Under SEC regulations, the company is required to use year-end pricing to establish the economic viability of reserves. On December 31, 2004, a combination of wide heavy oil differentials, high natural gas prices, and very high diluent costs resulted in low bitumen netbacks. As a result, under these price assumptions, the company wrote off all of the proved reserves for the Long Lake Project at year-end 2004.
"The integrated process we are using at Long Lake to upgrade bitumen into synthetic crude oil virtually eliminates any exposure to the variables that caused us to write-off our proved bitumen reserves at year-end," said Charlie Fischer, Nexen's President and CEO. "In fact, these conditions actually make our process, and the premium synthetic crude we will produce, more valuable."
This change in reserves disclosure does not reflect any change in our plans or the full-cycle economics of the project. The Long Lake Project is proceeding on schedule and on budget. Detailed project engineering is currently approximately 60% complete and we expect to be in a position to begin on-site construction work in the first half of 2005. Procurement of the major equipment is essentially complete. We have procured 75% of our bulk materials and we have signed all of our major contracts. Commercial SAGD drilling is ahead of schedule and under budget. Bitumen production is expected to commence in late-2006 and the upgrader is scheduled to start-up in 2007. Peak production of synthetic crude oil is expected to reach approximately 60,000 bbls/d, with Nexen's share totaling approximately 30,000 bbls/d.
Under NI51-101, the Canadian reserves standards, we would have reported 205 million barrels of proved synthetic reserves at year-end 2004.
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