Ettrick Ettrick and surrounding fields
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In 2009, Nexen plans to invest $2.6 billion in oil and gas projects and grow net production by approximately 10%.
- Production, net of royalties, to grow approximately 10% compared to 2008 and range from 220,000 to 235,000 boe/d (250,000 to 265,000 boe/d before royalties)
- Expected cash flow of between $2.3 and $2.9 billion assuming WTI averages between US$50/bbl and US$65/bbl
- Oil and gas capital investment plans of $2.6 billion
- Plan to drill eight exploration and six appraisal wells, testing approximately 750 mmboe of unrisked resource potential (240 mmboe, net to us)
Our Financial Position is Strong
For the past several years, we have invested significant capital in a number of major development projects including Buzzard and Long Lake. The investment in these projects is largely behind us and they will make significant contributions to our cash flow for many years to come. Our Ettrick and Longhorn projects will start up in 2009 and also contribute cash flow. The cash flow from all of these investments allows us to fund our next generation of new growth projects, such as Usan, offshore West Africa and shale gas in the Horn River basin.
For 2008, we expect to generate more than $1 billion of free cash flow. We are using this free cash flow to repurchase shares and build our cash balances. This positions us well as we enter 2009, since we have about $1.8 billion of cash and over $2 billion of undrawn committed credit lines. We have no debt maturities over the next few years and the average term of our public debt is approximately 20 years. Our upcoming capital investment plans position us well to pursue our next generation of growth while preserving our liquidity.
"Our 2009 capital investment program will allow us to meet our commitments, pursue our strategic opportunities and preserve our liquidity," said Marvin Romanow, Nexen's Executive Vice President and CFO, and incoming President and CEO. "We are well positioned to pursue the opportunities in our attractive portfolio without compromising our financial position and we have choices to adjust our capital investment as the economic environment unfolds."
In the North Sea, Buzzard continues to exceed expectations and is a significant contributor to our 2009 production. Our estimate for Buzzard includes a month of downtime in the third quarter, which coincides with a six week slowdown of the Forties pipeline, to install the jackets for the fourth platform and complete tie-in operations pending installation of the topsides. This platform will allow us to handle higher levels of hydrogen sulphide and maintain peak production until 2014. At Long Lake, we expect volumes to ramp up to design rates over the next 12 to 18 months. Syncrude will experience downtime in the second quarter as a result of a planned coker turnaround. In the Gulf of Mexico, approximately 20,000 boe/d is still shut in following hurricane damage to third party facilities in the third quarter of 2008. We expect most of our shut in production to be back on-stream in the first half of 2009. This contributes approximately 9,000 boe/d to our annual guidance.
Cash Flow-Driven by Superior Netbacks
Our cash netbacks are among the highest in the industry reflecting the low operating costs and royalties on much of our production. As a result, we are well positioned to handle the recent decline in commodity prices.
Assuming WTI ranges from US$50/bbl to US$65/bbl in 2009, we expect our cash flow to be between $2.3 and $2.9 billion. Our cash flow expectations assume a NYMEX gas price of US$6.50/mmbtu and a US/Cdn exchange rate of US$0.83.
Each US$1.00 increase in benchmark oil prices above US$60/bbl adds about $50 million to our after tax cash flow, whereas a decline in prices below US$60/bbl reduces cash flow by about $40 million. This sensitivity includes the impact of put options purchased on 45,000 bbls/d of our production with an average 2009 strike price of US$60/bbl Brent. A US$0.50 change in natural gas prices impacts our cash flow by about $35 million and a US$0.01 decrease in the exchange rate increases our cash flow by about $35 million.
Capital Investment Plans-Continued Investment in our Next Generation of Growth
In 2009, we plan to allocate our oil and gas capital investment as follows:
- 34% on our existing producing assets, including the fourth platform at Buzzard;
- 31% on major development projects. This allows us to progress Usan, offshore West Africa and bring Ettrick in the North Sea and Longhorn in the Gulf of Mexico on stream in 2009;
- 27% on advancing our Horn River shale gas play and on exploration and appraisal opportunities in our key regions-the North Sea, Gulf of Mexico and offshore West Africa; and
- 8% on early stage development projects expected to contribute future production and cash flow growth. These include future phases of oil sands in the Athabasca region.
Major Development-Progressing Usan
Approximately 31% of our 2009 oil and gas capital investment is focused on advancing significant development projects in a number of key growth areas.
With the project sanctioned and first production expected in 2012, this development project is progressing well. In 2009, we expect to begin fabrication of the FPSO hull and facilities and initiate development drilling. In addition, we plan to complete detailed engineering and procurement of remaining equipment and materials.
In 2009, we will complete the tie-in of the Ettrick development, with first oil expected in the first quarter. We plan to conduct additional development drilling at Ettrick and move forward with an assessment of development options for our adjacent Blackbird discovery.
First production here is expected in mid 2009, ramping up to 200 mmcf/d (50 mmcf/d net to us). Capital investment includes development drilling and installation of facilities.
"We are excited to be bringing on Ettrick and Longhorn this coming year, while Usan is another legacy asset in the making," commented Romanow.
Core Asset Development-Sustaining Buzzard until 2014
We plan to invest approximately $880 million on our core assets in 2009.
At Buzzard, construction of a fourth platform will continue throughout the year. This contains production sweetening facilities designed to handle higher levels of hydrogen sulphide. Existing wells and process equipment can maintain current deliverability until the additional facilities are commissioned in 2010. We also plan to drill four production and two injection wells. At Scott/Telford, we plan to invest in facility improvements and ongoing reservoir development.
In Canada, we have scaled back our investment on mature conventional assets. At Long Lake, we will invest approximately $100 million on phase one activities, primarily on further core hole delineation drilling and the development of Pad 11, which represents the first of our sustaining well pads. At Syncrude, we plan to invest approximately $90 million on the emissions reduction project currently underway and on base plant projects.
In Yemen, we expect to invest $120 million to drill 40 development wells at Masila and on Block 51 in order to maximize the value of these assets over their remaining contract terms. In the Gulf of Mexico, our development program will focus on the deep-water where our drilling and completion activities are expected to add production volumes in 2009 and early 2010.
Early-Stage Development-Continued Commitment to our Oil Sands Leases
In 2009, we plan to invest up to $210 million on early-stage development projects, of which 85% relates to our oil sands leases. These plans allow us to advance detailed engineering on SAGD and upgrader facilities for Phase 2 of Long Lake and conduct core hole drilling to further delineate our leases.
"We are committed to developing our oil sands leases in a measured and responsible manner," said Charlie Fischer, Nexen's President and CEO. "Sanctioning of Phase 2 will depend on numerous factors including the initial performance of Phase 1, receiving regulatory approval for Phase 2 SAGD operations, receiving clarity on proposed climate change regulations, finalizing cost estimates and an improved economic environment."
Exploration and Appraisal-Advancing our Horn River Shale Gas Play
We plan to invest approximately $690 million in our 2009 exploration program. This program has two major components. First, to advance our Horn River shale gas play and second, to drill up to 14 conventional exploration and appraisal wells in the Gulf of Mexico, North Sea and offshore West Africa.
Horn River Shale Gas
In the Horn River basin of northeast British Columbia, we have completed our summer drilling program and have commenced fracing the wells. In 2009, we plan to drill and test seven wells from a single pad to progress our understanding of this play.
We plan to drill up to five exploration and four appraisal wells in the North Sea, including two exploration wells and one appraisal well following up our Golden Eagle and Pink discoveries. We also plan to appraise our Blackbird, Bugle and Polecat discoveries and drill our first exploration well in Norway.
Gulf of Mexico
In the deep-water Gulf, we plan to drill an exploration well and two appraisal wells. With the arrival of our contracted deep-water rig late next year, we plan to drill an appraisal well at Knotty Head. The other appraisal well is expected to be drilled in the Eastern Gulf where we have discoveries at Shiloh and Vicksburg. We have contracted a second deep-water drilling rig that is scheduled to arrive in 2010. With the arrival of these two rigs we are in a position to drill our exciting deep-water exploration program.
"We have an exciting portfolio of opportunities," said Fischer. "The strong cash flow generated by our assets combined with the strength of our balance sheet allows us to pursue high quality opportunities without compromising our financial liquidity. Nevertheless, we are closely monitoring the current economic environment and are ready to adjust our capital program as appropriate."