Nexen Expects Production to Surge in 2007

In 2007, Nexen plans to invest approximately $2.9 billion in value added projects.

Strong Growth in 2007 and Beyond

For the past several years, we have invested significant capital in several major high-margin projects. The Syncrude expansion came on stream in mid-2006. Buzzard is expected to come on stream shortly and ramp up to full production during the first half of 2007. In the Gulf of Mexico, additional development wells at Aspen and development at Wrigley will add to our 2007 production profile. We also expect the Long Lake upgrader to come on stream in the second half of 2007 and reach full production of premium synthetic crude within six to 18 months of upgrader start up.

These projects will generate approximately 50% growth in our production, net of royalties, and significant free cash flow.

                                      2007                    2006
                              Estimated Production    Estimated Production
                              Before         After     Before        After
                           Royalties     Royalties  Royalties    Royalties
Core Asset Development       (mboe/d)      (mboe/d)   (mboe/d)     (mboe/d)
US Gulf of Mexico(1)           45-55         38-48      34-36        29-31
U.K. North Sea                90-100        90-100      19-21        19-21
Yemen                          60-75         35-45      92-94        50-52
Canada(2)                      45-50         38-42      37-39        30-32
Syncrude                       20-25         18-20      18-20        16-18
Other International(3)           6-7           5-6        6-7          5-6
Total                        275-305       230-260    212-214      158-160

(1) US natural gas production is estimated to comprise 49% of total US
    equivalent production in 2007.

(2) Production includes volumes from Long Lake in the Athabasca oil sands.
    Canadian natural gas production is estimated to comprise 59% of total
    Canadian equivalent production in 2007.

(3) Substantially all production is from Colombia.

Assuming average production of 300,000 boe/d before royalties, WTI oil price of US$50/bbl, NYMEX gas price of US$6/mmbtu, operating costs of approximately Cdn$8/boe and a US/Cdn exchange rate of US$0.88, we expect cash flow to increase by approximately 25% to $3.3 billion.

Each US$1.00 increase in oil prices adds about $73 million to our cash flow, whereas a decline in WTI below US$50/bbl reduces cash flow by about $42 million. We have purchased put options with a strike price of US$50/bbl on 105,000 bbls/d of our 2007 crude oil production. A US$0.50 change in natural gas prices impacts our cash flow by about $33 million and a US$0.01 variation in the exchange rate impacts our cash flow by about $35 million.

The new production we are adding at Buzzard and Syncrude features lower royalties and better margins than our average production. As a result, if prices in 2007 are the same as 2006 on average, our cash flow growth would be about 70%.

"In 2007 we start to reap the benefits of our investments in oil sands, CBM and the North Sea," commented Charlie Fischer, Nexen's President and CEO. "These are significant opportunities which will define Nexen's strategy for years to come."

Investing $2.9 Billion in Value Accretive Projects

In 2007, capital will be allocated as follows:

  • 35% in major development projects. These include Long Lake, coalbed methane (CBM), Ettrick and Wrigley;
  • 24% in our existing producing assets;
  • 14% in early-stage development projects expected to contribute production and cash flow growth beyond 2007. These include Knotty Head, Alaminos Canyon Block 856, Tobago and Ringo in the Gulf of Mexico, additional phases of oil sands in the Athabasca region and Block 222 offshore West Africa; and
  • 24% in exploration opportunities in our growth areas.

                                            Estimated 2007  Estimated 2006
Capital Investment Profile                 ($millions)   % ($millions)   %
Major Development                               1,000   35      1,650   49
Core Asset Development                            700   24        800   23
Early-stage Development                           400   14        300    9
Total Development                               2,100   73      2,750   81
Exploration                                       700   24        525   15
Oil and Gas                                     2,800   97      3,275   96
Other                                             100    3        125    4
Total Capital                                   2,900  100      3,400  100

"This budget reflects our commitment to building sustainable businesses in Canada, the Gulf of Mexico, the North Sea, and offshore West Africa," said Fischer. "Each of these businesses will be anchored by a world-class producing asset that combines large reserves and anticipated high margins to provide superior returns and sustained value creation."

Maximizing Value from Core Producing Assets

Buzzard is one of the largest oil fields to be discovered and developed in the U.K. North Sea in over a decade. The field is expected to come on stream before year-end and to ramp up to its peak production rate of 200,000 boe/d (85,000 boe/d net to Nexen) during the first half of 2007. "Inclement weather over the last few weeks has impacted final commissioning of the facilities," said Fischer. "This minor delay has no impact on our ramp up or peak production rates."

In 2007, we plan to invest approximately $130 million at Buzzard. The majority of this will be invested to pre-drill and complete 11 future production and injection wells. Buzzard is a very attractive project, which generates high margins. At peak production, we expect Buzzard to generate approximately $1.6 billion of annual pre-tax cash flow for us, assuming oil prices of US$50/bbl. Elsewhere in the North Sea, we plan to drill, complete and tie-in three development wells in the Scott/Telford area.

In the Gulf of Mexico, our development program will focus in the deep water where we plan to drill and tie-in another development well at Aspen. On the shelf, we will focus on gas opportunities in the Eugene Island and Vermilion areas.

In Canada, we remain focused on maximizing value from our conventional assets. In 2007, we expect to drill approximately 165 infill wells and continue optimization activities on these assets. At Syncrude, the Stage 3 expansion came on stream in mid-2006, adding 8,000 bbls/d of incremental synthetic crude oil capacity. We plan to invest approximately $50 million in sustaining capital at Syncrude.

In Yemen, we expect to drill 23 development wells to manage declines and ensure we recover the remaining reserves in the most economical manner. Yemen continues to generate significant free cash flow for our company.

Major Development

Over one-third of our 2007 capital program is focused on advancing significant development projects in our key growth areas.

Major Development Capital                                   Estimated 2007
Investment Profile                                              ($millions)
Long Lake                                                              500
U.K. North Sea - Ettrick                                               200
Fort Assiniboine CBM                                                   200
Other                                                                  100
Major Development                                                    1,000

"These projects were inventoried when commodity prices were much lower," said Fischer. "These are great long-term assets that are expected to generate attractive full-cycle returns."

Long Lake SAGD Steaming in early 2007, Upgrader start-up in second half 2007

Approximately 50% of our major development capital in 2007 will be invested at our Long Lake project in the Athabasca oil sands where we plan to invest approximately $500 million, including capitalized interest. Long Lake continues to progress well. The SAGD facilities are approximately 95% complete and we expect SAGD operations to be mechanically complete near year-end 2006. Steam injection is expected to commence in the first quarter of 2007, with bitumen production ramping up to peak rates over a 12 to 24 month period. For the first six months of SAGD operation we will largely be heating the reservoir. During this period, steam to oil ratios will be high but will decline with time as bitumen production ramps up to our target rates. Depending on our actual start up date and the amount of downtime at our facilities, 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, with a steam to oil ratio of between 3.5 and 4.0. We expect the steam to oil ratio to average approximately three over the long-term.

Upgrader module fabrication is largely complete and over 95% of the modules are on site. Construction of the upgrader is approximately 75% complete and start up is scheduled for late 2007. Peak output of premium synthetic crude oil is expected within six to 18 months of upgrader start up and we expect to exit 2007 between 28,000 and 36,000 bbls/d (between 14,000 and 18,000 bbls/d net). 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.

"By gasifying the bottom of the barrel, we produce our own fuel for steam generation and hydrogen for upgrading, creating a significant cost advantage," said Fischer. "In 2009, we expect to fully realize this cost advantage, and it will continue in the years to come as we develop additional phases of the oil sands using the same technology."

Ettrick Development Progresses

Our Ettrick development in the North Sea is approximately 30% complete and progressing as expected. Ettrick includes three production wells tied back to a floating production, storage and offloading vessel (FPSO). Modifications to the FPSO hull are ongoing and development drilling is expected to begin in early 2007. First production is expected in the first half of 2008, with our share reaching approximately 16,000 boe/d. We operate Ettrick with an 80% interest.

"This is a solid project that adds certainty to our production profile beyond 2007," said Fischer. "The North Sea is important to our overall growth strategy and Ettrick is an example of our ability to add value in this core area."

CBM Development Ongoing

We are continuing to develop our Upper Mannville CBM assets in the Fort Assiniboine area of Alberta. In 2007, we plan to invest approximately $200 million to develop 98 gross (41 net) sections in the Corbett, Thunder and Doris fields using multiple-leg horizontal wells and construct gas gathering and processing facilities. We expect our total production from our CBM lands to grow to approximately 75 mmcf/d by the end of 2007.

"We are targeting to add approximately 150 million cubic feet of daily CBM production by 2011," said Fischer.

Early-Stage Development - Exciting Future Growth Opportunities

In 2007, we plan to invest approximately $400 million in a number of early-stage development projects. "These projects are natural extensions of our core expertise and knowledge, and will provide low risk growth and attractive returns into the next decade," said Fischer.

In the oil sands, 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 additional 60,000 bbls/d (30,000 bbls/d net) projects using the same technology and design as Long Lake.

In 2007, we plan to invest approximately $170 million to advance our oil sands strategy outside of Phase 1, including $125 million in Phase 2 development. Phase 2 is well advanced with seismic and core hole drilling programs complete, several major vessels ordered and regulatory applications finalized. We continue to develop our overall execution strategy, cost estimate and project schedule and expect to have approximately 30% of engineering complete prior to sanctioning Phase 2 in early 2008.

Offshore West Africa, we plan to invest approximately $140 million. This includes funds to progress the development of our Usan discovery on Block 222. The development will include a FPSO with a storage capacity of two million barrels, capable of handling peak production rates of 160,000 bbls/d of oil. In 2007, we expect to complete our cost estimate and sanction this project, with first production expected as early as 2010. We have a 20% interest in this development program.

In the Gulf of Mexico, we expect to invest approximately $55 million for pre-feed and development work at Knotty Head, Alaminos Canyon Block 856, Tobago and Ringo. We have a 25% interest at Knotty Head, a 30% interest at Alaminos Canyon Block 856, a 10% interest in Tobago and a 50% interest at Ringo.

"We are well positioned for the future as these projects are expected to provide production growth and create shareholder value well into the next decade," commented Fischer.

Exploration - Building on our Successes

Our 2007 exploration program builds on recent successes, including major discoveries at Knotty Head in the Gulf of Mexico and on Block 222 offshore West Africa. We plan to invest approximately $700 million to drill up to 19 exploration wells in the Gulf of Mexico, offshore West Africa, North Sea, Colombia and Yemen. In total, we will test approximately one billion boe of unrisked resource potential (400 mmboe net to Nexen).

                                                            Estimated 2007
Exploration Capital Investment Profile                          ($millions)
US Gulf of Mexico                                                      325
North Sea                                                              125
Unconventional Gas                                                      50
West Africa                                                             50
Yemen Block 51                                                          50
Other                                                                  100
Exploration                                                            700

In the Gulf of Mexico, we plan to drill four deep-water prospects and five shelf gas prospects. Two of these deep-water prospects are in the subsalt Miocene play, on trend with our Knotty Head discovery.

In the U.K. sector of the North Sea, we plan to drill five exploration wells in 2007. As part of our growth strategy in the North Sea, we recently participated in a bid round for exploration rights offshore Norway and expect to invest approximately $30 million in additional seismic and geologic studies there.

We expect to drill at least one deep-water exploration well offshore West Africa, three exploration wells on Block 51 in Yemen, and one in Colombia.

We also continue to focus on large unconventional resource opportunities in Canada. In 2006, we acquired approximately 100 sections of prospective shale gas acreage in northeast British Columbia. In 2007, we expect to begin evaluating this emerging play.

We have drilling rigs secured for the majority of our drilling program next year. We are confident that we will be able to secure the remaining rigs required to complete our program.

"Looking forward to 2007, I am excited about our planned projects," said Fischer. "Our major projects are progressing well, and our exploration program is delivering results. Also, with no fixed price hedges in place, we are benefiting fully from high commodity prices and are on track for another great year."

Governance - Majority Vote By-law Adopted

Our Board of Directors has revised our corporate by-laws regarding Director re-election. Prior to the revision, Directors only required a single vote in order to be appointed to the Board. The by-laws now require that a Director receiving a majority withhold vote in an uncontested election submit a resignation to the Board. The Board will decide whether to accept the resignation and will publicly disclose the reasons for its decision. "We feel this is a transparent review process where a Director-elect does not receive a majority of shareholder support," said Francis Saville, Q.C., Board Chair. "The Board will review the resignation and may reject it, if, for example, the issue was curable - such as removing the director from a particular committee." Our by-laws are available on our website at

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.