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EXPLORERS USA 2005: No change for Nexen’s prized Gulf assets Nexen’s making waves with purchase of EnCana’s North Sea assets; deal troubles rating agencies, triggers plans to divest assets Gary Park Petroleum News Calgary Correspondent
In the mythical world of win-win there is usually a consensus over who actually won and who lost, but Calgary cross-town rivals — EnCana and Nexen — both emerged apparently on level terms from a startling deal last fall.
For US$2.1 billion, Nexen bought EnCana’s British assets, including the 43.2 percent operator stake in the giant Buzzard oil field, the largest U.K. North Sea discovery in a decade, freeing EnCana to step up the realignment of its business to focus on North American natural gas.
Nexen’s first sizeable acquisition since 1997 caught the industry watchers off guard and left EnCana counting its gains after collecting 40 percent more than Petro-Canada paid for a 30 percent stake in Buzzard just six months earlier.
With estimated recoverable oil reserves of 400 million barrels, Nexen will add 80,000 barrels per day of net production, a welcome chance to arrest a drop in its output to 200,200 bpd in 2004 from 222,500 bpd in 2002, although its gas volumes edged up to 297 million cubic feet per day from 279 million over the same period.
The transaction also gave Nexen interests in two producing properties, 41 percent in the Scott field and 54.3 percent of the Telford field, along with satellite discoveries, as well as a share of exploratory blocks covering 740,000 net undeveloped acres.
In the process it joined other Canadian E&P companies — Petro-Canada, Canadian Natural Resources and Talisman Energy — in filling the gaps created by departing majors and giving a solid vote of confidence in the elements that make up the North Sea, including a belief that there is still ample value creation through low risk development and improved fiscal terms to promote development of smaller, maturing fields. CEO: Nexen ‘significant player’ in North Sea For Chief Executive Officer Charlie Fischer the purchase establishes Nexen as a “significant player in the (North Sea) region,” adding a legacy asset that has “significant exploration and development potential for future growth.”
Not everyone shared his enthusiasm. Off the top, Standard & Poor’s cut Nexen’s long-term credit rating because of the “heightened risks associated with the company’s increasing undeveloped reserves base and the large capital spending requirements to develop these projects,” while Moody’s Investors Service expressed qualms about Nexen paying US$16 per barrel of oil equivalent of proved reserves for Buzzard, compared with its three-year average finding and development costs of US$10.49 per boe.
Fischer countered those concerns by predicting that Buzzard will achieve triple the operating profits of his company’s 12-year venture in Yemen, where before-royalties production was 107,300 bpd last year and its Block 51, after coming on stream in November 2004, is expected to deliver 25,000 bpd before royalties by late 2005.
The Yemen experience and the absence of any concerns about an anti-Western sentiment in the Middle East has emboldened Fischer to hint that Nexen could extend its reach into Libya, Kuwait, the United Arab Emirates and North Africa.
However, to get its financial house in better order in the post-North Sea deal, Nexen said it planned to sell C$1.5 billion worth of mature assets, such as its chemicals business that could fetch up to C$800 million, and conventional properties in Western Canada. Gulf interests won’t be sold What emphatically isn’t on the table is the Gulf of Mexico, one of the jewels in the Nexen collection, pumping 54,700 boe per day before royalties in 2004, including additions of 30,000 boe per day from the deepwater Aspen and Gunnison fields in the past two years, making it the company’s fastest-growing region.
The Gulf has been rated a “terrific” asset by Fischer based on large finds with multiple productive horizons, high success rates, production infrastructure and attractive fiscal terms.
Bolstering the outlook, the company said in its latest operations report, are rapid gains in technology that are making finding, drilling and development more cost effective.
The strategy for the Gulf is simple: Explore for new reserves, acquire assets with potential and exploit the existing asset base, with the focus on three areas — deep-shelf gas; deepwater prospects near infrastructure; and deepwater, sub-salt plays with potential to become new core areas.
Nexen feels it has also advanced to the point where it can operate more of its deepwater properties, having invested time to build its skills and understanding under the tutelage of large experienced operators.
To take greater control over the pace of activity, it spent C$400 million on exploration and development in 2004, with half of the world-wide exploration budget invested in the Gulf, and expected to kick in another C$315 million this year. Nexen drilling two Gulf wells, two more scheduled Nexen’s deepwater undeveloped Gulf land position grew by 19 blocks last year to 148 and the company is now engaged in its most active exploration program yet, with two wells drilling and results expected before mid-year and two more scheduled for the first half. Other deep-shelf and deepwater prospects are on tap for 2005 through 25 percent interests in Pathfinder and Knotty Head.
The 100 percent operated Aspen field has been a winner barely two years after production start-up, adding 11,000 boe per day in 2004 to reach 27,200 boe per day, 14 percent of which was gas. Although the field is not tagged for any significant capital plans in 2005, the project has just been fully paid out.
Gunnison, involving a 30 percent non-operated stake, came on stream at the end of 2003 through a platform that can handle 40,000 bpd of oil and 200 million cubic feet of gas.
Aside from its big plays in the Gulf, Yemen and North Sea, Nexen is adding another core area in the offshore West Africa plats of Nigeria and Equatorial Guinea and is quietly edging ahead in Colombia. Company will operate in oil sands Regardless of what happens to its more mature conventional assets in Western Canada, including 1.7 million undeveloped acres and 141 million barrels of oil equivalent in proved reserves, Nexen is building a head of steam in the Alberta oil sands, where it has 7.23 percent of the giant Syncrude consortium and is operator of what will be the fourth fully integrated project.
The C$3.5 billion Long Lake venture, in a 50-50 joint venture with OPTI Canada, is due on stream in the second half of 2007, with initial processing of 72,000 bpd of bitumen into 60,000 bpd of premium synthetic oil.
By doing its own upgrading on site and generating its own fuel and electricity, Nexen is hoping to circumvent the price risk on input costs.
To ensure his company is associated with leading edge advances, Fischer was a driving force behind the mid-March launch of a new government-industry coalition, Energy iNet, to promote Canadian research and policy-making on alternative energy, the oil sands, clean coal, reducing greenhouse gas emissions, maximizing petroleum recovery and water technology.
The organization has been described by Alberta Innovation and Science Minister Victor Doerksen as essential for a “new era of unprecedented collaboration” between federal and provincial agencies working with the private energy sector.
He said energy research spending has “stagnated” in recent years, tumbling to C$90 million in 2001 from C$1.3 billion in 1983 and probably needs an infusion of C$3 billion a year over 20 years.
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