Full Transcript of Amerada Hess’ 3Q05 Conference Call - Q&A (AHC)

Oct.30.05 | About: Hess Corporation (HES)

Here’s the entire text of the Q&A from Amerada Hess' (ticker: AHC) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Questions and Answers

Operator

OPERATOR INSTRUCTIONS. Here first question comes from Arjun Murti, Goldman Sachs.

Arjun Murti

Just on some of the production variances. It looks like third quarter, the variance, you have the hurricanes and the North Sea downtime and in the fourth quarter same thing plus I guess the JDA effect. It seems to us adjusting for that the production in all your other areas seems to be on track and doing fine. But maybe you can provide some comments on base production ex these impacted areas? And then just secondly, if you had any color or comments on the West Med development how you're thinking about development costs and timing of start up and that kind of stuff.

John O'Connor

Okay, Arjun, let me take that. I think you're right, we don't see any underlying unexpected declines or sub surface issues at all in any of the fields we've talked about. A little bit surprised perhaps at the extended duration of some of the turnarounds in the North Sea, but this is all surface equipment issues which can be obviously put right and we expect to see that. The pacing with which we bring back production in the Gulf of Mexico is also dependent on activities by others. And so we're being a little bit cautious as to the timing with which we can recover that production. But I think the most important take away is we're not seeing any impacts in the fundamental base production business. I would also, while I'm at it at the same time point to 2006 and remind everybody that we do have new production coming out with that property. That project is in the commissioning phase right now. The wells have been drilled, facilities installed and commissioning is occurring at the safe gas plant. Also of course the contract quantities for the JDA from January 1, 2006 will be 390 million cubic feet a day gross. As to West Med, obviously we're very pleased to have the opportunity to have the characteristics that that project will bring to our portfolio. Until the transaction is closed, and we expect closing to occur in the first quarter, I'd be remiss to comment on any specific detail on that. But I would point out again for modeling purposes, remember that we have traded current production in the Permian of some 6,000 barrels a day to access that long-term opportunity in West Med.

Arjun Murti

That's great. Then just to confirm I guess, the hurricane impacts I think we can all see and we appreciate that those are clearly out of your control. Schiechallion we should probably get back next year, the JDA cranks up, we'll lose some Permian production, we'll get Atlantic Cromarty, that's plus or minus how we should be thinking about '06?

John O'Connor

Yes, exactly right.

Arjun Murti

Thank you.

Operator

Your next question comes from Doug Terreson, of Morgan Stanley.

Doug Terreson

Congratulations on solid results. My question has to do with refining and marketing. Specifically in marketing between higher stations and flat gasoline volume per station, it appears that gasoline volumes in Q3 were probably pretty similar to that of Q2 of 2005. And so my question regards monthly trends in demand during the quarter, specifically the trend in consumption on a same-store sales basis during July, August and September if you have it. And any quarter to date information for Q4 2005 would be appreciated as well.

John Hess

That's a good question. Actually our sales were up for our Company operated stations somewhere between 5 and 10% same-store gallon per site per month. In terms of the c-stores themselves I'd say that was sort of flat because the hurricanes definitely have impacted operations in some areas. So at the end of the day I'd say trending up we get our fair share of the business. When things like this go on we try to stay open later and open earlier and as a consequence of that I'd say they're trending up. There's no major trend there I'd say because of the higher prices.

Doug Terreson

And John, those are quarter-over-quarter figures?

John Hess

Yes.

Doug Terreson

Great, thanks a lot.

John Hess

Year-to-date is similar to that, by the way.

Doug Terreson

Great, thanks a lot.

Operator

Your next question comes from Doug Leggate, of Citigroup.

Doug Leggate

A couple of questions. First, to John Hess, just a similar question on the retail. Can you give us some feel as to how your pricing policy worked during the quarter? Was this negative swing on the marketing earn predominantly you guys holding your prices flat? Is that a fair assumption?

John Hess

I think the best way to say it is we always try to make supply available at a price that is a lower cost than our competitors. So we try to price slightly below our competitors and have the supply available. As the colonial pipeline was prorated and certain areas had supply problems we went to a lot of efforts and I'm very proud of all the efforts of all our supply and terminal and marketing people in this to keep our stations full while others were running out. So that's one of the reasons I think for the increase in sales quarter-to-quarter if you will versus last year and the improvement. And yet at the same time we want to make sure we price lower than the competition. So the combination of those factors I think are the reason the revenues were what they were. And I think it's important to know that on an arm's length basis the retail was profitable in the third quarter. But what happens is our supply operations, there were times when both hurricane Rita and hurricane Katrina were going on where the Gulf Coast let's say would be $3 and the posting at the racks would be $2.30 a gallon. And there were those periods and that's the reason you see the marketing margin erosion that we show in the third quarter.

Doug Leggate

Is that bouncing back in the fourth quarter so far, John?

John Hess

Yes.

Doug Leggate

Second question is to John Rielly if I may on the balance sheet. John, I just want some clarity on what happens at the end of this year when the hedges essentially roll off significantly to the other comprehensive income line. Can you just tell us what the dynamics of that is going to be and the impact on your equity?

John Rielly

Sure. In the press release it lays out the year-by-year contracts that we still have outstanding. So what happens is each quarter as it's been going in 2005 we are rolling off a significant amount of the hedges, the existing hedges that we had on. So the number of contracts have been going down each quarter and will continue to go down each quarter based on that information you see in the press release. So what happens with other comprehensive income, all else being the same meaning prices, the accumulated loss that's sitting in comprehensive income will reduce each quarter as the contracts come off. Now prices move around, if prices move up it may mitigate some of that decrease on a quarter, but if prices go down it will cause the accumulated loss to go down quicker. So that's the basic dynamics.

Doug Leggate

Given the bulk of your hedge you'll roll off at the end of this year, will we see a disproportionate reduction at the end of this year on the other comprehensive income?

John Rielly

You will see similar as the after-tax impact that I spoke about earlier in this quarter you're going to see that same type of impact with these kinds of prices coming off in the fourth quarter. Then it all depends on the curve going out to 2012 versus the contracts that we have outstanding which are listed out in that press release. But yes, I mean again, you're going to see a good chunk of it come off in the fourth quarter.

Doug Leggate

Great. I guess my final question is to John O’Connor. John, there's obviously a lot of interest on the Pony prospect. Would you care to comment on any perhaps ongoing discussions to potentially unitize Pony with, or your block with the adjacent Knotty Head block?

John O'Connor

We always talk to partners and people with shared interests. I'm not personally aware of any substantive discussions going on, but there are always interactions between people operating in the same neighborhood, so to speak. So discussions will occur from time to time. I would think that there will be further discussions obviously depending on the outcome of the well once our Pony well reaches TD. I think that's more the time to look for discussions.

Doug Leggate

Gentleman, thanks very much indeed.

Operator

Your next question comes from Bruce Lanni, of AG Edwards.

Bruce Lanni

Just a couple of quick questions, both on the upstream. I may have missed some comments I think early on when you talked about the Malaysian Thailand production being down 12,000 barrels a day. Could you go over a little bit more detail about that and if it will go into 2006? And then my second question will be on the swap, the Permian basin for Egypt. Can you kind of outline what the capital outlays will be? In either words, Egypt versus the Permian Basin, are you going to be spending more per year both on capital and exploratory expenses? And what will be the impact on per unit operating costs as a result of this?

John O'Connor

Okay, Bruce. A fairly comprehensive set of questions there. Let me first of all address the JDA. The actual 20-year contract term for the gas at 390 million cubic feet a day takes effect the 1st of January 2006. In advance of that, in negotiations with the buyers and just to remind everybody on the call, Amerada Hess has 50% equity in the production and Petronas Carigali, the EP arm of Petronas Malaysia, has the other 50%, and the producers are responsible to deliver gas at the rail, at the platform to the buyers. The buyers are responsible and have constructed a pipeline to shore and have constructed a gas plant onshore to treat the gas to make it sales ready. The buyers have asked for an additional roughly 200 million cubic feet a day for nine months of this year or all told some 73 BCF of gas to be delivered. This is to be delivered under take-or-pay agreements, meaning if they don't take 73 BCF, they pay us and Petronas Carigali for the gas not taken. That is the situation. They started taking gas in February this year. The rates were within the range of the 200 million cubic feet a day. They constructed the gas plant and they started commissioning it in August. This is a three-month commissioning period. So August, September and October are the periods that they may have planned, they the buyers, TTM, have planned to commission their plant.

At the same time and overlying that take-or-pay for this early gas increased to 390 million cubic feet a day with effect from the 1st of September. So our expectation was that that 390, given it was contractual, would continue from the 1st of September through the end of the year. And it was with respect to that that we have reduced our forecast. So what we are saying is perhaps they won't take 390 million cubic feet a day. Right now, they are taking day to day between 100 million cubic feet a day and 250 million cubic feet a day, depending on their commissioning activities. If the commissioning activities can begin satisfactory at the end of October, then our projection will be too conservative. But at this stage, because we are not party to the plant construction, we do not have insights into the commissioning schedule. We simply respond as producers to the takes the plants ask for. We thought it was prudent to assume that through the fourth quarter. The takes will continue to be the same as those we have experienced in August and September. So that is the story on the JDA.

As I said in my remarks, we are not economically impacted in any event by the production number. So I would just like to point that out. If they don't take at the contract rate, there will be cash payments, etc. As to West Med, certainly, first of all, in our press release on West Med we pointed out that contractually first gas production from the block will occur in 2009. So there's a period of time to go between now and then. Secondly, until we made the press release, we really did not have access nor the ability to put together a constructive integrated project team. We are in the process of doing that now. So estimations of capital requirements at this stage would certainly not be sanction quality. I would just say, however, that this is a growth project. We will have 55% equity in it. It is a substantial development, and we will have a significant call on capital probably not noticeable in 2006, but more likely in 2007, 2008. By comparison, the assets in the Permian have minimal call on capital.

In terms of unit cost for the portfolio, this will be, certainly it will have the effect of reducing unit cost because of the type of development we will have. I don't think the absence of the small volumes in the Permian will cause a significant reduction, but the addition of 55% of the contract quantities for that gas in West Med after development costs that are likely to be incurred on the operating cost there will certainly be beneficial to unit cost going forward.

Bruce Lanni

Okay, great. So, in other words, what you just said, so the loss of the Permian, net-net your per unit costs are going to be the same up until the time production would start over in Egypt, correct?

John O'Connor

With respect to that swap. Of course, there will probably be other portfolio issues that will be affecting the cost too, starting up other production at the end of '06 prior to West Med. But the direct effect of the West Med addition to the portfolio, once it comes on stream, will certainly cause unit cost to come down.

Bruce Lanni

Understand, thank you very much.

Operator

The next question comes from Nicole Decker, of Bear Stearns.

Nicole Decker

My question is on unit costs. If I adjust the lifting cost for hurricane related expense I still note on a unit basis a higher cost year-over-year and sequentially. Can you just talk about how much of that is related to inflation pressure and how much perhaps is changes in your production profile?

John Rielly

Sure, Nicole. You did adjust for the production so you take out the $21 million from those production expenses and then you see the absolute costs are down from the second quarter. However, then when you're looking at the unit cost per barrel as compared to the second quarter, we have the volumetric issue in the third quarter being that we had the downtime from the North Sea maintenance and the extended shutdowns in the North Sea as well as the hurricane. So what ends up happening is you just have our fixed costs now being divided over a lower number of barrels, and that is going to drive up the cost of our unit cost per barrel. So it is a bit of an anomaly here in the third quarter. Now having said that, there is no question we are not immune to the cost pressures in the industry and the cost increases that are coming from the service companies in the industry. So we are having to deal with that just like every other company, but if you're specifically looking at the third quarter, it is a volume issue.

Nicole Decker

That is great. Can you quantify maybe on a percentage basis the inflation rate year-over-year?

John Rielly

It is difficult to do because you could look at individual contracts and you can see day rates on rigs and you can see numbers going up by a substantial amount, but then you have to factor in it is going to be a company by company type analysis of we had locked in some of our rigs for a good portion of time before really we saw the substantial cost inflation. So you try to average it all in, it is difficult, and it would just be a pure guess on what the inflation rate is for Amerada Hess, because you have to compare it from a capital standpoint and from our expense standpoint.

Nicole Decker

Okay. Do you still have a target range for unit cost going forward?

John Rielly

What we try to do is look at it from a competitive standpoint. So we are going to look at the rest of our competitors, and we want to be in the first quartile as we compare to our competitors. So again, it's this kind of price environment, and with the cost inflation you're seeing, it is very difficult to just set an absolute target. So again, we want to be competitive with our peers.

Nicole Decker

Okay, great. Thank you.

John Rielly

You're welcome.

Operator

The next question comes from Mark Flannery, of Credit Suisse First Boston.

Mark Flannery

I guess this is a question for John O’Connor. It is a follow-up really to Nicki's question there about cost. Could you talk specifically about the Okume Complex, which is entering a fairly high spend phase right now; how much of those costs let's say are already dialed in or controllable, and how much of those costs, that capital cost there, will you feel inflation acting on over the next, say, 12 to 14 months?

John O'Connor

Yes, great question. All of the total project capital exposure, somewhere between $300 million and $350 million of that has already been committed to the fabrication and other material procurement issues. That is going to continue to step up through next year as the facilities construction is finished and they're moved out to West Africa starting in December and through the first quarter with installation to occur in April. The drilling rigs required, we have two rigs contracted to drill the production wells, starting in the fourth quarter of 2006. I would say that they have been contracted, one certainly before the most recent one up in rig rate, so it is very competitive; the other just at the cusp as rates were beginning to move. So I think we are pretty well covered with respect to the inflation pressure we are seeing on costs in the industry. I think as John Hess remarked in his opening, our major projects are still on schedule with respect to time and on budget. So while it is, overall license fee is a $1 billion development, everything was contracted for and controlled before the run-up in prices.

Mark Flannery

Maybe I could just have a quick follow-up then. As you look forward into 2006 and you see costs rising, you mentioned rig availability impacting when you're going to drill one or two wells, is there anything at the edge of your portfolio that you are considering not doing because of cost pressures, or at least further deferral of the very marginal discretionary piece of spending?

John O'Connor

Great question. First of all, to give you some sense with respect to what John Rielly talked about, the primary driver I think that is going to significantly move the needle upwards in terms of cost exposure is in gen 5 deeper water drilling equipment. That is where we're seeing significant increases. We think we're covered through 2006, and that for the rigs we're starting to continue to use, the contract extensions will probably be negotiated late '06 into '07. And that is when I think we will see a significant increase occurring, depending on what the market is at the time, because they will be renegotiated at market prices. The equipment we are using now and next year, whether for our own purposes or whether in partnership with public operators, all of this equipment is being secured before the run-up to the $400,000 a day type day rates. So through 2006, I think we're not going to see the significant increases that are going to feed their way through in the industry over the next 18 to 24 months or so. I don't know if that helps.

Mark Flannery

Yes. No, that answers the question. Thanks a lot.

Operator

Your next question comes from Paul Sankey, of Deutsche Bank.

Paul Sankey

Given all the moving parts that we've talked about this morning, I wondered if you could give some guidance on fuel volumes for '06?

John Hess

We'd like to, but we're in the process of finalizing our program capital and our objectives for the year for '06, and we will give guidance in that regard as we normally do in our January fourth quarter conference call.

Paul Sankey

But I guess it has changed somewhat, but we're not going to get anything more at this stage?

John Hess

No, that's standard practice.

Paul Sankey

Sure. I'm going to ask the traditional demand question. How is, so far in October and post-hurricane, how have you seen through your service stations oil demand holding up?

John Hess

Oil demand is holding up.

Paul Sankey

Okay, good. I'll leave it there. Thanks.

John Hess

Thank you.

Operator

Your next question comes from Jennifer Rowland, of JP Morgan.

Jennifer Rowland

I wonder if you could comment a bit on the Port Reading earnings? It looks like those numbers would have been close to 50 million versus last quarter of around 7 million. Just wondered if you could talk about what drove that, if it was anything outside of margins, and then also what the outlook is for that sector going forward?

John Rielly

Sure. I mean, Port Reading did have a strong quarter. It really was marginal related, a clear expansion from the second quarter. You have to remember that the cracks are a little different if you're looking at Port Reading to Hovensa, it really is just a cat cracker unit there at Port Reading. So when you're comparing it to the second-quarter margins, they didn't move as much for Port Reading as they did for Hovensa in the second quarter. And in the third quarter, though, the margins really did expand, and that is what drove the significant increase in earnings.

Jennifer Rowland

Okay. Then I think you may have mentioned this earlier; I just missed the comments. On the foreign tax rate, it looks like it went up quarter on quarter to 50% versus last quarter at 43%. I think you had quickly mentioned two items, though, that impacted that. I just wondered if you could just repeat that.

John Rielly

Sure. Again, for overall E&P, we said at the beginning of the year that the rate we expected to be 43 to 45%. And what happens quarter to quarter, it is difficult to absolutely forecast the E&P rate because it is going to move around based on mix. So now in the third quarter, you had the hurricane, you were just talking on the foreign side, so you had the North Sea maintenance. So you're taking down our UK fields, which from an international basis have a lower tax rate than the rest of our production. And basically what happened is, especially with Norway, Norway became a much more significant component of our earnings overseas. And so from a mix standpoint, it just drove the rate up higher. But again, from an overall standpoint, we still are saying it will be 43% to 45%.

Jennifer Rowland

Then one last question, can you just remind us what your insurance covers you for, given the damage from the hurricanes?

John Rielly

Sure. Per event, so each hurricane is a per event, we have $400 million of property damage coverage. Each event has a $10 million deductible associated with that. So we were covered from a property damage standpoint. We do not insure for business interruptions in the Gulf of Mexico.

Jennifer Rowland

Okay, great. Thank you.

John Rielly

You're welcome.

Operator

Your next question comes from line of Paul Cheng, of Lehman Brothers.

Paul Cheng

John, over the past couple of months that we've seen a lot of the large E&P companies start making acquisitions on some smaller E&P names. When we're looking at Hess, you guys have a pretty nice profile there over the next several years. But on the other hand that your stock has gone up a lot over the past two years. And so one may argue that your currency, while it may not be perfect yet, but it's far more attractive than several years ago. When you're looking from that aspect, if acquisitions will play a role or a more meaningful role for you over the next two or three years, is there any particular area that you may think that that will be useful for you to quickly free up your present or that you're pretty satisfied with where you are, and you think the better course for you, at least for the next two or three years, would be organic?

John Hess

Paul, I wouldn't want to speculate in any way. I think the important thing about our company is we've worked very hard the last five years to position the Company to organically create value with our exploration and development program on a global basis, and it's creating a lot of value. So that's the best use of our money and the best use of our focus and we're not going to be distracted from that. We're just in the execution mode now and in the investment mode to grow our reserves the way we've outlined and grow our production in a very cost-efficient way, and we think that's the best use of our money. You always pay attention to opportunities on the markets, whether it's assets or companies. If things come along over the next several years that are accretive to our strategy, obviously we'll consider it at the time. But right now, we see better opportunities internal in the Company to grow our Company for the future.

Paul Cheng

I think that this one is for John O’Connor. John, for Egypt I know that you can't really comment too much before you close the deal, but can you comment a bit in terms of what kind of physical regimes that we may be talking about? Do you think that's under a PSC or gas realization? Is it linked to a certain basket or portable, how does that work?

John O'Connor

You're right, Paul, it is premature, and our intention is once we have actually closed the deal because we should remind ourselves that this is subject both to EGPC and to ministry approvals, which we will go to seek next month, I would certainly be more comfortable at a fuller disclosure on the moving parts of this once we are party to the agreement, because we are not yet party to it.

Paul Cheng

Okay. John, you gave a 320,000 to 330,000 barrel yield per day of production guidance for fourth quarter. Can you break it down by the three different regions, U.S., Europe, and others?

John O'Connor

That's pretty much made up Paul, from the comments I had in my opening remarks. What we have said is 12,000 barrels a day less than we had assumed for the JDA. And again, I would point out this is conservative. It assumes that the experience we have seen thus far in the commissioning of the gas plant will continue. And again, I will make the point if that turns out to be the case we are not economically disadvantaged because this is gas that is contracted for on a take-or-pay basis.

Paul Cheng

John, how does the accounting work? You're not going to book the income, right? It's just become a deferred revenue, I presume?

John Rielly

That's correct, Paul.

Paul Cheng

The cash that you will bring in, but income wise that you won't book yet.

John Rielly

That's right, until the production is delivered. We don't record the revenue until that time. So economically, we will have the cash, but from a book standpoint, we will not book the income.

John O'Connor

What I also talked about Paul, was the impact of the hurricanes, that in the fourth quarter that might be as much as 17,000 barrels a day average for the quarter. So between Southeast Asia and the Gulf of Mexico, if you add those two together, together with our projection, then the Schiehallion turnaround which is going to be a full scale turnaround in the North Sea is going to have an impact together with perhaps some minor other operational issues, the total amounting to about 9,000 barrels a day in the North Sea. So that's roughly the breakdown. Will all of it happen? Who knows. That's why we've given the range for the outcome for the fourth quarter, because there are a lot of moving parts there. Will production come up sooner in the Gulf of Mexico? It's dependent on repair of major gas and oil transportation lines in the offshore. In the JDA, will the commissioning suddenly result in takes of 390 or even greater, because we have the well capacity to deliver above the DCQ. So it's really quite a range, quite frankly, of outcomes likely. At this stage, I would say that we have projections such that we will not be below that.

Paul Cheng

What's the DD&A, unit DD&A and unit operating cost for the JDA?

John O'Connor

Just repeat the last part.

Paul Cheng

The unit cash operating cost and DD&A charge for the JDA operation?

John Rielly

When you're looking at it right now, Paul, we've got a start-up operation. And as John was saying, the nominations are moving around.

Paul Cheng

I'm talking about the ones that went into next year, that when the contract is firm and you start delivering in the full production.

John Rielly

So it's from a DD&A?

Paul Cheng

Both DD&A and cash operating cost on a per unit basis for the JDA next year.

John Rielly

I would say overall Paul, it's a general estimate it would be approximately a $7 DD&A rate. Again, that's from the acquisition costs associated with that rolling through on the DD&A. From an operations standpoint, it's a fairly low-cost type operation in the $3 to $4 range. So you're looking at a $10 to $11 overall unit cost.

Paul Cheng

And the gas part you realize there is about $4, right, right now per MCF?

John Rielly

What we have with the JDA, again there is a basket calculation to it, and it's clearly north of $3, and that's really what we've been giving out. It does move with the basket, but it's a nice price right now north of $3.

Paul Cheng

Is there a net effect on that basket? Is it a 12-month lag?

John O'Connor

Yes, Paul, that's exactly the point. There is a 12-month lag effect with respect to recalibrating the index. So as we move into 2006, price will be recalibrated, taking kind of the higher commodity prices that we have experienced in 2005. So the price right now is not an indication of current commodity prices. The price next year will be.

Paul Cheng

Okay, thank you.

Operator

The next question comes from Mark Gilman, of Benchmark Company.

Mark Gilman

I had a couple specific things if I could. First, John O’Connor, where do we stand on the Shenzi sanction, and can you give me an idea on timing on that? Secondly, you may not want or choose to answer, but let me give it a try anyway. On the West Med gas contract, is that a warranty contract or a reserve dedication contract, and are there take or pay features? Thirdly, John Hess, maybe you could comment on Port Reading or Hovensa turnaround activities planned for the fourth quarter and first quarter?

John O'Connor

I will answer your second question first and tell you that in January, hopefully, fingers crossed once we've closed the transaction, we will give you full disclosure and all the details, and hopefully by then we will master all of the details. So I'm sorry, you are going to have to be patient until hopefully January. We will talk about that at that time. With respect to Shenzi, the operator and the non-operating partners are well along with the development plan. I still look to see Shenzi sanctioned around the turn of the year. Will it be in the fourth quarter this year or first quarter next year? That is really a function of the diligence we are now doing as a partnership with respect to the case for the platform in the wake of the experiences with respect to offshore facilities and their reactions to Rita and Katrina. So we are taking time to go back and recalibrate the engineering calculations in the wake of experience from those two hurricanes, Mark, but I don't think that is going to be an extensive re look.

John Hess

In terms of turnaround work, nothing major planned for the fourth quarter, Mark, either at the Hovensa joint venture refinery or Port Reading. As you will recall, we had major turnarounds in the cat crackers at both facilities in February and March of this year, so they are in pretty good shape on a run rate going forward.

Mark Gilman

First quarter, John?

John Hess

No, in the first quarter of this year.

Mark Gilman

Next year, what are you looking for?

John Hess

Next year not so much the first quarter, but next year there will be some work in the Virgin Islands on two of the different crude units.

Mark Gilman

Thanks.

Operator

Your next question comes from John Herrlin, of Merrill Lynch.

John Herrlin

Pretty much everything has been asked, but I will throw some more West Med questions out for Mr. O'Connor. Apache was looking for kind of a $1 billion type development cost. Ballpark, are you still kind of thinking that range, or you'll answer it in January? Then my other question regarding that is laminated pay an issue at all at West Med or not?

John O'Connor

With respect to the capital, while I didn't have our own people as I said earlier give me their views on what the capital will be we do have an integrated project team at work now. They have visited in country. We do have to be somewhat circumspect, as I said earlier, because of the dependency on securing government approvals. I will say, however, that in relationships and partnerships with Apache in the past, they have got a pretty good pencil. And I think there is no reason not to assume that our work will come close to their cost estimates, whatever they may be. What was the other question, John?

John Herrlin

My recollection of West Med was that you were dealing with turbidites that were laminated pay?

John O'Connor

I think that the analog I would draw for you and one of the things that fit our pistol in terms of this acquisition is that the subsurface bears somewhat of a resemblance to the subsurface in Equatorial Guinea. We had a very, very able team of subsurface people, geologists, geophysicists and reservoir engineers, working that area now for a couple of years. We think we have very good insights into how to develop and manage fields of that nature. That gives us confidence that we will be able to bring a lot of expertise to the West Med development.

John Herrlin

Great, thank you.

Operator

Your next question comes from Ted Ivatt, Bear Stearns.

Ted Ivatt

I have a couple questions here. First of all, how will the production declines affect your free cash flow for the fourth quarter?

John Rielly

Obviously, with the production declines, it will lower our cash flow a little bit as the production is reduced, but no significant impact. We can obviously fund all of our CapEx requirements through either existing cash flow in the fourth quarter or the cash we have on hand.

John Hess

Obviously, another piece of cash flow is the capital expenditures, and some of the deferrals that John O’Connor talked about should work in a supportive fashion to keep the cash flow strong. But obviously, there are moving pieces there in the CapEx for the fourth quarter.

Ted Ivatt

So would it be fair to say you don't see any borrowing needs at all?

John Rielly

Yes, that would be fair to say.

Ted Ivatt

Second, will there be any impact in terms of your reserve replacement numbers or your reserve numbers at the end of the year based on all of this with these delays?

John O'Connor

No, absolutely not. This is all aboveground operational issues. If anything, we project that reserve bookings will be the same, and with production somewhat down from where we forecast, reserve life will likely increase as a consequence. So no, absolutely no negative impact on the reserves; no impact on reserves whatsoever.

Ted Ivatt

Okay, thank you.

Operator

Next question comes from Paul Tice, of Lehman Brothers.

Paul Tice

I guess my first one is for either John O’Connor or John Hess. Can you just give us an update on Equatorial Guinea, whether we're still on budget and on time? And then any latest color around the restart of Oasis in Libya?

John O'Connor

Paul, let me take the first question, and then John Hess will handle the Libya one. We are very, very pleased with the progress we have been making on the construction for the Okume Complex development. Part of that fabrication is being conducted in the Louisiana Gulf Coast and the Texas Gulf Coast. And fortunately, although the yards did receive some storm water, it was not significant, the impact to the fabrication. In fact, we're ahead of schedule. The fabrication in the Gulf Coast, both in the yards of Texas and in Louisiana. The TLTs are being fabricated at Samsung's yard in South Korea, and there again they are a couple percent ahead of the S-curve with respect to fabrication. We expect completion of those facilities early in February and flowed out and installation in April next year. Rigs have been contracted and will move to West Africa late in the third quarter to commence drilling in the fourth quarter. And as of this moment, essentially all of construction and materials and drilling and tubulars and linepipe, all of these materials have been contracted for. All are on budget with respect to the original budget developed 12 to 15 months ago.

Paul Tice

And how much remains to be, how much had been spent through the end of September, and what is left to go through the end of '06?

John O'Connor

The commitment, the spend earned by all of the fabricators and material suppliers through the end of September was about $300 million. I would expect a similar sum to be expended in 2006, but the shift will be towards installation contracts, transportation contracts, and drilling consumables.

John Hess

In terms of Oasis, our talks with the government of Libya are ongoing. Just to remind everybody, we and our partners, Conoco Philips and Marathon, as 41% owners of Oasis really worked with a national oil company and got a framework for reentry commercially and otherwise as of last December. And since then, it has been in the government's lap to give us approval, and discussions with the government are ongoing.

Paul Tice

Okay. Then just a couple of quick ones for John Rielly. I dropped off, so I apologize if you already answered this. Do we currently have a 2006 CapEx estimate?

John Rielly

No, we don't. We will be updating everyone on our January conference call.

Paul Tice

And the fourth quarter of this year, do we have a number?

John Rielly

For the fourth quarter, we had previously said our CapEx program will be 2.4 billion to 2.6 billion. What I can tell you right now is based, we were speaking earlier that some of our exploration wells in the Gulf are being deferred a bit as a result of the hurricanes. So I would guide you to the lower end of that range, but we still have that range for our forecast.

Paul Tice

For next year, you should be free cash flow positive. Any update in terms of your thoughts around the use of that free cash flow between CapEx and buying back debt or shares?

John Hess

Again, and it's a very fair question, the exact numbers we won't be able to give you an update on until the January call. Having said that, we have been very consistent in this. The first call on our cash is to grow our reserves and invest wisely to do that. The next call will be further debt reduction, and the third call would be current returns to the shareholders in terms of either dividends or share repurchases. But first it is going to be investing organically to grow our reserves.

Paul Tice

One last quick one. Hovensa, can you just provide an update in terms of the cash distributions? I think August of this year, there was going to be a decision about a payout or an actual cash distribution.

John Rielly

Yes. In August 2005, there was a cash distribution; on 100% basis was $325 million. So Amerada Hess' share was $162.5 million in the third quarter.

Paul Tice

And those are presuming annual; is that right, John?

John Rielly

They happen in February and in August.

Paul Tice

Thanks a lot.

John Hess

Thank you, everybody, for your interest in the call. We look forward to our call in January. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.

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