It is a pleasure to be writing my first letter to shareholders as President and Chief Executive Officer of Talisman. I will start by echoing Doug Baldwin’s comments in thanking Jim Buckee. It was Jim’s vision that transformed Talisman into a global independent E&P company, with a talented and enthusiastic workforce and a portfolio of high quality assets. I have spent time in my first six months visiting our operating areas around the world and it is the quality of our employees in all these locations and the assets assembled under his leadership, which gives me confidence for the future of your Company.
2007 was a very active year, with capital spending of $4.4 billion, almost equalling the record set a year earlier. In the UK North Sea, we completed and brought onstream the Tweedsmuir Phase 1, Enoch, Blane, Duart and Wood projects. Over the year-end and into early 2008, we have been commissioning Tweedsmuir Phase 2 in the North Sea. In North America, we drilled several very successful wells in both the Inner and Outer Foothills, confirming our optimism for these areas. In Southeast Asia, we completed a major natural gas plant expansion in Indonesia and began flowing gas down the newly commissioned pipeline to West Java. We expect these volumes to grow into the future. The Company completed the sale of an additional 28,000 boe/d of non-core assets during the year. We also made very exciting exploration discoveries at Cayley in the UK and at Hai Su Den, offshore Vietnam. You will hear more about both these discoveries in the future.
In many respects, 2007 was a year of contrasts. Falling North American natural gas prices, the strong Canadian dollar and some project delays to some extent offset the benefits of record high oil prices. In Alberta, the government has proposed royalty changes, which negatively impacted our plans to drill higher risk, deep, expensive Foothills gas wells. It was also a year of transition to a new CEO, which brings change for our employees.
Net income was a record $2.1 billion, reflecting the gains on asset sales, although net income from continuing operations (which excludes assets sold through the year) was down, reflecting increased depreciation, depletion and amortization (DD&A) and dry hole costs. Cash flow from our continuing operations was unchanged from 2006, at $4.2 billion. Our production in 2007 was 452,000 boe/d, 7% below 2006, reflecting our asset disposition program, and was lower than our expectations at the start of the year. The shortfall was due to reductions in North American capital spending during the year and project delays in the UK North Sea, including Tweedsmuir, which we expected would be flowing at full capacity before year-end. We have taken a number of steps to underpin our future expectations, including strengthening our project processes in light of a difficult external market.
Again in 2007, we replaced more than 100% of our production with proved reserves, maintaining our long track record. Our new discoveries in Vietnam and the North Sea give us confidence that we can continue this track record into the future.
Looking ahead, I have established three priorities for our focus during the current year.
Safety and operations are my first priority. Talisman has a good safety record and safety processes, as I’ve seen first hand in my visits to our operations. But there are risks involved in oil and gas operations and we strive to continuously reduce these risks and improve the safety of our operations. During 2008, we will improve and standardize our safety and environmental reporting and have initiated a global review of our process safety systems. Once the review is complete, we will establish a program to fill any gaps we find.
My second priority relates to improving our delivery processes to meet our short-term targets. We have a large project load across our business, especially in our North Sea operations. While we have brought many projects onstream during 2007, we continue to rely on new project development as we build the business and we have a number of active projects, which will be completed over the next few years. We have taken steps to build up our internal engineering capability and I am confident that we will underpin and improve our track record of delivery into the future.
Third, we have initiated a strategic review to define the longer term growth potential for Talisman. Our existing skill base and our diverse, global portfolio offer exciting potential for the future. We are already identifying opportunities for investment in the longer term, which will allow us to build on our growth projections beyond 2011. This review involves all of our teams around the world and represents an important priority for the first half of 2008.
We are projecting continued production growth in 2008 from the comparable 2007 number, with an overall investment level around $4.4 billion. We are increasing investment by around one-third in each of Southeast Asia and Norway. These expenditures reflect new development projects in Malaysia, Vietnam and Norway, as well as exploration drilling in Norway and Vietnam and appraisal activity around our recent basement discovery in Vietnam. In the UK, expenditures will decrease slightly this year, having completed a number of projects in 2007. Our activity levels in the North Sea remain high as we appraise our Cayley discovery, bring on the Rev and Yme fields and continue engineering on several more projects for completion over the next few years. In North America, we have slowed our rate of spending as we watch the direction of natural gas prices during the year and redirect capital as a result of royalty changes in Alberta. We are drilling some very important wells during 2008 to determine how best to develop our unconventional resource plays, including the Bakken and Montney areas. We are also building on our 2007 success in the Outer Foothills area to establish a long-term program of development.
Our employees have, as always, given their best to the Company throughout the year. I am very grateful to them for their dedication and hard work, in particular during a year of transition.
There is a great deal to look forward to in 2008 as we appraise our recent exploration discoveries and bring on a suite of new projects. We will also complete our work to clarify the longer term investment opportunities for the Company and set in place actions to deliver them. I am excited about the outcome of this work and am looking forward to working with the management team to help deliver the next phase of growth for Talisman.
