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Nexen Eyes Up to 16 Wells in Horn River Basin by Year's End

Nexen Inc., which locked up a position in the emerging Horn River Basin of British Columbia earlier this year, is setting aside more money to drill up to 16 natural gas wells in the play by the end of the year.

The Calgary-based producer, which announced its earnings results Thursday, is bumping up its capital spending across the board to develop several projects worldwide, including its leasehold at Dilly Creek in British Columbia. Nexen has accumulated more than 123,000 net ares in the basin over the past 18 months in lands that run parallel to a joint venture of EnCana Corp. and Apache Corp. (see NGI, April 28).

During a conference call Thursday, CFO Marvin Romanow told energy analysts that capital spending this year will jump another C$600-800 million to "allow us to accelerate shale gas, coalbed methane and shallow gas projects in Western Canada, along with development drilling in Yemen and the development of Usan in offshore West Africa."

Of the total, about C$150 million has been set aside for its gas projects. Total capital spending this year is expected to be C$3-3.2 billion, up from an earlier budget of C$2.4 billion.

"We expect this additional investment will add between 4,000 and 6,000 boe/d to our 2008 exit volumes, and bring our total capital investment program for 2008 to between C$3 billion and C$3.2 billion," Romanow said.

Nexen, whose worldwide portfolio includes oil and gas assets spread onshore and offshore North America, has a strategy that "focuses on identifying resource opportunities and moving early to build an asset base," the CFO said. "A great example of this is our Horn River shale gas position. Our Horn River basin in northeast British Columbia has the potential to become one of the most significant shale gas plays in North America and has been frequently compared to the Barnett Shale in Texas."

To quickly commercialize its Horn River stake, Nexen has to "build some infrastructure, so we've got some road cost; we've got some pipeline cost, and we've got to line up equipment for the winter program, and we'll start that winter program thoroughly," Romanow told analysts. "One of things we are trying to do here is accelerate our knowledge.

The Dilly Creek winter drilling program has some "real opportunities, and we are going to go as fast as we can to define the opportunity and move toward commerciality," he said.

Nexen's Dilly Creek leasehold is estimated to contain 3-6 Tcf, and "that's roughly 0.5-1.0 billion barrels of oil equivalent of recoverable contingent resource," Romanow said. "This could double our total proved reserves of the company," but "further appraisal activity is required before these estimates can be finalized and commerciality established."

Nexen now has one horizontal well and one vertical well tied in, and the two wells each are producing around 2 MMcf/d, said CEO Charlie Fischer, who also participated in the conference call.

"The horizontal is a well that we had completed using two frac segments. and what we are seeing is about that when we look across the industry results, we've got 1 MMcf/d capacity on initial production from a frac segment," Fischer said. "So, it lines up with that. And when we look this summer with the two wells, we will be looking at significantly more frac segments to try and confirm that work."

If Nexen drills a few wells this summer and ties them back, "we could see 6 MMcf/d coming in the early stages from those wells," said Fischer. "If we drill as many as 16 this winter, we'll have a lot of gas coming from that. So we think with the takeaway capacity that we have matched up with the processing capability at Fort Nelson [in British Columbia], it will get us through all of these early stages of evaluation, allow us to complete the wells, put them on long-term test where we are selling the gas, that it gives us the sense as to what those decline curves are going to look like so that it will be easier for us to determine commerciality with some history."

Nexen's profit rose 3.3% in 2Q2007 after stock-based compensation costs failed to overcome higher commodity prices. Net income rose to C$380 million (C70 cents/share), up from C$368 million (C68 cents) in 2Q2007.

Natural gas output rose 13% to 244 MMcf/d in the quarter. Oil and gas production averaged 254,000 boe/d (211,000 boe/d after royalties) in the period, which was down from the first three months. Nexen blamed the shut down of a pipeline in the United Kingdom and a strike at a refinery in Scotland, which required it to shut-in some North Sea production. However, the company said it remains on track to meet its annual production guidance.

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