Royal Dutch Shell plc (NYSE:RDS.A)
Q3 2013 Results Earnings Call
October 31, 2013 9:30 AM ET
Simon Henry - Chief Financial Officer
Peter Voser - Chief Executive Officer
Alejandro A. Demichelis - Exane
Hootan Yazhari - Bank of America
Theepan Jothilingam - Nomura
Jason Gammel - Macquarie
Jon Rigby - UBS
Rahim Karim - Barclays Capital
Nick Edelman - Goldman Sachs
Lucas Herrmann - Deutsche Bank
Martijn Rats - Morgan Stanley
Fred Lucas - J.P. Morgan
Peter Hutton - RBC
Jason Kenney - Santander
Robert Kessler - Tudor, Pickering, Holt & Co.
Stephen Simko - Morningstar Research
Welcome to the Royal Dutch Shell Q3 Results Announcement Call. There will be a presentation followed by a Q&A session. (Operator Instructions)
I’d like to introduce your host, Mr. Simon Henry.
Thank you, Operator. Ladies and gentlemen, a very warm welcome to you all. Let me run you through our third quarter results and portfolio development and then leave plenty of time for your questions.
First, leave the disclaimer statement. Shell’s underlying current cost of supplies or CCS earnings were $4.5 billion for the quarter and that’s a 32% decrease in earnings per share over the third quarter of 2012. Cash flow generated from operations was $10.4 billion, that’s an increase of 10% year over year.
There were a number of negatives for us in the quarter. We were impacted by weaker industry refining conditions globally. Our industry is facing considerable headwinds from those low refining margins and we saw continued challenges in the operating environment in Nigeria.
We have a strong project flow in place for 2014 and beyond. We’ve started up a series of new oil and gas projects in the last few months, deepwater in Brazil and integrated gas in Australia and in the longer term plays such as Iraq. And these are all part of the project flow that will drive our cash flows in 2014 and well beyond the [coast]. But that comes along aside what we expect will be a significant reduction in net spending next year as we work through the series of the 2013 acquisitions and we increase the pace of divestment.
The company has many new investment opportunities and we are capital disciplined. We will need to make some hard choices in the next few quarters, between the best new investment opportunities from this emerging portfolio, I mean is not done, this is as much about what we choose not to do as what we choose to do.
Dividends, our main route to return cash to shareholders. We have distributed more than $11 billion of dividends in the last 12 months. The scrip dividend uptick for the second quarter was 44% and we will be offering scrip again for the third quarter 2013 dividend.
We use share buybacks through the cycles to offset the earnings per share dilution from that scrip program. So far this year, we have repurchased over $4 billion of shares, in fact, 4.3 billion of last month and we are on track for up to $5 billion of buybacks in the calendar year 2013, underlining the commitments to return to shareholders.
Move on to details starting with the macro, if you look at this picture compared with the third quarter of 2012, Brent oil prices was some $1 per barrel higher than year ago level but we have narrowed a differentials between Brent from the North American market, particularly WTI.
Our Upstream realizations overall did decline slightly from the third quarter a year ago.
On the Downstream side, the refining margins weakened in all regions, particularly the U.S. and Europe. You may remember that, a year ago margins were actually elevated by number of industry capacity outages.
Our North America refining margins were hit by narrower WTI differential, as well as by the maintenance activities in Canada planned maintenance. The European margins were significantly reduced by poor demand both in the regional and export market. And in Asia, refining margins are under pressure from new capacity online and from the poor regional demand growth.
On the Chemical side, we saw stronger margins in most product lines with better industry conditions in the United States and Europe, both helped by competitor outages.
Turning now to earnings, first, the regular disclaimer, quarterly result are important clearly high or low, but they are only three month snapshot of performance and what is a volatile industry where we are implementing a long-term strategy that is both investment and performance criteria looks at the much longer wavelength then three months.
The first quarter CCS earnings excluding identified items were $4.5 billion with compared to last year lower contributions in both the Upstream and the Downstream. In aggregate, macro and environment factors were $1 billion net negative for us on the Q3 to Q3 basis, that includes the lower margins in refining but also $200 million relative reduction from the double dividend payment in LNG in last years result just the one payment this year.
We had $300 million earnings reduction year-on-year for Nigeria where the operating conditions continue to be challenging and uncertain. The Upstream portfolio growth was overall positive in this result adding around $500 million year-on-year, particularly driven by Pearl gas and liquids project in Qatar, not despite an offset there from higher maintenance.
Depreciation and exploration charges increased significant with the net impact of $800 million year-on-year. This is leasing part driven by growth in terms with the higher level of exploration spend with around $500 million difference year-on-year, which $400 relates to write-off of unsuccessful drilling. Now that includes dry holes in Australia, the Gulf of Mexico, French Guiana and other regions, and the rest is primarily $90 million net cost increased Alaska where we expensing all to spend this year.
The remainder of the Q3 to Q3 movement is combination of factors, included an increase in abandonment provision, visibility stand, maintenance programs and overhead.
Turning now to operating performance, the headline, oil and gas production for the third was $2.9 million barrels of oil equivalent per day. The deteriorating Nigeria operating environment resulted in some 65,000 barrels oil equivalent per day reduction and that’s from the Q3 to Q3 basis but also remove 280,000 tons of LNG from the quarter.
Excluding oil price production sharing contract effects, the effect of the Nigeria environment and divestments made in the last 12 months, the underlying oil and gas production actually increased by 1% and LNG volumes increased by 5 -- 4%. The underlying production volumes supported by the growth projects and the operating performance there overall was good.
So offset to that there some 60,000 barrel oil equivalent per day from maintenance activities including downtime in the U.K. North Sea, where we are replacing the Schiehallion FPSO and in the Gulf of Mexico where the 30,000 BOE per day Auger field was shutdown for maintenance. We took advantage of that downtime opportunity at Auger to do some of the work on the future Cardamom tie back, Auger should be back online in Q4 and the 50,000 barrel a day Cardamom discovery is scheduled to come on stream next year.
In the Downstream, refinery and chemicals availability improved from the year ago level and that benefit is from lower plant and plant downtime, overall a good performance. Excluding accounting changes, the oil products sales volumes were broadly unchanged Q3 to Q3 and the underlying chemicals volumes increased due to trading activity. Now you'll see some indications on this particular slide about the fourth quarter. We are expecting a heavy quarter for maintenance overall from 60,000 barrels oil equivalent per day in the Upstream, Q4 to Q4 reduction. That’s in production at high margin assets such as the U.K. the deep-water Nigeria and in Brunei.
There will be plant maintenance in Pearl gas-to-liquids during the fourth quarter and LNG volumes in general will be reduced by around 900,000 tons and that’s around 17%, 18% of total by maintenance programs in a number of facilities. Exploration charges should remain relatively high in the fourth quarter and the operating environment in Nigeria remains challenging and uncertain.
And turning now to the portfolio; we’ve added new opportunities during the quarter. We started up new production and we’ve announced new asset sale, all parts of positioning the company for a profitable growth in the future. Now you can see the details in this chart according to the strategic themes. We have new positions in deep-water, two new final investor decisions, startups and asset sales. On the divestment side, we’ve been granted regulatory approval to sell the harbor Harburg refinery in Germany. This is part of a 300,000 barrel a day exit program that’s underway already in Germany and Australia in the refining portfolio, which is around 8% of the worldwide capacity. Three months ago in the second quarter results, we announced strategic reviews of our Nigeria onshore and our North America shale resources portfolio.
We are now marketing assets from both of these areas, where as I expect more to come. Now just let me highlight four new project startups. In deep-water Brazil, we commenced production in the second phase of the BC-10 development. This should add 35,000 BOEs per day, 100%. We recently launched the construction of Phase 3 development for BC-10 and that is to refer the 28,000 barrels oil equivalent per day. This is a highly successful development from the field overall. In Australia, Woodside has started production at the North Rankin Redevelopment Project and that provides new gas supplies for Royal Dutch Shell's LNG project.
In Iraq, we’ve restarted the Majnoon field and we now focus on reaching the first commercial production targets of 175,000 barrels a day. That’s the point in which we will start to recover cost. In Kazakhstan, the North Caspian Operating Company commenced production at the Kashagan field in September. The field is currently shut in not producing following the discovery of leaks on the gas pipeline. Shell and Kazmunai Gas or KMG who will ultimately be the joint venture operators of Kashagan, they are ready to manage production activities at Kashagan on behalf of the joint venture if and when the facilities are ready for hand over.
Moving on, we’ve made a series of quite substantial startups in 2013 just discovered. But we have further large new projects coming on the way. The five largest of these alone should add more than $4 billion to our CFFO once we’re fully ramped up, not 2014. That’s more likely ’15. Now Kashagan is having a difficult startup as I just mentioned. But I have to refer you to the operators for any further questions on that.
In the deep-water, commissioning is now underway of both Mars B in the Gulf of Mexico, the Olympus platform and that Gumusut-Kakap in Malaysia making good progress on both of those Shell operated project.
Now we are making good progress closing at the purchase of Repsol LNG business. That will bring some 7.2 million tonnes per annum of LNG volumes into Shell’s overall portfolio, representing long-term off-take agreement. We expect -- still expect the acquisition to close by the end of this year.
Now looking further into the future, just let me highlight two exciting new oil plays for Shell, firstly, in Canada, heavy oil and secondly deepwater reserves. We have taken final investment decision that ends today on the Carmon Creek development in the Peace River area in Northern Alberta.
This will be a steam flood development, two phases, 40,000 barrels a day each. The bitumen will be exported by pipeline to East Canada, already commit to a capacity and from there onward to refineries for processing, for example, Gulf Coast in the U.S.
And in Brazil, recently we’re very pleased with how good are weather consortium for a stake in the giant Libra field has been accepted. This is a really exciting launch, world scale, world class opportunity where Shell can bring our deepwater expertise into play. We will pay $1.4 billion signature bonus for this in the fourth quarter of 2013.
Let me update you on the financial framework. Our business strategy is and remains to grow cash flow on a sustainable basis through the cycle at competitive returns. We have clear targets for financial growth, cash generation. These are underpinned by the capital investment which in itself reflects strict investment hurdle, all aimed at adding value for shareholders.
And it goes to balance sheet underpins the financial framework. In the last 12 months, we have generated $47 billion of cash, excluding $3 billion from divestments and over the same period, the outflows for investment and acquisitions were $37 billion and then further $12 billion on dividends and buyback.
Gearing at 11.2% at the end of the third quarter have included some $4.4 billion of new borrowing as we take advantage of low interest rate for market here. Of course that sells towards the lower end of our expected range.
For 2013, we have announced some $10 billion of acquisitions. It’s already announced so nothing new here. They included Repsol LNG business, the pre-emption rights for BC-10 in Brazil, the Petrobras share which was for sale, the signature bonus for Libra I just mentioned and the bulking up earlier in the year of the North Sea Upstream position.
That means that our net investment spending, we expect assuming closure of all of the above to be around $45 billion in 2013. The final outcome will depend on timing of closure.
This increase from the net $40 billion guidance that we gave three months ago is driven fairly simply by the new acquisitions close to $3 billion in Brazil and by lower divestment proceeds that we expected earlier this year as we expect closure there, they expand into 2014. So divestment proceeds somewhere between $1 billion and $2 billion.
The $2 billion in the 2013 acquisitions have already been booked but the remainder now it’s up to $8 billion should come in the fourth quarter. Overall, I’d look to stress this quite clearly, we are managing to a $130 billion net spending program 2012 through 2015, that’s a full-year program in the $100 oil price scenario. There were many moving parts in that intent -- in that investment program, not just investment but asset sales, acquisitions, new final investment decisions. We managed all of it on a multiyear basis, not annual and certainly not three months.
2013 will clearly be a peak year for net investment. As we work through those $10 billion of acquisition and this year’s lower rates of divestments, the divestments will step up significantly in 2014-15. We’re not providing a split of ‘14 and ‘15 spending today or any of the moving part, something we might come back to next year. But to help with the simpler [recluse] net investment last year $30 billion, net investment this year $45 billion, net investment over four years 130 is a pretty good indicator of significant divestment activity and capital choices to come. We've built up substantially new options for the Company in the last few years and a much larger expiration portfolio. I think we’ve reached critical math may be beyond with that 2015 and beyond investment options at now, so there will be decisions to make in the next few quarters on which options to take through the final divestment decisions and which projects we drop or differ out beyond that period. But not particularly applies to our global integrated gas business.
We have a series -- the embarrassment of riches of high quality opportunities for new LNG, gas-to-liquids and then Downstream gas-to-chemicals. We can't do all of these. Some of these essential projects are reaching critical planning milestones over the next few months and each projects is potentially individually material. So we are expecting to make choices of that in future, part of capital discipline and bettered in our management process.
Now moving on just to summarize before the Q&A. Underlying CCS earnings $4.5 billion for the quarter, strong project flow, reasonably the best in the industry for 2014 and beyond we can see the transparency of what gets delivered now over the next one to two years. We’ve already started out a series of new oil and gas projects in the last few months, none of which were on the big [progress], but each which is material and that being in deep-water and integrated gas and the longer term plays like Iraq. They are all parts of a project flow that drive Shell cash flow into 2014 and beyond, it will come alongside a significant reduction in net investment spending next year and particularly helped by increased divestment.
We make capital allocation decisions on the global basis. We invest in the best projects, we take a full value chain approach, (inaudible) and we allocate and redesign or exit from positions that just only those return material policy or strategic focus thresholds. We have distributed more than $11 billion of dividends in the last 12 months and we are on track for up to $5 billion of buybacks in 2013 all of the above underlying our commitment to shareholder returns. But before we go to your questions, I want to just share with you that the fourth quarter results will be on the January 30, 2014 and Ben van Beurden who will be our Chief Executive by then from the January 1. He will be on seat before a week and he will lead that call with me on that day. There will also be a separate even management day for shareholders on the 13th of March, 2014 and that’s where you should expect to hear the latest thinking on strategy and overall delivery in a bit more detail.
Now with that, could I move to your questions, please could we try and sort of restrict ourselves little capital discipline to one or two each so that everybody has the opportunity to ask a question. Operator? Thank you, Operator.
Thank you. We will now begin the question-and-answer session. (Operator instructions) The first question comes from Alejandro Demichelis from Exane. Please go ahead.
Alejandro A. Demichelis - Exane
Yeah, good afternoon. I'm Alejandro Demichelis from PNB Paribas. Couple of questions here, the first one is, you mentioned the lower net investment into next year, may you can give us some kind of indication of how we should we thinking about the growth CapEx or the organic CapEx into next year? And then the second question is maybe you can give us a bit of an update in terms of what is the ultimate cause of Carmon Creek that’s not really have the FID there?
Thanks Alejandro, I’ll completely (inaudible) in the next couple of years there is 55 of net investment remaining. Our current organic spending this year was around €46 million because we have ten of acquisition of more divestments, so 36 goes out, 45 of net but 36 of organic. That means organic investment is going into attractive competitive projects. It is not going to go down rapidly because that would be the best way to destroy value in our portfolio.
We are able to finance that level of investment and the growth in the dividend, as we deliver the cash flow growth. There is no spend or one-off or headline attempt here. This is sustainable investment activity through cycle in pursuit of long-term strategic intent.
The organic level of CapEx, a lot of next year is already committed and we will be looking obviously for opportunities either to effectively look at big partners and investment that’s ongoing or where we bring new projects such as Carmon Creek, look to offset that with the divestment program. So, I can’t be more specific than that because it will to a certain extent depend on actual transactions, some of which are in the early stages of development.
On Carmon Creek, I would just say a couple of words about that. It is a project that will be produced in a decade. It’s a multi-billion barrel resource. The first two phases we announced today. There are further phases potentially available to take advantage of the resource.
It’s one of the longest lasting potential resources in the Shell Group. It will produce 80,000 barrels of oil for many decades. It is a breakeven price, well below the bottom of our range of testing for investment capabilities. And in practice, the upfront investment and facilities last for many years but the drilling continues for many years beyond that. So even if I was predisposed to giving individual signal for single investment I wouldn’t because the drilling takes place for the best part of 20-odd years.
But the breakeven price in terms of generating returns for the shareholders is below $70 and this is an attractive investment that ranks well in our overall portfolio of opportunities. It’s also a good timing in terms of taking the investment decision, in terms of the management and the supply chain. So hopefully that helps, Alejandro.
We go to the next question.
Thank you. The next question comes from Hootan Yazhari from Bank of America. Please go ahead.
Hootan Yazhari - Bank of America
Peter, Simon, two questions if I may. Starting with how you are thinking about your aggressive divestment program in ‘14 and ’15. It would be great if you could give us some color around the source of assets that you're looking for inclusion in a divestment program, whether it be producing assets, whether it be Upstream, Downstream, whether you would look to sell down some of your integrated gas portfolio or is it just too early thing?
Second question I have was regarding the North American portfolio. Obviously in the second quarter you took some write-downs after an extensive geological assessments of your assets in North America. I just wanted to see going into the end of the year, whether that process would continue or whether you have substantially finished that and whether the valuation of your U.S. portfolio could be impacted by any repricing assumptions that you have on U.S. natural gas? Thank you.
Hootan, thank you very much for that. Two important questions, the divestment program, I will give you a couple of specifics and then the general intent, the specifics that play in Nigeria and the onshore shale portfolio that we talked about in Q2. They will happen.
The general intent in divestment is always and there was ongoing program, we will just be slightly more aggressive I think as we go forward. Is mature midlife or late life assets in the Upstream are always potential divestment candidates because other people have a different approach. They have to generate value and maybe better owners than Shell. So that’s always part of our -- the other type of assets in the Upstream is, at the other end is maturity care. It is exploration or early development type assets where we have derisked. We’ve created an opportunity, created value and either it’s not strategically or economically attractive for us to develop it and back it to somebody else or where we can bring in partners. So to debate for example, on the prelude floating LNG project, so that type of asset or those two types of assets in the Upstream, well I think own the bulk of the activity. In the Downstream there are clearly opportunities to come. We know, you know because we’ve talked before, the total capital employed in the Downstream business is quite significant, it’s around a third of the total and the return on that business remains below where it needs to be. And we know where some of the challenges are and we’ve already -- so I mentioned the Germany and Australia, there will be potential further activities in the Downstream based on the assessment of the long term credibility of achieving a competitive position both in returns or growth. So it will come from across the portfolio, the basic answer.
North America, it wasn't the total North America profile, I think the question is really about Shell and the unconventional gas liquids rich. The process continues, now the process is exploration and appraisal rather than continually looking for impairments. So the reason that there were impairments in the second quarter is that exploration activities did not lead to a potential development in the assets that we’re impaired. We have $25 billion still on the balance sheet, some of that remains exploration. It’s less than half but it’s still a significant potential number. The exploration and appraisal continues third quarter and maybe in fourth quarter, it’s still too early to tell. The rest of the portfolio is either being developed or would be a clear fact to development.
We’re already producing 320,000 barrels a day, in fact that could go down a bit from divestments and up as we focus our investment on the better opportunities. So it is useful portfolios, great results, it will be very valuable for Shell over time. It’s not something we change our hand overnight and after the second quarter I cannot or will not relay any future impairment, but they are on the nature of an exploration rifle. They just happen to be in accounting sense, as defined as imbalanced and hopefully that’s clear.
Move on to next question please.
Thank you. The next question comes from Theepan Jothilingam from Nomura. Please go ahead.
Theepan Jothilingam - Nomura
Yeah. Hi Simon, two quick questions please. Firstly just on Iraq and Majnoon, could you just talk about the speed of the ramp up there and what level investments Shell is already paying to that project. And then just secondly in terms of the Downstream, I think you highlighted pretty much the weakness in refining, could you just sort of confirm that you had a sort of typical quarter in terms of marketing and trading profitability. I think in the past you’ve talked about a $100 billion to $1.1 billion of earnings coming from those businesses. Thank you
Thanks, Theepan. On Iraq Majnoon, I remember this was essentially a Greenfield development unlike the first wave of Iraq developments such as West Qurna or Zubar. So it’s built on some old facilities, but essentially is Greenfield, so we took the ground field down and we’re now bringing the Greenfield facilities up. The new facilities we’re running well above the first commercial production target of 175,000. We’re running today well over 10% above that however we have to sustain that on average for 90 days out of 120.
So to meet that original requirement, we need to sustain the performance level. And looking good at the moment, with a bit of a fair wind behind us, because there is no simple operations, we should get that by the end of the year, which then enables us to get cost recovery. Now while we don’t give individual investments, it’s of a small number of billions and it will take us two to three years of productions to recover the full amount, once we start to get the recovery. But that will put us in a better situation in the country overall. Refining weakness certainly weak, my (inaudible) collogues always advise me that we no longer give the same break down as the business model is changing and evolving, but the marketing performance overall is a combination of lower volumes but higher unit margins. Growing in the areas we want to grow such as Turkey, Russia, China, Brazil, and then demand challenges in some of the developed markets in Western Europe and North America, and that overall the marketing performance was pretty positive and what is a challenging environment, but there is quite a shift away from developed markets towards developing markets going on underneath the result.
Trading outcome was pretty much at the standard level. So, the Daesan plant, yes, it was in the range we used to talk about. There will be issues in this particular course, basically driven by manufacturer.
Theepan Jothilingam - Nomura
Great. Thank you, Simon.
Thanks Stephen. Move on to the next question.
Thank you. Your next question comes from Jason Gammel from Macquarie. Please go ahead.
Jason Gammel - Macquarie
Thanks very much. Simon, welcome back to the North American portfolio. I am trying to put my arms around what we should we think about in terms of the rate of return on the liquid-rich shale metric here? And I believe you sought about $10 billion on essentially unproved property acquisition in the U.S. over the last three years? Now we would expect to see proceeds coming in from the property sales that you talked about in Niobrara and Mississippi Lime, et cetera. But can you really talk about where you think you staked out core positions in liquids rich shales? Is the Permian an area that you think is scalable and economic? And are there any others that you find scalable and economic outside of the Marcellus and the (inaudible)?
And thanks Jason. The portfolio question is easier than the rate of return, the portfolio is the scalable position of the Marcellus and the Grand (inaudible) and the gas potentially the Haynesville, which is already fairly material, is just at a higher end of the Cosco in Louisiana on the liquids rich, yes, Permian and for us most likely no Eagle Ford, that’s one of the asset up for sale.
And again, West Canada in general in more than one area, so those are the areas we would expect to scale in North America. We are drilling in the Vaca Muerta in Argentina, which looks good. Early days we have two rigs down there, and of course, in the rest of the world in China, Ukraine, we are drilling. In Russia there is some activity through our joint venture with Salym Petroleum.
So there are plenty of basins around the world that they are up for opportunity. But for now its West Canada and Permian that are the main liquid-rich development with Argentina probably the next one.
I can’t comment on rate of return because that will depend on the decisions to be taken. But they will need to meet our overall criteria, which is considerably above cost of capital returns. Okay. Next question?
Thank you. The next question comes from Jon Rigby from UBS. Please go ahead.
Jon Rigby - UBS
Thanks. Hi, Simon.
Jon Rigby - UBS
Couple of questions, just the first one is, the -- if I -- my mathematics is correct, the implication from the numbers you gave is that the disposal program over the next two years is going to be in the order of $15 billion to $20 billion and I think you talked about some of that comment from operating assets? So, I am just wondering how that squares with you all, operating cash flow target where you look like you behind a little bit against where I would expect run rate to be to make it any disposal than of operating assets, it’s clearly going to put you further behind? So I just wondered how you square those two objectives off over the next couple of years?
Second question is the script, I think where people for the industry as a whole get concern is around assurances on capital discipline, of course, one of the methods of giving some sort of assurance around that is the availability of the buyback? Has it -- has there any been -- any discussion or is that the Board -- the Board appreciate, the script dividend itself actually blocks you out from doing a traditional share buyback if I am understand it correctly? And has there been some sort of managing the script just to give you so the availability of doing the traditional share buyback rather than just an anti-dollar issuing share buyback? Thanks.
Thanks, Jon. $15 billion to $20 billion, I can’t confirm, the arithmetic is now far off away a bit on the high side. But it is something we will come back to as we progress, really it’s by progressive divestment transaction, there is some flexibility over two years, of course, on the investment program as well. And where we would expect to be particularly choiceful to stay within the bands of the financial framework and yet clearly, if we divest more (inaudible) particularly cash generative, it will have an impact. It’s probably worth noting that on the full year's cash generation overall, there it's not only behind us -- some challenges on the operational performance such as Nigeria or the operational downtime we've had in the U.K. and the gulf, but looking forward Nigeria doesn't get any better, we are doing slower investments in the shale and we are -- the divestments are likely to have an impact and the refining macro of the gas prices North America both look considerably worse than we might initially have hoped for.
Bearing that in mind and leaving specific numbers aside, we have to balance the both. We have to finance the investments which gets to the -- your second question really; we need the flexibility both on the balance sheet and in our investment-divestment choices that enable us to maintain a robust financial position. Where we do not have to make, we’re not forced to make potentially value destroying choices around that investment program. So the script is an important part of that and we fully understand the board fully understands the impact on the leisure.
Having started the script, three, three plus years ago and the aim, remember was to give us roughly plus or minus $10 flexibility on the great cash breakeven price in any given year which is roughly what it’s giving us, the $3 billion or so up script. It’s widely supported by shareholders, 30% of our shareholders take it up and to stop it potentially would be unpopular with all shareholders as well. So what we have been doing is the buyback, the higher than the script. I think I mentioned before we think to have maximum buyback in any given calendar years about six.
If we do five this year, we’re about four behind on a cumulative basis and we look to do that dilution offset through cycle rather than in any given year and the board is acutely aware of the dilution impact, but also aware of the important thing because the numbers are a bit bigger is to manage the net investment levels and most importantly they've all in the short term to deliver the cash flow growth. So we have to keep all of those balls in the air and use all of the tools in the tool box with the aim being through cycle, sustainable cash flow growth. And so, yes we sell things, we lose a bit, but it will be replaced by other choices that we do make.
Slightly congregated and we rented the script thinking -- but hopefully that gives something of a sale for the way we are thinking about it and I can certainly confirm John that the board is acutely aware of these issues, as I commenced the discussion yesterday on exactly this. Next question?
Thank you, the next question comes from Rahim Karim from Barclays. Please go ahead.
Rahim Karim - Barclays Capital
Good afternoon, Simon. A bit of a follow on actually from the last question; I could take consent of cash flow estimates for the next couple of years about $90 billion of cash flow at least, you talked about net investment of 55 over that same period of time. The balance sheet in a pretty strong position already, I just want to understand the priorities of the use of that cash and it really seems like it can go back to shareholders if you -- you’re kind of limiting yourself in terms of the amount you can buy back on a net basis, kind of any points to higher dividend. So I was wondering if that’s the way we’re thinking of it or if I’m missing something.
I won't comment on the CFFO estimates other than to say that we need to shoot for that will be on to meet our own growth target. And the fair comment on the arithmetic, let’s get half way there first Rahim, before I have the discussion particularly on the script. But the aim clearly is to deliver free cash flow through cycle. And if you just -- the cycle is the full year that we talked about and we get there, then yes, there will be free cash flow, we will have the luxury of choice. We’re not there yet at the moment and one of the slides, the financial segment slide; you’ll see a step before my job is to keep the red line above the, bars over the period.
But right now in the last 12 months, the red line is dropping, the free cash flow is turning negative because of the high level of buybacks and we are looking at the fourth quarter where we may have somewhere about $6 billion of cash guidance on acquisition. So it needs to balance all of those factors and think through. So hopefully in 12 months time, you can ask for the same question. Rahim, we’ll have some divestments behind us. We’ll have the three points on the growth and the discussion in the board will be precisely what to do with that excess cash.
At the moment, it’s about the confidence with delivery and the choices that we make to ensure that we remain in charge of the choices irrespective of what happens in the macro environment. And I am recognizing the clear and legitimate interest to the shareholders and the ratings agent will have that.
Thanks Rahim. We will come back to that subject, I am sure in future. Next question?
Thank you. The next question comes from Michele della Vigna from Goldman Sachs. Please go ahead.
Nick Edelman - Goldman Sachs
Hi. It’s Nick here. Thank you for taking my questions. And I was wondering, given your exposure to Gulf of Mexico refining and the widening of the LLS spread, how much light crude your refiners can take there and also on your onshore U.S. assets that you are putting on the sale, I was wondering how much money in terms of organic CapEx you are spending this year.
Thanks Nick. The Gulf of Mexico refining, we are not set up to process light sweet crude. Our refineries have designed and configured for heavy power. In fact, the designed process just for everything up to old (inaudible) and unfortunately that is not the feedstock that is most attractive at the moment.
We can take some and we are looking to maximize what we can take but that is not the basis of design. We are reasonably well positioned in our Canadian refineries which is where we actually have had planned maintenance downtime in Scotford over the past month or two and that Scotford should be back up again in the near future, which is well placed particularly on the WCS spread.
It will take longer term adjustments if we were to change the nature of the Gulf Coast refining which you may recall that is all in joint ventures either with the Southeast or with the Pemex.
On the LRS assets, we’ll press more generally. Our total activity has reduced quite significantly. At the end of last year, we were 40 rigs on shore, and we are 24 now, where some of our drilling has been done by joint venture partners in both the Permian and Haynesville and we are effectively taking that activity level down. The assets that are for sale, basically Kansas and the Rockies, I don’t think we’re drilling at all.
And Eagle Ford, there are couple of rigs active but needs to active still to hold the production and make commitment on the acreage but basically it’s on the minimum care of maintenance activity overall. The balance of the 24 rigs of the drilling, two-thirds of them are on the LRS accreage, some of it developed into the Permian and the rest is rocket appraisal in Canada.
And we would expect and we have in fact 40 wells awaiting hoping in the fourth quarter, may be more as the drilling continues during the quarter. So we’d expect see the gas declines that we are clearly seeing because we are not really offset by LRS production coming in over the next three or six months.
Moving on, next question?
Thank you. The next question comes from Lucas Herrmann from Deutsche Bank. Please go ahead. Lucas, your line is open.
Lucas Herrmann - Deutsche Bank
Sorry. Apologies. I was on mute. Simon, good afternoon. Thanks very much for the time. Thanks for the opportunity and thanks for (inaudible) things. I am really struggling to understand Shell’s capital allocation over the last five years and to listen to what you have to say about choices. When I look at what’s happened in your America’s business, Simon, you invested broadly 60 billion of capital.
You bought return on capital go from north of 20% in 2007. So you are negative at the present time. You have invested understandably for growth but you are now retrenching, also it certainly very much seems that way and narrowing. And you have told us today that you are going to invest significantly in bitumen assets in Canada which I think typically one -- the experience rampage I mean it's not been particularly favorable. On the other had you got an integrated gas business where you’ve grown your invested capital volume and brought to $24 billion, you’ve driven your returns from 12% to 23%, you’ve driven your profit from $3.4 billion to $10 billion, you’ve got clear competitive advantage, it's a market that is moving in your direction and everything that you have in that business is just it's going the right way for you and the decision on (inaudible) through the right one per se.
And then just want you to talk about hard choices, I mean the integrated gas opportunities but you indicate you’re going to sell the -- that you’re integrating to selling down now I appreciate you can't take everything but the allocation of capital here over the last five years is in many respect beyond belief and what I really struggle with is the sense of which in terms of decision Simon you are pushing into a region which have be -- if anything you do need to readdress, you do need to reconsider and you do need to try and d-capitalize in order to accelerate an improvement in cash flow in return, that’s question or that’s observation one and question one.
Question two is just Downstream, I really struggle looking at the numbers to understand where the major issues are in the manufacturing business? Are they as you've just -- Pat alluded to essentially the Gulf Coast it's the wrong --that position for the seed stock, they are going to remain disadvantage for as long as the WTI Brent, etcetera disconnect remains in place or until you can start feeding crew to that market or other issues elsewhere in the photo, but sitting on this is desk, it's not an impossible to get a sense of exactly what is going on that business and why the result is disappointing consistently as they have been?
Lucas Herrmann - Deutsche Bank
All right, you’re still there.
I’ll take them backwards and probably because the first was perhaps more to say belief than a question, but I’ll may be address it anyway. The Downstream where are the major issues, well the -- if you look at the capital employed are in the world we're in the U.S., where in Europe and we have probably less capital in Asia-Pacific. The Asia-Pacific assets are primarily in [Buka] in Singapore. That market is significantly challenge with negative processing margins to date and they've been negative to zero for quite sometimes though, they will need the ability to add value right through the chain that it make any sense running the refineries at all. And turning that situation around is going to be -- it's going to take some choices around which markets and how we load the unit.
The Australian refineries are already in the process of either closure also. In Europe, there are two major complexes in Rotterdam and in Germany. Rotterdam is doing considerably better in its operational performance, it is struggling at the moment in the sense of export to the U.S. is no longer an open opportunity probably because of the change nature in the U.S. on these stocks.
The Rheinland refinery in Germany is more challenged, but I mentioned there the change in the business model the way we manage these blocks of capital and the flow of value from customer backwards through to (inaudible) into their refineries. We are fundamentally changing the way we manage that. As a result of that imbalance of producing $1.6 million barrels a day, refining three, but selling six to our customers. That balance has changed quite substantially of with doing a bit of catch up in terms of business model and can't go with this managing the margin. So I wouldn’t say the European major blocks are at risk, but we have to prove to ourselves first that will allow also that we can make good returns of that. The U.S. is currently a tale of two stories really the (inaudible) Joint Venture has had quite some significant operational challenges. It is also configured for based on as I've just stated. The other refinery is in Deer Park which is also Gulf Coast but on the West Coast of Canada have generally perform well on both operationally and better financially overall. There may be other blocks of that debt capital but not necessarily inside the productive capital around the Downstream, but it's the large pieces of kit that I just talk through that the major contributor. We will have over $20 billion in the capital -- in the working cap in the Downstream, which depending on your accounting convention isn’t there in all that competitor. So hopefully that helps on the Downstream.
On the capital allocation, I can either confirm or deny the figures that you stated. However, the American business so that is in the huge exploration activity there as well, so that’s been part of the allocation and some of that is to Alaska.
That allocation to Alaska will be, it’s bit of a binary outcome, there is either bigger oil there or there isn’t, it’s the nature of the business but there is risk and hopefully, we will see that in not too distance future, whether that was money well spent or not.
I have talked about the Shell Gas, the Shell Gas, we created the large portfolio, it is losing money at the movement, still losing money in earnings terms that is slightly cash positive. It needs to become rather more cash positive and returning positive based on the strategic moves we are taking. And that is one thing, in fact, both the things we have talked about, but the Downstream and the Shell business and where we are heading on exploration, those are thing that we will definitely cover as that right now comes obviously.
The rest of the business, they all time is performing well and reliability improving, profitable, cash generative. The challenge there is the debottlenecking and we are ensuring the ongoing maintenance CapEx does not get to close to the cash generation from the asset, so the debottlenecking, et cetera will grow that business overtime.
Carmon Creek is an in situ heavy oil play. It is not standard because we have the access of the bitumen to the east coast, in fact its most like to be fully integrated play with the solvent require to move the bitumen coming from our own liquid-rich activities and Carmon Creek is essentially a gas to oil arbitrage because there is very significant gas going into the project, which will then go into effectively CHP scheme to produce the steam and export electricity.
So we are creating a core piece of energy infrastructure that will make money for many, many years to come. It is also the major player in situ, are only major player in situ but it’s an asset we work for many years.
So as I standalone material piece of business that could double from the initial 80,000 barrel a day. It is very much worth having in the portfolio. So it’s wrong to look at the Americas only and through one land. I didn’t talk about Brazil, but has separate potential if anybody will wish to go there. And okay, move on to the next question.
Thank you. The next question comes from Martijn Rats from Morgan Stanley. Please go ahead.
Martijn Rats - Morgan Stanley
Yeah. Good afternoon. And I’ll leave with one question. I just wanted to ask during the quarter there has been some newspaper coverage of large GTL facility in Louisiana and I was wondering, if you could comment on where we stand with that project and at the same time and then also includes the chemical cracker room, which I believe is schedule for Pennsylvania and the project for on the export and those sort of sweet types of investments, what do you expect in terms of FIDs over the next couple of quarters?
Over the next couple quarters, none, because none of them anywhere close to FID and but I’ll give you broader answer on that one, okay. Those three opportunities are all large scale investment LNG Canada, it will be the LNG, I think, that you mean. And there are all approaching what we call the concept selection stage before we go into final front -- the engineering design, front-end engineering feed stage before the final investment decision. We are already doing some of that detail design in LNG Canada, but we not have something, that’s only on the other two.
When I talked about choices in the integrated gas portfolio in front, deciding which one we take forward that’s precisely what I was referring to. We cannot afford to take all three together at once and if we could, I am not sure we have the engineers and the project managers to do so. So we will need to make choices which go forward.
At the same time, just on North America overall, we are investing in the Elba Island export facility, which is small modular, rapid and highly profitable. The gas-to-transport schemes go ahead with three of those also small and modular, a bit more risk of the profitability on those projects, because we’re looking to create a new market. But all of those and as I mentioned Carmon Creek are in effect, plays on gas price, a low gas price, high oil price arbitrage opportunity, so quite significant value potential for Shell. We don’t have to do all of these at once. We will not do all of these in the same time. Hopefully that helped. We’ll move on to the next question.
Thank you. The next question comes from Fred Lucas from J.P. Morgan. Please go ahead.
Fred Lucas - J.P. Morgan
Thank you, good afternoon Simon, just one question. Is Shell's strategy immune to the share price?
Thanks, Fred. To the point as always and no, but the share price reflects what we feel sometimes short term trends whereas if we are really to deliver value for our shareholders, we have to think longer than that. And I’m going to wind the clock back and I have never done it before that. But, I’ve seen all of the research and the analysis and say why the -- the returns were higher 10 years ago than they are today with higher oil price. The answer is simple. Five years focus on returns lead to a no growth activity and the next -- though the last five years, you’ve seen everybody had to bump up investments to get back to the point where they can afford to grow the dividends.
So 10 years ago, the returns were overstated; I would say they are understated, because everybody is carrying a greater than normally expected weight of not yet productive capital on their balance sheet. Now the actual return should achieve from this industry is somewhere in between. Now our aim, we deliver the cash flow growth, we’ll get our returns back into what we would say the competitive position. It will get there earlier than others because we started earlier. We need a belief that our best way of generating cash flow is a relatively consistent level of investment activity.
The actual cost of it may go up and down because it’s not necessarily directly related to that activity, but through cycle investment and through cycle cash flow growth. We’re not going to stop start, no matter where the apparent pressures may come from because that destroys the value. We leave the stop start for those who maybe -- do need to do it; we’re already back in a more sustainable level with choices. The acquisitions, they’re all significant this year. The divestments will offset the acquisitions. We will grow the dividend. We will do the buybacks to three cycles offset dilution and we will invest to the level where we get both the cash flow growth to sustain this for a considerable time to come and also there is a competitive return. And that’s what we need to do. Unfortunately if we read the headlines and made choices on 20, 30 year investments, I don’t think anybody will be anybody’s interests that we came up with that outcome.
Now of course the share price matters apart from anything else, it’s -- there are quite a few people in the company do own shares and impacts hugely the motivation of people in the company and they feel about what they do when they come to work every day. And in a word, it affects my job security. So perhaps the answer is yes. Next question.
Thank you. The next question comes from Peter Hutton from RBC. Please go ahead.
Peter Hutton - RBC
Good day, Simon. Can I just sort of concentrate a little bit more on the details as where you used the helicopter view? But on exploration writers; we saw a huge jump in the third quarter and on the record levels that 950 looking at the math. That’s a 750 on a year ago. Can you just talk us through some of the larger moving parts and that how much is that related to liquids rich shale and also how much of that was the (inaudible) in Australia, what proportion is that? And are there any implications on shale’s willingness to be 100% holder on major exploration wells in the future.
And secondly, you said Alaska drilling is effectively a binary option. There will be big oil there or there won’t and we will find out. Can you confirm that you are planning to drill in the summer window in 2014? Thanks very much?
Thanks Peter. Exploration here, we did actually give an indication this will be higher for Q3. It ends up being slightly higher than we had expected. The exploratory well was around the couple of 100 million. We also had write-off in, one in the Gulf of Mexico, in Qatar, in Norway, in Kazakhstan, not but not in the Kashagan concession but elsewhere, in French Guiana and we also had some of the shale gas developments in the [Zhuhai] activity in China. Interestingly, there was nothing really in LRS in this particular quarter.
More exploration is a good idea to build the portfolio. Unfortunately, it was particularly unsuccessful six months really because not all those wells were actually drilled in the third quarter.
Does it impact our willingness to go 100%, depends on the nature of the opportunity but -- let me just -- Libra is a buy end, most likely less than $1 of barrels, so massive world scale opportunity. We don’t have to go find more oil. We have to explore and appraise further that particularly opportunity. Over the next four years of the exploration appraisal process in Libra, that is almost certain to back out exploration opportunities that’s already in portfolio elsewhere because that’s of a high probability and a great certainty of development.
Therefore our willingness to go forward with high shares may well have been impacted a bit by success in Libra and we might also argue your first point, if we have not been as successful as we thought, we have to understand why not and that may also impact.
Alaska, the current intent is to submit the exploration plan for 2014 and beyond in the next few weeks. That will focus on the Chukchi which is by far the bigger opportunity, partly because we have taken on a third rig effectively to replace the Kalak in the short opportunities and in the [Beaufort sea] is very shallow and only the Kalak can actually operate properly there.
It’s quite likely we will not continue to repair on the Kalak, which may mean a right-off, few hundred million into the fourth quarter. It would be an identified item of course. So we have the two rigs. We need to go through and the intent clearly is to drill in 2014 but first of all we have to ensure that all are on equipment, all 25 or so are vessels that needs to be in the theater already and permitted to operate will be short of that sometime in the first quarter. And then we need the exploration plan and all the associates to permit in place before we start to drill.
The clear focus is on the Chuckchi, the Burger prospect and just to close the loop strategically, Libra, Carmon Creek and Alaska are all multi-billion barrel prospects. And just the Burger prospect below mapped in matches our potentials. Our potential share in Libra are higher, in fact Alaska is the biggest of those three.
So it is the most attractive asset and I said before, and I’ll say it for reputation purposes, the money we spent on Alaska so far will still be money well spent if those wells come in, those wells in the Chuckchi, if they come in on the pre-drill prognosis. So it’s high risk but sometimes in our industry that’s what we need to take.
So hopefully that gives you some feel for both the results in Q3 where we actually think this is one of the main reasons why we were below the expectations for those of you who are on the call, with higher exploration expense in the quarter.
We move onto next question please.
Thank you. The next question comes from Jason Kenney from Santander. Please go ahead.
Jason Kenney - Santander
Hi, Simon. Just going back to Libra while you are on the subject, can you confirm that Petrobras is paying its own share of the signature bonus in cash alongside your Q4 payments, which I think is going to be $1.4 billion at the unit. And then when would you expect first material spend on those -- (inaudible) production systems. I’m assuming beyond 2015. So it won’t be in your 2015 cash flow assumptions. And then the second question, what’s the chance that you’re actually going to cross that CFFO target at next year’s strategy day.
Thanks, Jason. And Petrobras, I mean, sorry I don't know about Petrobras whether they pay, we certainly do pay that there’s a little bit of a FX exposure which goes to payments in rise, but we expect it to be around $1.4 billion in the U.S. And the basic deal on Libra, this is full expiration appraisal price, as we committed to drill some well, issue some size making, prepare a development plan. So for the next few years on our account, it’s -- well, that’s in the next year probably below $100 million there after a couple of $100 million a year during that process at the end of which I’ll be able to answer the questions about what rates do we develop. It isn’t going to be many [CFFOs], many wells and investments probably over 20-plus years.
On the CFFO target the target themselves have not changed, we’ll give you an update obviously -- a fuller update in January, when we do the fourth quarter. I mentioned there have been headwinds to date in operational performance and going forward there are some headwinds and just recap Nigeria obviously Kashagan, not being up and running doesn’t help. Lower investment in the shale, the refining margins and all of these things will make that more challenging and therefore the need to ensure that the net investment doesn’t get ahead of us though and needs to balance the book and keep the shareholder resent perfected and enhanced will be paramount in those choices. But I can’t say anymore at the moment, it’s not something we reassess on a monthly or a quarterly basis. Thanks, Jason. Move on to the next question.
Thank you. Your next question comes from (inaudible). Please go ahead.
Good afternoon, Simon. I had a couple of questions. The first is potentially the risk of breaking over old grown, but I hear what you are saying in terms of net CapEx and the tough choices in the $55 billion number over the next couple of years. But is it not the case that for a company of Shell’s size and with the scale of its portfolio, in any one year they’re always likely to be options, unexpected options appearing where there is a signature bonus, a compelling preemption opportunity or an acquisition. So I guess the question is, in that sort of full year net, sort of investment target is that included in that and implicit bucket for these types of unexpected opportunities that arise and almost are too good to turn down.
And then, my second question is just one of communication, you’ve clearly being trying to give the market a greater guidance in the recent quarters and then I guess the market’s been unsuccessful in folding that it was way too pessimistic in Q1 has been too optimistic over the past couple of quarters, clearly you guys create consensus from analysts. But I was just wondering what this procedure is, is that once you realize that your numbers are significantly of variance with consensus whether you actually do consider putting out a comment with regards to either a profit warning or numbers being significantly ahead of forecasts. Thank you.
Thanks, Neil. And the good question the first one around the overall net investment level. There is an explicit -- an implicit allowance of acquisitions that is divestments across the full year period. The buses and trains don’t always come one every hour, so the preemption opportunity in BC-10, the opportunity for Libra, the Repsol asset; yeah, they were almost too good to me, that we got on those buses, is therefore not much of an explicit bucket left for the next two years and the opportunities will still come through. I would have to say, we will not ignore new opportunities going forward, but the bar to get through to be attractive relative to other options has gone up. It’s a higher bar because two reasons; one we’ve got some great options in the book by (inaudible) partly from acquisition and partly because of the need to ensure we stay within the financial framework. So there is no explicit bucket going forward, but we’re not out of the market for two years to the opportunities that do come along.
Our guidance, well, two things really, yes, I give guidance in this call. That’s the last guidance you will get for Q4. The guidance I just gave was relatively negative in terms of the levels of maintenance, both in LNG and GTL and the refining margins are not in a good place.
We give no further guidance and that’s one of the reasons that estimate presumably divesting from expectations. And going back to Q1, we are now head of the markets estimate. So our view is and will remain. We’ve given you the guidance. There will be updates during the quarter on anything that’s relevant such as issues in Nigeria, which is perennial. You see the gas prices just soar and it’s highly unlikely that we will ever make a profit warning ahead of results just because markets estimates are not where they are. Warnings are only against statements we’ve made, not statements made by analysts or anybody else who happens to guess what our earnings might be.
And to be honest, both of the last quarters were not that different from the guidance that I have given in the previous quarter. I’ve just acknowledged that our explorations like else were higher but not in the bigger theme and really big issue. So we have no intent to give different type of guidance and we are not really able to do so in terms of basic disclosure rule.
I know that doesn’t help you, we will try and give you as much guidance as we can in these calls and help you to understand the relationship between events and ultimate financial outcome in the short-term. But I would encourage all of you to look three to three months and think more about strategic delivery and reassess where we need to demonstrate what needs to be done in terms of growth and returns in that context. I have a couple of questions left, I believe.
Thank you. The next question comes from Robert Kessler from Tudor, Pickering, Holt & Co. Please go ahead.
Robert Kessler - Tudor, Pickering, Holt & Co.
Hi, Simon. Pleasure to hear, standing on this very long call. Couple of Downstream questions for me. One is, you mentioned some spots across the globe and I appreciate the overview where things are challenged, in Singapore, for example you kind of split up Europe into different pieces. But can you quantify any economic one cuts, where you are running for little optimal utilizations simply because of economic reasons not operational reasons?
Robert, not exactly. It’s difficult to hear actually that question on economic run cuts in the Downstream. Some of our facilities don’t run full flat-out, partly because of the economic but they are not recent economic run cuts and they are quite the opposite. The major shortfalls have been in the Gulf Coast area and in Europe where basically demand in Europe has not necessarily matched the capacity available.
And in North America, it’s more about the matching of feedstocks to the refinery configuration. But we actually saw a marked improvement as a result of some of the organizational accountability changes we’ve made on the full utilization of the European refineries. Hopefully that covers and that’s likely to continue by the way, the utilization improvement.
Thank you. Next question comes from Derek (inaudible). Please go ahead.
Hi. Thank you. Just going back to the exploration roll write-off, how does this compare to last quarter and could you quantify into that how much was runoff?
950 was written off, I think it was a couple of hundred million higher than last quarter and ideally, which shouldn’t be taken as an indication. It’s four times 950 and so it was a particularly high quarter. We expect it to be a reasonably high level in the fourth quarter but not in that kind of level. Ongoing exploration expense for the year is running -- which includes seismic and other activities is probably running for €4 billion I think at the moment.
One last question?
Thank you. The final question comes from Stephen Simko from Morningstar Research. Please go ahead.
Stephen Simko - Morningstar Research
Hi, good afternoon, Simon. I’ll ask just one question and that would just be, I don’t think you didn’t update on unconventional production in North America in a little while, at least in explicit detail as you have may be a few quarters ago. And I was wondering, I know obviously there is going to be a lot of movement in the portfolio or then let's call next few quarters, but with the spending times that you have today and the portfolio have today can you give some sort of -- can you give any color around where volume levels will be given the plan spending that you have, so not saying necessarily if you kept putting money into different plays that you are planning to invest but as a matter of just what the acres that you have today and spending that you are planning today for the next 12, 18 months, where your volume going to be going both with regards and/or [target], thanks.
Thanks, Steve. The production in the third quarter is about 320,000 which 55 or so of which was from liquid-rich areas, as that was about 340 at the beginning of the year, so we’ve been running down the gas basically and replacing it with liquids but not quite at the same rate. Going forward, the 55 will go down by something around 25 as and when we are able to sell the Eagle Ford asset, give or take, but we’ll go off as we invest in Permian and West Canada. The gas is likely just declined for a bit because we are not drilling really at replacement rate and we are reducing our investment pretty much to the lowest level that is appropriate to staying in the major basins.
So I can't give them because I don’t actually have them but those are the trends and that -- because the more important thing from the financial, they're getting the cost base right on both the operating cost and the capital cost of drilling those well, driving it down so that everything we’re drilling is okay at $4 and the prices we then realized and NGLs on the common side, so that’s where the focus is really, it's not a production thing, it's a financial outcome driven strategy and hopefully that with something we’ll be able to return to with the most positive views over the next few quarters.
Well, thank you very much for the questions. I appreciate it's a really busy day from any of you with multiple companies reporting, so thanking you for spending the time with us. As I mentioned earlier the fourth quarter results will be released on Thursday, the 30th of January 2014, hopefully there will be five others that reporting on the same day. Ben and I will be happy to you, all then, I look forward to that and thank you for joining. Take care.
Thank you. That concludes conference call. Thank you for participating. You may now disconnect.
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