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The Nexen building is seen in downtown Calgary, Alberta, in this July 23, 2012 file photo.

TODD KOROL/Reuters

Nexen Energy ULC will lay off 350 people by year's end as the upgrader at its troubled Long Lake oil sands site will remain out of service, perhaps permanently, following the explosion at the facility early this year that killed two workers.

After a string of setbacks, the CNOOC Ltd.-controlled oil and gas company must make decisions about the future of the upgrader in an uncertain crude market. In the interim, Nexen will struggle alongside other oil sands firms to make the economics work for producing high-cost bitumen in a global price rout.

With the upgrader in a dormant mode, Long Lake will narrow its focus to producing limited amounts of crude – as a steam-assisted gravity drainage (SAGD) operation only.

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"The reality is that in the economic environment that we're in right now, SAGD production is not making much money," Ron Bailey, Nexen's senior vice-president of Canadian operations, said on Tuesday.

Designed to produce 72,000 barrels of bitumen a day, the integrated SAGD and upgrading Long Lake site has suffered operational issues since its startup in 2008. However, the past 12 months have been a particularly painful spell.

The annus horribilis includes a massive pipeline rupture on July 15, 2015, that spilled more than 31,000 barrels of bitumen, water and sand onto the ground, and the deadly explosion in January.

Mr. Bailey said that following an investigation, they believe the Jan. 15 explosion at the hydrocracker, a part of the upgrader, was the fault of the two Nexen employees who died – the only two people in the building – as they were performing work outside the scope of approved activities. Further details were not released and the incident is still being probed by provincial workplace investigators.

Still, Mr. Bailey said the incident "highlights gaps in our safety culture and we are taking steps to reinvigorate our focus on safety through training, education and increased oversight."

Nexen said a short-term repair to the upgrader is not feasible. The company will revisit the issue in the last quarter of this year and decide whether it's worth investing in the upgrader so it can produce a different set of products, operating it as it was, or shutting it down completely.

It's not the low oil price, but the potential future discount on Canadian heavy oil – commonly referred to as the differential – that is driving the question, Mr. Bailey said.

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He said the company's investigation into the pipeline leak found the project design was incompatible with the muskeggy ground conditions, and the rupture went undetected for more than a month because of major shortcomings in the leak-detection system. Mr. Bailey cited the failings of the pipeline work done by contractors and subcontractors, without disclosing names, and said the pipeline technology was new to land use and had usually been used offshore previously.

A number of improvements have been implemented, he said.

And while many oil sands operators avoided the full brunt of the wildfires in the Fort McMurray region in May, the blaze passed right through Nexen's Long Lake facility. The fire forced an evacuation and a complete shutdown of operations. The actual oil sands operations were relatively unscathed, but a 150-person modular work camp was destroyed, Mr. Bailey said.

Nexen said that following a total shutdown owing to the fire, SAGD production of 15,000 barrels of bitumen a day started again in late June. Production is set to increase over the next month to about 27,000 barrels a day – compared with 40,000 to 50,000 b/d before the January explosion.

Nexen was purchased by CNOOC for $15-billion in early 2013, with Long Lake being the centrepiece of the sale. The deal, which set off a national debate about foreign state-controlled firms holding majority stakes in oil sands operations and pushed the federal government to create new rules around foreign ownership, included assets in the North Sea, the Gulf of Mexico and Africa.

On Tuesday, Nexen chief executive officer Fang Zhi expressed his sympathies to the families of the men who died in the explosion in January and apologized for the damage to the environment from the pipeline leak.

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He also said the Chinese state-run energy giant remains committed to its Long Lake investment.

"Oil sands are long-term assets that need careful cultivation," he said.

The layoffs will be focused in the company's Canadian operations, both at the Long Lake site and at corporate headquarters in Calgary, Mr. Fang added.

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