Rick Jensen - Policy & Regulatory Experience in British Columbia.
Nexen Shale Gas Development:Policy & Regulatory Experience in British Columbia
Forward-Looking Statements: Certain statements in this report constitute “forward-looking statements” (within the meaning of the United States Private Securities Litigation Reform Act of 1995) or “forward-looking information”(within the meaning of applicable Canadian securities legislation). Such statements or information (together “forward-looking statements”) are generally identifiable by the forward-looking terminology used such as “anticipate”,“believe”, “intend”, “plan”, “expect”, “estimate”, “budget”, “outlook”, “forecast” or other similar words and include statements relating to or associated with individual wells, regions or projects. Any statements as to possible futurecrude oil, natural gas or chemicals prices, future production levels, future capital expenditures and their allocation to exploration and development activities, future earnings, future asset acquisitions or dispositions, future sourcesof funding for our capital program, future debt levels, availability of committed credit facilities, possible commerciality, development plans or capacity expansions, future ability to execute dispositions of assets or businesses,future sources of liquidity, cash flows and their uses, future drilling of new wells, ultimate recoverability of current and long-term assets, ultimate recoverability of reserves or resources, expected finding and development costs,expected operating costs, future cost recovery oil revenues from our Yemen operations, future demand for chemicals products, estimates on a per share basis, future foreign currency exchange rates, future expenditures andfuture allowances relating to environmental matters and dates by which certain areas will be developed, come on stream, or reach expected operating capacity and changes in any of the foregoing are forward-looking statements.Statements relating to “reserves” or “resources” are forward-looking statements, as they involve the implied assessment, based on estimates and assumptions that the reserves and resources described exist in the quantitiespredicted or estimated, and can be profitably produced in the future.The forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or impliedby such statements. Such factors include, among others: market prices for oil and gas and chemicals products; our ability to explore, develop, produce, upgrade and transport crude oil and natural gas to markets; ultimateeffectiveness of design or design modifications to facilities; the results of exploration and development drilling and related activities; volatility in energy trading markets; foreign-currency exchange rates; economic conditions in thecountries and regions in which we carry on business; governmental actions including changes to taxes or royalties, changes in environmental and other laws and regulations; renegotiations of contracts; results of litigation,arbitration or regulatory proceedings; and political uncertainty, including actions by terrorists, insurgent or other groups, or other armed conflict, including conflict between states. The impact of any one risk, uncertainty or factoron a particular forward-looking statement is not determinable with certainty as these factors are interdependent, and management’s future course of action would depend on our assessment of all information at that time.Although we believe that the expectations conveyed by the forward-looking statements are reasonable based on information available to us on the date such forward-looking statements were made, no assurances can be givenas to future results, levels of activity and achievements. Undue reliance should not be placed on the statements contained herein, which are made as of the date hereof and, except as required by law, Nexen undertakes noobligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained herein are expressly qualified by this cautionarystatement. Readers should also refer to Items 1A and 7A in our 2009 Annual Report on Form 10-K for further discussion of the risk factors.Cautionary Note to US InvestorsIn this disclosure, we may refer to “recoverable reserves”, “recoverable resources” and “recoverable contingent resources” which are inherently more uncertain than proved reserves or probable reserves. These terms are notused in our filings with the SEC. Our reserves and related performance measures represent our working interest before royalties, unless otherwise indicated. Please refer to our Annual Report on Form 10-K available from us orthe SEC for further reserve disclosure.Cautionary Note to Canadian InvestorsNexen is an SEC registrant and a voluntary Form 10-K (and related forms) filer. Therefore, our reserves estimates and securities regulatory disclosures follow SEC requirements. In Canada, National Instrument 51-101—Standards of Disclosure for Oil and Gas Activities (NI 51-101) prescribes that Canadian companies follow certain standards for the preparation and disclosure of reserves and related information. Nexen’s reserves disclosures aremade in reliance upon exemptions granted to it by Canadian securities regulators from certain requirements of NI 51-101 which permits us to:● prepare our reserves estimates and related disclosures in accordance with SEC disclosure requirements, generally accepted industry practices in the US and the Canadian Oil and Gas Evaluation Handbook (COGE Handbook)standards modified to reflect SEC requirements;● substitute those SEC disclosures for much of the annual disclosure required by NI 51-101; and● rely upon internally-generated reserves estimates and the Standardized Measure of Discounted Future Net Cash Flows and Changes Therein, included in the Supplementary Financial Information, without the requirement tohave those estimates evaluated or audited by independent qualified reserves consultants.As a result of these exemptions, Nexen’s disclosures may differ from other Canadian companies and Canadian investors should note the following fundamental differences in reserves estimates and related disclosures containedin the Form 10-K:● SEC registrants apply SEC reserves definitions and prepare their reserves estimates in accordance with SEC requirements and generally accepted industry practices in the US whereas NI 51-101 requires adherence to thedefinitions and standards promulgated by the COGE Handbook;● the SEC’s technical rules in estimating reserves differ from NI 51-101 in areas such as the use of reliable technology, aerial extent around a drilled location, quantities below the lowest known oil and quantities across anundrilled fault block;● the SEC mandates disclosure of proved reserves and the Standardized Measure of Discounted Future Net Cash Flows and Changes Therein calculated using the year’s 12-month average prices and costs only whereas NI 51-101 requires disclosure of reserves and related future net revenues using forecast prices;● the SEC mandates disclosure of reserves by geographic area only whereas NI 51-101 requires disclosure of more reserve categories and product types;● the SEC prescribes certain information about proved and probable undeveloped reserves and future developments costs whereas NI 51-101 requirements are different;● the SEC does not require disclosure of finding and development (F&D) costs per boe of proved reserves additions whereas NI 51-101 requires that various F&D costs per boe and additional information be disclosed;● the SEC leaves the engagement of independent qualified reserves consultants to the discretion of a company’s board of directors whereas NI 51-101 requires issuers to engage such evaluators;● the SEC does not allow proved and probable reserves to be aggregated whereas NI 51-101 requires issuers disclose such; and● the reserves disclosures in this document have not been reviewed by the independent qualified reserves consultants whereas NI 51-101 requires them to review it.The foregoing is a general description of the principal differences only. The differences between SEC requirements and NI 51-101 may be material.NI 51-101 requires that we make the following disclosures:● we use oil equivalents (boe) to express quantities of natural gas and crude oil in a common unit. A conversion ratio of 6 mcf of natural gas to 1 barrel of oil is used. Boe may be misleading, particularly if used in isolation. Theconversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead; and● because reserves data are based on judgments regarding future events actual results will vary and the variations may be material. Variations as a result of future events are expected to be consistent with the fact that reservesare categorized according to the probability of their recovery.ResourcesNexen’s estimates of contingent resources are based on definitions set out in the Canadian Oil and Gas Evaluation Handbook which generally describe contingent resources as those quantities of petroleum estimated, as of a given date, to be potentially recoverablefrom known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Such contingencies may include, but are not limited to, factorssuch as economic, legal, environmental, political and regulatory matters or a lack of markets. Specific contingencies precluding these contingent resources being classified as reserves include but are not limited to: future drilling program results, drilling andcompletions optimization, stakeholder and regulatory approval of future drilling and infrastructure plans, access to required infrastructure, economic fiscal terms, a lower level of delineation, the absence of regulatory approvals, detailed design estimates and near-term development plans, and general uncertainties associated with this early stage of evaluation. The estimated range of contingent resources reflects conservative and optimistic likelihoods of recovery. However, there is no certainty that it will be commerciallyviable to produce any portion of these contingent resources.Nexen’s estimates of discovered resources (equivalent to discovered petroleum initially-in-place) are based on definitions set out in the Canadian Oil and Gas Evaluation Handbook which generally describe discovered resources as those quantities of petroleumestimated, as of a given date, to be contained in known accumulations prior to production. Discovered resources do not represent recoverable volumes. We disclose additional information regarding resource estimates in accordance with NI 51-101. Thesedisclosures can be found on our website and on SEDAR.Cautionary statement: In the case of discovered resources or a subcategory of discovered resources other than reserves, there is no certainty that it will be commercially viable to produce any portion of the resources. In the case of undiscovered resources or asubcategory of undiscovered resources, there is no certainty that any portion of the resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources.
Lessons and Opportunities for Colombia• Engage all stakeholders early• Regulators and industry must work together to provide input into the creation of shale gas regulations to create a stable and beneficial framework that supports investment and provides competitive fiscal system• Certainty in regulatory environment – avoid tendency to issue separate statutory enactments and instead amend laws• Baseline studies are important to establish a regulatory and industry accepted starting framework• Simplify the system whenever possible to reduce cost, bureaucracy and confusion• Continuous dialogue between industry, government and other shale gas jurisdictions to share best practices and address concerns• Win/win scenario can be achieved!
Nexen’s 2011 Activities North Sea: Opening new Canada: high impact BC Shale Gas areas and Opportunities: Horn River growing Oil sands: Long Lake through exploration. Adding value to Golden Eagle Gulf of Mexico: and Buzzard Resuming activities areas. following Macondo spill hiatus: Appomattox, Kakuna, Angel Fire and Cypress Colombia: Unconventional West Africa: Yemen: exploration: Shale Gas Evaluating high quality Renegotiating PSA for opportunities: Potential Masila block. Evaluating exploration and appraisal opportunities. drilling
Nexen sees excellent opportunities in Colombia• Nexen is in early operational stages of drilling four wells on our Sueva and Chiquinquira shale gas blocks• Currently working with Petrobras to drill on the Boqueron block in 2011• Nexen is interested in developing and increasing our shale gas position in Colombia
Nexen position - Colombia LOWER VILLETA TEA Nexen 100% WI Eastern Bogotá Cordillera Basin CHIQUINQUIRA E&P Nexen 100% WI BOQUERON ASSOCIATION CONTRACT SUEVA E&P Nexen NX 10% WI 100% WI FOMEQUE TEA ECP 75% WI Nexen 100% WI PB 15% WI GUANDO SW NX 10% WI ECP 75% WI PB 15% WI VILLARRICA NORTE E&P NX 50% WI PB 50%WI
Well-positioned in North-Eastern BC for shale gas CORDOVA N.W.T • Significant shale gas acreage in NE British Columbia, Canada with excellent land tenure (15 years plus) LIARD • 300,000 total acres split over 3 areas Alberta BASIN • Horn River • Cordova • Liard • Development in Horn River is at least 2 HORN RIVER years ahead of other regions BASIN • Horn River is median depth with high gas in place (GIP) Fort • Cordova is shallower, lower GIP Nelson • Liard is deeper, potentially higher GIP Areas where land Existing Nexen was acquired in Highways Acreage subsequent land Pipelines sale (dashed – Proposed)
Nexen’s experience to date in North-Eastern BC • Drilled and cored wells indicating thick shale resource The Resource is there • Third party evaluation estimates Nexen’s shale gas resource as 4-15 tcf contingent recoverable resource and 5-23 tcf of unrisked prospective resource • Competitor wells drilled near Nexen’s lease lines confirm Nexen is in the heart of the play • Wells successfully fracked – resource density supports multiple The Resource fracs per well; well productivity is excellent; frac costs coming can be produced down • Strong initial production rates (up to 1 mmcf/d per frac) • Long-term take away capacity secured • Play breaks even (10% IRR) at US$4-4.50/mcf Breakevens are dropping rapidly • We control the pace of development; small discrete capital allocations result in quick production adds • Early signs indicate lower declines than other shale plays leading to superior economics
Nexen continues to reduce costs and improve productivity Metrics • Driving down drilling and completion costs • Improving productivities • Producing at well rates in line with regional competitors and expectations Next Steps Horn River ($/frac) • 8-well pad program adding 50 mmcf/d in early 6 2011($MM/ Frac) • Pace of development will be driven by gas price 4 outlook Target 2 0 2008 2009 2010 2011 2012 Drill Frac & Complete Total D & C
Future shale gas potential of North-Eastern BC • Potentially more than doubles Nexen’s Contingent proved reserves 25 Resource High • 18 wells with 18 fracs/well over 1,800m well 20 Low length supports 100 mmcf/d facility • Growing competitive advantage 15TCF • 2 more wells will hold all acreage for 10 yrs 10 • No one has as much core coverage & analysis as Nexen does 5 • Strategically impacts Nexen’s portfolio • Short cycle time production adds Horn River Cordova Total Liard • Increased exposure to natural gas
Nexen industry leader in shale gas completions Fracs/Day Performance vs Major Competitors 4.0 3.5 Fracs/Day New Industry Record 3.5 3.0 2.5 2.5Fracs per day 1.7 Fracs/Day 1.5 – 2.0 2.0 New Industry Record 1.7 1.5 Various Competitors 1.0 0.8 Competitor A 0.4 0.5 Nexen Nexen Nexen Nexen 0.0 Q1 2008 Winter 2008-2009 Summer 2009 2009 to Winter 2009-2010 Summer 2010 Single Well Pad 2 Well Pad 3 Well Pad 2010 8 Well Pad
EUR (bcf) 0 2 4 6 8 Horn River Haynesville Vienna Shale Eagle FordAnadarko WoodfordMarcellus NortheastMarcellus Southwest Barnett Woodford Sweden Shale Germany Shale Poland Shale Mancos Gothic Arkoma Woodford Barnett Utica Algeria Shale China Shale Karoo Fayetteville Pierre Cody Baxter Barnett Southwest Horn River holds highest Expected Ultimate Return rates Palo Duro Floyd Huron Horn River driven by good rocks and rates and shallow production declines well design that deliver high initial flow Conasauga New Albany Chattanooga Antrim
Comparable resource to leading U.S. shale basins Nexen Barnett Dilly Creek Parameters* Shale Parameters** Thickness (Ft) 572 to 578 355 Permeability (nd) 150 to 450 250 Gas-Filled Porosity (%) 3.2 to 6.2 4.5 Maturity (Ro) 2.2 to 2.6 2.2 Silica Content (%) 45 to 60 55 GIP (Bcf/Mi2) (Discovered 130 to 250 193 Resources) * Parameters reflect log and core analysis results from three vertical appraisal wells ** Barnett shale data from EOG Resources Shale Presentation, February 2008 Our contingent recoverable resource estimate of 3 to 6 tcf reflects an assumed 20% recovery factor compared to some Barnett recovery factors ranging from 30-35% Note: Refer to our press release dated April 22, 2008 for information with respect to forward-looking statements and cautionary notes.
2. Government Approach:The BC Government’s Approach to Development: Vested Interest in Growth and Supporting Policy and Regulations
Government has Vested Interest in Development of the IndustryThe BC Government has recognized industry as critical to revenues amidstdeclines in other sectors and growing demands on social programs2009 Throne Speech: “In 2008 we saw record oil and gas rights sales of $2.66 billion.Beyond that, the industry pays corporate tax, personal income tax, sales tax, property taxand more. Those dollars go to support priorities like health care and education in ourcommunities. Far from government subsidizing energy, energy is subsidizinggovernment.” Supportive policy and collaboration have ensued….
Requirements and benefits from the government/community perspectiveGovernment/community needs• Secure gas supply – energy security issues• Skilled jobs• Revenue• Infrastructure developmentGovernment and community benefits from shale gas development• Energy security• Encourages exploration• Promotes foreign investment in the country• Develop local industry and expertise• Technological transfer• Provides jobs and economic growth
Government role in creating the regulatory structureGovernment role to establish successful regulatory structure• Understand the process for unconventional development, costs and regulations• Balance the needs of industry and local stakeholders• Voice and input in development and pace of industry • Single window regulator vs. multiple voices and influence
3. Industry Approach:Nexen and the Industry’s Approach to Development
Requirements from industry perspectiveIndustry needs• Favorable fiscal terms that promotes exploration and shares risk• Sanctity of contract• Stable, streamlined, open and transparent regulatory structure• Transparent process for licensing and permitting• Access to financing• Infrastructure to customer• Liberalized gas market• Political stability• Secure and predictable operating environment• Legitimate government consultation on regulation, terms and policy
Benefits for industryIndustry benefit from shale gas development• Active investment• Testing potential• Additional reserves• Access to market• Partnership with governments and stakeholders• Make reasonable fiscal returns
4. Collaborative Approach: Opportunities for Collaboration and Planning in a Greenfield Area
Industry Collaboration on PlanningDevelopment of the HornRiver Producers Group:• Formed by industry in 2007 to: • Collaborate on infrastructure • Build local capacity • Engage communities in the long term development plans• Now involvement includes government, indigenous and community of Fort Nelson.• Achievements include: • Environmental studies • Operating protocol development • Footprint reduction • Regulatory suggestions • Communication • Social benefits• Nexen is able to direct HRPG efforts though our leadership position. Fort Nelson, BC
Working Early with Governments and Regulators• Using water monitoring data, working with government on surface water licensing protocols• Inventing technology to enable use of deep saline groundwater – working with government to define saline groundwater and develop regulations that enable its use• Supporting the development of wildlife policies that both protect the species and enable responsible development• Open relationship with indigenous peoples - puts us ahead of regulatory process• Providing technical and financial information to the regulator to enable the best “fit for purpose” regulations possible
Regulatory certainty encourages investment• Government empowerment of “one window” operational regulator – the Oil and Gas Commission (OGC) • All activities deemed oil and gas activities are permitted by the OGC.• Government Developed the Oil and Gas Activities Act • Various pieces of legislation combined into a single overarching Act. • Detailed consultation with industry • Aimed at increased certainty • Focus on simplicity and mechanisms to review “unintended consequences”• Government continues to engage Nexen and industry in an open and consultative manner – examples: • Wildlife policy • Roads regulation (increase certainty on road use and cost sharing) • Climate change
Policy and Programs • Recognition of challenges: • Mobility of capital • Low price environment • Distance from markets • Lack of public infrastructure • Competition for investment dollars • Resultant policies and programs include: • Revamp to the deep gas royalty credit • Net Profit Royalty • Infrastructure Royalty Credit Program • Updated policy on holding lands • Government dollars allocated for infrastructure
Recognized Leadership Role in Dealing with Indigenous Peoples The BC Government has recognized and undertaken its duty to consult • Province has signed Economic Benefits Agreements with some indigenous peoples • Royalty stream for indigenous groups • Province has signed Consultation Protocol Agreements with some indigenous peoples • Outlines consultation requirements and timelines Nexen’s Role with Indigenous peoples • Strategic community investment • Capacity building for local indigenous groups
5. Key challenges facing shale gas exploration
Issues to consider in shale gas industry• Proving resource is present with sufficient resource density• Increased well density and design• Land use and access• Challenging economics• Water management and water stress• Frac sand supply• Land disturbances• Infrastructure to market• Environmental issues• Impact on industry services and supply chain requirements• Security• Regulatory stability• Indigenous concerns