The average sales price realized for our oil and gas production was $40.11 per equivalent barrel (boe) compared to $45.84 in the first quarter of 2003. Although realized prices were almost $6 lower than in 2003 because of the strengthening Canadian dollar, our cash netback after deducting royalties, cash taxes and operating costs, was only $3.30 lower, at $19.73 per boe.
"These results are a great start for the year," said Charlie Fischer, Nexen's President and Chief Executive Officer. "Net of dispositions, production after royalties increased 4% compared to the first quarter of 2003. Our growth is largely from new deep-water Gulf of Mexico projects that generate cash netbacks almost twice our corporate average and very strong investment returns."
Production on Track
Production before Production after Royalties Royalties --------------------------------------- Crude Oil, NGLs and Natural Gas (mboe/d) Q1 2004 Q4 2003 Q1 2004 Q4 2003 ------------------------------------------------------------------------- Yemen 114 117 54 58 Canada 62 65 49 51 United States 55 53 47 45 Other Countries 9 9 8 9 Syncrude 18 15 18 15 -------------------------------------- Total 258 259 176 178 -------------------------------------------------------------------------
Oil and gas production before royalties averaged 258,000 equivalent barrels per day (boe/d). US production was 5% higher than in the fourth quarter of 2003, and 24% higher than the first quarter last year. US production will continue to grow as we tie-in additional wells at the deep-water Gunnison and Aspen fields. Canadian production was lower than the fourth quarter of 2003 due to continuing declines in mature fields, temporary impacts in heavy oil from severe winter weather, and facility upgrades at Hay. Yemen production is meeting expectations and will grow in 2005 when new production from the development of Block 51 comes on stream.
Production after royalties averaged 176,000 boe/d. High crude prices reduced the net production from Masila. Under our Masila production sharing agreement, our share of production decreases and the Yemen government's share increases as crude prices escalate.
Our total production outlook for the full year remains between 255,000 and 275,000 boe/d before royalties and 180,000 and 195,000 boe/d after royalties.
Gulf of Mexico - Gunnison Production Increasing; Drilling Success at Aspen
Gunnison, our second deep-water Gulf of Mexico field, came on stream in December with three of the field's ten wells producing. Since year-end, we have completed the fourth and fifth development wells at Gunnison and are currently producing 140 million cubic feet of gas and 12,000 barrels of oil per day. As the remaining wells are completed, field production is expected to increase to peak daily rates between 165 and 180 million cubic feet of gas and 28,000 and 30,000 barrels of oil by year-end. Our 30% share of peak daily rates will range between 55 and 60 million cubic feet of gas and between 9,000 and 10,000 barrels of oil.
Another development well was successfully drilled at our 100% owned Aspen field. The well encountered over 300 feet of very high quality net oil and gas pay and will significantly increase production from Aspen when placed on stream in the third quarter of this year.
"The Gulf of Mexico is currently our fastest growing and largest geographic source of cash flow," stated Fischer. "The deep-water's attractive cost structure and low royalty rates generate great returns with rapid payback of our investment."
We completed drilling activities at the Dawson Deep prospect located approximately three miles from the Gunnison production facility on Garden Banks Block 625. We hold a 15% interest in this discovery and are currently evaluating opportunities for subsea development and tie-back to Gunnison. We expect to drill several additional prospects in the Gunnison area this year.
In March, we acquired a 13.34% interest in the Tobago prospect. Tobago is located in 7,500 feet of water on Alaminos Canyon Block 859 and the east half of Block 858, between the Great White and Trident discoveries. Results from the first exploration well at Tobago are expected shortly.
Athabasca Oil Sands - Long Lake Synthetic Crude Oil Project on Track
In February, our Board of Directors approved proceeding with commercial development of the Long Lake Synthetic Crude Oil project where we hold a 50% interest. As a result, we converted 200 million barrels of probable reserves for this project to proved reserves. The Long Lake project will develop approximately 15% of our Athabasca bitumen resource and will upgrade this bitumen into a high-quality, light, sweet, premium synthetic crude oil (PSC). The project will ramp up to produce 60,000 barrels of PSC per day (30,000 net to Nexen), beginning in 2007.
Clearing and grading of the facilities site has commenced and long lead-time equipment is being ordered. Facilities construction is scheduled to begin in the third quarter of 2004, with the steam-assisted-gravity-drainage facilities completed in 2006 and the upgrader facilities in 2007.
"The experience of other major projects in the Athabasca region helped shape our project plan for Long Lake," commented Fischer. "By incorporating a high degree of modularization, we expect to minimize site construction hours and costs."
At the Syncrude Joint Venture, progress on the Stage 3 expansion is continuing. We expect this expansion to add 110,000 barrels per day (8,000 net to Nexen) of production. Recent analysis by Syncrude and independent experts indicates a delayed start-up to mid-2006, contributing to an increased gross capital cost from an estimated $5.7 billion to $7.8 billion. Of the total $7.8 billion, approximately $2 billion is attributable to costs related to base plant improvements, product quality enhancements and environmental mitigation measures. The Syncrude owners are currently reviewing the gross capital costs and timing for the Stage 3 expansion. We have a 7.23% interest in the Syncrude Joint Venture.
Middle East - East Al Hajr (Block 51) Development in Yemen
Development is progressing at our Bashair al Khair-A field, where our interest is 87.5%. To date, we have drilled eight successful delineation wells and four development wells, with six additional development wells planned for later this year. Engineering work on a 35,000 bbls/d central processing facility, a gathering system, and pipeline tieback (capacity-100,000 bbls/d) to our Masila export system is advancing. Construction is scheduled to start in June 2004, with production beginning in early 2005. Peak production is expected to reach between 20,000 and 25,000 boe/d during the first quarter of 2005.
"East Al Hajr adds to the substantial remaining value we have in Yemen," said Fischer. "Development of BAK-A will enable us to maintain our high production rates in Yemen for several more years. On top of this, the East Al Hajr Block holds significant further potential, some of which we will test through the drilling of six exploration wells in the second half of this year. In anticipation of further success, we have oversized the design of our Block 51 facilities."
Offshore Nigeria, Nexen is reviewing development plans for recoverable resources in the range of 500 million barrels for the Usan field on OPL-222, where we have a 20% interest. On the exploration front, the Usan West-1 exploration well, located 4 miles west of the main Usan field, will commence drilling later this month in 2,400 feet of water. Usan West-1 is the first well in a multi-well exploration program designed to test a series of independent prospects on the block.
On OML-115, offshore Nigeria, seismic acquisition has been completed. Seismic reprocessing is currently underway on Block K, offshore Equatorial Guinea. We expect to drill on each of these blocks in the second half of this year, after seismic interpretation has been completed.
"We continue to invest strongly in our four key regions: the deep-water Gulf of Mexico, offshore West Africa, the Athabasca oil sands and the Middle East, where opportunities are plentiful and overall returns are strong," said Fischer. "Our core operations in Canada, the shallow-water Gulf of Mexico and Masila are generating significant free cash flow, helping to fund our growth in these areas."
The Board of Directors has declared the regular quarterly dividend of $0.10 per common share payable July 1, 2004 to shareholders of record on June 10, 2004.
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