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Nexen slashes bitumen estimates at Long Lake

Nexen's ENSCO 8501 rig in the Knotty Head region of the Gulf of Mexico.

Dave Olecko/Handout

Nexen Inc. has cut the bitumen reserve estimate at its flagship oil sands project by a quarter, a firm admission that its reservoir does not hold as much potential as thought when the project launched years ago.

However, the shortfall at Long Lake was more than replaced by reserve revisions at a slice of its Kinosis lease, the company said in its fourth-quarter results Thursday. Long Lake has long been a drag on Nexen's reputation and bank account, with executives finally detailing its troubles last February and providing further information in April.

The company's blunders at Long Lake – including upgrader troubles and poor placement of wells – reflect some of the dangers when drilling deep into the ground in search of bitumen. While shallow oil-sands strip mines can be much more expensive than steam-assisted gravity drainage projects such as Long Lake and Kinosis, the latter type comes with more intense exploration and production risks.

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Nexen increased its estimate for K1A, which was previously part of its Kinosis plans, now that it plans to develop that chunk of land.

"The lower quality parts of the [Long Lake]reservoir weren't going to give up the oil the way we originally expected," Kevin Reinhart, Nexen's interim chief executive officer and past chief financial officer, said in an interview. "The oil is still there, [but]it is harder to get out, and it is not economic and we don't have plans to recover it, then that's no longer a proved reserve."

Nexen said it will release more information on its reserve estimates shortly. The new data was released Thursday as part of the company's annual reserve estimates, said Mr. Reinhart, who replaced Marvin Romanow a month ago.

While knocking 25 per cent off reserves estimates is a considerable reversal, Nexen had already indicated the reservoir is disappointing, and investors had given up faith its first wells would meet their targets. Indeed, rather than punishing Nexen for the Long Lake revision, traders pushed the company's stock up 4 per cent Thursday.

"The market had already written it off long before today," Phil Skolnick, an analyst at Canaccord Genuity, said.

Nexen's first wells at Long Lake hit watery zones and the company had to pump extra steam into the reservoir to extract bitumen. With less bitumen coming out of the ground, its upgrader is running well below capacity. New wells, and the K1A zone, are expected to increase production and feed the upgrader, Nexen says.

The company said it made $43-million or 8 cents a share in the quarter, down from $160-million or 30 cents a year earlier. The drop is a result of a one-time, after-tax charge of $190-million tied to "previous costs associated with our shift away from large, integrated upgrading projects in our future oil sands development strategy" and a $127-million after-tax charge for impairments tied to North American gas assets. A gas glut in Canada and the United States has pushed prices to 10-year lows.

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Nexen is searching for a new CEO, after replacing Mr. Romanow with Mr. Reinhart. Mr. Reinhart declined to say if he wanted the job.

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