of Paul Cheng representing Barclays Capital. Please proceed.

Paul Cheng – Barclays Capital

Thank you. Hi gentlemen. John, at the end of September since you said third quarter at the end of September, are you neutral or underneath?

John Rielly

Sure. For the whole year, if you looked at our production for nine months, our total volumes are actually pretty much the same sales volume versus production. Now, when you do look at it compared to country by country, there are some countries that are underlifted and some countries that are overlifted. It is very difficult to give guidance going forward about where the lifts are and what countries will end up overlifted in the fourth quarter. From a general standpoint, for the nine months for this year, Libya has been overlifted and the UK is underlifted, that is our general for the nine months. In the quarter itself, what had happened was Denmark, Norway and the UK were the basic countries that were driving the underlift and the $25 million reduction in the income.

Paul Cheng – Barclays Capital

John, in the OM outside, is there any inventory gains in the result given the rapid decline in oil prices?

John Rielly

No, there is none. There is no liquidation left, no letters have been taken out.

Paul Cheng – Barclays Capital

Think this will be for John O'Connor, John you have were talking about Ghana and BMS-22 currently drilling, can you tell us what is the TD that you expect to reach and where are we?

John O'Connor

Ghana is about 15,000 feet TD Paul and it will certainly TD up my expectation is in the next 45 days. Brazil, the TD is about 18,000 feet, it is really just in the top hole [ph] section right now, it probably will be at the 10,000 feet within the next 48 hours and then we said in John Hess’ remarks that we expect the TD to do well in February.

Paul Cheng – Barclays Capital

So that means that Ghana actually there is a possibility maybe by the end of December that you may be able to announce something?

John O'Connor

I would hope so, absolutely.

Paul Cheng – Barclays Capital

I know it is just the early stage, you just drilled four wells in Australia, three of them have been a success, anything you can share in terms of how much we serve so far you have been able to identify there?

John O'Connor

Obviously we are very encouraged by what we have seen in these wells Paul. It is a very, very sizeable block and we have acquired and are processing 3D seismic over the block and really it is going to be necessary to take the result of the 3D data and the drilling results from the wells integrate all of that information technically and it is probably going to be into the second quarter before we would be in a position to realistically determine what the ultimate resource will be and at the end of the day it is going to require us to drill more wells in order to confirm what the estimated resource on the block would be. We are very, very pleased at the discoveries that we have made so far.

Paul Cheng – Barclays Capital

So, you think that by the second quarter of next year you may be able to come up with some pin memory estimate and then you will continue to go on some additional drilling program there to firm up on that estimate.

John O'Connor

I don’t think we would talk about anything at that time Paul because there is so much dependent on subsequent drilling.

Paul Cheng – Barclays Capital

How many more wells that you foresee yourself that you need to drill in order for you to come to the point you feel pretty comfortable that (inaudible)?

John O’Connor

As you know, we have a remaining commitment of some 12 wells and we will start up doing programs in the middle of 2009 I think that it is more than likely that each of the wells would be required in order to give us the sort of confidence we would have in publicly discussing the results on the block. So, I guess that we will wait till the end of the program before we talk about it.

Paul Cheng – Barclays Capital

Okay, that is fair. Maybe this is either for John or maybe it is for John Rielly, (inaudible) I know everyone is talking about that, can you tell us what may be – is there a number you can share, what is the minimum you have spend in your CapEx program that based on all the commitments that you have already in or that you are already in the middle of trying to finish the project, is there a number you can share, what is the minimum spending level?

John Rielly

No, there is no set number right now that we would share at this time going through our budget. I guess I would like to reiterate that we do have flexibility in that program. So, there is a number of discretionary projects that we have that we can potentially then defer to where – as we try to live within our means next year and we can still fund obviously all our key growth projects and all key appraisal drilling be it as it is, let’s hope Brazil, Libya, Ghana that will not be a problem in the program. So, we have flexibility in it, we will adjust it to live within our means and then we will give you more information on the January conference call.

Paul Cheng – Barclays Capital

Then the final one, on the hedge position, I just want to confirm, you said that you have locked in at $86.45?

John Rielly

$86.95.

Paul Cheng – Barclays Capital

$86.95, that’s Brent, right?

John Rielly

Yes it is.

Paul Cheng – Barclays Capital

And I think that (inaudible) in year end will be the same as what we are seeing today with the exception then in the pricing, it is not going to be factored based on the spot price?

John Rielly

You are exactly right.

Paul Cheng – Barclays Capital

Okay, perfect. Thank you.

John Rielly

You are welcome.

Operator

(Operator instructions) Your next question comes from the line of Mark Gilman representing The Benchmark Co. Please proceed.

Mark Gilman – The Benchmark Co.

Guys, good morning. Just staying with that hedge question for a second, John I am trying to understand the cash situation, did you outlay the cash in October or will the cash be laid out in accordance with the same type of schedule you mentioned in the terms of the earnings impact?

John Rielly

Yes, exactly it is on a monthly basis. So, all we did was enter into offsetting contracts at the market so no cash was put out at that time and the cash will be paid as the contracts mature.

Mark Gilman – The Benchmark Co.

Okay graduating to the capital thing for a second, exploration is always a bit of a wild card in capital budgets and I guess I am wondering whether it is likely to bear the brunt of any reductions in 2009?

John O'Connor

You are right in your observations but I don’t think that it will necessarily be one area that would take the brunt of the cuts Mark. We are still frankly working our way through each piece of the business and as John Rielly said earlier, we want to protect the most profitable investment opportunities of which we have many and at the same time we want to have a balanced approach for the future so that we continue with an exploration program that will determine the strength of our developments and production into the future.

Mark Gilman – The Benchmark Co.

John, would I be correct in characterizing the Seminole and the Balkan as being the projects at the margin in terms of any reductions you might implement?

John O'Connor

Not necessarily, it is not quite as easy as that frankly. The Seminole basically the work is essentially complete, we will complete in the middle of 2009, so this is a development where the bulk of the investment has been made and it is a profitable project even in today’s prices. So, we would obviously continue and finish off that project. Balkan we might be inclined to tweak it compared with maybe some more bullish prospectors we had at higher market prices but we will certainly continue with our program there. I think we can come up with a very attractive balanced program that will (inaudible) and will protect most of the opportunities that we have which is a robust opportunity for us.

Mark Gilman – The Benchmark Co.

John O’Connor, can you comment at all about the Ames [ph] discovery and potential commerciality?

John O'Connor

We are always happy as you know Mark to have a discovery of any sort, shape or size. This is really sort of peripheral to our portfolio quite frankly and I am not sure what the plans are for the operator, for other people who might be listing in this is an offset operator who made a discovery and then the discovery extended over into the Balkan so we had equity in the North Sea and it has been an encouraging result thus far.

Mark Gilman – The Benchmark Co.

Okay. Then just one final one on the downstream side, it appears that FCC utilization rates at HOVENSA have been fairly low all year and I guess I am wondering is this an operational issue or is this a discretionary economic plan?

John O'Connor

More of it is discretionary economic Mark – but some of it is they are economics affected capacity utilization but there were also some issues in terms of maintenance there that affected it as well.

Mark Gilman – The Benchmark Co.

Okay guys, thank you.

Operator

Your final question will come from the line of Sarah Hunt representing Alpine. Please proceed.

Sarah Hunt – Alpine

Good afternoon or good morning gentlemen. I think most of my questions have been answered because I think the biggest struggle for us right now is trying to figure out what is going to happen to CapEx budgets and I am sure with the way oil prices have been swinging wildly, it is one of your issues as well, but I guess and I know that you would rather talk about some of this in January but is there some oil price that you are thinking of where things go back to what you would originally have thought about or has regardless to where the oil price goes in the short term, has the credit issues and everything else really changed your mind about the way you want to spend next year?

John Rielly

These are uncertain times and oil prices have gone down a material amount. It is prudent for us to reduce in an appropriate way our CapEx and our exploratory spend for 2009 to maintain our financial strength and flexibility while still protecting our growth options and the specifics of what that program is we will give you on the January call.

Sarah Hunt – Alpine

Okay, and I guess if you don’t mind I would just follow that up with is there any concern that given what is going on in the credit markets and for governments around the world that you think that Brazil would change some of its current schemes on blocks that are already being worked on or is that something that you feel comfortable with the way government is going to treat that at the moment?

John Rielly

In talks with government officials, we have been assured that the block that we have where we have a 40% interest that the terms that the government has with us will be honored. I think some of the information that is coming out from government officials about potentially going to a different contractual set up be it production sharing agreements or otherwise have to do with the unlicensed block not the licensed block that we are in.

Sarah Hunt – Alpine

Okay, I just wanted to clarify that. That’s what I thought that I wanted to clarify.

John Rielly

That’s the way we understand it.

Sarah Hunt – Alpine

Okay.

Operator

Gentlemen, you have a follow-up question from the line of Mark Gilman representing The Benchmark Co. Please proceed.

Mark Gilman – The Benchmark Co.

John O’Connor, I am going to work Western Shelf, can you indicate at this point whether the second half ’09 drilling program is going to test additional prospects on the block or is it going to be focused on appraising the discoveries you have made?

John O'Connor

No, it would be predominantly additional prospects Mark.

Mark Gilman – The Benchmark Co.

Okay. I have also just John O’Connor one more, right. European gas volumes in the quarter were quite a bit soft than what we thought, is that demand oriented which I guess am skeptical of or are we seeing declines?

John O'Connor

I think it is the usual third quarter seasonality kicking in Mark. So, there is both the seasonality with respect to demand and there is also that there is heavy maintenance of turnaround activities in the North Sea.

Mark Gilman – The Benchmark Co.

Okay John, thank you.

Operator

Ladies and gentlemen, this concludes the question-and-answer session. Thank you for your participation in today’s conference. This concludes you presentation. You may now disconnect. Good day.

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