Question-and-Answer Session
Thank you. [Operator Instructions] The first question is from Brian Singer of Goldman Sachs, please go ahead.
Brian Singer - Goldman Sachs
Thank you and good morning. I joined a little late so I apologize if you discussed this earlier but I was wondering when you think about next year, you think about the winter natural gas drilling program, how fluctuations that we have seen in natural gas prices effect your thoughts and the aggressiveness of drilling and just some thoughts on the interplay between spending for oil and Horizon stage 2 versus spending for natural gas?
Steve W. Laut - President and Chief Operating Officer
Thanks Brian, Steve here. Obviously we are looking at a capital allocation and with the sort of budget here in for 2009 in September but we are to sort of looking at it carefully now. I think it's pretty clear that the returns for oil are significantly better than gas. A year now with the higher gas price and with gas price softening and what we see the gas rates in the U.S. lower 48 increasing. We are concerned that we will see further softening of gas prices. And if they do rebound, I mean not rebound to levels that will be required to compete on the capital allocation basis of oil. Particularly in 2009 in Alberta with the increased royalty regime, Alberta gas projects will have a very, very difficult time and I think you'll see the gas drilling here in Alberta decline markedly in the industry in Canada.
As far as allocating between further projects in Horizon and our oil projects in Canada and in international. I would say, right now Pelican Lake has very much the best drilling. We've got a very disciplined defined program there that we'll continue to execute. We don't see the need to ramp that up or slow that are down. We're trying to keep our cost effectiveness where we are. Primary heavy oil drilling, very much we can dial it up and dial it down with our inventory. And I expect you'll see us more likely dial that up as we go forward. On Horizon, we are very disciplined, and we have Tranche 2 that we are well in our way, we didn't talked much about that at all today in the call. But we are well on our way on Tranche 2 and we look at approving Tranche 3 as we move forward. The one thing that we do see here, in Fort McMurray in particular, area is the cost escalation of the availability of contractors. And as I would say the lack of competition for people that bid on your projects has had a more significant impact on cost increases than even we would have anticipated.
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