Nexen Reclassifies 8% of Proved Reserves, Blames Drop on Spending Cutbacks
Calgary-based Nexen Inc. became the latest producer to revise downward its oil and gas reserves, reclassifying 8% of its proved North American reserves this week. The company, which will take a C$175 million (C$1.40/share) writedown in fourth quarter earnings, blamed the revision on a cutback in spending on aging, conventional North American assets.
According to Nexen, as of Dec. 31, 2003, proved reserves of Canadian oil fell to 114 MMboe from 189 MMboe for the same period a year earlier and Canadian proved gas reserves fell to 78 MMboe from 103 MMboe. U.S. proved oil reserves fell to 75 MMboe from 2002 and U.S. proved gas reserves fell to 55 MMboe from 51 MMboe. It revised upward its proved reserves in Yemen to 192 MMboe from 183 MMboe and other international proved reserves also rose to 11 MMboe from 10 MMboe.
Probable gas reserves between 2002 and 2003 also fell in the United States to 12 MMboe from 15 MMboe, while probable oil reserves fell in Canada to 38 MMboe from 59 MMboe. Probable Canadian gas reserves were up to 14 MMboe from 12 MMboe, while probable U.S. oil reserves jumped to 21 MMboe from 14 MMboe.
To counter the Canadian reserve losses, Nexen plans to give the go ahead in the next few weeks on a C$3 billion Long Lake, AB, oil sands project, which is expected to produce 60,000 bbl/d beginning in 2007. So far, Nexen has recognized more than 300 million barrels of crude as probable reserves from Long Lake, but CEO Charlie Fischer told analysts Wednesday that it was only a "fraction" of the barrels expected to ultimately be produced.
"We would expect, on sanctioning, to reclassify about 200 million bbl of those 300 million-plus bbl that are in probable to proved-undeveloped," Fischer said. Proved reserves in the 50% jointly owned project will rise when the project begins ramp up.
Fischer explained that Nexen, the fourth largest producer in Canada, recently has been concentrating on larger international projects that will take years to develop instead of its conventional drilling, which had been focused in Alberta and Saskatchewan. The shift in capital spending in Canada and the deepwater Gulf of Mexico's Aspen and Gunnison developments brought in higher profit margins but lower production, he said.
"Canadian conventional development represented just 10% of our 2003 capital program and will only represent 7% of our 2004 program," said CFO Marvin Romanow. "This is reflected in our reserve revisions. Half of the Canadian revisions resulted from a more conservative view of future production profiles."
Fischer noted that the conventional oil and gas properties in Canada "are continuing to mature, and we have been managing our capital investment accordingly. Over the past few years, we have re-invested less than half of the cash flow from these assets back into the region."
"Following our annual evaluation, we reduced the estimate of our proved reserves by 67 million boe," Nexen noted in a statement on the reserves. "This is 8% of our total world-wide reserves and includes a reduction of 60 million boe to our conventional proved reserves in Canada."
Fischer said the revisions would have no impact on the company's production guidance for 2004. "Our Canadian conventional assets have significant remaining economic value and we will continue to manage them to maximize that value."