"Our strategy is to grow in the deep-water Gulf of Mexico, offshore West Africa, in the Middle East, and Canada's Athabasca oil sands where we can generate superior growth and returns," said Charlie Fischer, Nexen's President and CEO. "We are moving forward in these areas with concrete development projects and high-quality exploration opportunities. Our investment in the deep-water Gulf is already delivering high-margin volumes at Aspen, with Gunnison to follow shortly."
Production Fueled by Deep-water Gulf of Mexico
Approximately 45% of our cash flow from core assets is being reinvested in those assets to deliver production between 255,000 and 275,000 equivalent barrels (boe) per day in 2004. Production after royalties will average between 180,000 and 195,000 boe per day. The remaining 55% of cash flow will be invested in new growth projects, which will come on-stream in 2005 and beyond. The deep-water Gulf of Mexico is our fastest growing core area with significant new low-royalty production commencing from Gunnison by year-end 2003 and expansion of our Aspen development next year. Production from Gunnison will commence by year-end with the tie-in of three subsea wells. Production will continue to grow throughout most of next year as seven additional oil wells are completed and brought on-stream sequentially. At Aspen, a third development well that is currently drilling will be tied back to the existing Aspen infrastructure by mid-year. We expect the Gulf of Mexico production to reach over 70,000 boe per day by year-end.
"Deep-water Gulf of Mexico developments are very attractive," commented Fischer. "At current prices, the cash netback from Aspen production is almost double our corporate average. This increase in margins is accelerating our value growth despite relatively flat production year-over-year."
In Yemen, we will drill at least 80 wells on the Masila Block and commence development on the Tammum field in Block 51. In Western Canada, our conventional assets are maturing and we sold over 9,000 barrels of daily production at attractive prices in 2003. In 2004, we will focus on shallow gas, heavy oil and light oil projects that provide the highest returns on invested capital, while we transition to new sources of production growth such as synthetic crude oil and coal bed methane (CBM). We expect Syncrude to have a record year following turnarounds of both cokers and the LC Finer in 2003, combined with the recent commissioning of the second bitumen train at Aurora.
In Colombia, production will continue to grow as we drill 24 new development wells and implement a full-field waterflood of the Guando field. We anticipate the Buffalo field, offshore Australia will be fully depleted during 2004, while the Ejulebe field, offshore Nigeria will be decommissioned in early 2004.
"Our net production growth will be modest in 2004, as over half of our cash flow is invested in major growth projects coming on-stream in 2005 and beyond" commented Fischer. "In 2005, we begin to see production ramp up with the Tammum field in Yemen coming on-stream and a full year of production at Aspen-3 and Gunnison."
High-Value Production Additions
"The production volumes we're adding in the deep-water Gulf of Mexico are more valuable than the barrels they are replacing," expressed Fischer. "Aspen and Gunnison's low operating costs and royalties are having a dramatic impact on our cash netbacks. Normalizing for prices and exchange rates, our overall corporate netback from our oil and gas production will grow significantly in 2004."
Better oil and gas margins will partially offset lower assumed commodity prices and a stronger Canadian currency. Assuming oil prices average US$25 per barrel, gas prices average US$4.25 per thousand cubic feet and the exchange rate averages US$0.75 in 2004, we expect to generate cash flow of approximately $1.3 billion, compared to an expected cash flow of $1.8 billion in 2003. However, in a price neutral environment, cash flow would grow by approximately 10% in 2004 over 2003.
Each US$1.00 change in oil prices will affect our 2004 cash flow by about $53 million. A US$0.10 change in natural gas prices will affect our cash flow by $12 million, and a US$0.01 variation in the exchange rate will change our cash flow by $21 million.
In addition to strong cash flow from our oil and gas operations in 2003, we expect solid performance from our chemicals and marketing businesses. Our chemicals division anticipates improved cash flow from growing production and lower unit costs as we continue to consolidate production at our low-cost facility in Brandon, Manitoba. Our marketing division also anticipates another profitable year from our natural gas, crude oil and power marketing businesses.
In 2003, we expect to repay $600 million of debt while taking advantage of attractive capital markets in November to complete 10- and 40- year debt offerings. We raised US$960 million at an average cost of 6.15%, pre- funding our 2004 maturities, refinancing our existing preferred securities, and covering the majority of our shortfall required to meet our capital plans in 2004. Following the refinancings, we filed an amendment to our existing universal debt shelf prospectus, which will allow for the offering of up to US$1 billion in debt securities in the United States and Canada.
Approximately two-thirds of our 2004 investment capital will fund new growth projects that are expected to add production in 2005 and beyond. "Development of the Tammum field on Block 51 in Yemen and the Long Lake Synthetic Crude project in Canada are key drivers of the overall increase in our new growth budget in 2004," explained Fischer. "This is offset by lower development expenditures in the Gulf of Mexico now that Aspen and Gunnison are on-stream."
Yemen Block 51 - First Production in 2005
Development of the 2003 Tammum discovery on Block 51, where we hold an 87.5% working interest, will commence in 2004. Initial development of the field includes development wells, a central processing facility, a gathering system and tieback to our Masila export system. Based upon drilling results to- date, we expect to develop in excess of 40 million barrels of reserves and add between 20,000 and 25,000 barrels per day of production capacity in early 2005. The field has additional potential that will be quantified by a 3D seismic program and delineation drilling in 2004. We also plan to continue to explore the Block with seismic collection and at least 6 exploration wells.
Syncrude Expansion - Stage 3 On-stream in 2005
In Canada, the Syncrude Stage 3 expansion is expected to add an incremental 8,000 barrels per day of net production following completion in 2005. Activities next year will focus on completing the upgrader expansion and replacing bitumen production capacity that will be lost with the planned closure of the southwest quadrant of the Mildred Lake Base Mine in 2005. Nexen has a 7.23% interest in the Syncrude Joint Venture.
High-quality Synthetic Crude Production Expected in 2007
Our Synthetic Crude Oil Strategy has been developed to extract value from an estimated four-billion-barrel recoverable resource that we hold on leases in the Athabasca region of Alberta. The first phase of this strategy consists of 70,000 barrels per day of steam assisted gravity drainage (SAGD) bitumen production and a 60,000 barrel per day field upgrader to be located at Long Lake, 40 kilometers south of Fort McMurray, Alberta. This project will develop around 15% of our recoverable resource in the region.
The Long Lake project is progressing rapidly. In 2003, we commenced pilot testing of SAGD technology at Long Lake, obtained Alberta Energy Utilities Board approval and completed more than 15% of the detailed engineering.
A comprehensive project review will be presented to our Board of Directors for approval early in 2004. Subject to Board approval, our plans for 2004 include detailed engineering, ordering long-lead time equipment and commencing construction at Long Lake to meet a 2006 start-up date for bitumen production and 2007 start-up date for synthetic crude oil production. Nexen has a 50% interest in this project.
An important part of our value-based growth strategy is a strong exploration program, with an extensive inventory of exploration opportunities. In addition to Block 51 in Yemen, our high-impact exploration program includes testing prospects in the deep-water Gulf of Mexico, delineating existing discoveries and testing additional prospects offshore West Africa, and making a commercial decision on our Canadian CBM project in 2004.
Almost half of our budgeted exploration capital will be invested in the Gulf of Mexico. We plan to drill at least five high-potential exploration wells, including deep-water tests in the Green Canyon, Garden Banks and Eastern Gulf of Mexico areas, plus two Miocene gas prospects on the shelf.
"We are very well positioned in the Gulf with core deep-water production from Aspen and Gunnison, over 150 exploratory blocks and a multi-year inventory of identified prospects," said Fischer. "Additional wells could be drilled in 2004 based upon success and partner priorities."
Offshore West Africa, we have three projects currently underway. OPL-222 and the recently acquired OML-115, both offshore Nigeria and Block K, offshore Equatorial Guinea. On OPL-222, where we have the Usan and Ukot discoveries, we plan to drill four wells to test other prospects on the block. We are currently considering development options for Usan in conjunction with the government of Nigeria. For OML-115, we are planning to shoot seismic and drill one exploration well. On Block K, we plan to drill two wells to assess Equatorial Guinea's ability to contribute to the growth of our West Africa region.
In Canada, we will significantly expand the size of our CBM pilot project at Corbett and expect to reach a decision on commerciality by the end of 2004. We will test four other Upper Mannville CBM prospects and drill a number of conventional gas exploration wells in the Alberta foothills.
"No other company offers investors better exposure to opportunities in the Middle East, the vast resource of the Athabasca oilsands, and the exciting potential of the deep-water Gulf of Mexico and offshore West Africa. Our 2004 plan will deliver significant progress in each of the areas and significant value growth for our shareholders," concluded Fischer.
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