Nexen's Current Production at Annual High Following Start-Ups
Throughout the third quarter, we made significant progress in advancing our strategies. We successfully executed the planned turnaround at Long Lake, announced the largest discovery in the UK North Sea in the last ten years after Buzzard, and moved our breakevens down on our Horn River shale gas play. We also started up Ettrick in the North Sea and added incremental volumes from successful infill drilling at Telford. Longhorn in the Gulf of Mexico started up earlier this week. Current production rates are now at an annual high. A summary of our quarterly results, together with recent highlights, is as follows:
- Cash flow of $379 million ($0.73/share) and net income of $122 million ($0.23/share)
- Production before royalties of 214,000 boe/d impacted by turnaround and maintenance activities
- Current production before royalties of 275,000 boe/d and increasing as Ettrick, Longhorn and Long Lake continue to ramp up
- Successful turnaround at Long Lake; bitumen production ramping up; upgrader start-up imminent
- Successful Telford step-out well in the North Sea and significant shale gas progress in the Horn River
- Knotty Head appraisal well currently drilling
"We previously announced that our third quarter would be impacted by planned turnarounds on a number of fields," stated Marvin Romanow, Nexen's President and Chief Executive Officer. "With the completion of these activities and the start up of new production, current production is 275,000 boe/d and growing. With production ramping up at Ettrick, Longhorn and Long Lake, we expect fourth quarter production volumes to be strong."
Global Exploration-Excitement Continues to Build
UK North Sea
The Golden Eagle area has emerged as a significant development opportunity. Our current estimates of contingent recoverable resource range between 150 and 275 mmboe. We expect development of the area will be economic with oil prices as low as US$40/bbl and require standalone facilities due to its size. Project sanction is targeted for 2010. Appraisal activity continues and we have now drilled 13 wells in the area.
"The Golden Eagle area is the largest discovery in the UK North Sea in the last 10 years after Buzzard," commented Romanow. "Like Buzzard, this discovery is a hard to find stratigraphic trap. Our geological model is working well in this mature basin."
As we move into 2010, we are finalizing exploration plans to drill the North Uist prospect, west of the Shetland Islands and the Brand prospect in the Norwegian North Sea. These prospects have target sizes well above our typical North Sea target size.
Offshore West Africa
Earlier this year we 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. Nexen has an 18% interest in the well.
"We continue to be excited about our exploration opportunities offshore West Africa," said Romanow. "This is a very oily part of the world which improves our chances of success."
Deepwater Gulf of Mexico
In the Gulf of Mexico, the arrival of the Ensco 8501 rig has allowed us to start drilling our Knotty Head appraisal well. The well spud earlier this month and we expect results in the second quarter of 2010. A second deep-water drilling rig is expected to arrive in mid 2010. This will allow us to start drilling more of our identified prospects.
In the Eastern Gulf, we recently spud the Appomattox prospect, which is located six miles west of our Vicksburg discovery. Drilling results are expected early next year. During the quarter, we completed drilling the Antietam prospect. The well encountered thick good quality sand, but was wet. We have a 25% interest in Vicksburg and a 20% interest in Appomattox and Shiloh, an earlier discovery. Shell operates all three.
Long Lake-Turnaround Complete, Moving Full Steam Ahead
The turnaround at Long Lake is complete and we have resumed steaming our wells. Steam production is increasing. Bitumen production is back up to pre-turnaround rates of 10,000 to 12,000 bbls/d (gross) and growing. Upgrader start-up is imminent now that we have sufficient bitumen feedstock.
The turnaround activities focused on replacing valves, cleaning out the hot lime softeners and isolating the water treatment trains, and we performed a number of other planned maintenance activities to improve reliability and operability. These activities were successfully completed within the period of scheduled downtime. We also installed ESPs in a number of our SAGD wells. This will allow us to have better pressure control and ultimately reduce our overall steam to oil ratio ("SOR").
In addition, we recently completed the steam de-bottleneck project which will increase our SAGD steam production capacity to over 230,000 bbls/d. Start-up of the de-bottleneck project will proceed as required to support the SAGD ramp-up. We continue to expect a long term SOR of 3.0 over the life of the project.
With respect to the Upgrader, we have now operated all units including the solvent de-asphalter and the thermal cracker. These units are necessary to achieve our target yield of approximately 80%. In addition, Syngas is being used in all SAGD operations. This allows us to decrease operating costs by reducing the requirement for purchased natural gas.
"Following the addition of steam to our hot lime softeners earlier this year, the successful execution of our turnaround program a few weeks ago and the recent completion of our steam de-bottleneck project, we are in great shape to get back on the ramp-up curve we saw prior to the start-up of the upgrader," commented Romanow. "While we expect there will be periods of downtime as bitumen production ramps up, we anticipate continuing improvements in operational stability."
Phase 1 of our Long Lake project is designed to produce 72,000 bbls/d of gross bitumen, upgraded to approximately 60,000 bbls/d (39,000 bbls/d, net to us) of PSCTM. We have a 65% interest in the project and the joint venture lands. We are the sole operator of the resource and the upgrader. We expect Long Lake will generate significant value with 40 years of production at a $10/bbl margin advantage.
UK North Sea-First Oil Produced at Ettrick
Our Ettrick development in the North Sea produced first oil in mid August and we have tested the floating production, storage and offloading vessel (FPSO) up to its design rates. Field production will ramp-up as we commission the gas system. The project is expected to add approximately 12,000 to 16,000 boe/d to our production volumes for the remainder of the year. We have a 2008 discovery at Blackbird which could be a future tie-back to Ettrick. We operate both Ettrick and Blackbird, with a 79.73% working interest in each.
Gulf of Mexico's Longhorn Now On-Stream
Earlier this week, we started production from Longhorn. The field is expected to reach peak production of approximately 200 mmcf/d or 33,000 boe/d gross (50 mmcf/d or 8,000 boe/d, net to us) early next year. We have a 25% non-operated working interest in this project and ENI is the operator.
Horn River Shale Gas-Breakevens Coming Down
Following the conclusion of our recent three-well drilling and completion program, we continue to make significant progress on our substantial Horn River shale gas position in north-east British Columbia. With five shale gas wells now on-stream, we are producing approximately 15 mmcf/d with the majority of production coming from the three new wells. These wells have a higher frac density than our earlier wells. Our land position here could support 500 to 700 wells.
Substantial cost savings and productivity improvements were realized with this drilling and completion program. We took advantage of improved equipment utilization, drilled longer wells, initiated more fracs per well and maintained an industry-leading frac pace of 26 fracs in 15 days while achieving a 100% success rate on our frac program. Two of the wells were completed with eight fracs, while the third well was completed with ten fracs.
"We are making excellent progress in bringing down our Horn River breakevens by decreasing costs and increasing well productivity, and there is more upside to come," said Romanow. "We are in the process of developing an eight-well pad drilling program for this winter. These wells will be longer than our current wells with eighteen fracs per well. The following winter we plan to drill an eighteen-well pad which we expect will drive our breakevens down further."
We have approximately 88,000 acres in the Dilly Creek area of the Horn River basin with a 100% working interest. We estimate our lands contain between 3 and 6 trillion cubic feet (0.5 to 1.0 billion barrels of oil equivalent) of contingent recoverable resource which could double our existing companywide total proved reserves. Further appraisal activity is required before these estimates can be finalized and commerciality established.
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 is underway and the FPSO hull is under construction. 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 on this block and Total E&P Nigeria Limited is the operator.
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