Nexen Inc.'s discovery of a major oil pool in a tricky spot below the North Sea has helped validate the company's heavy exploration spending in an area that many believe has few petroleum gems left to discover.
The company surprised markets yesterday with word that its Golden Eagle discovery contains between 150 and 275 million barrels of oil equivalent, the biggest such find in the North Sea since the discovery of the prolific Buzzard field.
That field, found in 2001, contains about 700 million barrels of oil and is the top North Sea discovery in 25 years.
The North Sea success is important for Nexen, which saw its petroleum reserves fall by 7 per cent last year, and sees the area as key to maintaining production. Nexen will devote nearly 40 per cent of its $700-million exploration budget this year to the North Sea, which many other oil companies have abandoned because of the difficulties finding oil in the area's complicated geology.
"We're very hopeful that there's going to be some more great discoveries up there," said Mike Harris, Nexen's vice-president of investor relations.
"The same guys that found [Buzzard] found Golden Eagle. There's obviously some knowledge that's residing in this exploration team in the U.K. that's identifying these things."
Market analysts pointed out that Nexen's share of Golden Eagle, at roughly 60 to 100 million barrels, is not a huge boost to its 988 million barrels of proven reserves. It also pales in comparison to the importance of Nexen's trouble-ridden Long Lake oil sands project in Alberta, which has had difficulty achieving promised production, said Philip Skolnick of Genuity Capital Markets. Other major partners in the project are Suncor Energy Inc. and Maersk Oil UK Ltd.
"Putting things in perspective, it's not a significant add to them," he said. "Keep in mind the North Sea is a mature area, with a short reserve life."
Still, Golden Eagle has helped prove Nexen's adroitness at finding oil tucked away in pockets the industry calls "stratigraphic traps" - reservoirs which, unlike more common "structural traps," often go undetected by the standard tools of petroleum discovery.
The difference between the two is highly geological in nature, but results from the different ways oil is locked beneath the surface of the earth. Explorers looking for structural traps can home in on pools of oil by looking for relatively easy-to-find signs in the earth's crust, such as folds in rocks, or faults. The signs for stratigraphic traps are much more subtle, and also the layers of oil are often thinner. Even test drills often have difficulty finding the deposits, which can easily be confused for non-productive rock.
Stratigraphic traps are common features on the Canadian Prairies, and experience there - along with a knowledgeable British team - helped the Canadian company locate the hidden reservoirs in the North Sea.
"You can miss it by 50 metres," said Per Pedersen, an associate professor of geoscience at University of Calgary. "So they tend to have a much lower success rate."
That explains why, despite decades of drilling and hundreds of production platforms in the North Sea, many larger companies have left, and the lustre has come off the area.
Even marquee fields like Shell's Brent are all but done. Shell, in fact, has begun the work of decommissioning Brent. Nexen got into the area when EnCana Corp. sold off its assets, including Buzzard.
Nexen believes the North Sea has much left to offer. The British government estimates there is enough oil to keep pumping for four more decades at today's rates, and Nexen is now the third-largest oil producer on the British side of the North Sea. It has also acquired leases in the Norwegian side that it hopes to begin exploring next year.
"We're looking for more, and we do expect to find more," said Kevin McLachlan, Nexen's vice-president of global exploration. "The North Sea is a mature area, but it's one of these unique basins that's an extremely prolific hydrocarbon petroleum province. And because the stratigraphic traps are a bit more difficult to see, we expect there will be more to find."
Nexen (NXY)
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