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Nexen evaluating future activities in Yemen after Masila sharing contract not renewed
Nexen (TSE:NXY)(NYSE:NXY) said on Wednesday that the Yemen Government did not renew its production sharing agreement at the Masila block, prompting the oil and gas company to evaluate future activities in the country.
The production sharing agreement is scheduled to expire on December 17, 2011. The block will then be operated by a newly created Yemen state-owned company.
Nexen chief executive Marvin Romanow said: "The Masila discovery started Nexen's long and mutually beneficial association with Yemen and its people.
"While we're disappointed we did not receive an extension, our operations at Masila have generated significant value for our company, enabling us to deploy the cash flow to build our current portfolio of legacy assets."
Nexen first entered Yemen in 1987, and has produced more than 1.1 billion barrels of oil. Production at Masila peaked in 2003 at 225,000 barrels of oil per day (bbl/d), and has since fallen to an average 24,000 to 28,000 bbl/d.
The company said that after royalties its share of production this year is expected to be about 14,000 to 16,000 bbl/d.
Nexen said the decrease in overall production volumes in Yemen will be mitigated by the start-up of the Usan offshore project in West Africa, which is slated to begin production in the first half of 2012.
"This change in production mix is expected to contribute to higher cash flow from operations in 2012 as Usan's anticipated netback is about double the Yemen netback at current prices," Romanow said.
The production agreements expiry will not affect Nexen’s reserves. The company noted it did not book any barrels beyond the contracts term. Capital costs were also amortized over the contract period, the company said.
A second production agreement block in Yemen, named East Al-Hajr, is slated to expire in 2023. That block produces about 6,000 to 8,000 bbl/d, after royalties Nexen nets 3,000 to 4,000 bbl/d.
"We are currently evaluating alternatives with respect to Block 51 and future activities in the country," the company said in a statement.
The Calgary, Alberta-based energy producer lost 41 cents, or 2.79 percent, falling to $14.29 a share on the New York Stock Exchange.