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Apache (NYSE:APA)

Q3 2011 Earnings Call

November 03, 2011 2:00 pm ET

Executives

Janine J. McArdle - Senior Vice President of Gas Monetization and Member of Risk Management Committee

Rodney J. Eichler - President and Chief Operating Officer

Roger B. Plank - President, Chief Corporate Officer and Member of Risk Management Committee

G. Steven Farris - Chairman of the Board, Chief Executive Officer and Member of Executive Committee

Unknown Executive -

Thomas P. Chambers - Chief Financial Officer, Executive Vice President and Member of Risk Management Committee

Analysts

Robert L. Christensen - Buckingham Research Group, Inc.

Pearce W. Hammond - Simmons & Company International, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

John P. Herrlin - Societe Generale Cross Asset Research

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

John Freeman - Raymond James & Associates, Inc., Research Division

Bob Brackett - Sanford C. Bernstein & Co., LLC., Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Unknown Analyst -

Operator

Good day, everyone, and welcome to the Apache Corporation's Third Quarter 2011 Earnings Conference Call. This call is being recorded. Today's presentation will be hosted by Mr. Patrick Cassidy, Director of Investor Relations. Mr. Cassidy, please go ahead.

Unknown Executive

Thank you, David. Good afternoon and thanks for joining us for Apache Corporation's third quarter 2011 earnings conference call. This morning, before the market opened, we reported third quarter 2011 net income of $983 million or $2.50 per diluted share. As disclosed in the release, Apache's adjusted earnings, which exclude certain items that impact the comparability of results, total $1.2 billion or $2.95 per diluted share. Cash flows from operation totaled $2.7 billion. On today's call, we will have 4 speakers making prepared remarks prior to taking questions. Steve Farris, our Chairman and Chief Executive Officer; Rod Eichler, President and Chief Operating Officer; Roger Plank, President and Chief Corporate Officer; and Tom Chambers, Executive Vice President and Chief Financial Officer.

We have prepared our usual detailed supplemental data package for your use, which includes a reconciliation of any non-GAAP numbers that we used, such as adjusted earnings, cash flow from operations or costs incurred. The data package can be found on our website at www.apachecorp.com/financialdata.

Today's discussions may contain forward-looking estimates and assumptions, and no assurances can be given that those expectations will be realized. A full disclaimer is located with the supplemental data package on our website.

With that, I will now turn the call over to Steve.

G. Steven Farris

[Audio Gap]

And development plays around the world during the quarter.

[Technical Difficulty]

G. Steven Farris

And I don't think I have to say good afternoon, but good afternoon, everyone. Again. We had a great quarter and as I mentioned in the silent part of this, it was -- we set a new record year. We had record production of 752,000 barrels of oil equivalent in a day, which is 50% was liquids. The bulk of that was oil. We had record cash flow, as Patrick pointed out, of $2.7 billion, which on an annualized basis gets us real close to $11 billion for the year. We reduced our debt by $650 million and we funded it our very ambitious investment program.

Rod is going to point out a little later, we had an excellent drilling results across the wide portfolio of exploration and development plays around the world during the quarter. And on the project side, we had achievements of positive final divestment decision on our Australian Wheatstone LNG development, a major long-term project with Chevron, it was a visible value over a long period of time, 20 years, with no decline in its -- it's based on oil-linked revenue. Importantly, Wheatstone is really a growth platform, which will provide us multiple additional phases of development that we can bring additional gas in from other discoveries in the Carnarvon Basin.

At the opposite end of the Pacific, we obtained a 20-year export license for our proposed Kitimat LNG project on the West Coast of Canada, which is the other long-term oil-linked project in our portfolio. And that moves us closer to our final investment decision there, which should hopefully happen first half of next year.

And on the strategic side, we announced the addition of ExxonMobil North Sea business. We added that to our North Sea portfolio, which is a major legacy asset, which has tremendous potential for value upside through the same things that we did at our Forties Field in exploitation capabilities and really geophysical technology.

All of that actually happened in a single quarter. Obviously, for us, it's very exciting but what's ahead of us is also very exciting. As market fluctuates, the cash flow strength of our portfolio and the robustness of our balance are key strengths of our company. We're in a position to build 2 major oil-linked projects, Wheatstone and Kitimat, because of the strength of our existing assets, and what Apache's do every day to focus on coming up with efficiencies and economic opportunities in which to grow our production.

Every workover and recompletion in the Anadarko Basin, and every discovery in Egypt or the Gulf of Mexico shelf, which is quickly tied in, turns into cash flow to help fund these long-term projects. And as we have launched one of these LNG projects, we're getting ready to embark upon the second one. And it's important to underline that we continue to emphasize our core business, which is bringing value out of our daily operations, which really enables our shareholders to be able to invest in these long-term projects. That, in the future, will provide steady visible cash stream for decades to come.

As I'm sure many of you are aware, we're also stepping up our exploration activity, and we have always been an exploration company. If you look at some of the things we've done in Australia, Egypt, and our international shales, all of those were key positions that we built through explorations. What we're now able to do with our enlarged financial and talent resource is to spread out a bit more and take more exploration risks. And you will to some of the elements of that strategy are already taking shape. And we're building a serious exploration business in the Deepwater Gulf of Mexico. We have 110 exploration blocks. We are now the largest acreage holder in the Cook Inlet of Alaska. We're running a big 3D seismic shoot there as we speak. Hopefully, we'll be drilling a well there next year. We're in the Deepwater Canyon. We're drilling oil prospects there next year also. We're an early mover in the unconventional oil play in New Zealand, which ultimately could provide access to about 1.7 million gross acres. All of these opportunities have the potential to be very material to our shareholders from a contribution standpoint.

If you look at our history, there is nothing new to any of this. Apache has added a new core area to its portfolio every couple of years over time and build a real business with real value in each one of them. We intend to continue to do that and as well, we continue to squeeze value out of our existing assets to recompletions, workovers and efficiencies.

And with that, I'd like turn it over to Rod Eichler, our President, Chief Operating Officer, to provide operating highlights, and I'd urge him to turn on his mic.

Rodney J. Eichler

Thank you, Steve. In the Permian, our production increased 3% sequentially, driven by strong drilling results than prior period adjustments. We operated 24 rigs during the third quarter with 132 new wells spud, and with initial completion operations started on 171 wells. This increased the level of completion activity has reduced our backlog of wells waiting on completion at the end of the third quarter to 71, which we will continue to work down over the next 2 quarters. The key focus areas of our activity during the quarter continued to be the horizontal redevelopment of legacy water flood units and the multizone zone development of Mariner's Deadwood area. We also continue to progress other plays and projects across the basin where we have about 3 million acres. One notable example is the horizontal climb play at Deadwood, where we have a very positive update.

After somewhat disappointing first test on the previous quarter, our second climb horizontal well came in flowing 325 barrels of oil per day, so 320 Mcf of gas per day after our 10-stage slick water frac and has produced 8,800 barrels of oil equivalent to its first 30 days. We anticipate completing 2 additional climb horizontal wells in the fourth quarter.

Moving to the central region, production increased 4% sequentially driven by higher margin in liquid drilling. We operated 9 rigs during the quarter and drilled 18 wells, including 7 Granite Wash, 3 Cherokee, 2 Hogshooter, 2 exploratory wells in the Bivins Ranch. For the year, the region is trying to complete 34 Granite Wash, 14 Cherokee, 11 Hogshooter, 8 Cleveland and one Marmaton well. The region's transformation from vertical to horizontal drilling has evolved over the last 2 years and now the region is targeting the liquids-focused objectives. Since the beginning of 2010, central gas production has increased 11% and oil production has grown over 200%.

Acquisition of a 240-square mile 3D survey is underway now across our Bivins Ranch new ventures play, while we had a 75% interest in 126,000 gross acres. And we are already seeing positive well results. Our first well tested over 700 barrels of oil per day from 233 [indiscernible] canyon wash pay. Two additional wells are presently drilling and we expect to be running 2 drilling rigs through the end of the year. In 2012, we expect to drill a minimum of 6 wells on the Bivins Ranch acreage.

Gulf of Mexico shelf production was down 4% sequentially, including downtime impact from tropical storms Don and Lee. All the fields affected by the storms are put back into service by the end of the quarter. Unrelated third-party downtime and natural field decline accounted for the remaining drop in production from the prior quarter. We operated 5 rigs on the shelf during the quarter and reached TD of 7 wells with 100% success. We are on track to deliver our target of 41 wells in the shelf this year and we are preparing to ramp up our activities further in this very profitable region in 2012 as the permitting process becomes more predictable.

We grew our block footprint in this region by over 40% last year to over 600 blocks and we have a deep inventory of exploitation of low-risk exploration opportunities ahead of us.

In the Deepwater Gulf region, production declined 11% sequentially due to some weather downtime and this timing of new projects coming online. We expect a full [indiscernible] decline in fourth quarter before 3 additional new projects, Mandy, Bushwood and Wide Berth, come on stream next year. Two of these projects were originally scheduled for fourth quarter first production, but is then pushed back due to third-party operator delays.

Our large development projects in Deepwater continue to move forward. Lucius is on track for its final investment decision before year end, and drilling of appraisal well Heidelberg is currently underway. We recently contracted a semisubmersible drilling rig and we are preparing for a deepwater exploration program in the Gulf of Mexico next year.

Gulf Coast onshore region production was up 2.5% sequentially on strong drilling results and new properties on production. We operated 3 drilling rigs during the quarter and participated in 17 wells. In Canada, production declined 3% sequentially driven by property divestments. We operated 8 rigs during the quarter and participated in 48 wells. Activities focused on oil and liquids drilling plays with 28 wells in Provost, 5 wells in Blue Sky, 3 wells in House [ph] Mountain area, 3 wells in Glauconite and one well in the Montney. In addition, we progressed our development plans for the Chinook play, which will start in the fourth quarter. And we move forward one more liquids-rich play within our enlarged acreage, the Gooseberry Sparky play, which alone could represent as many as 37 wells for us next year.

Natural gas production continue to be robust. Third quarter Horn River production increased by 18%, as compared to the second quarter that averaged 98 million cubic feet of gas per day net to Apache's working interest, with peak leaping into production approximately 122 million cubic feet of gas per day. Third quarter production levels don't reflect the benefit of our activity in liquid-driven plays yet. And a significant volume of the wells we have drilled that are put in Canada year-to-date are still low on production.

The Kitimat LNG project, which Apache operates with a 40% interest has made yet another important step forward with the award by the National Energy Board of Canada of a 20-year export license for a 2-train development of 10 million tons of LNG per annum. This approved throughput double the size of our additional project scope of one train. We continue to work toward our targeted final investment decision in 2012.

In Egypt, net production increased 4% sequentially, driven largely by drilling results. Gross production also grew, up 3%. We operated 25 rigs during the quarter and drilled 57 wells with a 93% success rate, including 7 successful exploration wells in the Faghur, Baharia [ph] and Abu Gharadig basins. We continue to have excellent drilling results in Egypt. We recently achieved a record level oil rate completion since we began operations in the Western Desert in 1996. This completion was an exploration well. The Tayim South 1-X discovery, which tested 8,200 barrels of oil per day. This oil found play in the Cretaceous AEB, Jurassic Safa and Paleozoic formations.

In the Abu Gharadig basin, a development well in the former BP assets tested its 7,600 barrels of oil per day and 1.5 million cubic feet of gas per day for the lower Baharia formation.

As an update on the BP assets of Egypt, we have drilled 16 wells with 100% success on the acreage acquired from BP last year. Since becoming an operator last -- we have increased oil production by 34% to 28,000 barrels of oil per day and gas production by 64% to 70 million cubic feet of gas per day. This incremental production has enabled us to fuel the export pipeline we acquired from BP to its current D-rated capacity of 70 million cubic feet of gas per day. We have also completed the [indiscernible] study on this pipeline and we expect to reroute it to 135 million cubic feet of gas per day in 2012 to repair works requiring about 6 months of downtime. This project will add a gross 65 million cubic feet of gas per day to our current export capacity and position us to significantly expand this capacity through looping further down the line.

Industry's opportunities of Egypt continue to grow, with 4 million acres now being offered a new licensing round in the Western Desert, the first in almost 5 years. The contractual framework to these 15 blocks on offer is the same one under which oil and gas operations have been conducted in Egypt consistently over the years. This is clearly a positive development for the sector and consistent with Egypt's strong lead for large continued investment by oil and gas companies to meet its energy needs. We are currently evaluating the blocks included in this licensing round.

Turning to Australia, production was up slightly from second quarter. Van Gogh production resumed at August and averaged a net 9,700 barrels of oil per day during the third quarter, up 1,000 barrels of oil per day sequentially. It is currently producing a 29,400 barrels of oil per day or 15,500 barrels of oil per day net to Apache. Swivel and compressor performance remain a risk to medium-term production levels, and we are finalizing a solution involving a shipyard remediation program now expected to take place in 2013. We operated one rig during the quarter to Australia and reached TD of 3 offshore wells, 2 of which have been completed as successful offshore oil producers. During the quarter, we achieved a positive final investment decision to our landmark Wheatstone LNG project in which Apache will participate with a 13% interest and which is now moving going forward. Wheatstone had monetized an estimated 2.1 Tcf and 42 million barrels of condensate from our operated Julimar and Brunello fields. Expected investment net to Apache for the combined upstream and LNG projects is approximately USD $4 billion in aggregate through 2016. Average net sells to Apache will be 140 million cubic feet of gas per day and LNG at prices peg crude oil indices 22 million cubic feet of gas per day of sales gas into the attractively priced West Australia domestic market and 3,300 barrels of condensate per day.

Importantly, Wheatstone is a platform for our future growth for the exploration in Australia. The project has already been environmentally approved for nearly 3x the size of this 2-train 9-million ton per annum per space of development. During the third quarter, we achieved final investment approval for yet another oil project in Australia, Balnaves, with gross peak initial production expected in 2014 at 30,000 barrels of oil per day through an FPSO. Apache's interest in the project is 65%.

Finally, we can see to progress our existing pipeline [indiscernible] projects. The Reindeer, Devil Creek our second domestic gas processing hub was 98% complete at the end of the third quarter and will be on stream at the end of the year. Apache's interest in this project is 55%. The North Sea region production increased 1% sequentially on exceptional drilling results despite some unplanned infrastructure constraints. We continue to operate 3 rigs, 2 platforms strings and one heavy duty jackup during the quarter and have drilled 15 Forties wells so far during 2011 with 87% success rate. We plan to drill 3 more wells before year end.

Then new Bravo to Charlie pipeline was successfully installed, allowing an extra 4,000 barrels a day to the export beginning in August. During the quarter, we announced the acquisition of Exxon's Mobil North Sea business, which will significant expand our opportunities set in the region with the addition of the Beryl complex as a second operating area for us. We also gained important midstream assets and an experience in talent organization that will present a terrific addition to our North Sea team.

As Steve mentioned and really the [indiscernible] of Forties has demonstrated Apache's expertise in exploitation of geophysics represents a unique fit for a maturing basin in North Sea, and we are very happy to have finally secured the right assets for our expansion there. We continue to work toward a year-end closing for this transaction.

In Argentina, production increased 3% sequentially driven by growth in premium-priced gas production. We operated 8 drilling rigs during the quarter and drilled 11 wells. One highlight of our activity was our resource delineation in our 1.7 million acres within the shale fairway in the Neuquén basin. During the third quarter, we got our first horizontal shale well introduction that reached target depth on 3 vertical wells that will also test the shales. Our first test, the ACL X2000 1H, was completed with 9 fracs on a 2,100-foot horizontal Los Mojos shale section. Initial production is 4.5 million cubic feet of gas per day, and they're selling the gas at $5.22 per Mcf under a Gas Plus contract. That early design in the fracture stimulating program for the other [indiscernible] wells that reached target depth during the quarter. A long and [indiscernible] data obtaining those wells have been very encouraging and our work continues as we appraise a very large resource in a market where it is very seriously needed. Tom?

Thomas P. Chambers

Thanks, Rod. Good afternoon, everyone. As Steve indicated in his opening remarks, record production set the tone for our strong financial performance in the quarter, with record cash flow and very good earnings underpinned by solid margins, results of a balanced portfolio and a focus on holding the line on costs. For the third quarter, Apache reported earnings of $983 million or $2.50 a share, up 18% on a per share basis from the year-ago quarter that's down slightly from the sequential quarter. Adjusting for the FX impact of deferred taxes in the previously announced charge for the tax increase in the U.K., we earned $1.2 billion or $2.95 per share, up 34% from the prior-year period.

Cash from operations before working capital items of $50.7 billion, our best quarter ever, was up 35% versus the year-ago quarter and up 2% over the second quarter despite lower realized prices. Our portfolio continues to deliver excellent results with oil currently garnering around 24x the price of North American gas, and our international gas portfolio exposed to rising gas prices, particularly in Australia and Argentina.

Our oil and liquids volumes currently make up 50% of our total production but account for more than 3/4 of our $4.3 billion in revenue. It's important to note that almost 92% of our liquids are crude oil, which sells for almost double the price of NGLs.

Further bolstering our revenue generation ability is the fact that nearly 75% of all our oil production receives Brent index or Brent comparable index pricing. This balance allowed us to post solid margins, despite market pressure, which decreased average price realizations by $2 of Boe or 3%. Cash margins of $46.23 per Boe were down less than 2% compared to the prior quarter's $46.96, while pretax margins which include DD&A were $30.26 per Boe versus $31.29 in the prior quarter. We continue to focus on margins and holding the line on cost. As evidenced, total cash cost of $16.29 of Boe decreased $0.40 from the prior quarter and we continue to integrate the prior-year acquisitions. As we mentioned last quarter, cash cost should remain in the range of around $16.50 per Boe given current strip prices for the remainder of the year. A detailed calculation of our margins, adjusted earnings and cash from operations can be found in the financial supplement located in our website.

Turning to the balance sheet. One of our core strategies is to maintain a strong and flexible balance sheet. Our ability to generate excess cash flow and prudently manage our spending has served us well in this regard. We have to date been able to increase our planned capital expenditures to $8 billion without compromising our balance sheet. Based on current prices, we forecast that not only will we have been able to increase our capital expenditures, but we will be able to pay for the recently announced North Sea acquisition and still meet our debt reduction objectives, all from available excess cash.

This quarter, we paid down $650 million of debt, bringing the balance at the end of the quarter to $7.2 billion which drove our debt-to-capitalization ratio down to 20.5% from 23% at the end of last quarter and 25% at year end. We believe this serves as a critical foundation as we head into 2012 and ramp up our significant long-term growth projects as you heard from Steve and Rod.

A key point I need to highlight for the third quarter is our effective tax rate of 52%. The largest impact to the rate was a nonrecurring charge of $274 million for our deferred tax balances as a result of the U.K. tax increase. This we told you about in our last call and wasn't active this quarter, requiring this retroactive adjustment. We recorded a total charge of $305 million in the third quarter, but $274 million is truly out of period, specifically $218 million of the $274 million resulted from the remeasurement of our deferred tax liabilities prior to 2011 and $56 million is related to operating results for the first and second quarters of this year.

This adjustment was partially offset by a $99 million benefit relating to the impact of foreign currency gains on our deferred taxes. Absent any impact of foreign exchange movements, which we really can't predict, we would expect our go-forward effective tax rate to be in the range of 42% to 44% and our deferred tax percentage to average 40% to 45% for the year.

To wrap up, we are building a [indiscernible] momentum, heading into the fourth quarter and into 2012. From a financial perspective, rising production, exceptional cash flow, a continued focus on delivering margins and returns and a strong balance sheet give us a solid foundation from which to build future growth and shareholder wealth.

And with that, I'd like to turn the call over to Roger.

Roger B. Plank

Okay. Thanks, Tom. At a time of seemingly unprecedented volatility, we take solace in earning high returns, netting a strong balance sheet and generating substantial excess cash flow. I'm going to update you today briefly on some new business at Apache that improves our lot and supports our ongoing objective of consistent profitable growth. Our North Sea acquisition from ExxonMobil is on track and slated to close at year end. All press right periods have run their course with no exercises, so we should benefit from the full complement of the incremental daily production of around 30,000 barrels of oil equivalent for all of next year. Keep in mind that 2/3 of this production is Brent price crude, currently selling at about $110 a barrel and the remainder is North Sea gas, which goes for around $9.50 per thousand cubic feet. So this is very high-margin production that will contribute meaningfully to our North Sea profits and cash flow throughout next year and beyond.

In Australia, during the quarter, we signed 2 new agreements to sell gas at prices substantially above our current realizations. While confidentiality precludes us from disclosing individual specifics, cumulatively, this new business will add approximately 45 million cubic feet of gas per day at variable prices linked to oil and to inflation. These agreements have built-in floor prices that are more than 2.5x our current average realizations of just under $3 per Mcf. The majority of this production is scheduled to commence in the fourth quarter of 2012 and ramp up into 2014.

Clearly, strong demands from mining projects is raising the bar for gas pricing in Western Australia. And whilst specific timing for these lumpy demand increases is tied to completion of major projects that is difficult to predict. We now have agreements covering -- agreements in place covering approximately 150 million cubic feet of gas per day at prices that are at multiple of current realizations. These volumes represent some 3/4 of our current productions that will come online between January of 2012 and year-end 2015. That makes for a nice bridge to 2016, which as you've heard, is the time at which our Julimar Wheatstone gas is slated to add another 160 million cubic feet per day of production.

After years in the making, the improvement in Australian gas market fundamentals is upon us, with first sales of significantly higher priced gas finally hitting our coffers beginning this January and volumes rising progressively throughout the coming decade. Consequently, Apache's Australian gas margins and profitability are on track to grow rapidly from here on out. As Steve indicated at the outset, 2011 is shaping up to be a record year for Apache across the board, but it is also a year that has laid a solid foundation for a strong start in 2012. Pat?

Unknown Executive

That includes our prepared remarks. David, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Leo Mariani with RBC.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

I wanted to follow up on other comments you made. Rod, you just talked about higher prices, starting in January 2012. I guess that's your range to your project. Could you give us an indication of what type of gas prices you expect to see there?

Roger B. Plank

Floor price is 2.5x in excess of $3, about 7.5. So north of that.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Okay. So now you'll see that on the range to your volumes. Can you remind us kind of roughly what those volumes are net to Apache?

Roger B. Plank

Well, there's going to be a commissioning period and it's a very difficult to predict exactly what the timing is. But we'll probably start with about 10 million cubic feet a day in January and ultimately, gross that -- that will rise to 100 million cubic feet of gas per day. How much of that takes place next year is uncertain, but probably the lion's share of it. And we have 55% of that quantity, if you will.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Okay. And can you guys kind of comment on the paces of permitting in the Gulf of Mexico? Just trying to get a sense of where your activity levels might be able to go next year. I know this year, obviously, they were certainly hampered.

Rodney J. Eichler

Well, in the, the shallow water area, things have moved along now. This year reveals [indiscernible] including well programs, and we're expecting similar performance next year to go throughout the program. The Deepwater -- things, of course, certainly are slower there since Macondo. Just to give you an idea in the Deepwater areas, it used to take about 45 to 60 days to get a drilling permit approved in the Deepwater. Now, using -- since Macondo, using the [indiscernible] actual data, it takes between 225 and 250 days to get a permit approved all in. So that's -- it's seen some slight improvements in and out of the year, but there's just more additional reorganization regulatory level and the ways to be seen, but that trend will be significantly improving in 2012. I mean, we have been getting permits on our projects, but it's still amazingly slow for the industry.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Okay. Question on Argentina, you guys talked about your first shale well, it sounded like a good result. Just trying to get a sense of what that well cost you guys to drill there?

Rodney J. Eichler

I'd have to look that up and have Patrick get back with you and the exact cost. I mean, these early wells are test-of-concept wells. I mean, we drilled pilot holes, take a lot of cores, we do a lot of petrophysical work, almost research side work and we understand the nature of the resource we are dealing with [indiscernible] because there are very few control points they've been targeting specifically for this shale. That's the purpose of one of the placement of the wells, the type of the work program we have. But I'll have Patrick give you the number after the call.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Okay. You guys talked about the Cook Inlet area, you picked up a lot of acreage recently. Can you talk about kind of what's some of your targets are next year? Is it going to be both oil and gas and just kind of give us a sense of the opportunity there?

G. Steven Farris

Frankly, we -- hopefully, by the midyear. We're shooting our 3D as we speak, actually. Hopefully, get to the first pass of some field cubes in the first quarter of next year. But that whole play is all about oil. I mean, we're looking at all the oil plays there and if you look at a [indiscernible] curve of the amount of activities that was in the Cook Inlet before Prudhoe Bay was found and afterward, it just goes flat. So truthfully, we're very excited about the potential of finding reserves with 3D seismic. There's been very little 3D seismic shot out there.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Fine. I guess, I've seen a press story somewhere. Let's talk about you guys looking at spending about $1.5 billion next year in Egypt. Any truth to that number?

G. Steven Farris

Well, I happen to be the chairman of the U.S. Egyptian Business Council and that was in D.C. at a council meeting. I think what I said is between $1 billion and $1.5 billion, which is about -- we're going to spend $1 billion this year and next year, it'll probably be the same. We got 25 rigs running there and we continue to be very active in terms of drilling wells and increasing production. Nothing's changed there, really, for us.

Operator

Your next question comes from the line of Bob Bracket with Bernstein Research.

Bob Brackett - Sanford C. Bernstein & Co., LLC., Research Division

Quick question on the Gulf Coast onshore. Can you talk about what sort of plays your targeting? And any news from some of the Southern Louisiana deep prospects?

Rodney J. Eichler

Our programs are -- they range across the coast from South Texas development programs, like at Chafford Ranch [ph], with gas plays around to the South Louisiana myosin plays. We currently have about one well in progress there outside operating at Shalamar and we have -- recently [indiscernible] acquired properties in the quarter from Phoenix, which we're beginning the planning for well exploiting, exploration drilling on those at current time. So we're cutting the early stages of our exploration out there in South Louisiana.

G. Steven Farris

Now that you have been there, I might just elaborate. We'll be looking for some of that deep gas in South Louisiana. We have a huge mineral acreage position there and we've got 3D seismic over. So there's a number of plays that are coming through there. I think that well that Rod mentioned is about 28,000-foot well that we are not operating in, but that's going to be a future for us there also.

Unknown Analyst -

And then another question. On Kitimat, with Shell acquiring some land around your position, have you looked at that property and said no to it and what do you think of them being in that neighborhood?

G. Steven Farris

Janine?

Janine J. McArdle

Yes. They've been in discussions that we understand for quite some time on that property. So we did not look at that specific piece of land. As far as being in that general area, we understand they've been looking in that area for quite some time and they will probably come on the end of this decade and we'll be sometime in the middle. So we're fine.

Rodney J. Eichler

What we're talking about, of course, is the -- specifically is wharf area, the landing area in the harbor, with Shell's acquisition in the former [indiscernible] properties. So we had similar land that we own by buying a similar industrial site adjacent to this. It provides us the same type of access. Of course, the actual LNG site itself is about 15 kilometers to the West of this coast, where our facility will be located.

Operator

Your next question comes from the line of Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

In the Permian, when you think about the horizontal opportunities and shifting to more of a horizontal strategy, do you see the Permian competing better for more capital relative to other opportunities within the company or do you just see redirecting more of the Permian's budgets towards horizontal drilling?

Rodney J. Eichler

Well, I'd say, a little of both. The Permian is a premier oil play in ore 48. It competes very effectively inside the company for its share of capital. And likewise, this year, we'll probably drill about 700 wells total in the Permian, of which about 40 are horizontals. Next year, I expect a similar number or perhaps more total wells and probably over 100 horizontal wells. So our program is definitely focused on increasing the number of horizontal drilling opportunities as the basin yields a large number of opportunities that are unconventional reservoirs that's suitable for horizontal exploitation.

Brian Singer - Goldman Sachs Group Inc., Research Division

Okay. So essentially, your viewing it as more incremental as opposed to reducing verticals, just adding to the budget and then doing more on the -- and adding to the horizontal?

Rodney J. Eichler

We're adding the horizontal, but it's like in the Deadwood area, we've drilled so many wells. In fact, we probably drilled about 200 wells there this year that we've really driven the cost down. So we get more wells per $1 divested in our drilling program by wide margin that we cut the drilling time almost in half in the last 30 months.

Brian Singer - Goldman Sachs Group Inc., Research Division

And then shifting to Australia on Van Gogh, what do you think the existing units can produce per day until 2013 when you begin the remediation?

Rodney J. Eichler

Right now, it's just performing in the last 60 days in about, typically, about 30,000 and 32,000 barrels a gross production in which we probably reflective of ongoing field performance on natural -- the other field recurring basis. So borrowing some mechanical upset, dealing with compression or the swivel of beyond that, expect to see a normal decline through that time period before heading to dry dock to do significant repairs to the vessel. That time, we'll be able to bring the vessel back into the field to not only produce Van Gogh but also tie into our constant field development, which is adjacent to the Van Gogh field.

Operator

Your next question comes from the line of John Freeman with Raymond James.

John Freeman - Raymond James & Associates, Inc., Research Division

Just a follow-up question on what Brian just asked about Van Gogh. I just want to make sure that I understood correctly because I think in the past, you talked about doing the remediation program next year and I just wanted to make sure I understood why it got pushed to 2013?

Rodney J. Eichler

Well, we did lot of work on the vessel this fall. We had a lot of downtime in 2011 in the second quarter associated -- in the first quarter, associated with these repairs. We've made good progress on those. [indiscernible] temporary repairs. They've got very good production levels exceeding our expectations. Those have been performing namely for the last 60 to 90 days. I think this kind of changed our approach. I really [indiscernible] the project going forward to the change from 2012 to 2013.

John Freeman - Raymond James & Associates, Inc., Research Division

So a sort of an increased confidence in the actual vessel?

Rodney J. Eichler

Now that's a good way to describe it, yes.

John Freeman - Raymond James & Associates, Inc., Research Division

Okay. And then back on the Permian, I apologize if I missed this, how many rigs are currently running in the Permian, is it still the 24?

Rodney J. Eichler

Yes, that's correct.

John Freeman - Raymond James & Associates, Inc., Research Division

And I know that in the past, at least, the constraint on trying to add more rigs in that area, a lot of it was on the people side. Is that still sort of the major constraint?

Rodney J. Eichler

It's a combination of both the equipment, as well as good qualified personnel, our experienced personnel. It's an industry [indiscernible] problem across the entire basin.

G. Steven Farris

And a little bit of it is capital because I can't say enough -- if you recall where we were a year ago, when we were talking about what 2011 was going to look like, I mean, we projected to pay down debt, we paid $650 million down this quarter. I think we paid $400 million down the quarter before that. Because when we bought BP, we put ourselves a goal out there to be at about $7.5 billion or thereabout the end of this year. And I think what you're seeing is, is we've been slow to ramp up that activity just because we've got other needs for cash right now. So I think for 2012, what you'll see is, is a start to increase the activity level there and then it will be subject to people and rigs. But right now, it's a capital constraint, though, because we're going to pay down debt first before the end of the year.

Operator

Your next question comes from Pearce Hammond with Simmons & Company.

Pearce W. Hammond - Simmons & Company International, Research Division

Steve, a question on Egypt. Just from your expertise [Audio Gap]

I'd love to see what you see as sort of the road paths for a formation of an elected Egyptian government. I think we're supposed to have elections in December, and then how do you see that happening? And ultimately, what do you think it's going to take to give investors more confidence in the Egypt story as it's been an overhang on Apache this year?

G. Steven Farris

Yes, I think what your going -- I think you're going to see, I think they've have announced here recently what the schedule is for the parliamentary and the Shura Council, which is the grand congressional oversight basically, like the Senate in the U.S., the Shura Council. And those are going to take place over a 3-month period, starting I think November 28 and they're going to stagger those across the country. So you won't see final Shura Council elections, I think, until about the middle of March. There is some question as to whether or not the Presidential election will follow immediately or will it be a little time afterward. So you're going -- it's going to be an evolution going forward. And I think, honestly, I think that is a very practical way to go about doing it, because they are evolving into a true democracy and I think you see it in everything that you do and I don't think like anything it's always up and to the right because there are times when things kind of get jagged. But in the scheme of things, they've done a very good job and I don't know why that doesn't continue.

Pearce W. Hammond - Simmons & Company International, Research Division

And then switching to the Gulf of Mexico, Deepwater Gulf of Mexico, do you think rig capacity could become an issue if Gulf of Mexico permits really start picking up? Do you think this could be an issue in '12? And how does it impact your plans?

G. Steven Farris

Well, I'll let -- Rod mentioned a little bit about the permitting. I think we've got our first exploration permit as Apache and we're securing a rig. The one thing I would say is, is that all of these things are connected to everything else because rigs are based on cost. And as you see more activity, you're going to see increased cost, you're going to see increased term, which means people are going to have to decide how in the hell they see that. So we're going to be active in the Deepwater. We haven't put that in our plans in terms of hard numbers because we're still trying to understand what's going on with permitting, et cetera. But over time, it is going to be a query from us from an exploration standpoint and the production standpoint. And what's happened out there really has been a benefit to us because we're learning something. And you got to go out into -- we're settled up to some good operators with Anadarko and some other folks. So we're very comfortable with where we are.

Operator

Your next question comes from the line of Doug Leggate with Bank of America Merrill Lynch.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

I'll try a couple of quick ones. First of all, jumping back to Egypt. Rod, you made some, I guess, some interesting remarks regarding the pipeline. I wonder if you could just elaborate a little bit as to the downtime you anticipate on specifically, I think you said there was room for looping in significant expansion. If you could talk a little bit about what that means in terms of your 100,000 barrels a day production target in Egypt? And I've got a quick follow up, please?

Rodney J. Eichler

With regard to how it fits into the 100,000 barrel they got, it's on top of my head, I'm not sure what that comp would be like. But to give you an idea, I mean, it's certainly be a positive addition to the goal itself and we've had some really good results of the drilling side this year that will add nicely to the goal. But the pipeline itself, after you had [indiscernible] and fully evaluate the [indiscernible] results, actually was a much better condition than we were expecting. There are about 2 dozen places along the line scattered across the entire 260 kilometers when that require well loss greater than 50% that require replacement. The total amount of pipes that needed to replace those, in aggregate, it's only about 4 kilometers of 24-inch pipe. The problem is we have to dig it up in about 25 different places to be able to install it, these limited sections of pipe to effect the repairs. But we're very optimistic that can be done in 2012. I mean, we're going to stay on working through the normal bureaucracy [indiscernible] tenders and everything would procure the piping equipment to get the job done as soon as possible. In the meantime, we're looking at moving the gas around other ways we have in the basin. Perhaps, [indiscernible] flow at our [indiscernible] 18-inch gas pipeline and move it back up. There's this plant up in the North, which we have -- where we have mileage. So there's a lot of possibilities. Ultimately, we will have the opportunity to reap the line. There's a possibility to increase the capacity to access the trunk line that's goes to upper Egypt, which is the main national Grid line, a 34-inch line that goes [indiscernible]. To be able to do that, we'll have to add a small amount of compression that the operated lines are sure [indiscernible] higher pressured pipeline environment.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Okay. So just to be clear, you're running ahead of that kind of the run rate of 100,000 barrels a day currently?

Rodney J. Eichler

I'd say we're making progress toward that goal. We've got 3 years, I believe, that these are ordered 45,000 barrels a day with 100,000 increment.

G. Steven Farris

And another way to look at world of plans for 2011.

Rodney J. Eichler

What our projected plan for 2011. So we're ahead of the longer-term goals too, Doug.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

AlL right. My follow up just real quick on the Permian. I guess, this year, you held your CapEx back a little bit and as you pointed out, your cash flow is well ahead of what you're going to spend. Where are you in terms of being able to step up the activity level in the BP assets that you picked up last year, and I'll leave it at that.

Rodney J. Eichler

Well, we still have a significant effort on bringing the BP assets in the door and integrating the land position, understanding exactly what BP owned and just what's interested the level of development. However, we're checking with plays on it [indiscernible] the way we return basis in places where we had drilling obligations, of course, they're the highest priority other places. We're not really focused specifically on the BP projects. It's really the best opportunities are to achieve the best value for the dollars we're investing. Of course, BP assets are significant part of our position in the Permian Basin, and I expect that we will continue to expand on those properties as time goes by. Right now, our biggest part of our development in the Permian has been focused in the Deadwood area, which is a former Mariner property. So it's bit of very core assets of 100,000 acres that we have to exploit that area.

G. Steven Farris

And then about 1/3 of our rigs are on BP properties right now.

Operator

Your next question comes from the line of John Herrlin from Societe Generale.

John P. Herrlin - Societe Generale Cross Asset Research

Argentina, you had a good well result, there are others to go. What kind of a program ramp are you going to get since you're getting higher gas prices than in the U.S.?

Rodney J. Eichler

What kind of a -- I didn't hear the second part?

John P. Herrlin - Societe Generale Cross Asset Research

Program ramp.

Rodney J. Eichler

Well, our program in Argentina is pretty much tied to our investment level and cash flow in that country at present time. But most of the drilling program is focused partly on our base development of our existing properties, which also includes horizontal drilling in our conventional reservoirs and where we have Gas Plus contracts. And another half is exploration projects dealing with testing the unconventional reservoirs in the [indiscernible] and block [indiscernible] shales principally. I expect to see additional wells, horizontal wells drilled in the shales as a follow up to this year's test-of-concept program in some of these concessions we have. And since we don't have the results of those key vertical wells yet and we won't be able to have those completions underway until probably really the first quarter next year, it's still hard to say what the exact global activity would be.

G. Steven Farris

I've mentioned, too, John that part of this Gas Plus program, this clearly recent program, so kind of gaining its sea legs. Here at floor, a lot of that Gas Plus has gone to quasi-government-owned type electrical generation companies. And now, it's starting to branch out into the rest of industry. So we're very pleased to see of late that's beginning to take hold within a broader industry within the country. And as that continues to pick up, then there'll be more and more of that Gas Plus market that we'll be able to tie our production into.

John P. Herrlin - Societe Generale Cross Asset Research

With the Deepwater Gulf of Mexico, Steve, you're going to have your first Apache-operated well, you have some non-positions, should we expect just a couple of wells a year in total for Apache overall, on a going-forward basis?

G. Steven Farris

Well, don't know in total. Certainly, you probably are going to see a couple of operated wells -- I mean, a couple of operated wells out of us a year and then whatever our activity level is from our non-operated.

Operator

Your next question comes from Robert Christensen with Buckingham Research.

Robert L. Christensen - Buckingham Research Group, Inc.

On Egypt, again, should I read into the high level of activity there what 23 rigs, almost the same as what you got in the Permian, as a indicator as to your confidence that things will remain constructive and then your comments just now about the new concession not much different than previous concessions. Should we take this all to mean that the confidence, your insights are good for continue business there?

Rodney J. Eichler

From an operating standpoint, it really is, really it's been business as usual. Right through the revolution, the week of the revolution, you can look at our production curve over the last 12 months you'd be hard pressed to point at the curve and say when you think the revolution take place. We've had growing production, as I indicated. So the bureaucracy there is a little slower than normal, I have to say, because there's some confusion again on [indiscernible]

[Audio Gap]

following the concession agreements as they always have and the field operations continue as they have and this announcement is a good round. We haven't had a lot of those for a long time [indiscernible] because this is very encouraging and the terms of government [indiscernible] out are consistent with a big round we've seen in the recent past, including the blocks we have ourselves. So these are all good signs. For the financial standpoint, they haven't missed a beat [indiscernible] on paying us or permitting around our exports for our contracts, everything is working very nicely.

G. Steven Farris

Then I must just add that one difference between Egypt and other countries around them is Egypt really uses all this product in the country that have tremendous growth and use of domestic natural gas about 12% per year for over 5 years. They are right on the cusp of having to import crude oil, they actually import products now. So they need companies that invest in refined oil and gas and we've had a very good relationship there.

Robert L. Christensen - Buckingham Research Group, Inc.

Final question if I may. One company large E&P in the United States, which is yet to do a JV on its properties is indicating a JV possibility on its properties. They're well healed, you're well healed. Has that been a consideration of Apache to accelerate your activity on such a big base of properties that you have and was augmented last year? I mean, how do you think about those JVs?

G. Steven Farris

I don't think about it. And I don't mean that -- I think that they have a role for some companies and in terms of the way they want to invest, that's really not something that we do. And we have more than opportunities that we can fund right now to take the Permian and what we're doing in Anadarko and what we're doing in Canada. And the stuff that we're doing in the Deepwater, we've got -- we're opportunity-rich and we've got to find what places that we really can add value and that's not looking for [indiscernible].

Operator

This concludes the question-and-answer portion of today's call. Mr. Cassidy, do you have any closing remarks?

Unknown Executive

Yes. I want to say thank you for participating in the call today. A replay of this webcast and a podcast of the call will be archived on Apache's website later this afternoon. The conference call will also will be available for delayed playback by telephone for one week, beginning at approximately 3:00 p.m. today. And that's it.

Operator

This concludes today's conference call. You may now disconnect.

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