Why Nexen Energy decided to gamble on Newfoundland and Labrador’s offshore
Standing on the podium at the Newfoundland and Labrador Oil and Gas Industries Association’s 2016 conference in St. John’s in June, Patrick McVeigh, Nexen Energy’s senior vice-president for global exploration and international developments, introduced his company to Newfoundland and Labrador.
McVeigh was there to tell attendees what to expect from the Calgary-based firm, which had picked up its first exploration licence in the province for $261 million via the Canada-Newfoundland and Labrador Offshore Petroleum Board’s 2015 calls for bids. “This is my first visit to St. John’s, but it likely won’t be my last,” McVeigh told the crowd gathered in the brand new St. John’s Convention Centre. “Hopefully you’ll see us around for quite some time.”
As McVeigh continued his talk, he gushed about the province’s “world class” rocks, its stable regulatory regime and said Nexen planned to grow its position in Newfoundland’s offshore. His comments made an impression. With low oil prices hammering bottom lines across the industry, speakers representing Newfoundland’s established operators (industry heavyweights like Statoil Canada, Husky Energy and Suncor Energy) were much more cautious in their remarks at the NOIA conference, stressing the need to do more with less and warning attendees that if the province wanted more oil and gas investment, it had to be competitive with other regions around the world. McVeigh, it appeared, wasn’t interested in being cautious.
However, as the saying goes, talk is cheap. Nexen isn’t the first company to come to Newfoundland and Labrador with high hopes. But this offshore region is one where only the strong have traditionally survived. Will Nexen be one of them?
That Nexen entered Newfoundland’s offshore at all surprised some industry experts. “I’m not going to lie,” says Mark Oberstoetter, a senior researcher for oil and gas consultancy Wood Mackenzie. “I was a little bit shocked.” Oberstoetter says with Nexen’s problems at its Long Lake oil sands project in northern Alberta (it has never achieved its production capacity and has been plagued by cost overruns and accidents) he figured the company would focus on optimizing that asset before it jumped into another region where the costs and geological risks are high.
But upon further review, Oberstoetter thinks Nexen’s entry into Newfoundland and Labrador’s offshore – it acquired a second exploration licence for roughly $40 million in the C-NLOPB’s 2016 call for bids – makes sense. It’s already got offshore operations in the United Kingdom’s side of the North Sea, Nigeria, the Gulf of Mexico and Trinidad and Tobago.
What’s more, Oberstoetter says Nexen’s parent company, China’s state-owned CNOOC Limited (CNOOC acquired Nexen for about $15 billion in 2013) has deep pockets and ambition to be one of the world’s premiere deep water players. “Nexen’s getting in relatively early in the Flemish Pass exploration stage, and CNOOC takes the long view,” Oberstoetter says.
CNOOC certainly has deep pockets. In 2015 it reported US$26.5 billion in revenue and US$3.1 billion in profits. But as a subsidiary of CNOOC, Nexen isn’t a mirror image of its Chinese owner. It has its own management team and different assets. Oberstoetter says since CNOOC bought the company in 2013, Nexen has remained much the same company it was before the sale. “You haven’t seen much of an expansion. It remains focused on the areas it was operating in already,” he says.
While Newfoundland’s offshore is a new area for Nexen, McVeigh says the company did its due diligence before investing in the province. McVeigh, a London University graduate who joined Nexen in November of 2013 after serving as the head of commercial activities for Shell, says the company only goes into basins where it understands the geology and where there are source rocks that have large hydrocarbon potential. He says Newfoundland and Labrador has those qualities.
The two parcels Nexen picked up are near Statoil’s Bay du Nord discovery in the Flemish Pass, which contains between 300-600 million barrels of light, sweet crude. It’s the kind of large discovery that is getting harder to come by. But in places where there’s been little exploration like the Flemish Pass, big finds are still possible. “It’s a huge land area with very few wells drilled and a high success rate of discovery,” Oberstoetter says.
Nexen knows a little bit about big offshore oil discoveries in frontier areas. The company has a 25 per cent interest in the Liza oil discovery found in 2015 and 2016 in offshore Guyana, a former British colony east of Venezuela. ExxonMobil is the operator and holds a 45 per cent interest in Liza, which could hold more than 1.4 billion barrels of recoverable oil.
Nexen would love to discover an oil field of similar size in Newfoundland and Labrador. Nexen’s Canadian producing assets, Long Lake and its 7.23 per cent interest in Syncrude’s oil sands mining and upgrading facility, churned out an average of 58,115 barrels of oil equivalent per day in 2015. CNOOC also says it has 835 million barrels of oil equivalent in reserves in Canada. By diving into Newfoundland and Labrador’s offshore, Nexen and CNOOC are showing they will be aggressive in adding to their reserves and increasing production, something shareholders always appreciate.
However, Rob Strong, a St. John’s oil and gas consultant, says it’s rare for a company to acquire big parcels in Newfoundland’s offshore like Nexen has without bringing in a partner or two. That’s because operating in frontier offshore areas is expensive. The Flemish Pass is 500 kilometres away from St. John’s, and it’s a deep water play with rough seas and challenging ice conditions. Strong says a Chevron Canada exploration well in the adjacent Orphan Basin in 2013 came up dry, although the company has never said what the well cost. “They must have deep pockets and big balls,” Strong says of Nexen going it alone in Newfoundland and Labrador.
McVeigh says Nexen is open to having partners come in on its East Coast acreage, but it doesn’t know enough about the two blocks yet. The company has started the work to increase that knowledge. It shot seismic on the exploration licence it acquired in 2015 and that’s being evaluated. As this magazine went to press, the company was in negotiations with contractors to shoot seismic on its second block. “The aim is to get seismic on that this year. We would then start interpreting that once it hits the work station towards the end of the year and early 2018,” McVeigh says. “So it’s early stages. I fully expect we will be out there drilling wells. But when that will happen I can’t say at this juncture.”
NOIA president and CEO Bob Cadigan is happy to see Nexen embrace Newfoundland and Labrador’s offshore. He says in the last two years, Nexen and six other new companies have entered the jurisdiction. That’s important for the province because it could speed up the pace of exploration and development. More companies with exploration blocks should lead to more wells drilled, and potentially more discoveries. “What we need to see is a significant number of exploration wells drilled in the next four-to-six years,” Cadigan says. “Competition is good.”
But will Nexen be one of the companies drilling those wells and will it become one of the province’s most active players rivalling Statoil, Husky, ExxonMobil and Suncor Energy? McVeigh won’t go that far. But he makes it clear Nexen likes what it sees in Newfoundland and Labrador and it’s not a company that drills and runs away. “We will not be flying in, drilling a well and flying out. That’s not how we work. We’re in for the long haul”.
This story has been edited to correct a figure that stated a Chevron Canada exploration well in the adjacent Orphan Basin in 2013 was rumoured to cost as much as $500 million.