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Nexen approves North Sea development plan

Nexen Inc. approved plans to develop a $1.2-billion (U.S.) oil field in the North Sea, as the company seeks to invigorate its fortunes while distancing itself from a struggling oil sands project it once tagged as a major source of growth.

The decision to go ahead with the Golden Eagle project comes just one month after the United Kingdom raised taxes for energy companies there. Despite the tax increase, energy companies producing oil in Europe are enjoying an advantage since oil prices are trading substantially higher there than in North America due to supply constraints.

Nexen owns 36.5 per cent of Golden Eagle, which it hopes will produce 70,000 barrels per day, 25,500 of which would belong to the Calgary-based company. It expects to produce the first drops of oil in 2014, and forecasts that its share of the development costs will ring in at $1.2-billion. The project still needs approval by its partners, as well as regulators.

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The go-ahead for Golden Eagle provides a spark for Nexen, which continues to grapple with production shortfalls at its Long Lake oil sands project in northern Alberta, which it shares with OPTI Canada Inc.

"We are not the Long Lake company – that's our friends over at [OPTI] that's our partners," Marvin Romanow, Nexen's chief executive officer, said in an interview after the company's conference call.

"Our company is the North Sea, West Africa, Gulf of Mexico, shale gas, and Long Lake," he said. "We've had one of the most significant discoveries [in Golden Eagle]there that, in the face of a tax increase, we still have an enormous set of economics. That's the story."

Mr. Romanow stressed that three-quarters of Nexen's production comes from conventional plays, and more than half its production comes from the North Sea.

However, Nexen continues to face challenges at Long Lake.

The Calgary-based company controls 65 per cent of Long Lake and last predicted it would produce between 38,000 and 45,000 barrels a day in 2011, a steep drop from its previous pledge to churn out from 40,000 to 60,000 barrels a day by the end of 2010.

Alan Knowles, a senior energy analyst at Hayward Securities Inc., said investors often cling to Nexen's Long Lake problems because its partner and original project owner, OPTI, is solely dependant on the success of that effort.

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Despite Nexen's insistence that it is more than an oil sands play, the company is also arguing that it has learned from its mistakes at Long Lake and is making adjustments as it explores the nearby Kinosis development. For example, Nexen has drilled about 400 exploration holes to determine the quality of the bitumen reservoir on the property, almost double what it did before it went ahead with Long Lake.

"I wouldn't call [Long Lake]a failure, but more of a disappointment [and]something they are learning from for Kinosis," Mr. Knowles said. "Unfortunately it is a big lesson" that is expensive.

Nexen earned $212-million, or 38 cents a share, in the first quarter, compared with $141-million, or 27 cents, in the same frame last year. OPTI, which is looking for a buyer or another transaction that can rescue the company from financial ruin, lost $27-million in the quarter.





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About the Author

Carrie Tait joined the Globe in January, 2011, mainly reporting on energy from the Calgary bureau. Previously, she spent six years working for the National Post in both Calgary and Toronto. She has a master’s degree in journalism from the University of Western Ontario and a bachelor’s degree in political studies from the University of Saskatchewan. More

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