Nexen to wait until drilling ban ends to do further work on major Gulf oil find

CALGARY - The spectre of tighter offshore drilling rules is not deterring Nexen Inc. from investing heavily in the Gulf of Mexico — home to a major oil discovery the company touts as its best in the region.

"It's a core growth area for Nexen," Lavonne Zdunich, manager of investor relations for the international energy explorer, said Tuesday.

"We've got significant exploration acreage there. There's a lot of unfound barrels still to be developed there,"

Nexen (TSX: NXY.TO) said late Monday that its Appomattox discovery in the Gulf's deep waters has a recoverable contingent resource of some 250 million barrels of oil, with the potential for more.

"We do think there is potential upside there, so this could get even bigger, said Zdunich. "But until we do additional appraisal drilling we really don't know what that upside is."

Nexen has a 20 per cent interest in Appomattox, which it is jointly developing with Royal Dutch Shell PLC (NYSE: RDS).

"Shell is significantly larger than Nexen and if they're excited about this, and if they consider it important to them, it's definitely significant for Nexen," Zdunich said.

Nexen is working with Shell on two other discoveries in the region: Shiloh and Vicksburg.

Based on the early numbers, Nexen says Appomattox could be big enough to support the development of a hub in the area.

"Those are significant capital investments and you're only going to invest in one of those if there are the reserves to support it," Zdunich said.

The Appomattox discovery could add between 46 and 92 cents per share to the company's net asset value, CIBC World Markets analyst Andrew Potter said in a note to clients.

"While this is another data point on the company's strong track record of recent exploration success, we would note that the current political environment surrounding the Gulf of Mexico could have an impact on the market's willingness to assign full value to the discovery," he said.

Nexen (TSX: NXY.TO) shares dropped a nickel Tuesday afternoon to $20.61 on the Toronto Stock Exchange.

Nexen and Shell were doing some appraisal drilling earlier this year, which was halted when a rig drilling BP PLC's Macondo well exploded in April, setting off the worst offshore oil spill in U.S. history.

The results disclosed Monday were from testing done prior to the Gulf disaster.

More appraisal work will take place once the U.S. government lifts a moratorium on offshore drilling.

The ban is set to expire Nov. 30, but federal officials have indicated it could end early. Michael Bromwich, with the Bureau of Ocean Energy Management, said Monday two significant rules on safety inspections will also be announced later this week.

"Once the moratorium is lifted, this is definitely one of the priorities for Shell and for Nexen to get moving ahead on," Zdunich said.

Companies drilling in the Gulf will need to get their permits approved once the ban ends, so it's not likely everyone will rush back to work right away.

"We don't think that the Gulf of Mexico will all of a sudden let everyone start drilling. We think it will be sort of a progression," Zdunich said.

It's also still unclear what the new rules and regulations will entail.

"We will work around those as an industry and as a company so that we can continue to drill in the Gulf of Mexico," said Zdunich

Last week, Nexen said it aimed to start up its fourth production platform in the North Sea's Buzzard field by the end of the year. Until the work wraps up, production volumes at Buzzard are expected to be 70 to 90 per cent of normal output.

In addition to its operations in the Gulf of Mexico and North Sea, Nexen has offshore assets in West Africa, an operating stake in the Long Lake oilsands venture and unconventional gas holdings in Western Canada.