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Drilling rig over the heijah feild in Yemen. (Courtesy of Nexen Inc.)
Drilling rig over the heijah feild in Yemen. (Courtesy of Nexen Inc.)

Nexen pushed out of Yemen oil project Add to ...

Nexen Inc. ’s growth will be dampened next year now that it has been pushed out of one of its largest oil projects by Yemen’s government.

The Calgary-based company has a partnership deal with Yemen tied to the Masila oil field, which accounted for roughly 9.5 per cent of Nexen’s production after royalties in the third quarter. The pair’s production sharing agreement expires Dec. 17, and Yemen did not renew it, rejecting the company’s application to continue operating in the volatile country. A new state-controlled operating company will take over the project, Nexen said in a statement.

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As conventional oil fields in stable countries dry up, many energy companies have been forced to explore and produce oil under challenging circumstances – whether geologically or politically. Companies operating in the oil sands, for example, benefit from Canada’s relatively predictable laws and stable government, but have to master difficult extraction techniques. Nexen’s Long Lake oil sands project is one that has struggled.

While strong commodity prices attract natural resource companies to unstable countries, it comes with the risk that governments may want to shut out their partners in order to rake in more cash for themselves.

“Unfortunately, some of the best plays are in politically uncertain regions,” said Dennis da Silva, a senior fund manager and resource expert at Middlefield Capital Corp. in Toronto. “This is also happening in the mining sector as royalties and taxes keep getting revised.”

Now that Nexen has been shut out of its major project in Yemen, its offshore Nigerian oil field becomes even more important. Nexen is counting on oil from Usan, the new project, to help replace the lost barrels from Yemen. Production at Usan is not scheduled until the first half of 2012.

At its peak, Usan’s production will give Nexen 36,000 barrels of oil equivalent per day. By comparison, Nexen churned out roughly 164,000 barrels of oil equivalent per day after royalties in the third quarter. Of that, the Yemen project made up about 15,500 barrels of oil equivalent per day. Nexen operates the Masila oil field, which hit its peak in 2003, and is Yemen’s largest.

The company argues that its profit margins in Nigeria are healthier than those in Yemen, which will ease the pain as it packs up its Yemen operations.

“The decrease in our overall production volumes resulting from the contract expiry will be mitigated by the start-up of the Usan project,” Nexen said in its statement. “This change in production mix is expected to contribute to higher cash flow from operations in 2012.”

The lapsed partnership will not affect Nexen’s reserves, the company said, noting it did not book any barrels of oil beyond the joint venture’s expiry date. Capital costs were also amortized over the contract’s lifespan, Nexen said. Further, while the market agrees that the Yemen fallout is bad for Nexen, many investors and analysts stopped giving the company credit for this project in case it was cancelled. Nexen’s stock price did not take a hit Wednesday. The company will announce its 2012 production forecast next Tuesday.

“While we’re disappointed we did not receive an extension, we’re proud of the accomplishments we’ve achieved there,” Marvin Romanow, Nexen’s chief executive, said in the statement. “Our operations at Masila have generated significant value for our company, enabling us to deploy the cash flow to build our current portfolio of legacy assets.”

Nexen, which entered Yemen in 1987, has a second contract there, set to expire in 2023. Nexen’s slice of the production at this project is between 3,000 and 4,000 barrels of oil equivalent per day after royalties. “We are currently evaluating alternatives with respect to Block 51 and future activities in the country,” Nexen said in its statement.

Mr. da Silva, the fund manager, thinks Nexen might leave Yemen completely. “We would not be surprised to see the company try to sell this asset as it is now non-core,” he said.

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