Australia represents 10% of Apache’s worldwide reserves and last year accounted for 12% of the company’s production.

Looking east

"Once we have finished these wells we'll start on our Gippsland Basin program", added Howell. "We've picked up a rig and we're ready to move over there."

Bass said the company wanted to put a lot of effort into the Gippsland Basin, with confidence being underpinned by Exxon Mobil and BHP Billiton having recently acquired one of the largest 3D seismic survey programs in the world.

"We think the basin holds a lot of secrets and we're excited about the future there", he said. "We see it as the next logical step for us in Australia. We want to grow in Australia and see opportunities in the Gippsland that fit nicely overall with our program expansion into the Perth Basin and Exmouth Sub-basin. "
"We looked at several basins, Perth is obviously one, but then we started looking really hard at Gippsland, which we hadn't looked at much before", said Howell.

"The more we looked at it, the more we thought 'yes'. We saw lots of little companies were going to Gippsland, very wisely I think, so there were farm-in opportunities. One with Nexus was the first we looked at… their program made sense and we were familiar with their people… they had some good technical people who were familiar with the basin."
Apache intends to drill in VIC/P54 in the Gippsland Basin before the end of the calendar year and has a letter of intent with the Ocean Patriot, a Diamond Offshore semi submersible drilling rig which is being brought in from South Africa.

"VIC/P54 is in quite shallow water; about 50 m and you could use a jack-up drilling rig" Howell stated. "Where we are, we could probably use either but in some weather conditions, it is probably best to use a floater. We're definitely going to drill two wells. We would like to drill more if we can develop some more prospects.

"One of the reasons we took this block was that ExxonMobil had just acquired the large Northern Fields 3D which actually covers some acreage that isn't held by them. In this particular block, about half of it is covered by the Northern Fields 3D. Nexus was able to negotiate with ExxonMobil to actually get that data ahead of it becoming open file.

"So we will drill on that 3D data."

Howell said the company viewed entering the eastern states as part of a long-haul strategy. As to why Apache was considering well-trodden ground, she said the Gippsland Basin had historically been prolific and dominated by the ExxonMobil/BHP Billiton joint venture.

"Inevitably, where one joint venture has been dominant, there is always something that won't be on their radar, something that will be overlooked", she said.

Howell cited the example of how, in the early 80s, Woodside and Wapet ceased their dominance of the Carnarvon Basin, which they had been working over for a good 20 years, only to see other players enjoy a wave of discoveries with fields such as the Harriet complex, Griffin and South Pepper.

"… you know, a different set of eyes, maybe ones happier with smaller objectives… I actually think there's a lot of oil opportunities in the Gippsland Basin", she said.

"Also attractive is the big population centre and the higher gas prices there, that are about $1 per unit higher than in the west, which is just a supply and demand issue."

Bass said there was room for the company to move into the eastern states gas market.

"… there's room to create some additional diversity of supply without unduly damaging the price", he said. "We think competition is good for any market. And it's good for the consumer."

Bass said on an operating cost per barrel basis, Australia gave the company one of its best returns. "And that's a matter of moving all the volume you can and controlling your costs", he said. "When you're working in a somewhat isolated geographical setting, costs can get out of control quite quickly if you allow them to. We have no control over commodity price, but we can make sure we control our cost structure."

"The price of gas in Australia is indeed tough for players like Apache", Bass said, "significant volumes have to be sold into the market for it to be worthwhile."

"It's a very low margin but it's a good consistent annuity, which again, was part of building our foundation here", he said. "The margins aren't huge; you really have to watch your operating costs. But if you can keep them under control, you've got the nice, long-term contractual setting that's providing ongoing cash flow. The main point being that we have pushed some new projects over the start up line with lower gas prices helping their initial operating costs. However, we expect reciprocation with some price increases down the road when the projects have stabilised."

Howell said that in recent years the only place in the world where the gas price was lower was the Middle East. "Finding costs are also pretty low there, and that's where they find one field that contains greater than 300 Tcf of gas," she said.

"The gas price in Western Australia is certainly very low, which is why these gas to liquids projects and ammonia urea processors that rely on gas have been looking to WA. However, the recent rise in the Australian dollar is making WA less competitive now."

"The thing about gas is that we don't always actively go out looking for gas, but we keep an eye on the market and when we need a bit more, we do another gas exploration or appraisal well.

"It's a matter of keeping some in reserve but not too much. We don't have much that is 'stranded'. Our gas marketing team do forecasts of the market and look at our competitors, and we try and stay just ahead on gas to sell."

Howell is a great believer in using 3D seismic data and said, offshore, good quality 3D seismic is a must. In the Perth Basin for example, no 3D seismic had ever been acquired prior to the latest campaigns in which Apache was involved. Several prospects had been drilled based on loose 2D grids. Of course, when these wells came up dry, everyone could remap the seismic and decide they were 'off structure'. We want to make sure we drill robust structures and then if they fail we know there is some other reason and we have really learnt something about the Perth Basin. Of course we are hoping they succeed!"

In the Carnarvon Basin, Apache's most recent wells are Monet, Kadinsky and Gaugin, all Flag Sandstone targets like Harriet. "Monet came in but the other ones were dusters", Howell said. "They were wildcats. One out of three isn't at all bad. We found a 20 m column of oil in Monet, so that was good. But this is just mopping up some Flag Sandstone opportunities.

"We'll be able to put Monet on production in June. Now we know something is in Monet, we'll drill a long-reach horizontal well from the Simpson platform – I think it's about 3.5 km. The beauty of drilling from the platform is that you can turn it on straight away.

"Two… to four years down the road, we have tremendous production increases built-in, but we need to finish delineating what we have in the Exmouth Sub-basin before we know what the most logical development concept will be", Bass said.

"We're very excited about the drilling possibilities in the Exmouth Sub-basin over the next month or so, and then we'll come back later this year to evaluate and appraise any additional new successes we have.

"Right now, we don't know if we need a facility for 100,000 or 150,000 barrels per day, or if there is a point of diminishing returns on the size of the facility versus bringing those fields on in stages - bring them on in sequence rather than all at once."

Howell confirmed that Jim Bass's excitement over the Exmouth Sub-basin was for a good reason. "We should start production there just as East Spar, Stag and Legendre production continue to come off", she said.

"The Exmouth Sub-basin discoveries are in relatively shallow water (~200 m), and if we can prove that the oil is clearly commercial, then we can book reserves soon. It's heavy oil, similar to Stag and Wandoo, so it's quite marketable."

Although Apache has been in Australia for more than 10 years, " there is room to grow", said Bass.

"Steve Farris likes to say, 'there's a lot of room between us and Shell, us and ExxonMobil, and us and ChevronTexaco!' Statistics on their amount of daily production and reserves in the world compared to Apache's show there's a lot of room between us and those guys around the globe." Similar analogies can be drawn with other companies in Australia.

"Put it this way: two years ago, would anyone have said that BP would up and sell the Forties field, their flagship field, to Apache? This is a field that has produced 1.6 billion barrels or so. At one point in time it was producing 500,000 barrels per day. Right now, it's between 40-50,000 barrels per day. But we think we can improve those production volumes.

"We can operate a field at that stage of its life more efficiently than some of the majors can. They also have larger, more impactual to them, projects to spend their money on. So it's another example of the food chain within our industry."

"We don't buy things to drag them home, throw them in the garage and forget about 'em. We bring them home to plan how to nurture and grow them into something better", said Bass. "So the key is identifying the right opportunity in the first place that fits your strengths".

Take over target: too hard, pick on someone else!

As to how Apache has managed to stay independent all these years, Bass said that, in the early days, it was a very complex drilling fund program business that nobody (outside the company) really understood. "After that, I think it is a combination of the fact we got large enough to be able to take care of ourselves and, I think, as trivial as it might sound, no-one wanted to take on Raymond in a hostile situation", he said laughing.

Howell agreed that Apache had probably maintained its independence (in the early days) due to the complexity of the drilling funds. "Others would think it was too hard and pick on someone else", she laughed. "Also, many majors now would just get all their own late-in-life assets back!"

For a while the market thought of Apache as an 'acquire and exploit' company. "If you look at the past few years, there's almost a 50:50 balance between the amount of money that's been invested into drilling, exploration and development, and the amount of money that's been invested in acquisitions", Bass said.

"And the reserves from each have yielded similar balance. In 2003, the company spent $1.62 billion on purchasing 267 million barrels of oil. We also put $1.5 billion into drilling 1,449 gross wells, and we added 243 million barrels of reserves from the drilling program, so it's almost a 50:50 split.

"It just turned out that way… it wasn't something that fit into a specifically pre-planned 10 year master strategy. You just look back and think maybe it's telling you something, that there is a good decision making process in place and a desire to maintain balance along the way."

During his four years in Australia, Bass has seen Apache's daily oil as a percentage of total production increase to a little over 60% compared to about 37% when he arrived. "That was a conscious effort to increase our daily oil production in the near term", Bass said. "We shifted our focus a bit in 2000, the exploration team put forth a great effort, and we've been very successful in accomplishing our objectives."

"Once we complete the John Brookes platform that we're building now, we will have constructed and installed and brought onto production eight offshore oil and gas facilities in the last four years." That is a significant achievement anywhere, let alone in the sensitive environment where most of our operations exist", said Bass.

"We spent US$124 million in Australia in 2003 on exploration and development, and we'll spend US$234 million this year", he said.

"The majority of the incremental $100 million jump over last year will be going into facilities: the finishing up of Linda, John Brookes and the third gas train at Varanus Island that we're building now. We plan to maintain at least a steady US$60-80 million going into the ground in the drilling program."

Company jewels

Reflecting on her 10 years with the company, Howell said finding Stag was - of course - one of the highlights, but the String of Pearls period from 2000 to 2002 was what she personally found most exciting.

"… particularly because it was an old area that was re-born with new technology and it really highlighted that technology can make the difference", she said.

"There are around 20 production wells there. The name came from Gary Jeffery of Hadson: he used to talk about the string of pearls – in those days, we had Campbell, Sinbad, Harriet – but he used to ask 'how could we extend the string of pearls?' and then years later we actually started finding them", she said laughing.

"It sort of caught on. We class it as part of the string of pearls if it can be brought on using the same Varanus Island infrastructure. It's that concept of adding one, adding one… until you have a really nice necklace", she added with a broad grin.

"Another really exciting time was signing up the Burrup Fertiliser contract, because that was the biggest contract, until recently, that the company had signed.

"It was a very serious deal and hard work on the part of the marketing group. It took years from the day somebody walked in and said, 'I'm thinking about building a plant' to the concept for the plant and negotiations to mature and close – it was about a three year process."

Howell said field start-ups were always fun, but one stands out in particular as being memorable: Having identified that the WA-1-P permit area – being worked by Santos, Woodside and BHP – was of interest, Apache managed to buy BHP's interest and convince Woodside to accelerate the drilling of a well called Jaubert-1 – which turned out to be a great well.

"… the biggest column on the field that they had seen until then", she said, and everyone had been worried about a large gas cap but there wasn't one!"

"Legendre-1 had been discovered in 1969 and it just sat there as a sub-commercial discovery – nobody thought it was viable. So that was a great moment, the day first oil flowed from Legendre in 2001

"We had a combined development team with Woodside, but the development concept was very much Apache's idea. We found the jack-up for conversion in the Gulf of Mexico. It was very satisfying – a great project with good collaboration. Many people said it wouldn't work, with us having such different work cultures. But we both learned so much from it. I think we got the best out of both groups."

A pretty good story

In 2003, Apache [Australia] was able to replace 220% of production through drilling. In fact, the company has been continually replacing reserves for the past decade, all whilst replacing significantly increasing production volumes.

Bass stated that "In Australian dollars, we have spent – whether it's through drilling, acquisition, exploration or development – $2 billion in Australia in the last ten years, and through net operating income from successful efforts, we've recovered about $1.8 billion of our investment and we've got the equivalent of 167 million barrels equivalent in the ground as of year end 2003."

"So we have recovered almost all of our investment over all those years and we've got all those reserves in the ground. It's a pretty good story." "The important thing is to focus on the challenge of improving those numbers even more as we go forward. With the recent success in the Exmouth area, the reserves number is primed to increase significantly in the near term, with production growth for the long term", said Bass.

The bar is still being raised, with the company recently reporting a record first quarter revenue per share.

Into the future, Howell said it was important that Apache continued to keep its debt/capitalisation ratio low.

"We've got good numbers coming out of Perth office and lots of gas", she said. "In the short term, it would be nice to see our gas price double. Prices could go up if something like a pipeline linking WA to the east happened. Prices would probably level for the whole country. But we're still many years away from seeing that!

"We want to continue our exploration and production focus – we don't want to get involved in downstream. E&P is where our skills are. We would only own a pipeline if it was integral to getting a project up."

Howell said the company recently met a shareholder approved long-term benchmark: as part of a three-part share appreciation plan, the first objective was to (by the end of 2004) get the split-adjusted share price to US$43.29, then trade at this level for 10 days within a 30 day trading period. Success has triggered payments for employees, and Howell said, "there were a lot of smiling faces here recently."

"Besides the reward for the employees, the real winners were all the Apache shareholders", added Bass. "The associated increase in overall company value required to achieve the incentive plan's first hurdle yielded a US$ 6 billion company value appreciation. That equates to a pre-split share price appreciation from just under $30 per share when the plan was adopted, to around $100 per share. Additionally, that growth came while we actually reduced the company's debt level. It's a great win for shareholders."

As to the other two benchmarks? Howell added, "You can be assured they are ambitious…but we're trying to get there……"

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