Oct 22, 2015
Executives
Kathleen L. Quirk - Chief Financial Officer, Treasurer & Executive VP Richard C.
Adkerson - Vice Chairman, President & Chief Executive Officer James C. Flores - Vice Chairman; President/CEO, Oil & Gas, Freeport-McMoRan, Inc.
Analysts
Jorge M. Beristain - Deutsche Bank Securities, Inc.
Brian Hsien Yu - Citigroup Global Markets, Inc. (Broker) David Gagliano - BMO Capital Markets (United States) Tony B.
Rizzuto - Cowen and Company, LLC Jeremy R. Sussman - Clarkson Capital Markets John C.
Tumazos - John Tumazos Very Independent Research LLC Christopher Domenic Mancini - Gabelli Brian T. MacArthur - UBS Securities Canada, Inc.
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Third Quarter Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
I would now like to turn the conference over to Ms. Kathleen Quirk, Executive Vice President and Chief Financial Officer.
Please go ahead, ma'am.
Kathleen L. Quirk - Chief Financial Officer, Treasurer & Executive VP
Thank you and good morning. Welcome to the Freeport-McMoRan third quarter 2015 earnings conference call.
Our results were released earlier this morning, and a copy of the press release and slides for today's call are available on our website at fcx.com. Our conference call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call.
In addition to analysts and investors, the financial press has also been invited to listen to today's call and a replay of the webcast will be available later today on our website. Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on the call include forward-looking statements, and actual results may differ materially.
We'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our Form 10-K and subsequent SEC filings. Today on the call, we have Jim Bob Moffett, Richard Adkerson, Jim Flores and several other of our senior members of the team in the room here.
I'll just start by briefly summarizing our financial results and then turn the call over to Richard who'll review our recent performance and outlook. As usual, after our remarks, we'll open the call up for questions.
During the third quarter, we had an active quarter of announcements on revised plans and cost reductions. We've got further announcements in today's press release regarding our Sierrita mine, which Richard will talk more about in his presentation.
Today, FCX reported a net loss attributable to common stock $3.8 billion that was $3.58 per share in the third quarter of 2015. The net loss attributable to common stocks included net charges totaling $3.7 billion, or $3.43 per share, primarily related to the reduction of the carrying values of oil and gas properties.
After adjusting for the net charges, the third quarter 2015 loss attributable to common stock totaled $156 million or $0.15 a share. Our adjusted EBITDA or earnings before interest, taxes, depreciation and amortization during the third quarter approximated $940 million.
We reported total sales of copper during the quarter of 1 billion pounds, gold sales of 294,000 ounces, 23 million pounds of molybdenum, and 13.8 million barrels of oil equivalents. Our average realized price for copper was $2.38 per pound.
That was below last year's third quarter average of $3.12 per pound, and gold prices of $1,117 per ounce or below the year-ago quarter average of $1,220 per ounce. Our oil and gas realized price for crude was $55.88 per barrel that included about $11 per barrel of realized cash gains on derivative contracts.
That was substantially below last year's average price of $88.58, which included $6.77 of cash losses on derivative contracts. Operating cash flows during the third quarter totaled $822 million and capital expenditures totaled $1.5 billion.
We ended the quarter with total debt of $20.7 billion and consolidated cash of $338 million. We have information in the press release on our progress; on our after-market equity programs, to date, we've raised proceeds of $1.2 billion out of a total announced program of $2 billion.
We ended the quarter with a strong liquidity position. We had availability under our $4 billion revolver of $3.5 billion and availability under our Cerro Verde credit facility, $1.8 billion credit facility of roughly $300 million.
I'll now turn the call over to Richard who'll be referring to the materials on our website.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Good morning, everyone. What we're going to talk about here today is what our company is doing to respond to the current weakness in the commodity price market.
Almost all of you have heard me talk in the past about how positive the long-term market is for copper. Continue to believe that.
But we need to – we're recognizing the need to prudently manage our self in the short run, and we've taken some really important steps to allow us to do that, so that we can maintain our financial situation and our liquidity and our assets for what we believe is going to be a very positive market for us in our business as we go forward. We have taken and continue to assess very aggressive steps to control costs, limit capital expenditures.
We have, as we will show in a later slide, a very positive view about our free cash flow generation, particularly beginning in 2016 as we get the benefit of the expansion projects, the project at Cerro Verde. In this quarter, we've had some really positive steps for our company, the things we worked on for a very long period of time.
The Cerro Verde start-up is really going well, really proud of our team there, it's coming up very quickly. Our costs are under control.
It's good to see where we are as we complete that project. And then we had an important step, we got a letter from – of assurances from the Indonesian government about our ability to extend our operations beyond 2021, and a commitment from the government that we'll do so on terms that are consistent with the existing rights on fiscal matters and enforceability matters that's in our existing contract of work.
Jim Flores will report on our continuing positive drilling results as we execute our development activities in the deepwater Gulf of Mexico. As Kathleen said, with reluctance, we made a decision to raise some equity for FCX, strengthen our balance sheet, provide insurance against unforeseen potential negative situations, and we've executed that in a very efficient manner.
Just two weeks ago, our board announced that we are undertaking and we're now engaged in a strategic review of alternatives for our oil and gas business. There are some alternatives there, the market is a difficult market, unquestionably right now, but we have an overriding goal of being able to manage that business under these alternatives in a way that funds itself with its cash flows or outside financing.
Copper markets. Copper averaged $2.39 in the third quarter ranging from $2.21 to $2.62.
I just returned last week from the LME event in London where we got a full dose of the financial markets' view of the situation in China and the declining growth and outlook for there. Chinese consumption of copper remains significant.
Our physical business there, and actually globally, is relatively strong, stronger than the sense you would get by looking at the financial markets' view of the situation. And consumption in China continues to increase, admittedly at a much lower rate.
U.S. and Europe are recovering slowly and certain sections remain positive, in automobiles and construction.
But the price volatility, without question, creates short-term demand uncertainty that we're taking into account the way we run our business and manage our financial affairs. Global macroeconomic conditions are weaker than many expected right now.
And so, I said, we're being realistic about what we face here. But underlying that in the copper business, the industry continues to be supported by mine supply limitations.
We've announced and we're making a new announcement today about curtailing high-cost production throughout the industry. The companies are limiting CapEx.
This is resulting in reductions or deferrals of investments in long-term development of supplies, that's going to be positive for the market as we go forward. As we go through this time, existing mines continue to decline in grades.
We're going to be moving underground at Grasberg and others in the industry. In South America, going to have to convert from open pit operations to underground operations.
And some very important ore bodies are still being stymied by environmental concerns, community restrictions or government issues. So, our copper commodity continues to be supported by supply-side situation.
So, let's go over what we're doing as a company to be responsive to the current conditions. We made a 20% reduction in our 2016 consolidated CapEx, and we're continuing to review the CapEx that's currently in our plans for further reductions.
In the mining business, as we did in 2008, we've gone through on a mine-by-mine basis to optimize cash flows and consider low prices. As a result of that, today we are announcing a 50% reduction in our mine rates at our Sierrita mine in Eastern Arizona.
This is a mine that goes back to the 19th century. It was a mine that has very low grades of copper, but significant molybdenum byproduct, and we're reducing its rate by 50%.
And I'll explain that in a few minutes as to why we're not doing 100%. But aggregating together with previously-announced cuts, we're cutting our copper, annual copper production by 5% and with other actions we're taking in the molybdenum business, where prices have been very weak recently, we're reducing our molybdenum production by 20%.
We reduced mining CapEx by 25%, including 50% reduction in sustaining capital. Our major project CapEx will be dropping off in 2016 as we complete the Cerro Verde project.
We're having a significant reduction in our unit site production delivery cost, 20%; that's going, in 2015, from $1.78 to $1.45 before byproduct credits. The way we've approached this on a mine-by-mine basis, is we had Red Conger and our other members of our team look at each mine, and review their operations with a $2 copper assumption and ensure that we can be cash flow profitable at $2, including sustainable capital.
As I mentioned, we're undertaking this review of our oil and gas business. In our numbers today, we're reflecting a $1.8 billion reduction over 30% of CapEx in 2016 and 2017.
We deferred investments in several projects. We included acceleration of production, and this review we're undertaking is going to be focused on an ongoing effort to eliminate the cash flow shortfall that exists between this level of capital spending and our cash flows at low crude oil prices.
So, here's what we've done with our mining operations. In North America, we've taken steps to cut mine rates at the Tyrone SX/EW operations.
We suspended all mining at Miami, where we're engaged in significant reclamation activities, and we reduced mining at Morenci and other North American operations. That aggregates at an annual rate that will come into play over time because it takes time for the reduced placement of material on SX/EW stacks to affect production, but that will result in about 50 million pounds, and we're talking pounds here, reduction annually.
The previously announced reduction in stacking rates at El Abra will result in a 100 million pound reduction in 2016. We've had a 35% reduction in molybdenum production at Henderson through adjusting operations there.
And today, with this reduction at Sierrita, that's another 100 million pounds. We are continuing to look at the possibility of a full shutdown at Sierrita.
The barrier for that is we have weigh stacks there that were developed in the 1970s where we have to capture water coming off those weigh stacks, and we use that water in our mill to operate our mill. If we shut our mill down, we have cost issues and operational issues as to what to do with that water because we have to process it.
So, we're looking at alternatives to that. In the meantime, we're using the water and operating the mill at a 50% rate.
From costs, we've deferred projects. We reduced our workforce in connection with this cutback.
We're aggressively managing capital, operating and administrative costs, and we're keeping our finger on the market and in each of our operations and we're prepared to do whatever it takes, whatever it takes, to keep our operations generating positive cash flows, to protect our liquidity, hold on to these assets for a better day. Slide seven show what we are looking at going into 2016, which we've been pointing to at some times because it will reflect the benefits of investments that we started to pursue at the end of 2010 as we were coming out of the 2008-2009 crisis to invest in very high-return businesses.
We've spent or will spend roughly $7.5 billion at expanding our operations in the DRC at Tenke Fungurume, at the projects that's completed now at Morenci, where we paid significant mill additions and other improvements, and now with completion of the major project of – at Cerro Verde. I want to make a couple of points because there's a lot of focus on this.
Aggregate capital was $7.5 billion. It was funded out of cash flows plus a $1.8 billion bank line at Cerro Verde.
This is going to be repaid over a relatively short period of time. So, it is not a case of us going out and leveraging the company to invest in these funding it out of cash flows, these projects' economics were based with a view of looking at the possibility of the kind of economic environment we have now.
They establish a long-term base for future production and they're going to give us increasing volumes in 2016, where we'll go to over 5 billion pounds consolidated a year at what we think based on today's rate will be a net cash operating cost of $1.15 a pound. You can see that decline in unit net cash cost after byproduct credits, which is roughly at $1.50 level now, going to $1.15 next year.
The combined impact of operating cash flows of higher volumes, lower unit costs will be roughly at $2.40 copper of doubling our cash flow from operations next year from $3.3 billion this year to $6.8 billion. At the same time, CapEx will be falling from $6.3 billion to $4 billion.
That's roughly half in oil and gas, half in mining. And you can see sustaining capital bonus $600 million a year, and the $2 billion of oil and gas cash flows – oil and gas CapEx will be under review as part of the process we're now engaged in.
We've had really exceptional execution of these projects at Tenke, Morenci and Cerro Verde. Tenke achieved full operating rates early in 2013, Morenci achieved full rates in mid-2015, and Cerro Verde is ramping up now.
It's a major project, it will be the world's largest concentrator facilities, we're basically tripling output there, and full rates are expected to be achieved very early in 2016, and we're moving up on that right now. You can see some – a picture of Cerro Verde on slide nine.
Notably, we've done this without facing community opposition, as many mining projects are based in Peru. Our team there has done a great job in doing community projects, including providing fresh water to the city of Arequipa, the second largest city in Peru.
We're getting water for this project from a waste water collection plant. Previously, that city was just dumping its waste water into the river.
Now, it's being modernized to collect waste water, treat it, the ecology of the river is improving, farmers like that and it's getting us a source of water without having to compete with agriculture interests for that. It's a big step for us and it's allowed us to complete this project, to-date, without protest from the local community.
In fact, support and accolades from the local community. A little complicated slide on slide 10, but just to show you how quickly we're ramping this up, we've achieved two-thirds of production in a month-and-a-half.
We have two major primary crushers. One is operating, the other is commissioning.
We have secondary crushing with eight units. Four are now operating.
One is commissioning, three will be commissioned in the fourth quarter. This will use modern, high-pressure grinding roll mills, which we are using there now, and also using as part of our operations in Indonesia.
Eight new mills, four are operating, three – one is being commissioned, three comes on in the fourth quarter. Six modern 40,000 ton per day ball mills, which are coming on-stream quickly in our flotation circuits.
This gives you a visual just to see how quickly we're ramping this up. So far, knock on wood, thanks to Red and his team, we're achieving this without hitches, and we're focused on completing it.
Turning to Indonesia with our underground development, this is a major long-term project for us. You can see that the chart at the bottom as we complete mining from the open pit scheduled by the end of 2017, our future operations will be all underground.
We have an existing mine called the DOZ, where we block cave, started doing that in the early 1980s. The recent extension of that is starting up – has started up in the third quarter, it's a deep MLZ mine, with very positive grades of copper and gold.
And then when we complete mining the open pit, we'll be moving to the Grasberg Block Cave mine, which we'll begin ramping up in 2018. Again, this is mine with 1% copper, eight-tenths of gram of gold per ton.
This is an exceptional project, exceptional project. To-date, we've spent $3.5 billion of capital on the operations.
And as we look forward, PTFI share, this is a joint venture with Rio Tinto with our company's share of these underground projects, we will be spending capital of $800 million a year for the next several years, including power and processing facilities. And then, as we go forward, as we look in the first 10 years of the life-of-mine average for this underground operation, we will be, to our company's interest, achieving 1.1 billion pounds of copper and 1.5 million ounces of gold a year.
So that's the reason why we're spending this money and working hard to secure our contract rights. This spending is conditional on getting the approval of the government on acceptable terms for an extension of our contract.
And with this new step that we've gotten, which is a quote from the letter that we received earlier this month on page 12, we feel that an important step has been made in getting documentation of these contract rights on a basis that's acceptable to us and to the government. Jim Bob met with the President in Indonesia and worked with the mine minister in securing this commitment.
And it's a very, very important step for us. At the same time, we are progressing with our negotiations with union officials and expect to have our new CLA approved imminently.
Now, looking at our worldwide, large-scale mines, we have a group of mines globally that – potential of having 1 billion pounds of copper, roughly 500,000 tons of copper a year as we go forward, that's the base for having a company that, when we acquired Phelps Dodge, our goal was to set and make ourselves the premier company in the copper mining industry. And we've done that, and we have the resources to continue to do that.
So, we have the Morenci mine now with the recent expansion and future expansion opportunities. Cerro Verde is being completed.
It will operate even though we're curtailing current production. It has an enormous resource that's available for future consideration.
Tenke Fungurume mine is operating well, generating cash, returning capital, has significant growth opportunities. We just had some very positive exploratory drilling intercepts there that are expanding our knowledge of that ore body and giving us opportunities for future growth.
And then the Grasberg mine, I've talked about earlier, with its underground development. We have a really interesting greenfield exploration project in Serbia, where we've had some really significant intercepts, with substantial indicated volumes and high grades, 1% copper grades and gold byproduct.
So, now, we have all these great opportunities to develop mine operations. I want to be clear.
After we complete these current projects, until the market warrants further investments, we're not going to be making them. We're going to be planning for them in the future, but as we complete these projects, we're going to realize the benefits of the cash flow, our improved cost situation to delever our company, but underlying all that is an enormous future growth opportunity that will be available to us when the market warrants it.
Before turning off – handing the ball off to Jim, let's talk about oil and gas business, I want to go back and mention what we did at a board meeting earlier this month roughly two weeks ago. First of all, we reconstituted the FCX board in response to discussions with shareholders broadly.
Previously, we had a board with 13 members and independent members and three management members. That was reduced to six independent members and two management members, and then we've added two representatives Carl Icahn, who had a position in our company.
And as we go forward, we're all going to be working together with a common goal of trying – of working to increase the value of shareholdings in FCX, to increase the value of our share price, to run business in a prudent way, and we're going to be working with our board to get everyone's ideas as to how we do that. Our objectives with this oil and gas review, which we announced during the time of reconstituting our board is to achieve our original goal that we had when the deal was first announced of achieving self-funding of that business.
Now, current market's challenge for that, no question, given where we were with our operation, and we're going to look at a variety of alternatives to enhance values to the FCX shareholders. What we have is an opportunity to do that because of the quality of our assets in our oil and gas business.
These are high-quality assets that have very attractive opportunities for low-risk development growth over time. We have significant existing Deepwater Gulf of Mexico infrastructure that has large excess capacity, which will allow us to do drilling for resources that can be tied back to these facilities and completed and brought on production in a low-cost way.
We have a talented and experienced team lead by Jim, and they know how to do this, and they are committed to doing it. Alternatives will include potential ideas for separating the business.
We talked about an IPO. We've gone through the SEC process, and we're positioned to do that if the market provides us that opportunity.
It's a difficult market right now, but that's an opportunity for us. We will look at various alternatives for spin-off.
All of these things are challenging in today's market, at the same time, we'll be evaluating other funding alternatives through joint ventures or other transactions. And in the event there's a time required to get the markets to the point of where we can execute a separation-type transaction, we're going to come up with plans to significantly reducing spending, so that we achieve this goal of self-funding in any circumstance.
And I want to make that clear as to what we're doing with this oil and gas review. So Jim is going to give us a report now of where we stand operationally with the oil and gas business.
James C. Flores - Vice Chairman; President/CEO, Oil & Gas, Freeport-McMoRan, Inc.
Thank you, Richard. On page 15, we have our third quarter 2015 highlights.
You can see where 61% of our sales were in the Gulf of Mexico. It continues to be our most important asset area, while California continues to be a strong steady producer, and the rest is our gas business, onshore in Haynesville and Highlander area.
We had EBITDA of about $0.3 billion for the third quarter, trailing 12 months of $1.3 billion. We had – continue to have positive drilling results in the Gulf of Mexico and derisking our business plan.
The Horn Mountain Deep well and the King well, we announced two wells with tremendous reservoirs and producibility. And we continue to deal with the success we have in our development drilling as we try to manage costs and manage our CapEx.
At the same point in time, we did not plan for 100% success in our development activities at these fields. And what I mean by that is the 100% success requires us to complete wells after drilling and so forth that we do not plan to capitalize.
So, it becomes very much an orchestra of cutting and deferring projects at the same point in time continue to execute our business plan to create value long term for our company, but also be in a situation of be able to provide an excellent production profile and add value on a daily basis of production in 2016 going forward. What I mean by that is because of the positive drilling results in the Deepwater is our oil production.
Crude oil production 2015 to 2016 is going to increase by 25% with our CapEx of $1.8 billion in 2016. That 25% increase, we'll be able to kept flat going forward for 2017 on, in a $45 oil market, at a $1 billion of spending and – of CapEx.
So, that's flat from 2016 through 2017 on, at a $1 billion of spending in 2017 after spending $1.8 billion in 2016, and increasing production by 25%. Our business would be very – the cost will be variable from 2017 on as we have drilling rig contracts and service contracts and commitments rolling off that have already been committed to and execution in our production increase, much like finishing a large mining project in 2016.
So, our ability to ratchet capital up or down in 2017 going forward, remains maximum flexibility. The $1 billion of CapEx in 2017, I mentioned, is a 65% decrease from capital in 2015 at the peak of our spending and ramping up in the Gulf of Mexico.
The field developments in Heidelberg and Holstein Deep, first production anticipated in mid-2016 continue to stay on track. Excellent execution by our operator, Anadarko, Heidelberg and, of course, we're 100% on project at Holstein Deep.
The announced CapEx reductions that Richard talked about in 2016, 2017 continue to expand, by deferring projects and right-sizing our business for a $45 long-term oil market. Again, that is not a forecast.
It's just the way we're going to gauge our business and we certainly hope oil prices are higher than $45, where our shareholders can reap the profits. They've certainly taken the pain for the last 18 months with the severe decline going down.
We suspect the substantial oil volumes and the 25% increase in 2016, and cash margins in the near term going forward as we control our spending. On page 16 is a familiar slide of our assets.
We continue to expand all the production here, and this is where our high-margin barrels. And it costs us about $20 a barrel to drill and hook up our wells to these facilities, which is about 25% the cost of a newbuild project, when you have to put all these facility costs ahead of it.
So with a $20 a barrel cost of hooking up the production, less a $12 a barrel LOE cost in the Gulf of Mexico currently, and $3 or $4 of G&A and interest and so forth, we're talking about a full-cycle business with a cost between $36 and $38 a barrel, which makes a profit in the $45 barrel realm. So, it's a highly-profitable business and it's the best place for us to spend our capital.
The Deepwater Gulf of Mexico focus map on page 17 refreshes everybody's memories of where our assets are. You'll see the red, Power Nap discovery we discussed, which is going in with the operator, and we're working with regulators to figure out what our development plan will be there over the long term.
A key slide on page 18, where we have production that's coming on in our 100% owned wells in 2015, 2016 and 2017. You can see 2016 is a very active year.
The Kilo/Oscar, Québec/Victory KQOV, that is not named after Kathleen Quirk, but it does – because it's a prolific area. And Holstein Deep 1, 2 and 3 and our Heidelberg wells, that's our significant oil production increase.
And then in 2017, interestingly enough, we can put on Horn Mountain Deep, Horn Mountain Updip, King D-3 (sic) [D-13] (34:31) and King D-9, but under the $1 billion CapEx scenario, we'll only put on one of these areas, and we'll roll one of the areas in 2018. You can start to see the flavor of the operations and flexibility and keeping production steady, managing our capital and continue to provide returns back [ph] to our stockholders (34:40).
Richard, I'll turn it over to you for the outlook. How's that?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
That's great, Jim. Thanks.
Our current outlook for sales for 2015 is $4.1 billion. That's briefly $100 million lower than our previous outlook.
Most of that comes from Indonesia, where we're being affected by this very significant El Niño event. And, ironically, in an area where rainfall ranges from 200 inches to 400 inches a year, we have water constraints because of El Niño.
This happened to us in 1997-1998, but it's limiting how much material we can run through our mill. We have been taking exceptional steps of getting water there, including trucking water up the mountain.
You guys have been there before. So, this is an effect.
Our production cuts really come in over time because of the way that adjustments to SX/EW operations work, they will be more in place for 2016. Our goal is down 100,000 ounces.
Again, this is because of Grasberg. The – I mentioned the operating cash flow numbers from the previous time.
Each $0.10 change in copper price for the fourth quarter means $110 million for us. And we've previously mentioned the unit cost and capital expenditure changes which – CapEx changes to date represent no changes from what we disclosed in July with the oil and gas CapEx under review.
Sales profile by year is shown on page 20. You can see impact in 2016 of the completion of Cerro Verde, but also the access to very high-grade ore at the bottom of the Grasberg pit, as we complete mining there.
This is something we've been talking about since we started developing Grasberg in the early 1990s, at an operation where we once – where mine rates were 750,000 tons a day. We're going to be dropping to 200,000 tons in 2016 and down to 100,000 tons, 150,000 tons in 2017 with no stripping.
There'll be no stripping virtually of those years, and we'll just have access to this very high-grade ore. So, it'll be a very profitable operation.
And you can see the impact of that on our gold production in 2016, 2017. Our quarterly sales profile is presented in the reference slides.
Also, the longer-term outlook for Grasberg beyond mining in the pit is shown in the reference slides. So, slide 21.
You can see how our 2015 production breaks down by region and how our cost structure would be for this year, where we are very consistent with previous guidance of having consolidated net cash cost after our product credits in the $1.50 range and dropping down to $1.15 next year under current commodity price environment. Our EBITDA and cash flow opportunities are presented at various copper prices on slide 22.
This is an average for 2016, 2017 and excludes working capital changes. But it shows how it varies going from copper prices at $2.25 to $3.25.
And at the lower end of the prices, we'd have operating cash flows after taxes and interest of $5.25 billion. And that would rise to over $7 billion at $2.75, to show you how leveraged we are to prices.
We present a sensitivity chart that we present quarter for your use and looking at how to adjust that for commodity prices and certain cost elements. And our capital expenditures are shown on page 24, where we're going from CapEx in 2014 at $7 billion plus to $6 billion plus this year, and dropping the $4 billion plus with oil and gas CapEx under review at this time.
And I want to just comment on this at the market. Equity offering, as I said, we took this step reluctantly.
None of us like raising equity in this kind of marketplace, but we concluded it was prudent as a further step to protect our liquidity and our balance sheet now. We found this to be an efficient way to raise capital without having to go to market and face the pressures that come about from a marketed deal and the pricing implications of that.
We did this in the first quarter of 2009, and now we've executed a $1 billion range in the third quarter where we raised capital at higher than market prices. We have a second $1 billion program approved by our board.
Had to back out the market, as we got close to earnings release. But to date, we raised $200 million on that, since the initial offering, for what it's worth, and you know with the movement of our companies and other commodity prices during the calendar year this year.
But we significantly outperformed other companies since announcing the first ATM offering. As I said, it gives us advantage of deciding when we want to place the shares in the market.
We do it at significantly lower commissions and costs than you would have in a traditional follow-on offering. And it allows us to price share issuances in appropriate days in the marketplace when there's demand for the shares and gives us the flexibility of execution.
We are committed to debt reduction, challenged by commodity prices, but we recognize the need to do this. We have a large resource base and strong cash flows.
And with capital discipline, we have the ability to do this over time. We will be generating cash with increasing volumes, declining CapEx.
This will enhance our credit metrics. To date, the credit rating agencies have supported our investment-grade rating, that's challenged by commodity prices, but we're taking steps that we believe will be positive in supporting that.
And as we move forward, this situation will be improved. We work hard to maintain available liquidity under our bank credit facilities.
We have a $4 billion corporate facility at FCX, and $3.5 billion of that is currently available. We have a $1.8 billion facility at Cerro Verde, which is being used to fund that expansion.
We have $300 million left on it. And we have, because of our past financing, an attractive average interest cost of 3.7%.
Small maturities for the next couple of years, and we'll be looking for opportunities to deal with our balance sheet as we go forward. So, with our long-lived reserves, our really strong production base, this great portfolio of undeveloped resources across our businesses globally, and with the great team of workers and management we have, we are up to dealing with these issues and working hard to create long-term values for our shareholders.
Thank you for your interest. And now, we are prepared to respond to your questions.
Operator
Our first question will come from the line of Jorge Beristain with Deutsche Bank. Please go ahead.
Jorge M. Beristain - Deutsche Bank Securities, Inc.
Good morning, Kathleen and everybody. My question is actually for Kathleen.
Could you talk a bit about what the stance is of the credit agencies toward the current commodity environment and obviously, everyone can appreciate your current leverage level. But have you received any kind of language from them that they're starting to get concerned about the protracted nature of your net debt balance?
Kathleen L. Quirk - Chief Financial Officer, Treasurer & Executive VP
Well, Jorge, I think you can see the press releases that both S&P and Moody's made during the quarter. They have – their commodities team have updated their outlook for commodities across the board including copper.
And they undertook a review of Freeport during the quarter that both agencies affirmed our ratings and we did go to it from a stable outlook to negative. We've been in close contact with S&P, Moody's and Fitch really to walk them through our plans for debt reduction, show them how we get there with our organic business in terms of rising volumes, lower costs and lower CapEx.
And so, the expectation is that as we get through 2016, our credit metrics will improve significantly and be within their parameters for our rating. And we're very focused on executing those plans so that our outlook can be moved back to stable.
And that's really what they have been looking at in terms of our plans. But they've been running numbers at different commodity prices.
Like I said, we've been in close communication. But they do see 2015, as we have signaled all year, as a bridge year, getting to this higher cash flow and free cash flow more importantly in 2016 and 2017.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
And, Jorge.
Jorge M. Beristain - Deutsche Bank Securities, Inc.
Yes.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
This is Richard. I think without question, they're giving us credit for what we did in deleveraging after the Phelps Dodge deal and how we managed the crisis in 2008-2009.
So, they are looking at what we say we're going to do. Now, it's on us as a management team to show that same degree of discipline in executing our plans as we go forward.
Jorge M. Beristain - Deutsche Bank Securities, Inc.
Got it. And sorry, just maybe a technical question.
I'm not sure Kathleen or Jim would answer this. But what oil price assumption are you guys using to determine the carrying value of your oil assets, which obviously took another write-down this quarter?
But where are we just as a jumping off point if we had to do a further mark-to-market? What are you kind of using as your baseline for oil at this point?
James C. Flores - Vice Chairman; President/CEO, Oil & Gas, Freeport-McMoRan, Inc.
Jorge, we're required to use SEC price deck which is a trailing 12 month average. If you use the forward curve, forward curve is actually lower by a few dollars than the SEC price deck.
So, you'll see us continue. If oil prices continue to stay in the $40, $45 range, the $50 range, you'll see, in the fourth quarter, you'll see a slight reduction there.
But all depends if oil prices stay steady or go up or erode going forward. But we're kind of at – we're at that apex point where we may not totally be there just because of the oil price in the fourth quarter.
So far, here in October, has been a few dollars below the SEC price, average price for the last 12 months that we used for that reporting purposes.
Jorge M. Beristain - Deutsche Bank Securities, Inc.
Got it. Thanks very much.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
So, Jorge, we used the realized prices in each region we have, but they are referenced off a WTI price of $59 a barrel at the end of the third quarter. So, that's not the exact price we use because we adjust it for what oil is selling for in California and offshore.
But the reference price, the WTI price, and we don't have a choice on this. This is the – these unfortunate SEC rules that require us to use this trailing-12 month average and it was $59 WTI for the third quarter.
Jorge M. Beristain - Deutsche Bank Securities, Inc.
Got it. But it sounds like, as you're saying, you're basically cycling that out by the fourth quarter.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Well, that all depends. It won't all cycle out because in the fourth quarter we'll use the four quarters in 2015, and in the first quarter, the price was $70 something.
So, it takes time for this to cycle through using the 12-month average, that's why I call these rules unfortunate.
James C. Flores - Vice Chairman; President/CEO, Oil & Gas, Freeport-McMoRan, Inc.
But at the fourth quarter, we're getting through the – we're getting through a lower average price and if you have a $55 oil price in 2016, for example, we'll be kind of there, versus if it's $45 price in 2016, there'll be some more for reevaluation ahead. Does that kind of help you?
Jorge M. Beristain - Deutsche Bank Securities, Inc.
Yes. Thank you.
Operator
Your next question comes from the line Brian Yu with Citi. Please go ahead.
Brian Hsien Yu - Citigroup Global Markets, Inc. (Broker)
Yeah. Thanks and good morning.
First question is just on Indonesia. It sounded like the government would make – maybe seeking a little bit higher royalties.
Can you speak to that? And then, on the guidance that's built in there for next year, how much of a wage increase is reflected in those numbers?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Thanks, Brian. We agreed last year when we signed a Memorandum of Understanding with the government that allowed us to go forward with restoring exports at the time and also set the stage for further discussions with the government leading to this recent letter.
At that point, we agreed to increase the royalties that were in our contract of work to the royalties that were specified in the 2009 mining law. That was a concession we made to meet the government's aspirations.
And so, in our discussions with the government now, those are the royalty rates that would be reflected in our extending contract going forward. And they would be fixed.
They wouldn't be subject to further changes. So the – like we see here in the United States with this presidential campaign, there'll be a lot of comments politically coming out of Indonesia.
But that's the facts of where we are with our royalties and with this recent understanding with the government about how we'll go forward.
Kathleen L. Quirk - Chief Financial Officer, Treasurer & Executive VP
And Brian, the second part of your question regarding the wages. We have made assumptions on what we expect the wage negotiations to be concluded at.
But it wouldn't be appropriate for us to give that at this point because we're still finalizing those negotiations. But the numbers that you're looking at includes what we expect the results to be in our ongoing discussions, which we're progressing as we speak.
Brian Hsien Yu - Citigroup Global Markets, Inc. (Broker)
Got it. That's helpful.
Maybe the second question is just on the oil and gas with your plans, either a partial IPO or a spin-off, is there a cash dollar amount that we can think about that you would put into those assets under either of those scenarios?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
That's really what we're reviewing now. So – and again that depends on alternatives and marketplace and our view of – we're going to have a view of how to make sure whatever we do is supportive of FCX's financial condition and financial position.
At the same time, if we do have a separation, we have to separate the business in a way of where it's sustainable on its own and can trade well. And so that's the trade-offs we're going.
But Brian, it's – again, that's subject to this review and we'll be pursuing this aggressively. And further information will come out as we – as our board reaches decisions on it.
Brian Hsien Yu - Citigroup Global Markets, Inc. (Broker)
Okay. Definitely appreciate that.
All right. Thank you.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of David Gagliano with BMO Capital Markets. Please go ahead.
David Gagliano - BMO Capital Markets (United States)
Thanks for taking my questions. I did want to drill in a little bit more on Indonesia.
Just the commentary in the press release regarding the longer term, the underground development and potentially pushing some of that out, I was wondering, first of all, if you could give us a bit more color on the thought process there, the timing associated with more visibility on potentially deferring some of that CapEx and when we should hear more definitive commentary.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Okay. Well, the numbers you see today actually reflect some of the work that we're doing about adjusting our longer-term mine plans.
Previously, the annual spending on a gross basis for the joint venture was a $1 billion. We've now – annually, average.
We've now reduced that to $800 million. And part of that has to do with how we mine and ultimately process ore that contain pyrites.
And that includes some of the Grasberg Block Cave ore. And that would in the longer range affect how we do with the Kucing Liar ore body.
But altering the mine plans to avoid the bulk of this pyrite ore, we can defer capital spending on the processing facilities and the transport and storage facilities for pyrite. We're developing plans to do that with – so that we don't end up wasting significant amounts of ore.
So, it's a timing opportunity that would allow us to then go back and make those investments in mining and processing that ore in the future, and we're continuing to do that. But that's the major factor, Dave, along the lines of what you're talking about.
That's how we're dealing with the long-term mine plans at Grasberg.
David Gagliano - BMO Capital Markets (United States)
Okay. All right.
Thanks. And then just separately on the strategic review of the energy business, the alternatives for the energy business, I'm wondering if you could give us a feeling for timing, when we should get more visibility on that front as well.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Well, we reconstituted our board two weeks ago. We announced this review.
We're starting the process now of coming up with alternatives and how to evaluate it. We need – there is a degree of urgency in dealing with these capital cost.
So I'm not in a position right now giving you any red line time dates, but I can tell you, it's a matter of focus, and we are approaching this immediately.
David Gagliano - BMO Capital Markets (United States)
Is it reasonable to say within the next, say six months, we'll get something or is it longer?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Yes. Within that timeframe.
David Gagliano - BMO Capital Markets (United States)
All right, great. Thank you.
Operator
Your next question comes from the line of Tony Rizzuto with Cowen and Company. Please go ahead.
Tony B. Rizzuto - Cowen and Company, LLC
Thank you very much. Good morning, all.
Kathleen L. Quirk - Chief Financial Officer, Treasurer & Executive VP
Good morning.
Tony B. Rizzuto - Cowen and Company, LLC
I've got a couple of questions here. First one is on Indonesia.
It does sounds encouraging that the process is moving forward. Now, assuming you get resolution on the extension of the COW, how can you assure investors that you'll be able to get a fair value with the additional 20% stake in PTFI?
There seem to be conflicting reports about the ability to do an IPO, and I was wondering and associated, is that now off the table?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
No, Tony. It's not off the table.
Throughout this whole process, our position has been and now the government supports it, it was in the MOU in mid-2014, it's reflected in what the letter says, is that any divestment would be on the basis of fair value. And exactly how we divest depends on how we work with the government on it.
The government, the central government itself will have the opportunity to acquire shares, they've had that opportunity in the past and haven't elected to do it, but we will work with them on it. The possibility of sales to stay-on companies is there.
The possibility of an IPO is something we've done work on, and we can see some benefits to that to be traded on the Indonesia Exchange. Government officials would – some government officials are very supportive of that.
So, all of this process is, again, conditional on getting the final documentation of the extension, and then we're prepared immediately at that point to go forward in working with the government as to exactly how to do that. But the IPO is certainly one of the alternatives that we'll be talking with them about.
Tony B. Rizzuto - Cowen and Company, LLC
Okay. And then I got a question also on oil and gas.
And of the $2 billion CapEx, how much is purely sustaining and how much of that number is required to develop and kind of reload inventory with prospects?
James C. Flores - Vice Chairman; President/CEO, Oil & Gas, Freeport-McMoRan, Inc.
All right. Tony, look at this way.
About $750 million will keep production flat in the Gulf of Mexico and California. So, you're really talking about $2 billion is forecasted and I might have mentioned today that we're trying to work – continue to work with that number.
Everything above that would be toward the growth CapEx (58:11) 25% increases.
Tony B. Rizzuto - Cowen and Company, LLC
Okay.
James C. Flores - Vice Chairman; President/CEO, Oil & Gas, Freeport-McMoRan, Inc.
And going forward – going forward to 2017, that's kind of $750 million to $1 billion. That's why at $45 and even lower, we can continue to be cash flow neutral once we have this production on, and just defend it by putting on one or two wells a year.
When you have 13 good discoveries in your inventory, it's pretty easy to see the visibility there.
Tony B. Rizzuto - Cowen and Company, LLC
Okay. And just – I'm curious what do you think is the most preferable outcome?
I mean, a complete spin-off to existing shareholders or what the – obviously, it's a matter of debt allocation and a lot of other factors. But I'm just curious as to management's thinking.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Well, Tony, that's something that's going to be a board decision. And so, for us to come out now and say – we're going to have lots of ideas.
The ideas are going to be considered and assessed in terms of creating value for the FCX shareholders. And that's going to be a board deliberation.
And all of us have ideas. And we'll present those ideas, do analysis on them.
We'll have expert advice on the markets and what's best. And that – then the decision is going to come out.
It wouldn't be appropriate at all for us to start speculating on where that's going to go.
James C. Flores - Vice Chairman; President/CEO, Oil & Gas, Freeport-McMoRan, Inc.
Tony, where Rich highlighted the board reconstruction, I resigned from the board and so forth. That's so we wanted to give the board maximum flexibility to have as far as separating the oil and gas business if that makes sense.
Their advisors advise them and so forth of where the highest and best value of FCX is. That's the path forward.
But they have maximum flexibility. There's no sacred path or no prohibited path at this point.
So, that's the value for the FCX shareholders, that's the number one goal here.
Tony B. Rizzuto - Cowen and Company, LLC
Okay. And just – thanks for that color.
And just a quick one on Sierrita. And I was wondering if the evaluation you're doing now points to a full shut-down there, what impact might this have on your overall unit cash costs?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Well, Sierrita is – at these – it's really such an interesting mine because it's got low grades and big moly content. You don't have to look back many years ago to where it was our lowest cost mine.
And now it's our highest cost mine. So, at current levels, unit cost are $1.90 roughly.
And so that's why we cut it back and if we could cut it back totally, we're dealing with this water management issue, we would do it. But it's not big enough to have a material impact on our consolidated costs.
But it's our highest cost mine or among our highest cost mines, it's the one obviously that deserves the cutback attention.
Tony B. Rizzuto - Cowen and Company, LLC
Good to see the discipline. Thanks very much.
Appreciate the color.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
All right. Thanks, Tony.
Operator
Your next question comes from the line of Jeremy Sussman with Clarkson. Please go ahead.
Jeremy R. Sussman - Clarkson Capital Markets
Yeah. Hello and thanks for taking my question.
You spoke, obviously, quite a bit about some of the oil and gas initiatives that you are reviewing. But I'm just curious on the copper side.
Outside of some of the production potential curtailments that you're looking at, if you consider something either small or even large on the asset sale side, and I guess the context is copper does seem to still be the one commodity that the majors, or at least one of the commodities, I guess, that some of the majors are looking to expand upon. Thank you.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Yeah. Thanks, Jeremy.
Listen, we have an open mind on how we approach things. We have a constant flow of people coming to us with ideas, both companies, bankers, some of the private equity funds.
So, we get opportunities to consider a lot of things. If you look at the majors, though, there's a consistent positive view of the longer-term copper market.
And so, the better assets in that market are owned by the larger companies, and so, that's what is really a barrier for doing major transactions. But, listen, we are – as I said, I was in London last week, saw a lot of people, had a lot of discussions, a lot of people want to meet, present ideas and we're open-minded, we're going to listen to the ideas.
Jeremy R. Sussman - Clarkson Capital Markets
That's great. Thanks very much for taking my question.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Sure.
Operator
Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research. Please go ahead.
John C. Tumazos - John Tumazos Very Independent Research LLC
Thank you very much for all the decisions you've made in the last 90 days for the shareholders and progress since your last call. It's just been spectacular.
First question, if you sell down from 90% to 70% in Indonesia, would you be required – would Freeport be required to fund the entire $800 million average full-year CapEx budget, or would the buyer be required to pay its share? First question.
Second question, if I may, have any of your commodity long-term price expectations changed in the last year or two as everything has fallen in price? It's notable that a week or two ago, Toyota said that by 2015, they'll stop making gasoline engines.
In New Jersey, there is a 3,400 megawatt, 100 mile long wind farm that federal government auctioned without asking New Jersey. West Texas is one company putting up 400,000 solar panels and Fort Stockton and I guess there're several others coming after them.
And all these investments are being made not on the basis of price as they affect the energy market. It can create some doubts in our minds once in a while.
Please we – we want to thank you for all the good decisions.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Okay. Thanks, John for your comment about steps we've taken.
With regard to your first question, the divestment we're talking about is a divestment of shares, common stock in PTFI. And so, whereas now, we own 90% plus.
The government has a 9.36% interest. After we go through this process of divestment, which will occur after we get the documentation of our contract extension, we would own 70%, but it's a share investment.
And all of these PTFI funding of CapEx is coming out of its cash flows. So, we don't contemplate any of the shareholders being FCX or the new shareholders having any requirements to make capital investments in the company.
So, it would come out of cash flows. Then with respect to this future of the energy business, I'll make one side comment.
Everything you talked about from electric cars to alternative energy investments requires substantial amounts of copper. And so, that's going to be the demand factor for future – the future of the copper business and all of these issues related to the future of energy and the future of climate change and so forth are – is an unfolding story still to be played out for the foreseeable future.
The world's going to require substantial volumes of oil and gas to run these economies and maintain standards of living.
James C. Flores - Vice Chairman; President/CEO, Oil & Gas, Freeport-McMoRan, Inc.
John, as long as Exxon, Shell, Chevron, BP are in oil business, I'm going to be in the oil business. So, that's the way I look at it.
John C. Tumazos - John Tumazos Very Independent Research LLC
Thank you.
Operator
Your next question comes from the line of Chris Mancini with Gabelli and Company. Please go ahead.
Christopher Domenic Mancini - Gabelli
Hi. Thanks for taking my call.
Just a quick question on the dividend. How are you thinking about paying the dividend now, especially considering that you're issuing stock and it would seem that you're free cash flow negative, at least in the current point in time?
So, is there a potential for that dividend to be cut back. And second thing is in terms of the equity raises, how much more do you think you would need to raise to have an appropriate buffer for whatever might transpire in the commodities market, again, given that it seems like next year with the high grades at Grasberg in 2017, you'll be pretty significantly free cash flow positive?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Yeah. Good question.
This dividend issue, we made a decision to substantially reduce the dividend earlier this year. We maintained a relatively small dividend because certain institutions have dividend requirements.
The board's going to continue to review that. And we'll continue to look at.
With respect to equity raises, the board's approved this $2 billion raise. We're going to have our finger on the market with the factors that you mentioned.
I believe it will, absent some further changes in our free cash flow generation, it's the cash flow coming in, in 2016. This appears to be sufficient to provide the kind of buffer that we need.
Christopher Domenic Mancini - Gabelli
Okay. And just a quick question.
I know other people kind of asked this, but on the oil and gas business, there are $2.5 billion of oil and gas senior notes. Would it be reasonable to assume that that would be the only amount of debt that the oil and gas business would be able to sustain if it were to be spun off?
Or could it potentially take on more debt?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Well, that's a valuation we're doing. It's not related to the source of the debt at all.
I mean, that's just the legacy issue that came to our consolidated company when the acquisition was made. So, we're evaluating it more broadly from a financial perspective as to what would be sustainable for the entity that was separated if, in fact, we go a separation route.
But it's not tied to any specific issue.
Kathleen L. Quirk - Chief Financial Officer, Treasurer & Executive VP
And Chris, just as a reminder, the FCX parent guarantees that debt.
Christopher Domenic Mancini - Gabelli
Okay.
Kathleen L. Quirk - Chief Financial Officer, Treasurer & Executive VP
So, that guarantee doesn't go away.
Christopher Domenic Mancini - Gabelli
Okay. Okay.
So, it's just a big picture valuation determination as to how much debt the oil and gas business will be able to take on?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Exactly.
Christopher Domenic Mancini - Gabelli
Right. Okay.
I understand. Okay.
Great. Thanks very much.
Operator
Our final question comes from the line of Brian MacArthur with UBS. Please go ahead.
Brian T. MacArthur - UBS Securities Canada, Inc.
Good morning. I just want to go back to Dave's question on the longer-term situation at Grasberg because you talked about deferring the pyrite ore and stuff.
But when I look at the 2018 through 2022 stuff, it all looks like the same guidance. Are you just pushing stuff post-2022 back by deferring this capital, i.e.
the KL gets pushed back from 2025 or what exactly is happening there? Because you've obviously been able to save some money up front, but without any change to production in the next five years.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Yes, and that's why it's attractive. That's why it's attractive, Brian.
KL is scheduled to come on later. It is much later than that.
So the real issue about production is, with the Grasberg Block Cave, and near-term production isn't really affected in any significant way by this deferral of capital, and that would come into play, basically, post-2020. But it's the Grasberg Block Cave production as opposed to the KL production.
I mean what we're doing is, as we come out of the pit and start mining the Block Cave, we ramp up to get back to a mill operation of 250,000 tons a day after the ramp-up, which will require several years. And then we have – the great thing about this operation is that we have the ore to feed a 250,000 ton per day mill through 2041.
Brian T. MacArthur - UBS Securities Canada, Inc.
Right. So are there any secondary benefits by pushing this pyrite ore?
Like when you build the new smelter or whatever, does it allow you to put you throughput better there? So you get another benefit there, as well?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Yes, and it also potentially gives us the opportunity to kind of stage the smelter investment at a smaller level to begin with, which saves some capital, and this is desirable, and then deal with it later on, as we ramp back into the pyrite. So there's benefit on CapEx standpoint, both at the mine and mill operations in Papua, as well as capital required for the smelter.
Kathleen L. Quirk - Chief Financial Officer, Treasurer & Executive VP
But Brian, all of this is still being looked at and optimized as we go through it. So what you're looking at is our most recent thinking, but we're continuing to look at it, and continue to look at how we smooth out, concentrate production, so we don't have big spikes, and have enough smelter capacity to be able to deal with it.
So, it's a work in progress, but what you're seeing is what our current thinking is.
Brian T. MacArthur - UBS Securities Canada, Inc.
Great. Thanks.
And maybe just one question on the oil and gas. You talked about the 25% increase in oil from, I assume, Gulf of Mexico.
But what's happening at California next? It looks like it's coming down in the third quarter.
Capital there is pretty small. Is it actually on a decline the next three years?
Or should we think it bottoms out and flat or how should I think about the reinvestment on that part of the equation?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Well, we've cut reinvestment from $300 million two years ago to $70 million this current year. Probably need to get closer to $125 million, $150 million, to keep production completely flat at this point in time, Brian.
So what happens with the thermal reservoirs out there, as you've been heating them for years and years, you can cut capital for about 24 months before they start kind of cooling. And as they start cooling, the oil gets more viscous, and the production rate slows.
We're all talking about small, small increments here. So we'll need to start reinvesting there, probably in late 2016, early 2017, and then it flattens out.
The one production adjustment that you're seeing is in our offshore business, where we have our (74:06) platform, which is our highest cost production. It's shut in, and it's shut in indefinitely, due to the plains all American pipeline situation, where the pipeline ruptured and they're shut in due to repair work.
And that forecast is in years, so we're not sure that production will be restored. So I think the new production level that you see currently is pretty good for 2016 and going forward.
Brian T. MacArthur - UBS Securities Canada, Inc.
Great. And I should just use about $100 million in capital in California for the next two years, then?
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Yeah. That's probably good average at this point.
Brian T. MacArthur - UBS Securities Canada, Inc.
Great. Thank you very much.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
Thanks, Brian.
Operator
Now, we'll turn the call over to management for any closing remarks.
Richard C. Adkerson - Vice Chairman, President & Chief Executive Officer
All I'll say is thank you again for being on the call and your interest. We'll look forward to reporting progress as we go forward and if you have any follow-up questions, as you study the material, or for any reason you feel free to contact David Joint.
And we'll make sure the right person answers your questions. Thanks a lot, everybody.
Operator
Ladies and gentlemen, that concludes our call for today. Thank you for your participation.
You may now disconnect.