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Executives

John A. Manzoni – President, Chief Executive Officer & Director

L. Scott Thomson – Chief Financial Officer & Executive Vice President Finance

Ronald J. Eckhardt – Executive Vice President North American Operations

Paul Smith – Executive Vice President International Operations

Richard Herbert – Executive Vice President Exploration

Analysts

[Harry Mater] – Barclays Capital

Gil Yang – Citigroup

Chris Theal – Tristone Capital

Mark Pollack – Scotia Capital

Brian Dutton – Credit Suisse

[Rob Mark – McDougal, McDougal & McTara]

Andrew Fairbanks – Merrill Lynch

Rafi Khouri – Raymond James

Carrie Tait – National Post

[Jeff Gordon – Ottawa Capital]

Talisman Energy, Inc. (TLM) Q4 2008 Earnings Call March 5, 2009 1:00 PM ET

Operator

Welcome to the Talisman Energy, Inc. yearend results conference call. At this time all participants are in a listen only mode. Following the presentation we will conduct a question and answer session. (Operator Instructions) This call contains forward-looking information. Certain material factors and assumptions were applied in making the forecasts and projections we discuss in this call and actual results could differ materially both anticipated by Talisman and described in the forward-looking information.

Please refer to the cautionary advisories in the March 5, 2009 news release, Talisman’s most recent analyst information form which contains additional information about the applicable risk factors and assumptions. I would like to remind everyone that this conference call is being recorded on Thursday, March 5th at 11:00 am Mountain Time. I will now turn the conference over to John Manzoni.

John A. Manzoni

Thank you for joining our fourth quarter conference call. I am joined here today in Calgary by the management team with the exception of John Hart who is away today. I want to take this opportunity to welcome Paul Smith and Richard Herbert who have now joined the team. Both will be relatively quiet today because they’ve been here only a few days. But, I hope you’ll meet them soon and of course they’ll have plenty to say in the future.

I will also take this opportunity to thank John Hart and Nigel Hares for their huge contributions over many years and this will be the last conference call on their watch. Nigel will of course answer your questions on his area today.

As you know in Mid January we provided some guidance for this year and very little has changed regarding our outlook from that call so we’ll concentrate today mainly the review of the fourth quarter and 2008 results. I’ll outline some key points and then I’ll ask Scott to provide some more detail and talk about our balance sheet. Then of course we’ll be happy to take your questions.

So to the fourth quarter and the year results. Our headline results for the quarter and the year were very strong with a reported net income of $1.2 billion for the quarter and $3.5 billion for the year which represents a record result for the company. The annual result was about 70% ahead of 2007 and the quarterly result was 83% above the fourth quarter of last year.

The reported income reflected big contribution from the unrealized mark-to-market gains on our commodity hedge programs which amounted to $769 million for the quarter and $841 million for the full year. Our reported results was negatively impacted by a particularly high DD&A charge in the fourth quarter of $1.2 billion which was largely the result of applying the yearend price to our reserves which I should talk about in a moment.

Stripping out these various one off impacts our underlying earnings were also very strong. Earnings from operations in the fourth quarter were $537 million compared to $123 million for the same quarter last year. This is despite a significant reduced headline price which was down by more than $16 a barrel from the fourth quarter of 2007. The fourth quarter results in 2008 was largely insulated from this reduction in price by our hedging program which protected our realized price through the quarter.

Cash flow from operations was $1.6 billion for the quarter and over $6 billion for the year. These are also very strong and represent an increase of about 60% for the quarter and 40% for the year. We constrained capital expenditure in the fourth quarter to preserve our balance sheet and you will see we balanced cash flows during the quarter allowing us to pay down debt over the year by about $1 billion.

The headline net debt is reduced less than that as foreign exchange had an impact on our US dollar denominated debt. Exploration rights also were lower than both the equivalent quarter last year and were also lower for the year as a whole. In the fourth quarter the dry hole costs included the MacDonald Well and the Clyde northeast flank well in the UK and the Marsden and TR3 wells in Norway.

Operating costs were contained during the quarter and we’re already starting to see signs of reducing cost pressures around our operations. We’ve met with all of our contractors and are starting to see results from those meetings. We’re experiencing significant reductions in areas such as supply vessel day rates in the North Sea which have come off as much as 50% from the peak. Some rig rates in North America are also reducing fast, we’ve seen reductions in some areas of around 30% so far.

Production for the quarter was 432,000 barrels a day, just a little above where I signaled in mid January and brings the total annual production to the same number, 432,000 barrels a day. For the year production from continuing operations which excludes the production we sold or is held for sale was 419,000 barrels a day which is 3% higher than the prior year. I believe other than the mark-to-market gains on our hedges and the impact of reserves write downs which I shall come to in a moment the results for the quarter are fairly straight forward and represent a very solid end to last year with the cash balances being managed to secure a strong balance sheet as we entered 2009.

Overall in 2008 we feel very positive about the progress we’ve made. The numbers are good for the year and we’ve set a new direction for the company. Implementation so far has been excellent and the new strategy has proved robust to a significant downturn in commodity prices. Are wells in to the unconventional pays are proving at least as good or better than the assumptions when we laid out the strategy and we’ve divested around $1 billion in assets despite the difficult environment and that number excludes the sale we announced yesterday of our Southeast Saskatchewan assets.

We took advantage of high prices, laid in some protection for our cash flows and paid down about $1 billion of debt so we enter this year in great financial shape and have a plan going forward which can handle a range of outcomes for the year. One feature of our fourth quarter results was the impact of yearend prices on our reserves and I want to spend just a moment on this.

The headline proved reserve additions and revisions for the year excluding net acquisitions and divestments were negative at -41 million barrels against a total produced volume of 158 million barrels. The numbers are distorted by using the yearend price which had a very large impact on our headline numbers.

Price related revisions which are included in the numbers I’ve just quoted were 159 million barrels negative of which 152 million were in the North Sea. The yearend price for brent crude was $36.5 a barrel compared with $96 a barrel at the end of 2007. Of course, nothing has changed in the production from the fields from which these reserves have been written down but the current SEC rules require us to use yearend pricing.

Excluding the price related revisions, total additions and revisions to proved reserves were 118 million barrels which represents 75% reserve replacement for the year. We’ve provided an estimate of the outcome using 2008 average prices in our press release where you can see that the result is actually very similar.

Within this overall number reserve replacement in North America was 106%, the proved undeveloped percentage within this total remains relatively low at under 15% and our reserve booking for 2008 included very little of our new unconventional lands. In fact only 11% of our proved reserves today within North America are from new unconventional plays so we can look forward to these increasing as we move forward.

The UK replaced 67% of crude reserves over the year and in Norway the equivalent number was 135% benefiting from excellent in field well programs in both Gyda and Brage. Southeast Asia replaced only 16% of proved reserves this year as well as seeing some price related revisions in Australia. We didn’t book any reserves from the Hai Su Trang or the Hai Su Den developments in Vietnam which we will bring to sanction this year or any further reserves from the corridor asset where we’re negotiating the next contract for gas delivery.

The bookings for last year demonstrate the lumpy nature of the bookings reserve process and I think the Asia numbers highlight this. We expect to book reserves in Vietnam this year and we’ll also bring on some unconventional reserves on to the books in 2009 all of which will significantly improve the reserve replacement metric going forward.

Finding and development costs excluding the price impact were $42 barrel of oil equivalent reflecting the low bookings in Asia and the early stage of our unconventional strategy implementation. It was also impacted by capital we spent building our land position on our unconventional plays where we added 320,000 net acres over the year at a cost just under $700 million. Excluding this expenditure F&D would be $36 a barrel.

We expect F&D to begin falling from this year as our strategy begins to take effect. I’ve explained before that as we ramp up drilling in our unconventional strategy F&D will fall and we also expect our Southeast Asia bookings to increase this year. The final impact to draw your attention to is the depreciation charge in the fourth quarter which at $1.2 billion is also related to the reserves write down.

There are two impacts here, a one off increase and an ongoing impact and I’m going to leave Scott to describe these in more detail and also to run through our balance sheet and hedging programs for you now.

L. Scott Thomson

As John highlighted, net income and cash flow performance for both the quarter and the year were strong given the high commodity prices in the first half of the year and the benefits from commodity derivatives towards the end of the year. I’d like to take a moment to expand on John comments about the impact on DD&A expense from the decline in yearend proved reserves.

At yearend prices the Tartan field in the UK and the Brage field in Norway had no proved reserves which led to the net book values of these properties being written off as additional DD&A in the quarter of approximately $500 million. In addition declines in yearend proved reserves in other fields resulted in incremental fourth quarter DD&A of approximately $85 million. In total a price related DD&A increase of $585 million on a pre-tax basis in the quarter.

When calculating earnings from continuing operations in the quarter we have not include the after tax impact of the one-time DD&A write off associated with the Tartan and Brage fields which equaled $225 million but we have included the negative impact of the incremental DD&A associated with our other UK fields. As is typical we have also backed out of earnings for continuing operations the after tax benefit of the unrealized gains on our commodity derivatives.

Earnings from continuing operations in the quarter were $537 million, up more than four-fold from the prior year while full year earnings from continuing operations were up 170% to $2.5 billion. Earnings from continuing operations were positively impacted by higher average commodity prices and realized gains on commodity derivatives. Net debt declined from $4.3 billion to $3.9 billion during the year. As John mentioned in 2008 we used the cash flow generated by Talisman to reduce debt substantially. Although we paid down net debt of $935 million this was partially offset by an increase of $580 million due to currency translation as the majority of our debt is US dollar denominated. We ended the year of debt to cash flow of .7 to 1 and debt to debt plus equity of 26%.

At the end of the third quarter we indicated that our objective would be to maintain our balance sheet strength and liquidity position. Although debt increased from $3.7 billion to $3.9 billion since the third quarter the reasons were entirely foreign exchange related. In fact, excluding the impacts of foreign exchange our debt position decreased and our liquidity position was enhanced slightly. We maintain over $2 billion in liquidity as a result of our $2.8 billion committed credit facility to 2012. As mentioned on previous calls we have very limited near term maturity so we feel good from a balance sheet perspective.

Although we remain well positioned from a liquidity perspective we may take advantage of terming out some of our bank lines if market conditions prove favorable. Finally, the announced sale of our Southeast Saskatchewan assets and enhances our liquidity even further and positions us well to continue to implement our strategy trough either organic or in organic opportunities.

I’m pleased to report that in these turbulent times our balance sheet is strong and we’ll continue to be financially prudent in order to maintain that strength. Our success in locking in commodity prices resulted in after tax realized gains of about $400 million in 2008. Our hedges in 2009 will ensure we maintain the cash flow required to continue executing our strategic plan.

In the first quarter of 2009 we have 115,000 barrels per day of oil hedged at a floor of US $90 and for the remainder of the year we’ve entered in to collars for approximately 76,000 barrels which will ensure a floor price of approximately US $75 per barrel. At the end of February 37% of our remaining estimated 2009 oil production was hedged.

For North American gas we have protected 48% of our remaining estimated 2009 production at a floor price of approximately $6 [AKO]. In addition we have protected approximately 200 standard cubic feet per day of 2010 production at prices of $6 [AKO]. We plan to preserve financial flexibility by funding ongoing capital spending with cash flow and proceeds from dispositions. As we mentioned in January, our capital budget is based on $40 oil and $5 gas. To adjust to the new economic reality we reduced our planned 2009 capital program from $5.8 billion to $3.6 billion.

To reiterate our capital spending plans for 2009, $1 billion will be directed towards North American unconventional gas programs with a focus on the Montney and the Marcellus, $850 million will be directed towards Southeast Asia with the majority focused on development drilling in the northern fields and appraisal and development work in Vietnam. $1 billion will be directed towards North Sea development split evenly between the UK and Norway and finally $660 million will be spent on exploration outside of North America in keeping with the strategic objective of high impact exploration delivery longer term growth.

We have the flexibility in our capital program to increase or decrease spending depending on the economic environment. In particular, we are capable of ramping up or down North American spending quite quickly. Our objective of focusing the portfolio continues with our announcement yesterday of our sale of the Southeast Saskatchewan assets we have now sold assets worth more than the target of $1.5 billion we set for ourselves when we introduced the strategy last May.

We have accomplished our objective while only divesting approximately 20,000 barrels of production. We are extremely pleased with the value received for our Southeast Saskatchewan assets. Metrics of $85,000 per flowing barrel and $21 per BOE on proved plus probably basis are impressive in any commodity price environment. The proceeds will be helpful in allowing us to continue to accelerate the implementation of our strategy in a fashion that maintains balance sheet strength. We expect the transaction with Crescent Point and Tristar to close on the first of June.

Finally, it is worth mentioning that we have recently entered in to an agreement to sell a 10% interest in the Yme field. We continue to be excited about the prospects of the Yme project but reducing our exposures from 70% is prudent in this economic environment. Given the economic environment we expect the ability to move forward on our focused objective may be constrained for the time being however, we’ll continue to evaluate opportunities to focus the portfolio as they arise and proceed with dispositions if the value received and the strategic rational make sense for Talisman.

Those are my highlights. John, I’ll turn the call back over to you.

John A. Manzoni

Just before we answer your questions, a quick update on progress so far this year and our outlook. We’re implementing what we told you in May last year and what I said we would do in January of this year. We’ve set a capital budget which allows us to live within our means at our base case projection for the year of $40 a barrel WTI and a NYMEX price of $5 a million standard cubic feet and we will continue to be flexible as the year unfolds.

We will stay true to our objectives for the year which is to balance cash, continue to implement our strategy and maintain a focus on costs and efficiency. It’s possible they’ll be opportunity in the marketplace over the next 12 to 18 months and we’re working to give ourselves the balance sheet strength to be able to act if we believe it is in line with our objectives.

We continue to make progress in our unconventional strategy and we’ve now completed five horizontal wells in the Marcellus which confirm our initial assumptions for IPs of 2 to 3 million standard cubic feet per day and we remain confident in our target well costs of less than $4.5 million per well. Our Montney wells are also in line with the assumptions we laid out in the strategy and we will continue with our plans to drill 36 wells in the Marcellus and 49 in the Montney during the year. So far so good.

Including the Southeast Saskatchewan sale announced yesterday, we’ve now sold about $1.7 billion of assets against a projected total I outlined last May of $1.5 to $2 billion. We’ll continue to seek opportunities to focus the portfolio as Scott says where we believe good value can be achieved.

We have active exploration wells today in Columbia, in Kurdistan, Vietnam, Norway, the UK and Peru. January and February production have been good at over 440,000 barrels a day. I said in January that we expected production for the year to remain largely the same as 2008 with any down side limited to no more than 5%. That projection was based on our portfolio at the end of the year and accounted for the planned sale of our Trinidad assets but not the sale of our Southeast Saskatchewan assets which are producing about 8,500 barrels of oil equivalent today and as Scott has just said that sale is effective first of June this year.

As Scott has also outlined, we have a strong balance sheet and good protection for our cash flows is in place. So, overall we’re on track despite dynamic commodity prices and I’m looking forward to seeing progress through this year. Ladies and gentlemen I think we should now turn this over to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Harry Mater] – Barclays Capital.

[Harry Mater] – Barclays Capital

I was just wondering if you could provide us with a more detailed schedule of the cost incurred in 2008?

John A. Manzoni

Harry, I’m not sure I understand your question. I think we can provide you will all sorts of details. Do you want to be a bit more specific or can we come back to you with some more detail?

[Harry Mater] – Barclays Capital

I was specifically looking for development spending, exploration spending. I think you typically break that out in your annual report, in your yearend disclosure but I didn’t see it in the press release today.

John A. Manzoni

I’m just looking around to see what we typically do. I’ve just been told that we’ve put some additional information that I think gets the data you require, we’ve put it on the web. So, the data I think you’re needing and is normally available to you is actually on the website.

Operator

Your next question comes from Gil Yang – Citigroup.

Gil Yang – Citigroup

Could you talk a little bit about the Saskatchewan sale? How you evaluated the credit risk or the risk of the buyer not getting funding for that transaction?

John A. Manzoni

Let me ask Scott to answer your question. We did of course quite a lot of inquiry.

L. Scott Thomson

One, the deal as you know closes June 1st; two, there is no financing out in the agreement; and there is a deposit put down by the buyers in the agreement that we’d obviously get if the transaction didn’t close for any reason. That being said, my understanding and you probably have a better understanding of this than I do, the financials went relatively well last night for both Crescent Point and Tristar so I’ll leave it up to them.

Gil Yang – Citigroup

So they’ve already gotten funding for it?

L. Scott Thomson

I think there was a bought deal last night for each of them.

Gil Yang – Citigroup

John, could you just talk about obviously F&D was a little high this year and maybe from some timing issues associated with Asia and the early development of the unconventional. How should we look at the longer term F&D from a timing matched basis?

John A. Manzoni

Gil, F&D is quite high this year and in fact I’ve been signaling that as we’ve been going through the year but I’m actually not too troubled by it to be honest. First of all, it’s naturally lumpy and some of those lumps we could see coming this year. For instance in specific 2008 we choose not to sanction or rush through to sanction the project developments in Vietnam HST, HSD both of which will be coming forward and they’re both coming together during the course of 2009.

In our NAO business, in our North American unconventional business we spent, as I mentioned $700 million on land which doesn’t bring with it any reserves. So, you can see certain things that we could see them coming frankly for 2008 which were going to push F&D up. As we go forward, I think that we can look for substantial improvements. In fact, I believe we shall see improvements in this metric from 2009 and on.

But the fact that we have only 11% of our total reserves booked in North America represented from our unconventional lands which is of course the strategy of the future, I think that says that there’s lots of running room in there. We have a low [pud] percentage I suppose compared to our peers in the unconventional gain, we’re sitting below 15%, there’s quite a lot of running room there.

We’ve got corridor reserves being progressed in Asia so that I think in 2009 or 2010 we can look forward to that coming forward as contracts are renewed and as I mentioned HSD and HST. So, I do think that we can see specifics through the course of 2009 and 2010 which are going to act to bring this metric down. But, in any event, even at a higher level unconventional strategy has a lower F&D generally than conventional activity.

Southeast Asia is generally lower F&D and as the exploration program kicks in with larger resources pools the F&D goes down so the strategy in various ways is also programmed and specifically directed to bring structural F&D for the company down. That’s frankly one of its main underlying objectives. So, I recognize it is high this year but I think we’re in sort of a transitional mode to new strategy and I think I may have given you some specifics which are why we can expect from this year that some of those things are going to start bringing the F&D down.

Gil Yang – Citigroup

Would you be willing to venture a guess a guess that you could bring it down to below $18?

John A. Manzoni

Not if I can avoid it Gill. I mean over time I believe we should be targeting low levels. I know that Ron has his own targets which we’re not going to share today but we’ll be talking about them some more midyear when we talk to the market in a more detailed sense about how we’re targeting some of these things. So, I think if you can wait until then we’ll give you a little more detail over that time.

Operator

Your next question comes from Chris Theal – Tristone Capital.

Chris Theal – Tristone Capital

Two questions, the first is can you give us an update on the Trinidad sale process? The second is in filing with Petro Vietnam or the Vietnamese government can you share with us your assessment of reserve potential for HSD and HST?

John A. Manzoni

Let me turn first to Scott if I may for Trinidad and then I’m going to ask Paul to make a comment on your second question Chris.

L. Scott Thomson

On Trinidad it’s still progressing so we’re in the process of continuing to work through whether we sell it or not and hopefully we’ll have more to announce on that shortly. That’s unfortunately all I can give you at the current time.

John A. Manzoni

Paul, anything on development in Vietnam?

PP

With respect to the development of Hai Su Trang and Hai Su Den the reserves assessment was approved by the government as is the outline development plan and indeed just very recently a declaration of commerciality was agreed by the government which takes the block forward to the next step for development.

From a reserves perspective we carry around 60 million barrels net Talisman currently on HSD and HST in our probably category much of which will move to proven as we sanction the project this year. Having said that, just to remind you that with respect to the Hai Su Den basin feature that is just the central fault block B component that is part of that early production booking.

Operator

Your next question comes from Mark Pollack – Scotia Capital.

Mark Pollack – Scotia Capital

Just curious, the proceeds from the Southeast Saskatchewan sale coming in June, if a tremendous acquisition opportunity doesn’t present itself by then would you see using that to pay down what’s drawn on the credit facilities right now or potentially increasing your spending in either the Montney or the Marcellus areas?

John A. Manzoni

Let me ask Scott to talk a little bit about how we’re thinking generally about our balance sheet. Actually I’m not going to ask Ron so I’m going to ask Scott to see if he can talk generally about how we think about all of that.

L. Scott Thomson

So, when we set the $3.6 billion cap ex program, it didn’t include proceeds from the sale of Southeast Saskatchewan. These proceeds I think one, strengthen our balance sheet and provide us with incremental liquidity when we get them in on June 1st. That being said, it provides I think flexibility for 2010 to continue to implement the plan. Implementing the plan, the strategic plan could be either organically or inorganically so I’ll leave it at that.

John A. Manzoni

As Scott has said before, priority 1A, strong balance sheet; priority 1B, strengthen the portfolio. So, we have to balance those two things going forward Mark.

Operator

Your next question comes from Brian Dutton – Credit Suisse.

Brian Dutton – Credit Suisse

I was wondering if you could compare and contrast for us the economics costs that you’re seeing in the Marcellus versus the Montney at this point?

John A. Manzoni

Let me turn to Ron in a general sense. Ron, do you have any sort of general comments comparing the two?

Ronald J. Eckhardt

It’s still early days Brian. The Marcellus continues to improve, we’ve got five wells on production now and our latest well came on at over 5 million a day. It has been the best one and in fact, everywhere we drill has been better than the previous one. Costs are coming down and it’s in a NYMEX plus market so the Marcellus area is really a favorable place to be.

The Montney, still to early to tell. Our piloting is just kicking off in earnest. We talked about a fair well at the last conference call which looked very good and we’re drilling a number more as we move ahead. So, until we get more data on where to put the horizontal wells and get a good feel for what those reserves are like, it is still too early to tell. But, I’m optimistic for both.

John A. Manzoni

Structurally Ron, egress out of both places is pretty well stitched up?

Ronald J. Eckhardt

Egress is very well stitched up in both areas. In the Pennsylvania area we have an agreement on the Tennessee pipeline, over 100 million going up to 200 and in the Montney area we have a specter agreement as well as PCPL agreement giving us lots of egress capacity.

Brian Dutton – Credit Suisse

If I could ask the second question on Hallwood, I was wondering where the joint venture stands at this point and are there any implications given Hallwood’s financial position?

Ronald J. Eckhardt

Well to date we’ve earned 20% of all of Hallwood’s assets and 33.25% on the wells we participated in. We’ve benefitted greatly from bringing Hallwood’s expertise in chalk, we’ve used them extensively across our operations and frac design and drilling ideas which has really helped a lot and we’re comfortable with our position and we’ll see how this plays out over time. But, all in all it’s not a material thing and we’re in pretty good shape.

Operator

Your next question comes from [Rob Mark – McDougal, McDougal & McTara].

[Rob Mark – McDougal, McDougal & McTara]

Just wondering if I can get a bit more color on the rationale for selling Saskatchewan? Whether there’s a lack of sufficient scale there or you prefer your other unconventional gas plays?

John A. Manzoni

Let me just make a general comment Rob if I may, we said from the very beginning when we laid out the strategy in May we said we had five potential unconventional areas at the time. We knew then that we couldn’t possibly develop all of those plays in parallel because any one of them working well would be sufficient for the transformation of the company to be quite sufficient for us. So, we said then we would be focusing down our attention once we found the results from more wells.

So, I think we’re entirely consistent with what we said. With regard to the Bakken we had a super position in the core but we knew at the time it was insufficient by itself to be material and so we took a decision that we were either going to get it bigger or we were going to get out and concentrate our resources somewhere else which is exactly what we have done. I think strategically this is sitting really exactly where we were indicating we were going. I think we sort of executed on this decision. Ron, is there anything else you wanted to add?

Ronald J. Eckhardt

The only other thing that drove it is we knew this was a strategically important piece of business for the people that actually bought it. We anticipated getting a high price for it and it looks like we did.

Operator

Your next question comes from Andrew Fairbanks – Merrill Lynch.

Andrew Fairbanks – Merrill Lynch

Just curious, I know it’s early days for the Montney and the Marcellus but particularly for the Montney plays, do you have a sense for where [AKO] prices need to be to start to really ramp up the drilling program and generate some compelling economics there or is it still too early to tell?

Ronald J. Eckhardt

Well, it’s too early to tell but it’s fair to say though that we are driving to make the Montney work at sub $5 and in fact, all things going great we could get that down to $4 and that’s our goal. It’s about squeezing out costs, using everything we know about lean processes to do that and find the right zone to drill in. So, it’s still very early days but I believe that’s where we need to get to, to make this play go.

Andrew Fairbanks – Merrill Lynch

Are you getting any early reads on reduction in frac costs or drilling costs out there as the industry slows down a bit?

Ronald J. Eckhardt

We’re seeing it across the board and as you can imagine we’re negotiating heavily and double digits for sure and we’re still working on what the first number is.

Operator

Your next question comes from Rafi Khouri – Raymond James.

Rafi Khouri – Raymond James

Would you be able to expand a bit on your exploration? We’ve been reading about the Peru well maybe having some delays and then Kurdistan, a nice perspective well but it seems to be going on for quite a while. So, maybe comment on those two if you can and then going in to ’09 sort of what some of the bigger highlights could be.

John A. Manzoni

Sure. It’s slightly unfair John Hart isn’t here, I’m just looking at Richard Herbert to see if he’s ready to talk a little about Peru in particularly. Do you want to give a little comment and update on where we are? Is there some evidence or indication of some operational issues?

Richard Herbert

Let me just talk first about Peru, I mean there we’re drilling the appraisal well on the Situche discovery, there have been some operational issues. It’s not an easy operating environment but it is moving forward and we expect to get some results in the next two to three months. That’s the story on Peru. In Kurdistan, where we’re currently drilling the [Cekala] well, that well is still operating. Again, that has had some operational issues, it’s the first well in that part of the province. We don’t have any logs yet but operations there are ongoing.

John A. Manzoni

He wanted to know what are we sort of looking forward to in ’09? It’s a little unfair because Richard arrived only two days ago so he’s sort of drinking from a fire hose.

Richard Herbert

Let me just speak to it very briefly. John mentioned in his introduction, we’re spending about $600 million on exploration this year. We’ve got about 27 wells in our program. We’ve talked about Peru and Kurdistan, we also have some high impact drilling in Columbia where we will be finding out some results from that also in the next one to two months and have some encouragement there.

We continue with our programs in the UK and in Norway and I think particularly in Norway where we’re participating in two appraisal wells with [Statoil Hydro] and our operated program. We expect to see some results also in the next few months.

John A. Manzoni

Let me help you then because I’ve been here a little bit longer than two days and I can help Richard a big. Of course, we’ve also got in Asia we’ve got quite an active program continuing to appraise the Vietnam basement discovery and of course, preparing to drill some of the higher impact Eastern Indonesia area where we’re shooting seismic and stuff. In Kurdistan we’ll be doing another well after the end of this first one.

So, I think quite an active program and beginning now to focus on some areas which have the chances of finding material pools. Currently, as Richard has said we’re spending somewhere between $600 and $700 million this year on our exploration activity which continues to be quite an active program.

Rafi Khouri – Raymond James

Maybe just a sort of unfair follow up given only two days on the job might be throwing a curve ball but, the $600 to $700 million would you be able to give us a either risk or unrisk potential BOE that you’ll be targeting with that.

John A. Manzoni

It would be very foolish to do that at this point Rafi. I’m going to claim the curve ball. What I have said in a general sense, over time in our exploration program in the most general sense we’ve said we want to find 150 million barrels of resources at a finding cost of less than $5 a barrel. That’s the long term objective. As we refocus the program over time that’s where we’re aiming this program to be.

We need to give Richard more than a couple of days to get his feet under the table to a) first of all decide whether he likes that target and push back if he doesn’t for me. But, that’s what I’ve said and that’s I think where we’re targeting the program over the medium to long term.

Operator

Your next question comes from Carrie Tait – National Post.

Carrie Tait – National Post

I had a question about something you mentioned at the top of the conference call when you were talking about contract rates coming down in the North Sea about 50% and I think you said about 30% in North America. Do you expect this to fall further at all?

John A. Manzoni

Let me just give you a bit more specificity. I think I said that supply vessel day rates came down in the North Sea at 50%. Just in the general sense the compensation about what’s happening on costs is quite complex because of course it depends on ones individual contract structures that are in place across a broad basis. What I would say is that we’re seeing significant reductions and I think we expect to see more in various locations across the world.

In the UK we have actually been at the forefront of discussions with our contracted work force and we have taken those rates down, if you look sort of day rates down to the order of 10% and I think that’s in line with general activity now going on in the UK in the North Sea so that’s what’s happening sort of with general rates and of course activities are reducing and therefore number of people are reducing as well in addition to that.

In the rigs situation, it depends where you are. We have had rig contracts in North America in place variously from somewhere from one year to three years so we’ve been enjoying actually if you like three years ago rates for some of our rigs and some of those things are coming up for renegotiation and where we were expecting increases of course, we’re not expecting those now.

I think for the specialist rigs in our North American organization we’re seeing it slightly sticker than some of the more general rigs. Some of the more general rigs are coming down faster and that’s the numbers that I quoted of maybe 30% or maybe even a little more for some of the general rigs. But, it’s not across the board and I think it depends if you like, on what sort of rigs.

The only other comment I’d make is that we’ve been most recently bidding some capital projects and rebidding some capital projects because we’ve been taking the view that the market has softened and we’re seeing maybe 15% to 20% reduction in some of the activities as the result of that. In Southeast Asia I would say the numbers are in the 15% to 25% range for rigs. So again, it’s a slightly complex picture and I’ve always struggled to find a simple way of articulating but I hope I’ve given you enough color behind what I said.

Operator

Your next comes from [Jeff Gordon – Ottawa Capital].

Jeff Gordon – Ottawa Capital]

I had a question about the Quebec play and how you’re going to go about it this year and what you’re going to be doing for the rest of the year? And, how much you’re going to put towards that play considering the other plays you have going on for unconventional gas plays?

John A. Manzoni

Let me ask Ron to talk about Quebec for a little?

Ronald J. Eckhardt

Just to update you, we’re drilling the last well that we plan on drilling this year and we’re engaged in testing two wells that have been completed drilling. As you might imagine we collect an awful lot of rock data over the drilling of these wells and our plan over the biggest part of this year is to understand those rocks in detail. It’s a very thick section of shale including both the Utica and Lorraine and it’s important that we really understand what are the best places to target. Quebec is a very [inaudible] area if it works and we will move ahead cautiously and rank it with the other things that we have to do.

[Jeff Gordon – Ottawa Capital]

A follow up to that question, are the rocks similar to other rocks in the other plays or are they very different in terms of the data?

Ronald J. Eckhardt

Well it is a unique shale, it is a little bit different than other plays. Rather than having silica to make it brittle it has an awful lot of calcite so one of the worries going in was whether or not you could effectively frac it. Initial tests say that we can and what we need to understand is storage and deliverability. Further analysis and ultimately a horizontal well will tell us a lot of that.

Operator

There are no further questions at this time. Please continue.

John A. Manzoni

Ladies and gentlemen if you haven’t gotten any more questions, thank you very much for taking the time to join us. I think with that we’ll close this call and I shall look forward to updating you again at the next time we have one of these conference calls. Thanks very much for your time.

Operator

Ladies and gentlemen this concludes the conference call for today. Thank you for your participation. Please disconnect your lines.

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Source: Talisman Energy, Inc. Q4 2008 Earnings Call Transcript
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