Nexen Inc.

Nexen Inc.

December 05, 2006 17:05 ET

Nexen Expects to Invest $2.9 Billion and Increase Production 50% in 2007

CALGARY, ALBERTA--(CCNMatthews - Dec. 5, 2006) -

2007 Highlights:

- Production, net of royalties, expected to grow approximately 50% compared to 2006 to between 230,000 and 260,000 boe/d (275,000 to 305,000 boe/d before royalties)

- Cash flow expected to increase approximately 25% to $3.3 billion at US$50/bbl (WTI) and US$6/mmbtu -- assuming 2006 commodity prices, cash flow would grow about 70%

- Long Lake SAGD steaming and upgrader start up expected

- Advancing early-stage major development projects in the Gulf of Mexico, offshore West Africa and in the Athabasca oil sands

- Plan to drill 19 exploration wells, testing approximately 1,000 mmboe of unrisked resource potential (400 mmboe net)

In 2007, Nexen plans to invest approximately $2.9 billion in value added projects.

Strong Growth in 2007 and Beyond

For the past several years, we have invested significant capital in several major high-margin projects. The Syncrude expansion came on stream in mid-2006. Buzzard is expected to come on stream shortly and ramp up to full production during the first half of 2007. In the Gulf of Mexico, additional development wells at Aspen and development at Wrigley will add to our 2007 production profile. We also expect the Long Lake upgrader to come on stream in the second half of 2007 and reach full production of premium synthetic crude within six to 18 months of upgrader start up.

These projects will generate approximately 50% growth in our production, net of royalties, and significant free cash flow.

2007 2006
Estimated Production Estimated Production
Before After Before After
Royalties Royalties Royalties Royalties
Core Asset Development (mboe/d) (mboe/d) (mboe/d) (mboe/d)
US Gulf of Mexico(1) 45-55 38-48 34-36 29-31
U.K. North Sea 90-100 90-100 19-21 19-21
Yemen 60-75 35-45 92-94 50-52
Canada(2) 45-50 38-42 37-39 30-32
Syncrude 20-25 18-20 18-20 16-18
Other International(3) 6-7 5-6 6-7 5-6
Total 275-305 230-260 212-214 158-160

(1) US natural gas production is estimated to comprise 49% of total US
equivalent production in 2007.

(2) Production includes volumes from Long Lake in the Athabasca oil sands.
Canadian natural gas production is estimated to comprise 59% of total
Canadian equivalent production in 2007.

(3) Substantially all production is from Colombia.

Assuming average production of 300,000 boe/d before royalties, WTI oil price of US$50/bbl, NYMEX gas price of US$6/mmbtu, operating costs of approximately Cdn$8/boe and a US/Cdn exchange rate of US$0.88, we expect cash flow to increase by approximately 25% to $3.3 billion.

Each US$1.00 increase in oil prices adds about $73 million to our cash flow, whereas a decline in WTI below US$50/bbl reduces cash flow by about $42 million. We have purchased put options with a strike price of US$50/bbl on 105,000 bbls/d of our 2007 crude oil production. A US$0.50 change in natural gas prices impacts our cash flow by about $33 million and a US$0.01 variation in the exchange rate impacts our cash flow by about $35 million.

The new production we are adding at Buzzard and Syncrude features lower royalties and better margins than our average production. As a result, if prices in 2007 are the same as 2006 on average, our cash flow growth would be about 70%.

"In 2007 we start to reap the benefits of our investments in oil sands, CBM and the North Sea," commented Charlie Fischer, Nexen's President and CEO. "These are significant opportunities which will define Nexen's strategy for years to come."

Investing $2.9 Billion in Value Accretive Projects

In 2007, capital will be allocated as follows:

- 35% in major development projects. These include Long Lake, coalbed methane (CBM), Ettrick and Wrigley;

- 24% in our existing producing assets;

- 14% in early-stage development projects expected to contribute production and cash flow growth beyond 2007. These include Knotty Head, Alaminos Canyon Block 856, Tobago and Ringo in the Gulf of Mexico, additional phases of oil sands in the Athabasca region and Block 222 offshore West Africa; and

- 24% in exploration opportunities in our growth areas.

Estimated 2007 Estimated 2006
Capital Investment Profile ($millions) % ($millions) %
Major Development 1,000 35 1,650 49
Core Asset Development 700 24 800 23
Early-stage Development 400 14 300 9
Total Development 2,100 73 2,750 81
Exploration 700 24 525 15
Oil and Gas 2,800 97 3,275 96
Other 100 3 125 4
Total Capital 2,900 100 3,400 100

"This budget reflects our commitment to building sustainable businesses in Canada, the Gulf of Mexico, the North Sea, and offshore West Africa," said Fischer. "Each of these businesses will be anchored by a world-class producing asset that combines large reserves and anticipated high margins to provide superior returns and sustained value creation."

Maximizing Value from Core Producing Assets

Buzzard is one of the largest oil fields to be discovered and developed in the U.K. North Sea in over a decade. The field is expected to come on stream before year-end and to ramp up to its peak production rate of 200,000 boe/d (85,000 boe/d net to Nexen) during the first half of 2007. "Inclement weather over the last few weeks has impacted final commissioning of the facilities," said Fischer. "This minor delay has no impact on our ramp up or peak production rates."

In 2007, we plan to invest approximately $130 million at Buzzard. The majority of this will be invested to pre-drill and complete 11 future production and injection wells. Buzzard is a very attractive project which generates high margins. At peak production, we expect Buzzard to generate approximately $1.6 billion of annual pre-tax cash flow for us, assuming oil prices of US$50/bbl. Elsewhere in the North Sea, we plan to drill, complete and tie-in three development wells in the Scott/Telford area.

In the Gulf of Mexico, our development program will focus in the deep water where we plan to drill and tie-in another development well at Aspen. On the shelf, we will focus on gas opportunities in the Eugene Island and Vermilion areas.

In Canada, we remain focused on maximizing value from our conventional assets. In 2007, we expect to drill approximately 165 infill wells and continue optimization activities on these assets. At Syncrude, the Stage 3 expansion came on stream in mid-2006, adding 8,000 bbls/d of incremental synthetic crude oil capacity. We plan to invest approximately $50 million in sustaining capital at Syncrude.

In Yemen, we expect to drill 23 development wells to manage declines and ensure we recover the remaining reserves in the most economical manner. Yemen continues to generate significant free cash flow for our company.

Major Development

Over one-third of our 2007 capital program is focused on advancing significant development projects in our key growth areas.

Major Development Capital Estimated 2007
Investment Profile ($millions)
Long Lake 500
U.K. North Sea - Ettrick 200
Fort Assiniboine CBM 200
Other 100
Major Development 1,000

"These projects were inventoried when commodity prices were much lower," said Fischer. "These are great long-term assets that are expected to generate attractive full-cycle returns."

Long Lake SAGD Steaming in early 2007, Upgrader start-up in second half 2007

Approximately 50% of our major development capital in 2007 will be invested at our Long Lake project in the Athabasca oil sands where we plan to invest approximately $500 million, including capitalized interest. Long Lake continues to progress well. The SAGD facilities are approximately 95% complete and we expect SAGD operations to be mechanically complete near year-end 2006. Steam injection is expected to commence in the first quarter of 2007, with bitumen production ramping up to peak rates over a 12 to 24 month period. For the first six months of SAGD operation we will largely be heating the reservoir. During this period, steam to oil ratios will be high but will decline with time as bitumen production ramps up to our target rates. Depending on our actual start up date and the amount of downtime at our facilities, we expect bitumen production to reach between 35,000 and 45,000 bbls/d (between 17,500 and 22,500 bbls/d net) by the end of 2007, with a steam to oil ratio of between 3.5 and 4.0. We expect the steam to oil ratio to average approximately three over the long-term.

Upgrader module fabrication is largely complete and over 95% of the modules are on site. Construction of the upgrader is approximately 75% complete and start up is scheduled for late 2007. Peak output of premium synthetic crude oil is expected within six to 18 months of upgrader start up and we expect to exit 2007 between 28,000 and 36,000 bbls/d (between 14,000 and 18,000 bbls/d net). Production capacity for the first phase of Long Lake is approximately 60,000 bbls/d (30,000 bbls/d net to Nexen) of premium synthetic crude which we expect to reach by late 2008 or early 2009.

"By gasifying the bottom of the barrel, we produce our own fuel for steam generation and hydrogen for upgrading, creating a significant cost advantage," said Fischer. "In 2009, we expect to fully realize this cost advantage, and it will continue in the years to come as we develop additional phases of the oil sands using the same technology."

Ettrick Development Progresses

Our Ettrick development in the North Sea is approximately 30% complete and progressing as expected. Ettrick includes three production wells tied back to a floating production, storage and offloading vessel (FPSO). Modifications to the FPSO hull are ongoing and development drilling is expected to begin in early 2007. First production is expected in the first half of 2008, with our share reaching approximately 16,000 boe/d. We operate Ettrick with an 80% interest.

"This is a solid project that adds certainty to our production profile beyond 2007," said Fischer. "The North Sea is important to our overall growth strategy and Ettrick is an example of our ability to add value in this core area."

CBM Development Ongoing

We are continuing to develop our Upper Mannville CBM assets in the Fort Assiniboine area of Alberta. In 2007, we plan to invest approximately $200 million to develop 98 gross (41 net) sections in the Corbett, Thunder and Doris fields using multiple-leg horizontal wells and construct gas gathering and processing facilities. We expect our total production from our CBM lands to grow to approximately 75 mmcf/d by the end of 2007.

"We are targeting to add approximately 150 million cubic feet of daily CBM production by 2011," said Fischer.

Early-Stage Development - Exciting Future Growth Opportunities

In 2007, we plan to invest approximately $400 million in a number of early-stage development projects. "These projects are natural extensions of our core expertise and knowledge, and will provide low risk growth and attractive returns into the next decade," said Fischer.

In the oil sands, we are planning to increase synthetic crude oil production to 240,000 bbls/d (120,000 bbls/d net). Over the next decade, we plan to sequentially develop additional 60,000 bbls/d (30,000 bbls/d net) projects using the same technology and design as Long Lake.

In 2007, we plan to invest approximately $170 million to advance our oil sands strategy outside of Phase 1, including $125 million in Phase 2 development. Phase 2 is well advanced with seismic and core hole drilling programs complete, several major vessels ordered and regulatory applications finalized. We continue to develop our overall execution strategy, cost estimate and project schedule and expect to have approximately 30% of engineering complete prior to sanctioning Phase 2 in early 2008.

Offshore West Africa, we plan to invest approximately $140 million. This includes funds to progress the development of our Usan discovery on Block 222. The development will include a FPSO with a storage capacity of two million barrels, capable of handling peak production rates of 160,000 bbls/d of oil. In 2007, we expect to complete our cost estimate and sanction this project, with first production expected as early as 2010. We have a 20% interest in this development program.

In the Gulf of Mexico, we expect to invest approximately $55 million for pre-feed and development work at Knotty Head, Alaminos Canyon Block 856, Tobago and Ringo. We have a 25% interest at Knotty Head, a 30% interest at Alaminos Canyon Block 856, a 10% interest in Tobago and a 50% interest at Ringo.

"We are well positioned for the future as these projects are expected to provide production growth and create shareholder value well into the next decade," commented Fischer.

Exploration - Building on our Successes

Our 2007 exploration program builds on recent successes, including major discoveries at Knotty Head in the Gulf of Mexico and on Block 222 offshore West Africa. We plan to invest approximately $700 million to drill up to 19 exploration wells in the Gulf of Mexico, offshore West Africa, North Sea, Colombia and Yemen. In total, we will test approximately one billion boe of unrisked resource potential (400 mmboe net to Nexen).

Estimated 2007
Exploration Capital Investment Profile ($millions)
US Gulf of Mexico 325
North Sea 125
Unconventional Gas 50
West Africa 50
Yemen Block 51 50
Other 100
Exploration 700

In the Gulf of Mexico, we plan to drill four deep-water prospects and five shelf gas prospects. Two of these deep-water prospects are in the subsalt Miocene play, on trend with our Knotty Head discovery.

In the U.K. sector of the North Sea, we plan to drill five exploration wells in 2007. As part of our growth strategy in the North Sea, we recently participated in a bid round for exploration rights offshore Norway and expect to invest approximately $30 million in additional seismic and geologic studies there.

We expect to drill at least one deep-water exploration well offshore West Africa, three exploration wells on Block 51 in Yemen, and one in Colombia.

We also continue to focus on large unconventional resource opportunities in Canada. In 2006, we acquired approximately 100 sections of prospective shale gas acreage in northeast British Columbia. In 2007, we expect to begin evaluating this emerging play.

We have drilling rigs secured for the majority of our drilling program next year. We are confident that we will be able to secure the remaining rigs required to complete our program.

"Looking forward to 2007, I am excited about our planned projects," said Fischer. "Our major projects are progressing well, and our exploration program is delivering results. Also, with no fixed price hedges in place, we are benefiting fully from high commodity prices and are on track for another great year."

Governance - Majority Vote By-law Adopted

Our Board of Directors has revised our corporate by-laws regarding Director re-election. Prior to the revision, Directors only required a single vote in order to be appointed to the Board. The by-laws now require that a Director receiving a majority withhold vote in an uncontested election submit a resignation to the Board. The Board will decide whether to accept the resignation and will publicly disclose the reasons for its decision. "We feel this is a transparent review process where a Director-elect does not receive a majority of shareholder support," said Francis Saville, Q.C., Board Chair. "The Board will review the resignation and may reject it, if, for example, the issue was curable - such as removing the director from a particular committee." Our by-laws are available on our website at

Nexen Inc. is an independent, Canadian-based global energy company, listed on the Toronto and New York stock exchanges under the symbol NXY. We are uniquely positioned for growth in the North Sea, deep-water Gulf of Mexico, the Athabasca oil sands of Alberta, the Middle East and offshore West Africa. We add value for shareholders through successful full-cycle oil and gas exploration and development and leadership in ethics, integrity and environmental protection.

Conference Call Notice

Date: December 6, 2006

Time: 1:30 p.m. Mountain Time (3:30 p.m. Eastern Time)

We invite you to learn more about this by joining Charlie Fischer, President and CEO, and Marvin Romanow, Executive Vice-President and CFO, who will host a conference call to discuss further details around this capital budget and expectations for the future.

To listen to the conference call, please call:

888-789-0150 (North American Toll-Free)

416-695-9757 (Toronto)

800-4222-8835 (International Toll-Free)

A replay of the call will be available for two weeks starting at 5:30 p.m. Eastern Time, December 6, 2006 by calling 416-695-5275 (Toronto) or 888-509-0081 (toll-free) passcode 636697 followed by the pound sign. A live and on demand web cast of the conference call will be available at

Forward-Looking Statements

Certain statements in this report constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as "intend", "plan", "expect", "estimate", "budget", "outlook" or other similar words, and include statements relating to future production associated with our Coalbed Methane, Aspen, Long Lake, Syncrude, North Sea, West Africa and other projects.

The forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, among others: market prices for oil and gas and chemicals products; the ability to explore, develop, produce and transport crude oil and natural gas to markets; the results of exploration and development drilling and related activities; foreign-currency exchange rates; economic conditions in the countries and regions where Nexen carries on business; actions by governmental authorities including increases in taxes, changes in environmental and other laws and regulations; renegotiations of contracts; results of litigation, arbitration or regulatory proceedings; and political uncertainty, including actions by terrorists, insurgent or other groups, or other armed conflict, including conflict between states. The impact of any one factor on a particular forward-looking statement is not determinable with certainty as such factors are interdependent upon other factors, and management's course of action would depend on its assessment of the future considering all information then available. Any statements as to possible future prices, future production levels, future cost recovery oil revenues from our Yemen operations, future capital expenditures and their allocation to exploration and development activities, future asset dispositions, future sources of funding for our capital program, future debt levels, future cash flows, future drilling of new wells, ultimate recoverability of reserves, expected finding and development costs, expected operating costs, future demand for chemicals products, future expenditures and future allowances relating to environmental matters and dates by which certain areas will be developed or will come on stream, and changes in any of the foregoing are forward-looking statements.

Although we believe that the expectations conveyed by the forward-looking statements are reasonable based on information available to us on the date such forward-looking statements were made, no assurances can be given as to future results, levels of activity and achievements. Readers should also refer to Items 7 and 7A in our 2005 Annual Report on Form 10-K for further discussion of the risk factors.

Cautionary Note to US Investors - The United States Securities and Exchange Commission (SEC) permits oil and gas companies, in their filings with the SEC, to discuss only proved reserves that are supported by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. In this press release, we may refer to "recoverable reserves", "probable reserves" and "recoverable resources" which are inherently more uncertain than proved reserves. These terms are not used in our filings with the SEC. Our reserves and related performance measures represent our working interest before royalties, unless otherwise indicated. Please refer to our Annual Report on Form 10-K available from us or the SEC for further reserve disclosure.

In addition, under SEC regulations, the Syncrude oil sands operations are considered mining activities rather than oil and gas activities. Production, reserves and related measures in this release include results from the Company's share of Syncrude.

Cautionary Note to Canadian Investors - Nexen is required to disclose oil and gas activities under National Instrument 51-101-- Standards of Disclosure for Oil and Gas Activities (NI 51-101). However, the Canadian securities regulatory authorities (CSA) have granted us exemptions from certain provisions of NI 51-101 to permit US style disclosure. These exemptions were sought because we are a US Securities and Exchange Commission (SEC) Registrant and our securities regulatory disclosures, including Form 10-K and other related forms, must comply with SEC requirements. Our disclosures may differ from those Canadian companies who have not received similar exemptions under NI 51-101.

Please read the "Special Note to Canadian Investors" in Item 7A in our 2005 Annual Report on Form 10-K, for a summary of the exemption granted by the CSA and the major differences between SEC requirements and NI 51-101. The summary is not intended to be all-inclusive or to convey specific advice. Reserve estimation is highly technical and requires professional collaboration and judgment. The differences between SEC requirements and NI 51-101 may be material.

Our probable reserves disclosure applies the Society of Petroleum Engineers/World Petroleum Council (SPE/WPC) definition for probable reserves. The Canadian Oil and Gas Evaluation Handbook states there should not be a significant difference in estimated probable reserve quantities using the SPE/WPC definition versus NI 51-101.

In this press release, we refer to oil and gas in common units called barrel of oil equivalent (boe). A boe is derived by converting six thousand cubic feet of gas to one barrel of oil (6mcf:1bbl). This conversion may be misleading, particularly if used in isolation, since the 6mcf:1bbl ratio is based on an energy equivalency at the burner tip and does not represent the value equivalency at the well head.

Contact Information

  • Kevin Finn
    Vice President, Investor Relations
    (403) 699-5166
    Grant Dreger, CA
    Manager, Investor Relations
    (403) 699-5273
    Nexen Inc.
    801 - 7th Ave SW
    Calgary, Alberta, Canada T2P 3P7