Canadian Natural Sees Record Production in First Six Months

Commenting on second quarter 2007 results, Canadian Natural's Chairman, Allan Markin stated, "As we exit the first half of the year, we continue with our defined plan to manage costs while maximizing value. On the conventional side, the strength of our natural gas program and the quality of our assets was demonstrated through a very productive winter drilling program and successes from a variety of wells that have performed above expectations. Our crude oil program also continues to deliver with solid results in North America. Looking to Horizon, at 75% complete, we remain on track for targeted start-up in the third quarter of 2008 and maintain our focus on execution. "

John Langille, Vice Chairman, stated, "The Company generated a record cash flow of just over $3.1 billion in the first half of 2007. Heavy crude oil differentials widened from Q1/07 but were favorable in Q2/07 considering the significant heavy crude oil conversion capacity shut downs in the US Midwest. The differentials continue to be positively impacted by the pipeline reversals to the Gulf Coast and our marketing of blended products. This reaffirms our belief that our marketing strategy is effective. Our active commodity hedge program underpins our cash flows during the Horizon Project construction period and reduces downside exposure in today's volatile commodity markets."

Steve Laut, President and Chief Operating Officer of Canadian Natural commented "In the first half of 2007 we demonstrated the strength and quality of our asset base as well as our ability to effectively allocate capital to those activities that maximize value. At present, returns and recycle ratios for crude oil are significantly higher than those for natural gas, and therefore crude oil will continue to be the focus of our capital program for the remainder of the year. The high grading of our natural gas inventory has resulted in better than expected natural gas production; however, with minimal scheduled drilling for the remainder of the year, natural gas production will decline somewhat in the second half of 2007. Crude oil production remained strong throughout Q2/07 with volumes expected to grow from Q2/07 to Q3/07 as our thermal projects come off a steaming cycle."


                                Three Months Ended        Six Months Ended
($ millions, except as       Jun 30    Mar 31    Jun 30    Jun 30    Jun 30
 noted)                        2007      2007      2006      2007      2006
Net earnings              $     841 $     269 $   1,038 $   1,110 $   1,095
 per common share, basic
 and diluted              $    1.56 $    0.50 $    1.93 $    2.06 $    2.04
Adjusted net earnings
 from operations (1)      $     595 $     621 $     514 $   1,216 $     782
 per common share, basic
 and diluted              $    1.10 $    1.15 $    0.96 $    2.25 $    1.46
Cash flow from
 operations (2)           $   1,513 $   1,622 $   1,287 $   3,135 $   2,326
 per common share, basic
 and diluted              $    2.81 $    3.01 $    2.40 $    5.82 $    4.33
Capital expenditures, net
 of dispositions          $   1,460 $   2,009 $   1,558 $   3,469 $   3,867

Daily production, before
 Natural gas (mmcf/d)         1,722     1,717     1,475     1,719     1,456
 Crude oil and NGLs
  (bbl/d)                   327,494   327,001   338,852   327,249   331,299
 Equivalent production
  (boe/d)                   614,461   613,114   584,611   613,790   573,879
(1) Adjusted net earnings from operations is a non-GAAP term that the
    Company utilizes to evaluate its performance. The derivation of this
    item is discussed in the Management's Discussion and Analysis ("MD&A").

(2) Cash flow from operations is a non-GAAP term that the Company considers
    key as it demonstrates the Company's ability to fund capital
    reinvestment and debt repayment. The derivation of this item is
    discussed in the MD&A. 

  • Natural gas production volumes remained strong and represented 47% of the Company's total production. Natural gas production for Q2/07 averaged 1,722 mmcf/d, up 17% from 1,475 mmcf/d for Q2/06 and up marginally from 1,717 mmcf/d for Q1/07. Volumes in Q2/07 reflected better than expected production from a number of wells, the addition of Anadarko Canada acquisition volumes, and continued high-grading of opportunities. Stronger production has resulted in Canadian Natural exceeding Q2/07 guidance.
  • Annual natural gas production guidance has been increased to reflect the volumes recorded during the first half of 2007.
  • Total crude oil and NGLs production for Q2/07 was at the top end of guidance for the quarter at 327,494 bbl/d. Q2/07 production was 3% lower from Q2/06 of 338,852 bbl/d and was comparable to 327,001 bbl/d for Q1/07. Volumes are expected to increase in Q3/07 as a number of thermal wells transition from steam cycles to production cycles.
  • Quarterly cash flow was $1.5 billion, a decrease of 7% from Q1/07 and an increase of 18% from Q2/06. The increase from Q2/06 primarily reflects higher after-hedging commodity realizations year over year, whereas the decrease from Q1/07 primarily represents wider heavy crude oil differentials and lower natural gas pricing. Cash flow in Q2/07 was negatively impacted by the strengthening Canadian dollar to US dollar average exchange rate of US$0.9112 compared with US$0.8535 for Q1/07 and US$0.8918 for Q1/06.
  • Q2/07 achieved quarterly net earnings of $841 million, a 213% increase from Q1/07 and a 19% decrease from Q2/06. The quarterly adjusted net earnings from operations for Q2/07 were $595 million, a 4% decrease from Q1/07 results and a 16% increase from Q2/06.
  • Completed the Q2/07 North American drilling program targeting 78 net crude oil wells and 7 net natural gas wells, excluding stratigraphic test and service wells, with a 95% success ratio. The success rate is a reflection of Canadian Natural's strong, predictable, low-risk asset base. Crude oil drilling activity remained unchanged from Q2/06. Natural gas drilling decreased by 85% compared to Q2/06, reflecting Canadian Natural's reallocation of capital towards a higher return crude oil drilling program.
  • Maintained a strong undeveloped conventional core land base in Canada of 12.6 million net acres - a key asset for continued growth.
  • Primary heavy crude oil production increased by approximately 3,500 bbl/d in Q2/07 from Q1/07 levels due to stronger production results, recompletions and workovers, and increased drilling activity levels.
  • Continued production improvements at the Pelican Lake Field from new drilling activity and the expansion of the enhanced crude oil recovery program. Pelican Lake crude oil production averaged approximately 34,000 bbl/d during the quarter, up 12% or approximately 4,000 bbl/d from Q2/06. Production is targeted to continue to increase throughout the remainder of 2007.
  • Secured a deep water drilling rig for the Baobab Field. The equipment will be mobilized in late 2007 or first half 2008, enabling work to begin on the restoration of shut-in production. It is targeted that 3 of the 5 shut-in Baobab wells should come back on stream over the course of 2008.
  • The Horizon Oil Sands Project ("Horizon Project") exited Q2/07 75% complete and on track for a targeted Q3/08 start-up.
  • Declared a quarterly cash dividend on common shares of C$0.085 per common share, payable July 1, 2007, a 13% increase over the 2006 quarterly dividend.


In order to facilitate efficient operations, Canadian Natural focuses its activities in core regions where it can dominate the land base and infrastructure. Undeveloped land is critical to the Company's ongoing growth and development within these core regions. Land inventories are maintained to enable continuous exploitation of play types and geological trends, greatly reducing overall exploration risk. By dominating infrastructure, the Company is able to maximize utilization of its production facilities, thereby increasing control over production costs. Further, the Company maintains large project inventories and production diversification among each of the commodities it produces; namely natural gas, light/medium and heavy crude oil and NGLs. A large diversified project portfolio enables the effective allocation of capital to higher return opportunities.


Activity by core region

                                    Net undeveloped land  Drilling activity
                                                   as at   six months ended
                                            Jun 30, 2007       Jun 30, 2007
                                 (thousands of net acres)        (net wells)
Canadian conventional
 Northeast British Columbia                        2,462                 50
 Northwest Alberta                                 1,523                 88
 Northern Plains                                   6,578                347
 Southern Plains                                     907                 28
 Southeast Saskatchewan                              122                 10
 In-situ Oil Sands                                   406                155

                                                  11,998                678
Horizon Oil Sands Project                            115                 98
United Kingdom North Sea                             298                  5
Offshore West Africa                                 206                  2
                                                  12,617                783
Note: Drilling activity includes stratigraphic test and service wells

Drilling activity (number of wells)

                                                Six Months Ended Jun 30
                                                2007               2006
                                           Gross     Net      Gross     Net
Crude oil                                    290     271        196     171
Natural gas                                  254     207        616     483
Dry                                           74      64         80      68
Subtotal                                     618     542        892     722
Stratigraphic test / service wells           241     241        310     309
Total                                        859     783      1,202   1,031
Success rate (excluding stratigraphic test
 / service wells)                                     88%                91%

North America Conventional

North America natural gas

                                Three Months Ended        Six Months Ended
                             Jun 30    Mar 31    Jun 30    Jun 30    Jun 30
                               2007      2007      2006      2007      2006
Natural gas production
 (mmcf/d)                     1,696     1,694     1,448     1,694     1,430

Net wells targeting natural
 gas                              7       245        48       252       547
Net successful wells drilled      6       201        43       207       483
 Success rate                    86%       82%       90%       82%       88%

  • Q2/07 North America natural gas production increased 17% over Q2/06 and was comparable to Q1/07. The increase reflects completion of a successful winter drilling program and the continued high-grading of assets in conjunction with a focused drilling program. Production will decline somewhat in the second half of the year as a result of the Company's strategic decision to scale back the 2007 drilling program due to reallocation of capital to currently higher return crude oil projects.
  • Canadian Natural targeted 7 net natural gas wells in Q2/07 including 2 wells in the Northern Plains region, 4 wells in the Northwest Alberta region and 1 well in the Southern Plains region, with an overall success rate of 86%. This compares to 48 net targeted natural gas wells in Q2/06, an 85% reduction from Q2/06 to Q2/07.
  • Planned drilling activity for Q3/07 includes 121 targeted natural gas wells, comparable to the Q3/06 drilling activity of 111 targeted natural gas wells.
  • The Company has seen decreased third party service costs along with productivity gains as a result of the industry-wide trend towards scaling back natural gas drilling within the Western Canadian Sedimentary Basin (WCSB).

North America crude oil and NGLs

                                Three Months Ended        Six Months Ended
                             Jun 30    Mar 31    Jun 30    Jun 30    Jun 30
                               2007      2007      2006      2007      2006
Crude oil and NGLs
 production (bbl/d)         240,420   237,489   234,780   238,962   228,901

Net wells targeting crude
 oil                             78       207        78       285       168
Net successful wells
 drilled                         75       191        76       266       164
 Success rate                    96%       92%       97%       93%       98%

  • Q2/07 North America crude oil and NGLs production increased 1% from Q1/07 and increased 2% over Q2/06 levels. Conventional heavy crude oil and Pelican Lake crude oil experienced solid performance and production growth that offset the slight decrease in thermal volumes for Q2/07, which was largely a result of the timing of the normal steaming cycle.
  • During Q2/07, drilling activity included 22 net wells targeting heavy crude oil, 40 net wells targeting Pelican Lake crude oil, 14 net wells targeting thermal crude oil and 2 net wells targeting light crude oil.
  • The Primrose East Expansion, a new facility located 15 kilometres from the existing Primrose South steam plant and 25 kilometres from the Wolf Lake central processing facility, is anticipated to add approximately 40,000 bbl/d. The Primrose East Expansion received Board of Directors' sanction in 2006 and The Alberta Energy and Utilities Board regulatory approval in the first quarter of 2007. Drilling and construction are currently underway, and production is targeted to commence in 2009. Primrose East is the second phase of the 300,000 bbl/d conventional expansion plan identified to unlock the value from Canadian Natural's thermal crude oil resource base.
  • In early 2007, Canadian Natural issued its proposed third phase of the conventional expansion plan with a development plan for the 30,000 bbl/d Kirby In-Situ Oil Sands Project located approximately 85 km northeast of Lac La Biche in the Regional Municipality of Wood Buffalo. The Company is targeting to file its formal regulatory application documents for this project in the latter half of 2007. Final corporate sanction may depend upon the results of potential changes to royalty regimes and environmental regulations, and their associated costs.
  • Development of new pads and secondary recovery conversion projects at Pelican Lake continued as expected throughout the Q2/07. Drilling consisted of 40 horizontal wells, with plans to drill 52 additional horizontal wells for the remainder of 2007. The response from the water and polymer flood project continues to be positive. Pelican Lake production averaged approximately 34,000 bbl/d for Q2/07 compared to approximately 30,000 bbl/d for Q2/06.
  • Conventional heavy crude oil production volumes increased by approximately 3,500 bbl/d in Q2/07 from Q1/07 due to increased drilling activity levels, recompletions and workovers that commenced during the second half of 2006 as a result of the narrowing heavy crude oil differential.
  • Planned drilling activity for Q3/07 includes 147 net crude oil wells, excluding stratigraphic test and service wells.

Potential Changes to Legislation

  • The Alberta provincial government is currently reviewing its crude oil and natural gas royalty regime. The results of this review, which are not determinable at this date, are expected in the fall of 2007 and may place additional costs on the crude oil and natural gas industry.
  • The crude oil and natural gas industry is also experiencing cost pressures related to changes to environmental regulations, both in North America and internationally. In Canada, the Federal government is drafting policy and legislation to control greenhouse gas emissions. In Alberta, provincial regulations came into effect July 1, 2007, while in the UK, greenhouse gas regulations have been in effect since 2005. The Company has processes in place to comply with the regulations. Additional requirements resulting from greenhouse gas legislation will add to the cost of executing projects company wide.


The Company operates in the North Sea and Offshore West Africa where production of lighter quality crude oil is targeted in conjunction with natural gas that may be produced in association with crude oil production.

                                Three Months Ended        Six Months Ended
                             Jun 30    Mar 31    Jun 30    Jun 30    Jun 30
                               2007      2007      2006      2007      2006
Crude oil production (bbl/d)
 North Sea                   57,286    61,869    63,703    59,565    62,261
 Offshore West Africa        29,788    27,643    40,369    28,722    40,137
Natural gas production (mmcf/d)

 North Sea                       15        15        17        15        17
 Offshore West Africa            11         8        10        10         9
Net wells targeting crude
 oil                            3.1       2.0       2.8       5.1       7.0
Net successful wells drilled    3.1       2.0       2.8       5.1       7.0
 Success rate                   100%      100%      100%      100%      100%

North Sea

  • Canadian Natural continues to execute its exploitation strategy in the North Sea. The first ongoing stage of this exploitation program is based upon optimizing existing facilities and waterfloods. The second stage of exploitation incorporates more near pool development and exploration in order to maximize utilization of the common facilities and ultimately extend all fields' economic lives. Ongoing development at Ninian, the Columba Terraces and the Lyell Field continued in Q2/07.
  • In Q2/07, 1.9 net crude oil wells were drilled along with 1.8 net water injectors, with an additional 1.9 net wells drilling at the end of the quarter.
  • The development of the Lyell Field continued with the first well onstream in Q2 through the existing infrastructure. A second well is scheduled for completion in early Q3/07. Tranche 1 of the development comprises two production wells in 2007, and an additional one production well and one well workover in 2008.
  • Construction of the Columba E raw water injection facilities continued during the quarter. During Q2/07, commissioning of the facilities was completed and 2 water injection wells were delivered, allowing water injection into the reservoir to commence.
  • Completed the successful Ninian Central platform turnaround in Q2/07. Planned platform shutdowns are scheduled for Q3/07 at Ninian, B-Block and T-Block, which will impact production in the third quarter.

Offshore West Africa

  • During Q2/07, 1.2 net wells were drilled with 0.6 additional net wells drilling at the end of the quarter.
  • First crude oil from West Espoir commenced production in mid 2006 with 3 production wells and 2 injector wells, followed by an additional production well in Q1/07. During Q2/07, 2 additional production wells were added. The West Espoir area has seen favorable production growth and development drilling is continuing until 2008 with producers and injectors being brought on-line as they are completed.
  • A deep water drilling rig has been secured for the Baobab Field. The rig will be mobilized in late 2007 or first half 2008 with the Company targeting to bring 3 of 5 of the shut-in Baobab wells back into production over the course of 2008.
  • At the 90% owned and operated Olowi Field in offshore Gabon, all major construction contracts have been awarded. The project is on schedule with drilling scheduled to commence in Q2/08 and first crude oil is targeted for late 2008. Production is targeted to plateau at approximately 20,000 bbl/d.

Horizon Project

  • Canadian Natural achieved a major milestone on the Horizon Project during Q2/07, with overall work progress at the end of the quarter reaching 75% complete and field construction approaching two thirds complete. All major vessels have either been erected or are currently on site. Work scheduled for the coming months will focus on mechanical construction, which is scheduled to be completed through a combination of lump sum and reimbursable contracts.
  • The Horizon Project remains on track for targeted start-up in the third quarter of 2008. Project progress slowed slightly during the quarter due in part to labour productivity, the temporary work shut down on the tank farm and delays associated with a realignment of certain contract packages to match scope to the marketplace contractor supply to better manage costs.
  • Despite the challenges of a construction market in Alberta operating at high capacity, the Company has been able to build the on-site manpower to over 7,000 personnel. With the success of the Fly-In Fly-Out program and Managed Open Site policy Canadian Natural has been able to add workers as required.
  • Management of costs continues to be a focus for the team and the Horizon Project currently remains within the Company's forecast estimate of 5% to 12% above the original $6.8 billion Board Authorization for construction capital spending.
  • The quarterly update for Phase 1 of the Horizon Project is as follows:

Project status summary                           Jun 30, 2007  Sep 30, 2007
                                                 Actual  Plan          Plan
Phase 1 - Work progress (cumulative)                 75%   77%           88%
Phase 1 - Construction capital spending
 (cumulative)(1)                                     79%   77%           85%
(1) Relates to overall Phase 1 construction capital of $6.8 billion. 

Accomplished during Q2/07

Detailed Engineering

  • Overall detailed engineering 97% complete and substantially complete in most areas. Procurement
  • Overall procurement progress is 95% complete.
  • Have awarded over $5.4 billion in purchase orders and contracts to date.
  • Delivered to site over 30,000 standard loads.
  • Operations and maintenance service and supply agreements are in negotiation. Modularization
  • Delivered an additional 172 oversized loads to site during the quarter for a total of 1,424 loads, which represents approximately 86% of the total requirement. Construction
  • Overall construction progress is 63% complete.
  • Mine overburden removal has moved over 37 million bank cubic meters, which represents approximately 54% of the total to be moved and is 1% ahead of schedule.
  • Construction of cofferdam for the Tar River Diversion completed in Mining.
  • Fabrication of Crushing Plants, Surge Facility and Conveyor Structure is 100% complete in the Ore Preparation Plant.
  • Started erection of Conveyors in Ore Preparation.
  • Completed Hot Water Tank in Extraction.
  • Hydro-tested Primary Separation Cells and Hot Water Tank.
  • Completed construction and hydro-testing of Inclined Plate Settlers in Froth Treatment.
  • Flare Stacks installed in Upgrading.
  • Mechanically completed cooling tower piping.
  • Mechanically completed Inhibited Water and Cooling Water Pumphouse buildings.
  • 42" Water Pipeline completed.
  • Wet Gas Compressor received and installed.
  • Completed installation of Coker and Diluent Recovery Unit process structures.
  • Completed interconnecting welding of Primary Upgrading's piperacks.
  • Energize main electrical substations R1/R2.
  • Milestones for the Third Quarter of 2007

  • Complete construction of Raw Water Pond.
  • Extraction plant hydro-testing.
  • Start of pre-commissioning activities in all Bitumen Production Areas.
  • Permanent Power energized in R1/R2 corridors pump houses.
  • Electrically energize Main Electrical Substation.
  • Start commissioning of Recycle Water Pond.

Operations Readiness

  • Canadian Natural is also well into the planning for commissioning and start-up. The commissioning plans are established to identify the priority systems that will be required later this year and early in 2008. The Company is currently hiring and training operating personnel, setting up procedures and systems and continues to develop the start-up strategies to ensure the Horizon Project stays on track for first crude oil.
                                    Three Months Ended        Six Months Ended
                                 Jun 30    Mar 31    Jun 30    Jun 30    Jun 30
                                   2007      2007      2006      2007      2006
    Crude oil and NGLs pricing
     WTI(1) benchmark price
      (US$/bbl)                $  65.02  $  58.23  $  70.70  $  61.64  $  67.14
     Lloyd Blend Heavy oil
      differential from WTI (%)      30%       27%       25%       29%       35%
     Corporate average pricing
      before risk management
      (C$/bbl)                 $  53.74  $  51.71  $  60.05  $  52.72  $  52.22
    Natural gas pricing
     AECO benchmark price
      (C$/GJ)                  $   6.99  $   7.07  $   5.95  $   7.03  $   7.37
     Corporate average pricing
      before risk management
      (C$/mcf)                 $   7.44  $   7.74  $   6.16  $   7.59  $   7.21
    (1) Refers to West Texas Intermediate crude oil barrel priced at Cushing, Oklahoma 

    • In Q2/07, the Company experienced a widening of the Lloyd Blend heavy crude oil differential of WTI to 30% due to refinery conversion capacity outages, which for Q2/07 represented approximately 150,000 bbl/d of heavy crude oil refining capacity shut downs in PADD II. Given the level of reduced conversion capacity the Company believes a 30% differential of WTI to be favorable, considering past history for similar outages.
    • Canadian Natural has committed to 25,000 bbl/d of pipeline capacity on the Pegasus Pipeline which transports Company crude oil volumes to the U.S. Gulf Coast as part of the Company's efforts towards working with various industry groups to find new markets for Western Canadian heavy crude oil and to ease the logistical constraints in getting crude oil to the area. The pipeline reversal has had the impact of improving the corporate realized price on Canadian Natural's heavy crude oil production. The heavy crude oil sold to the Gulf Coast receives Mayan equivalent pricing, which receives a premium to the Lloyd Blend price. For Q2/07, the Mayan differential to WTI averaged $12.45/bbl or 19%.
    • During Q2/07, the Company contributed approximately 134,000 bbl/d of its heavy crude oil streams to the Western Canadian Select blend as market conditions resulted in this strategy offering the optimal pricing for bitumen.
    • Fluctuations in North American natural gas prices from comparable periods in 2006 related to weather and storage levels.


    • Canadian Natural has structured its financial position to profitably grow its conventional crude oil and natural gas operations over the next several years and to build the financial capacity to complete the Horizon Project and other major projects. A brief summary of its strengths are:
    • A diverse asset base geographically and by product - produced in excess of 614,400 boe/d in Q2/07, comprised of approximately 47% natural gas and 53% crude oil - with 95% of production located in G7 countries with stable and secure economies.
    • Financial stability and liquidity - first half cash flow of $3.1 billion, available unused bank lines of $1.4 billion at June 30, 2007 and access to capital debt markets supported by strong credit ratings.
    • Reduced volatility of commodity prices - a proactive commodity hedging program to reduce the downside risk of volatility in commodity prices supporting cash flow for its capital expenditure program throughout the Horizon Project.
    • Declared a quarterly cash dividend on common shares of C$0.085 per common share, payable July 1, 2007, a 13% increase over the 2006 quarterly dividend.