Ongoing North Sea Exploration Success Highlights Nexen's Q2 Results

Block 13/21b-7, Golden Eagle, & Buzzard
(Click to Enlarge)

Nexen announces second quarter results highlighted by exploration success in the UK North Sea. A summary of the quarter is as follows:

  • Production before royalties of 240,000 boe/d-impacted by scheduled downtime at Buzzard and Syncrude
  • Current production volumes approximately 260,000 boe/d; third quarter volumes expected to be lower as a result of planned maintenance downtime; fourth quarter volumes expected to be higher as new fields ramp up
  • Ongoing exploration success in the UK North Sea at Hobby-significant development potential for the Golden Eagle area
  • Long Lake-record steam injection driven by water treatment modifications; bitumen volumes ramping up; reservoir performing well

Global Exploration-Delivering exciting results

UK North Sea

The Golden Eagle area is emerging as a potential significant development opportunity. Our current estimates of recoverable resource are at the high end of our pre-drill estimates. We expect development of the area will be economic at approximately US $40/bbl and should support standalone facilities with project sanction targeted for 2010.

In 2007, we drilled the initial Golden Eagle discovery well in what is now the Golden Eagle area. This well, and a subsequent sidetrack to the north, indicated the presence of a high quality reservoir and testing of the initial discovery well demonstrated production rates of approximately 5,000 boe/d. Net pays of 150 feet and 60 feet were encountered in the discovery and sidetrack wells, respectively.

In 2008, we drilled our Pink discovery well further south, between the Golden Eagle discovery well and Buzzard. We encountered 57 feet of net pay in a high quality reservoir, which was primarily light oil from Upper Jurassic Burns sands. We successfully sidetracked the well to the west and encountered 134 feet of net oil pay. In addition, we have recently completed an appraisal well here and the results are being assessed.

In January 2009, we drilled the Hobby discovery. The well encountered light sweet oil with an API of 37 degrees and was tested at a constrained rate of 5,550 bbls/d with a 56/64 inch choke. We have subsequently drilled three successful sidetracks from the discovery well and an appraisal well. In the second half of the year, we expect to continue the appraisal drilling program for the Hobby discovery. We have a 34% operated interest in both Hobby and Golden Eagle and a 46% operated working interest in Pink.

"The success we are having in the Golden Eagle area is coming from hard to find, stratigraphic traps. These discoveries come from the same exploration team that found Buzzard, one of the largest stratigraphic traps in the UK," commented Romanow. "Our geological model is working well in this mature basin and we intend to leverage this knowledge as we move forward with our exploration programs in the North Sea."

Offshore West Africa

We recently completed drilling an exploration well in the southern portion of Oil Prospecting License (OPL) 223, Offshore West Africa.

The Owowo South B-1 well was drilled in a water depth of 670 meters and is located 20 kilometers northeast of the Usan field, currently under development. We expect to announce drilling results shortly.

Under the production sharing contract governing OPL 223, the Nigerian National Petroleum Corporation (NNPC) is concessionaire of the license, which is operated by Total Exploration & Production Nigeria Ltd. (18%) with its co-venturers: Nexen Petroleum Exploration & Production Nigeria Ltd. (18%), Chevron Nigeria Deepwater F Ltd. (27%), Esso Exploration and Production Nigeria (Upstream) Ltd. (27%) and Nigerian Petroleum Development Company (NPDC) Ltd. (10%).

Deepwater Gulf of Mexico

In the Eastern Gulf of Mexico, we have previously made two discoveries at Vicksburg and Shiloh. We are currently reviewing tie-back options to existing platforms for the Vicksburg discovery and expect to drill an appraisal well here in 2010. In addition, we recently spud the Antietam prospect, which is located three miles west of our Shiloh discovery. Drilling results are expected in the third quarter. Later this year, we also expect to drill an exploration well at Appomattox, about six miles west of Vicksburg. We have a 25% interest in Vicksburg and a 20% interest in Antietam, Appomattox and Shiloh, with Shell operating all four.

"By focusing where we have had success, our global exploration program is delivering excellent results," said Romanow, "We are leveraging talent and learnings across our select basins and the discoveries we are making are adding significant upside to our strong portfolio of identified growth projects."

Long Lake-Bitumen volumes responding to record steam injection rates

The ramp up of Long Lake is progressing and the reservoir continues to perform as expected given the amount of steam that has been injected. Steam volumes have been limited by our ability to treat water.

In May, we successfully completed a project to add supplementary heat to the hot lime softeners ("HLS") in the water treatment plant. We also completed routine maintenance work to remove deposits which typically build up in water treatment plants. Steam production increased in June and we have achieved record injection rates of approximately 95,000 bbls/d and gross bitumen production rates of approximately 18,000 bbls/d. There are currently 41 of 81 well pairs on production and we are producing at a steam to oil ratio ("SOR") which ranges between 4.0 and 5.0. We continue to expect a long term SOR of 3.0, over the life of the project.

Bitumen production volumes for the second quarter set a new record and averaged approximately 14,300 bbls/d (gross), an increase of 7% over the first quarter. Production volumes have been impacted by downtime associated with improvements made to the HLS units. We plan to replace valves and conduct maintenance on our water treatment plant during the third quarter to further optimize our steam production. The cost of these activities will not be significant and will result in scheduled downtime in the third quarter, impacting bitumen and premium synthetic crude (PSC(TM)) production. As steam generation increases, all wells will be converted to production mode.

With respect to the Upgrader, all major units are operational and Syngas is being used in SAGD operations. This allows us to decrease operating costs by reducing the requirement for purchased natural gas. The solvent de-asphalter and thermal cracker units are expected to start shortly and will allow us to transition from gasifying vacuum residue, which contains some lighter parts of the barrel, to gasifying asphaltenes, the heaviest part of the barrel. As a result, we expect our PSC(TM) yield to increase from approximately 60% to 80%.

During the ramp up phase, we expect periods of downtime but anticipate that the stability of operations will continue to improve. We expect to reach full design rates of 72,000 bbls/d of gross bitumen production, upgraded to approximately 60,000 bbls/d (39,000 bbls/d, net to us) of PSC(TM) in 2010. We have a 65% interest in the Long Lake project and joint venture lands. We are the sole operator of the resource and upgrader. This allows us to maximize operational efficiencies and reduce the cost of managing the project.

"The reservoir at Long Lake continues to meet expectations," commented Romanow. "Water treatment issues have limited production to date, but we have identified and continue to implement cost effective solutions. We are committed to a safe and reliable start-up. Long Lake will generate significant value with 40 years of production at a $10/bbl margin advantage."

UK North Sea-First oil at Ettrick scheduled in the next few weeks

Our Ettrick development in the North Sea is expected to produce first oil in the next few weeks. The project is expected to add approximately 12,000 to 16,000 boe/d to our production volumes for the remainder of the year. Ettrick will produce to a leased floating production, storage and offloading vessel (FPSO) designed to handle 30,000 bbls/d of oil and 35 mmcf/d of gas. We have a discovery at Blackbird which could be a future tie-back to Ettrick. We operate both Ettrick and Blackbird, with an 79.73% working interest in each.

Gulf of Mexico Upcoming Drilling Schedule

Nexen reported that at the Knotty Head prospect, also in the Gulf of Mexico, the company plans to start drilling an appraisal well in the fourth quarter of 2009 after the first of our two new deepwater drilling rigs arrives. The rig left the Singapore shipyard in mid-June and is expected to enter the Gulf of Mexico in August and begin deepwater sea trials. This new rig has been contracted at attractive day rates, which are significantly better than industry average. Nexen is currently negotiating the terms of an agreement to jointly develop Knotty Head and Pony. The company has a 25% operated interest in Knotty Head.

Horn River Shale Gas-Well tests confirm high quality resource

During the quarter, we put two horizontal wells on production that were drilled last summer and completed in the first quarter. Initial production rates for the first month averaged 850 mcf/d per frac. These results are in line with previous tests and those of our competitors. We drilled three additional wells earlier this year and we recently began fracing these wells. We are starting to see efficiencies in our shale gas program as the time to complete the initial fracs in our new program is substantially less than our previous experience. We plan to complete and tie-in these wells in the third quarter. By the end of the year, we expect to have six wells on production at a total exit rate ranging between 12 and 18 mmcf/d.

Our drilling activity to date has allowed us to secure tenure on the majority of our Dilly Creek lands. Only two more wells are required to secure the remainder. Primary tenure in the Horn River basin is four years and drilling activity and extensions increases this up to 18 years.

The Horn River basin has the potential to become the most significant shale gas play in North America as it has the highest resource density and excellent well productivity. We have approximately 88,000 acres in the Dilly Creek area and 38,000 acres in the Cordova area in northeast British Columbia with a 100% working interest in each. As previously announced on April 22, 2008, we estimate that our Dilly Creek lands contain between 3 and 6 trillion cubic feet (0.5 to 1.0 billion barrels of oil equivalent) of recoverable contingent resource which could double our total proved reserves. Further appraisal activity is required before these estimates can be finalized and commerciality established.

"Our most recent well tests continue to confirm the resource quality of our Horn River shale gas play," said Romanow. "The long land tenure we have secured gives us significant optionality in pacing our development, allowing us to focus on creating value as gas prices warrant, rather than managing land expiries."

Offshore West Africa-Usan development continues

Development of the Usan field on block OML 138, offshore Nigeria is fully underway. The field development plan includes a FPSO vessel with a storage capacity of two million barrels of oil. Development drilling has begun and throughout the course of the year the FPSO hull will be constructed. The Usan field is expected to come on stream in 2012 and will ramp up to a peak production rate of 180,000 bbls/d (36,000 bbls/d net to us). Nexen has a 20% interest in exploration and development along with Total E&P Nigeria Limited (20% and Operator), Chevron Petroleum Nigeria Limited (30%) and Esso Exploration and Production Nigeria (Offshore East) Limited (30%).


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