Oct 29, 2013
Executives
Christopher Stavros - Vice President, Investor Relations and Treasurer Steve Chazen - President and CEO Cynthia Walker - Chief Financial Officer Willie Chiang - Vice President, Operations and Head, Midstream Business Sandy Lowe - President, International Oil and Gas Operations Bill Albrecht - President, Oxy Oil and Gas, Americas Vicki Hollub - Executive Vice President, Oxy’s U.S. Oil and Gas Operations
Analysts
Doug Leggate - Bank of America Merrill Lynch Doug Terreson - ISI Ed Westlake - Credit Suisse Leo Mariani - RBC Paul Sankey - Deutsche Bank Sven del Pozzo - IHS Faisel Khan - Citigroup John Herrlin - Societe Generale
Operator
Good morning. And welcome to the Third Quarter 2013 Earnings Release Conference Call.
All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.
(Operator Instructions) Thank you, Mr. Stavros, you may now begin.
Christopher Stavros
Thank you, [Tamica]. Good morning, everyone.
And thank you for participating in Occidental Petroleum’s third quarter 2013 earnings conference call. On the call with us this morning from Los Angeles are Steve Chazen, Oxy’s President and Chief Executive Officer; Cynthia Walker, our Chief Financial Officer; Willie Chiang, Oxy’s Vice President of Operations and Head of our Midstream Business; Sandy Lowe, President of our International Oil and Gas Operations; Bill Albrecht, President of Oxy Oil and Gas in the Americas; and Vicki Hollub, Executive Vice President of Oxy’s U.S.
Oil and Gas Operations. In just a moment, I’ll turn the call over to our CFO, Cynthia Walker, who will review our financial and operating results for this year’s third quarter and provide some guidance for the current quarter.
Sandy Lowe will then provide a brief overview of our Oil and Gas operations in the Middle East focusing on key countries for Oxy, as well as our strategic objectives for the region. Steve Chazen will then follow with a decision of our strategic initiatives and some of our growth opportunities.
As a reminder, today’s conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements and our filings.
Our third quarter 2013 earnings press release, Investor Relations supplemental schedules and conference call presentation slides, which refer to our prepared remarks, can be downloaded off of our website at www.oxy.com. I’ll now turn the call over to Cynthia.
Cynthia, please go ahead.
Cynthia Walker
Thank you, Chris, and good morning, everyone. My comments will reference several slides in the conference call materials that, Chris, referenced are available on our website.
Overall, in the third quarter, we continued the solid execution seen in the first half. Total company production was 767,000 BOE per day and importantly, we produced 267,000 barrels of oil domestically.
This is on track to achieve our second half growth objectives. In addition, with three quarters of successful execution behind us, we are confident that we will exceed the goals we set for the year for operating cost and capital efficiency.
We had core earnings of $1.6 billion or $1.97 per diluted share and for the first nine months of 2013 we generated $9.4 billion of cash flow from continuing operations before changes in working capital and enter the quarter with $3.8 billion of cash on our balance sheet. If you turn to slide three, you will see a summary of our earnings for the quarter.
Core income was approximately $1.6 billion or $1.97 per diluted share. As you can see, this is an improvement over both of the prior quarters.
Compared to the second quarter of 2013, the current quarter results reflected improved Oil and Gas segment earnings, driven by higher realized oil prices and domestic volumes, as well as higher core earnings in the Chemical segment and improve performance in the Midstream segment, driven by higher margins in the marketing and trading businesses, largely due to commodity price movement. Now I will discuss the segment performance for the Oil and Gas business and begin with earnings on slide four.
Oil and Gas earnings for the third quarter of 2013 were $2.4 billion, an increase over both the second quarter of 2013 and the third quarter of 2012. On a sequential quarter-over-quarter basis, improvements came from higher oil prices and domestic volumes.
Volume increases resulted largely from higher oil production in California, the Permian and Williston, and improved Columbia liftings. Moving to slide five, you will see a summary of production changes during the quarter.
As I mentioned, total production for the quarter were 767,000 barrels per day, a decrease of 5,000 barrels per day over the second quarter and an increase of 1,000 barrels per day over the year ago quarter. On a sequential quarterly basis, these results reflect domestic oil production growth as a result of our drilling program, as well as resumption of Permian production following plant turnarounds and weather interruptions in the second quarter.
As you can see, we also experienced an improved environment in Colombia although disruptions continue to impact production in the quarter and we’ve seen the same early in the fourth quarter. MENA production was lower primarily due to the impact of full cost recovery under contract in Yemen, lower spending in Iraq, some maintenance in Qatar and labor issues in Libya.
Excluding certain of these impacts under disruptions in Colombia, our overall international production was in line with our guidance on the last call. On a year-over-year basis, full cost recovery and other adjustments under our production sharing and similar contracts also reduced MENA production by about 7,000 barrels per day.
If you turn to Slide 6, I’ll now discuss our domestic production in a bit more detail. Our domestic production was 476,000 barrels per day, an increase of 6,000 barrels per day from the second quarter of 2013, and an increase of 7,000 barrels per day from the third quarter of 2012.
Focusing on our commodity composition, oil production increased 6,000 barrels from the second quarter, driven by California, the Permian and the Williston basin. For the first nine months of 2013, our domestic oil production has increased by 13,000 barrels per day.
This is a 5% increase versus the same period in 2012. NGL production increased 2,000 barrels per day versus the second quarter .
Natural gas volumes were lower by about 11 million cubic feet a day compared with the second quarter, almost entirely in the Permian as a result of third-party processing bottlenecks. Moving to our realized prices for the quarter and the comparison to benchmark prices, you can see the summary on Slide 7.
Compared to the second quarter, our worldwide crude oil realized price increased about 6%, primarily reflecting changes in benchmark prices. We experienced improvement in NGL prices domestically, which contributed to 5% increase in worldwide NGL realized prices, while domestic natural gas realized prices experienced 14% decrease driven by the decline in the benchmark.
You’ll note we also included updated price sensitivities. Next, I will cover production costs on Slide 8.
Oil and gas production costs were $13.60 per barrel in the third quarter and $13.64 per barrel for the first nine months of 2013, compared to $14.99 per barrel for the full year of 2012. As you can see, domestic operating expenses increased slightly from the second quarter of 2013.
This was due to the timing of certain plant workover activities. International production costs have remained fairly consistent with 2012 levels, excluding the impacts of the facilities turnarounds in Qatar and Dolphin that affected the first quarter of this year.
We are very pleased with our performance on operating cost this year and will be our full-year target. Taxes other than on income, which are generally related to product prices were $2.61 per barrel for the first nine months of 2013 compared with $2.39 per barrel for the full year of 2012.
Third quarter exploration expense was $68 million and we expect fourth quarter exploration expense to be about $100 million. Turning to chemical segment core earnings on Slide 9.
Third quarter earnings of $181 million were $37 million higher than the second quarter, primarily driven by strong caustic soda export volumes and lower energy and ethylene costs. Looking ahead to the fourth quarter, demand for chlor-alkali products is typically lower due to seasonal factors.
We expect fourth quarter 2013 earnings to decline to approximately $100 million, driven by the seasonal factors coupled with lower Far East demand and lower caustic soda spot and export prices. Slide 10 is a summary of midstream segment earnings.
They were $212 million for the third quarter of 2013, compared to $48 million in the second quarter of 2013 and $156 million in the third quarter of 2012. The 2013 sequential quarterly improvement in earnings resulted mainly from higher marketing and trading performance, driven by commodity price movements during the quarter.
Year-over-year improvement was driven by improved margins in our pipeline and gas processing businesses. The worldwide effective tax rate on core income was 40% for the third quarter.
The lower tax rate and guidance resulted from lower volumes in Libya where tax rates are significantly higher than our overall effective tax rate. We expect our combined worldwide tax rate in the fourth quarter of 2013 to remain in the 40% to 41% range.
Slide 11 summarizes our year-to-date 2013 cash flow. In the first nine months of 2013, we generated $9.4 billion of cash flow from continuing operations before changes in working capital.
Working capital changes increased our cash flow from operations by 400 million to 9.8 billion. Capital expenditures for the first nine months of 2013 were 6.4 billion, of which 2.2 billion was spent on the third quarter.
We generated approximately $270 million of cash from the sale of a chemical investment and used 340 million for acquisitions of domestic oil and gas assets. After paying dividends of $1 billion and other net flows, our cash balance was 3.8 billion at September 30.
Our debt to capitalization ratio remained at 15% at the end of the quarter. Our annualized return on equity for the first nine months of 2013 was 14% and return on capital employed was 12%.
Last I’ll turn to the fourth quarter outlook. With respect to production, domestically as I mentioned we are on track to achieve our second half oil growth average of 6000 to 8000 barrels per day increase over the first half average.
Our natural gas and NGL volumes are expected to decline modestly in the fourth quarter due to lower drilling on gas properties and natural decline coupled with the effect of a major turnaround in the Permian. Internationally, we expect total production to be about flat with the -- in the fourth quarter compared to the third quarter, excluding the impact of insurgent activity in Columbia.
We expect international sales volume to increase in the fourth quarter -- the deferred listings we experienced earlier in the year. Our annual capital is expected to be about $9 billion.
This is about $600 million lower than the $9.6 billion program we previously discussed. Of this reduction, approximately 200 million resulted from achieving better than plant efficiencies in our oil and gas program, particularly in our drilling costs and additional 200 million resulted primarily from the deferral of certain oil and gas facilities in mid-stream projects into 2014 and the further $100 million from lower than planned spending in Iraq.
We are particularly pleased that we are on track to meet or exceed our planned drilling activity levels for the year while spending less capital than planned as a result of efficiency initiatives. I will now turn the call over to Sandy Lowe who will provide an overview of our Middle East, North Africa operations.
Sandy Lowe
Thank you, Cynthia. As you are aware we’ve had a successful involvement in the Middle East, North Africa region for over 40 years.
We are active in key major oil producing countries in the region and have formed excellent relationships with all of them. The countries in which we operate include Oman, Qatar, United Arab Emirates, Iraq, Iran, Libya and Yemen.
We have a diverse set of projects in the region and manage all of our projects by safety standards creating local jobs and development opportunities for people in those communities. Our current producing operations have generated over $20 billion net free cash flow in the past 15 years and our currently generating annual free cash flow of around $1.6 billion excluding Al Hosn Gas project capital which is currently running in about $1 billion annually.
We recently expected that our Middle East business would generate over $2 billion free cash flow annually once the Al Hosn Gas project becomes operational. We have invested $9 billion of capital in the Middle East region since 2010.
75% of which has been spent in Oman, Abu Dhabi and Qatar. We have drilled over 2500 wells in the region during this time and currently have 37 drilling rigs running.
We have also spent $300 million on exploration since 2010. Our projects make a significant contribution to the economies of these countries employing around 15,000 full time employees and contractors, outstanding workforce at the Al Hosn Gas project which is currently over 34,000.
We have drilled several types of wells throughout the region. These include onshore oil wells in Oman, offshore wells in Qatar and soar wells onshore Abu Dhabi.
The production from our wells ranges from 200 to 4500 barrels of oil per day and our gas rates are as high as 120 million standard cubic feet per day. Our Middle East operations are designed to leverage our technical expertise based in central support groups such as project management, engineering, exploration and drilling.
We apply this knowledge locally to successfully execute on our projects. We have used the central support of project effectively in the areas of reservoir characterization, flood implementation, drilling and completion techniques and management of major projects.
This enables us to apply best practices across region, while minimizing the deployment of western expatriates and maximizing opportunities for nationals in each country. We expect net Middle East production for 2013 will exceed 260,000 barrels of oil equivalent per day, representing about 35% of Oxy’s total production worldwide.
When the Al Hosn Gas project reaches full operational status in 2015, it should add net production of over 60,000 barrels of oil equivalent per day. Our 2013 Middle East development capital is expected to be about $3 billion, with about 44% spent on water flood projects, 34% on the Al Hosn Gas project, 12% on steam floods and 10% on primary production.
We will drill over 750 development wells this year and plan on around 665 wells next year. Our strategic goals for our Middle East business can be summarized as follows.
Continue to be a growing, profitable and vibrant business in the Middle East region, continue to be a preferred strategic partner with the host countries where we operate, expand our Middle East area business by partnering with local investors to secure strategically important growth projects, continue to successfully execute projects, achieve returns in an excess of 20% on our invested capital, continue our investment philosophy where our presence makes meaningful contributions to the host economies and makes a positive difference to the lives of the people in the local communities, including increased education and employment opportunities for nationals. We have a strong track record in each of the goals summarized above and believe we will be able to deliver successfully on each of these going forward.
In particular, we have developed and nurtured close relationships with key partners in the countries we operate. We have always been respectful of the interest, expertise and values of the host countries.
This philosophy has overtime led to mutual respect and helped us grow our operations’ processes. I will now provide a brief summary of our operations in three of the countries in the Middle East region, which collectively make up 70% of our current production, 85% of our income from operations and nearly all of our free cash flow.
We spent about 75% of our Middle East capital in these three countries as well. Oman, we’ve been present in Oman for 34 years and operate in Blocks 9, 27 and 62 in the North of Oman and Block 53, which is the Mukhaizna Field.
We are the largest independent oil producer in Oman and have a highly skilled and loyal national staff. Our nice staff has grown from 246 in 2005 to 1,858 today.
Most of our national employees have developed their skills and experience within Oxy, including opportunities to train and work on Oxy projects in the United States and other countries. As a result, over 81% of our employees are Omani nationals and Omani citizens now hold most of the high levels executive positions, including the President of our Oman business unit.
Oxy’s gross production is expected to be about 230,000 barrels of oil equivalent per day in 2013 with a net of 76,000 in [‘09]. Our Oman operations are a significant free cash flow generator.
We expect to continue to achieve returns well in excess of 20% from our Oman projects. Northern Oman, in Northern Oman a combination of development wells, exploration success and the application of water flooding techniques has led to an increase in gross production from 92,000 to 106,000 barrels of oil equivalent per day since 2010.
We have a large pipeline hub in gas plant at Safah associating with the producing wells in Northern Oman. This infrastructure enables us to rapidly and efficiently bring new wells into production.
Most wells initially free flow and later having the gas lift or electric submersible pumps installed. We have maintained our gross average operating cost at around $5.50 per barrel with the key drivers being down-hole maintenance, surface operations and support cost.
We have drilled 107 out of our 153 plant wells for this year. These are typically horizontal wells with lateral length in between 1,800 and 3,500 feet.
Recent production rates have been as high as 3,800 barrels of oil equivalent per day with an average for 2013 of around 550. During 2014, we’ve planned to drill another 125 development wells.
Over the next five years, our plans include drilling 400 development and water injection wells. We expect our annual drilling capital to be between $250 million to $300 million per year.
We believe our developments program will increase gross production to about 125,000 barrels of oil equivalent per day during this period. Our exploration program in Northern Oman has been one of our most successful ever as a company with the Discovery rig of greater than 60%.
We attribute this success to our use of technology such as horizontal drilling, state-of-the-art 3D seismic as wells as the development of new plate concepts. Our discovery this year mostly coming from horizontal wells have an average production of 3000 barrels of oil equivalent per day and produce over 70% oil.
We continue to expand our technical understanding and have a robust inventory of future drilling prospects. In addition, we are nearing completion of a 2000 square mile 3D seismic program which should further enhance our growth portfolio.
This new seismic data and over block 927 should yield many attractive prospects and enable us to continue exploring in these areas for many years. Over the next five years, we expect to drill more than 50 exploration wells, 13 of which are planned for 2014 and could generate more than 250 new development drilling locations.
Our Block 62 development is in the early stages of engineering with a number of gas producers already drilled. We are planning to further delineate one of the largest structures by the end of this year allowing an updated development plan to be presented to the government during 2014.
Mukhaizna, Mukhaizna is one of the world’s largest steam flood projects. At the end of 2012, it ranked third in the world in terms of steam flood production ahead of the large best known U.S.
steam floods. Oxy’s involvement in the Mukhaizna field began in 2005.
Since that time, we have increased gross production from 8000 to 125,000 barrels of oil per day and produced 160 million barrels of oil from the field. We have drilled over 2000 wells in which 825 are producers.
The steam wells enable injection in over 500,000 barrels per day. Waste heat recovery systems on power on power generators account for 20% of our steam.
We continue to optimize the development plan of this field with the government and our partners, and we expect to continue executing our infill drilling program. The anticipated peak production is estimated to be between 135,000 and 140,000 barrels of oil per day.
We expect to drill 340 wells this year. Recent rates have been as high as 830 barrels of oil per day, with an average for 2013 of around 330.
We plan to drill another 300 wells in 2014. We currently have six rigs running in Mukhaizna, in addition to the main Mukhaizna reservoir as we are delineating the extensive Kahmah fractured carbonate heavy-oil reservoir, which lies above the main pay in Mukhaizna.
We presently have one rig dedicated to this activity, another milestone will be reached in Mukhaizna next year with the drilling of our first deep exploration well in the field. Qatar, we presently operate three shallow water offshore oil fields in Qatar.
The Idd El Shargi North Dome, Idd El Shargi South Dome and Al Rayyan. We also have an interest in the Dolphin project which has been a great success since its start.
Through our plans for various projects in Qatar we expect to achieve returns well in excess of 20%. In nearly 20 years in Qatar we have invested $4.3 billion and produced 680 million barrels of oil.
Our operations in Qatar provide significant free cash flow. Current production is around 106,000 barrels of oil per day for 2013 from the three fields, netting 67,000 barrels of oil per day to Oxy.
Dolphin’s current production net to Oxy is about 38,000 barrels of oil equivalent per day. In Qatar, as in Oman, we are focused on the development of national staff and have successful national employees in all levels in the company.
Oxy has established itself as an active and committed member of the community. During our presence in Qatar we have forged strong and effective relationships with a number of organizations in the focus areas of health, education, arts and culture and sports.
Examples include, partnering with the Supreme Education Council and the Weill Cornell Medical College in the promotion of a healthy lifestyle, which is aligned with Qatar’s 2030 national vision. Other initiatives relate to specific causes such as diabetes, cancer, working with the Al Noor Institute for the Blind and partnering with the Qatar Museums Authority and supporting a number of sporting events.
In Idd El Shargi North Dome we will drill 17 wells in 2013 from jack-up rigs in a water depth of around 130 feet. Over the course of our involvement in Qatar since 1994, we have drilled 268 horizontal producing wells and over 100 horizontal water injectors.
Recent well production rates in Idd El Shargi North Dome have been as high as 4,500 barrels of oil per day with an average for -- average 2013 around 1,460. As part of approved Phase -- as part of our recently approved Phase 5 development plan we will drill another 205 wells at the cost of $1.2 billion.
We plan to drill 36 of these wells in 2014. The development plan includes the installation of new wellhead platforms, the compression and power platform and various pipelines in related facilities.
We believe that as a result of this development we will be able to continue the plateau of gross production of 100,000 barrels of oil per day for many years to come. We also have new development opportunities being planned for the Idd El Shargi South Dome and Al Rayyan fields.
Dolphin, the Dolphin project remains one of the flagship projects in the region and it has been a great success since coming on the screen in 2007. The project involves production from wells located on two off shore platforms in the north field of Qatar.
Wet gas flows to the onshore gas plant at Rasputin where we’ve process and to Condensate natural gas liquids and Sulfur. The dry gas is exported on under a long term contract to the UAE via a 48 inch, 230 miles subsea pipeline.
In addition to the two 2 billion cubic feet a day of contracted gas from Qatar, we transport additional gas on an interruptible basis to customers in the UAE. While meeting a significant portion of the UAEs gas needs, Dolphin also provides gas to Oman.
We’re currently expanding gas impression facilities in Rasputin to achieve the maximum pipeline capacity of 3.5 billion cubic feet per day to handle additional volumes. We believe substantial opportunities remain in the region to sign up additional customers to provide gas transportation up to the full capacity of the Dolphin pipeline generating additional midstream revenues and cash flows.
We expect our 2013 net production from Dolphin to be around 38,000 barrels while equivalent per day with significant free cash flow which we believe will grow overtime as we take on new customers. United Arab Emirates.
Oxy’s initial experience in the UAE was as a partner in offshore exploration during the 60s. Most recently Oxy has had a presence in the UAE since 2000.
Since then our Abu Dhabi office has developed into a regional hub supporting our Middle East assets with engineering, geoscience, business development, operations, supply chain and finance resources. During this time the Dolphin midstream infrastructure has continued to expand and the pipeline system now extends with 475 miles throughout the UAE and into Oman.
The Al-Hosn gas project where we’re partnering with the Abu Dhabi National Oil Company -- ADNOC, involves the development of the Shah Sara gas field in the western region of Abu Dhabi. Production from the field contains natural gas and condensate along with high concentrations of hydrogen sulfide and carbon dioxide.
A large processing plant currently under construction with an average 34, 000 workers at the site, this is a world scaled mega project with the involvement of major engineering, construction and manufacturing companies from around the world. It remains on schedule and on budget.
When completed the plan will be able to process about 1billion cubic feet a day of gas from the field and then separated into sales class condensate, natural gas liquids and sulfur. Oxy’s mid share production is expected to be over $200 million in cubic feet a day of sales gas and more than 20,000 barrels of NGLs and condensate.
By the end of 2013, the project will be about 92% complete and will start up next year. The 2013, of this year of Al Hosn capital is expected to be about $1 billion.
Total project cost is expected to be on budget and about $10 million with Oxy’s share of $4 billion. We expect production from the project to start in the fourth quarter of 2014.
Once the field achieves steady state, annual average free cash flow to Oxy should be approximately $600 million at current liquid prices. Currently we are spending about $1 billion per year to steady state operation should provide a net cash flow swing of $1.6 billion annually.
As we have recently announced we’re currently looking to tell a minority interest in our Middle East, North Africa operations. We believe this will give us an exciting opportunity to possibly partner with key regional players.
This sale will reduce the Middle East/North Africa share in our overall portfolio. We believe a partnership with regional investors will align us with local interest in our existing operations and on new opportunities throughout the Middle East to achieve future growth from a lower base.
In summary, we believe we are well positioned to meet each of our strategic goals in the region. Specifically, we have a highly profitable, vibrant and growing business.
We have developed strong and lasting relationships with host countries where we are welcome and invited to stay. We will continue to be a preferred strategic partner to them in the years to come.
Our plan to sell a minority in our Middle East/North Africa operations will assure that we will continue to grow our Middle East/North African business profitably over time by securing strategically important future projects. Our development and operating plans will ensure continued success in executing our projects.
We will continue to achieve returns in excess of 20% of our invested capital. We are continuing to apply our investment philosophy where our presence makes meaningful contributions to the host economies and makes a positive difference in the lives of the people in the local communities, including increased education and employment opportunities for nationals.
In closing, I would like to emphasize we are very excited about our presence and our opportunities in the Middle East. We believe that our excellent relationships and partnership with key regional players, coupled with our long regional experience and our track record of timely project execution will allow us to continue to enhance our rich growth potential of the region.
I will now turn the call over to Steve Chazen who will discuss our strategic initiatives.
Steve Chazen
Thank you, Sandy. Earlier this month, we announced the initial phase of the company’s strategic review as part of an effort to streamline and focus our operations, in order to better execute the company’s long-term strategy and enhanced value for our shareholders.
As a result of the initial actions, Oxy’s Board of Directors has authorized the following, to pursue a sale of minority interest in the Middle East/North Africa operations in a financially efficient manner that Sandy just discussed, pursue strategic alternatives for selective Mid-continent assets including our oil and gas interests in the Williston, Hugoton, Piceance Basin and other Rocky Mountain assets and the completed sale of a portion of our 35% interest in general partner of Plains All-American Pipeline. This resulted in pre-tax proceeds of $1.4 billion.
This initial sale process is concluded and we’ve received the proceeds. Our cash balance of $3.8 billion at end of the quarter does not include these proceeds.
Oxy’s remaining interest in the Plains All-American Pipeline, based on the IPO price, is valued at approximately $3.3 billion. As we indicated, these are our first formal steps in our effort to streamline the business, concentrate in areas where we have depth and scale and improve overall profitability.
Our goal is to become a somewhat smaller company with more manageable exposure to political risk. We will continue to seek additional strategic alternatives for the company to maximize total returns to our shareholders.
These actions are expected to generate a significant amount of proceeds together with the excess cash on the company’s balance sheet. These funds will largely be used to reduce Oxy’s capitalization.
While we expect to use a substantial and a vast majority of these proceeds to repurchase our shares, we also anticipate paying down some of our debt on a proportional basis. We expect to retire $600 million of bonds due in December.
We also expect to reinvest a portion of these proceeds in high-return growth opportunities throughout the business, several of which I will discuss in a moment. We continue to make steady progress and expect to complete the strategic view in the coming months and will disclose material developments as they occur.
Approximately a year ago our oil and gas business embarked on an aggressive plan to improve our operational efficiency across all cost categories, including capital with a view to achieving an appreciable reduction in our operating expenses and drilling costs. Our teams are to be commended for doing a superb job on this front, exceeding our initial goals, we continue to run ahead of our full year objectives to improve domestic operational and capital efficiencies.
For example, we have reduced our domestic well costs by 22% and operating costs by about 18% relative to last year. This is ahead of our previously stated target of 15% well costs improvement and total oil and gas operating cost below $14 a barrel.
Total annualized savings from these operating cost and capital efficiency initiatives amount to $1.2 billion compared to last year. We expect these savings to result an additional development opportunities as previously marginal project are now economic.
The purpose of these initiatives is to improve our return on capital or continue to execute a focused drilling program in our quarter core areas and grow our domestic oil rates. The benefits of these cost savings cannot be overstated as they will result in a year-over-year improve in our F&D cost leading to a more stable DD&A rate.
We believe we can sustain the benefits realized to date, achieve additional savings in our drilling cost, receive and reach our 2011 operating cost level overtime, barrel loss in production and sacrificing safety. We are particularly pleased that we are on track to meet or achieve our drilling activity levels planned for the year or spending less capital on plan and result of these deficiencies.
These achievements have generated higher margins giving us confidence to allocate additional capital for profitable growth opportunities. As Vicki discussed in last quarter’s call, we’re the largest oil and gas mineral acreage holder in California with more than 2.1 million net acres, we have a large and diverse portfolio of opportunities available to us across-the-state.
We’ve reduced our overall operating cost in California by more than $4 a barrel equivalent, you’d expect an average of under $19 for all 2013. Improvement in our operating as well as our drilling costs as exceed our targets and should allow for combined savings at least $300 million this year compared to 2012.
The result of these improvements and combined with more favorable permitting, we planned to increase our capital spending in California by about $500 million to approximately $2.1 billion next year. Most of this increase will be directed towards unconventional drilling opportunities where we have more than $1 million perspectives acreage for unconventional resources.
In Permian basin we’ve accumulated more than $1.7 million net acres covering both relatively established emerging place anchored by our high, our core free cash generating CO2 flood reservoirs. We’ve recently created an exploitation team, who is mandate is to optimize our drilling capabilities and accelerate the development of unconventional opportunities throughout the basin.
This year we are focused on delineating incremental opportunities and establish plays as well as to actually (inaudible) with many emerging plays which included the drilling of approximately thirty horizontal wells. We’ve also succeeded in reducing our drilling cost by more than 20%, which increased our ability to enhance our economics utilizing horizontal drilling, multi-stage completions to develop establish unconventional reservoirs.
As a result of these efforts you can now shift our development strategy, expect to spend an additional $500 million in capital next year largely directed towards increased drilling horizontal wells. The step-up in capital will allow for additional four rigs which will be dedicated to drilling horizontal wells in our focus plays of Wolfcamp both on a bone springs in the Delaware Basin as well as Wolfcamp in the Midland basin.
As an example, as we recently completed a well in our South Curtis Ranch area, which is near our (inaudible) acreage, it was completed in the Wolfcamp would be in access of just over a 1000 barrels of oil a day, 77% of which is oil, 15% NGLs with a small amount of remaining natural gas. We have over 17,000 net acres that is perspective from this in the area.
This represents a major change in our Permian 9 CO2 development strategy with a number of horizontal wells drilled next year, we’ll count it for more than 50% of total wells compared to only 10%, 32013. Turning to our international operations, our 30 plus year history of operating Columbia as provided us unique insight around heavy oil product, matured oil field development opportunities.
Historically, this has been among Oxy’s ,most profitable operations. Experience associated with steam flood development is a core competency at Oxy, a skill that fits well with Colombia’s strategy to grow its crude oil production.
Going forward, we intend to focus our efforts on applying our expertise towards pursuit of high-additional, high-return oil redevelopment projects and we expect to participate in several more steam flood projects in the coming years. In our Middle East/North Africa business and as Sandy discussed, the majority of the value of our production, income and cash flow is derived from three key countries, Oman, Qatar and U.A.E.
Majority of our regional capital is also deployed in these countries. And we expect our MENA business will generate more than $2 billion of annual free cash flow after the Al Hosn Gas project becomes operational.
We feel fortunate to have many successful years, operating in the region. Part of this we believe is a result of successfully executing on a number of challenging projects.
We also feel that it is in part due to the mutual respect we have for our partners, the host countries in which we operate and for the people who reside there. Although a sale of a minority interest will reduce our share of MENA within our overall portfolio, we expect to remain a major participant in the region with a focused presence.
Our track record of success and strong relationships should allow us to compete for new projects and provide us with future growth off of a smaller base. We look forward to forging new partnerships in the region, which will allow us to continue our profitable growth strategy.
Opportunity for high growth is also present in our chemicals business, where we plan to pursue a 50-50 joint venture with Mexichem to build a world scale ethylene cracker at the OxyChem plant in Ingleside. As part of this long-term strategy, strategic supply relationship between the companies, essentially all of the ethylene produced from the cracker will be consumed by Oxy in the manufacture of vinyl chloride monomer, utilizing our existing VCM production capacity.
The VCM will then be delivered to Mexichem to produce polyvinyl chloride, PVC and PVC piping systems. Using the cracker, OxyChem’s overall operations effectively consume more than one-third of Oxy’s domestic natural gas and NGL production.
A significant benefit of this project is that it provides higher levels of integration from the wellhead through to VCM production and sales. The project is just one example of several we plan to pursue in our effort to capture greater value in the downstream portion of the natural gas and the NGL chain versus an independent upstream gas producer.
Construction on the Ingleside cracker project is expected to begin in mid-2014 with the facilities becoming commercially operational in 2017, and we expect it will have a material benefit on our chemical earnings. OxyChem is also expected to continue to be free cash flow positive throughout the investment phase of the project.
In the Midstream segment, our investment in the BridgeTex Pipeline continues on track for scheduled start-up in mid-2014. The roughly 450-mile-long pipeline will be capable of transporting approximately 300,000 barrels a day of crude oil between the Permian region and the Gulf Coast refinery markets.
We are confident that these and other opportunities to deploy our capital will be meaningful drivers of our earnings growth over the coming years. I think we’re now ready to take your questions.
Christopher Stavros
Tamica, can you please poll the line for questions?
Operator
(Operator Instructions) Your first question comes from the line of Doug Leggate, Bank of America Merrill Lynch.
Doug Leggate - Bank of America Merrill Lynch
Thanks. Good morning, everybody.
Steve, I’ve got a couple if I may. Good morning.
Starting with the Middle East, there has been a lot of speculation over the potential value that may or may not be associated with this asset. I know you can’t give specifics, but could you frame for us given the relative lack of transparency in terms of -- you’ve done a good job today of laying out the businesses, but reserve bookings and so on are still somewhat lacking transparency.
So, could you help frame for us what you think a realistic acceptable range of volume might be and whether or not the Midstream would be part of that? I’ve got a couple of follow-ups, please.
Steve Chazen
Yeah. The Dolphin Project would be part of the sale process.
So that piece of our Midstream business would be part of that sale. There are confidentiality agreements between the three -- in each of the countries.
So we can’t actually give you more transparency without violating the confidentiality agreements. So, for example, we can’t tell you the details in Oman or Qatar or Abu Dhabi.
I think it’s fair to say that we book only to the life of the lease and as the extensions come obviously more research come. We also appreciate basically over the [lease] of the earnings that someone understated.
I think if you look at the cash, we view it as an ongoing business, that is to say it’s not a pile of asset that we’re going to deplete. The extensions on ongoing business we expect receive a price of reflexive value with ongoing business not really price of a depleting asset or the reserves or necessarily the reserves are there.
The countries can see the long term reserves, so I don’t think there’s a lot of issue with them not understanding what the long term outcome is. I don’t really get -- we don’t really want them to negotiate with myself on the values.
Doug Leggate - Bank of America Merrill Lynch
Okay. A related question then Steve on the buybacks, the potential -- I mean there’s been a number of bond that they run in the pass of $8 billion from Middle East, but like to see the amount is reasonable.
I believe there’s some tight issues around what you can bring back as a -- on optimum level, but if you then look at claims on potential mid coincident sale, can you help frame for us what you see the scales, the buyback like would be and (inaudible) coming to this acquisitions in the Permian Basin seems to have slowed down I guess probably in relation (inaudible) to do that, you’re generating a lot of cash. So how should we think about buybacks on a go forward basis to maybe enhance your per share growth?
Steve Chazen
I think buybacks have been important not only though for share growth in the next -- to certainly next few months. We have a lot of cash in the balance sheet.
We had $3.8 at the end of the quarter plus the money from the sale of the midstream assets. We would expect to begin a repurchase of some shares too shortly.
As far as the scale goes, we’re not going to build cash. We’re not going to pay down the debt reduction to be proportional.
So if we sell 10% of the assets maybe the debt will go down 10%. We only have about of $7 billion of debt, so approximately a big looser, these projects will not probably allow us to still stay within our cash from operations next year.
This is probably not going to drain a lot as far as acquisition is concerned. I think the issue in the Permian is about -- you’re just not allowed for sale and that which is for sale is not that interesting.
Companies -- we have a lot of acreage are just highlighted, now just one small area where we’re doing well, a lot of acreage. And so the need to drive the business through large scale acquisitions is pretty modest at this point.
So you should expect the bulk of the proceeds to go towards share repurchases and else we’re not going to build cash. So I think you should -- I can’t tell you exactly the number and one of the reasons why we’re -- once we could frame this more fairly, as to how much money is involved and we can talk about the last steps in this, but I think we’re going to see where we are.
Our goals are really two fold. We’ll make sure we continue to operate well because that’s really good price value and we need to execute the things we’ve announced.
So I think that’s what we’re trying to do but once we get that leased and safe then we’ll talk about further restructuring stats.
Doug Leggate - Bank of America Merrill Lynch
Okay. Last one for me so far…
Steve Chazen
(Inaudible) or not.
Doug Leggate - Bank of America Merrill Lynch
I guess we’re locking specific Steve, so obviously I think market is kind of telling you to the locking specific. So I guess we’ll have to wait until you can give more color, but if I could try one final one if I may.
In your press release the other day, sales dimension in California, it continues to be a dragon, frankly see it under performer I guess in the end of the market. What are the parameters that you think may or may not contribute to your decision on whether or not California can do better on its own, I think that is clearly one of the key gating items for the mark issue on the restructuring on a go forward basis.
I’ll leave it there, thanks.
Steve Chazen
Yeah, I think, if you go back to the question about where we -- you could come up with a very high number without me telling you exactly, what it is or for a share repurchase, I mean, so you might be of a $1 billion or$2 billion. If that’s about all of then you could use the numbers that are floating around up there.
If you could guess what the proceeds from the Mid-Continent sale would be or within a few $100 million, then obviously you would we see how much cash we have now. I don’t think anybody should be off very much in computing how much the share repurchased would be as the debt reduction and the other stuff is not large in comparison to that.
As far as California is concerned, the fundamental question is can it operate better as a standalone business with a different model? The different model, if you are just going to operate just like it does now and it might be better off staying where it is.
But if it operates better with the different model than as a higher capital model and basically literally no dividends and with a more entrepreneurial background then I think that it would be better separated from the company. More to the point, I think is that separating California from the rest, could enhance visibility and attractiveness of the remaining business.
And I think that’s -- I think they are enough for now. Once we get some slightly better numbers on the proceeds of these two various areas that we are working on now then we can size California.
We are going to do it appropriately.
Doug Leggate - Bank of America Merrill Lynch
Thanks for taking my questions, Steve.
Steve Chazen
Okay.
Operator
The next question comes from the line Doug Terreson with ISI.
Doug Terreson - ISI
Good morning, everybody. Congratulation on your results.
Steve Chazen
Thank you.
Doug Terreson - ISI
Yeah. Steve, you do highlighted on some of the strategic review slides, a major change in strategy in the Permian today.
It’s going to be driven by this new exploitation team and on this point I want to say whether you could provide some color or whatever color you might have on this new unconventional drilling group in the Permian. And also -- you also just mentioned a few minutes ago about the Plains All-American position and the question there is, whether there is any strategic or operating rationale as to why the remainder may not be divested in the future?
So, two questions.
Steve Chazen
The second one is easier to say. It will be divested in the future.
Doug Terreson - ISI
Thank you.
Steve Chazen
So there is no -- when we entered into it, it was a private business.
Doug Terreson - ISI
Yeah.
Steve Chazen
And I don’t have any problem investing in a private business if shareholders can’t access if I think it makes sense for us. Once it becomes public and you can duplicate the ownership with yourself there is no reason for us to hold it.
I’m going to let, Vicki answer the question about the operational group.
Vicki Hollub
Okay. First, I would like to say thanks to our current Permian unconventional team that’s gotten us to where we are today, because currently we are running seven horizontal rigs.
We expect to ramp that up to 16 next year. So we are now being more aggressive with our properties in the Permian because we now understand them a little bit better.
This exploitations team is going to be one that we have developed to get us into a position where we are more entrepreneurial and much more aggressive in the way that we attack our entrepreneurial opportunities in the Permian. So this group, we expect to start helping us to more accelerate those opportunities, so within two to three years out in our typical development schedules.
This team also will focus on ensuring that we provide the technical support to the business unit to make sure that we are spacing our wells correctly, that we are adequately drilling our horizontal wells and the correct direction and spacing. So the bottom line is we just expect this to be a technical support to help us get more aggressive.
Doug Terreson - ISI
Great. Thanks a lot.
Operator
Your next question comes from the line of Ed Westlake with Credit Suisse.
Ed Westlake - Credit Suisse
Yes. Good morning, Steve.
Steve Chazen
Good morning.
Ed Westlake - Credit Suisse
There is a statement in your slides, on Slide 35, saying, expect to complete strategic review in the coming months. Is that a statement just around the overall thinking about the business, or is that around the timing that you might expect for making some of the disposals in the Mid-Continent and valorization in the Mid-East that you’ve discussed?
Steve Chazen
And the decision about California, right.
Ed Westlake - Credit Suisse
Okay.
Steve Chazen
That’s intended to -- so that’s intended to be as soon as I didn’t get clarity about the proceeds.
Ed Westlake - Credit Suisse
All right. Okay.
Steve Chazen
And then very disruptive and I don’t know people don’t understand it. We put out the announcements so we could go do the work because you can’t go secretly go sell 9% of your assets.
Once that’s done then we’ll look at the next step what we need to do, but you can’t just (inaudible) disrupt the whole organization all at once with sort of this massive idea without some pretty specific numbers.
Ed Westlake - Credit Suisse
And then a question that maybe you’ll be able to answer on the Middle East, obviously, there -- seems like there’s a decent amount of growth still to go for and thanks for the slides? Is there some sort of recovery factors that you can give on these fields at present to give us some kind of a geological understanding, you think you can’t talk about reserve bookings that could help us think about the long-term for these fields, particularly Oman…
Steve Chazen
Yeah. Unfortunately -- yeah, unfortunately that’s part of what we’re supposed to keep secret.
They’re very high recoveries by U.S. there or by current U.S.
mandates. They’re like fields that we started with the U.S.
in the ‘30s not the like fields that were discovered last few years.
Ed Westlake - Credit Suisse
Okay. And then the final one, the (inaudible) chemical cracker, I mean, world scale is sort of $5 billion to $7 billion, is that the right ballpark for your…
Steve Chazen
No, no. Nowhere near that.
This is under $1 billion of our share.
Ed Westlake - Credit Suisse
Okay. Great.
Thanks very much.
Steve Chazen
Thank you.
Operator
Your next question comes from the line of Leo Mariani with RBC.
Leo Mariani - RBC
Hey. Just question on the Permian here, just looking at your oil production, it’s kind of been flattish there for the last handful of quarters.
Clearly, you’re accelerating activity in 2014 talked about an incremental 500 million to drill horizontal largely unconventional. You guys also talked about clearly significant proceeds coming in the door soon, I mean, ballpark it’s probably if it could get to something like 10 billion type of number, should we expect that is, if you guys have success as we get through 2014 that 2015 and ‘16 can see a lot more incremental capital on the Permian given how big your acreage position is here?
Steve Chazen
Yeah. Certainly hope so.
If it isn’t then it hasn’t been successful, but we expect Permian to be self-funding because there’s so much cash coming out of CO2 business.
Leo Mariani - RBC
Okay. I guess, in terms of your activity there, you kind of mentioned that acquisitions were didn’t seem like they were as paramount.
I mean, do you think there is still potential for that down the road if stuff becomes available that looks more attractive to you guys or do you think you have enough acreage to really drill this aggressively for many years to come?
Steve Chazen
I don’t think we need to do any acquisitions, no, no, obviously something attractive comes along that’s different, but we shall not going to press acquisitions.
Leo Mariani - RBC
Okay.
Steve Chazen
We’re better off, frankly, buying the shares with the money than doing the acquisitions.
Leo Mariani - RBC
Okay. Thanks a lot.
Appreciate it.
Operator
Your next question comes from the line of Paul Sankey with Deutsche Bank.
Paul Sankey - Deutsche Bank
Hi. Good morning, everyone.
Steve do you think you can complete the Middle East deal by the end of the year?
Steve Chazen
Complete, no, there is we got sign a lot of factors, factors probably fill a room. So I think that, we’ll -- I expect we will have clarity as to the proceeds by the end of the year and probably signing on completion in the first quarter.
Paul Sankey - Deutsche Bank
And when you talk about a minority, I think the previous guidance was 25% sale is that still…
Steve Chazen
I think you should think of it as being focused on how much money we can bring back in efficient manner rather than the exact percentage.
Paul Sankey - Deutsche Bank
Yeah. And that’s being reported as sort of…
Steve Chazen
Some amount of money, there is a sizeable number that we can bring back in an efficient manner. The Middle East business generates a sizable amount of foreign tax credits.
So we have a probable those that we could use. It will continue to generate foreign tax credits.
It’s a shelter of the income going forward. So if you exceed what you have you pay taxes, U.S.
taxes on money that you would otherwise not be tax assigned. So we are mindful of that and this rate.
Paul Sankey - Deutsche Bank
I understand.
Steve Chazen
I know that sounds more confusing but
Paul Sankey - Deutsche Bank
No. I think people have been talking about $8 billion type numbers being the ultimate proceeds in the work around percentage share towards that.
And then I think the year-end guidance that you’ve kind of given, at least, what more matters is the numbers is in line with what we’re hoping?
Steve Chazen
We’re not going to give exact numbers. (inaudible) that’s useful, again, negotiate with ourselves on the phone.
Paul Sankey - Deutsche Bank
Yes. I understand and the options of California, is that a spin IPO what are you thinking there?
Thanks.
Steve Chazen
We really haven’t decided what the options are. Generally, simpler is better.
Increased complexity is probably not something I must up for at this point.
Paul Sankey - Deutsche Bank
So would that imply a spin then?
Steve Chazen
What’s the simplest thing to do. There are two simple things to do.
And only two simple -- everything else requires lot of brainpower and we’re perhaps short of that right now.
Paul Sankey - Deutsche Bank
Fair enough. I think I’ll leave it there.
Thanks Steve.
Steve Chazen
Thank you.
Operator
The next question comes from the line of Sven del Pozzo with IHS.
Sven del Pozzo - IHS
Good morning. We’ve seen a big run-up in Delaware Basin stocks over recent months.
And I know you guys have lot of acreage there. So do you think that -- I think it is based on a relatively small number of successes in horizontal Wolfcamp such as you had mention on your call.
I’m wondering where do you think we stand in making this play more repeatable in the Delaware basin?
Steve Chazen
Vicki, do you want to take a shot at that. That’s true.
There are relatively few wells. We are encouraged about what’s going on?
So I’ll let Vicki talk here.
Vicki Hollub
And again that’s part of what the exploitation teams will be doing, working with our current business units, that is to look at the data in the Delaware. We do believe that there is potential there and it is repeatable.
And one of the things that we’re going to focus on trying to do is determine what drives the variations within the reservoir. This team has the skill sets we believe to work with the business units to accomplished that.
And so it’s just a variability that we want to understand a little bit better but we do believe that success is repeatable.
Sven del Pozzo - IHS
In your opinion, is it more upside in the Wolfcamp formation or Bone Springs or equal, just as an idea. And then secondly, Wolfcamp and the Midland Basin, how would you compare the two, kind of, answering the question the same way, just like you did now?
Vicki Hollub
I think that the upside in both Wolfcamp and the Bone Springs will be ultimately pretty equal and the Wolfcamp and the Midland Basin, certainly we’ve had some recent success there that -- but based on information we see from a couple of wells, we’re drilling now and from offset operators where we’re starting that that’s going to be very successful.
Sven del Pozzo - IHS
Thank you. Then moving over to Bakken for a moment, most of your drilling, as I think it’s been in Southwestern Dunn county.
Is that to hold the acreage by production or is that just your own choice because you’ve got a lot of acreage outside of that area as well. And I’m just wondering what your plans are.
We’re developing that under acreage?
Steve Chazen
We’ve been focused on holding the production -- holding it by production?
Sven del Pozzo - IHS
Okay. And then ….
Steve Chazen
The majority of the drilling is done for that purpose.
Sven del Pozzo - IHS
Okay. Thanks.
And then Pronghorn Sand in Bakken, you mentioned that in your last press release, have you had any successful wells in Pronghorn Sand. I know that there is offset operators that have had success there.
I’m wondering when you guys plan to drill Pronghorn Sand or if you have already?
Steve Chazen
Bill is going to answer that.
Bill Albrecht
Yes. We’ve build a -- we’ve build a couple of Pronghorn wells.
We’ve been very pleased with the success that we’ve seen so far. So I think you could expect more of that.
Sven del Pozzo - IHS
Okay. And then finally, just a little bit of data points, if you could help me what the Dolphin project equity income.
I know you have disclosed that in the past, but as a while back and just to bring me up the speed on what that is on an annualized basis and if that equity income number -- if it’s a pre-tax number or post-tax number, and you can get me that later if you want to, if you know, I would appreciate it?
Steve Chazen
Roughly 60% of the income in the Midstream business is split between Dolphin Midstream pipeline and the Plains interest. So if you take our Midstream income for a year, I wouldn’t use any quarter numbers.
For a year, about 60% comes from those two and, it’s maybe quite equally divided but something like that.
Sven del Pozzo - IHS
Okay. Thank you very much.
Operator
Your next question comes from the line of Faisel Khan with Citigroup.
Faisel Khan - Citigroup
Hi. Good morning.
Steve Chazen
Good morning.
Faisel Khan - Citigroup
On the $2 billion of annual free cash flow, you expect to generate the MENA portfolio after the -- closing the startup, can you discuss if that free cash flow number sort of assumes that you continue to spend the capital on growth projects and if -- you can also discuss if that the CapEx number has embedded in that free cash flow number if that’s enough to sort of replace reserves?
Steve Chazen
The answer is, we continue to expend it on growth projects and it would be enough to replace reserves.
Faisel Khan - Citigroup
So it includes that some of the projects you are looking at in the UAE and in Oman, some of the…
Steven Chazen
It includes projects that are in hand now that we think we have. If we want to do something brand new, they might have a different effect.
But that’s -- but if you look at what we have in hand and projects in Qatar and Oman and Abu Dhabi, that sort of includes all of that. But if you said well, you can have some projects some other place.
It’s radically different than -- maybe different outcome. But this includes enough to replace production.
Faisel Khan - Citigroup
Okay. Understood.
And then your comments on the sort of favorable permitting environment in California, is that a result of the law that was signed into or the legislation that was signed to law by Jerry Brown or was it -- is there something else that’s going on in terms of how you are lining up the permitting process in the state?
Steven Chazen
Vicki, you can answer that, I think.
Vicki Hollub
Yes. I would say that the division of Oil and Gas and Geothermal Resources for the State of California has been trying diligently to ensure that there is more certainty around the permitting process.
And so they have been processing permit applications as quickly as they can, granted, it still takes a while in the States because of their personnel resources. But recently we’ve also been trying to anticipate if the application of details from Senate Bill 4 that was just passed and we are trying to ensure that we stay ahead of the anticipated specific requirements of that bill to ensure that we are not negatively impacted by that.
Faisel Khan - Citigroup
So the Senate bill, does it help provide more transparency to the process or does it make the permitting process more difficult?
Vicki Hollub
It will provide more transparency, but it will also require more monitoring from the operator standpoint, also more reporting and we are hoping that the requirements are not so stringent as they overload the staff at DOGGR. And that’s the degradation for us is that increased permitting requirements is going to be a load on their staff.
Faisel Khan - Citigroup
Okay. Okay.
Thanks for that color. And just last question from me, could you give us the sort of what you envision the capital cost being for the ethylene plant, the gross cost?
Steven Chazen
Well, as I said that half of that would be under $1 billion dollars.
Faisel Khan - Citigroup
Okay. And so…
Steven Chazen
And more -- So whether it’s $750 million or $800 million or something like that, that’s sort of the range. We’re half of it.
Faisel Khan - Citigroup
Okay. And are -- Do you have all the permits in hand, the air permits and the CO2 permits?
Steven Chazen
Yes. I think we are about set to go.
Faisel Khan - Citigroup
Okay. Great.
I appreciate the time. Thank you.
Steven Chazen
We will be spending -- we’ll be spending some money this year but it will build up in 2014, ‘15 and ‘16.
Faisel Khan - Citigroup
Okay. Understood.
Thank you for the time.
Steven Chazen
Thanks.
Operator
We do have time for one more question. Your final question comes from the line of John Herrlin with Societe Generale.
John Herrlin - Societe Generale
Hi. Two quick ones.
Given more of an unconventional focus, should we expect to see your PUD count go up in the U.S., Steve?
Steve Chazen
PUDs as a percentage of proven…
John Herrlin - Societe Generale
I understood.
Steve Chazen
Okay. The actual PUD count is very large, how much they actually, but there were always very reluctant to book PUDs and you’ve got to put a gun to their head to get them to book PUDs.
So I would suggest that the PUDs are likely not to change very much as a percentage. It doesn’t mean there aren’t PUDs but just.
They feel, I mean, just to tell you why, they feel they’re borrowing from next year’s program. So if they book a PUD, they book the barrels now and the money gets funded next year.
So they are afraid of just hurting their F&D costs next year. So basically that you have the steady state of PUDs and [PEP] adds and therefore your F&D costs are from perspective of deeply being more predictable.
We can argue with them but there is more PUDs out there but they tend to take a very conservative view of it. I don’t think there is any question about that, not the end of the world or worse things you could do.
John Herrlin - Societe Generale
Okay. That’s fine.
I just was wondering whether you’re going to be more like your peers because you are more conservative about that?
Steve Chazen
No. I think it requires brain surgery and we are not up for that as part of my liabilities that get older.
John Herrlin - Societe Generale
Okay. On the bottom these are peeping, next question.
With California you’re spending more on J&J and you said your rent do more unconventionally. Are you going to be outside existing areas for your unconventional activities, what I’m trying to get out is, in terms of volume recruitment will production activities be more protected if you’re not within your existing field areas or TVD?
Steve Chazen
I think we are going to build out from our field areas rather than go off, part of building efficiency is to build out from your existing infrastructure and one keys to the next year or so is to keep the efficiency strong, so we will build out from where we are.
John Herrlin - Societe Generale
Okay. Great.
Thank you.
Steve Chazen
Thank you. Chris?
Christopher Stavros
Please give us a call if you have any questions, further questions here in New York and thanks for joining us today.
Steve Chazen
Thank you.
Operator
Thank you. And this concludes the third quarter 2013 earnings release conference call.
Thank you for joining. You may now disconnect your line.