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Heads roll as Nexen aims to up its game

Like a struggling hockey team, the front bench of Canada’s Nexen has been shaken up with the surprise resignation of its chief executive and senior vice-president, amid claims of poor operational performance

Marvin Romanow and Gary Nieuwenburg left the Calgary-based company with immediate effect. Chief financial officer Kevin Reinhart will continue as the firm’s interim president until a replacement is found.

Nexen, Canada’s fifth-largest independent oil and gas producer, has struggled with a sagging share price and missed production targets at its Long Lake oil-sands project, which is yet to hit design production rates more than three years since it was first commissioned.

Both Romanow and Nieuwenberg were strong proponents of Long Lake and its disappointing results – present output of about 28,000 barrels a day (b/d) is less than half its rated capacity of about 70,000 b/d – was likely a key factor in their departure. Last year, the company’s Yemen concession was not renewed and it struggled with weather delays at its North Sea projects, which contributed to disappointing production growth.

Investors demand accountability

While many of these factors were clearly beyond Romanow’s control, large institutional investors demanded accountability. The company’s share price, which fell by almost 40% in 2011, reflected impatience with the leadership. France’s Total has long been rumoured to be interested in Nexen, and its falling shares are a potent reminder of its vulnerability to a hostile take-over.

Romanow was appointed president on 1 January 2009, after serving as Nexen’s executive vice-president and chief financial officer since 2001. He replaced Charlie Fischer, a Calgary native who steered the company from its inception – as a spin-out of Occidental Petroleum’s Canadian division.

Nexen chairman Francis Saville was unapologetic for wielding the axe. "We are committed to closing the value gap for our shareholders through execution of our oil sands, conventional offshore and unconventional gas strategies.”

The financial community welcomed the news, with the Toronto Stock Exchange registering a jump of C$1.33 ($1.30) in the company’s shares – almost 9% – to C$18.40 within minutes of the announcement

Long Lake looms

The bigger question is what’s next for Long Lake, Canada’s fourth integrated oil-sands project. Long Lake is unique because it uses an innovative gasification reactor to upgrade bitumen into synthetic crude oil, which fetches a higher price in North American markets.

But production has lagged from day one, which company officials attribute to poor in situ reservoir performance. After a seemingly endless stream of design modifications, the company hopes Long Lake will start generating a profit this year. The project came on line in late 2008. Long Lake, which carried budgeted development costs of C$3 billion eventually cost more than C$6.1 billion, not including the most recent design changes.

Although it takes time for new oil-sands operations to ramp up, Long Lake’s delays and constant spending increases forced junior partner Opti Canada into bankruptcy. Its 35% interest was snatched up by China’s CNOOC for $2.2 billion in October. Although it’s good news for Long Lake, it’s safe to assume the new Chinese owners will expect a significantly higher level of operational performance.

Nexen could continue with Long Lake, despite fears that it’s become a money pit, or it could sell its 65% interest. If it opts to write down the carrying value of the reserves, it will take a nasty financial hit to the books. But that would only create more pitfalls.

As the general manager of any hockey team can attest, who wants an ageing superstar performing to less than half of its potential? It’s much better to improve an underperforming asset to increase its value for a potential playoff run. Unfortunately for Nexen’s front liners, the shareholders – have limited patience and they’re the ones ultimately paying for the tickets. They’ve spoken, and heads have rolled.

For the rest of the team, it’s back to basics, to salvage what’s left of the peak winter season.

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