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Nexen in 2001 formed a joint venture with OPTI Canada to develop the Long Lake, Alta., oil sands property.

After years of struggling to wring crude from the earth beneath their Long Lake oil sands project, Nexen Inc. and OPTI Canada Inc. have confirmed longstanding speculation that something is awry with their massive reservoir of thick oily bitumen.

The companies say their problems are temporary, and experience has shown that with time and effort, they can successfully overcome their current problems.

But the admission that underground zones thick with water - rather than bitumen - are disrupting operations at Long Lake has raised new concern among investors, who have already witnessed years of delays at the more than $6-billion project. Those concerns were heightened yesterday by word from Nexen that, if Long Lake does not perform as expected, the project will require hundreds of millions of dollars in additional investment.

It has been nearly four years since Long Lake began operations, but it has yet to achieve the 72,000 barrels of bitumen a day it was designed for. Executives once promised it would reach that level by late 2009. It is not even halfway there. The delays have so damaged the prospects for OPTI, the 35-per-cent owner, that it recently hired a restructuring specialist.

And while the company says it has enough to meet its 2011 financial commitments, chief executive officer Chris Slubicki warned Thursday that "our current liquidity provides limited time to accomplish" those goals.

The problems stem in part from the formidable challenge of the water zones, which the company now says have lain at the heart of some of Long Lake's struggles dating back to its earliest days. Those zones are also partially responsible for a January drop in production at a project that is supposed to be growing rapidly.

Nexen calls the watery areas "lean zones," and says they make up 3 to 5 per cent of its reservoir. Long Lake, like many other oil sands projects, uses a technology called "steam-assisted gravity drainage," rather than a massive open pit mine, to bring bitumen to the surface. SAGD operates using pairs of horizontal wells - one to inject high-pressure, high-temperature steam underground, another to collect the bitumen that drips out from the rock after the steam heats it.

But when that rock is pocked with water, major problems can ensue. Steam flows more easily through a fluid, so more steam flows into the watery areas than those filled with bitumen. That steals heat from bitumen-rich parts of the rock, the result being that wells don't product much oil, since not enough bitumen is getting warm enough to melt from the rock.

That problem comes at a cost. Not only does it hamper production - after averaging 28,100 barrels a day of bitumen in the fourth-quarter of 2010, Long Lake's output fell to 27,000 in January - but it means more-expensive steam has to be created. SAGD wells are evaluated primarily on what is called the "steam-oil ratio" - how many barrels of steam it takes to produce a barrel of oil. It takes natural gas to produce steam, so the higher the ratio, the more costly the process.

Industry standard is two to four barrels of steam per barrel of oil - slightly below the range Long Lake is targeting. But Nexen chief executive officer Marvin Romanow said the company has seen wells with a ratio higher than 10 barrels of steam to one of oil when they hit those lean zones.

Still, he pointed to a series of wells that have, after "blasting through" all of the water, become strong producers. Some have seen their steam-oil ratios drop below three barrels of steam per barrel of oil as heat moves into the bitumen.

"Once the zone is heated, [steam-oil ratios]and bitumen rates improve, and this improvement can be dramatic," Mr. Romanow said. "We have excellent assets and an extraordinary amount of bitumen to invest in, and our experience is providing us the ability to resolve these issues on these lean zones."

Still, markets remain skeptical, especially given the number of issues already encountered by Long Lake, which also saw a sizable number of pump failures in January, as well as problems with its water treatment plant.

Raymond James analyst Justin Bouchard, who recently completed an in-depth study of the project, says just eight of 91 Long Lake wells have "blasted through" lean zones.

If the rest perform similarly, "it's hard to argue" that Long Lake will at long last achieve its promised output. "The question is whether or not you believe the other 83 wells are going to look like those eight wells," Mr. Bouchard said.

Indeed, investors and analysts have already begun to ask what might happen if Long Lake's steam-oil ratio is closer to five than four. Mr. Romanow acknowledged that would require building more steam-generating capacity.

"We still have a good shot of hitting that three to four," he said. But, he said, missing that number won't come cheap.

Boosting steam output by 20 to 30 per cent would cost "half- to three-quarters of a billion [dollars in]round numbers," he said. "But that would be well down the road from where we are today."