Nexen Announces Strong Fourth Quarter and Annual Financial Results Together With Excellent Reserve Adds. In 2009 we made significant progress on our three corporate strategies relating to the Athabasca oil sands, Horn River shale gas, and conventional exploration and development.
Strong proved reserve adds allowed us to replace over 200% of our production. During the year, we generated cash flow of $2.2 billion ($4.25/share) and earnings of $536 million ($1.03/share) driven by outstanding results in the fourth quarter. We achieved major milestones at our Long Lake oil sands project as we successfully brought the upgrader on stream. We are now creating our own fuel source and producing premium synthetic crude oil. In the Horn River, we moved our shale gas costs down.
Our exploration program delivered significant discoveries and we brought new production on stream in the North Sea and the Gulf of Mexico. As we move into the new year, our priorities include the ongoing ramp up of Long Lake, building on the success of our Horn River shale gas program, the development of our offshore Usan project, and ongoing exploration and development in our core areas.
Financial Results-Strong Fourth Quarter
Strong fourth quarter production volumes combined with attractive oil prices, industry-leading cash netbacks and solid results from our marketing division generated cash flow of $836 million, almost 40% of our annual cash flow. WTI strengthened on renewed economic optimism and averaged US$76.19/bbl for the quarter compared to US$58.73/bbl a year ago. With 85% of our production weighted to oil, we continue to benefit from increasing oil prices. Our industry-leading cash netbacks are generated by our low-royalty production and low conventional operating costs which averaged $9.13/bbl. Net income for the quarter was $259 million compared to a loss of $181 million in 2008 which included impairment charges and marketing losses.
For the year we generated cash flow of $2.2 billion ($4.25/share) and earnings of $536 million ($1.03/share). Our results were lower than the previous year as WTI averaged US$61.80/bbl in 2009 compared to US$99.65/bbl in 2008. In addition, the impact of scheduled downtime at several of our facilities reduced production volumes for the year.
"We had a strong fourth quarter which has set us up well for 2010," commented Marvin Romanow, Nexen's President and Chief Executive Officer. "At Long Lake steam volumes are at record levels and we are steaming more wells than ever before. On the exploration and appraisal front, our Appomattox and Knotty Head wells in the Gulf of Mexico are progressing well. And in the Horn River area, our winter drilling campaign is underway."
The fourth quarter delivered our strongest quarterly production volumes since early 2008, averaging 265,000 boe/d (235,000 boe/d after royalties) compared to 214,000 boe/d (184,000 boe/d after royalties) in the previous quarter. This increase reflects more production in the North Sea from Ettrick and Telford as well as the start up of Longhorn in the Gulf of Mexico. In addition, we saw production return from scheduled downtime during the previous quarter for maintenance and turnaround activities at Buzzard, Scott/Telford, the Gulf of Mexico and Long Lake.
Buzzard continues to perform well and contributed 86,500 boe/d (200,000 boe/d gross) in the quarter. We expect our North Sea volumes to remain strong in 2010 with Buzzard producing at plateau rates, Ettrick ramping up and additional development drilling at Telford.Our annual production averaged 243,000 boe/d before royalties and was impacted by extended downtime during the year for maintenance and turnaround activities at Buzzard,
Scott/Telford, the Gulf of Mexico, Syncrude and Long Lake. Fourth quarter volumes averaged 265,000 boe/d before royalties and reflects new production from a successful step-out well at Telford, the start up of Ettrick and Longhorn, and the ramp up of Long Lake.
In 2010, we expect our annual production to grow approximately 4% to 6%, assuming the midpoint of our guidance, and range from 230,000 to 280,000 boe/d (200,000 to 250,000 boe/d after royalties). This growth reflects a full year of production from Ettrick and Longhorn, and increasing volumes from Long Lake. At the high end of our guidance, our production growth would be as high as 15%. The low end includes the possibility of advancing the start up of the fourth platform at Buzzard which is currently scheduled for 2011. Advancement to 2010 would only be required if we see higher than expected levels of hydrogen sulphide. The downtime associated with advancing the start up could reduce annual volumes by 10,000 to 15,000 boe/d.
Our annual production grew from 210,000 boe/d to 213,000 boe/d, after royalties, reflecting increasing contributions from Long Lake. Over the last three years our production, after royalties, has grown at an average compound annual rate of 11%.
2009 Capital Investment and Reserves
We invested $2.8 billion on oil and gas activities and added 184 million boe of proved and 349 million boe of probable reserves, before the year-end transition to new SEC reserve rules (see footnote one to the table below). We are not carrying any proved or probable reserves for our discoveries in the Eastern Gulf, at Knotty Head or for our shale gas lands. A summary of our 2009 capital investment program and reserve additions are shown in the table below. Detailed tables can be found on pages 11 and 12 of this release.
Our conventional reserve replacement ratio is the best in three years at approximately 90% and excludes any potential proved reserve additions relating to our discoveries in the Golden Eagle area, at Owowo, Vicksburg and Knotty Head.
"Our 2009 global exploration program was one of our most successful ever and resulted in a number of significant discoveries," stated Romanow. "We plan to build on this success in 2010 with an exploration program that includes drilling up to 15 exploration and appraisal wells. In the North Sea, we are targeting several exploration and appraisal wells including a high impact prospect west of Shetlands and a potential extension of Buzzard. In the Gulf of Mexico, we have matured a number of prospects and plan to drill up to four of them."
In the North Sea, we added 34 million boe of proved and 33 million boe of probable reserves. At Buzzard, we added 22 million boe of proved reserves. For the Golden Eagle area, we added 32 million boe of probables which brings our total booked probable reserves for this area to 50 million boe.
At Long Lake, we added 107 million bbls of proved and 336 million bbls of probable reserves. Following the acquisition of an additional 15% interest in the Long Lake project and joint venture lands, we increased our proved and probable reserves by 86 million bbls and 220 million bbls, respectively. In addition, core hole drilling and ongoing delineation of the reservoir increased our proved and probable reserves by 21 million bbls and 116 million bbls, respectively.
New SEC rules that came into effect at the end of the year require us to report our Long Lake oil sands resource as synthetic reserves rather than bitumen. This reduced our proved and probable year-end reserves by 71 million bbls and 180 million bbls, respectively. The reduction reflects the removal of asphaltenes from bitumen which we use as a fuel source in our steaming, upgrading and co-generation power processes.
Capital Program Review
We invested $697 million in the North Sea last year including $214 million on exploration activities. As previously announced, our exploration program in the Golden Eagle area has generated exciting discoveries at Golden Eagle, Pink and Hobby. Estimates of gross contingent recoverable resource are 150 million boe or higher (over 55 million boe, net to us). To date, we have booked 50 million boe of probable reserves for this area. We expect to book proved reserves as we advance the field development plan, which is progressing. We expect development will support standalone facilities and be economic with oil prices significantly lower than they are currently. We have a 34% interest in both Golden Eagle and Hobby, and a 46% interest in Pink, and operate all three.
At Buzzard, we invested $232 million of which $104 million related to the construction of the fourth platform with the rest relating to ongoing development drilling. During the year we added 22 million boe of proved reserves here. 14 million boe are attributable to successful drilling and production performance which resulted in increases in both reservoir size and recovery factor. The remaining 8 million boe relate to positive economic revisions associated with improved oil prices.
In 2010, Buzzard will continue to be a significant contributor to our cash flow and production volumes. Assuming WTI of US$70/bbl, Buzzard will generate about $2.0 billion in pre-tax cash flow.
At Ettrick, production was brought on stream last year and is expected to ramp up to approximately 20,000 boe/d (gross) in 2010. We also have a discovery at Blackbird which could be a future tie-back to Ettrick, and plan to drill an appraisal well here later this year. We have no proved reserves booked for Blackbird. We operate both Ettrick and Blackbird, with a 79.73% working interest in each.
At Scott/Telford, we added 12 million boe of proved reserves largely as a result of successful development drilling at Telford which allowed us to almost double our production from the Scott platform. We see further upside in the area with opportunities for quick tiebacks and additional drilling is planned for 2010.
"In just over five years, we've gone from having no presence in the UK North Sea to being the second largest oil producer there," commented Romanow. "With no near-term decline expected at Buzzard, significant discoveries to develop and numerous exploration and appraisal wells to be drilled, we expect to advance our leading position with even more growth in the next five to ten years."
Yemen is an important asset for us and continues to generate cash flow in excess of capital requirements. In 2009, we invested $69 million and added 12 million boe of proved reserves. We will continue to maximize the value of these assets over the remaining life of the contract and expect our 2010 production to average between 32,000 and 37,000 boe/d, before royalties. We are currently working with the Yemen government on a possible contract extension.
Offshore West Africa
Development of the Usan field, offshore West Africa, is progressing well with first production expected in 2012. The development includes a FPSO with the ability to process 180,000 bbls/d (36,000 bbls/d net to us) and store up to two million barrels of oil. In 2009, our capital investment here focused on fabrication of the FPSO hull and topside facilities, subsea equipment, development drilling and completion of detailed engineering and procurement. In 2010, we expect to complete fabrication of the FPSO hull and most of the topsides. In addition, we will continue fabrication of subsea components, development drilling and well completion activities. We have a 20% interest in exploration and development on this block and Total E&P Nigeria Limited is the operator.
We continue to explore offshore West Africa and during the fourth quarter announced a successful exploration well at Owowo in the southern portion of Oil Prospecting License (OPL) 223. The Owowo South B-1 well was drilled in a water depth of 670 metres and is located 20 kilometres northeast of the Usan field. The well reached a total depth of 2,227 metres and discovered several oil bearing reservoirs containing light oil according to logs and other analysis. 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. We have an 18% interest in the discovery.
In the Gulf of Mexico our capital program is focused on the deep-water and in 2009 we invested approximately $64 million on our base shelf and deep-water producing assets.
We invested $91 million to complete the development of Longhorn which includes four sub-sea wells tied in to the ENI operated Corral platform. Production is approaching peak rates in excess of 200 mmcf/d gross (50 mmcf/d net to us). In 2009, we added 2 million boe of proved reserves and to date we have recognized 16 million boe of proved plus probable reserves here. We have a 25% non-operated working interest in Longhorn and ENI is the operator.
In the Eastern Gulf, we invested $62 million on our exploration activities which includes the Antietam and Appomattox wells. The Antietam well encountered thick, good quality sand, but was non-commercial. Operations at Appomattox are ongoing and we are currently drilling a sidetrack well to further evaluate the prospect. Appomattox is located six miles west of our Vicksburg discovery. We have a 25% interest in Vicksburg and a 20% interest in Appomattox and Shiloh, an earlier discovery. To date, we have not booked any proved or probable reserves for our Vicksburg and Shiloh discoveries. Shell Offshore Inc. operates all these Eastern Gulf wells.
Elsewhere in the deep-water, we are drilling an appraisal well at Knotty Head with our contracted Ensco 8501 rig. The well spud in December and we expect results in the second quarter. To date, we have not booked any proved or probable reserves here. A second deep-water drilling rig is expected to arrive in mid 2010 which will allow us to start drilling more of our identified prospects.
Insitu Oil Sands - Long Lake
In 2009, we invested $755 million on the acquisition of an additional 15% interest in the Long Lake project and joint venture lands. This added 86 million bbls of proved and 220 million bbls of probable bitumen reserves. In addition, core-hole delineation activities on the first phase of Long Lake added 21 million bbls of proved bitumen reserves while lease delineation work on Phase 2 added 116 million bbls of probable bitumen reserves.
At Syncrude, we invested $87 million in 2009 and converted 7 million boe of probable reserves to proved reserves. In 2010, a coker turnaround is scheduled in the third quarter and we expect annual production of between 19,000 and 24,000 bbls/d before royalties.
Horn River Shale Gas
As conventional basins in Canada mature, we are focusing our investment on unconventional resource plays such as shale gas. In northeast British Columbia, we have a material shale gas position in the Horn River basin with a 100% working interest. This play has the potential to be one of the most significant shale gas plays in North America. In 2009, we invested approximately $216 million to drill, frac, complete and test wells, and build infrastructure. 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 this summer of 26 fracs in 15 days while achieving a 100% success rate on our frac program.
In 2010, we plan to build on this success by drilling an eight-well pad which will have longer horizontal wells with more fracs (18 fracs per well) than our earlier programs. The wells will be drilled this winter and then fraced and completed with production commencing in the second half of the year. We expect to achieve shale gas volumes from this program of approximately 50 mmcf/d in 2011. This program sets up a potential capital investment plan consisting of an 18-well pad which could commence drilling later in 2010.
As previously announced, we estimate our Dilly Creek lands contain between 3 and 6 trillion cubic feet (0.5 to 1.0 billion barrels of oil equivalent) of recoverable contingent resource. Further appraisal activity is required before we can finalize these estimates, establish commerciality and book meaningful reserves.
"I am pleased with our progress at Horn River," said Romanow. "While we weren't looking for shale gas five years ago, today we have captured significant resource, with the potential to double our current proved reserves. With larger programs, increased well productivities and higher recovery factors we are successfully lowering unit costs and increasing returns."
Long Lake Update
The following update was provided on February 9, 2010:
With the completion of the turnaround at Long Lake, steam reliability has improved significantly and steam rates are at an all time high of over 105,000 bbls/d and increasing. As a result, we are injecting more steam into more wells than ever before with 57 well pairs now on production and steam circulating in an additional 19 pairs. These circulating wells will be converted to production over the next few months.
The reservoir is responding to consistent steaming and bitumen production levels are increasing. Prior to the turnaround, which was completed late last year, we were only providing meaningful steam to about one third of our 91 wells. These wells are providing the majority of our bitumen production which averaged 13,600 bbls/d (gross) in the fourth quarter. The remaining wells have been cold for about a year and need to go through the circulation and ramp up cycle.
We are currently producing approximately 18,000 bbls/d (gross) at an all-in steam-to-oil ratio (SOR) of approximately 6.0. This SOR includes steam to the wells that are in the steam circulation stage and not yet producing bitumen, and wells early in their ramp up cycle. As our circulating wells start producing, we expect to see an increase in bitumen production rates with a corresponding decrease in SOR. The SOR of our producing wells is approximately 5.0, and includes well pairs recently converted to production that are in the early stages of ramp up. We continue to expect a long term SOR of 3.0 over the life of the project.
"Post turnaround, we have experienced our three best consecutive months of steaming and bitumen production, and we are building on this," said Romanow. "Now that we are in a position to provide consistent steam to the reservoir, we are focusing on optimizing steam injection and individual well performance. To advance well productivity, we have converted over 40% of our wells from gas lift to electric submersible pumping and expect to have about 80% converted by year end. This offers more flexibility to optimize steam injection and grow bitumen production."
We have achieved a number of major milestones at Long Lake over the past year. The facility is running as designed. The gasification process is working, creating a low cost fuel source which reduces our need to purchase natural gas for operations. Post turnaround, the upgrader has processed approximately 90% of bitumen feedstock into the highest quality synthetic crude oil in North America. We continue to expect that we will ramp up to full rates and generate a significant margin advantage over our peers, even at current gas prices.
On February 16th, we identified an item requiring repair to the separator unit on the Buzzard platform. We are currently investigating the cause and have temporarily reduced production volumes to 30,000 to 50,000 boe/d (gross). Preliminary findings suggest that Buzzard will be operating at these reduced rates for the next several weeks. We will provide an update once our investigation is complete.
As announced in December 2009, we have identified a number of non-core assets for possible disposal, including parts of our marketing business, our heavy oil assets in Western Canada and our interest in the Canexus chemicals business. We have entered into an agreement to sell our European gas and power marketing business and have opened data rooms for other parts of our marketing business. We are also in the process of opening data rooms for our heavy oil assets. We expect that the disposition of non-core assets could generate over $1 billion in the next 12 to 24 months with timing dependent on market conditions.
"Assets that are no longer aligned with our main areas of focus will be monetized to focus on our three core areas," said Romanow. "We have an excellent portfolio of opportunities with significant captured resource and will focus on these."
The Board of Directors has declared the regular quarterly dividend of $0.05 per common share payable April 1, 2010, to shareholders of record on March 10, 2010. Shareholders are advised that the dividend is an eligible dividend for Canadian Income Tax purposes.
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, Western Canada (including the Athabasca oil sands of Alberta and unconventional gas resource plays such as shale gas), deep-water Gulf of Mexico, offshore West Africa and the Middle East. We add value for shareholders through successful full-cycle oil and gas exploration and development and leadership in ethics, integrity, governance and environmental protection.