Nexen Inc. Delivers Strong Results for 2006

Nexen says that strong commodity prices, together with attractive cash operating margins and outstanding contributions from our marketing division, resulted in solid financial results for the fourth quarter and the year.

Fourth quarter cash flow was $673 million, while net income was $77 million. Our marketing division generated $147 million of cash flow in the quarter, primarily through an increase in the value of financial contracts protecting the value of physical storage which will be delivered in the future. Net income for the quarter was reduced by $61 million to adjust the carrying value of certain oil and gas properties located primarily on the shelf of the Gulf of Mexico, $49 million of stock-based compensation expense and $80 million of exploration expense. This includes three unsuccessful wells in the Gulf of Mexico, three wells in Yemen, and one well in Colombia.

Cash flow for the year grew 11% to a record $2.7 billion, while net income was $601 million. Oil prices reached new highs resulting in a 9% increase in our realized commodity price over 2005. In addition, our marketing division had a record year as they were able to leverage their physical inventory and transportation assets, and capitalize on market volatility, primarily in summer/winter natural gas price spreads. These positive contributions were offset by charges which reflected the settlement of the Yemen Block 51 arbitration ($104 million after tax), an increase in the UK tax rate ($277 million) and the reduction in the carrying value of oil and gas assets ($61 million after tax).

"Overall, I am very pleased with our performance in 2006," said Charlie Fischer, Nexen's President and Chief Executive Officer. "We have completed Buzzard and the Syncrude Stage 3 expansion, and made solid progress at our Long Lake project which will start up later this year. Our accomplishments position us for an exciting 2007 as we ramp up production at Buzzard, bring Long Lake on stream, evaluate our recent discoveries and continue our exploration program."

Oil and Gas Production

                Production before Royalties   Production after Royalties
Crude Oil, NGLs          Fourth       Third         Fourth         Third
and Natural Gas         Quarter     Quarter        Quarter       Quarter
 (mboe/d)                  2006        2006           2006          2006
--------------------------------------------- -----------------------------
Yemen                        84          90             52            50
United Kingdom               24          15             24            15
Canada                       38          37             31            30
United States                33          34             28            29
Other Countries               6           7              6             6
Syncrude                     22          20             20            18
                  --------------------------- -----------------------------
Total                       207         203            161           148
                  --------------------------- -----------------------------

                Production before Royalties   Production after Royalties
Crude Oil, NGLs
 and Natural Gas         Annual      Annual         Annual        Annual
 (mboe/d)                  2006        2005           2006          2005
--------------------------------------------- -----------------------------
Yemen                        93         113             52            61
United Kingdom               20          16             20            16
Canada                       38          50(1)          31            40(1)
United States                36          42             31            36
Other Countries               6           5              6             5
Syncrude                     19          16             16            15
                  --------------------------- -----------------------------
Total                       212         242            156           173
                  --------------------------- -----------------------------

(1) Annual volumes include approximately 10,700 boe/d before royalties and
    8,100 boe/d after royalties of production related to asset dispositions
    in 2005.

Our 2006 annual production averaged 212,000 boe/d (156,000 boe/d after royalties) as compared to 242,000 boe/d (173,000 boe/d after royalties) in 2005. Natural declines from our properties in Yemen and the Gulf of Mexico reduced production year over year as did asset dispositions in Canada in mid-2005. Since year end, we have added incremental production at Aspen and Buzzard.

Capital Strategy - Investing in Long-Term, High-Value Production Growth

"We are building material and sustainable businesses in the deep-water Gulf of Mexico, Athabasca oil sands, North Sea and offshore West Africa," said Fischer. "Our projects tend to have longer cycle-times and require significant upfront capital investment." In 2006, we had over $5 billion invested in projects not yet producing oil or cash flow. With Buzzard and the Syncrude Stage 3 expansion now on stream, this investment is translating into production and cash flow. We expect our production after royalties to increase approximately 50%, from 156,000 boe/d in 2006 to between 230,000 and 260,000 boe/d in 2007. We currently have over $2.5 billion invested in non-producing development projects like Long Lake and Ettrick that will deliver additional cash flow and production growth in the future.

As part of our strategy to protect against commodity price downturns while preserving upside to higher prices, we have options in place providing a WTI floor price of US$50/bbl on approximately 38 million barrels of 2007 crude oil production.

2006 Reserves and Capital Results

In 2006, we invested $3.3 billion in oil and gas activities adding 341 mmboe of proved reserves, replacing approximately 440% of our production. Over the past five years we have invested approximately $14 billion and added approximately 749 mmboe, replacing 164% of our production. In 2006, our proved reserve additions include 246 mmboe at Long Lake.

Major and Early Stage Development Projects

Approximately 60% of our 2006 oil and gas invested capital was directed towards early stage and major development projects including Buzzard, Long Lake, Syncrude Stage 3 and coalbed methane (CBM). These projects added approximately 300 mmboe of proved reserves and are characterized by multi-year investments which result in timing differences between reserve additions and capital expenditures.


At Buzzard, we invested $488 million in 2006 to complete the initial development and added 20 mmboe of proved reserves. These reserve additions resulted from both development drilling and an increase in the proved recovery factor. To date, we have recognized 146 mmboe of proved reserves and 267 mmboe of proved plus probable reserves for the Buzzard field. Buzzard is performing as expected with an upward trend in production rates. Daily rates have averaged over 100,000 bbls (gross) in the last week. We are on track to reach peak rates of 200,000 boe/d (gross) by mid-year as we optimize the wells and facility.

Elsewhere in the UK North Sea, we invested $64 million and added 25 mmboe of proved reserves with approximately 70% of these reserves related to our Ettrick development project. Production at Ettrick is expected to commence in the first half of 2008, with our share reaching approximately 16,000 boe/d. We operate Ettrick with an 80% interest.

Synthetic Crude Oil

In 2006, we invested approximately $1.2 billion to develop our insitu oil sands resource. This included approximately $1.1 billion invested at our first phase of Long Lake. In 2006, we converted 246 mmboe of probable bitumen reserves to proved reserves.

Our oil sands strategy addresses the issues of wide differentials and high natural gas and diluent costs which erode the value of insitu bitumen. Our project integrates field upgrading with bitumen production to produce a high quality premium synthetic crude oil and substantially reduces our dependence on natural gas. This results in a significant operating cost advantage of approximately $10/bbl in the current price environment.

Long Lake continues to progress well. The SAGD facilities are in the final stages of commissioning and start up and we expect steam injection to commence at the end of the first quarter of 2007, with bitumen production ramping up to peak rates over a 12 to 24 month period. Upgrader module fabrication is largely complete and over 95% of the modules are on site. Construction of the upgrader is approximately 80% complete and start up is scheduled for late 2007. 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.

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 our five billion barrel recoverable resource with additional 60,000 bbls/d (30,000 bbls/d net) phases using the same technology and design as Long Lake.


At Syncrude, we invested $86 million in 2006 and added 13 mmboe of proved reserves. The Stage 3 expansion was completed in May 2006, and has increased our share of production capacity to approximately 25,000 bbls/d.

Coalbed Methane (CBM)

In Canada, we are developing the first commercial CBM project in Mannville coals. To date, we have recognized 39 mmboe of proved plus probable reserves. In 2006, we invested $237 million in exploration and development activities on our CBM lands, of which $181 million was associated with development. This resulted in the addition of seven mmboe of proved reserves. Mannville CBM is a new play type in Western Canada with no direct analogies. Our ability to recognize proved reserves is limited until we have sufficient production history to assess long-term decline rates. We expect our CBM reserves to grow significantly over the coming years as additional wells are drilled, development work progresses and more production history is obtained.

Offshore West Africa

On Block OPL-222, offshore West Africa, Nigerian authorities have provisionally approved the Usan Field Development Plan. Basic engineering of the facilities is complete and tendering of contracts for all major components is proceeding. The development plan includes a floating production, storage and offloading vessel with a storage capacity of two million barrels, capable of handling peak production rates of 160,000 bbls/d of oil. We expect the Usan development to be formally sanctioned in 2007, with first production as early as 2010. We have a 20% interest in exploration and development on this block.

Investment in Exploration

We invested approximately $620 million in exploration in 2006. This resulted in exploration success in the Gulf of Mexico at Alaminos Canyon Block 856 and Ringo, and at Golden Eagle in the UK North Sea. Approximately $323 million of this capital was invested in land, seismic and other early stage exploration activities. The balance was invested to drill 20 high-impact exploration wells. This added four mmboe of proved reserves and 57 mmboe of probable reserves. We expect to recognize additional proved reserves from these successes as we progress appraisal work and sanction commercial developments.

We have a 50% operated working interest at our Ringo discovery in the Gulf of Mexico and are evaluating a sub-sea tieback to nearby facilities which could be on stream in late 2008. Our current estimate of the recoverable resource is between 60 and 170 bcf (gross).

At Knotty Head, we completed drilling a sidetrack well in March of last year. Our current estimate of resource for the field is between 200 and 500 mmboe. Access to rigs remains limited in the Gulf and we continue to work with partners to find a rig to complete the appraisal of the field.

We are proceeding with the development of Wrigley on Mississippi Canyon Block 506. We have completed and tested the well at 62 mmcf/d and plan to use a sub-sea tieback to nearby existing infrastructure to initiate first production late in the first quarter of 2007. We have a 50% non-operated interest in Wrigley.

We recently completed drilling operations at our Golden Eagle prospect on License P928 in the UK North Sea. The discovery well was drilled to a depth of approximately 7,500 feet and encountered 123 feet of net pay. The well tested at over 4,000 bbls/d of light crude. A successful sidetrack well was drilled to appraise the accumulation and we are currently evaluating development options. We have a 34% operated interest in Golden Eagle.

In 2006, we participated in the Norwegian exploration bid round and were recently awarded four licenses. The licenses are in water depths from 1,000 to 1,300 feet and are located between 30 and 100 miles offshore, situated close to existing infrastructure. In 2007, we plan to invest in additional seismic and geological studies in this region.

Investment in Core Asset Development

Our investment in our maturing assets is directed at extracting maximum value over the remaining life of our assets. In 2006, we invested $748 million in our core assets. Approximately $537 million of this investment converted 26 mmboe of proved undeveloped and proved non-producing reserves to proved developed reserves. The remaining $211 million added approximately eight mmboe of new proved reserves. In the Gulf of Mexico, we began producing from an additional development well at Aspen in late December. Based on results from this well, we see further opportunities in the Aspen field and are currently sidetracking the Aspen 1 well to exploit deeper sands. In 2007, we expect production from the Aspen field to average between 15,000 and 20,000 boe/d. We have a 100% working interest at Aspen.

Two-for-One Share Split

The Board of Directors has approved a two-for-one share split of Nexen's issued and outstanding shares, subject to shareholder and regulatory approval.

"Since our last share split in May 2005, our share price has more than doubled," said Fischer. "With Buzzard on stream and Long Lake nearing completion, we are entering a period of significant growth and are optimistic about the future of our company."

Shareholder approval will be sought at our Annual Meeting scheduled for April 26, 2007.

Quarterly Dividend

The Board of Directors has declared the regular quarterly dividend of $0.05 per common share payable April 1, 2007, to shareholders of record on March 10, 2007.

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.


                                   Three Months Ended  Twelve Months Ended
                                          December 31          December 31
                                   ------------------- --------------------
(Cdn$ millions)                        2006      2005       2006      2005
Production (mboe/d)(1)
 Before Royalties                       207       225        212       242
 After Royalties                        161       165        156       173
Net Sales                               920     1,073      3,936     4,086
Cash Flow from Operations(2)            673       772      2,669     2,403
 Per Common Share ($/share)(2)         2.56      2.96      10.18      9.23
Net Income                               77       303        601     1,140
 Per Common Share ($/share)            0.29      1.16       2.29      4.38
Capital Expenditures                    951       731      3,458     2,691

(1) Production and reserves in this release also include our share of
    Syncrude oil sands. US investors should read the Cautionary Note to US
    Investors at the end of this release.
(2) For reconciliation of this non-GAAP measure, see Cash Flow from
    Operations on pg. 9.