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Canadian Natural Resources Limited (NYSE:CNQ)

Q1 2009 Earnings Call

May 8, 2009 11:00 am ET

Executives

John Langille - Vice Chairman

Allan Markin - Chairman

Steve Laut - President & Chief Operating Officer

Real Doucet - Senior VP, Oil Sands

Doug Proll - Senior VP, Finance

Analysts

Andrew Fairbanks - Bank of America

Arjun Murti - Goldman Sachs

Gil Yang - Citigroup

Peter Ogden - National Bank Financial

Martin Molyneaux - FirstEnergy Capital

Mark Polak - Scotia Capital

Operator

Good morning ladies and gentlemen, welcome to the Canadian Natural Resources 2009 First Quarter Results Conference Call. I would now like to turn the meeting over to Mr. John Langille, Vice Chairman of Canadian Natural Resources. Please go ahead, Mr. Langille.

John Langille

Thank you operator, and good morning everyone. Thank you for attending this conference call. We will discuss our first quarter results and our outlook for the balance of 2009 which we covered in our press release issued yesterday. Participating with me today are Allan Markin, our Chairman; Steve Laut, our President and Chief Operating Officer; Real Doucet, our Senior Vice President of Oil Sands; and Doug Proll, our Senior Vice President of Finance.

Before we start I will 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.

As we had anticipated, the first quarter was a challenging quarter as we saw very volatile commodity prices with West Texas Intermediate oil prices hovering around $40, and a continuing lowering of natural gas prices throughout North America. However, with our hedging position backstopping our cash flow, we achieved cash flow very similar to the fourth quarter of 2008 amounting to over $1.5 billion.

This cash flow exceeded our first quarter CapEx which has not generally been the case in the first quarter of the year. This reflects our focused discipline when allocating capital expenditures to ensure they are driven by value creation.

Our operating results were within our guidance with overall BOE production dropping from Q1 of '08, then increasing from Q4 of '08. These changes of course reflect reductions in natural gas production as we allocate less of our CapEx to those properties.

Steve will give a much more detailed update of our operations. But before Steve begins, I would ask Allan to make a few comments.

Allan Markin

Thanks, John. Good morning, everyone. It has been a great start to the year for Canadian Natural, and as John mentioned in very difficult times, decent oil regimes and very difficult natural gas regimes.

Obviously, the highlight of the first quarter was first production of SCO at Horizon, the first step in value creation from this great asset. This was followed shortly by the first shipment of SCO into the sales pipeline, heading slowly towards 110,000 barrels per day. The ramping up of production at Horizon has been going very well, as Real will talk about in further detail later on.

Internationally, first production was achieved at our Olowi field in offshore Gabon early in the second quarter. Congratulations to everyone involved in getting this online heading towards 20,000 to 25,000 barrels per day.

Also Baobab offshore, Cote d’Ivoire has been reclaimed at over 10,000 barrels a day from our recent re-drilling. We had a successful North American conventional winter drilling program that was completed well in advance of spring break-up, congratulations.

For North American liquids, production for the quarter was as in line with expectations and the economics for crude oil projects remained robust in this commodity price environment. Steve will get into further detail on our North American conventional assets.

Natural gas drilling was driven by market conditions and as such, we have concentrated our efforts on optimizing existing production, building an inventory of high quality prospects and executing the high-graded drilling program with focus on land expires and drainage issues, not a lot of gas drilling in $3 to $4 gas, and a difficult fiscal regime in Alberta for gas.

We continue to focus on efficiencies and execution, maximizing the value of every dollar spent in both crude oil and natural gas. We need to focus on growth in value, not growth in production in these tough times.

We have always worked together and survived together. Congratulations to our hardworking Board of Directors, Management and especially, our hardworking employees in all facets, Conventional, Western, Canadian, North Sea Offshore, Cote d’Ivoire, West Africa and all the hardworking people at Horizon.

Everyone everywhere at Canadian Natural just take a moment, pause and pat yourselves on the back for doing it right together with hopefully some fund and lots of integrity. Thank you.

Steve Laut

Thanks Al, and good morning everyone. As both John and Al has said, Q1 was a good quarter for Canadian Natural. It was also a very eventful and important turning point in the evolution of the company with a quick introduction of Horizon Oil Sands mining operations.

It was also a quarter of low commodity prices compared to Q1 2008. In these low price periods, Canadian Natural's strong, balanced and diverse asset portfolio combined with our focus on low cost and effective operations has allowed the company to generate substantial free cash flow during this period.

In 2009 each component of our conventional asset base; gas, light oil, heavy and thermal oil will generate free cash flow. Our assets are strong and we are low cost. Our priorities in 2009 remained unchanged. First, debt repayment. Second, capital allocation to maximize our return to the highest return projects either be asset development, acquisitions or share buyback. And thirdly, dividends.

In the first quarter, we proactively reduced our capital spending by $800 million. After the completion of the first quarter, we see no reasons to adjust the capital budget any further at this time. As always, Canadian Natural retains as much flexibility in our capital program as possible allowing us to be as proactive and prudent in managing that company and ensure we fulfill the priorities of 2009.

Our conventional production guidance remains unchanged reflecting the strength of our conventional assets. Let me now briefly update you on each of the assets, as well comment on the cost structure we see today and anticipate in the future.

Starting Canadian with gas, our gas production delivered as expected in Q1 and our small 72 well drilling program delivered at or above expectations. However, with a very small amount of capital allocated to gas, gas production will be count in 2009 in line with our production guidance.

We plan to drill approximately 70 gas wells for the remainder of 2009. These wells are being drilled to offset drainage, conserve land or strategic in nature. With the current gas price and cost environment, it makes no sense to drill any gas wells for any other reason. We however, are deriving significant free cash flow from our gas assets in 2009. Even in the slow priced environment, our gas assets will generate roughly $1 billion in free cash flow.

With the technology developments that have unlocked the potential shale gas in North America, the gas business has been significantly changed. We believe that it's unlikely that you will see sustained gas prices in a double-digit range that many believe less than a year ago. However, we also believe that current pricing level is not sustainable over the long-term.

Our expectations of gas prices in the long-term are in the $6 to $8 Canadian acre range. And as price levels drop below the range where we are today, we believe you will see a continued steady contraction in North American supply.

Canadian Natural has the second largest [wetland] basin in Western Canada with significant exposure to the unconventional resource base as well. We dominate the land base and infrastructure in our current core areas. As a result, we are a low cost gas producer.

When prices return to the $6 to $7 range for a sustainable period of time, we will then begin to have very disciplined capital program to develop our gas assets assuming of course, they rank favorably with the rest of the assets in our oil portfolio.

Canadian Natural's heavy and thermal oil assets in Canada are very strong, and will continue to add tremendous value to Canadian Natural shareholders.

Our total assets alone have 33 billion barrels of oil in place, and 5.6 billion recoverable in our defined plan. Our plan is to add approximately 300,000 barrels a day of heavy oil production in a very step-wise, disciplined and cost controlled manner.

Primrose East is our most recent incremental step on the road to 300,000 barrels a day of incremental production.

In on our last press release, we stated that we had experience of set back with a containment event. Since that time we have completed a significant amount of diagnostic work in the field, and analysis of that containment event.

We believe we have identified the event as a wellbore issue, with one wellbore. Our detailed report and analysis is with the potential regulators. And we will work with ERCV to develop the most prudent way forward to bring Primrose East back into steaming.

Our report recommends a number prohibited steps and further diagnostic testing, including diagnostic skin testing before we bring Primrose East back to full steaming and capacity. We are confident that issue can and will be resolved and effectively managed going forward with minimal effect on a long-term performance of Primrose East.

The results from the pressure pullback have been encouraging and we are confident that Primrose East will meet, and more than likely exceed pre-project expectations once these operational issues are behind us.

Production guidance has remained unchanged as we accounted for this event in our previous guidance ranges.

At Kirby, our next 40,000 barrel day of incremental production, we expect to receive regulatory approval this year. Before we kick off the development we'll need this regulatory approval, as well as the completion of the detailed engineering design work.

As I said in our last conference call, we expect to see capital cost reductions in this commodity price environment, and we also expect to see commodity prices and cost move more in line with each other before we proceed with Kirby.

At Pelican Lake, we continue to our programs to convert the field to polymer flooding, currently converted to roughly 28% of the field to polymer flooding and expect to put another 11% on the polymer flood in 2009.

Pelican is a world-class pool with 4 billion barrels in place, and between 350 and 475 million barrels recoverable. A very large pool and we expect to have the entire field on polymer flood by 2016.

On the positive side, we have seen some early indications lately for the field and lab work. Seeing the recovery factors, the potential is to go much higher than we currently carry in our reserve estimate. Additional skeptical work is where field performance will be required to prove the degree if any of the recovery can be expected to increase.

On a 4 billion barrel field, every 1% increase in recovery is 40 million barrels, not insignificant.

Our primary heavy oil program continues to roll along effectively and efficiently. In this commodity and cost environment, primary heavy oil generates top tested returns on capital in our asset portfolio. Importantly, it also generates the quickest payout and largest cash-on-cash return.

Although we do not spend much time talking about our primary heavy oil business, our dominant high quality land base, infrastructure and effective operations continue to make this one of the best value generators in our portfolio.

In the North Sea, we've been undertaking vital activity, we completed one well in the centre platform which was brought on the first quarter. And although production rates are below expectations, it has affirmed the reserve potential of the slumps to the east part of the main Ninian horst.

We're also nearing the zone in our Deep Banff, high pressure, high temperature gas exploration project. Canadian Natural operates and we'll have a 36% working interest in any development if commercial gas is discovered, our interest in the exploration well is about 17%.

In offshore West Africa, 2009 has been a busy year so far. At Baobab, we completed the fourth well in our program to convert three to five wells back on-stream. Plan for the one-year window we have the drilling rig. The fourth well P13 came on-stream mid April as expected. P13 is flowing very strongly at about 5,000 barrels a day gross, with room to open up the well more.

Original expectations from the Baobab program was to have between 10,000 and 15,000 barrels a day of net production, and with the ports well on-stream we've added roughly 11,000 barrels a day of net production from the Baobab program. Our very successful result considering some of the earlier wells in the horizontal sections ended up being much shorter than anticipated.

At Espoir production has returned to normal levels as compression issues early in Q1 have been resolved, we expect to add additional compression and processing capacity at the Espoir FPSO by the year-end which will increase production and provide better processing reliability.

At Olowi, Gabon, first oil is achieved in late April with the first well from platform Sea connected to the Olowi FPSO and it's valiantly to 2,000 barrels a day.

The second well was brought on shortly thereafter, and today we're in around the 5,000 barrel a day range between the two wells. Additional wells will be completed and brought on-stream as we drill and complete the wells on the platform.

We have drilled three production wells and a gas injection well from the platform Sea. The results today have been mixed, on the upside the reservoir quality and amount of net pay in the gas injector is well above expectations. On the downside, the production wells encountered the highest water oil contact expected to increase. And more importantly, the reservoir depth is much deeper than expected.

While we have over 15 delineation wells in the fields to date, it is clear the reservoir has some variability, and at least in assuming a platform Sea, our first platform, reserves may be less than expected.

It is too early at this point to address the open reserve potential at Olowi, and we will monitor well performance and particularly results for the remaining wells on the remaining three platforms yet to be drilled closely before we're rising the reserve potential at Olowi, one way or another, the next platform when we install later this summer.

Despite the high class world at both, Olowi and Baobab development have been undertaken. Overall, Offshore West Africa continues to provide some of the highest return on capital projects in our portfolio.

Going forward, we will be focused on reducing cost of all developments including the ongoing development of Olowi, to be more in line with current commodity price environment.

We expect additional winter drilling and waterflood optimization programs will take place at Espoir and Baobab, once we have detailed plans complete in cost, and price is normalized.

On the cost side overall, we are seeing some positive indications that our drive to reduce cost is beginning to pay dividends. In Canada, in our conventional activities we've been able to get drilling and completion cost on average, down to 2005 cost levels.

And in some cases, particularly in our deep gas drilling, which holds the majority of our significant gas potential and CNQ's land base, the second largest in Western Canada, well below the 2005 cost levels, anywhere from 10% to 15% depending on the area.

This reduction in cost has been driven primarily by significant increases in productivity and technical innovation, and to a lesser degree by lower service and supply costs. This is a very impressive result considering the steel prices which on average account for roughly 28% of our drilling cost, are up 45% since 2005. And the regulatory cost load, which now account for 6% of the cost, are up 35%.

Going forward we do see two-wheeler steel prices coming back in line with all the other commodity prices. So we should see some more cost reduction. It is clear that our conventional teams are very strong, have technical innovation, and productivity are the largest drivers of cost reduction. I'll take you back to 2005 cost levels.

Unfortunately for the gas business, we are nowhere near 2005 price levels. And we will need to drive more cost out of the business and to see commodity prices return to $6 a well before the majority of our gas inventory will be able to compete effectively for capital with our other projects.

At Horizon, future extensions will need to see even a greater cost reductions as the Fort McMurray region continues to lead Western Canada in cost increases, and lag in cost reductions. In productivity alone, we believe there is a likely of 20% to 30% cost savings achievable.

In Phase 1, we took many innovative steps to control and reduce cost pressure; most if not all of these steps helped us contain cost. We are currently undertaking a comprehensive lesson learned process so that we capture as many of the efficiency in cost control and reduction approaches as possible to implement in our future charges.

The dilemma of all major projects in the Fort McMurray region is the economic viability going forward. Today you can likely get some very enticing bits to proceed with construction, all of them on a reimbursable cost plus basis.

However, when certainty in commodity prices return the players will likely all move to start construction on a cost plus basis. The ultimate concern of course is the pool productivity, and cost inflation will re-ignite and we're all back in a same unfavorable position.

We are very focused on developing enhancements through our strategies and our execution plans to ensure that we will be able to execute the construction of the future phases in a cost effective manner.

On a positive side of the story, contracted capacity has increased significantly, something that we used to our advantage with our Fly-In Fly-Out program on Phase 1, as we're able to bring contractors from across Canada to our site.

This along with the recent consolidation of operators should allow for more orderly and effective scheduling of construction projects and major turnarounds.

This all sounds good and its easy to say, but it will take considerable effort from the industry once more stable commodity prices return to ensure that the industry will not again return to low productivity and minimal focus on cost control that we have seen in the past from everyone; owners, contractors, regulators and the labor.

With this in mind, Canadian Natural is proceeding with Tranche 2, our Phase 2/3 expansion. And we will only proceed and proceed very carefully with Tranches 3 and 4 when we ascertain the following.

Firstly, we can implement all of our lessons learned from Phase 1 to build and enhance our successful Phase 1 execution strategy. Two, we see significant less cost and cost pressures going forward. And thirdly, we see a period of more sustainable commodity prices with risk buyers to the upside versus the downside.

In the first quarter in Horizon we achieved first synthetic crude oil production, first pipeline shipments, and completed the construction of the distorted Hydrotreater on March 23rd. For the third Hydrotreater, we are currently running at 75,000 to 90,000 barrels a day of light suite SCO.

Although roughly 62 days since February 28th started up our first production, at the end of April we have been on for 30 days and averaged roughly 38,000 barrels per day, stream day. Only 17,000 barrel a day for the calendar day, however.

Despite the high cost in April, we took a significant outage to ensure we made the necessary adjustments to meet product quality specifications, and adjust and repair equivalent after the first significant rent period.

At this point, we are now expecting rent for an extended period of time and slowly ramp up the design capacity to 110,000 barrel a day of SCO. The most important factor in our success for 2009 will be uptime or plant reliability.

The major risk to an extended rent time and time required to achieve designed capacity will be the oil preparation plant as we extend some reliability issues with the crushers in associated gear boxes and a hydrogen plant which is also seeing number of premature valve failures that the vendor has addressed.

It is more important to note at this point is that we have not experienced any design capacity limitations with the major components of the entire horizon complex. And overall, it appears that higher triggers will be able to run above designed capacity and provide opportunity for potential de-bottlenecking opportunities.

With that I will turn it over to Real just to guide where we are today, and what the remainder of Q2 and 2009 will look like in terms of their production ramp up. Real?

Real Doucet

Thank you, Steve. As it is indeed pretty exciting right now the sites, since we are continuing our commissioning of the plant. In March and April, we have done quite a successful commissioning.

We have so far produced about 1.5 million barrel on this plant, we have filled the pipeline which was 766,000 barrel, and we have between Edmonton and site right now, over 900,000 barrels of inventory ready to be shipped.

We have gradually brought the production up in stages as you can imagine because of a different component of the plant and so on. Throughout the commissioning right now, we have found about three major issue that we have to deal with, and most of them have been dealt with so far.

Let me mention the oil preparation plan. You can imagine that we've built this plan during a period where the supply was in very, very high demand for equipment, and we had some left and adequate shipment in terms of our equipment, some of which were example of the primary crusher gear boxes. The shaft was the wrong metallurgy which allowed the gear box or the gear to spin on the shaft and so on.

We have four of those gear box in operation, two per crusher. Two of them have been fixed so far and it refers in the operation. And the other two are being fixed as we speak right now. Even though we were able to run the crusher with these kind of deficiencies, definitely brought also the challenges in terms of reliability.

The second one in the oil preparation plant was the secondary crusher, the [teeth] design required modification and the supplier crook is right now working them out. In the meantime, we have to recycle the oversized material which had a little bit of cost because we have to use our loader and trucks to do this. However, it does not impact the production at this time, these secondary crusher teeth problem should be solved here in the coming couple of months.

The second major challenge we have had in the start of this was the hydrogen plant which is a steam metal reformer. Amongst those plant there is plant called the pressure swing adsorption plant which is BSE plant. This what were separating the hydrogen from the CO2 and the particulate.

There is a tremendous amount of valving operations, amongst those there is six inches valve, there are 72 of them spread over 12 beds. These valves are opening full open and fully shutting down within a fraction of a second, and as you can imagine, they are controlled by computers and so on.

We found some scoring in some of the butterflies in the valves and some of the stems and so we're still investigating the cause of those. We have replaced several of them. Right now we see a higher reliability of the plant. We're running about 10 beds out of 12 for the time being. At full capacity, we need about 10 beds out of 12 but we are re-circulating these valves on a higher rate than anticipated so far.

The third issue that we have on the plan was a package management. As you can imagine, starting the plant with no intermediate package volume was quite a challenge since the plant is fully integrated in terms of energy and in terms of material balance.

For example, we have a DB, diluted cement tankage which is an intermediate tankage plant. We have an intermediate SCO tankage and we have treated tankage. So between these three tankage plans, we really have to manage that well. So when we crank up one unit we have also to crank up all the other at the same time. So if one goes down for any reason it stops the overall progress of the commissioning.

So we have those several issues, now unfortunately, most of these issues are behind us because we close to 900,000 barrels of intermediate product and final product on side. So this is definitely helping us out here, balancing the plans and reliability.

As far the design, like Steve mentioned, also the Hydrotreaters, we see right now that have been brought up to capacity and even more. So we know that we do have a credible capacity in that area. The cokers' have been run so far up to 80% of the capacity with no issue. And we see also that the yield of this plant is as per design. And if we don't see no problems of cranking it up also to a 100% capacity here in the future.

So as we're going along with this plant right now, we're continuing to ramping cautiously, we're doing at about 5,000 barrel to 10,000 barrel per day, watching and stabilizing every aspect of this plan before we move to the next portion.

So for us, definitely the second quarter bring it's challenge and keeping the reliability of the plant and gradually cranking it up to it's capacity and continuing also to fine tuning and tweaking this plant as to bring it up to full capacity by year-end.

On this, I will turn it back to you, Steve.

Steve Laut

Thanks, Real. In summary, Canadian Natural's in a very strong position. Our assets are strong, our balance sheet is strong and getting stronger and we have a very flexible capital program to maximize the value of our low-risk balance portfolio.

We are proactive, and making tough decisions to not only survive but prepare to capture the opportunities that they will present themselves in this environment, particularly, as gas prices have recently flurried with falling through the $3 floor.

As a low cost producer, Canadian Natural has a competitive advantage in today's environment. Our focus on cost reduction is always resolved in some early wins and we expect to return to our highest standards of execution despite the recent setbacks of Primrose East and our startup issues at Horizon.

With that I will turn it over to Doug, to update you on our financial position and our prudent financial management.

Doug Proll

Thank you, Steve. In the first quarter of 2009 Canadian Natural generated over $1.5 billion of cash flow from operations or $2.80 per share and $305 million in net earnings. We incurred $1.26 billion of capital expenditures in line with our cash flow. This has allowed our financial metrics to continue to improve, inside and below our targeted ranges.

Our commitment to cost control, controlled capital spending and discipline for the balance sheet as Steve said is again evident in the first quarter. Our liquid resources remain strong.

At the end of the first quarter, our undrawn bank lines of credit exceeded $1.7 billion. This liquidity combined with continued debt repayment through the free cash flow continuous to strengthen our balance sheet. Our debt-to-book capitalization was 41% at quarter-end which is near the midpoint of our targeted range of 35% to 45%.

Debt-to-EBITDA is at 1.7 times at the low-end of our targeted range of 1.8 to 2.2 times. We continue to systemically retire the non-revolving credit facility which matures in October 2009. To-date we have reduced the outstanding line to $1.645 billion from the $2.35 billion outstanding at December 31st. It is our intention to retire this facility from an allocation of cash flow from operations which includes the proceeds from our commodity hedged program.

Our revolving syndicate credit facilities are in place through June 2012 and our debt maturities are very manageable at less than $500 million per year through 2012. Our access to the debt capital material is good with strong and stable credit rating.

We remain active in our commodity hedge program, 92,000 barrels per day of crude oil plus with a floor of $100 per barrel, in addition to crude oil collars on 25,000 barrels per day with the floor of $70 per barrels and a ceiling of $111. These positions are in place for the remainder of 2009.

For natural gas, we have 400,000 GJs per day of acorn natural gas physical sales contract with an average price of $5.29 per GJ for the period April to December. In addition, we have 220,000 GJs per day of acorn natural gas collars with the floor of $6 and a ceiling of $8 for all of 2010.

We continue to monitor this program for expansion opportunities in 2010. Our commodity hedge book is posted on our website and is presented in the press release.

And finally, we have declared a quarterly cash dividend of $0.105 payable July 1st, continuing tradition of paying dividend for the ninth consecutive year.

Canadian Natural continues to grow and diversify the production from conventional oil and natural gas, new production fields in Canada and Offshore West Africa, and now addition of synthetic crude oil volumes from the Oil Sands mining and upgrading division.

All of our current areas are or soon will be generating free cash flow. We continue to grow shareholder value through the prudent management of our world-class assets.

Thank you. And I will return it to John for some closing comments.

John Langille

Thanks very much Allan, Steve, Real and Doug. Great review of where we are and what we're doing. As you ca see, Canadian Natural has a suite of assets that I believe is among the best in the independent ENP world. And we are continuing the execution of our plans and we look forward to creating additional value for our shareholders.

With that operator, I would like to open up the conference call for questions that people may have.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Andrew Fairbanks of Bank of America.

Andrew Fairbanks - Bank of America

I just was curious, how you all are viewing the current asset acquisition opportunities in the market? And given your price, how those back up again your internal CNQ project at this point?

Steve Laut

Obviously, we are starting to see more and more properties brought on to the market. We are starting to see some reduction in the expectations of the sellers. And I'd say right now we are fairly close on the gas side, I think you probably buy not much but you can drill for at this point. On the oil side, we're maybe getting close but we're not there yet.

Andrew Fairbanks - Bank of America

In the areas you're interested in, will those still be getting around your existing operating areas?

Steve Laut

Yeah, pretty much. That's why we're looking at mostly within our core areas. I don't think we need to go inside our core areas for any kind of acquisition but we would not be adverse to doing that if we found a really good deal.

Operator

The next question is from Arjun Murti from Goldman Sachs.

Arjun Murti - Goldman Sachs

My question is related to the future phases of Horizon. I think you made some very interesting comments about productivity alone could get you 20% to 30% savings and obviously, steeling and other things are down. But you follow that up with the observation that I think is correct, that if the oil price comes back and industry activity heats up again, how can one gain confidence that industry overall, including CNQ doesn't get back to a less favorable position where the cost we escalate?

Is the only solution to that, M&A? We've seen one step here with Suncor, emerging with Petro-Canada. And do you see that as the key to getting to the situation where industry activity doesn't heat up too much or what other solutions do you have to gain confidence that you can keep the cost down, whenever you think it's time again to go forward with future phases?

Steve Laut

We do see a lot of gains on productivity there we can achieve. I don't think you need M&A activity to get the cost down. If you look at the players now, very well disciplined group and it's just a matter of organizing ourselves. So if we don't compete and directly head on head, these projects hang over at the same time, but segmented at the timing of them. You don't want to have everybody doing several work at the same time or electrical work all the same time. We need to stagger the projects, even though there are concurrent, they need to staggered. So we have less demand on each of the contractors and labor components.

For us, the key thing that I talked about a little bit in earlier on here is we had a very, very successful execution strategy in Phase 1. Our costs were up with considering what we went through. It was our first time at it. It's very important for us to go to the lessons learned because we believe that we have some significant enhancements to our strategy that we can achieve. And obviously, I'm not going to share all those with you here today because we think we have some inside track.

Arjun Murti - Goldman Sachs

Is there a timeframe by which the lessons learned, project will take 6 months, 9 months and then after that we might expect some sort of news on what you're thinking about for Phase 2 and 3?

Steve Laut

We're probably 6 to 9 months to get all the lesson learned completed. Once you get the lesson you got to figure how you can use that and execute going forward. So we'll take our time and do it right.

Arjun Murti - Goldman Sachs

A follow up to the acquisition oriented question, I certainly heard that the preference or those logical areas, looking at your core areas, its sounds like on your price tick you're more bullish longer term in oil and natural gas. You obviously did do a large gas acquisition several years ago at the end of (inaudible) properties. You still have the inventories from those proprieties and I know you always consider what is the best deal and doesn't make sense, but is there bias towards not doing too large of a gas deal unless its just a phenomenal deal to keep more of an oil waiting? How should we think about the relative sizing of natural gas going forward as part of CNQ?

Steve Laut

I think Arjun, we try not to have a bias on anything. We're bias just to drain value. So we don't go in with a mind saying, we are only going to do a deal so big and in such a way. We are here to generate value for the shareholders and we have a certain core competency and skill set in the company, that's very strong. We have a very strong gas competency, heavier oil thermal and now with Horizon. We also have offshore capability in the North Sea and Offshore West Africa. So we try to leverage our strength, so we can add value or see value that our competitors may not see, and that's where we drive too.

Operator

Your next question is from Gil Yang of Citigroup.

Gil Yang - Citigroup

Could you comment on Olowi, I think you commented surely to tell what the reserve potential is? Could you remind us what the original reserve potential was thought to be?

Steve Laut

Our original number was about 50 million barrels of recoverable oil out of Olowi, and right now we're not sure where that will end up. We're seeing some surprises here with the first production oils and the gas injection oil. So if we hadn't drilled a production oil from just a gas injection well, we would have our guys pushing to increase the reserves because of the results there.

The other 15 wells in approval still align with our original estimate. As we go forward, I'm sure we'll see more surprises one way or another. We got to get the wells down and see how they perform before we actually start adjusting the reserves, just trying to be as of transparent as possible, telling you that the contact was higher in these reserves and we're expecting the dip is a bit steeper.

Gil Yang - Citigroup

So 15 wells looked on target and how many wells were different?

Steve Laut

Two. So we might be jumping again a bit.

Gil Yang - Citigroup

Sticking with West Africa, could you comment on in terms Laurie right now. In quote of oil, we do on our oil exploration opportunities you have in the context of what and Anadarko and Tullow was done, nearby in Ghana?

Steve Laut

We're not in Ghana. So, I guess you can say that we don't follow that. We're in Gabon and not Côte d'Ivoire. At Gabon, we're pretty much focus on [lag] right now. In Côte d'Ivoire we do on our lands have some development projects at [Akazhu] and few other small approvals in or out Espoir and Baobab that we can likely tie back.

There is also in field programs that will happen at Baobab, and as far as we move forward. We're working on that right now making sure we have basically all the geology and engineering nailed right down before we proceed, and see a little better cost and oil price alignment before we proceed.

But as far as the exploration side and that part of it, not a lot. We do have a BigE exploration project in South Africa, and it's obviously very high risk, very high reward and likely not going to drill down until 2011.

Operator

The next question is from Peter Ogden of National Bank Financial.

Peter Ogden - National Bank Financial

Quick question on Horizon. You mentioned production rate is 75,000 to 90,000, is that an instantaneous rate? And have you actually achieved that yet? And is Horizon on today?

Steve Laut

Horizon is on today, and this morning it was running at 84,000 barrels a day under the higher triggers. Under the cokers, we are running about 82,000 barrels a day. It has been running consistently for roughly the last nine days and I would say the average in the last nine days has been around 75,000 barrel a day range out of the higher triggers to the sales tanks.

Peter Ogden - National Bank Financial

I was wondering if you could elaborate, you mentioned speck issues in April and we had to turn down production. Does that has to do with the Hydrotreaters? And is that fixed now?

Steve Laut

It is fixed. It had nothing to do with the Hydrotreaters, it actually had to do just with the operating parameter in the coker. Because we're starting up, and as we all can probably give you a lot more detail, we're running at lower than design capacity because lot of the performance were designed for the full 232. We had some issues with foaming and in turn particular, not getting the gas oil backlash to get particular side of the other stream. So we end up getting some particulars in our speck oil. So we had to basically shutdown, get some filtering in place for our speck oil, and then just to make sure that the operating parameters for the rest of plant have nailed down, which we did.

Peter Ogden - National Bank Financial

Final question, just around capital allocation and maybe outside of the acquisition market, heavy oil prices have been extremely strong and I'm just wondering what your view is on heavy pricing and whether that's sustainable and whether you would allocate a more capital to the heavy oil program at this stage?

Steve Laut

We believe that long-term heavy oil prices will be fairly stronger, actually very strong right now. I think this branch was May wide in somewhat but with access to Gulf of Mexico, a refining complex, I think you'll see that narrow again.

As far as allocating more capital, we are very much a cost control type of company, rebooks on low cost. If we allocate too much more capital to heavy oil, we have some concerns that we may overheat the market and see some cost increases there. We don't want to put too much demand on our contractors.

Operator

The next question is from Martin Molyneaux from First Energy Capital.

Martin Molyneaux - FirstEnergy Capital

My questions have now been answered.

Operator

(Operator Instructions). The next question is from Mark Polak of Scotia Capital.

Mark Polak - Scotia Capital

Obviously, various bump in thermal production in the quarter, and I believe in thermal now you have a 120,000 of capacity, now that you've got to handle on the issues, I wonder if you could just give us some color on how you see the ramp up going? And when do you expect you would be up in that 120 range?

Steve Laut

While we're in rig now, we are not steaming. So we're just falling back on the Primrose East pads. That is starting to dwindle, decline away. We do not have approval yet from the ERCB to start steaming and neither do we want to start steaming right now. We're working very closely with the ERCB, we have a plan. We believe we know what is causing the issue, and we know how to resolve that. But obviously, on these issues you want to make sure everybody is on-site.

Once we get that approval then we will start diagnostic steaming, so we're not going to go in and just start steaming full board. We'll do it in a step-wise, start out small and then scamp ourselves up and very carefully monitor the whole situation. And in particular, the wellbore we believe is the issue. Before we do that obviously, we will repair that wellbore and go forward.

So remember, this is a cyclic steam operation here, Primrose East. We do hit 120,000 barrels a day capacity but you're always on a cycle, so you come up to 120,000 and you will rotate off. It's like a sign wave.

Operator

There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Langille.

John Langille

Thank you very much, operator and thank you very much for everyone listening in and attending our conference call. And as usual, if you have any further questions do not hesitate to contact us. Thank you very much. And have a good day.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.

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Source: Canadian Natural Resources Limited Q1 2009 Earnings Call Transcript
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