Business

Nexen outlook remains cloudy amid production problems

The uncertainty surrounding Nexen Inc. is unlikely to abate soon, after the company said it could still take years to reach planned production at its troubled Long Lake oil sands project.

Chief executive officer Marvin Romanow also acknowledged Tuesday that Nexen may not be able to conclude negotiations with Yemen before its contract to produce oil in that country expires at the end of the year.

Talks on an extension of that 25-year production sharing agreement were interrupted earlier this year amid violence in Yemen. They have since resumed, Mr. Romanow told a Barclays investor conference in New York, and the company hopes to have some “clarity” on its situation by year end.

But, he said, predicting an outcome “is not easy. … I shouldn’t eliminate the possibility that we will have continuing dialogue in the country even after our contract expires in mid-December.”

Perhaps a greater concern for Nexen is its continued trouble at Long Lake, the $6-billion oil sands project that has languished far behind expectations. On Tuesday, Mr. Romanow said it will take “a few years” to see results from a series of new oil sands wells the company intends to drill over the course of 2012 and beyond. It needs additional drilling because earlier wells haven’t performed well.

“We need more wells and we need more wells in the higher quality resource, which we do have,” Mr. Romanow said.

When Long Lake construction started in 2004, the company expected substantial oil production by 2007. Now, four years later, Long Lake continues to produce just 27,900 barrels per day – under half what it was designed for.

“This project has not met our expectations,” Mr. Romanow said. He sought to assure investors that better times are ahead.

Long Lake produced positive cash flow in the second quarter of this year, and “we also expect to be potentially cash-flow positive through the whole year,” he said. That achievement suggests stronger profits are possible, he explained, since the company is currently paying full operating costs, even at 40-per-cent throughput. That means if it succeeds in producing more barrels of oil, “the incremental barrels here come with almost no marginal operating cost.”

Long Lake is 65 per cent owned by Nexen. The remainder belongs to OPTI Canada Inc., which agreed in July to be sold to Chinese firm CNOOC Ltd. for $2.1-billion.

Mr. Romanow provided new insight into the impact of the financial troubles at OPTI, which spent well over a year trying to free itself from a mountain of debt. That process forced Nexen to “spend an awful lot of psychic energy,” as it got “involved directly,” Mr. Romanow said.

“We spent a lot of time on finding a home for OPTI,” he said. “We started travelling to Asia about a year and a half ago.”

OPTI’s problems “had no impact on what the company was going to do [at Long Lake], what its plans were and what the pace of the plans were,” Mr. Romanow said. Nexen did, however, cover the cost of building a $30-million natural gas pipeline.

“In that case, we paid their share and charged them a processing fee for the pipeline,” he said