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Unrest in Yemen could see Nexen quit key oil project

Nexen Inc. could be forced out of one of its biggest oil projects by the end of the year, as violent political protests continue in Yemen, making it difficult for the Canadian company to negotiate a future there.

The Calgary energy outfit has operated in Yemen for about 25 years, staying even through a civil war, and has been producing oil there for about 18. But now, after serving as the county's largest oil operator, one of Nexen's two contracts in Yemen expires Dec. 17. The company has said it is trying to stay, but at the same time, preparing to leave.

Political turmoil in the Middle East and North Africa, which started with protests in January and has been dubbed the "Arab Spring," has interrupted the oil and gas business across the region.

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In Yemen, a violent standoff between the regime of President Ali Abdullah Saleh and thousands of pro-democracy protesters – backed by opposition parties and defected soldiers – has dragged on for nine months.

But the delays and stalled negotiations caused by the unrest could morph into a boon for the industry as countries reshape themselves.

"Ultimately it could be very positive for producers entering this region because I think we're headed in the right direction," Scott Bolton, head of PricewaterhouseCoopers' Canadian energy team. "There's been a flowering of democracy … It could be, in the long run, positive."

The uprising, however, has been rocky for Nexen. "The political situation is making it difficult to make visible progress on a [contract]extension," Kevin Reinhart, Nexen's chief financial officer, said in the company's third-quarter conference call Thursday. "While we continue our efforts, we are preparing for an orderly exit if these efforts prove unsuccessful."

Of the 164,000 barrels of oil equivalent per day Nexen produced after royalties in the quarter, 17,000 barrels came from Yemen. Nexen has two projects in the Middle Eastern state, but it is the one that produces about 15,500 barrels of oil equivalent per day that sports the imminent expiry date. Mr. Reinhart said Nexen's after-royalty production will be "up a bit" if it is shut out of its largest project in Yemen but able to successfully crank up its offshore Nigerian effort, Usan. Profit margins in Nigeria, he said, are better than those in Yemen.

Nexen on Thursday cut its 2011 production guidance for the second time since July. It now expects to produce between 200,000 and 215,000 barrels of oil equivalent per day this year, down from its July forecast of between 210,000 and 230,000 barrels per day. Nexen in May predicted it would churn out about 230,000 barrels of oil per day.

The global energy company, with struggling operations in the oil sands, blamed both cuts on troubles tied to third parties at its Buzzard property, an offshore project in the United Kingdom. Nexen and its partners approved plans to build their $3.3-billion U.K. Golden Eagle development, and expect to pump out its first drops of oil in late 2014, the company said in a statement. Golden Eagle's production will come on just as the Buzzard project begins to decline, executives said. Britain's Department of Energy and Climate Change has approved the project, said Nexen, which holds a 36.54-per-cent stake in Golden Eagle and serves as its operator.

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Nexen made $200-million or 38 cents per share in the quarter, compared to $581-million or $1.11 a share. Its cash flow from operations, which indicates how much money it has to fund its budget, rang in at $516-million in the quarter, up from $496-million in the third quarter of 2010.

The company's Long Lake oil sands project had its best ever quarter for production, churning out a little under 30,000 barrels of bitumen per day, despite scheduled maintenance, Mr. Reinhart said.

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About the Author

Carrie Tait joined the Globe in January, 2011, mainly reporting on energy from the Calgary bureau. Previously, she spent six years working for the National Post in both Calgary and Toronto. She has a master’s degree in journalism from the University of Western Ontario and a bachelor’s degree in political studies from the University of Saskatchewan. More

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