2007 Highlights:
• Record annual cash flow of $3.5 billion ($6.56/share)-an increase of 30% over 2006
• Annual earnings of $1.1 billion ($2.06/share)-an increase of 81% over 2006
• Production after royalties growth of 33% for the year
• Proved reserve additions of 102 million boe, replacing approximately 110% of 2007 production
• 400 million bbls of probable reserves added for Long Lake Phase 2
• All wells steaming at Long Lake and upgrader on track for mid 2008 start up
• Ettrick project on track for mid 2008 start up
• Exploration success in the Gulf of Mexico and the UK North Sea
Quarterly cash flow was over $1 billion for the first time in company history and cash flow for the year grew 30% to a record $3.5 billion. With strong oil and gas production from their Buzzard field in the North Sea, attractive commodity prices and high cash operating margins, Nexen had solid financial results for the fourth quarter and the year.
"The record cash flow we generated reflects our significant production growth in 2007," commented Charlie Fischer, Nexen's President and Chief Executive Officer. "Our accomplishments last year position us for solid growth in 2008 as we bring Long Lake and Ettrick on stream, gain a full year of production from Buzzard, evaluate our recent discoveries and continue our exploration program."
Net income for the fourth quarter amounted to $194 million and we generated $1.1 billion of net income for the year. Our net income was reduced by non-cash charges for impairment, stock-based compensation and exploration expense. In the Gulf of Mexico, we recorded a non-cash impairment charge of approximately $238 million, after tax ($366 million, before tax) relating to Aspen and three of our shelf properties. This largely reflects disappointing results from our 2007 capital investment program in the United States. We use the more conservative successful efforts method to account for our oil and gas operations. This requires the assessment of impairment on a property by property basis compared to the country level assessment allowed by the full cost method.
"We are disappointed with last year's capital investment program at Aspen," stated Fischer. "Despite the impairment, Aspen has been a good asset and we expect to generate a full cycle rate of return here of over 30%."
Our quarterly net income was also reduced by $31 million, after tax, for stock-based compensation expense and $76 million, after tax, of exploration expense, primarily relating to seismic expenditures.
In our marketing division, results were below their 2006 record contribution. In North American gas markets, limited market and weather-related events presented fewer trading opportunities as natural gas time and location spreads remained relatively stable throughout the year. With respect to our crude oil trading activities, we were not positioned to take advantage of changing oil markets where crude oil spot prices rose suddenly without a corresponding rise in forward prices.
Production
Fourth quarter production averaged 262,000 boe/d (214,000 boe/d after royalties) with Buzzard contributing 75,000 boe/d. During the quarter, Nexen shut in production from the Buzzard platform following storm damage to one of the power generation turbine stacks. The damage was repaired within a few days. Reliability issues with the acid gas removal system at Buzzard also temporarily reduced production volumes. These issues have largely been resolved and Buzzard is now performing well, with Nexen’s share of production averaging over 95,500 boe/d (221,000 boe/d gross) for the month of January 2008.
Annual production averaged 254,000 boe/d (207,000 boe/d after royalties) as compared to 212,000 boe/d (156,000 boe/d after royalties) in 2006. This resulted in industry-leading production after royalties growth of 33%, but was less than the 50% growth forecasted a year ago. Project start-up and ramp-up delays, coupled with disappointing results from development drilling at Aspen, caused 2007 production to be less than originally forecast. At Buzzard, commissioning of all systems took longer than expected but this work is now complete and the platform is performing well. At Long Lake, project start up was deferred approximately six months to allow for completion of the air separation and sulphur recovery units. Despite these timing setbacks, project returns have not been impacted.
In 2008, Nexen expect additional production growth over 2007 and expect production to range from 260,000 to 280,000 boe/d (220,000 to 240,000 boe/d after royalties). For the month of January 2008, Nexen’s production was approximately 275,000 boe/d (233,000 boe/d after royalties).
2007 Capital Investment and Reserves
"Our strategy is to generate high value production growth for our shareholders and we are doing this by building material sustainable businesses in the deep-water Gulf of Mexico, Athabasca oil sands, North Sea and offshore West Africa," said Fischer. "Long Lake, Knotty Head and Usan will contribute significant value when they come on stream. Projects of this size tend to have longer cycle-times and result in step changes to our production profile."
In 2007, we added 102 mmboe of proved reserves and invested approximately $2.6 billion in oil and gas exploration and development activities, replacing approximately 110% of our production. Our total proved and probable reserves now total approximately two billion boe.
OVERVIEW OF OPERATIONS
United Kingdom
In the UK, Nexen invested $726 million. This included $160 million at Buzzard where the company drilled six development wells and added 46 mmboe of proved reserves. Increases in both the reservoir size and overall recovery factor from successful drilling and production performance resulted in these proved reserve adds.
"Buzzard has been a great project for us and is one of the few mega-projects worldwide in the last several years to be completed virtually on time and on budget. In addition, the Buzzard facility is capable of handling higher production volumes than we first thought," commented Fischer. "Oil prices are almost three times higher than when we first acquired this asset and we have successfully increased our proved plus probable reserves by 74 mmboe or 35%, creating significant value for shareholders. We are optimistic that this asset will generate even more value as we believe there is room for recovery factors to improve further."
The company’s Ettrick development in the North Sea is progressing well towards first oil mid 2008. In 2007, Nexen invested approximately $260 million and added 4 mmboe of proved reserves and 1 mmboe of probable reserves. To date, the company have recognized 46 mmboe of proved plus probable reserves here. This development will utilize a leased floating production, storage and offloading vessel (FPSO) designed to handle 30,000 bbls/d of oil and 35 mmcf/d of gas. Nexen expect to ramp up to production of approximately 30,000 boe/d gross by the end of the year. The company operate Ettrick with an 80% working interest. They have also identified a number of exploration opportunities in the immediate area that could be future tie-backs to Ettrick. Nexen have plans to drill at least two of these opportunities this year.
At Scott/Telford and Farragon, Nexen added 5 mmboe of proved reserves as a result of successful development well drilling.
Elsewhere, Nexen are assessing development alternatives for their Golden Eagle discovery where they have a 34% operated working interest. At Kildare, the company are planning to drill an appraisal well this year. The discovery well was drilled to a depth of approximately 14,100 feet and encountered approximately 91 feet of net pay. Nexen also completed an appraisal well at Selkirk which confirmed commercial quantities of hydrocarbons and development options are currently being reviewed. Nexen have a 38% operated working interest here.
At Bugle, Nexen are currently drilling an appraisal well. Well results are still being analyzed but initial test results are encouraging. The company have a 41% working interest here.
"Our strategy in the UK is working well," commented Fischer. "These satellite discoveries are in the same areas as our large operations at Buzzard, Scott/Telford and Ettrick. This infrastructure provides opportunities for quick tie-backs which will generate incremental value for shareholders."
Yemen
Yemen remains a significant asset for Nexen and is expected to generate approximately 15% of projected 2008 cash flow. In 2007, the company invested $139 million and added 3 mmboe of proved reserves. In 2008, Nexen expect to produce between 50,000 and 55,000 boe/d before royalties here.
Offshore West Africa
The Usan field development, located in Nigeria on offshore Block OPL-222, continues to move forward. Nexen expect the project to advance to the execution phase shortly and this will facilitate the award of major deep-water facilities contracts. The project will have the ability to process an average of 180,000 bbls/d of oil during the initial production plateau period through a new FPSO with a two million barrel storage capacity. the company have a 20% interest in exploration and development on this block.
United States
In the Gulf of Mexico, Nexen reduced our proved reserve estimates for Aspen and a few shelf properties by approximately 13 mmboe. At Aspen, disappointing results from Nexen’s recent investment in development drilling resulted in reserve reductions of 7 mmboe. While the company were encouraged by well log data indicating thick pay zones, well deliverability rates could not be sustained. This likely indicates barriers within this section of the reservoir that are not apparent elsewhere. On the shelf, negative reserve revisions of 6 mmboe primarily relate to gas properties, where unsatisfactory investment results, production performance and revised mapping resulted in a downward revision to reserves estimates.
"While we are disappointed with our capital investment performance and the reserve reductions in the Gulf of Mexico, these revisions have no impact on our production guidance for 2008," commented Fischer. "In 2008, we plan to keep capital reinvestment with respect to our shelf assets to a minimum."
At Longhorn, where the company have a 25% working interest, Nexen completed drilling an appraisal well which exceeded expectations and encountered approximately 400 feet of net gas pay in multiple sands. Nexen added 3 mmboe of proved and 3 mmboe of probable reserves here. The Longhorn project has been sanctioned and development will consist of subsea tie-backs to a host facility with first production expected in 2009.
In late 2007, Nexen invested $104 million to acquire three producing deep-water properties at Garden Banks Block 205 and Green Canyon Blocks 137 and 6/50. These properties added 7 mmboe of proved reserves and are currently producing approximately 3,000 boe/d. Drilling of a development well at Green Canyon 6/50 is underway and Nexen expect production from this well to add up to 5,000 boe/d to support 2008 annual volumes.
Elsewhere, Nexen had positive proved reserve additions and revisions of 4 mmboe, primarily at Gunnison and on the shelf as a result of performance and drilling activities.
At Knotty Head, Nexen continue to pursue rig availability in the short term to allow them to spud an appraisal well. To date, the company have evaluated two rigs but determined that these rigs did not have the drilling capability required. The company have contracted two new deep-water drilling rigs that are scheduled to arrive in mid 2009 and 2010, respectively.
The company’s 2007 exploration program resulted in discoveries at Vicksburg, Mississippi Canyon 72 and South Marsh Island 257. The Vicksburg discovery well, located on De Soto Canyon Block 353 in the Eastern Gulf of Mexico, was drilled to a depth of approximately 25,400 feet and encountered a hydrocarbon column of 300 feet. Core was recovered from the well and studies are underway to assess the productivity of the column. Additional drilling in the area is planned in 2008. Nexen have a 25% non-operated working interest in this discovery. Shell is the operator with a 57.5% working interest and Plains Exploration & Production Company holds the remaining 17.5% interest. In the same area, Nexen participated in a discovery well in 2003 at Shiloh located on DeSoto Canyon Block 269, that was drilled by Shell. This well was drilled to a total depth of approximately 24,000 feet, encountered hydrocarbons and was temporarily abandoned pending further evaluation of the area. Nexen have a 20% non-operated working interest in Shiloh. Shell operates and owns the remaining 80% working interest.
In the Eastern Gulf of Mexico, where the discoveries at Shiloh and Vicksburg are located, Nexen have identified a number of additional exploration opportunities in the region. The company also have the right to extend their acreage position through the acquisition of working interests in various blocks recently awarded to Shell as a result of their participation in Lease Sale 205 late last year.
"We are excited about the recent discovery at Vicksburg," said Fischer. "When we combine this with the previous discovery at Shiloh, the exploration opportunities we have identified and our access to acreage in the area, this has the potential to become a significant part of our Gulf of Mexico business."
Other discoveries at Mississippi Canyon 72 and South Marsh Island 257 are currently being evaluated. Both discoveries are expected to come on production in 2008. Nexen have working interests of 33% and 34.5% respectively in these discoveries.
Canada
In Canada, Nexen are developing the first commercial coalbed methane (CBM) project in the Mannville coals. In 2007, the company invested $173 million in exploration and development activities on their CBM lands. This generated 5 mmboe of proved reserves. To date, Nexen have recognized approximately 36 mmboe of proved plus probable CBM reserves. The company expect their CBM reserves to grow over the coming years as additional wells are drilled, development work progresses and more production history is obtained.
Elsewhere, Nexen added 8 mmboe of proved reserves relating to their conventional heavy oil and gas properties largely as a result of positive price revisions and development drilling.
In northeast British Columbia, Nexen have a material land position of approximately 190 net sections in an emerging Devonian shale gas play which has the potential to be one of the most significant shale gas plays in Canada. The company are currently evaluating this opportunity with a program of drilling, completing and production testing.
Long Lake
In 2007, Nexen invested a total of $1.1 billion to develop their insitu oil sands resource. This included approximately $1 billion on the first phase of Long Lake, $591 million of which related to the upgrader. At Long Lake, the company added 22 mmbbls of proved bitumen reserves based on further delineation of the lease and an increase in recovery factors based on performance from analogous reservoirs. Nexen also added approximately 400 mmbbls of probable bitumen reserves associated with delineation work on Phase 2.
Long Lake continues to progress well towards first production of premium synthetic crude in mid 2008. Nexen are currently injecting steam into the reservoir through all well pads. The company have started converting wells to SAGD operation and have also recently started up their first cogeneration unit which allows them to produce electricity and build their steaming capacity. The second cogeneration unit is expected to start up towards the end of the first quarter. Nexen expect bitumen production to ramp up in the spring and they are on track to have sufficient bitumen production for the start up of the upgrader. The bitumen production capacity of the SAGD facilities is approximately 72,000 bbls/d (36,000 bbls/d net to Nexen).
At the end of 2007, construction of the upgrader was 97% complete and commissioning is progressing well. Nexen have turned over the hydrocracker, the OrCrude(TM) unit and all main plant utilities to operations. The gasifier and air separation unit were essentially mechanically complete at year end 2007, and Nexen are completing final electrical and insulation work. Construction of the sulphur recovery unit is expected to be completed by the end of the first quarter, in sufficient time for first production of synthetic crude oil in mid 2008. Production of premium synthetic crude will ramp up to full rates over a 12 to 18 month period following initial upgrader start up. The upgrader is designed to produce approximately 60,000 bbls/d (30,000 bbls/d net to Nexen) of premium synthetic crude.
The total cost estimate for the Project remains unchanged at between $5.8 billion and $6.1 billion (between $2.90 billion and $3.05 billion net).
"We are excited about bringing our first oil sands project on stream this year and we are committed to the safe and steady start up of all facilities," said Fischer. "At current natural gas prices we expect to enjoy a cost advantage of approximately $10/bbl over competing technologies once Long Lake is fully ramped up in late 2009, as the patented process minimizes the need for purchased natural gas."
Nexen are planning to increase synthetic crude oil production as they sequentially develop their lands with additional 60,000 bbls/d (30,000 bbls/d net) phases using the same technology and design as Long Lake.
Syncrude
At Syncrude, Nexen invested $36 million in 2007 and converted 8 mmboe of probable reserves to proved reserves. In 2008, the company have turnarounds scheduled in the second and third quarters and expect annual production of between 20,000 and 25,000 bbls/d before royalties.