Nexen Inc.

Nexen Inc.

December 04, 2007 19:05 ET

Nexen Plans Capital Investment Program of $2.4 Billion in 2008

CALGARY, ALBERTA--(Marketwire - Dec. 4, 2007) -

2008 Plan Highlights:

- Expected cash flow of $2.9 billion assuming commodity prices of US$70/bbl (WTI) for crude oil and US$6.75/mmbtu for natural gas

- Anticipated free cash flow of $400 million after dividend payments

- Production, net of royalties, expected to grow by between 8% and 10% compared to 2007 and range from 220,000 to 240,000 boe/d (260,000 to 280,000 boe/d before royalties)

- Start up of Long Lake upgrader scheduled for mid 2008

- Ettrick on track for first production mid 2008

- Plan to drill 11 exploration wells, testing approximately 800 mmboe of unrisked resource potential (approximately 300 mmboe net)

In 2008, Nexen plans to invest $2.4 billion in value adding projects, grow net production by between 8% and 10% and generate $2.9 billion in cash flow.

For the past several years, we have invested significant capital in a number of major development projects. The Syncrude Stage 3 expansion was completed last year and Buzzard commenced production in early 2007, ramping up to full rates during the year. These projects contributed to our net production growth of approximately 35% in 2007 but was less than the 50% growth we forecasted a year ago. The shortfall was the result of ramp-up delays on our major projects at Buzzard, Long Lake and coalbed methane (CBM) coupled with disappointing results from development drilling at Aspen. We are now injecting steam at Long Lake and expect bitumen production to begin ramping up in the spring. The upgrader is expected to start up in mid 2008, with production of premium synthetic crude ramping up over a 12 to 18 month period. In addition, first oil from Ettrick is anticipated in mid 2008.

2008 Estimated Production
Before Royalties After Royalties
(mboe/d) (mboe/d)
UK North Sea 95-115 95-115
Yemen 50-55 27-32
Canada(1) 45-50 40-45
US Gulf of Mexico(2) 25-30 20-25
Syncrude 20-25 17-22
Other International 6-7 5-6
Total(3) 260-280 220-240
(1) Production includes bitumen volumes from Long Lake in the Athabasca oil
sands. Canadian natural gas production is estimated to comprise
approximately 45% of total Canadian equivalent production in 2008.
(2) US natural gas production is estimated to comprise approximately 60% of
total US equivalent production in 2008.
(3) Includes maintenance downtime at Buzzard and Syncrude in Q2 and Q3.

Assuming average production of 270,000 boe/d before royalties, WTI oil price of US$70/bbl, NYMEX gas price of US$6.75/mmbtu, and a US/Cdn exchange rate of US$0.97, we expect to generate approximately $2.9 billion of cash flow, after seeing cash taxes double from 2007 to approximately $1 billion in 2008.

Each US$1.00 increase in benchmark oil prices adds about $40 million to our after tax cash flow, whereas a decline in prices below US$50/bbl reduces cash flow by about $20 million. We have purchased put options with a strike price of US$50/bbl Brent on 100,000 bbls/d of our 2008 crude oil production. A US$0.50 change in natural gas prices impacts our cash flow by about $25 million and a US$0.01 variation in the exchange rate impacts our cash flow by about $30 million.

"In 2007, we began reaping significant benefits from our investment in the North Sea, and in 2008 we will start to see a return on our investment in the Athabasca oil sands," commented Charlie Fischer, Nexen's President and CEO. "In addition, with no fixed price hedges or caps in place, we benefit fully from high commodity prices."

Investing $2.4 Billion in High Value Projects

In 2008, capital will be allocated as follows:

- 29% on major development projects. This will allow us to bring Long Lake Phase 1 and Ettrick in the North Sea on stream in 2008 as well as progress Longhorn in the Gulf of Mexico and CBM at Fort Assiniboine in Alberta;

- 17% on early-stage development projects expected to contribute production and cash flow growth beyond 2008. These include future phases of oil sands in the Athabasca region, Block OPL-222 offshore West Africa, and our Knotty Head and Golden Eagle discoveries in the Gulf of Mexico and North Sea, respectively;

- 25% on exploration opportunities in our North Sea and Gulf of Mexico growth areas and on shale gas in northeast British Columbia; and

- 25% on our existing producing assets.

Estimated 2008 Estimated 2007
Capital Investment Profile ($millions) % ($millions) %
Major Development 700 29 1,400 39
Core Asset Development 600 25 1,100 31
Early-Stage Development 400 17 200 5
Total Development 1,700 71 2,700 75
Exploration 600 25 800 22
Oil and Gas 2,300 96 3,500 97
Other 100 4 100 3
Total Capital 2,400 100 3,600 100

Our 2008 capital investment program is approximately $1.2 billion less than the 2007 program. The decrease reflects reduced investment in a number of our major development projects. At Long Lake, a substantial portion of the project capital is behind us, we have scaled back CBM investment in light of uncertainty surrounding proposed changes to Alberta's royalty regime and we have completed the Wrigley development in the Gulf of Mexico. We also expect to invest less on our core assets. In the deep-water Gulf of Mexico, we have no 2008 development drilling plans for Aspen and we have reduced our development programs for our mature assets in Canada, Yemen and on the shelf in the Gulf of Mexico, as we optimize our capital investment to recover remaining reserves.

We expect to generate $2.9 billion of cash flow for 2008 which compares to our expected cash flow of approximately $3.4 billion for 2007. The decrease reflects the impact of higher cash taxes, especially in the UK reflecting strong cash flow from Buzzard, combined with the impact of a stronger Canadian dollar.

"This budget allows us to continue building sustainable businesses in our core areas while we pursue some of the significant growth opportunities we have inventoried," said Fischer. "At the same time, we expect to generate approximately $400 million of free cash flow after dividend payments to our shareholders. This free cash flow provides us with choices regarding future investments or debt retirement."

Major Development - Creating Value

Almost 30% of our 2008 capital program is focused on advancing significant development projects in key growth areas.

Major Development Capital Estimated 2008
Investment Profile ($millions)
Long Lake - Athabasca oil sands 400
Ettrick - UK North Sea 200
Other 100
Major Development 700

Long Lake - SAGD steaming underway and upgrader start up scheduled for mid 2008

Almost 60% of our major development capital in 2008 will be invested at Long Lake in the Athabasca oil sands where we plan to invest approximately $400 million, including capitalized interest, to bring Phase 1 on stream mid year. We are currently injecting steam into the reservoir through all ten well pads. We expect bitumen production to begin ramping up in the spring and we are on track to have sufficient bitumen production for the start up of the upgrader. The bitumen production capacity of the SAGD facilities is approximately 72,000 bbls/d (36,000 bbls/d net to Nexen).

Construction and commissioning of the upgrader continues and we have completed construction of the hydrocracker, the OrCrude™ unit and all main plant utilities. We are on track to complete construction of the gasifier, the air separation unit and the sulphur recovery unit in sufficient time for first production of synthetic crude oil in mid 2008. We anticipate production of premium synthetic crude to ramp up over a 12 to 18 month period after initial upgrader start up. The upgrader is designed to produce approximately 60,000 bbls/d (30,000 bbls/d net to Nexen) of premium synthetic crude.

"We are excited about bringing our first oil sands project on stream next year," said Fischer. "At current natural gas prices we expect to enjoy a cost advantage of approximately $10/bbl over competing technologies once Long Lake is fully ramped up as our patented process almost eliminates the need for purchased natural gas."

Ettrick - On track for first production in 2008

Our Ettrick development in the North Sea is progressing well towards first oil in mid 2008. This development project comprises three subsea production wells and one water injector tied back to a leased floating production, storage and offloading vessel (FPSO). The FPSO is designed to handle 30,000 bbls/d of oil, 35 mmcf/d of gas and to re-inject 55,000 bbls/d of water. We expect to ramp up to full production of approximately 25,000 boe/d gross by the end of the year. Our share of production from this field is expected to average approximately 9,000 boe/d in 2008. We operate Ettrick with an 80% working interest.

"The North Sea is important to our overall growth strategy. Ettrick, along with our recent discovery at Golden Eagle, is a great example of our ability to add value in this core area," commented Fischer.

Other - Longhorn and CBM

The original discovery well at Longhorn in the Gulf of Mexico was drilled in 2006 with a pre-drill resource estimate of between 60 and 250 bcfe. Earlier this year, we completed drilling an appraisal well which exceeded our expectations and encountered approximately 400 feet of net gas pay in multiple sands. We expect to sanction development of the Longhorn discovery in early 2008, with first production in 2009. The Longhorn development comprises subsea tie-backs to an existing platform and we expect to invest almost $70 million here in 2008. We have a 25% non-operated interest in this development.

We have scaled back capital investment on our CBM projects in 2008 in light of the uncertainty that exists around proposed changes to Alberta's royalty regime but we are optimistic that final royalty regulations will continue to support the economic development of Alberta's unconventional gas resource. In the Fort Assiniboine area, we plan to tie-in 19 wells and drill three new horizontal wells. We expect CBM production will continue to increase in 2008 as existing wells continue to dewater and the additional wells are tied in.

Core Asset Development - Maximizing Value

We plan to invest approximately $600 million on our core assets in 2008 with just over half of this amount planned for our North Sea assets. At Buzzard, we plan to drill five production wells, two sidetracks and one water injector, and we plan to commence construction work on a fourth platform which will contain production sweetening facilities designed to handle higher levels of hydrogen sulphide previously identified in the reservoir. Existing equipment and processes on the Buzzard platform can maintain current deliverability until the additional equipment is commissioned in 2010.

"The additional platform to deal with future hydrogen sulphide has a relatively modest capital cost considering that we expect Buzzard to generate approximately $1.9 billion of pre-tax cash flow in 2008," said Fischer.

Elsewhere in the North Sea, we plan to drill, complete and tie-in two development wells at Scott and Telford.

In the Gulf of Mexico, our development program will focus on the deep-water. At Green Canyon 6, we expect to spud a well late this year and commence completion operations in the first quarter of 2008. Production from this well is expected to add approximately 5,000 boe/d to our annual volumes. At Gunnison, a subsea development well is planned that will be tied-back through existing flowlines to the Gunnison Spar. On the shelf, a total of nine recompletion projects are planned in the Eugene Island and Vermilion areas.

In Canada, we plan to invest almost $80 million to maximize value from our heavy oil and natural gas assets. At Syncrude, we plan to invest approximately $45 million in sustaining capital projects.

In Yemen, we expect to drill six development wells and four sidetracks at Masila to manage declines and ensure we recover remaining reserves as economically as possible. On Block 51, we plan to drill, complete and tie-in five development wells.

"Yemen remains a core asset for us and is expected to generate approximately 15% of our projected 2008 cash flow," commented Fischer.

Early-Stage Development - Exciting Future Growth Opportunities

In 2008, we plan to invest approximately $400 million in a number of early-stage development projects. In the oil sands, our capital investment plans will allow us to advance detailed engineering on SAGD and upgrader facilities for future phases of Long Lake and drill appraisal wells to further assess our leases.

"The first phase of Long Lake only develops about 10% of our 5.5 billion barrels of recoverable bitumen," said Fischer. "In 2008, we plan to invest approximately $150 million in future phases of oil sands, and we are working towards sanctioning Phase 2. Sanction timing depends on accumulating sufficient operating history from Phase 1 and receiving clarity regarding climate change regulations and pending changes to Alberta's royalty regime."

Offshore West Africa, we plan to invest approximately $165 million primarily to progress the development of our Usan discovery on Block OPL-222. The project will have the ability to process an average of 180,000 bbls/d of oil during the initial production plateau period through a new FPSO which will contain two million barrels of storage capacity. Once the Usan development is formally sanctioned, the major deep-water facilities contracts will be awarded. We have a 20% interest in exploration and development on this block.

Elsewhere, we are assessing development alternatives for our Golden Eagle discovery and for Selkirk in the UK North Sea. We have a 34% and a 38% operated working interest at Golden Eagle and Selkirk, respectively.

"We are excited by the value that these projects will deliver for our shareholders," commented Fischer.

Exploration - Building on our Successes

We plan to invest approximately $600 million in our 2008 exploration program and we expect to drill up to 11 exploration wells in the Gulf of Mexico, the North Sea and Yemen. In total, this will test approximately 800 million boe of unrisked resource potential (approximately 300 million boe net to Nexen).

Estimated 2008
Exploration Capital Investment Profile ($millions)
US Gulf of Mexico 225
North Sea 210
Shale Gas 70
Other 95
Exploration 600

In the Gulf of Mexico, we plan to drill three deep-water wells and one shelf gas well. Two of the three deep-water wells will test sub-salt Miocene prospects. At Knotty Head, we continue to pursue rig availability to allow us to spud an appraisal well in mid 2008 and we have contracted two new deep-water drilling rigs that are scheduled to arrive in mid 2009 and 2010. In addition, we plan to drill an appraisal well at Vicksburg.

We were recently named the high bidder on 30 offshore blocks in the Central Gulf of Mexico Outer Continental Shelf Lease Sale 205. These awards are subject to the approval of the Minerals Management Service section of the US Department of the Interior, which is expected to occur before the end of the year. Our current deep-water portfolio totals approximately 230 blocks in the Gulf which contains several exciting sub-salt drill-ready prospects.

In the UK North Sea, we plan to drill six exploration wells in 2008 as well as appraisal wells at Bugle and Kildare. As part of our growth strategy in the North Sea, we have acquired interests in six exploration licenses in Norway and we recently opened an office in Stavanger. We are also awaiting results of bids submitted in a recent Norwegian exploration licensing round. In 2008, we plan to participate in upcoming licensing rounds and invest capital on seismic and geologic studies. We expect to drill our first exploration well in Norway in 2009.

We have secured a material land position of approximately 123,000 acres in northeast British Columbia on an emerging Devonian shale gas play which has the potential to be one of the most significant shale gas plays in Canada. In 2008, we plan to complete and test the two vertical wells we drilled last winter and drill and complete three horizontal wells. In addition, we plan to drill two vertical wells on a second lease in the area to acquire reservoir information.

Elsewhere, we expect to drill one exploration well on Block 51 in Yemen.

"We have an attractive, high-impact exploration program in place for next year," said Fischer. "We have secured drilling rigs for most of our 2008
drilling campaign and we are working with our partners to secure the remaining rigs required."

Improvement Initiatives Underway

"While we have delivered significant production growth this year, we have fallen short of the expectations we set for ourselves," commented Fischer. "The low end of our original 2007 net production guidance was 230,000 boe/d and we will miss this by approximately 9%, as a result of ramp-up delays at Buzzard, Long Lake, Wrigley and CBM coupled with disappointing results from development drilling at Aspen. At Buzzard, commissioning of all systems took longer than expected. At Long Lake, project start up was deferred approximately six months to allow for completion of the air separation and sulphur recovery units. Limited host platform heating capability restricted production rates at Wrigley, and in CBM, our progress was slowed by partner constraints and well reliability. Despite these setbacks, project returns have not been significantly impacted."

We have put plans in place to address these issues. We have restructured our North American operations so that we can focus more resources on our US assets. In the North Sea, the successful ramp-up of Buzzard, one of the few world-wide mega projects to come on stream on time and on budget in the last several years, allowed us to achieve significant production growth in 2007. As we move forward with this asset, we are providing more resources to maintain uptime reliability so that the platform consistently operates at full rates. At Long Lake, we are taking the lessons learned from Phase 1 and other projects and working them into our plans for subsequent phases. And in CBM, we have cautiously allocated capital following the uncertainty caused by proposed changes to Alberta's royalty regime.

"We are making improvements to our project execution strategies and I believe we have a bright future," added Fischer. "We have accumulated an enviable resource base in all of our core areas at a time when access to resource has become increasingly more difficult. We are building value with our inventory of world class early-stage developments at Usan offshore Nigeria, at Knotty Head in the Gulf of Mexico and in the Athabasca oil sands, and we have successfully transformed our production profile towards higher quality barrels. Compared to our peers, we are starting to generate significantly higher company-wide operating cash netbacks per barrel which, in some cases, are better by over 50%. This effectively means that for every barrel we produce, some of our competitors have to produce up to one and a half barrels to generate the same cash flow."

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

Charlie Fischer, President and CEO, and Marvin Romanow, Executive Vice President and CFO, will host a conference call to discuss further details around this capital budget and expectations for the future.

Date: December 5, 2007
Time: 7:00 a.m. Mountain Time (9:00 a.m. Eastern Time)

To listen to the conference call, please call one of the following:

416-641-6126 (Toronto)
866-542-4236 (North American toll-free)
800-9559-6854 (Global toll-free)

A replay of the call will be available for two weeks starting at 8:00 a.m.
Mountain Time, by calling 416-695-5800 (Toronto) or 800-408-3053 (toll-free)
passcode 3244144 followed by the pound sign.

A live and on demand webcast 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 "anticipate", "believe", "intend", "plan", "expect", "estimate", "budget", "outlook" or other similar words, and include statements relating to expected full year production, cash flow and capital expenditures as well as future production associated with our coalbed methane, Long Lake, Syncrude, North Sea, Gulf of Mexico, Yemen, 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; our ability to explore, develop, produce and transport crude oil and natural gas to markets; the results of exploration and development drilling and related activities; volatility in energy trading markets; foreign-currency exchange rates; economic conditions in the countries and regions in which we carry on business; governmental actions including changes to taxes or royalties, 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 risk, uncertainty or factor on a particular forward-looking statement is not determinable with certainty as these factors are interdependent, and management's future course of action would depend on our assessment of all information at that time. Any statements as to possible future crude oil, natural gas or chemicals 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, possible commerciality, development plans or capacity expansions, future ability to execute dispositions of assets or businesses, future cash flows and their uses, 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 1A and 7A in our 2006 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 2006 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

  • Michael J. Harris, CA
    Vice President, Investor Relations
    (403) 699-4688
    Lavonne Zdunich, CA
    Analyst, Investor Relations
    (403) 699-5821
    Sean Noe, P.Eng
    Analyst, Investor Relations
    (403) 699-4494
    Nexen Inc.
    801 - 7th Ave SW
    Calgary, Alberta, Canada T2P 3P7