Nexen Sets 2008 Budget at $2.4 Billion

In 2008, Nexen plans to invest $2.4 billion in value adding projects, grow net production by between 8% and 10% and generate $2.9 billion in cash flow.

For the past several years, we have invested significant capital in a number of major development projects. The Syncrude Stage 3 expansion was completed last year and Buzzard commenced production in early 2007, ramping up to full rates during the year. These projects contributed to our net production growth of approximately 35% in 2007 but were less than the 50% growth we forecasted a year ago. The shortfall was the result of ramp-up delays on our major projects at Buzzard, Long Lake and coalbed methane (CBM) coupled with disappointing results from development drilling at Aspen. We are now injecting steam at Long Lake and expect bitumen production to begin ramping up in the spring. The upgrader is expected to start up in mid 2008, with production of premium synthetic crude ramping up over a 12 to 18 month period. In addition, first oil from Ettrick is anticipated in mid 2008.

Assuming average production of 270,000 boe/d before royalties, WTI oil price of US$70/bbl, NYMEX gas price of US$6.75/mmbtu, and a US/Cdn exchange rate of US$0.97, we expect to generate approximately $2.9 billion of cash flow, after seeing cash taxes double from 2007 to approximately $1 billion in 2008.

Each US$1.00 increase in benchmark oil prices adds about $40 million to our after tax cash flow, whereas a decline in prices below US$50/bbl reduces cash flow by about $20 million. We have purchased put options with a strike price of US$50/bbl Brent on 100,000 bbls/d of our 2008 crude oil production. A US$0.50 change in natural gas prices impacts our cash flow by about $25 million and a US$0.01 variation in the exchange rate impacts our cash flow by about $30 million.

"In 2007, we began reaping significant benefits from our investment in the North Sea, and in 2008 we will start to see a return on our investment in the Athabasca oil sands," commented Charlie Fischer, Nexen's President and CEO. "In addition, with no fixed price hedges or caps in place, we benefit fully from high commodity prices."

Investing $2.4 Billion in High Value Projects

In 2008, capital will be allocated as follows:

- 29% on major development projects. This will allow us to bring Long Lake Phase 1 and Ettrick in the North Sea on stream in 2008 as well as progress Longhorn in the Gulf of Mexico and CBM at Fort Assiniboine in Alberta;

- 17% on early-stage development projects expected to contribute production and cash flow growth beyond 2008. These include future phases of oil sands in the Athabasca region, Block OPL-222 offshore West Africa, and our Knotty Head and Golden Eagle discoveries in the Gulf of Mexico and North Sea, respectively;

- 25% on exploration opportunities in our North Sea and Gulf of Mexico growth areas and on shale gas in northeast British Columbia; and

- 25% on our existing producing assets.

Our 2008 capital investment program is approximately $1.2 billion less than the 2007 program. The decrease reflects reduced investment in a number of our major development projects. At Long Lake, a substantial portion of the project capital is behind us, we have scaled back CBM investment in light of uncertainty surrounding proposed changes to Alberta's royalty regime and we have completed the Wrigley development in the Gulf of Mexico. We also expect to invest less on our core assets. In the deep-water Gulf of Mexico, we have no 2008 development drilling plans for Aspen and we have reduced our development programs for our mature assets in Canada, Yemen and on the shelf in the Gulf of Mexico, as we optimize our capital investment to recover remaining reserves.

We expect to generate $2.9 billion of cash flow for 2008, which compares to our expected cash flow of approximately $3.4 billion for 2007. The decrease reflects the impact of higher cash taxes, especially in the UK reflecting strong cash flow from Buzzard, combined with the impact of a stronger Canadian dollar.

"This budget allows us to continue building sustainable businesses in our core areas while we pursue some of the significant growth opportunities we have inventoried," said Fischer. "At the same time, we expect to generate approximately $400 million of free cash flow after dividend payments to our shareholders. This free cash flow provides us with choices regarding future investments or debt retirement."

Major Development - Creating Value

Almost 30% of our 2008 capital program is focused on advancing significant development projects in key growth areas.

Long Lake - SAGD steaming underway and upgrader start up scheduled for mid 2008

Almost 60% of our major development capital in 2008 will be invested at Long Lake in the Athabasca oil sands where we plan to invest approximately $400 million, including capitalized interest, to bring Phase 1 on stream mid year. We are currently injecting steam into the reservoir through all ten well pads. We expect bitumen production to begin ramping up in the spring and we are on track to have sufficient bitumen production for the start up of the upgrader. The bitumen production capacity of the SAGD facilities is approximately 72,000 bbls/d (36,000 bbls/d net to Nexen).

Construction and commissioning of the upgrader continues and we have completed construction of the hydrocracker, the OrCrude(TM) unit and all main plant utilities. We are on track to complete construction of the gasifier, the air separation unit and the sulphur recovery unit in sufficient time for first production of synthetic crude oil in mid 2008. We anticipate production of premium synthetic crude to ramp up over a 12 to 18 month period after initial upgrader start up. The upgrader is designed to produce approximately 60,000 bbls/d (30,000 bbls/d net to Nexen) of premium synthetic crude.

"We are excited about bringing our first oil sands project on stream next year," said Fischer. "At current natural gas prices we expect to enjoy a cost advantage of approximately $10/bbl over competing technologies once Long Lake is fully ramped up as our patented process almost eliminates the need for purchased natural gas."

Ettrick - On track for first production in 2008

Our Ettrick development in the North Sea is progressing well towards first oil in mid 2008. This development project comprises three subsea production wells and one water injector tied back to a leased floating production, storage and offloading vessel (FPSO). 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. We expect to ramp up to full production of approximately 25,000 boe/d gross by the end of the year. Our share of production from this field is expected to average approximately 9,000 boe/d in 2008. We operate Ettrick with an 80% working interest.

"The North Sea is important to our overall growth strategy. Ettrick, along with our recent discovery at Golden Eagle, is a great example of our ability to add value in this core area," commented Fischer.

Other - Longhorn and CBM

The original discovery well at Longhorn in the Gulf of Mexico was drilled in 2006 with a pre-drill resource estimate of between 60 and 250 bcfe. Earlier this year, we completed drilling an appraisal well which exceeded our expectations and encountered approximately 400 feet of net gas pay in multiple sands. We expect to sanction development of the Longhorn discovery in early 2008, with first production in 2009. The Longhorn development comprises subsea tie-backs to an existing platform and we expect to invest almost $70 million here in 2008. We have a 25% non-operated interest in this development.

We have scaled back capital investment on our CBM projects in 2008 in light of the uncertainty that exists around proposed changes to Alberta's royalty regime but we are optimistic that final royalty regulations will continue to support the economic development of Alberta's unconventional gas resource. In the Fort Assiniboine area, we plan to tie-in 19 wells and drill three new horizontal wells. We expect CBM production will continue to increase in 2008 as existing wells continue to dewater and the additional wells are tied in.

Core Asset Development - Maximizing Value

We plan to invest approximately $600 million on our core assets in 2008 with just over half of this amount planned for our North Sea assets. At Buzzard, we plan to drill five production wells, two sidetracks and one water injector, and we plan to commence construction work on a fourth platform which will contain production sweetening facilities designed to handle higher levels of hydrogen sulphide previously identified in the reservoir. Existing equipment and processes on the Buzzard platform can maintain current deliverability until the additional equipment is commissioned in 2010.

"The additional platform to deal with future hydrogen sulphide has a relatively modest capital cost considering that we expect Buzzard to generate approximately $1.9 billion of pre-tax cash flow in 2008," said Fischer.

Elsewhere in the North Sea, we plan to drill, complete and tie-in two development wells at Scott and Telford.

In the Gulf of Mexico, our development program will focus on the deep-water. At Green Canyon 6, we expect to spud a well late this year and commence completion operations in the first quarter of 2008. Production from this well is expected to add approximately 5,000 boe/d to our annual volumes. At Gunnison, a subsea development well is planned that will be tied-back through existing flowlines to the Gunnison Spar. On the shelf, a total of nine recompletion projects are planned in the Eugene Island and Vermilion areas.

In Canada, we plan to invest almost $80 million to maximize value from our heavy oil and natural gas assets. At Syncrude, we plan to invest approximately $45 million in sustaining capital projects.

In Yemen, we expect to drill six development wells and four sidetracks at Masila to manage declines and ensure we recover remaining reserves as economically as possible. On Block 51, we plan to drill, complete and tie-in five development wells.

"Yemen remains a core asset for us and is expected to generate approximately 15% of our projected 2008 cash flow," commented Fischer.

Early-Stage Development - Exciting Future Growth Opportunities

In 2008, we plan to invest approximately $400 million in a number of early-stage development projects. In the oil sands, our capital investment plans will allow us to advance detailed engineering on SAGD and upgrader facilities for future phases of Long Lake and drill appraisal wells to further assess our leases.

"The first phase of Long Lake only develops about 10% of our 5.5 billion barrels of recoverable bitumen," said Fischer. "In 2008, we plan to invest approximately $150 million in future phases of oil sands, and we are working towards sanctioning Phase 2. Sanction timing depends on accumulating sufficient operating history from Phase 1 and receiving clarity regarding climate change regulations and pending changes to Alberta's royalty regime."

Offshore West Africa, we plan to invest approximately $165 million primarily to progress the development of our Usan discovery on Block OPL-222. 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 FPSO which will contain two million barrels of storage capacity. Once the Usan development is formally sanctioned, the major deep-water facilities contracts will be awarded. We have a 20% interest in exploration and development on this block.

Elsewhere, we are assessing development alternatives for our Golden Eagle discovery and for Selkirk in the UK North Sea. We have a 34% and a 38% operated working interest at Golden Eagle and Selkirk, respectively.

"We are excited by the value that these projects will deliver for our shareholders," commented Fischer.

Exploration - Building on our Successes

We plan to invest approximately $600 million in our 2008-exploration program and we expect to drill up to 11 exploration wells in the Gulf of Mexico, the North Sea and Yemen. In total, this will test approximately 800 million boe of unrisked resource potential (approximately 300 million boe net to Nexen).

In the Gulf of Mexico, we plan to drill three deep-water wells and one shelf gas well. Two of the three deep-water wells will test sub-salt Miocene prospects. At Knotty Head, we continue to pursue rig availability to allow us to spud an appraisal well in mid 2008 and we have contracted two new deep-water drilling rigs that are scheduled to arrive in mid 2009 and 2010. In addition, we plan to drill an appraisal well at Vicksburg.

We were recently named the high bidder on 30 offshore blocks in the Central Gulf of Mexico Outer Continental Shelf Lease Sale 205. These awards are subject to the approval of the Minerals Management Service section of the US Department of the Interior, which is expected to occur before the end of the year. Our current deep-water portfolio totals approximately 230 blocks in the Gulf, which contains several exciting sub-salt drill-ready prospects.

In the UK North Sea, we plan to drill six exploration wells in 2008 as well as appraisal wells at Bugle and Kildare. As part of our growth strategy in the North Sea, we have acquired interests in six exploration licenses in Norway and we recently opened an office in Stavanger. We are also awaiting results of bids submitted in a recent Norwegian exploration licensing round. In 2008, we plan to participate in upcoming licensing rounds and invest capital on seismic and geologic studies. We expect to drill our first exploration well in Norway in 2009.

We have secured a material land position of approximately 123,000 acres in northeast British Columbia on an emerging Devonian shale gas play which has the potential to be one of the most significant shale gas plays in Canada. In 2008, we plan to complete and test the two vertical wells we drilled last winter and drill and complete three horizontal wells. In addition, we plan to drill two vertical wells on a second lease in the area to acquire reservoir information.

Elsewhere, we expect to drill one exploration well on Block 51 in Yemen.

"We have an attractive, high-impact exploration program in place for next year," said Fischer. "We have secured drilling rigs for most of our 2008 drilling campaign and we are working with our partners to secure the remaining rigs required."

Improvement Initiatives Underway

"While we have delivered significant production growth this year, we have fallen short of the expectations we set for ourselves," commented Fischer. "The low end of our original 2007 net production guidance was 230,000 boe/d and we will miss this by approximately 9%, as a result of ramp-up delays at Buzzard, Long Lake, Wrigley and CBM coupled with disappointing results from development drilling at Aspen. At Buzzard, commissioning of all systems took longer than expected. At Long Lake, project start up was deferred approximately six months to allow for completion of the air separation and sulphur recovery units. Limited host platform heating capability restricted production rates at Wrigley, and in CBM, our progress was slowed by partner constraints and well reliability. Despite these setbacks, project returns have not been significantly impacted."

We have put plans in place to address these issues. We have restructured our North American operations so that we can focus more resources on our US assets. In the North Sea, the successful ramp-up of Buzzard, one of the few worldwide mega projects to come on stream on time and on budget in the last several years, allowed us to achieve significant production growth in 2007. As we move forward with this asset, we are providing more resources to maintain uptime reliability so that the platform consistently operates at full rates. At Long Lake, we are taking the lessons learned from Phase 1 and other projects and working them into our plans for subsequent phases. And in CBM, we have cautiously allocated capital following the uncertainty caused by proposed changes to Alberta's royalty regime.

"We are making improvements to our project execution strategies and I believe we have a bright future," added Fischer. "We have accumulated an enviable resource base in all of our core areas at a time when access to resource has become increasingly more difficult. We are building value with our inventory of world class early-stage developments at Usan offshore Nigeria, at Knotty Head in the Gulf of Mexico and in the Athabasca oil sands, and we have successfully transformed our production profile towards higher quality barrels. Compared to our peers, we are starting to generate significantly higher company-wide operating cash netbacks per barrel, which, in some cases, are better by over 50%. This effectively means that for every barrel we produce, some of our competitors have to produce up to one and a half barrels to generate the same cash flow."


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