Talisman Energy Inc. says it will be able to reduce capital spending next year and still boost overall production by five to 10 per cent, thanks largely to its strategic shift into unconventional shale gas plays in North America.
The comments came Wednesday at an investors conference held by the Canadian multinational oil and gas producer in Toronto.
Talisman president and chief executive John Manzoni said that 2010 is a critical transitional year for Talisman, which has major holdings in the North Sea, Asia and North America.
For the first time in Talisman's history, the output added by its shale gas holdings offset the declines in its conventional natural gas production.
"Our shale business is growing," Mr. Manzoni said.
"Returns in the shale will depend on the quality of the rocks, since there are very few barriers to entry in the business. But we believe we have top-tier rocks and the key focus is reducing overall costs."
Talisman said it's on track to produce up to 300 million cubic feet of gas per day from the Marcellus shale formation in Pennsylvania. It also has another major shale holding in the Montney formation in Western Canada and less advanced holdings in Quebec and elsewhere.
Modern drilling and extraction technologies are enabling energy producers to tap the enormous amount of natural gas contained in shale rock formations. However, the process requires advanced skills and specialized equipment.
For this year, Talisman has budgeted $1.9-billion for capital spending in North America, including $1.5-billion for shale gas projects.
For 2011, Mr. Manzoni said Talisman is using a provisional estimate - which assumes natural gas prices remain low - to reduce North American capital spending to $1.6-billion, including $1-billion on shale.
"At the $1.6-billion level, everything we'll invest into will be profitable at the lower gas price," Mr. Manzoni said. "We have the option to increase if prices show signs of moving above $4 sustainably into next year."
In the two years since Talisman shifted its focus away from conventional sources of natural gas, the company has dramatically cut the percentage of cash flow it requires for capital spending in order to keep stable output, he said.
Talisman previously needed to spend 70 per cent of cash flow to replace its depleted reserves but the level will fall to 40 per cent in 2010 and drop even further the 35 per cent range next year, Mr. Manzoni said.
"It is true we can't hold production constant forever by spending just 35 per cent of our cash flow, but we think it's a good estimate to hold production at the levels we're at today for at least five years."
Because of Talisman's geographically diverse holdings, including its North Sea oil production and its offshore exploration activities in southeast Asia, the company is in good position to benefit from the relative strength of crude prices and wait until natural gas prices rebound to a more economic level, he said.
"The near-term direction of natural gas prices is quite difficult to judge because it depends on the rates of decline of conventional and the rate of build of unconventional."
Talisman is well-position to handle gas prices at current levels through 2011, he said.