Laying out its goals for next year, Nexen last Tuesday said its capital expenditure budget for 2008 would only be two-thirds of its 2007 budget of C$3.6 billion. The independent Calgary-based global energy company also told analysts and investors that development of a deepwater prospect in the Gulf of Mexico (GOM) could be put off until 2009 due to a shortage of rigs.

Nexen said in 2008 it plans to invest C$2.4 billion in value adding projects, grow net production by between 8% and 10% and generate C$2.9 billion in cash flow in 2008, which would be a decline from the company’s 2007 expected cash flow of approximately C$3.4 billion.

The C$2.9 billion of cash flow, which takes into account cash taxes doubling from 2007 to approximately C$1 billion in 2008, assumes average production of 270,000 boe/d before royalties, a WTI oil price of US$70/bbl, Nymex natural gas price of US$6.75/MMBtu, and a US/Cdn exchange rate of US$0.97.

The company explained that each US$1 increase in benchmark oil prices adds about $40 million to its after-tax cash flow, whereas a decline in prices below US$50/bbl reduces cash flow by about C$20 million. Likewise, a US$0.50 change in natural gas prices impacts Nexen’s cash flow by about C$25 million and a US$0.01 variation in the exchange rate impacts its cash flow by about C$30 million.

“In 2007 we began reaping significant benefits from our investment in the North Sea, and in 2008 we will start to see a return on our investment in the Athabasca oilsands,” said Nexen CEO Charlie Fischer. “In addition, with no fixed-price hedges or caps in place, we benefit fully from high commodity prices.”

Nexen was in the top 10 in natural gas sales in NGI’s Top North American Gas Marketers ranking ( during 2Q2007. The company came in ninth for 3Q2007 (see related story).

The company also said last week that a shortage of rigs will force it to delay drilling the deepest of deepwater wells in the GOM until 2009 — three years later than originally planned.

Nexen CFO Marv Romanow revealed the delay during a conference call Wednesday to discuss the Canadian producer’s 2008 spending plans. Nexen, which operates the deepwater Knotty Head field, holds a 25% stake in the project, along with Chevron Corp., StatoilHydro ASA and BHP Billiton Ltd. Knotty Head is estimated to hold about 350 million boe.

Romanow told investors and analysts that appraisal of the field has been put on hold until the partners have a rig capable of boring a well more than five miles deep.

“At this time, we’re still searching for a rig,” Romanow said. “We’ve rejected a couple of alternatives that we have evaluated, and this well may be delayed until 2009 when our Ensco [International Inc.] rig is available.”

Chevron drilled the first exploratory well at Knotty Head to depths more than 30,000 feet deep, and the appraisal wells were to be drilled in 2006. The field is located about 170 miles southeast of New Orleans in water about 3,500 feet deep. Nexen hired Ensco in January 2006 to build a rig to drill in waters up to 8,500 feet deep, and under a two-year leasing agreement Nexen will pay about $331,000 a day for the vessel. The rig is expected to be finished in early 2009.

“Knotty Head is a 33,000-, 34,000-foot well…so you really don’t want to be at the short end of rig capacity when you think of the kind of rig to put on there,” Romanow added.

The CFO said the lack of drilling equipment has forced Nexen to delay other GOM projects — but that could change as 2008 progresses.

“In the Gulf of Mexico…we have more drill-ready locations than we have been able to put in the budget largely because of equipment availability,” Romanow said. “If that equipment availability improves through the course of 2008, I could…expand our capital investment program there and drill additional exploration wells.”

In 2008 capital will be allocated as follows:

The C$1.2 billion decrease in its capital expenditure program from 2007 reflects reduced investment in a number of the company’s major development projects. “At Long Lake, a substantial portion of the project capital is behind us; we have scaled back CBM investment in light of uncertainty surrounding proposed changes to Alberta’s royalty regime; and we have completed the Wrigley development in the GOM,” Nexen said. “We also expect to invest less on our core assets. In the deepwater GOM we have no 2008 development drilling plans for Aspen, and we have reduced our development programs for our mature assets in Canada, Yemen and on the shelf in the GOM, as we optimize our capital investment to recover remaining reserves.”

The expected C$2.9 billion of cash flow for 2008 is less than the expected cash flow of approximately C$3.4 billion for 2007 due to the impact of higher cash taxes, especially in the UK reflecting strong cash flow from Buzzard, combined with the impact of a stronger Canadian dollar.

“This budget allows us to continue building sustainable businesses in our core areas while we pursue some of the significant growth opportunities we have inventoried,” said Fischer. “At the same time, we expect to generate approximately $400 million of free cash flow after dividend payments to our shareholders. This free cash flow provides us with choices regarding future investments or debt retirement.”

Nexen said it has scaled back capital investment on its CBM projects in 2008 in light of the uncertainty that exists around proposed changes to Alberta’s royalty regime, but the company is “optimistic” that final royalty regulations will continue to support the economic development of Alberta’s unconventional gas resource. In the Fort Assiniboine area, Nexen plans to tie in 19 wells and drill three new horizontal wells. “We expect CBM production will continue to increase in 2008 as existing wells continue to dewater and the additional wells are tied in,” the company said.

Nexen said it is looking to invest approximately C$600 million in its 2008 exploration program, drilling up to 11 exploration wells in the GOM, the North Sea and Yemen. In total, this will test approximately 800 million Boe of unrisked resource potential (approximately 300 million Boe net to Nexen).

“While we have delivered significant production growth this year, we have fallen short of the expectations we set for ourselves,” commented Fischer. “The low end of our original 2007 net production guidance was 230,000 boe/d and we will miss this by approximately 9%, as a result of ramp-up delays at Buzzard, Long Lake, Wrigley and CBM coupled with disappointing results from development drilling at Aspen. Despite these setbacks, project returns have not been significantly impacted.”

©Copyright 2007Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.