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Occidental Petroleum Corporation (NYSE:OXY)

Q2 2008 Earnings Call Transcript

July 24, 2008 11:30 am ET

Executives

Ray Irani – Chairman and CEO

Steve Chazen – President and CFO

Casey Olson – President of Oil and Gas in the Eastern Hemisphere

Analysts

Paul Sankey – Deutsche Bank Securities

Michael LaMotte – JP Morgan

Eitan Bernstein – FBR Capital Markets

Bernard Picchi – Wall Street Access

Robert Kassler – Simmons & Company

Erik Mielke – Merrill Lynch

Pavel Molchanov – Raymond James

Mike Jacobs – Tudor, Pickering, Holt & Co

Faisel Khan – Citigroup

Dough Legit [ph] – Quadrom Capital [ph]

Operator

Good morning, my name is Sheryl and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Occidental Petroleum's second quarter 2008 earnings conference call. (Operator instructions).

Thank you. It is now my pleasure to turn the floor over to your host, Christopher Stavros. Sir, you may begin your conference.

Christopher Stavros

Thanks very much, Sheryl and good morning everyone. I'd like to welcome you to Occidental second quarter 2008 earnings conference call. Joining us on the call from Los Angeles are Dr. Ray Irani, Oxy's Chairman and CEO; Steve Chazen, our President and CFO; and Casey Olson, Oxy's President of Oil and Gas in the Eastern Hemisphere. In a moment, I'll be passing the call over to Dr. Irani who will highlight some of Oxy's recent announcements and future development opportunities. Steve Chazen will then review our second quarter and six month financial results and will also provide greater detail on our plans for increased capital spending, oil and gas drilling activity and our outlook for growing our oil and gas production through the remainder of the decade.

Our earnings press release investor relations supplemental schedules in the conference call presentation slides, which refer to Steve's remarks can be downloaded off of our website at www.oxy.com. And I'll now turn the call over to Dr. Irani. Dr. Irani, please go ahead.

Ray Irani

Thank you, Chris and good morning everybody. Today, we are very pleased to announce a record second quarter with net income of $2.3 billion, a 63% increase compared to the second quarter of 2007. Net income for the first six months of 2008 was $4.1 billion, an increase of 58% over the comparable six month period last year. These results reflect, not only, the strong oil and natural gas prices which have generally benefited the industry but also the increase production across Oxy's operations. Comparing the first six months of this year to the first six months of 2007, our total worldwide production has increased by about 7% to an average daily production of 598,000 BOE per day despite the labor dispute in Argentina during May, which is now settled.

Very shortly, Steve, will discuss our results in more detail. But first, I'd like to mention some recent developments that will enable us to further expand our worldwide production and create additional value for Oxy's stockholders. As most of you are aware, the majority of Oxy's production is in the United States which last year provides a 63% of our total production and 35% of our proven reserves. We are the leading oil producer in Permian Basin in South West Texas and South East New Mexico with production at a rate of about 200,000 barrels of oil equivalents per day. In California, we are the largest natural gas producers, the third largest oil producer, and in total our current net total production in California averages a 126,000 barrels of oil (inaudible) per day. And we have stated repeatedly, that our long-term strategy is to maintain the U.S production to be over 50% of worldwide production and to have reserves well over 50% of the total, and so we intend to strengthen Oxy's net North America position even further.

We are making a significant effort to increase North America production with strategic acquisitions and increased billing. In the coming months, we will increase our 2008 capital expenditure budget to a total of $4.7 billion. This year, we plan on building and pre-completing approximately 400 wells located in each of our key business areas throughout the United States, namely, the Permian Basin in Texas and New Mexico, the Piceance Basin in Northwest Colorado and our California operations, and, we're also increasing building activity in Argentina, Colombia, and Libya.

The primary means of increasing production is through enhance oil recovery, including carbon dioxide flooding in which Oxy is an industry leader. We are now able to apply this technology to wells, which at lower oil prices, previously, were not economical to operate with EOR. And so consequently, these wells had what I would call low laying fruits [ph]. To enhance our position in CO2 oil recovery, last month we announced that we will develop a hydrocarbon gas processing plant and related pipeline infrastructure in West Texas that would provide a new source of CO2 for EOR at our existing properties in the Permian Basin. The project is expected to add approximately 500 million barrels to our industry leading reserves in the Permian over the next five years at a very attractive cost all from assets we currently own. This additional CO2 supply will enable us to expand production in the Permian by a minimum of 50,000 barrels of oil a day within the next five years.

Adding further to our North American assets, last month we agreed to purchase a 15% interest in the Total operated Joslyn oil sands project in Alberta, Canada. As you may know, this is one of the premier oil sands project in the world with over 8 billion barrel of hydro carbon in place. We estimate recoverable reserves net to Oxy to be about 370 million barrels. We expect to spend about $2 billion over the next few years to develop these reserves in Canada with production targeted to begin in 2014.

While we are emphasizing Oxy's North American operations, we continue to pursue our long-term strategy to grow the business at a faster pace in the Middle East and to pursue opportunities that meet our stringent standards for financial return. Last month, I joined with officials from the Libyan national oil company to formally sign new 30 year agreements upgrading our existing petroleum contracts in Libya covering fields with approximately 2.5 billion barrels of the recoverable high quality oil reserves. The new contracts would increase our profits from Libya immediately and allow us to increase production for the future.

Also significant for Oxy's continued potential growth in the Middle East long-term is our pre-qualification by the government of Iraq to participate in discussions to develop a number of that country's most prolific oil fields. As you are aware, development of these massive fields is a critical engine of growth for the Iraqi national economy. Depending on the security situation in Iraq, which is fluid, there is a possibility of projects being finalized by late next year. With the first two quarters of 2008 not concluded, we are pleased with Oxy's success and growth in light of the excellent additions to our asset portfolio and promising projects and pipelines, we expect 2008 to be another outstanding year for Oxy. And I'd now like to turn the call over to Steve Chazen.

Steve Chazen

Thank you, Ray. Core results for the quarter were a record $2.3 billion, or $2.79 per diluted share, compared to $943 million, or $1.12 per diluted share, in the second quarter of 2007. Second quarter core results superseded the previous records set in the first quarter by 26%.

Here's the segment breakdown for the second quarter. Oil and gas second quarter of 2008 segment earnings were $3.8 billion, compared to about $1.7 billion for the second quarter of 2007. Oil and gas core results for the second quarter of 2007 were about $1.6 billion after excluding gains from sale of oil and gas interest last year.

The following account for the increase in oil and gas earnings between these quarters. Higher worldwide oil and gas price realizations result in an increase of $2.2 billion of earnings, over the comparable period last year. Oxy's average realized crude oil price of 2008 second quarter was $110.12 per barrel, an increase of 86% in the comparable period in 2007. Oxy's domestic average realized gas price for the quarter was $9.99 per MCF, compared with $7.07 per MCF in the second quarter of 2007.

Worldwide oil and gas production in the second quarter of 2008 averaged 588,000 barrels of oil equivalent per day. An increase of over 5% comparable to 558,000 BOE production second quarter of last year. The bulk of production proven result of 46,000 BOE a day from the Dolphin project began production in third quarter of 2007 from the recently acquired domestic assets partially offset by 15,000 barrel a day in lower volumes from Argentine operations due a the strike in the Santa Cruz province in May of this year which I will discuss later and lower production of 19,000 BOE per day caused by higher oil prices affecting our production sharing contracts.

Dolphin contribute to $101 million to after-tax income during the second quarter on sales volume of 46,000 BOE a day. Dolphin's sales volume decreased in the first quarter of 2008 due to the effect of higher prices on our production sharing contracts which have reached the cost recovery ceiling for this year. Exploration expenses, $58 million on the quarter.

Oil and gas cash production cost for six months of 2008 were $14.08 a barrel, compared with last year's cost of $12.33 a barrel. Approximately 47% of the increase relate to increased energy cost. The increase reflected higher production and ad valorem taxes in field operating cost. Additional 17% of the increase was caused by the production— effective production sharing contracts.

The back-half of the year, we are boosting our expensed work over activity by 65% nor the increased production in the current high product price environment. Chemical segment earnings for the second quarter of 2008 were a $144 million. Chemicals earned a $158 million in last year's second quarter. Midstream segment earnings for the second quarter of 2008 were a $161 million, increase of a $136 million in the second quarter of 2007 results. Improvement was due to higher pipeline income from Dolphin, higher NGO margins in the Gas Processing business, and improved margins in the marketing side. Positive mark-to-market adjustments also contributed to pipeline and storage earnings during the second quarter of 2008. The worldwide effective tax rate was 42% to the second quarter of 2008.

Now let me – now turn to Oxy's performance during the first six months. Net income was about $4.1 billion, or $5.01 per diluted share, for the first six months of 2008, compared with about 2.6 billion, or $3.11 per diluted share, for the same period last year.

Six months 2008 reported net income was another record and was 58% higher than the first six months of 2007, the former record. Income for the first six months of 2007 included 893 million net of tax, the items noted on the scheduled reconciling our net income to core results.

Capital spending for the quarter was 1.1 billion and $2 billion for the first six months. Cash flow from operations for the six months was $5 billion. We used 2 billion of the company's cash flow to fund capital expenditures, $2.3 billion for acquisitions, which included a $450 million payment for the Libya contract bonus, and $415 million to pay dividends. We used $816 million to repurchase 11.1 million common shares in the average price of $77.82 a share. These outflows decreased our $2 billion cash balance the end of last year by 500 million to 1.5 billion in June 30th. That was 1.8 billion at the end of June which is unchanged from year-end.

The weighted average basic shares outstanding for the six months were 822.5 million, and the weighted average diluted shares outstanding were 826.9 million. At June 30th, there were 818.1 million basic shares outstanding and the diluted share amount was approximately 822.4. The Board has authorized repurchase an additional 20 million in shares, which brings the total remaining share repurchase authorization to 35.2 million. Oxy's 2008 annualized return on equity was 35%, with annualized return on capital employed of 32%.

As we look ahead in the current quarter with regard to prices, $1 per barrel change in oil price impacts oil and gas quarterly earnings before income taxes by about $37 million. The sensitivity includes the impact of Dolphin. We also included as a production sharing contract price impact of approximately 300 barrels per day. Assuming a $0.50 per million BTUs in domestic gas prices is a $25 million impact on quarterly earnings before income taxes.

Additionally, we expect exploration expenses to be about $90 to $110 million for seismic and drilling for exploration programs. We expect Chemical Segment earnings in the third quarter to be similar this second quarter results, with a range of $135 to $150 million. Weakness in the construction and housing market continue to impact domestic demand, while higher feedstock of energy cost have reduced margins. These factors have been partially offset by higher cost accelerated prices and higher polyvinyl export volumes. Despite difficult economic conditions, the concerns over export opportunities over the balance of the year, we believe these range of earnings is highly likely. We expect our combined worldwide tax rate in the third quarter remain at 42%, our second quarter U.S. and foreign tax rates included in the investor relations supplement.

Now, turning to our capital spending program. We expect to increase our 2008 capital spending estimate to $4.7 billion which is an increase of $700 million or 17%. This additional money we'll use to drill 254 new wells to complete 145 additional capital workovers. Overall, this represents a 16% increase in new wells and a 12% increase in capital workovers. Scheduled detail in this increased capital activity in 2008 is included in the Investor Relations slides.

Majority of the activity will be in California where we're adding six additional drilling rigs. We will expanding our rig fleet in the Elk Hills area by five, drilling additional 100 wells, mostly in shallow zones. We've added 50 capital workovers to our activity in the second half of the year. We are doubling the exploration wells in Elk Hills area to 20. In other California areas, we're expanding existing developments.

We are also adding six drilling rigs in Latin America, where in Argentina we'll be increasing drilling to offset the impact of the recent strike, during which, we could not engage in any drilling activities. We are also carrying out an extensive workover program in Argentina. In Colombia, we are expanding our drilling in the LCI field. In the Middle East, North Africa, additional wells are being drilled in the Masila area in Yemen. In Libya, we'll be drilling four additional exploratory wells, three of which are within the new contract area. Finally, we are increasing our midstreams spending primarily for the construction of new West Texas Gas Processing Plant and related pipeline which was announced at the end of June.

As we look at future production, we expect oil and gas production to be in the range of 590 to 600,000 barrels a day during the third quarter, at approximately $125 oil price. The strike in Argentina's Santa Cruz province lasted approximately five weeks. We're folded [ph] and complete shutdown of all production and drilling activities in that region. Production is back to approximately pre-strike levels. In addition, drilling activity expect to increase in second half of the year with additional rigs that are being deployed. As a result, the Argentine production is expect to increase by about 19,000 BOE a day from second quarter of levels. With this production, we expect to be 8,000 barrels a day in the third quarter with liftings of only about 5,000 BOE a day. The new contract terms reduced the company's share of production, offset by a reduction in tax rates which results in much more favorable earnings, perhaps two to three times existing levels.

Other operations expect to have an increase in production. Shown in the investor relations slides a table which provides daily production rate forecast for the first– using the first six months of this year as a base. Production expect to be 610,000 barrels a day in the second half of the year of 2008 and total growth of 2008 will be 6%. Due to higher price that we've lost 13,000 barrels a day which is about 2% of our production versus our original initial $80 WT outlook from production sharing contracts.

Production is expect8 to be 650,000 barrels a day in 2009, and 705,000 barrels a day in 2010. Our growth rate for both years would be 8% per year. Accumulative growth rate for the three-year period is 7.3%. These estimates are all based on a WTI price of $111 consistent with the first six months of 2008. At this price level, for every $5 change in WTI production will be an inversely impacted by about 1,500 barrels a day. Recognizing the likelihood for fluctuations in project timing, expect the range of 600 to 620,000 barrels a day for the last six months of this year, 640 to 670,000 BOE per day in 2009 and 609 to 720,000 BOE a day in 2010. Turning to the individual areas, we expect an increased production by expanding our drilling program in Elk Hills and surrounding areas; in plays such as the Antelope Shale and deeper pay zones where we have had recent exploration successes. We are also planning various to enhanced oil recovery projects, such as the expansion of the successful Eastern shallow oil zone waterflood.

In Ventura County California, we have an active drilling exploitation program in a deeper pay horizon beneath an existing successful waterflood, which is also being enhanced. In a Wilmington field Long Beach, we are trying to drill several delineation wells as a follow-up to a deeper exploration success.

In the Midcontinent/Rockies area, we expect to double our gas production exit rate in Piceance Basin by the end year from the current levels of 40 million a day to 80 million a day, as a result of 2008 drilling program, and to a 100 million a day in 2009 through an expanded development program. In conjunction with the increased production, we are retrofitting our Conn Creek gas plant compression facility to double its capacity to 80 million a day by year-end and to increase it to 100 million a day next year. We currently have 40 million a day of gas transportation capacity out of the Rockies. Based on contracts and placements, we'll increase capacity to 100 million a day this year and expect to finalize agreements for additional 50 million a day by 2011.

Our joint venture with Plains is also expanding its drilling activity in the Basin, which should increase production that currently have 26 million a day to 36 million a day by the end of the year and 44 million a day next – by 2010. In addition, we are pursuing oil exploration activity in Utah, which we expect to add to our production in that region.

In the Permian Basin, our ongoing drilling program is being accelerated around several place, take advantage of the exploitation opportunity from acquisitions over the last few years. We will expand our workover activity significantly by increasing our service rigs from 155 to 175 within the next few months.

We are increasing our CO2 flood program through additional resources from Bravo Dome, together with the drilling program and workover activity, is expect to increase out production over the next two years by about 10,000 barrels a day. By 2010, we should also see a positive impact on our production additional CO2 resources in the recently announced SandRidge transactions which will enable us to increase our production by a minimum of 50,000 barrels a day within the next five years.

In Latin America, our near field exploration program in Argentina continuous to be successful. This has enabled us to identify multiple new drilling locations in addition those in our current program. We will achieve significant production growth by expanding our drilling in these areas and other areas with the addition of five – hot five high performance rigs. In Columbia, we expect that th LCI will largely offset the natural decline to Cano Limon.

Moving to the Middle East, North Africa, and Dolphin, the higher prices and success realized to date have resulted in a very rapid pace of cost recovery. Consequently, at a $111 oil price, we will realize fuel barrels production going into the future. Libya's net production will decline as a result of the new contract which took into effect at the end of the second quarter. Based on current pricing, we expect earnings to increase two or three times under the new contract. As a result of our increased capital development program, production will increase over the nine – next five years to former levels with much improved profits.

In Oman, development efforts in the giant Mukhaizna steam flood are on track and we expect to exit 2008 at the gross level approximately 50,000 barrels a day. Large scale drilling activity in the range of 200 wells per year coupled with the introduction of multiple water treatment facilities to supply the steam generators, allow us increase gross production the rate of 100,000 barrels a day by year end – by year end 2009 and a 115,000 barrels per day by year end 2010. We expect our net production in Oman to double by 2010 to around 54,000 barrels a day.

In Qatar, we have agreed with the government on a third phase development plan to the ISND field. This phase entails about 70 low risk, infill drilling projects, as well as further platform and pipeline enhancements over 2008 to '10 time frame. A third drilling rig has recently been added to perform a large number of rate enhancing workover projects in ISND, and further development drilling activity is expected at the Al-Rayyan Field beginning in late 2008 and 2009. We expect this additional development activities to increase Oxy's net production in Qatar by as much as 20% over by 2008 over 2008 – by 2010 over 2008 levels. Yemen's production reflects a base decline in the Masila field. It's important to note that this forecast is based on existing projects and does not contemplate any new projects or future acquisitions. Copy of the press release in our schedules are available on our website or through the Edgar [ph] system. We are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question is coming from Paul Sankey of Deutsche Bank.

Paul Sankey – Deutsche Bank Securities

Hi, good morning Steve.

Steve Chazen

Morning.

Ray Irani

Morning.

Paul Sankey – Deutsche Bank Securities

Steve, you've said something here in terms of going a kind of detail we wanted to see on growth, and you also have an announcement on buying back. Could you just go through the processation [ph], strategic decision that you've taken there in terms of how much you want to spend on developing organic growth and how much you would spend on buying back stock, given where the stock prices now? Thanks.

Steve Chazen

On the stock buy back, organic growth – we'll spend what we need to have in organic growth as long as it works, works on a– at some reasonable oil price. I think where the difference will be, it's very difficult to – right now to do large scale acquisitions that would compete with buying back stock and so the excess cash would be used as long as the stocks is reasonable price – would be used to buy back shares. The reason we asked for additional authority from the board was we felt (inaudible) we're not on authority before the next board meeting.

Paul Sankey – Deutsche Bank Securities

I got you, and so that means we can expect to see the buy back accelerating pretty much from here, I guess?

Steve Chazen

As soon as the window ends.

Paul Sankey – Deutsche Bank Securities

Right. So basically, you haven't been in the market recently because you've been blanked [ph] now, obviously, and it's not rateable but basically when window closes, we would expect to see therefore more than 860 million, which is the first half number obviously of share re-purchase in the second half.

Steve Chazen

Obviously, we could compute the free cash flow of the company and for the back half of the year using whatever estimates you want to use, and we're not going to build cash. And while we would have, probably some smaller acquisitions and a large scale ones, so I would think you can get an idea of the scale.

Ray Irani

Yeah, but the bottom line, we will accelerate the share repurchase through the second half.

Paul Sankey – Deutsche Bank Securities

Okay, great. Thanks guys. I will leave you now.

Operator

Thank you. Next question is coming from Michael LaMotte of JP Morgan.

Michael LaMotte – JP Morgan

Thanks guys. I do thank you for all the details. It's great. Where to start with the questions. I guess first, in California, if I look at the volume progression of – in the first half and then look at the increase in commitments to wells and – rigs and wells, how quickly do you think we'll see a production response in that region?

Steve Chazen

Well, things always go slower than you might like. As far as the production, they've always want to test and fool around. So, I think, the schedule we've shown here is a reasonably conservative schedule. We would hope for a better results earlier, but I think, given the history of it, I think, we'll stay with this conservative view.

Michael LaMotte – JP Morgan

Okay.

Steve Chazen

You can see it boost in the second half and then into next year and the year after. The range that you see at the bottom, well, it has some other things in it as, the upper end of the range is probably some idea where we would hope California would wind up.

Michael LaMotte JP Morgan

Okay. And then, I was intrigued that the 17% increase in CapEx roughly correlates with the increase in wells, so would suggest that you're not seeing much rig inflation or service cost inflation. We've seen a lot increase in tubular cost and other equipment and services cost. Are you booked up with – are the rigs secured and the – a lot of equipment procured at this point?

Steve Chazen

We wouldn't show them unless they were secured.

Michael LaMotte – JP Morgan

Very good. In terms of '09, I mean –

Steve Chazen

tubular goes, there's no question that's sorry.

Michael LaMotte – J.P Morgan

Yeah.

Steve Chazen

But it's a small portion than Total.

Michael LaMotte – J.P Morgan

Shallow wells then?

Steve Chazen

Yeah. These we drill mostly post holes.

Michael LaMotte – J.P Morgan

Okay. And then if I could get you to touch on Elk Hills specifically and to sort of what you're learning in the Monterey shale play in that particular field. Anything you want to elaborate on there?

Steve Chazen

Nothing I want to elaborate on. But we've had some pretty good success and I think as we expand the program and you see a lot of it's dedicated to that kind of activity whether it's called Monterey or Antelope. And so, we'll have more detail as the year progresses but the initial results are very encouraging. We have a huge acreage position not just around our Elk Hills but in California. So, if this works, it probably works pretty good.

Michael LaMotte – J.P Morgan

That's great. I'll end it there. Thanks Steve.

Steve Chazen

Thank you.

Operator

Thank you. Our next question is coming from Eitan Bernstein of FBR Capital Markets. Eitan your line is live.

Eitan Bernstein – FBR Capital Markets

Sorry about that. Still had it on mute. Congratulations on a strong quarter and thanks for the additional detail. Would you consider levering up in a – and accelerating share buybacks more meaningfully? Obviously, the balance sheet is very, very strong. Maybe a little more so than is needed.

Steve Chazen

You know, having been through a ride for the last decade, it's hard for me to say that the balance sheet could be too strong but we'll just look at the product at the stock price and take appropriate actions to ensure that the stock is – that we're getting good value for the shareholders, which we clearly are at this point. We couldn't replace any portion of the – sizable portion of the business at what the stock is trading for now implicitly. So, we got plenty of cash for now. We'll see as we go forward.

Eitan Bernstein – FBR Capital Markets

Okay. Great, thank you.

Operator

Thank you. Your next question is coming from Bernard Picchi of Wall Street Access.

Bernard Picchi – Wall Street Access

Yes, good morning. I would ask about something that you didn't talk about in the slides. And by the way, thanks very much for all the information, it's great. I know it's really dazed, but, Dr. Irani, you said that you are looking at Iraq. Could you give us an idea of what you are looking at in terms of target sizes whether you are looking in the North or the South and kind of what – what kind of – would that be a production sharing contract or a more traditional kind of Western contract? What – can you give us a little bit more detail, a little bit more color if you could on what you have in mind for Iraq? Because it could be very, very important for the company going forward.

Ray Irani

Thanks. Let me say a couple of words and I turn it over to Casey Olson. There are some very large field in Iraq which are going to be available. And there are smaller ones, but which are very significant. Realistically, the huge ones are going to be run by Consortia, a consortium which would have managers in it and companies our size. So, we would be trying to be participating in those large ones. What I'm really saying is no one company is going to get a field with 20 billion barrels or more, period. So, we will be participating with some of the super majors, and looking at some of the large formations, now this could– may take time and so on. But we're also looking at some of the smaller fields where we could do them by ourselves. Now, all of this depends on the new administration, while the security situation takes place, Afghanistan, da, da, da, and so its safe to say when all this is going to happen, but it's moving in the right direction and we just wanted to share with you that we have been pre-qualified and that we are serious about the opportunities. When that's going to happen, I'm sure that all Americans would like to know. The case of a Jihad [ph], that's all right.

Steve Chazen

Sure. Just a couple of things. Bernie, one, as you probably know, going back even into the late 1980's as a company, we were very actively looking at Iraq and heavily engaged in detailed negotiations under its areas in the country, and unfortunately most of that went south with the problems between Kuwait and Iraq and then, subsequent history that's occurred since then, Dr. Irani's comments are exactly correct, I think the other thing to point out is the Iraqi's are as, as you probably know, looking at a formal process. They've identified eight or so of the giant fields in the country that they're going to work through a way a form of bidding process with the industry, probably starting later this year, and going through a good part of next year. Again, based on our previous work from the country, we actually have a pretty good handle on what those fields are, what potential they might have and etcetera, and I think we're very well positioned because of our work with the Ministries years ago, and like many countries, a lot of the key technical people in the Ministry are still the same folks that were there before, so we have an excellent relationship, a good solid understanding of what the potential is and certainly are going to be very aggressive in participating in whatever process the Iraqis decide to follow through on.

Bernard Picchi – Wall Street Access

Thank you.

Operator

Thank you. Your next question is coming from Robert Kassler of Simmons & Company.

Robert Kessler – Simmons & Company

Morning, guys. I appreciate as well as the others on the incremental detail you provided. I'm curious, I suppose we could say that this incremental $700 million of spending is marginal, sort of by definition, given that it came late in the year and with an eye towards higher crude prices but with that said, I imagine the returns are still quite robust. Can you characterize the average internal rate of return on these new investments relative to your based program and perhaps something with how the payback period or something like that?

Ray Irani

I think, one of the things that you will appreciate is some of these low-laying fruit we talked about earlier, if oil price is still over $100, you're looking at paybacks of six months or less and some others are more intermediate and some are longer term. But clearly, we're going to pick-up the low-laying fruit and Steve, would you add to all that?

Stephen Chazen

Well, we're sort of embarrassed to say that the rates of return on these items are well over 100%. And actually the returns are better the underlying returns of the company and we get paybacks of – the workover rig is hardly off the well before the – you get paybacks – you paybacks and a lot of these things are under 90 days. So, the rates of return are spectacular in product price environments well below current levels.

Robert Kessler – Simmons & Company

Any thoughts on average production per well or average reserves added per well?

Steve Chazen

No. I mean, yeah, we have thought but we're not going to share them with you.

Robert Kessler – Simmons & Company

Fair enough. Thank you.

Operator

Thank you. Your next question is coming from Erik Mielke of Merrill Lynch.

Erik Mielke – Merrill Lynch

Good afternoon. I have several questions, if I may. Firstly, on the CapEx increase for 2009 and 2010, is the 2008 level, is that a good place to start. And also from what you been talking about in the enhanced oil recovery and some of the short-term – short payback period projects. What would the impact be on operating cost more from the modeling perspective?

Steve Chazen

Sorry. I guess you have two questions. What's the capital going forward, if we can estimate it? Is that right?

Erik Mielke of Merrill Lynch

Correct.

Steve Chazen

Is it for going 2009 and '10, is that right?

Erik Mielke of Merrill Lynch

Yes.

Steve Chazen

I would think the – some version of this year's maybe increase a little bit, so it might approach five billion. We don't know exactly. But some of these things will go away and change but we can wind up with the five billion including chemicals in midstream. The second question was operating cost?

Erik Mielke of Merrill Lynch

Correct.

Steve Chazen

The – likely they have more expense workovers in the back half of the year because we're accelerating some – a backlog of those. And so, you are likely to boost your operating cost for the whole company under $1 a barrel but certainly $0.50 to a $1. (inaudible) deliberate policy in – to get – to expand the dollar a barrel to get $100 net, even if its $2 or $3 on the well or $5 the a well, Seems to us to be okay economics.

Erik Mielke – Merrill Lynch

Do you have a rough idea what the impact will be on your reserved bookings for 2008 based on the program that you've announced?

Steve Chazen

No. We – the answer to your question is yes we do, but we don't forecast reserved bookings. That's not something we are capable of forecasting from year-to-year.

Ray Irani

But, I would say we are comfortable that we have more than replaced a 100% of our production this year.

Erik Mielke – Merrill Lynch

Can I ask a follow-on question. You mentioned very briefly that you – the acquisition that you made in the oil sands – Alberta oil sands in Canada. How should we think about this project strategically. I'm sure that there are other companies that would have run a rule [ph] over the project when the asset was for sale. Should we think of Oxy as sense of servicing other oil sands deals and if there need for you to integrate downstream if you are going to be doing more oil sands. There's some pretty inexpensive refining assets available?

Steve Chazen

As far as refining assets, we don't have any current plans for any refining assets. Actually, there were very few companies interested. It was a very – because people felt that the current operator would want the property, which they did. And, we paid very little more than the current operator offered for it. We expect to have a good relationship with Total and participate in marketing food [ph] with them. So, I don't see this going downstream.

Erik Mielke – Merrill Lynch

(inaudible)

Steve Chazen

We would view this as not- you shouldn't – we are not capable of operating this kind of activity. So, if there were other interest available, non-operated interest will competent operators, we would be interested in that.

Ray Irani

But as you know, we did emphasized, maybe, we should again, that not all of oil sands are oil sands. This is a very high quality oil sand area and the opportunity came along and even though it's longer term than we'd like to be working on, it's a unique opportunity and so we decided to make the investment. And it gives us an option value because we know we can flip it easily if we have to in the future. It's not our intent at the current time but it gives us some optionality to participate and understand this activity better.

Steve Chazen

Remember this oil sands affect our– ultimately, affect our production, ability to market our production in West Texas. So, I think it's important for us to understand the flows of oil in North America and plan our marketing Appropriately to keep our differential flow.

Erik Mielke – Merrill Lynch

Thanks very much.

Operator

Thank you. Our next question is coming from Pavel Molchanov of Raymond James.

Pavel Molchanov – Raymond James

Just a follow-up on the discussion about Canada from the prior question. Are you looking to build kind of a core position in either the oil sands or perhaps in Canada, outside of the oil sands or is this– or should we think of this as more of one-off investment?

Steve Chazen

Not building a core position.

Ray Irani

No core – we are not building a core position in Canada, but as we said that this opportunity came along, and it's rather unique and so we took advantage of that, and we will see in the future, if there is other opportunities of this kind, we'll look at them, but this is not the beginning of an avalanche into Canada or into oil sands. It is part of our North American production.

Pavel Molchanov – Raymond James

Understood. Thank you very much.

Operator

Thank you. Your next question is coming from Mike Jacobs of Tudor, Pickering, Holt.

Mike Jacobs – Tudor, Pickering, Holt & Co

Hi, guys! Congrats on the quarter. Just a quick high level CAPEx question. Clearly, your rates of returning California in the Permian business were pretty economic at lower prices so, understanding what you said about the low-hanging fruit and thinking about the rationale for boosting domestic spending now, is it solely a function of higher commodity prices or have you learned something new that deserves capital?

Ray Irani

No, I think really, it's the multiplicity of things. I mean, one of them is, well why didn't we do this earlier? This project would have been very attractive at lower oil price, much lower oil prices. In some cases, we were accumulating acreage and we didn't want to get the price of the land going up. In other cases, folks were working on the facilities in terms of getting in the best safe– safety etcetera, etcetera. And now, we are moving along to capitalize on acquisitions we made earlier and money we spent on facilities and to exploit acreage accumulated over a number of years.

Steve Chazen

These are not worst projects that are average?

Mike Jacobs – Tudor, Pickering, Holt & Co

Okay, great...

Ray Irani

These work at $50.

Mike Jacobs – Tudor, Pickering, Holt & Co.

Okay. Just tell me a bit deeper in looking at the spending in Utah. Does your CapEx include any capitals for the proposed seismic shoot or is that just drilling CapEx?

Steve Chazen

The seismic would show up in the exploration program. So, it's included.

Mike Jacobs – Tudor, Pickering, Holt & Co.

Great. Thanks.

Operator

Thank you. Your next question is coming from Faisel Khan of Citigroup.

Faisel Khan – Citigroup

Morning. Just a question on Elk Hills. You talked about the deeper pay zones. We've had recent exploration success. Can you elaborate more in terms of what are these deeper pay zones? How deep are you drilling? And what are those well cost?

Steve Chazen

They're not expensive. These are deeper compared to post holes, that's all. Listen4 to the bowels of the earth.

Faisel Khan of Citigroup

This is directly below the Antelope Shale?

Steve Chazen

It's in that area.

Faisel Khan – Citigroup

Okay. And then –.

Steve Chazen

So, we're talking of not expensive wells. It's not expensive compared to Elk Hills wells. But not – we're not talking about 15,000 foot wells or any like that.

Faisel Khan of Citigroup

Okay. And the recovery – the recovery rates, in terms of the well recovery rates, the same as what you were experiencing before? Are these larger well or larger targets?

Steve Chazen

These are more productive than the average Elk Hills wells by a significant amount.

Faisel Khan – Citigroup

Okay. And you also had talked about drilling delineation wells for a deeper exploration of success in Long Beach. Can you talk a little bit about that? Like, what is, to say, the larger target or is this kind of key production, kind of flat [ph] from the Long Beach production?

Steve Chazen

This is a sizable target. It has a potential of growing the total.

Faisel Khan – Citigroup

So this would grow your thumbs [ph] production, your saying, right?

Steve Chazen

Thumbs [ph] and some other things that we've been accumulating down in the Wilmington field for awhile.

Ray Irani

But you know, we do have to discuss with the State of California to get their approval on this because they do have some ownership to some of that oil in the Long Beach vicinity.

Faisel Khan – Citigroup

And how difficult is that to do?

Ray Irani

Well, nothing is easy but we were talking.

Faisel Khan – Citigroup

Okay. And–

Ray Irani

Because it's a win-win for everybody. But, what I'm saying is, this is not as easy to exploit as Permian and Elk Hills where– it's a different atmosphere. The Long Beach is kind of vacations spot or being developed as such. No problems but that will, probably come at a slower pace than Permian where we think we can get quicker execution and in Elk Hills as we continue to exploit the success we've had on the large acreage position as we have accumulated.

Faisel Khan – Citigroup

And are these deeper exploration wells part of your growth plans in California. Let's have a look at your production growth targets to 2010, would these targets be in that production growth plan?

Steve Chazen

A highly risk portion of them.

Faisel Khan – Citigroup

Okay. Understood. And then, in terms of your Permian Basin CO2 enhancement projects with the new sandwich deal, how should we think about how those reserves get booked because I think, previously, in the past, you told us that as you find a way to get CO2 to your new flooding projects, that's when you start looking at booking some of those reserves. So, if you can just elaborate on how that works?

Steve Chazen

In order to book a reserve, it isn't just the physical barrel being there but you have to be committed to do what we have, in this case, the CO2 supplier firmly committed. So, we don't know exactly the pace but I would not – I would expect that it would come over several years rather than all in one year.

Faisel Khan – Citigroup

Fair enough. Thanks for the time, gentlemen.

Steve Chazen

Sure.

Operator

Thank you. Your next question is coming from Dough Legit [ph] of Quadrom Capital [ph].

Dough Legit – Quadrom Capital

Hi, Steve. How's it going?

Steve Chazen

Hi, Doug. How are you?

Dough Legit – Quadrom Capital

Good, thanks. I want to probe on a couple of things, if I may. Forgive me for going through this absolutely a little bit of detail. But, Argentina, it sounds like you're cranking up the CapEx and drilling activity a little bit. But, you haven't, as far as I know, resigned the lease there yet. Can you kind of update us as to where you are there and because also that comes as some pretty significant reserved bookings. Similarly on Libya, just maybe give us a kind of magnitude or at least some kind of feel for the lumpiness that we could see in the reserved bookings? It was like it could be a pretty big year if you are to lump.

Steve Chazen

Starting from Argentina, we're negotiating with the state problems. And, those things with governments is never easy to protect [ph].

Dough Legit – Quadrom Capital

That's why I mentioned California easier.

Steve Chazen

Make Long Beach easier, look like easy. So, we don't know the answer to that. Obviously, it would be a fairly sizable reserved add because you took the PDPs and just extending them out. It's a fairly sizable number. In Libya, going back to definition of approved reserve, you really have in order to book pods [ph] say, you have to have government commitment and our commitments to spend the money. And so, the rate of booking would be reflective of those levels of approval.

Dough Legit – Quadrom Capital

Okay.

Steve Chazen

You shouldn't expect to see it all at once.

Dough Legit – Quadrom Capital

And the U.S., the impact of SandRidge and the impact of California, I guess that was more rateable over a number of years.

Steve Chazen

Rateable over a number of years. And so, you ought to see – if you were to think about it, you would see over the next – its time for him in 2010 time frame, pretty safe reserve replacement levels over the years.

Dough Legit – Quadrom Capital

Okay. Thank you. Just two other quick ones. Libya now you've signed the deal. How do you catch up the earnings from December 1 last year. How do you go about getting that through (inaudible)

Stephen Chazen

We expect to get a check.

Dough Legit – Quadrom Capital

Okay, and that will come probably in the third quarter?

Ray Irani

Well, we expected a check. Yeah, probably in the third quarter, but I mean that's – that's kind of cash and if you want timer to catch up on the profits–

Steve Chazen

Which helps as a reduction to bonus.

Ray Irani

Yeah.

Dough Legit – Quadrom Capital

Alright. Okay. And the final one is, I guess the focus of this– the call today up here is to be, you know, clearly the great success you've harbor having in the US. It seems to be taking a strain off the Middle East a little bit, and I think there are some concerns that maybe things aren't going so well there in terms of your ability to lock in your projects. Could you, maybe just spend a little bit of time updating us on where you are, particularly in, obviously, the Emirates, Oman, and Bahrain and how you see things going forward?

Ray Irani

Well, I think the thing we tried to do in this call is to give you news. Bahrain, we continue to be optimistic that we will see success there. We continue to talk with them, and they have set a time schedule where they hope before the end of the year to choose one of three people who have made the cuts, and those three is Oxy, Exxon and Maersk. And so, we just have to wait that. Never said we're optimistic but there's nothing new I can tell you on that. We continue to negotiate in Oman and elsewhere for projects, but one thing I can tell you that it's going to happen next week or next month. These thing goes every – repeatedly say, government negotiate very slowly.

Dough Legit – Quadrom Capital

Okay, I guess, just one follow-up real quick. Steve, you said if I go into all those could be the CapEx number. Would that take a count of any success in the Middle East or would there be – could that number go higher? I seem to recollect you saying that kind of level (inaudible).

Stephen Chazen

It could go– it could go, it might go higher. I think right now, you would have to say that's a reasonable guess. But I would call it purely in the guess area. You know, if we have more success, we're going to spent more money because that's just the deal. But, you shouldn't. If we – were spending more than that than these numbers were showing in production are too low.

Ray Irani

Remember we demand the high returns. And the – we have enough of those to tell you that we're going to grow production over the next few years safely by over 7%. But hopefully, we will conclude projects, domestically and elsewhere, that have very good returns. We demand as of the growth that could be faster. So, increased capital should always be understood, in the case of Oxy, to mean higher growth and projects that have outstanding returns.

Dough Legit – Quadrom Capital

Thanks very much, indeed.

Ray Irani

We do still like free cash flow.

Operator

Thank you. (Operator instructions). Your next question is coming from Michael LaMotte of JP Morgan.

Michael LaMotte – JP Morgan

Thanks. I just have a quick follow-up on the comments throughout the presentation on the strategic acquisitions. It really does strike me with these kind of organic growth and Steve, as you put it in the last meeting, doing more of what you got in the opportunity now in the buyback, your comments on bigger deals that by strategic, you're really, I mean, we're talking pretty small. Is that a fair interpretation in terms of what your appetite is today?

Steve Chazen

Given where the stock is, it would be challenging to find a sizable acquisition that was –

Ray Irani

Give us better returns than dying [ph] our own –

Steve Chazen

It's just hard to– in fact, I'm not saying it's impossible, I just don't have one in my mind right now.

Michael LaMotte – J.P. Morgan

Do you have – the returns on the oil side, again, doing more of what you got seemed to be great, certainly relative, to even the gas plays and acreage opportunities that are out there. Do you have any thoughts or comments on gas versus oil in terms of–-

Steve Chazen

No. We– it's just – they're just about money. I don't think six to one, as you– I'm sure know. But sort of ten to one, it's really just about money. We're very pleased with the Piceance play. T-hat's developing very nicely. The production is coming along and reserve booking is coming along. Supply being able to ship at a low differentials is coming along. A lot of acreage there that we have in– so, we really pleased with that gas play. We thinks there some nice gas play in the Permian that we haven't really worked on much. We think we will do okay with there– going to fool around with stuff. If you look at acquisitions, you say "Why you're acquiring it?". Your acquiring it because you have expertise to make it work. There are other companies that have better expertise than we do in some of these place. So, I think, where stock prices today, pretty hard to make sizable thing like that work. You do have to move a needle on these numbers to spend that kind of money.

Michael LaMotte – J.P. Morgan

Okay. And then, lastly, and then going back to California and some of the newer zones that you are targeting within the shales, etcetera. I know it's light oil, is the gas-oil ratio any different from what you've seen in the conventional–

Stephen Chazen – Pres and Chief Financial Officer

It's a little good this year.

Michael LaMotte – J.P. Morgan

A little gas here. Okay. Great. Thanks.

Operator

Thank you. There appear to be no more questions at this time. I would now like to turn the floor over back to Christopher Stavros for any closing remarks.

Christopher Stavros

Well, thank you very much for joining us today and we do appreciate all your questions and please call us here in New York if you have any follow-up issues that you'd like to discuss. Thanks, again. And have a great day.

Operator

Thank you. This concludes today's Occidental Petroleum second quarter 2008 earnings conference call. You may now disconnect.

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