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Yemen Govt Denies Nexen Extension at Masila Block

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Nexen reported it has been informed by the Government of Yemen that its application to extend the Production Sharing Agreement (PSA) on Block 14 (Masila) has not been accepted. As a result, the PSA will expire on December 17, 2011. The block will then be operated by a newly created Yemen national operating company.

"The Masila discovery started Nexen's long and mutually beneficial association with Yemen and its people," said Marvin Romanow, Nexen's President and CEO. "While we're disappointed we did not receive an extension, we're proud of the accomplishments we've achieved there. Our operations at Masila have generated significant value for our company, enabling us to deploy the cash flow to build our current portfolio of legacy assets."

Nexen first entered Yemen in 1987 and has, since that time, produced more than 1.1 billion barrels of oil. Total field production at Masila peaked in 2003 at 225,000 barrels of oil per day (bopd). Nexen's share of production in 2011 is expected to be about 24,000 to 28,000 bopd (14,000 to 16,000 bopd after royalties).

The decrease in our overall production volumes resulting from the contract expiry will be mitigated by the start-up of the Usan project, offshore West Africa, which is expected to begin production in the first half of 2012. This change in production mix is expected to contribute to higher cash flow from operations in 2012 as Usan's anticipated netback is about double the Yemen netback at current prices.

The PSA expiry will not have any effect on Nexen's reserves, as we did not book any barrels beyond the PSA term. Similarly, all capital costs have been amortized over the contract period.

Nexen's PSA for Block 51 (East Al-Hajr) in Yemen, which currently produces about 6,000 to 8,000 bopd net to Nexen (3,000 to 4,000 bopd after royalties), expires in 2023. We are currently evaluating alternatives with respect to Block 51 and future activities in the country.

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