Nexen delivered solid financial results in the first quarter with cash flow of $598 million and net income of $121 million. These results reflect increased production, strong commodity prices and narrow product differentials. With Buzzard ramping up during the quarter, our production after royalties increased 20% year over year. Net income is up significantly as we reported a $277 million charge for an increase in the UK tax rate in the first quarter of 2006.
The contribution from our marketing group was substantially lower than reported last year. Economically our marketing division added value for the quarter, however for accounting purposes they broke even. We were unable to recognize gains on the increased value of our marketing inventories and transportation assets. These can only be recognized when the inventories are sold and the transportation assets are used. We expect to recognize these gains over the next 12 months. In the first quarter of 2006, marketing contributed $108 million after tax to our earnings as they took advantage of volatile gas markets in late 2005.
Since the beginning of the year, our share price has increased 10%, adding almost $2 billion in shareholder value. Our employees shared in approximately 7% of this additional value as we recognized $116 million ($80 million after tax, $0.30/share) of stock-based compensation expense during the quarter. Approximately 60% of this expense was cash related.
"We made good progress on our major development projects during the first quarter," commented Charlie Fischer, Nexen's President and Chief Executive Officer. "We recently started injecting steam at Long Lake and Buzzard is ramping up as expected. Over the coming months, production will continue to rise creating significant growth and value for our shareholders."
Oil and Gas Production
Production before Production after
Crude Oil, NGLs and
Natural Gas (mboe/d) Q1 2007 Q4 2006 Q1 2007 Q4 2006
Yemen 77 84 45 52
North Sea 58 24 58 24
Canada 38 38 30 31
United States 38 33 34 28
Other Countries 6 6 5 6
Syncrude 21 22 19 20
Total 238 207 191 161
Our first quarter production averaged 238,000 boe/d (191,000 boe/d after royalties) as the Buzzard field in the North Sea came on stream in early January. Buzzard is ramping up as expected and contributed 36,000 boe/d to our quarterly volumes. We are starting to see daily rates in excess of 162,000 boe (70,000 boe net) and are on track to achieve peak rates of 200,000 boe/d (85,000 boe/d net) by mid year.
"We are currently producing approximately 260,000 boe/d," stated Fischer. "As Buzzard ramps up to peak rates over the next few months and Long Lake comes on stream in the second half of the year, we are on track to grow production after royalties by 50% this year."
Long Lake Project Update
Our Long Lake project achieved a major milestone as we began injecting steam into two of our 10 well pads in April. Over the next several months we will continue to circulate steam into the injection and producing wells to heat up the reservoir and establish communication between the wells. Our plan is to commission a new pad (3 to 12 well pairs per pad) at a rate of one pad per week until all wells are circulating steam. We expect all 81 SAGD well pairs (10 pads) to be circulating steam by the end of the second quarter.
Bitumen production is expected to be minimal until the third quarter when we convert the wells to SAGD operation. During the initial ramp up period, we expect steam-to-oil ratios will be high from initial steam circulation and will decline with time as bitumen production ramps up to peak rates over a 12 to 24 month period. Over the project life, we expect our steam-to-oil ratio to average approximately 3.0. Depending on production ramp up and new facility uptime, we expect bitumen production to reach between 35,000 and 45,000 bbls/d (between 17,500 and 22,500 bbls/d net) by the end of 2007.
Upgrader module fabrication is now complete, all modules are on site and construction of the upgrader is approximately 85% complete. Peak output of premium synthetic crude oil is expected within 18 months of upgrader start up and we expect to exit 2007 producing between 28,000 and 36,000 bbls/d (between 14,000 and 18,000 bbls/d net) of synthetic crude. 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 which we expect to reach by late 2008 or early 2009.
The current commodity price environment is fueling the high rate of oil sands activity. This is resulting in unprecedented demand for supplies and services in the Athabasca region, causing inflationary pressure on costs. In addition, skilled labour shortages are affecting productivity. These pressures are impacting our Long Lake project. It has taken additional hours to complete the SAGD central processing facility and system turnover to operations has taken longer than anticipated. On the upgrader, progress and productivity has been less than expected on the sulphur and air separation plants, putting pressure on both cost and schedule. After a review of all trends, the projected cost of Long Lake has increased from $4.6 billion to approximately $5 billion ($2.5 billion net to Nexen). In addition, a contingency reserve of $300 million ($150 million net to Nexen) has been created for cost and productivity pressures over and above current trends.
"The cost increase is disappointing," stated Fischer. "However, the real value of the project lies in the production of synthetic crude oil for decades, where we enjoy an estimated $10/bbl operating cost advantage over existing technologies."
We are planning to increase synthetic crude oil production to 240,000 bbls/d (120,000 bbls/d net) over the next decade. We plan to sequentially develop our 5.5 billion barrel recoverable resource with additional 60,000 bbls/d (30,000 bbls/d net) phases using the same technology and design as Long Lake. This process significantly reduces our need to purchase natural gas, a key cost driver in competing technologies and results in a significant cost advantage for us.
"We are currently investing in Phase 2 development," commented Fischer. "While we are planning on sanctioning this project in 2008, the ultimate timing depends on achieving sufficient production history from Phase 1 and receiving clarity on fiscal and regulatory policies related to oil sands development and climate change."
Ettrick Development Progressing for First Oil in 2008
Development of the Ettrick field in the North Sea where we have an 80% operated working interest is progressing well. The project consists of three production wells and one water injector tied back to a leased floating production, storage and offloading (FPSO) vessel which is almost 60% complete. The FPSO is designed to handle 30,000 bbls/d of oil, 35 mmcf/d of gas and to re-inject 55,000 bbls/d of water. During the quarter, we began drilling the first development well. Production from the field is expected to commence by mid 2008 with our share averaging approximately 9,000 boe/d for the year.
Gulf of Mexico Update
At Aspen, we began producing from an additional development well in late December. With this well on stream, our production from the field averaged approximately 16,500 boe/d for the first quarter of 2007 compared to 10,400 boe/d a year ago. We have identified other opportunities in the field and we are currently sidetracking Aspen 1 to exploit a number of deeper sands. We expect this well to come on stream mid year. Our 2007 annual production from the Aspen field is expected to average between 15,000 and 20,000 boe/d. We have a 100% operated working interest in Aspen.
In May, we anticipate producing from Wrigley on Mississippi Canyon Block 506 where we have a 50% non-operated interest. The well flow tested at 62 mmcf/d (31 mmcf/d net to Nexen) during completion operations.
In 2006, we had discoveries at Alaminos Canyon Block 856 (Great White West) and Ringo on Mississippi Canyon Block 546. We are currently evaluating development options at Great White West. At Ringo we have an appraisal well planned for the fourth quarter. We recently pooled our acreage at Ringo with adjacent Block 502, as we believe the structure is situated on both blocks. We have a 25% non-operated interest in Ringo and Block 502. The operator has renamed this discovery Longhorn.
At Knotty Head, we are moving forward to secure a rig to drill an appraisal well. One of our partners has access to a deep-water drilling rig which they are prepared to make available late this year or early next year. We are currently verifying the rig's capabilities and reviewing contractual arrangements. Our current estimate of resource for the field is between 200 and 500 mmboe. We have a 25% operated interest in the field.
Coalbed Methane (CBM) Development Continues
In Canada, we continue to develop CBM from Mannville coals in the Fort Assiniboine area. Well performance continues to meet expectations, however capital spending has been less than planned due to partner constraints. We are taking action as permitted by our agreements to mitigate these constraints and move ahead with the capital program. Our production from this area averaged 21 mmcf/d for the quarter. We expect this to double by year-end and continue to grow as we develop additional sections of land in the Corbett, Thunder and Doris fields using multiple leg-horizontal wells.
"Although our current capital program has been constrained, we are committed to the development of CBM," said Fischer. "Well performance is in line with expectations and we are confident in our plan to increase our CBM production to at least 150 mmcf/d by 2011."
Offshore West Africa
The Usan field development, located in Nigeria on offshore Block OPL-222, continues to progress toward project sanction. The project will have the ability to process an average of 180,000 bbls/d of oil during the initial production plateau period through a new floating production, storage and offloading vessel (FPSO) with a two million barrel storage capacity. Recommendations have been prepared for award of the major deep-water facilities and drilling contracts, subject to final government and partner approval to proceed. These contracts provide for fabrication and integration of a portion of these facilities within Nigeria, reflecting the project's support of local content initiatives established by the Nigerian government. We expect the Usan development to be formally sanctioned this year, with first production as early as 2010. We have a 20% interest in exploration and development on this block.
Drilling Update--Successes in the UK North Sea
During the quarter, we had successes in the UK North Sea at Golden Eagle and Kildare. Golden Eagle is located on Block 20/1N. The discovery well was drilled to a depth of approximately 7,500 feet and encountered 123 feet of net pay. A successful sidetrack well was drilled to appraise the accumulation and we are currently evaluating development options. Our current estimate of gross resource for the field is between 20 and 50 mmboe. We have a 34% operated interest in Golden Eagle. Kildare is located on Block 15/26b. The discovery well was drilled to a depth of approximately 14,100 feet and encountered approximately 91 feet of net pay. We are currently analyzing the results from the well. We have a 50% non-operated interest in Kildare.
We are currently drilling two exploration wells. For the remainder of the year, we expect to drill an additional 12 to 15 exploration wells with the majority in the Gulf of Mexico and the UK North Sea. We have rigs lined up for all but one of these wells.
"This is a landmark year for Nexen as we expect our production to grow substantially," commented Fischer. "However the growth does not stop there. Projects like Ettrick in the UK, Usan, offshore West Africa, Knotty Head in the Gulf of Mexico, CBM and additional phases of Long Lake in Canada will ensure production growth into the future."
Two-for-One Share Split
At our annual meeting today, we expect our shareholders to approve our previously announced two-for-one share split. Following the share split, we will have approximately 526 million common shares outstanding.
The Board of Directors has declared the regular quarterly dividend of $0.05 per common share payable July 1, 2007, to shareholders of record on June 10, 2007. Shareholders are advised that the dividend is an eligible dividend for Canadian Income Tax purposes.
Nexen Inc. is an independent, Canadian-based global energy company, listed on the Toronto and New York stock exchanges under the symbol NXY. We are uniquely positioned for growth in the North Sea, deep-water Gulf of Mexico, the Athabasca oil sands of Alberta, the Middle East and offshore West Africa. We add value for shareholders through successful full-cycle oil and gas exploration and development and leadership in ethics, integrity and environmental protection.