Nexen Reports Third Quarter Results

Nexen delivered strong financial results with cash flow of $594 million and net income of $193 million in the third quarter of 2006. With oil comprising approximately 80% of our production, strong benchmark crude oil prices and narrow product quality differentials contributed to these results. In the third quarter of 2005, net income included significant gains from asset dispositions.

Earlier this year, a court of arbitration concluded that Nexen breached an obligation with respect to Block 51 in Yemen. While the amount of damages is yet to be determined, we have reduced our net income by $93 million to reflect our estimate of this liability.

Our third quarter production averaged 203,000 boe/d (148,000 boe/d after royalties). This was less than the second quarter due primarily to an extended maintenance turnaround at the Scott platform in the North Sea and natural declines elsewhere, offset by higher volumes at Syncrude.

Currently, we are producing approximately 212,000 boe/d. Production is expected to increase significantly in the fourth quarter with full volumes from Syncrude, the restoration of shut-in production in the Gulf of Mexico and new volumes from Aspen and Buzzard. At Syncrude, modifications to eliminate odours were completed and the expansion is now operating at capacity, increasing our share of production to approximately 25,000 bbls/d. In the Gulf of Mexico, we are restoring approximately 4,000 boe/d of production shut-in by last year's hurricanes. At Aspen, we are completing the development well drilled in the third quarter. This well is expected to come on stream before year-end. Based on results from this well, we see additional opportunities in the Aspen field and plan to sidetrack the Aspen 1 well to exploit deeper sands. In addition, we expect first production from Buzzard in late November. We expect our 2006 annual production before royalties to average approximately 220,000 boe/d (165,000 boe/d after royalties), depending upon the timing of these incremental volumes.

"This is an exciting time for Nexen," stated Charlie Fischer, Nexen's President and CEO. "With first oil from Buzzard expected before year-end and production at Long Lake next year, we are on the cusp of significant, high-margin production growth."

Buzzard on Track for First Oil

Our Buzzard project remains on schedule and on budget. Final hook-ups and commissioning are nearing completion. We expect production to ramp up as we tie-in the initial eight development wells, reaching peak rates of approximately 85,000 boe/d, net to us, in the first half of 2007. We have a 43.2% operated working interest in Buzzard.

The facility is designed to process up to 200,000 bbls/d of oil and 60 mmcf/d of gas, including the removal of hydrogen sulphide. Based upon recent drilling results, we have experienced more well-to-well variability in the concentration of hydrogen sulphide than previously seen. We are confident that existing equipment and processes will allow us to manage this variability for at least the first two to three years of production. Over the next 6 to 12 months we will acquire additional reservoir information to determine whether additional equipment is required. If required, our preliminary analysis indicates maximum additional capital of approximately $250 million ($110 million net to Nexen).

"Low operating costs and no royalties make Buzzard a very valuable asset," said Fischer. "At peak production, we expect it to generate approximately $1.6 billion of annual pre-tax cash flow for us, assuming oil prices of US$50/bbl."

Long Lake Project Update

Our Long Lake project continues to progress well. All SAGD wells have been drilled and completed. SAGD module fabrication is complete, all modules are on site and construction is approximately 90% complete. We expect our SAGD operations to be mechanically complete near year-end, with steam injection commencing in the first quarter of 2007. Bitumen production is expected to ramp up to peak rates over a 12 to 24 month period. Upgrader module fabrication is largely complete and over 90% of the modules are on site. Construction of the upgrader is approximately 60% complete and start up remains scheduled for the second half of 2007. Peak output of premium synthetic crude oil is expected within 6 to 18 months of start up.

While construction progress has been significant, high activity in the oil sands is placing ongoing pressure on the costs of labor and services. In addition, labor productivity has been lower than anticipated, requiring a larger workforce to maintain progress. After a review of all trends, the projected cost of Long Lake has increased from $3.8 billion to $4.6 billion ($1.9 billion to $2.3 billion net to Nexen).

"Although we are seeing pressure on capital costs at Long Lake, we expect to benefit from a significant operating cost advantage ensuring attractive returns," said Fischer.

Production capacity for the first phase of Long Lake is approximately 60,000 bbls/d (30,000 bbls/d net to Nexen) of premium synthetic crude. Our plan is to expand oil sands production to approximately 240,000 bbls/d (120,000 bbls/d net to Nexen) over the next 10 years. Three additional phases of 60,000 bbls/d (30,000 bbls/d net to Nexen) are planned using the same technology and design as Long Lake. We are currently progressing Phase 2 development. We have completed the seismic and core hole drilling programs, ordered several major vessels and are finalizing regulatory applications. We continue to develop our overall execution strategy, cost estimate and project schedule.

Unconventional Gas

In Canada, we continue to develop coalbed methane (CBM) from Mannville coals in the Fort Assiniboine area. At the end of the third quarter, our production from this area was 13 mmcf/d, increasing to over 30 mmcf/d this winter.

"We are committed to the development of CBM," said Fischer. "We have a long-term view of this business and plan to increase our CBM production to at least 150 mmcf/d by 2011, generating attractive full-cycle rates of return at gas prices as low as $5/mcf."

During the quarter, we significantly added to our unconventional gas resource. We acquired over 100 sections of land in an emerging shale gas play in western Canada. We plan to initiate a drilling and evaluation program in 2007 to demonstrate the feasibility of this opportunity.

Offshore West Africa Update

On Nigeria block OPL-222, basic engineering for the Usan field development plan is complete and tendering of contracts for all major components is proceeding. The current plan consists of a floating production, storage and offloading vessel with a storage capacity to two million barrels, capable of handling peak production rates of 160,000 bbls/d of oil. The co-venturers expect to formally sanction the project following evaluation of commercial bids. Government approval for contract award is expected to follow thereafter. Exploration and appraisal of additional opportunities on the block continues. We have a 20% interest in this exploration and development program.

Drilling Update

In the Gulf of Mexico, our Ringo exploration well on Mississippi Canyon Block 546 encountered approximately 150 feet of net gas pay. We are evaluating a single well development tie-back to nearby facilities which could be on stream in early 2008. Our current estimate of the recoverable resource is between 60 and 170 bcfe and we have a 50% operated working interest.

Elsewhere in the Gulf, we will complete the development of our Wrigley gas discovery on Mississippi Canyon Block 506 and expect to have this on stream in early 2007. At Alaminos Canyon Block 856, we are evaluating development options after completing a two-well exploration drilling program earlier this year. This block is located approximately 240 miles south of Houston and is immediately west of the Great White discovery. We have a 30% non-operated interest in the block. At Knotty Head on Green Canyon 512, we are proceeding with facility and subsurface studies. Access to rigs remains limited in the Gulf and we continue to work with partners to find a rig to complete the appraisal of the field.

In the fourth quarter, we plan to continue our exploration program, drilling one well in the Gulf of Mexico, three to five in the North Sea, one to two in Yemen and two in Colombia.

"We are well positioned for the future," stated Fischer. "Buzzard and Long Lake provide significant growth in the short-term. But the growth does not stop there. We have a portfolio of world-class assets such as Knotty Head in the Gulf, OPL-222 offshore West Africa, and CBM and oil sands leases in Canada that are expected to provide production growth and create shareholder value well into the next decade."

Soderglen Wind Power Project

During the quarter, we commenced power production at the Soderglen wind farm. The 70 megawatt wind farm is located southwest of Fort Macleod, Alberta. The project consists of 47 wind towers each with a 1.5 megawatt turbine. We have a 50% non-operated interest in the project.

"The Soderglen wind power project was completed on time and under budget," stated Fischer. "At full capacity it will produce enough green energy to power approximately 25,000 homes."

Capital Update

During the first nine months of the year, we have invested $2.4 billion in capital projects. For the full year, we expect capital spending to be between $3.2 and $3.4 billion compared to an initial budget of $2.9 billion. The increase is due to additional investment at Long Lake and Aspen, and for unconventional gas.


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