Nexen Boosts Bitumen Volumes by 10% at Long Lake Project

Nexen provided the following Long Lake project update.

In the fourth quarter, bitumen volumes increased by 10% over the previous quarter to 28,100 bbls/d (gross).

Bitumen volumes have more than doubled following the successful facility turnaround in the third quarter of 2009 when we replaced valves in the water treatment system, cleaned out the hot lime softeners and isolated the water treatment trains. Absolute operating costs increased about 10% year-over-year as we added resources to improve operating reliability of the SAGD and upgrader. During 2010, they have remained relatively constant. We expect them to remain relatively flat as we ramp-up to full capacity, with declines in ramp-up related costs offsetting increases in variable costs. We expect unit operating costs to be $25 to $30 per barrel at full capacity.

In December, the project produced 29,000 bbls/d, matching our previous monthly high achieved in October. We generated positive operating cash flow for the month, the second time we have achieved this milestone. January production has averaged 27,000 bbls/d, reflecting steam interruptions and downhole pump failures.

During December and January, we injected our highest steam volumes of 172,000 and 156,000 bbls/d, respectively. While fluid returns have risen, the bitumen production has not increased proportional to the steam injection. While some lag between steam increasing and bitumen production increasing is expected, we also believe some of the steam is heating high water saturation zones. Our experience on the pilot wells and Pad 7N has given us the confidence that once these zones are heated, bitumen rates and steam to oil ratios (SORs) should improve. Our geologic data analysis indicates higher water saturation zones make up only 3 to 5% of our reservoir by volume.

Our three pilot wells were drilled on an area of the lease with a higher concentration of these zones. The SOR on these wells initially declined to under 4, and then began to rise as the steam encountered these zones. The pilot was temporarily suspended in 2006. With the start-up of the commercial SAGD operation in 2008, we re-heated the pilot wells and after steaming through the zone of higher water saturation, two of those wells are now producing in line with our design expectations of 700 bbls/d per well pair of oil at an SOR of 3.0, while the third well is restricted due to mechanical well bore issues.

We also saw this behavior on Pad 7N, which is located on some of our highest quality reservoir. Once again, after ramping-up quickly, bitumen volumes stopped growing and SORs rose as we encountered a high water saturation zone. Once we steamed through it, performance improved and now it is, as expected, our best performing pad with five wells averaging 1,200 bbls/d per well pair at an SOR of 2.3.

Our experiences with the pilot wells and Pad 7N have provided us with valuable knowledge in dealing with our reservoir. We've learned that it's important to continue to inject consistent steam when we encounter these high water saturation zones and to lift all produced fluids with appropriate pumping and water-handling capacity. While we heat through them, there are times when we are returning up to 10% more water than we are injecting as opposed to the more usual 5 to 10% water losses. This occurs as the steam displaces formation water in these zones. As we currently have limited water disposal capacity this results in the need to limit production of fluids to achieve overall water balance with a resulting impact on bitumen volumes. We expect to increase our water disposal capacity in the next few months using existing disposal well capacity and low cost de-bottlenecking of facilities.

Various initiatives are underway to move us towards achieving our expectations of 600 to 800 bbls/d per well pair of bitumen at an SOR of 3 to 4. The increased reliability and availability of steam is allowing us to heat through these high water saturation zones faster. The expansion of our gas inlet capacity will allow us to generate more steam, with more consistent fuel availability independent of day-to-day upgrader operations. Pads 12 and 13 will be available for start-up next year, and the addition of two once-through steam generators will increase our steam capacity by late next year. In the meantime, bitumen rates and SORs will be variable as we steam through these zones with higher water saturations.

"The insight we gained from operating the three pilot wells and Pad 7N, and continuing to follow our convictions that zones with higher water saturation can be overcome has confirmed that our operating strategy is sound. And with the various initiatives we have underway, we have confidence we'll get the upgrader full," commented Marvin Romanow, President and CEO. "We are confident our company-wide production guidance for the year continues to be reasonable, despite downside risk to our production guidance at Long Lake due to variable volumes and SORs during our ramp-up."