Nexen Inc., whose portfolio is spread across North America and overseas, on Tuesday laid out its 2012 strategy, which includes new drilling in the Gulf of Mexico (GOM) and taking as a partner Japan’s largest exploration and production (E&P) company to ramp up unconventional natural gas development in northeastern British Columbia (BC).

The Calgary-based independent is forecasting 2012 natural gas and oil production to be 185,000-220,000 boe/d, largely flat compared with this year, but with expanding cash margins. Capital spending worldwide in the coming year is expected to be C$2.7-3.2 billion, with cash flow between C$2.8 billion and C$3.3 billion assuming current prices, or C$5.30-6.30/share. Year-to-date Nexen’s output has been about 206,000 boe.

“Our budget reflects growing cash flow, on a price-neutral basis, from significant cash margin expansion,” said CEO Marvin Romanow. “We expect this increase in cash flow despite flat year-over-year production…Our capital investment is expected to be in line with cash flow at current prices and supports the next stage of our action plan,” which involves “ongoing investment in our key conventional growth initiatives” that include the Appomattox development in the GOM and continued progress in shale gas development.

Nexen, which has about 300,000 net acres in northeastern British Columbia, on Tuesday announced it would sell a 40% stake in the properties for C$700 million to a consortium led by Japan’s Inpex Corp. The partnership, in which Nexen would remain the operator, is to develop unconventional gas-weighted lands in the Horn River, Cordova and Liard basins. Nexen doubled its holdings in the area in 2010 (see Daily GPI, July 16, 2010a) and earlier this year Romanow announced that Nexen was looking for a partner.

“This joint venture represents a significant milestone in the advancement of our shale gas strategy and the premium over our invested cost shows the value we have created in a short time,” said Romanow. The transaction gives Nexen “world-class partners” that have significant upstream and liquefied natural gas (LNG) expertise.

Under the agreement the consortium is to pay Nexen C$350 million in cash up front and to pay the other half as a capital carry. Closing is expected by the end of March, at which time about C$600 million would be paid to Nexen. The transaction would give Nexen 60% interest in the JV lands, with the remaining stake to be owned through Inpex Gas British Columbia Ltd., which was jointly established by Inpex (82%) and JGC Corp. (18%).

Once the JV is closed, the partners plan to begin appraisal and development on the BC acreage, “depending on economic conditions,” Nexen said. Nexen now is drilling an 18-well pad that is scheduled to be completed in late 2012, which would increase gross production volumes to peak rates of about 155 MMcf/d in early 2013. The parties also plan to “investigate the feasibility of a potential downstream project including LNG exports.”

Nexen’s capital spending in the BC region is to be about C$400 million in 2012, with C$60 million net to Nexen after the JV capital carry, with most of it to expand its processing capacity and complete the 18-well pad.

“Our development plan will allow us to unlock the value of our significant shale gas resource in northeast British Columbia,” said Romanow. “On a gross basis, the joint venture lands are estimated to contain 4-15 Tcf of recoverable contingent resource in the Horn River and Cordova basins and a further 5-23 Tcf of prospective resource in the Liard Basin.”

Nexen’s largest source of new production in 2012 is its Usan field in Nigeria, where first oil is expected in the second half of the year. However, oil output is expected to grow in the UK offshore, and oilsands and bitumen production is forecast to advance in Canada.

In the GOM Nexen is progressing with Kakuna, its first operated exploration well since the deepwater drilling moratorium was lifted. The company also has four wells planned within its “robust” drilling program for the Appomattox area with two exploration and appraisal wells there, as well as an appraisal well at Vicksburg and an exploration well in the nearby Petersburg area. Nexen and Shell Offshore Inc. in March 2010 announced the deepwater discovery in the Appomattox Field in Mississippi Canyon Blocks 391 and 392, which Romanow said had the potential to be the “best” discovery to date in the GOM (see Daily GPI, July 16, 2010b). The Appomattox Field, where Nexen is a 20% partner, was the third discovery in the area following discoveries at Shiloh and Vicksburg.

In total Nexen is planning to drill 28 exploration and appraisal wells in 2012, with six in the GOM, two in Canada’s tight oil fields and six in Poland’s unconventional fields.

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