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Executives

David Larson - Vice President of Investor Relations

Chuck Davidson - Chairman and Chief Executive Officer

Chris Tong - Chief Financial Officer

Dave Stover - Chief Operating Officer

Analysts

David Kistler - Simmons & Company

Brian Singer - Goldman Sachs

Gil Yang - Citi Investment Research

Nicholas Pope - JP Morgan

Michael Jacobs - Tudor, Pickering, Holt & Company

Noble Energy Inc. (NBL) Q2 2008 Earnings Call July 30, 2008 10:00 AM ET

Operator

Good morning everyone and welcome to the Noble Energy’s Second Quarter Year 2008 Earnings Conference Call. As a reminder today’s call is being recorded.

At this time, I would like to turn the call over to Mr. David Larson. Please go ahead, sir.

David Larson – Vice President of Investor Relations

Thanks, Dana. Good morning, everyone. Welcome to Noble Energy’s second quarter 2008 Earnings Call and webcast. We really appreciate your interest in Noble Energy. I would like to start out with a few introductions. On the call today we have Chuck Davidson, Chairman and CEO, Chris Tong, CFO, and Dave Stover, Chief Operating Officer.

We hope everyone have seen our earnings release issued this morning and the agenda for the call includes some opening comments by Chuck. Chris will then provide a little more detail on items affecting results for the quarter. Dave is going to finish up with a discussion of our operating highlights and programs for the remainder of the year. We will leave time for Q&A and try to wrap up the call in less than an hour.

Today we also expect to be filing our 10-Q with the SEC and it should be available on our website at www.nobleenergyinc.com. I want to remind everyone that this call contains projections and forward-looking statements based on our current views and most reasonable expectations. We provide no assurances on these statements as a number of factors and uncertainties could cause actual results in future periods to differ materially from what we discuss here today. You should read our full disclosures on forward-looking statements in our latest news release and SEC filings for a discussion of all the risk factors that influence our business.

We will also reference certain non-GAAP financial measures such as discretionary cash flow on the call today. When we refer to these items it is because we believe they’re good metrics for us and our stakeholders to use in evaluating our performance. Be sure to see the reconciliation in our earnings release as well.

With that, let me turn the call over to Chuck.

Chuck Davidson - Chairman and Chief Executive Officer

Thanks, David and good morning everyone. The volatility that we have been experiencing in the equity and commodity markets this past quarter just highlights how important it is to remain focused on operational performance. It is certainly the one area that we have the most control over, and from an operational perspective it’s been an excellent quarter for Noble Energy.

From the productions side, second quarter volumes were up 9% versus the second quarter of 2007 and that fits in very nicely with the increased guidance that we provided you in May of this year. Production growth for the quarter came in from both our US operations, as well as international operations.

On the cost side we continue to see the benefit of our asset quality as cash operating costs and I would define that here as lease, operating, production, taxes, transportation, and G&A. Those cash operating costs on a per unit basis were under $11 per barrel equivalent. The only material increase that we saw in this quarter was in the production tax area, which as you know is directly tied to revenue and commodity prices.

G&A increased somewhat, due to the increased accruals for incentive plans as well as the fact that we continued to build staff to handle the growing opportunity set that we’re developing. With respect to oil field services, we are starting to see some modest inflation and price pressure creep into our programs, nothing too significant since we contracted our 2008 program needs mostly late year, but we’ll have to watch 2009 carefully as we are getting into that timeframe where we are procuring services for next year.

Our revenues were a record $1.2 billion for the quarter, that’s up over 50% from the second quarter of last year, led by strength in the worldwide commodity markets, and of course very strong production. Operating income was also a record for the quarter, at $672 million more than double last year. And our operating margin per unit. that’s revenues less operating expenses expanded to nearly $34 per barrel oil equivalent or 56% of revenues.

As many of you know, we began accounting for our oil and gas hedges under mark-to-market accounting at the beginning of this year, as a result of the escalating commodity prices during this past quarter we recorded a significant non-cash after tax hedging loss, which actually put us in an overall net loss position for the quarter. As this item doesn’t relate to current period activity, we’ve adjusted our results and reported very strong adjusted net income of $137 million for the quarter.

As, Chris will discuss with the recent decline in commodity prices since the end of the second quarter, we’ve seen a dramatic reversal as a result of experiencing substantial mark-to-market gains as we go into the third quarter. This kind of price volatility is exactly why we hedge portion of our production.

Our cash flow is now much more predictable with these hedges in place, even though the mark-to-market earnings jump around quite a bit. We continue to be very well positioned for this environment, our diversified mix of production and projects help us immensely. We’re more balanced than many of our peers, between oil and natural gas production, and our international positions add tremendous diversification to the domestic markets. And as I noted previously, our hedge positions for both natural gas and crude help mitigate some of the price volatility we are seeing here recently.

At our analyst meeting in May, I told you that Noble Energy has moved its focus from one of transition to one of execution. That’s execution based on Noble Energy's competencies and strategies, with a focus on the thousands of low risk development projects in our inventory as well as identifying and capturing additional resource opportunity, carrying out a world class exploration program.

Second quarter was certainly all about execution for us. We continued, and in fact increased, our activity levels onshore in the United States participating in over 2,000 projects in 2008, was led by operations in the Rocky Mountains at Wattenberg, Piceance, and the Tri-State Niobrara Play. This is an area where we are seeing some very nice production growth, in fact, our Rocky Mountain production set a record in the second quarter at 61,000 barrels of oil equivalent per day that’s up almost 7% from the first quarter this year and 16% over the second quarter of last year, very nice growth indeed for this important area of our company.

Also we began programs focused on our large emerging resource potential and this includes the commencement of a horizontal James Lime program in East Texas, our first horizontal Hainesville Well in East Texas, North Louisiana area, and Dave will be going through the results of these programs in just a few minutes. But we’re very excited about the opportunity being there.

We continued our testing of the New Albany shale and southern Indiana, which continues to be very encouraging. We're preparing to initiate testing on some previously untested zones at Wattenberg and the Piceance, as well as some new resource plays that we are pursuing in the Rocky Mountains.

In the deepwater Gulf of Mexico, the development projects that we brought online late last year and early this year have continued to have strong performance in the quarter. Internationally we made great progress on a development program at Dumbarton in the North Sea, and we've drilled now our second successful appraisal well at Benita Offshore Equatorial Guinea as we move forward with some of the production planning for multiple discoveries we have now in Africa.

We recently added complimentary assets to our portfolio with the acquisition of approximately 15,508 net acres in Western Oklahoma that has current production of just over 25 million cubic feet a day equivalent. The horizontal Cleveland play has an inventory of over 70 new drilling locations. We like the near term growth potential, we think this is really an excellent fit with our portfolio. It’s the type of acquisition we like to make. And in the case of this particular opportunity we think we can double the production by 2010.

Total net resource potential is approximately 132 Bcf equivalent, so it’s a nice incremental add to the company. The production for this year is also additive to our prior guidance, which implies that ultimately we’re going to be closer to the upper end of the guidance that we’ve given you here. This is just another example of taking advantage of opportunities that come our way throughout the year. You will recall that during the first quarter we announced significant acreage acquisitions in the Rocky Mountains, Texas, North Louisiana. So, adding this most recent acquisition in Western Oklahoma that brings our total onshore acreage acquisitions for the year to over 4,000 net acres. On top of that we added some nice positions and prospects in the most recent Deepwater Gulf of Mexico.

That brings me to a quick discussion on capital. Our base organic capital program has not seen a lot of change in the past quarter, it added some incremental projects in the Rocky Mountains, primarily Wattenberg and Piceance and Tri-state Niobrara, which added just under a $100 million to prior capital estimate of $1.9 billion. Of course the Midcon acquisition is additive, and when we roll in the development that we would expect for the rest of the year, we would expect that total acquisition to add about $325 million for the year.

Now that we continued the execution of our current inventory of lower risk development projects where we have also identified and added some resource opportunities, and also we have to continued to move forward with our exploration program. After a relatively quiet first quarter, the second quarter was very busy for our exploration teams, had results on two wells from the deepwater Gulf of Mexico, one well offshore Suriname and two wells offshore Equatorial Guinea. Dave will be talking about several of these more in a moment, but of the five we discovered a natural gas reservoir in the Deepwater Gulf of Mexico and had two discoveries offshore at Equatorial Guinea, the latest one being our second oil discovery in this region.

We are certainly excited about these results and our prospects remaining in 2008, which include Gunflint, which is currently drilling in the Deepwater Gulf of Mexico and our Tamar prospect in Israel, which we expect to spud later in the year. In summary strong momentum continues here at Noble Energy. It's definitely nice to have a portfolio, its certainly nice to have the diversified portfolio that we have in this current environment, we look forward to executing our programs for the remainder of the year.

With that I’ll turn the call over to Chris.

Chris Tong – Chief Financial Officer

Thanks, Chuck and good morning everyone. As David mentioned, hopefully you had a chance to read through the earnings release on the company tables before the call. So, I’ll just focus on what I consider to be noteworthy items. I’ll also provide some additional discussions on expectations for the balance of the year for those of you with forecasting models.

Given the significant increase in crude oil and natural gas prices experienced during the second quarter, we recorded mark-to-market in the amount of $828 million, which resulted in us recording a book net loss of $144 million for the quarter. Much of this mark-to-market loss represents prospective future losses assuming foreign commodity prices remain, as estimated on the valuation date June 30th. We reported adjusted earnings in our news release, which adds back the after tax amount of these unrealized future period losses associated with the derivative contracts. As such our adjusted earnings for the quarter was $337 million or a $1.93 per diluted share, which represents our second best quarter ever.

To help you understand better the impact of mark-to-market accounting on GAAP net income, if commodity prices as of last Friday were in effect on September 30th, we would record approximately $450 million mark-to-market gain in the third quarter. As you can see this creates significant volatility in earnings which is another reason that we discus adjusted earnings.

Another expense item worth noting for the quarter is a benefit program that Noble holds, Noble stock in a Rabbi Trust. The stock is required to be mark-to-market each quarter and recorded. When our stock price increases it results in a booked expanse for the change in the value of the stock. This was the case in the second quarter, which resulted in non-cash charge of $29 million or about $0.11 per share. I want to point this out certainly as an item to be considered when looking at our results versus consensus estimates, which typically don’t include this item. Discretionary cash flow for the quarter was a record $685 which far exceeded our capital expenditures of $561 million. One final comment on commodity hedges and discretionary cash flow; many of our hedges covering ‘08 were put in place several years ago when we acquired Patina Oil & Gas. Obviously they were at much lower prices than today’s market. As a reminder, these positions roll off in ‘08 and our estimates are that ‘09 pre-tax cash flow will be enhanced by approximately $650 million. Just as a matter of reference, you can see our hedging positions in our 10-Q, which we plan on filing later today and posting on our website.

As we look at our results versus the second quarter of ‘07, sales volume growth and strong commodity prices were the primary drivers to our higher revenues, operating income, adjusted earnings and discretionary cash flow. Sales volumes were approximately 218,000 barrels of equivalent per day, domestic volumes were up about 5% from the same period last year resulting primarily from continued drilling success and our Rocky Mountain program combined with ongoing strong performance in our Deepwater Gulf of Mexico property.

Internationally natural demand in Israel as well as high volumes in West Africa contributed to the 18% growth in sales volumes over the same period last year after adjusting for the Argentina sale. In West Africa natural gas sales to the LNG plant were still ramping up during the second quarter of ‘07. West Africa liquid sales were also impacted by the timing of liftings, which benefited the second quarter of ‘07 over 2008.

Price realizations for all of our products were significantly above second quarter ‘07 levels. Consolidated crude oil and condensate for the quarter, averaged over $105 per barrel, up significantly over the last year. In the US our realized natural gas price was up 35% over the last year to an average of $9.82.

For the quarter, NGL prices averaged nearly $60 a barrel, about 50% of WTI, which is a little below our guidance for the year. NGL prices did strengthen during the quarter but were outpaced by the increase in crude oil. It was another strong quarter as well for our equity method investments with the methanol and LPG plants in EG, contributing about $56 million. Margin growth as compared to second quarter of ‘07 was primarily attributable to increased methanol prices, which averaged $1.15 per gallon during the second quarter up from $0.87 last year.

Condensate and LPG prices were up significantly from ‘07, however, these increases were offset by taxes resulting from the exploration of the Alba Plant tax holiday On the cost side our oil and gas operating cost averaged approximately $4.44 per BOE in the quarter, down $0.12 a barrel from the second quarter of last year.

DD&A for the quarter averaged $9.88 per BOE, as compared to $10.05 per BOE in the second quarter of ‘07. Volume growth from low cost assets such as Wattenberg, Israel and West Africa have contributed to lower per barrel metrics.

I want to take the time to remind everyone that when talked about our per barrel unit cost, we include our equity method volumes from the LPG plant in the denominator, so please make sure that your model treats our cost items consistently. As announced in the news release a couple of weeks ago, our exploration expense for the quarter included our West Tapir prospect, offshore Suriname and Stones River prospect in the Deepwater Gulf of Mexico.

Our adjusted second quarter effective tax rate was 35% with 33% deferred both consistent with our annual guidance. Looking now the balance sheet our cash balance continued to grow, ending at just under a $1 billion at the end of the quarter primarily due to strong contributions from our controlled foreign corporations.

As a reminder, these CFCs are subject to incremental taxes, should we repatriate the funds, so rather than bring the cash back to the US, we are investing in the cash overseas in anticipation of upcoming expenditures in several international development projects. Total debt at the end of the quarter was flat at about $1.9 billion and our debt-to-capital ratio was 27%. Once you factor in the growing cash balance, our debt-to-cap, net of cash, decreased about 15%.

I do wish to mention one item that we have included in our Form 10-Q. Unfortunately one of our crude oil purchasers filed for bankruptcy protection late in July. Our current estimated pre-petition exposure is about $73 million. Working closely with counsel, we’ll be pursuing collection. No doubt we’ll have a better understanding of its collectability over the next several weeks and months. Fortunately while we want to collect what’s owed to us, we do not expect this event to be material to our financial position.

Now, just a moment on our expectations for the remainder of the year. As Chuck mentioned we expect our production volumes to be on a high end of the range for the year. Volumes in the third quarter will likely be down from the second quarter due to some anticipated plant down time in EG, at the methanol and LPG plants as well as a third party LNG facility combined with normal declines in the North Sea and Deepwater Gulf of Mexico.

We expect the fourth quarter rebound to be more consistent with the first half levels. The lower volumes in the third quarter will result in higher company-wide per unit cost metrics particularly with lower natural gas sales volumes in EG, one of our lowest cost assets. For the year, our expense items generally remain within our annual guidance ranges. LOE, production taxes, exploration expense and G&A will be at the upper end of the ranges, while DD&A will be near the low end of the range. Transportation, interest expense and taxes should be within our previous guidance.

That completes the financial review and I’ll turn it over to Dave.

Dave Stover – Chief Operating Officer

Thanks, Chris and good morning everyone. I’ll review some of our operational highlights for the quarter and discuss our activity in each of our pre-operating areas. Let’s start onshore in the United States, our largest domestic property, the Wattenberg field, continues to deliver excellent results. Production averaged a record 278 million cubic million cubic feet equivalent per day for the second quarter approximately 13% greater than 2007 second quarter and 6% greater than the previous quarter.

As we further expand the limits of the field, we continue to be pleased with the growth of liquid, production averaging 46% of production up from 41% last year. We drilled 117 new wells in this field during the quarter, bringing the year-to-date total to over 250 new wells, we continued to see great results from our drilling program. For example the traditional rigs we operate in the field are starting to drill 7,000 foot wells in three to four days, which is becoming competitive with our coiled tubing experience.

In addition to our ongoing activity in Wattenberg, we’ll be evaluating some of the areas emerging resource potential during the second half of the year. Currently we’re analyzing core samples and developing plans for testing other formations in the field later this year. Our other Rockies production is also growing, with the second quarter up 10% over first quarter this year. The Piceance Basin, our very active drilling program is targeting approximately 110 new wells this year with the addition of a fifth drilling rig this past quarter. We’ve started testing some of the wells in the eastern part of our acreage and, our most recent completion was producing two to two and a half million cubic feet per day after a couple of weeks which supports our expectation that would see increased pay reserve potential as we expand Northeast through our acreage position. Also in the Piceance, we are beginning to test some deeper horizons that we believe can further build our resources in this prolific field.

In the eastern part of the DJ basin, in the Tri-State area of Niobrara trend, net production is around 29 million cubic feet equivalent per day, up close to 7% since the beginning of the second quarter. This is an area where we are currently operating two rigs with over 365 wells planned in 2008, and we expect to accelerate our level of activity in this play based on our 3D seismic program. Also, in our northern region, we continue to expand our position in new resource plays. So far this year we have acquired close to 200,000 net acres with plans to drill some test wells late this year or early next year.

Continuing onshore in the US but moving to our southern region, I’ll start with our activity in East Texas. We began our James Lyme horizontal drilling program during the second quarter, our first well has tested at rates over 4 million cubic feet equivalent per day. Currently we are drilling our second of seven planned James Lyme wells for the year with the expectation of a larger 2009 drilling program. In the Caspiana field we are participating our first horizontal Hainesville well, which is currently being completed. Initial drilling results were encouraging with continuous gas shows while drilling the Hainesville well section. The New Albany shale we have been pleased with our 2008 drilling results thus far. We initiated our drilling program in the round rock acreage with four additional wells so far this year, two of which looked very encouraging. Our Sullivan County activity continues as we drilled 12 wells during the quarter, both of which are also very positive with one well testing around the million cubic feet per day, our best well so far. We will continue drilling both areas of the play and also look hard at stimulating some of our earlier wells. You may recall that all the wells to date have been natural open hole horizontal completions. Turning to the Deepwater Gulf of Mexico production for the second quarter was pretty flat to the first quarter. We expect our deep water production will experience normal decline now until the gas well can be brought on line late in the year. This project was deferred to resolve some issues concerning electric commands between the host platform and subsea well controls. We are currently on location in appraisal of our South Raton discovery where we have a 62% interest. This is a sidetracked obstructer, which will set up production in late 2009 or early 2010 as successful. Our Deepwater Gulf of Mexico exploration program was extremely active in the second quarter. We participated in the three exploration wells at Tortugas, Stones River and Gunflint. The last, a couple of weeks ago, the primary objective for Tortuga was wet but we did encounter a quality natural gas zone in the secondary objective. We anticipate this well will be a subsea tieback along with previous Isabella discovery. This area is part of what we call Galapagos project and we still have two prospects remaining in the area, Santiago and Santa Cruz, and anticipate additional drilling in 2009. We are excited about the potential of the Gunflint prospectus currently drilling. If you recall this is our largest prospect, which will have drilled to date in the Gulf of Mexico and is on trend with the Kodiak discovery. Results on this well should be known in the next month or two and we have 37.5% interest in our operator for development of this block is well successful.

Recently we were awarded the last of the 15 blocks that we won in the March OCS lease sale, bringing this acreage and more importantly the identified prospect into the inventory. It compliments our ongoing program and gives us over a billion barrels of net un-risked resource potential in the deepwater Gulf of Mexico.

Now lets move on to international, where our programs represented approximately 45% of total volumes in the second quarter, about 97,000 barrels of oil equivalent per day. Starting in the North Sea, we saw expected declines in our quarterly production versus first quarter, drilling from the second phase at Dumbarton is on schedule, comprised of two new producers and one injection well, with first production expected in the fourth quarter of this year. Early tests have been very encouraging, with flow rates were good or better than the initial phase of the development.

During the fourth quarter we’ll also be initiating the drilling of another four producers and one injection well that will have volume starting next year. In addition, two producers in the Lochranza discovery will be drilled late this year or early 2009. These additional developments will drive our total North Sea production growth through at least 2010.

In Israel, it was another very strong quarter for Noble. As we’ve mentioned before, the second quarter of the year is typically the lowest in terms of seasonal demand, but we continued to experience year on year growth. The infrastructure in country is continuing to move forward, and we recently saw the commissioning of an additional gas-fired power plant at Gezer, which should ramp up demand in the third quarter.

Construction to bring the Hagit Power Plant online continues, and we anticipate it will be ready for volume sometime in the fourth quarter. We continue to hear conflicting reports regarding gas deliveries for Egypt, so we still have some uncertainties impacting our projections for the remainder of the year. Our production should stay fairly constant until September, and then we’ll have to see how the plant timings and gas delivery from Egypt impact the rest of the years volumes. There’s been a lot of news recently regarding Israel’s desire to secure additional natural gas supplies for the future. We remain excited about the countries natural gas demand outlook. We believe this is a great time to be exploring for additional gas in the area.

During, the quarter we signed an agreement with Atwood Oceanics to secure the Atwood Hunter drilling rig for use on the Tamar prospect planned to spud later this year. The rig should be arriving on the prospect site in the fourth quarter and we should have results in this well some time in the first quarter 2009. As a reminder, Tamar is a 3 plus PCS gross prospect with a chance of geologic success in the range of 35%. We operate the prospect with a 1/3 working interest, and should Tamar be successful we have offsetting prospects to pursue in this area.

Our, West Tapir exploration prospect offshore Suriname was drilled in the Second Quarter and did not find commercial hydrocarbons. This was a high risk prospect and first well drilled Suriname in over 20 years. Despite the disappointment of the well we remain optimistic about the prospectivity of our significant acreage position in Suriname.

Moving to West Africa, our Operations at the Alba Field and methanol and LBG plants delivered very strong results in the Second Quarter. At the LPG plant production was curtailed during July as we completed plant maintenance. We expect the plant to be back to full capacity by next week. At the methanol plant Operations were down for most of the month of July but are now back online. Due to these two items as well as some scheduled down time at the third party LNG facility, our natural gas volumes will be lower in the third quarter and should rebound back in the Fourth Quarter this year. Our West Africa teams have continued their tremendous success in our operated blocks. At our analyst meeting in New York, we announced the downdip oil test at Benita encountered approximately 42 feet of net oil pay, found the water oil contact, and moved the lowest known oil-bound structure approximately 28 feet. Subsequently, we were able to flow test the well, and confirm that Benita will be capable of producing approximately 50,000 barrels of oil per day gross, from just five wells.

In addition, we announced a gas condensate discovery at the Felicita prospect on block O, which should have similar liquid yields as the blended discovery, and recently, we drilled another discovery at Diega in block I, marking our sixth successful well drilled on the block with no dry holes, and our second oil discovery. Results confirm the existence of two separate hydrocarbon-bearing reservoirs, one a very nice gas condensate sand, with about 38 feet of net pay, while the second sand contains 30 feet of net gas condensate pay on top of 37 feet of net oil pay.

The upper gas condensate sand correlates to previous discoveries in the region. The deeper reservoir containing both gas condensate and oil was a previously untested feature. We’re in the process of testing the Diega oil discovery and should have results in the next few weeks. Needless to say we’re pretty excited about the results from Diega, which is certainly a tie-back candidate to the Benita oil development.

Our development teams remain extremely busy with their work in moving toward project sanctioning. In May, we discussed several possible scenarios for the development of our oil and gas condensate discoveries in the region, so I won’t go into more detail on this call, but we are working hard on all of the options available to us. We’re still targeting the end of the year to submit a plan of development for the oil discovery at Benita, with hopes of sanction in the first half of 2009.

Based on our West Africa drilling success, we have secured a rig to begin additional drilling late 2009 or early 2010, and we also expect to supplement this with additional rig activity during 2009. Overall the great start to the year has continued into the second quarter. Unit operating cost, performance, and production have remained strong, as we are now positioned to deliver volume growth in the high end of our guidance for 2008. The exploration program is extremely active with mix of exciting impact prospects while we continue to build momentum and understanding and testing our emerging resource inventory.

We took the advantage of opportunity to further build our onshore US position with asset that compliments our operating base, and will start delivering production in third quarter. Internationally, we’ve made great progress for the development project at Dumbarton. We continue to see growth and upside in Israel.

As we mentioned in New York in May, with an unrisked resource inventory six times proved reserves, or risked inventory 3.5 times our reserve base, we’re excited about the value we can continue to unlock at Noble energy.

I guess at this time, Dana we would like to go ahead and open the call to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And we’ll go first to David Kistler, Simmons & Company.

David Kistler - Simmons & Company

Good morning guys.

Chuck Davidson

Morning.

David Kistler - Simmons & Company

Chuck I wanted to explore a little bit your comments on volatility in gas previously.I had been a little bit concerned but 2009 gas prices. I wanted to ask specifically with those thoughts in mind, can you talk a little bit about hedging and how that impacted with some more of your capital budget moving towards the Rockies.

Chuck Davidson

You bet. As you know earlier this year we did begin adding some incremental hedges for North America and in particular on North American gas, we find that we’re roughly in 2009 hedged at about 40% of our gas. And right now, we have those hedges at Henry Hub although we will certainly be considering adding basis hedges to get a portion of it to the Rockies. Our, 2008 volumes are hedged at a comparable level with quite a bit of it hedged back to the Rockies. So it’s an important element of our program. We’re at about the level that we would target and that being about 40% of North American gas to be hedged as a rule, we’ll generally hedge up to no more than 50%.

We continue to see volatility and we’ve seen certainly a lot of our gas supply growth in the last few months. And I would just say that perhaps what’s happening in the gas markets here recently is fairly consistent with what our thinking was earlier in the year, and that was that we saw supplies growing, which I think is a real positive for the consumers in this market, but at the same time, it’s having an impact on pricing. And we would expect to continue to see volatility not only in the broader North American markets but also in the Rockies as well going forward, thus the reason for hedging a portion of our production there.

David Kistler - Simmons & Company

Okay. And just a clarification on CapEx, if I understood your comments correctly, you’re shifting $100 million of the original 1.9 more towards the Rockies and then if I add the incremental associated with the purchase of the Oklahoma assets, all in capital budget of 2.22 billion give or take?

Chuck Davidson

No, let me clarify there. The comment I made at just under $100 million, those were incremental projects.

David Kistler - Simmons & Company

Okay.

Chuck Davidson

And they were basically in the Rockies in a variety of areas, so you have to treat that as an incremental to the 1.9 and then as you noted then you add the $325 million for the Western Oklahoma acquisition as well as what we expect to spend on the development for rest of the year.

David Kistler - Simmons & Company

Okay, so it’s a little north of $2.3 billion?

Chuck Davidson

Into the 2.3, yes little north of $2.3 billion.

David Kistler - Simmons & Company

Perfect. And then last question and I’ll hop off, with respect to Israel and really the Egypt gas situation as well, any updates on the commissioning of the two power plants and what that might do to demand?

Chuck Davidson

Yeah, I think I’ll let Dave comment on that in terms of the status of the two. I think you mentioned one is already commissioned.

Dave Stover

Yeah, Gezer is ramping up kind of as we speak so that should get up to the full capacity this quarter. I think Hagit is still more of a wildcard. We’re assuming that will come on in fourth quarter. They still have to work through some issues there. That will really be the wildcard as to where they end up on demand this year.

David Kistler - Simmons & Company

Well, great, guys, thanks so much for those clarifications.

Chuck Davidson

Thank you.

Dave Stover

Thank you.

Operator

And we’ll take our next question from Brian Singer of Goldman Sachs.

Brian Singer - Goldman Sachs

Thank you. Good morning.

Dave Stover

Good morning.

Brian Singer - Goldman Sachs

Following up on the acquisitions you announced in western Oklahoma, was wondering if you see additional opportunities to acquire properties or companies, and then as you look across your asset base, whether you see any opportunities for asset sales as well?

Chuck Davidson

Well, I think in terms of incremental opportunities, I think we do see additional opportunities of the type. The one that we mentioned in western Oklahoma, that really is the type of things that we’re looking at, which are tactical, they fit in, they utilize our expertise, and in this particular case, in terms of type reservoirs, horizontal drilling, so it’s a nice add-on for a business. And we’ll continue to look for more of those as we go forward.

Quite honestly, earlier in the year when you look at larger opportunities, things certainly from the producing standpoint seem to be priced very high. We have tended to add more acreage to our inventory, rather than producing properties, although in western Oklahoma, we don’t have any opportunity but we’ll continue more and more as we go forward. We have seen there’s been a real flood of properties put on the market here the first half of the year.

I don’t know whether it’s because of the commodity price environment, or whether there were other drivers on the part of sellers, so there’s been quite a bit of inventory out there, but I would just say that probably some of the price expectations are beyond where we have been willing to go, considering the other opportunities and internal in our portfolio.

Brian Singer - Goldman Sachs

Thanks, and then when you think about also the various areas that you can shift capital from one place to another, how do you think about that looking ahead over the next couple of years, depending on where Rockies differentials go, and where say international gas or Israeli gas prices relative to U.S. prices, relative to oil prices go, I guess how flexible do you see capital programs, and maybe talk a little bit for prioritizing various parts of the portfolio?

Chuck Davidson

I think we clearly have a lot of flexibility in our near-term programs when we look at the Rockies, those are opportunities that are captured, in they’re in inventory. There’s obviously a tremendous incentive to move them forward because they’re very long-life properties, and they are generally very low cost. So, we continue to see that they are very appealing and attract capital, the Wattenberg has a very high liquid content, and as a result, it really is of course, Wattenberg is a big opportunity there. As Dave mentioned, we are over 40% liquid production out of Wattenberg so it’s just got a tremendous driver to keep going forward.

The other areas, we can scale up or scale down as necessary. I would say that as we look forward in the next couple of years, I am very pleased that we have a position in international global gas, because that is an area that there’s many, such as we mentioned in Israel and other areas, where there’s a real local demand for the market or in West Africa where it’s clear that there’s going to be demand for that LNG in coming years. And in many instances, those supplies are more tightly priced against crude oil and other alternatives that they would have to pursue if they didn’t have natural gas. As a result of the economics on some of those projects, it’ll continue the strengthening of global gas. So for that reason, we will continue to be very flexible, Brian, and how we allocate capital. Our base programs are very solid in a variety of prices and so they will probably continue to be well funded going forward and we’ll just look on the edges of things that speed up or slowdown, based on how we see the markets and the relative ranking in our portfolio.

Brian Singer - Goldman Sachs

Great, thank you.

Chuck Davidson

Thank you.

Operator

And we will take our next question from Gil Yang at Citi Investment Research.

Gil Yang - Citi Investment Research

Hi, could you just comment on what you have learned from the dry hole at West Tavapir?

Chuck Davidson

Yeah, I’ll ask Dave to add a few more comments on that. That is a huge area, that in and of course, that is Suriname for those who are not following the prospect names, and we have a very large acreage position there and as we talked about in May, there are multiple play opportunities in an area and each of them has their own kinds of specific risks. So, I think the well that we drilled there and the reason it failed was one of the identified risks of the prospect and it was a very high risk prospect. I mean, we would expect that only around less than 25%, so one in four of those but the other opportunities, area and maybe Dave would just comment on some other things

Dave Stover

Yeah, yeah, I think just to elaborate on Chuck’s comment a little bit, it did help us narrow down some of the risks obviously in the country with what we learned from that well. But at the same time, as Chuck mentioned, it was testing one of the potential play concepts out of three or four different concepts that would be in that potential type opportunitie. Lot of work to do and it’s a very large acreage position to continue to explore as we get comfortable. We are being a little careful about what exactly we found in the well. It continues to be an area that has attracted interest by other companies and as a result the specific well results were to being and very proprietary to the investment.

Gil Yang - Citi Investment Research

Okay, does this well result, does it say that that play concept doesn’t work or is it just that specific well, that specific prospect within that concept didn’t work?

Chuck Davidson

I think it’s more of the latter, Gil.

Gil Yang - Citi Investment Research

Okay, so you can recalibrate and go out for other...

Chuck Davidson

I think, we just have to go back and do the recalibration take what we’ve learned and then start looking a little harder at some of the areas.

Gil Yang - Citi Investment Research

Okay. And so the next one you drill, will it be in the follow on types of wells in the same play or are you going to go to one of the other play concepts?

Chuck Davidson

Yeah. We haven’t determined what the follow-up activity will be yet. It’s probably too early to speculate on that.

Gil Yang - Citi Investment Research

Okay. In West Africa, can you give any sense of what you’re thinking about development cost given the way steel costs are moving these days?

Chuck Davidson

Well, we had an estimate in May of kind of a broad estimate on the development costs. Yes, things have moved up. I would say that we’re still going through as part of our work now, we’re actually getting into some of the feasibility work in terms of the FPSO and things like that. And again there’s a caveat, we keep adding discoveries here, but based on the 2007 discoveries, we were estimating that our net capital would be somewhere between $1.6 billion and $2.2 billion and that was an estimate based on second quarter May type numbers for steel and other things like rigs (inaudible) and keep in mind the the FPSO will probably be a leased vessel rather than a (inaudible) vessel. And that was the develop about on our mean basis about 270,000 million barrels equivalent. And since then we’ve talked about discoveries at Felicita, as well as Diega, and those will be an incremental add onto that. I don’t know, Dave, did you want to add anything more in terms of currently what we’re doing there.

Dave Stover

No. I mean, I think we mentioned to Chuck that we’re still firming up our overall development plans. I think the two additional discoveries here since we talked about this in May, you know, does nothing but help our overall cost scenario especially if you’re looking at tie-backs of Belinda, and Benita, so we continue to firm up the cost as we move through the year.

Chuck Davidson

The good news is that as was demonstrated by the Bonita tests, that these are very high quality reservoirs, they take only a few wells to produce, virtually all of our discoveries appear to be keepers in terms of being able to be used as producers, so a lot of the costs are going to be, or a significant portion of some of the drilling costs are going to be as part of the exploration program that’s behind We’ll still have lots more subsea development production facilities, but we continue to be more and more encouraged about the overall development scenarios and opportunities and just every incremental discovery is going to make it easier and certainly having other oil discovery at Diega just is further confidence in being able to move.

Gil Yang - Citi Investment Research

Okay. Sure. And I just to clarify that the 1.6 – 2.2 is the go forward capital.

Chuck Davidson

Yes. It doesn’t include the sum capital.

Gil Yang - Citi Investment Research

Okay. And so, the costs are likely to go higher but, it’s combination of more development or more resources that you are developing and maybe some inflation?

Chuck Davidson

That cost estimate again was only for the discoveries for 2007 so everything forward that we discover fortunately is incremental. And we’ll just have to see what cost inflation is. Keep in mind this is a multi-year project and my experience has been that major projects like this, when you get all of the things worked out they tend to probably grow cost but you also find ways for discoveries and a lot of things to optimize. But we’re in the early stages.

Gil Yang - Citi Investment Research

All right, thank you very much.

Operator

And, we’ll take our next question from Nicholas Pope of JP Morgan.

Nicholas Pope - JP Morgan

Good morning.

Chuck Davidson

Good morning.

Nicholas Pope - JP Morgan

Something to get a little more detail on the acquisition. I was wondering, like how many wells do you all have drilled in that acreage position and are the wells, have they already been targeting the Cleveland sand or is that something you all are going after going forward?

Chuck Davidson

Yeah. I can give a little more color on that. There’s already a number of horizontal Cleveland producers in the Field. I think 30 or 40 possibly, and then like we said we’re targeting another 70 or so going forward. One of the things we really liked about this is that it has a very low operating cost structure also. It’s under $0.50 an Mcf on operating cost. It’s got a nice liquid content on top of the gas content. For example, some of the recent wells have, in fact our last four or five wells after a week of production, they were producing 2 million to 3 million a day, with 300 barrels or more of liquid per day, of condensate per day, oil condensate per day. So it’s got a nice mix, especially when you look at a revenue stream going forward on liquid content and high BTU gas, per say And it’s something we’re pretty excited about, and really hitting the ground running here as we bring it in here in July, and it’s a nice addition to our current operations.

Nicholas Pope - JP Morgan

Okay, and do you know what the proved reserves are, and are those proved reserves, those 30 to 40 Cleveland wells?

Dave Stover

Yes, the proved reserves out of that 132 Bcf, probably about 70% of it is proved, probably about 25% to 30% of the total piece is proved producing.

Nicholas Pope - JP Morgan

All right okay. And then I was just wondering, have you all added any acreage in east Texas, north Louisiana from that like 19,000 I guess you all talked about during the analyst day?

Dave Stover

Yes, we’re a little over 20,000 now. We keep adding little pieces here and there so we are probably up 20 to 22,000 acres right now.

Nicholas Pope - JP Morgan

And are you all drilling that well in Caspian, or is that or is that another operator doing that work?

Dave Stover

We’re a partner in that with another operator. We’ve got about a quarter of that well.

Nicholas Pope - JP Morgan

Can you say who the partner is?

Dave Stover

JW is the operator.

Nicholas Pope - JP Morgan

I think that’s all I had. Thanks a lot.

Dave Stover

Thank you.

Operator

[Operator Instructions] We will go next to Michael Jacobs with Tudor, Pickering, Holt & Company.

Michael Jacobs - Tudor, Pickering, Holt & Company

Thank you and good morning.

Chuck Davidson

Good morning.

Michael Jacobs - Tudor, Pickering, Holt & Company

Just a couple of questions on your exploration program. I’d like to get a better understanding of your net resource estimate, actually for all of West Africa, before Diega (inaudible), and the previously untested deeper feature. I believe you had $450 million of net un-risked resource, that’s ex-Diega and Felicita. So, with Diega finding pay in the deeper feature that appears to be oilier, can you update your estimate of net unrisked resource for West Africa?

Chuck Davidson

We gave the pre-drill estimate for Diega, which was 20 million to 80 million barrels equivalent. And yes, we have probably found more than what we expected but this kind of falls in the category of like Benita. We’ve got to appraise this before we really understand what’s a valid resource range for Diega. So I think it’s a little too early to jump to any kind of hard resource numbers for Diega. I think the one thing that it does, Mike, it’s probably too early for us to change any of the unrisked resource potential, but it does take some of the risking off some of that potential, obviously.

Michael Jacobs - Tudor, Pickering, Holt & Company

And, recognizing that the new information has to be integrated with seismic, is there any idea if this deeper potential is going to be present with any of your other prospects and that the overall potential for all of West Africa could go up?

Dave Stover

Well, I think as we go forward, we’re like everybody else. We pick the easier things first, and then we sort of move on to the ones that are more challenging, and the good news here is this one, which was maybe a little more challenging, worked out to the positive. What we had been exploring mostly in 2007, were what we would call some of the upper Miocene, that had very strong amplitude signatures associated with them, and this being a little deeper, does have a different seismic signature, and part of the work that we are doing now and will continue to do, is to look at that and see how it may evolve over the blocks in the areas. We certainly have identified, previously, some of these deeper targets, and we had as part of our program that we’re going to continue to look at testing them, and there’s more to be tested as we go forward. So has it opened up doors? Absolutely. Have we decided which door to go through yet? That’s still left to a lot of work by the explorationists to fully integrate all of the data and probably do some more analysis, and I’m sure they’re going to hit us up for more data and more reprocessing to sort it out, but they’re very excited because it has opened up opportunity.

Michael Jacobs - Tudor, Pickering, Holt & Company

Great. And, just switching over to the Gulf of Mexico, industry body language on Gunflint is positive. If it is successful are you anticipating a sub-sea tie-back, or stand alone development?

Chuck Davidson

I don’t know about any body language on Gunflint, but it’s still got a ways to go. It’s a test that will go projected a little below 30,000 feet, and in a nice neighborhood, there’s always been a lot of positive excitement about the neighborhood that Gunflint is in, being on kind of a depositional trend down from Kodiak. But there’s also been some dry holes in the area as well. So, we’ll just have to wait and see. It can move all over the map. Yes, it could be a tie-back to something, or it could be a stand alone. It all depends on what we find. So, as Dave mentioned, more to come, and hopefully we’ll have results in a month or two that we’ll be able to report to you.

Michael Jacobs - Tudor, Pickering, Holt & Company

Great thank you, very much.

Chuck Davidson

Thank you.

Michael Jacobs - Tudor, Pickering, Holt & Company

Thank you.

Operator

And gentlemen, we have no further questions at this time. Mr. Larson, I’ll turn the call back over to you for any additional remarks.

David Larson

Thanks, Dana. I want to thank everyone again for participating in our call. If you do have questions, don’t hesitate to call Brad Whitmarsh or myself to gain some extra clarity, and again, I appreciate your interest.

Operator

And that does conclude today’s conference call. Thank you for your participation. You may disconnect at this time.

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