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Executives

John G. Langille - Vice-Chairman of the Board

Allan P. Markin - Chairman of the Board

Steve W. Laut - President & COO

Douglas A. Proll - CFO & Senior Vice-President, Finance

Real J.H. Doucet - Senior Vice-President, Oil Sands

Analysts

Brian Dutton - Credit Suisse

Martin Molyneaux - FirstEnergy Capital

Steven Calderwood - Raymond James

Peter Ogden - National Bank Financial

Barbara Betanski - UBS Global Asset Management

Robert Plexman - CIBC World Markets

Canadian Natural Resources Ltd. (CNQ) Q1 FY08 Earnings Call May 9, 2008 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Canadian Natural Resources First Quarter 2008 Conference Call. I would now like to turn the meeting over to Mr. John Langille, Vice Chairman of Canadian Natural Resources. Please go ahead, Mr. Langille.

John G. Langille - Vice-Chairman of the Board

Thank you, operator, and good morning or afternoon as the case may be. Thank you for attending this conference call giving us the opportunity to review our first quarter results for 2008 and review the development of our projects.

Participating with me today are Allan Markin, our Chairman; Steve Laut, our President and Chief Operating Officer; Doug Proll, our Senior Vice President of Finance, and Real Doucet, our Senior Vice President of Oil Sands.

Before we start, I would like to refer you to the forward-looking statements contained in our press release and also note that all dollar amounts are in Canadian dollars and production and reserves are both before royalties, unless otherwise stated. Before I turn the call over to Allan, Steve, Real, and Doug, I would like to make a couple of initial comments.

Our cash flow was very strong in the first quarter as we saw a number of things. Firstly, our production volumes were all within our budgeted guidance in all segments of our business. The sale price of oil remained strong throughout the quarter. The sales price of natural gas began to show a strong recovery, and both the price of oil and natural gas have continued their strengths beyond the first quarter, resulting in very beneficial strip prices for our commodities going forward. The differential of West Texas intermediate price for heavy oil narrowed as crack spreads were at a level to influence the demand for heavy oil and we continued to control our cost.

This resulted in our first quarter cash flow almost equaling our CapEx, which is not usual in the first quarter of the year, as we direct more CapEx to our winter-only drilling areas. As a result of this strong cash flow, our balance sheet continues to improve and we ended the first quarter with a debt-to-book capitalization back within our targeted ranges.

Early in 2008, we made the decision to increase our total forecasted CapEx on the Horizon Project to protect the targeted completion date of Phase 1. Project continues to target first oil in the third quarter of this year. Realizing that target of course will result in very strong future cash flows from the sale of synthetic crude oil from this mining project.

Alan, would you like to make a comment or two?

Allan P. Markin - Chairman of the Board

Yes. Thank you John. Good morning everyone. It has been a good start to the year for Canadian Natural. Operationally, we had an efficient and well-executed winter drilling program that was completed well in advance of spring breakup with all budgeted wells drilled and all planned tie-ins completed.

The continued benefits of our high graded natural gas drilling program were seen as expected, as we maximized the value of every dollar spent with focus placed on efficiency and execution. Our crude oil drilling program also produced good results, particularly at our Pelican Lake operations and our heavy oil projects continued to be some of the highest returning projects within our portfolio of assets, and we look forward to the developments at Primrose East, the next step in our thermal expansion plans.

Overall, our conventional operations produced to our expectations within original budgets. All went as planned. We were faced with some weather-related challenges during the first quarter with several weeks of extremely cold weather conventionally and at our Horizon Project site. Once the weather became warmer, efficiencies improved as expected, and the project continues on schedule for first oil targeted in the third quarter of this year. We are mindful, however, that a significant amount of work remains before first production. That being said, I have the confidence in our team's ability to work through these remaining challenges and any new ones that may arise.

Our long-term objectives have been changed... or have not changed. The first quarter of this year was a good example of that. We are committed to consistent value creation for our shareholders through efficient execution, long-term growth opportunities and capital discipline. We have the people and the projects in crude oil, natural gas, as well as the oil sands that once again affirm that we are the premium value defined growth independent. Thank you.

Steve W. Laut - President & Chief Operating Officer

Thanks, Al, and good morning, everyone. As both Al and John have pointed out, the first quarter was a strong quarter. Production was at the midpoint of guidance for gas and near the top end for oil. Costs in our conventional business are on track with the budget. At Horizon we are tracking well within our revised cost estimate. Also at Horizon, we are making good steady progress with start-up targeted for Q3 2008. I think that's the third time you've heard it already. You'll hear it a couple more times before we are done.

Briefly updating you on each of our products, starting with gas. Our gas assets are strong and our production rates are looking good. Our Q1 program was right in line with our expectations both on the rate and cost side. Considering we drilled only 161 gas wells in Q1 versus 201 gas wells in 2007 Q1 and 452 gas wells in Q1 2006, our gas volumes have held up remarkably well. Our Q1 gas drilling in 2008 was actually only 35% of the wells we drilled in Q1 2006.

With the recent increase in gas prices, the relative economics between gas and oil has improved, particularly in BC. In Alberta, it's a different story. Alberta government will receive 75% of the price increase for a normal conventional gas well in 2009. In other words, as gas prices have gone from $6 to $10, $3 of the $4 increase will be paid to Alberta in the form of royalties. The message here is, although the gas prices have gone up, the price increases producers see at the wellhead is significantly less in Alberta than in BC.

As you know, Canadian Natural has a deep inventory of gas locations, a dominant infrastructure, and very strong technical and operational teams that add significant value from our gas assets in a relatively quick and effective manner. Clearly this turnaround will be delayed in Alberta until significantly higher prices are realized. Fortunately for Canadian Natural, our asset base is well balanced and our inventories in oil are as deep or deeper than our gas inventories. This is where the majority of our capital will be allocated as we move forward.

Turning to oil in Canada and particular heavy oil and thermal heavy oil, which in our view is the most undervalued and under-appreciated asset in our portfolio. The Primrose East development bringing on 40,000 barrels a day of heavy oil is on cost and on track with the first steam in late 2008 and first oil in early 2009. Primrose East is the second phase of our defined program to bring on 325,000 barrels a day of incremental oil from our vast thermal oil assets. At Kirby, our 45,000-barrel a day third phase, is in a rig [inaudible] process, approval is expected in 2009.

As you know our defined program, which will add 325,000 barrels a day of heavy oil from a vast resource of assets, is really unmatched and will add tremendous value to Canadian Natural shareholders. Higher pricing has dramatically increased that value as well and of these assets. It's ready to take another step though, a significant step, with pipeline access to Gulf of Mexico refining markets. Canadian Natural expects at least one of the four pipeline proposals to be completed and on steam likely in late 2011 or early 2012. This will normalize the differentials between the Midwest and Gulf of Mexico, adding value to all heavy oil producers in Canada.

At Pelican Lake, our world-class pool with 2.8 billion barrels in place, we have a significant resource. With the polymer flooding, we can take recoveries from 5% up to 25% on an incremental 550 million barrels of low cost incremental oil. Our polymer flood expansion continues on track and is delivering as expected. Our polymer flood will add significant value for Canadian Natural shareholders.

On the heavy oil differential side, we have seen a marked reduction, as John mentioned, in differentials in March. That has remained through April and May, having a very positive impact on Canadian Natural's cash flow in Q1 and will have an impact in Q2. Our heavy oil assets are vast, pricing is strong with additional pipeline access to new markets and our well-defined plan, the future looks very bright for this undervalued and under-appreciated jewel in our portfolio.

Turning to international operations which provide light oil balance and some of the highest return on capital projects in our portfolio. North Sea production was steady in Q1, will remain pretty much flat for 2008, with some reductions expected with turnarounds in Q2 and Q3. Today, we're in a major turnaround in Ninian South for 21 days and that will be completed in May. We continue to implement our mature basin strategy by optimizing water floods, in-fill drilling, work-overs and re-completions to maintain production capacity, adding reserves and extending field life.

In Cote d'Ivoire, the deep-water rig has arrived at Baobab and has began the restoration of production from the five wells shut-in due to sanding issues. We have a one-year contract with the rig and depending on the effectiveness, anticipate to bring on a minimum of three of the five wells shut-in due to sanding. Currently, we have eight to 10,000 barrels a day of capacity shut-in. Our Olowi development in Gabon is on track. A jackup rig has arrived last week, well ahead of our expectations, and the rig will drill two delineation wells before it sets up to begin drilling of platform production wells. The FPSO is under construction in Dubai, wellhead tower is in Virginia, and we are on schedule with first oil expected in late 2008, early 2009, ramping up to a 20,000-barrel a day plateau.

Now before I ask Real to give you an update on Horizon, our world-class oil sands project, I'll make just a few general comments. We have, as you know, over six billion barrels of oil developed at Horizon. Phase 1 is nearing the end of construction with start-up on track on target for Q3 2008. Phase 1 will produce at 110,000 barrels a day. We have broken Phase 2 and 3 into four tranches. The first tranche is complete and the second tranche is underway and the long lead items for Phase 2 are 3 are ordered. In fact, the coke drums and the hydrotreating vessel rings are on site. Phase 2/3 will take us to between 230,000 and 250,000 barrels a day of light sweet 34 degree API crude. In addition, we have plans for phases 4 and 5 to take production to just under 500,000 barrels a day or half a million barrels a day of light sweet crude with no declines for 40 years, creating tremendous value for Canadian Natural shareholders.

We're now in the Phase 1 homestretch with a tremendous amount of effort and focus being expended by our teams as we push for mechanical completion, pre-commissioning, commissioning, and getting ready for operations. Overall, we're on track and we will be ready for our targeted Q3 startup.

With that, I will turn it over to Real to bring you up to date and comment on our plans going forward. Real?

Real J.H. Doucet - Senior Vice-President, Oil Sands

Thank you, Steve. Yes, indeed we have achieved 94% progress on the project in the first quarter now. So, it is on target and we have on the engineering side now, of course, totally completed. The engineers left onsite right now, are helping in the field construction. On the procurement side, we have all the equipment onsite. We have also in terms of heavy load pretty well everything onsite except few truck and shovel components right now. On the close-out of the contract, we're over 30% closed out now on all the contracts we have, as you know, we have about 600 contracts onsite, so we're winding down that as well.

So, on a modularization, all the oversized loads have been installed already and we're into finalization of piping. The major effort right now is really into hydro-testing, pipe blowout kind of thing… air blowout and few other walk down the plant side with the operators and so on. So, on the construction side, the overall construction progress is 91%. Starting with the mine, in overburden removal, we have moved 56.7 million bank cubic meter already, which represent about 80% of the total to be moved, and we are on schedule for that one. We already have commissioned trucks and shovels also for the mine. We have completed the Tar River Diversion and the Fish Habitat construction that we had awarded to our own mining crew. So, the mining crew now is back into doing overburden and that's the thing also with the contractor.

We are substantially completed now in the extraction plan, and in the first quarter, we have introduced water to the plant, that’s all the pipes and the pumps and so on. We have completed also the constructions on two tanks on the tank farm, on the East Tank Farm, which are now filled with diluent for the startup. So, we have 190,000 barrels of diluent now ready for the startup of the plant. We have installed three nitrogen storage tanks and completed all the pipings and the systems, control systems, and so on for the nitrogen plant. It is now ready and commissioned. So, it is available to each area. We have installed the auxiliary boiler in the co-generation plant. We have the warehouse fully functional now and we have close to $5 million worth of inventory in them already for the sustaining operation.

We have energized the last two substations, sulfur recovery and the gas reading substation, on the plant side. So, all the substations, all the power distribution is completed, energized and commissioned. So, it is also available for each area for startup. We have also substantially completed the construction of the aiming plant and we're moving that plant now into pre-commissioning. We have started also the construction of the sulfur pipeline, which, as you know, we're going to do some sulfur blocking and that also will be complete on schedule. And we have completed a lot of piping right now on heat integration, pretty well done and we're starting the walk-down on that area.

All in all, we have over 100 systems that have been commissioned, tested and everything and the majority of them are in operation right now. So, indeed we have started the commissioning of our plant already in January and we're continuing right now. That has been completed to date, so we have all the fire, water distributions and also energized and operational, the portable water treatment plant, the permanent sewage treatment plant, the natural gas pipeline, the raw and recycle water pipeline, river water intake and pump house, the raw water ponds in the pump house, recycle water pump with this pump house, all the electrical distribution. We've the tank also to be able to put the plant in circulation. We have the main piperack also that has been energized, the air, the water, the gas, the powers, all right now live in the piperack. So, the instruments and the utility air also right now is operational for the area who needed it.

So, we're forecasting now for the second quarter of '08 to have the extraction commissioned, the flare system, the steam in the coal generation plant, the cooling and the heating integration plant, the delayed coker and the diluent recovery unit, the hydrogen plant, the gas reading and the sulfur recovery, the West Tank Farm also which is an inter plant, intermediate kind of tankage, to be able to put the diluent and the DB, the sulfur blocking pipeline and the synthetic crude oil product pipeline. So, what we're going to have left for Q3 is the oil preparation plant, the froth treatment plant, the coal generation on the power side, the pipeline corridor, hydrotreater, and whatever other things that are remaining in the East Tank Farm.

So, right now, the plant is vibrating. There are a lot of activities out there. It is really high focused at this time to make sure that the plants are running well. We're doing a lot of walk-down and we're checking all the equipment instrumentation and by the way, the control room, which is controlling and managing the entire plant, is fully operational right now. So, all the pumps and pipes and valves and so on are controlled by the control room at this time. So, we are well and true right now to finish the commissioning and having first oil in the third quarter of 2008. We have reallocated some resources already to Phase 2/3 on the engineering side. We are in negotiation right now with some engineering firm also for the detail design for Phase 2/3. We have awarded already several contracts, major contracts, into Phase 2/3.

So, that's pretty well where we are right now and we're looking forward here to produce oil in the third quarter.

Steve W. Laut - President & Chief Operating Officer

Thanks Real for that great up date. As you can see, we have made good progress at Horizon as we prepare for the target Q3 startup. With the startup of Horizon, Canadian Natural will take a major positive step in our ongoing evolution. Horizon will shift from a large consumer of our conventional free cash flow to a large sustainable contributor to Canadian Natural's cash flow. As a result, our balance sheet will strengthen quickly. Cash flow available to allocate to capital projects will increase dramatically, allowing Canadian Natural not only to unlock the huge value associated with future Horizon expansions, but the significant value in our high quality conventional assets.

We are in great shape and we're in an enviable position. Our gas assets are strong and poised to deliver value growth once the relative economics of oil and gas normalize. Our oil assets are even stronger in Canada with 325,000 barrels of incremental oil to add. Internationally, we continue to leverage our material base and expertise, our offshore expertise and our government relations niche into some of the highest return projects in the company's portfolio and of course Horizon is a world-class project, which will add tremendous value for shareholders.

We have the assets, a well-defined plan, the discipline, and most importantly the people to execute the plan and generate significant value for shareholders. We are on the verge of taking the next step in our evolution and we are in great shape, not only to successfully making it step, but to add tremendous shareholder value into the foreseeable future. We are on track and confident in our ability to deliver the future.

With that, I'll turn it over to Doug to update you on our strong financial results.

Douglas A. Proll - Chief Financial Officer & Senior Vice-President, Finance President, Finance

Thank you, Steve, and good morning. In the first quarter of 2008 Canadian Natural generated over $1.7 billion of cash flow from operations or $3.19 per share and $727 million of net earnings. We incurred $1.75 billion of capital expenditures, in line with our cash flows, which have allowed our financial metrics to continue to improve inside or below our target ranges.

Our commitment to cost control, controlled capital spending, and discipline to the balance sheet is very evident in the first quarter. Our liquid resources remain strong. At the end of the first quarter, our undrawn bank lines of credit was over $2.6 million. This liquidity, combined with the plan to balance cash flow and capital expenditures in a year, which will see us complete four major projects, again demonstrates our financial discipline.

Our commodity hedge book is posted on our website and is presented in the press release. Our hedging policy has served us well since it was implemented coincident with the Horizon Project sanction in early 2005. This policy and the program allowed us the confidence to proceed with the major projects, continue to develop our existing conventional assets, and be opportunistic in several asset acquisitions, which further strengthened our asset base, as well as our cash flow generating capabilities.

Now, we are happy to report, as we look forward to first oil from Horizon and with our financial strength intact that we will be reducing our reliance on commodity hedges commencing next year. The company's commodity hedge program has been revised to allow for the hedging of up to 50% of the near 12-month budgeted production, down from the current 75% and up to 25% of the following 13 to 24 months estimated production down from 50%. We will continue to monitor opportunities to reduce commodity risk, but we will rely more on capital allocation and we will improve our balance sheet strength through absolute debt reduction in 2009.

Thank you. Back to you, John.

John G. Langille - Vice-Chairman of the Board

Thanks very much, Doug, and thank you, Steve and Real for that great update on our developments. I think as you can see our strategy of having a balanced asset base with many exploitation opportunities continues to result in excellent value creation for our shareholders. We are focused to continue this value creation relatively for the rest of 2008 and into the next stages of the developments of our strong asset base.

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

Question and Answer

Operator

Thank you. [Operator Instruction]. The first question is from Brian Dutton of Credit Suisse. Please go ahead.

Brian Dutton - Credit Suisse

Yes, good morning, Steve. You were commenting on the attractiveness of the heavy oil prospects you have, could you compare for us the recycle ratios that you believe you will be getting over the near-term on heavy crude versus what you are seeing on natural gas?

Steve W. Laut - President & Chief Operating Officer

Thanks Brain, that's a very good question, and one that probably isn't as well understood, considering the first quarter our cash flow, we managed to generate, if you look at our heavy oil recycle ratios, particularly with Q2 pricing is sort of a strip sales right now, we will be getting, depending on whether to go on from Pelican Lake to Primrose or conventional cool heavy, anywhere from 4.5, 5 to 6 recycle ratios. So, pretty down strong. On the gas side, if you assume gas gets up to 970, 965 range, we would get at recycle ratio of 2.7. So, pretty good recycle ratio, but certainly doesn't compare to oil today. The other thing to look at, Brian, here is, in 2009, if you look at that same recycle ratio going forward for a well in that price range, normal well, sort of 600 Mcf a day, we would get a recycle ratio right now under this current loyalty scheme of 2.4. Under the new royalty formula, which will come in effect January 2009, the recycle ratio drops to 1.6. So, effective January 2009, our recycle ratio drops well below 2 even in a price that’s close to $10. So, with the heavy oil prices and oil prices in general and new royalty you're seeing coming in 2009, I don't think it's... it takes a rocket scientist to figure out why we're not doing as many gas wells in Alberta.

Brian Dutton - Credit Suisse

Okay. Just to clarify that 2.7 recycle ratio, was done on all your wells or did you hear… you are talking 2.7 or into the 2.4?

Steve W. Laut - President & Chief Operating Officer

Talking 2.7 is sort of on a historical basis, but if you look at going forward, we will be about 2.4.

Brian Dutton - Credit Suisse

Okay. Great. Thank you very much.

Operator

Thank you. The following question is from [inaudible] of Legal & General Investment Management. Please go ahead.

Unidentified Analyst

Hi, good morning. I was wondering if... two-part question. First one, how much do you have on your bank lines currently?

John G. Langille - Vice-Chairman of the Board

Doug will answer to that question. I think, we have various lines there Doug?

Douglas A. Proll - Chief Financial Officer & Senior Vice-President, Finance

Yes. Right now, we have available bank lines of $3.8 billion and garn [ph] at the end of the quarter was just under $1.2 billion, meeting us with the $2.6 billion of available.

Unidentified Analyst

Okay. And as part of the plans for that, you mentioned that you anticipated the balance sheet to strengthen quickly with the cash flow. Are you contented to just use the cash flow to pay down the debt bank line or you have expectations of terming that debt out?

Douglas A. Proll - Chief Financial Officer & Senior Vice-President, Finance

We issued debt in January and that gave us the liquidity we need for the rest of this year and so we will be allocating much of our excess cash flow going forward to bank debt and then when we get to the 2009 budget, will re-evaluate and see where we are at that point.

Unidentified Analyst

Okay. Thank you very much.

Operator

The following question is from [inaudible]. Please go ahead.

Unidentified Analyst

Hi good morning Steve. Three questions. First of all, on the budget, somewhat following the last question. When I just look at the numbers which you guys did in the first quarter and where the strip is, you got to be doing cash flow probably well north of $6 billion this year and you are only spending $2.4 billion of that in conventional CapEx, ex the acquisitions, based on the budget you gave us at the Analyst Meeting. So, you're spending between 35% and 40% of your CapEx. Why don’t we get a sense of when you are going to ramp that up? You got Horizon coming on in Q... yes, within the next quarter. Are we going to need wait until you guys come out with the new budget at the end of the year, or would you possibly consider doing something in the second half to go and start spending the money, given how much cash flow you're going to be looking at once your comfortable Horizon is on in time?

Steve W. Laut - President & Chief Operating Officer

I think what we're going to do here is, obviously wait and see what the pricing environment is going forward. Obviously, it's very strong right now and the strip book is strong. We want to just see that that's going to continue before we make any commitments. Obviously, we can ramp up. Our first allocation of this cash will go the balance sheet. So, near-term here, all that cash flow will go to our balance sheet, and we will see how we go in the second half, we haven't made any decisions at this point.

Unidentified Analyst

Okay. Second question on the polymer floods, you mentioned the recovery rates, can you talk a little bit more about what that's adding incrementally, where you initiated that program? And then also and probably more importantly, how much of your heavy oil reserve base could be polymer flooded?

Steve W. Laut - President & Chief Operating Officer

I'll answer the second part first. We are looking at other areas in polymer flood, but not much. Pelican Lake in itself is a very unique pool. It’s very appropriate for polymer flooding. We're probably 35% to 40% of the way of getting the pool converted. So, we have got a lot more to go and we see production ramping up here. We are on to a major conversion right now, so obviously you lose a lot of production wells as you converge. So, it's a flat area in [inaudible] kicks in. As far as the other heavy oil properties we have, our average recovery we guys see in our primary heavy oil is somewhere in that 10% to 15% range and we are looking at many different techniques and technologies to increase that recovery. Clearly, there is a huge amount of oil that's in the ground. We've got the wells drilled already. So, there is a lot of leverage to any increased technology we can get there.

Unidentified Analyst

Okay. But it sounds like you're saying the polymer floods really are Pelican Lake opportunity right now, and not much beyond that?

Steve W. Laut - President & Chief Operating Officer

That's true.

Unidentified Analyst

Okay. And then lastly, on your South Africa project, you guys have that offshore prospect, we've talked about in the past, can you give us an update on what you're thinking about there and what the opportunity could be and when you might go after it?

Steve W. Laut - President & Chief Operating Officer

Yes, we can. You are probably talking to the wrong guy because I'm an engineer, they me it's a 30% chance of success. But, to me that means a 70% chance of a dry hole. But, going forward, they are very, very big structures. It's in deep water, it's a very hostile environment, strong currents, and large waves. So, you got to drill in the summer and you got to pick your spot. We're looking... we will drill this well I believe, but probably not until late 2009 or maybe late 2010. It’s quick drilling as you near summer or winter.

Unidentified Analyst

Okay, great. Thanks very much, Steve.

Operator

Following question is from Martin Molyneaux of FirstEnergy Capital. Please go ahead.

Martin Molyneaux - FirstEnergy Capital

Steve, if you’ve accelerated 49 of the 120 Primrose north wells in to this year, was it purely an economic decision or was it more a decision of equipment becoming available? What drove you to do that?

Steve W. Laut - President & Chief Operating Officer

Primrose, Martin, we're getting, as you know, very, very good results at Primrose. Primrose is a long lead time, [inaudible] it takes a long time to drill the wells and takes a long time to get facilities set up to produce and have seen. We felt that it's very economic to do and it's a case of being efficient with the equipment that we have and will keep on drilling here for the rest of the year, and that production will come on in 2009. But, it's really kind of both I guess. It's economic and it's efficiency of the equivalent used right now.

Martin Molyneaux - FirstEnergy Capital

So, does it help 2009 volumes?

Steve W. Laut - President & Chief Operating Officer

It will help 2009 volumes, yes.

Martin Molyneaux - FirstEnergy Capital

Great. Okay. And second question, we've seen sulfur prices explode hear in the last four or five months. You guys will be producing sulfur out of Horizon, you produce sulfur modest amounts elsewhere, any thoughts on being able to get some revenue out of all of that?

Steve W. Laut - President & Chief Operating Officer

Martin, good point. We’ve used a lot of sulfur coming out of Horizon. We will produce 800 tons a day on roughly 1,100 barrels a day. We will and we are right now in negotiations to sell that sulfur. We won't do that till Q1 2009, we don't want to have a bunch of things going here in basically Q3 and Q4 when we are trying to get lined up for value. So, Q1 2009, we are looking to actually transport that sulfur and sell it in the market. As you know, what’s going through the [inaudible].

Martin Molyneaux - FirstEnergy Capital

Great. Thank you very much.

Operator

Thank you. The following question is from Steven Calderwood of Raymond James. Please go ahead.

Steven Calderwood - Raymond James

Hi, good morning. I wonder if you could expand on…. or I’d get to expand on carbon capture issues. You obviously have some projects, like a Primrose where you have an established baseline of production, and then in Horizon where you are just establishing or where you will establish a baseline for emission. Do you have any thought around using your excess cash flow to try and take the lead on carbon capture, maybe participate in building some pipelines from Fort Mcmurray … or just how do you... how do you view the opportunities in carbon capture?

Steve W. Laut - President & Chief Operating Officer

I think we are looking fairly optimistically at carbon capture Steve. It is important for us to do this right and our first step will be in tranche 2, tranche 3 of Phase II and III. We will capture the CO2 from the hydrogen plant, and that's part of the engineering design that is going on right now. It’s a pure kind of CO2, we'll use that in our canning process. So, that's going to give a number of things for us, Steve. It's win, win, win really. After capturing CO2, we’ll put that through our tailings, it allows us to basically lock up the CO2 forever, but it gets the slit and the sediments to drop out of the water very quickly, comparison to issues now. That will allow us to get the water back in the system when it’s warmer or cold. Means, we'll put in less fuel so less cost. Burning less fuel means less CO2. The fact that we have taken thickened tailings, means our chilling ponds will be smaller, so overall it has sort of a win, win, win on the environmental side, as well as the cost side for us. It costs a lot of capital to get there, but it is an important thing for us to do. We're also looking forward, we’ll participate for all the industry initiatives to do more as an industry to get carbon back on in place. To early to say where that’s going.

Steven Calderwood - Raymond James

Okay. Thanks.

Operator

Thank you. The following question is from Peter Ogden of National Bank Financial. Please go ahead.

Peter Ogden - National Bank Financial

Good morning gentlemen. Couple of questions. In your budget, you still have allocated $390 million towards acquisitions. Given where prices are, I guess, what kind of opportunities do you see out there and then is that money better spent drilling at this point, given maybe price expectations in the acquisition market?

Steve W. Laut - President & Chief Operating Officer

It's a good point Peter. We evaluate all the time. Every acquisition we make has to compete with other activities in the company. Every dollar competes with capital, and may be that we will not keep capital acquisitions and as we get into later in Q3 and Q4, we may allocate that to drilling. Obviously, we have the inventory and resources to make that allocations if we need.

Peter Ogden - National Bank Financial

Would that money spent in the second half or would that get pushed into 2009?

Steve W. Laut - President & Chief Operating Officer

No, it will be in the second half.

Peter Ogden - National Bank Financial

Second question. I guess surrounds cash back guidance, maybe for Doug, The guidance is based on $73 oil and $7 NYMEX, obviously expected to go up. I would guess that cash tax as a percentage of total tax goes up. Is there any additional guidance that you can give us surrounding that?

Douglas A. Proll - Chief Financial Officer & Senior Vice-President, Finance

Yes, I think that's two things Peter. The first thing is that the increases that we saw on natural gas and the heavy oil differential pertain to Canada. So that increases are allocations to Canada. So that actually dropped our effective tax rate for the first quarter. The second thing that might help a little bit too is the fact that we had just over $2 billion worth of expenditures that became available for use in 2008 with respect to the Horizon Project and they transfer across into [inaudible]. So, that has the effect of reducing our cash taxes for 2008.

Peter Ogden - National Bank Financial

So, on a proportional basis, as we go forward, is it still the same percentage of cash tax or is that actually going to go down then in 2008 compared to the guidance that...

Douglas A. Proll - Chief Financial Officer & Senior Vice-President, Finance

On the cash taxes it should be the same. On the effective tax rate for the overall tax rate will be at the low end of our guidance.

Peter Ogden - National Bank Financial

Perfect. Thanks very much.

Operator

Following question is from Barbara Betanski of UBS Global Asset Management. Please go ahead.

Barbara Betanski - UBS Global Asset Management

It's a natural gas question and it's related to the considerable excitement that we're seeing in the industry over some new horizontal drilling and multi-tracking technique. The question is, I am not sure if this technology has sort of a narrow applicability to plays like the Montney or the resource type plays or whether you would possess assets where this technology might be beneficial. So, whether it can be more widely applied and if perhaps some of the benefits to economics of this type of technique might offset some of the negative impacts of the royalty changes?

Steve W. Laut - President & Chief Operating Officer

Barbara, I'm not sure it's going to impact the royalty changes. The basis of the fracs is to get the rates up to economic levels. And as you know, the royalties are based on rates, so the higher the rate, more royalty you pay. So, it's not going to really help us on a royalty side. As you know, most of this shale gas focus has been in BC and that now the way it's described and the way we see it and the way our aspiration groups see that, there seems to be, in a way, really no [inaudible] declined on the shale gas. It's an evolving play. You have the Horn River Basin, and you have the Montney Shale Play, I mean you have the Cordova Basin with the EV and other shales. We obviously are one of the largest landholders in BC and in Alberta. On the Montney Gas Play, we have 200 sections of 100% land that we feel looks very prospective. I think the Montney is most developed for us. On the Horn River Basin, we have some land, but we're not thinking a great land yet. But it's hard to say, it doesn't seem to be of define limit. You know with more drilling the limits will get defined on all these plays. In the Cordova Basin, where we have the EV shale, we have some drilling, it doesn't look that good yet. Obviously, we have a significant land base there, but from other activities. So, that now I think is probably lagging the rest of the shale plays. As far as developing to other resources, it's really a tight rock and you've seen it being used in the Bakken and southern Saskatchewan, basically the same technology just modified. So, we have other areas and resources that haven’t because they are tight, we're looking at some of those. Interesting enough, we are actually at it at a little bit in the North Sea. The deeper you go in the North Sea, the more compact the zones get and tighter the rock. Obviously, to do these long horizontal wells with major cracks, [inaudible] facilities you have and it's different to get these large cracks off. So it's not... I don't know if it's really economic, but there is a lot of oil, particularly on our Ninian field that is very deeper, but very tight and low rates. So, we're looking at some of that as well.

Barbara Betanski - UBS Global Asset Management

Okay. So, it would be fair to say then in terms of North American gas, it is very early days and whatever you find might... won’t really impact your strategy for gas for the next year or so?

Steve W. Laut - President & Chief Operating Officer

I think that's fair to say. We've got a pretty good inventory, it's not like we have to develop shale gas just to stay alive. We are watching, we're doing some drilling ourselves, we're doing experiments and we’ll probably have, I would say, in 2009 some developments and bring on a major development later in 2009, early 2010.

Barbara Betanski - UBS Global Asset Management

Thanks very much.

Operator

Thank you. [Operator Instructions]. The following question is from Martin Molyneaux of FirstEnergy Capital. Please go ahead.

Martin Molyneaux - FirstEnergy Capital

Go on. It's been asked and answered.

Operator

Thank you. The following question is from Robert Plexman of CIBC World Markets. Please go ahead.

Robert Plexman - CIBC World Markets

Okay. Hi, Steve. I want to ask you another question about Horizon. Construction and progress is 91% complete at the end of the quarter, so there is a lot of work to be done. I am not so concerned about your ability to get that work done between now and the summer. But, to the extent that finishing the construction can interfere with the commissioning, what do you do to prevent that?

Steve W. Laut - President & Chief Operating Officer

Rob, I will keep this as a general question, and Real can probably give you a description for the next two years. Really, what we are doing here is… and you came to the plant site Rob, so it is a very large site, very well spread out. We have designed this thing with that in mind. So, as you heard Real talk, will be completing and commissioning plants as we go. Right now the extraction path is basically running on water, we are circulating waters around and around. So, it’s pretty well ready to go. There is some construction that you got to do some insulation for heat tracing. Those things really don't need to be done before winter and you get them done as you can. Everything will be happening across the plant. So, it is a very good and well thought out plan. How you do it, you're right if you try to just send a bunch of guys in there and do a bunch of things differently without a well thought out plan, and if you can’t, that’s into bit of a circus. So, Real, you want to give more detail?

Real J.H. Doucet - Senior Vice-President, Oil Sands

Yes. I think what we do understand is once you are at the 90% completion you are switching your construction progress from area progress to system progress. So, what we do then is we're assigning the workloads for the construction base system. So, you are finishing up, for example, when you are finishing up welding your pipe, then you do your hydro-testing, then you connect your instrumentations, electrical, insulations, and so on. As you do your hydro-testing you do your walk-around and that this done with the operator, so then the operator knows what the system looks like. He also has completed his punch list, the mechanics… the welders are picking up the list. We do reinstatement after, in other words, all the little gauges and so on that were used to the hydro-test are removed, and then we are going to think about final inspection and then installation. So, it’s a coordinated effort at this stage between the construction and the operation. So, in fact, right now, the project managers and the operation managers are working hand in hand, as this stage in the same office. They are using the same planning and the same planner, as a matter of fact, the same coordinators also, to get the job going and a smooth transition between the constructions and the operations.

Robert Plexman - CIBC World Markets

Okay. Thank you.

Operator

Thank you. We have no further questions during this time. I'd like to turn the meeting back over to Mr. Langille.

John G. Langille - Vice-Chairman of the Board

Thank you very much operator, and thank you ladies and gentlemen for attending our call, asking very good questions. I think you can see that our company is well on track to continue it's value creation, continue it's technology advances. We have a lot of resource that we can find and exploit over the next several years and we're very focused on doing that. So, again thank you very much. If you have further questions of course please contact our Investor Relations department. Thank you and have a good day.

Operator

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

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Source: Canadian Natural Resources Ltd. Q1 2008 Earnings Call Transcript
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