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Executives

John G. Langille - Vice Chairman

Steve W. Laut - Principal Executive Officer, President and Director

Analysts

Christopher Feltin - Macquarie Research

Canadian Natural Resources, Ltd. (CNQ) 2013 Budget Announcement Conference Call December 4, 2012 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Canadian Natural Resources 2013 Budget Conference Call. The slides for this conference call are available to view with the webcast and in PDF format at www.cnrl.com. I would like to meeting over to Mr. John Langille, Vice Chairman of Canadian Natural Resources. Please go ahead, Mr. Langille.

John G. Langille

Thank you, operator, and good morning, everyone. Thanks for attending this conference call where we will review our planned budget for 2013, which was included in our press release issued earlier today. Participating with me today is Steve Laut, our President. Doug Proll, our Chief Financial Officer is also here, available to answer any questions at the end of Steve's presentation.

Steve will be referring to certain information contained on slides which, as the operator indicated, can be accessed through our website at www.cnrl.com. Before we start, I would refer you to the comments regarding forward-looking information contained in our press release, and also note that all dollar amounts are in Canadian dollars and production of reserves are both expressed as before royalties, unless otherwise stated.

We'll make some additional comments before I turn the call over to Steve.

Our targeted 2013 budget reflects our established business principles. We have maintained our overall balance in a number of ways. CapEx is established in the context of cash flow, with allowance for excess cash flow to pursue dividends and share repurchases, which we have been completing more aggressively; spending on mid- and long-term projects, but not affecting capital to realize current short-term production increases; growing production of 9% in high return oil projects, offsetting an overall decline in natural gas production due to continued reduced capital directed to lower return natural gas projects; continued free cash flow derived from international operations where CapEx has been increased we drill additional infill-producing wells; and we have built in flexibility in our capital allocation through all of 2013.

I'll now turn the call over to Steve for his detailed comments.

Steve W. Laut

Thanks, John, and good morning, everyone. Before I go through the 2013 budget overview and our assets, I'll spend a few minutes talking about our -- what sets Canadian Natural apart from our peer group in terms of our objectives, strengths and advantages starting at Slide 4.

Canadian Natural has and will continue to build a premium value defined growth independent. We're one of the few companies in our peer group that has the assets that deliver free cash flow on a sustainable basis, a direct result of our ability to effectively execute our strategies.

Canadian Natural has the largest reserve base in our peer group, a reserve base that ranks with global industry players. It's balanced and is delivering significant cash flow. Critical to our ability to continue to grow free cash flow is our very large, undeveloped resources that we own and control. Resources that are long life and low decline.

Importantly, we require only a portion of our cash flow to grow current year production, about 40% in 2013, reflecting the strength of our assets and Canadian Natural's tremendous capital flexibility. The remaining cash flow can be utilized to increase the strength of our free cash flowing reserves by unlocking the value of our undeveloped resources; return to shareholders through increasing dividends and share buybacks, acquisitions or pay down debt. Probably the most important of all, we have the people, the expertise and the experience to execute our programs and operate effective, efficient operations.

Looking out, you'll see that we are not undertaking any projects that are new to Canadian Natural.

Our balance sheet is strong with the capacity to capture opportunities and weather any commodity price volatility we might encounter. Canadian Natural is in a very enviable position, and has a clear advantage compared to many of our peers, when it comes to unlocking the value and the free cash flow from our long-life, low decline resources. Illustrating Canadian Natural's advantage and the robustness of our model is shown on Slide 5.

Canadian Natural reserve base is balanced and very strong, generating significant cash flow. Only a portion of our cash flow is required to deliver near-term production growth, about 47% in 2013, and delivers 9% oil growth, allowing Canadian Natural to allocate the free cash flow which continues to grow between 4 choices: The development of our large resource base, which received the lion's share of the capital allocation at this point; and/or opportunistic acquisitions, which in turn increases the strength of our asset base and increases our ability to generate even greater amounts of cash flow and due to the long-life, low decline nature of these resources, even greater amounts of more sustainable free cash flow going forward; or we can allocate the free cash flow to strengthening the balance sheet, a balance sheet that is already very strong; or return the cash to shareholders through increasing dividends and share buybacks. Over the past number of years, Canadian Natural's effectively balanced the allocation of free cash flow between all of these choices.

This model is highly effective and is driven by effective capital allocation, effective and efficient operations and strong management. It all starts with the strength of our large well-balanced asset base, Slide 6, at 4 billion BOEs, Canadian Natural has largest proved reserve base amongst our Canadian and U.S. peer group.

On a proved and probable basis, Slide 7, Canadian Natural has 7.5 billion BOEs, the largest reserve base compared to our Canadian peers. Our reserve base is large and our long-life, low decline resource base is even larger, Slide 8. Canadian Natural has significant resource space we are developing in a disciplined, cost effective approach, unlocking huge value and significantly increasing our sustainable free cash flow. We can add an additional 11 billion BOEs to our reserve base, most of which are long-life, low decline assets at Horizon, Thermal and Pelican, with an additional 1.8 billion BOEs or 11 Tcf of undeveloped gas developed in the Deep Basin and Montney alone. We own, operate and control all resources, and we'll almost quadruple the proved reserve base of the company to 19 billion BOEs, a number that is likely conservative, particularly when you compare how our metrics are utilized compared to our peers, and the way they calculate their resource base.

Canadian Natural's reserve base, Slide 9, already ranks with global E&P companies. And if you were to add a conservative estimate of resources to our current reserves, you can see that Canadian Natural has the resources to organically grow our reserve base of long-life, low decline reserve base to a level that compares with leading global industry players. Few, if any of our peers, have the assets, the balance sheet, the expertise or the free cash flow to fund the cost-effective development of our resource base, allowing Canadian Natural over time to almost quadruple our proved reserve base and not only grow our cash flow significantly, but increase the sustainability of this free cash flow.

Although our reserve base has its capacity almost quadruple, our primary goal is value growth and to drive every increasing economies of scale to generate even greater profitability.

Canadian Natural has significant free cash flow to allocate, Slide 10, a wedge of free cash that grows significantly and becomes more sustainable as our longer-term expansion projects at Pelican, Thermal and Horizon come on stream. Canadian Natural takes a balanced approach to the allocation of this free cash flow. In 2013, '14 and '15, the major portion of our free cash flow is allocated to unlocking our resource base. However, as we move forward, the relative proportion required to unlock our resources will decline, allowing Canadian Natural the opportunity to increase allocation through our other choices: Dividends, share buybacks, opportunistic acquisitions and debt repayment. As well, our capability to withstand any commodity price downturns is enhanced.

Returns to shareholders are important, Slide 11. Canadian Natural's dividend growth has been significant, a 21% CAGR since 2001. Overall return to shareholders, dividends and share buybacks, Slide 12, has also been significant, at 38% CAGR since Horizon came on stream.

To round out the picture, Slide 13, our cash flow growth is driven by strong and steady oil production growth, which is a bit lumpy, with Kirby and Horizon expansions coming on stream. Overall, we're achieving an impressive 9% CAGR over the next 6 years. Our balance sheet remains strong, Slide 14, and we feel very comfortable at these levels going forward.

Turning to 2013 in more detail, Slide 15, in 2013 our capital budget is set at $6.9 billion. The budget is almost exclusively weighted to oil development, with 94% allocated to oil. This capital allocation ensures the disciplined, cost-effective development of our long life, low decline resources, but also delivers production growth in 2013, Slide 16. Oil production growth in 2013 is 9%, with gas production declining as we choose to allocate relatively minor capital to gas development in 2013.

Overall, BOE growth, production growth is 3%. On an exit rate basis, we are targeting to deliver 12% oil production growth, a 3% decline in gas production as Septimus comes on-stream and an overall 6% BOE growth rate.

Our cash flow, Slide 17, at the midpoint of guidance and strip pricing is $7.6 billion, delivering roughly $700 million of free cash flow, ensuring our balance sheet remains strong, the debt to book of 25% providing additional flexibility going forward.

Importantly, we're allocating $3.3 billion or 40% of the capital budget to projects that do not add production in 2013. In addition, this capital budget provides Canadian Natural with significant flexibility, with roughly $2.9 billion in capital projects we can quickly curtail, if we choose.

Now before I touch on each of our asset bases, I'll comment on the current North American oil markets and provide additional clarity on Canadian Natural's view of the market, Slide 18.

We are bullish on heavy oil pricing in 2013, as well as the mid- and long-term, as there are significant heavy oil conversion capacity coming on stream in PADD II, significant current underutilized, heavy oil refinery capacity on the Gulf Coast, and we see the infrastructure constraints to get to the Gulf coast being removed. Although there will be some headwinds for light production, we believe these are manageable, Cushing is on its way to being debottlenecked, which will reduce the LLS to WTI differential. And although we expect light oil production to keep increasing, we believe access to incremental light oil markets in North America will be realized.

If we look at the infrastructure issues first, Slide 19, the Cushing de-bottlenecks -- our Cushing bottlenecks are well on their way to being removed. Seaway will be expanded to 400,000 barrels a day of takeaway capacity in Q1 2013 and 850,000 barrels a day in Q2 2014, plus a Keystone Cushing market link will add 700,000 barrels a day capacity by Q3 2013.

As a result, we expect to see the WTI to LS -- LLS differential narrow as each of these projects are completed. Once completed, we expect the LLS to WTI differential to be essentially the transportation cost between Cushing and the Gulf, about $5 a barrel. In the mid-to long-term, access to the Gulf coast for light and heavy oil will come from the Enbridge Flanagan South expansion of 585,000 barrels a day, which is slated to come on stream Q2 2014, does not require a presidential permit and has the required producer and refiner support to proceed. It will also come from the Keystone XL project, which needs a presidential permit, and is slated to add 830,000 barrels a day of capacity in Q1 2015, if approved in Q1 2013.

In addition, there'll be 220,000 to 300,000 barrels a day of access to the Line 9 Reversal, and longer-term, via Gateway, at 525,000 barrels a day, the TMX Expansion, at 550,000 barrels a day on the West Coast, or via the TCPL Option for 800,000 barrels a day to the East Coast. These last 3 options face their own unique regulatory and stakeholder challenges and will provide export capacity to new markets.

In the meantime, Slide 20, we expect significant movement of light oil, and to a lesser degree, heavy oil via rail, to access refining capacity currently being supplied from foreign offshore sources. Currently, there's about 400,000 barrels a day of light oil imports in the Gulf Coast, which will be supplied ultimately via pipelines. However, as the North American light oil supply continues to grow, we expect that the 2 million barrels a day of capacity on the East Coast and at 350,000 barrels a day on the West Coast, will be markets that could be supplied via rail, and as the rail infrastructure gets built out, this will happen. There's a strong economic incentive for both refiners and producers to ensure these offloading facilities get built.

On Slide 21, you can see there's a significant increase in heavy oil demand for Canadian heavy oil producers. As a result, PADD II supply demand balance is about to change dramatically. With 80,000 barrels a day additional capacity now on, but still working out minor infrastructure issues, a new capacity coming on stream by Q2, Q3 2013, we will see an additional 310,000 barrels a day of heavy oil conversion capacity come on stream. The existing market for Canadian heavy is 1.5 million barrels of a day, adding 310,000 barrels a day will add 20% more heavy oil capacity for Canadian heavy oil. In addition, the North West refinery in Edmonton will add 75,000 barrels a day of heavy oil blend demand in 2016. As you know, Canadian Natural's sanctioned this project and is a 50% owner, which can, over time, be expanded to 225,000 barrels a day of heavy oil blend and produce largely ultra-low sulfur diesel.

Once heavy oil gains market access to Flanagan in 2014, and we expect Keystone in 2015, there is significant demand for heavy oil in the Gulf coast, Slide 22. The optimum feedstock mix for Gulf Coast refiners will cross approximately 3.4 million barrels a day of heavy oil. Today, U.S. Gulf Coast refiners are importing 2.4 million barrels a day. So once connected, we have 1 million barrels a day in heavy oil demand, that today, is not satisfied. In addition, over time, and it will take some time for Canadian heavy oil to fill that 1 million barrels a day of Gulf Coast demand, we'll also be able to push out foreign heavy oil imports on the Gulf Coast. I'll also point out that light oil can be blended with heavy to produce a medium crude look-alike, and compete for medium crude oil refining capacity on the Gulf Coast. Gulf Coast medium demand is approximately 1.5 million barrels a day, providing incremental demand for both North American light and heavy oil.

What this means for heavy oil pricing in our view, Slide 23, is with the increasing refining conversion capacity, the Flanagan and Keystone access to the Gulf Coast, we expect the Gulf, with the Cold Lake heavy oil differential, to Maya heavy oil crude to narrow to a spread that reflects the transportation cost between Hardisty and the Gulf Coast.

If you look at the LLS, Mayan and WCS, in relation to WTI, Slide 24, it is easy to see the effect of the Cushing bottlenecks driving LLS and Mayan premiums to WTI, a very unusual situation where heavy mine crude grades at a premium to light WTI crude. Canadian Natural ships roughly 30,000 barrels a day of Cold Lake heavy crude to the Gulf, 20,000 barrels a day via pipe and 10,000 barrels a day via rail that receives Mayan market pricing on the Gulf Coast, reflecting the demand for heavy oil on the Gulf Coast.

The WCS heavy oil differential, WTI, has been very volatile over the last couple of years. This volatility can be attributed to unplanned pipeline and refinery outages and the bottlenecks in the transportation system. As you can see, past these events, the WCS differential has traded in a 10% to 20% discount to WTI over the last few years. Going forward, we expect that as incremental Midwest heavy oil refinery capacity comes on stream, Cushing becomes debottlenecked, and the Flanagan and Keystone pipelines come on stream, we'll see that volatility in heavy oil differential significantly reduce, and heavy oil differentials tighten. We expect LLS and WTI differential to reduce to the transportation cost from Cushing to the Gulf, and the Maya to WTI differential to trade at its historic norm of 8% to 10% to 12%, and the WCS at 15% to 22% discount, more in line with historic differentials. The timing on this return to historic levels may happen even sooner, if rail transportation becomes a bigger factor, providing access to new markets.

Turning to each asset in a bit more detail, starting with gas on Slide 26. Canadian Natural is the second largest natural gas producer in Canada, with a very large land base and effective and efficient operations. When gas prices strengthen, Canadian Natural is in great shape. Our vast asset base in conventional and unconventional gas and our dominant infrastructure position allow us to maximize the benefits of higher gas prices if we choose, allow us to quickly and efficiently increase gas drilling and production at very effective costs. On our current production, a $1 increase in AECO pricing drives $280 million additional cash flow, giving Canadian Natural an option on increased gas price.

Slide 27 shows our dominant Montney Land position, with over 1 million net acres, the largest in the industry. Our Duvernay land position is also large at 500,000 net acres. Canadian Natural has significant gas assets to develop.

As you can see on Slide 28, Canadian Natural has 5.8 Tcf of 2P gas reserves, and are at Deep Basin and Montney resource base alone, conservatively have over 11 Tcf of gas to develop. If we use the parameters many of our peers use to calculate resources, we'd have close to 24 Tcf of resources developed, not really that surprising since we have the largest land base in Western Canada, and the largest Montney position in Canada.

In 2013, Slide 29, we'll maintain our capital discipline in this low price environment and drill less wells in 2013 than 2012. We will, however, continue with the development of Septimus, completing 10 wells drilled in 2012, drilling 14 new wells and complete the gas plant expansion to take us to 125 million cubic feet a day and 12,200 barrels a day of liquids. Septimus plant is scheduled to come on stream August 2013.

An additional 16 strategic wells will be drilled on our remaining land base, as well as turnaround in infrastructure maintenance capital to preserve our asset base when gas prices strengthen for a total capital cost of $445 million.

Turning to our oil and our vast thermal heavy oil resources. As you can see on Slide 30, we have a dominant land position in the high-quality fairway for thermal in situ development. These lands, Slide 31, have 79 billion barrels in place and we expect to recover 8.8 billion barrels from our vast thermal heavy oil resources. Canadian Natural is executing a disciplined stepwise plan, Slide 32, to unlock the huge value of this asset base by bringing on 40,000 to 60,000 barrels a day, every 2 to 3 years, taking production facility capacity to 510,000 barrels a day or 0.5 million barrels a day, all at 100% working interest. The timing on this profile has been modified slightly to accommodate the potential inclusion of the lands in our greater Kirby area to provide a more balanced expenditure profile going forward.

Our Thermal assets throw off significant operating free cash flow, Slide 33, shown in green. In 2012, most of that operating free cash flow was allocated to develop Kirby South. In 2013, Kirby South capital requirements decreased, and Kirby North has allocated additional capital. What is important to note on this slide is that in 2013, we begin to generate operating free cash flow over and above what is targeted for future growth. And in 2014, when Kirby South is on for a full year, generate significant operating free cash flow available for allocation outside our defined thermal development program. This scenario will build as we move forward. 2016, when Kirby North capital winds down and production comes on stream and gross capital begins, we will see even greater amounts of sustainable, operating free cash flow to allocate outside our thermal development program.

Our 2013 plant, Slide 34, you see thermal production increase by 4%, to 124 producers drilled in Primrose and 4 Kirby South well pairs. Capital will be $1.29 billion, down 15% from 2012, as Kirby South capital requirements are less.

At Primrose, Slide 35, we'll continue to add pads at a very cost effective rate of 13,000 BOEd, continuing to authorize steaming techniques to ensure oil recovery is maximized, and our operating costs are optimized. We'll also review the feasibility of expanding the Primrose/Wolf Lake facilities to handle increasing production capacity.

At Kirby South, we're on budget and slightly ahead of schedule to deliver 40,000 barrels a day of production, steam-in, November 2013. Our thermal operating costs are the best in the industry, Slide 36, with operating costs under $10 a barrel, are significantly lower than our peer group, and Primrose drives some of the best economics in our portfolio.

Canadian Natural has always had a strategy of dominating the land base and infrastructure to optimize capital efficiency and maximize the value of our assets. Also, to effectively drive higher returns on capital and thermal operation, scale matters.

We have, in 2012, effectively used this strategy at Kirby, Slide 37. On this slide, you can see the original land base, with the Kirby South and North plants illustrated.

We have, in 2012 made 3 tuck-in acquisitions from smaller landholders, who are on their own, do not have the scale for commercial project. These lands are contiguous to Kirby, as you can see from the rough outline of the Kirby McMurray pools, we are developing an extension to our Phased Kirby development, that we're calling Kirby West. This allows Canadian Natural to leverage our infrastructure and capture stranded reserves, as well as achieve operating and capital cost synergies. These lands have 340 million barrels of contingent resource, and because of the stranded nature of these lands, were acquired at a very reasonable cost, allowing the scale of the overall Kirby development to potentially increase, from 140,000-barrel a day phase project, to potentially 180,000 a day phase project. This incremental 40,000 barrels a day is still in the planning stage, and has yet to be included in our development plan, shown on Slide 32.

The development of these resources with leverage our existing Kirby development with the enhanced scale -- and with the enhanced scale, be very economic. We'll also improve slightly the overall economics of the entire Kirby development, another clear example how Canadian Natural leveraged our infrastructure and land base to maximize value. Canadian Natural has a dominant land base in the high-quality thermal heavy oil fairway. As a result, we are able to leverage that land base and utilize the development work of others to significantly de-risk the development of our lands.

The Grand Rapids development of Pelican, Slide 38, illustrates this strategy. This slide shows the pool outline for the Grand Rapids. Canadian Natural has a dominant land position in the heart of the Grand Rapids pool, shown in yellow. There are 3 other operators, who also have significant landholdings, although somewhat less than Canadian Natural. These operators have made regulatory application for a very large, 150,000-barrel a day -- 180,000 barrels a day and 100,000-barrel a day developments. Canadian Natural believes the development of the Grand Rapids is feasible. However, we have some concerns on the pressure and [ph] rates achievable from our Grand Rapids SAGD pair will be somewhat less than a typical McMurray SAGD pair, which impacts the overall return on capital.

As a result, Canadian Natural has prioritized the development of McMurray pools in our portfolio. That being said, we see good results in offsetting lands, we'll able to accelerate what could be a very significant Grand Rapids development on our lands.

Turning to primary heavy oil, Slide 39, Canadian Natural is the largest primary heavy oil producer. We dominate the land base in infrastructure. We have over 8,500 locations in inventory. Due in part to our dominance, we have excellent capital efficiencies and low operating costs, making primary heavy oil the highest return on capital projects in our portfolio and generate significant free cash flow.

In 2013, Slide 40, Canadian Natural will drill 890 wells, roughly the same as we did in 2012, with 120 of these being horizontal wells. Our capital spend is the same as 2012, and will deliver an additional 12% growth in production to just over 140,000 barrels a day at the midpoint of guidance. We expect that our inventory to be able to grow production to roughly 150,000 barrels a day and then see production plateau due to the high rate, high decline nature of primary heavy oil.

At our world-class Pelican Lake pool, Slide 41, our leading edge polymer flood is driving significant reserves and value growth. We have over 550 million barrels to develop on our polymer flood. Our plan in 2013 at Pelican Lake, Slide 42, is to continue the development at the polymer flood with 56% of the pool converting to polymer flood by the end of 2013. We're seeing good production response from our polymer flood, and we'll see production increase by 19%, 2013. You can see from this slide that we built out our facilities to handle -- that as we build out the facility to handle polymer flood, driven production growth and convert the remainder field to polymer flooding, our capital requirements dropped dramatically.

As a result, Pelican generates significant free cash flow, a wedge of free cash flow that grows dramatically into the future. 2013 capital is forecast to be $340 million, down 30% from 2012, a spending of facility expansion is largely completed.

Our oil plans in Canada for 2013, Slide 43, are to continue with the optimizing of our existing waterfloods and leverage technology over extensive land base. Capital spending is down $70 million in 2012, as we drill fewer wells and have less EOR facility capital. Our production growth is very solid at 5% to 67,000 barrels a day at the midpoint of guidance and with exit growth rates targeted at 10%. We will continue to progress our secondary and tertiary projects, and drill 40 net wells targeting new play developments that were initiated in 2012.

Canadian Natural's international operations continue to generate free cash flow. In 2013, we target roughly $100 million of free cash flow from our international operations. Our 2013 plan for international operations, Slide 44, is to run 2 rigs in the North Sea and drill 3.6 net wells, as those wells perform a number of workovers and safety critical work on the platforms.

In Offshore, West Africa, we'll continue with the S4 infill drilling program that will -- that well, when completed in 2013, to add 65,000 barrels of oil a day of light oil and at a cost of 24,000 flowing barrel. We'll also prepare for an infill program in Baobab in 2014, with the purchase of long-lead items.

In South Africa, Slide 45, we are tracking to plan in our process to bring in a partner for the Oribi exploration project. As a reminder, this development has up to 3 significant structures in our land, 1 billion barrel-type structures that we currently own 100%. We're seeing strong interest from a select group of potential partners. The likely earliest date for South Africa exploration well will be late 2013 or early 2014. Long lead equipment to drill this well has been ordered.

Turning to Horizon, Slide 46, our world-class oil sands mining operations, where we have 14.4 billion barrels in the ground, with just under 6 billion barrels of oil to recover, which will likely grow closer to 8 billion barrels, as we expand our pit limits and seize opportunities as drilling improves to ore body delineation.

Our current capacity is 115,000 barrels a day, and we're on track with the expansion to 250,000 barrels a day of light sweet 34 API crude, with the ability to expand to 500,000 a day. With no decline for 4 years, and virtually no reserve replacement cost, Horizon will generate significant free cash flow for decades to come, creating value that is underestimated in nutritional, standard economic analysis. As a value, the last 20 to 25 years of no-decline production is severely discounted. However, as a long-term no-decline reserve base, Horizon provides Canadian Natural the steady free cash flow stream for decades.

Our 2013 plan, Slide 47, will see production between 100,000 to 108,000 barrels a day as an 18-day plant turnaround is scheduled in May, to change out the hydro-treated catalyst and conduct required pressure vessel inspections, as well as other preventive maintenance to increase production reliability. The cost for this turnaround is $95 million, as well as sustaining capital budget of $200 million, or about $5.26 a barrel, $7.70 a barrel, including the turnaround.

On the operating cost side, we expect to see continued improvement over the course of 2013 with lower costs expected in Q3 and Q4. Overall, we expect to be in the $35 to $39 a barrel range for the full year.

The Phase 2, 3 expansion of Horizon, Slide 48, is proceeding to plan and we are very happy with the execution of the project at this point. Canadian Natural maintains a flexible schedule for the Horizon construction to ensure capital efficiencies. We have incurred roughly $2 billion, committed over $5 billion towards Horizon expansions to date. We target to complete the 10,000 barrel expansion in 2015, the 45,000 barrel expansion in 2016 and the 80,000-barrel a day expansion in 2017 with a ramp up of production occurring after the completion.

Going forward, we expect to allocate roughly $2 billion to $2.5 billion a year to rising expansion in the 2013 to 2016 period, with capital dropping in 2017.

Our execution strategy, Slide 49, continues to be effective as we continue to work on all phases. We have awarded significant lump sum contracts, with 15% of the overall project now complete. Capital expenditure profiles are looking good at this stage, and with 36% of the capital cost committed, we're tracking below our overall cost estimate. The Horizon project has been designed and built to be optimal, when Phase 3 is completed, and a major portion expansion economics is driven by operating cost optimization, as shown on Slide 50, with expansion to total operating cost on a yearly basis will go up. However, because of the fixed nature of the operating cost on a per-barrel basis, the operating cost will be reduced significantly. Labor is the largest portion of the fixed operating cost, and while we need more labor with the expansion, mostly in mining, the labor costs are not proportional with the production increases.

In summary, Slide 51, Canadian Natural is in great shape. We have built a premium value, defined growth independent. Our balance reserve base is the largest in our peer group, a reserve base that ranks with global industry players and delivers significant cash flow. Importantly, we're able to now effectively allocate a portion of our free cash flow to our very large, undeveloped resources that we own and control. Resources that are long life and low decline, which further strengthen our ability to generate even greater amounts of free cash flow in the future, providing ever-increasing amounts of free cash flow for allocation outside of avail-ment of our vast resource base, as well as to increase the ability to withstand potential commodity price downturns in the future.

Probably the most important of all, we have the people, the expertise and experience to execute our programs and operate effective, efficient operations. Our balance sheet is strong, with the capacity to capture opportunities and weather commodity price volatility. On an overall basis, Canadian Natural is in great shape.

So with that, operator, we'll open up the call for questions. John, and Doug, myself will be happy to answer.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Chris Feltin from Macquarie.

Christopher Feltin - Macquarie Research

A quick question, maybe just trying to pin you down on the Horizon cost. I think, Real had indicated at the Investor Day earlier this year that you're targeting on an integrated basis, to keep cost below the 100,000 of flowing barrel basis. And just curious, I think you mentioned that you've committed about $2 billion to date. So looking forward, just trying to confirm what's been spent to date, and that, that 100,000 benchmark on an unintegrated basis is still the target that you're striving to keep below?

Steve W. Laut

Yes, Chris, I think you got it right there. We still see that we'll able to achieve less than $100,000 a barrel target -- per flowing barrel at Horizon, on a fully integrated basis, and we're tracking below that right now. And we have committed $2 billion or spent $2 billion and committed $5 billion. So we have lump sum contracts, and we have other contracts we awarded that add up to $5 billion. So we feel pretty good at that 36% point here that we're going to be able to achieve or do better than our target of less than 100,000 a flowing barrel.

Christopher Feltin - Macquarie Research

Okay. And maybe just jumping over to the Duvernay, very large land position, obviously. Just kind of curious what your original read is on that play. Starting to see some other operators get some data points out there. Just kind of get a sense of where you think this is or where it ranks, what rates you would maybe like to see or liquid deals that make it compete with the rest of your oil-related portfolio.

Steve W. Laut

So on the Duvernay, you're right. We do have a very large land base here. And we have land, both in the liquids-rich, the volatile oil and the gas windows. I think right now at the stage of play is we're starting to see a definition of where that crossover is between dry gas and liquids-rich and volatile oil. So that's getting defined right now. I would say from what we're seeing right now, the rates are a little less than what we would expect to see of economic return on capital. So right now, we are being cautious and taking our time to make sure we understand what's going on. I think rates would have to be a little better than what we're seeing right now.

Operator

[Operator Instructions] Mr. Langille, there are no further questions registered at this time.

John G. Langille

Okay. Thank you very much, operator. As you can see our budget has been well thought out, and it provides the right balance to ensure our projects are advanced in an orderly and efficient manner, while growing current production and having capacity to increase returns to shareholders. We will always continue to make sure that creating value for our shareholders is #1 in our things to do.

Thank you very much for attending the call. And as usual, if you have any further questions or comments, do not hesitate to call us. Thank you, Lynn, have a good day.

Operator

Thank you, Mr. Langille. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.

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