Nexen Inc. is used to navigating the restless seas of business, but the now-infamous Hurricane Ivan proved a sombre reminder that reward has its risks.
Last Monday, as Ivan made a sudden left turn into the Gulf of Mexico, Nexen began shutting in drilling operations. On Tuesday, it shut down oil production and began to evacuate its workers from offshore platforms.
Nonetheless, Nexen CEO and president Charlie Fischer is adamant that the route to growth, although sometimes stormy, is well worth the voyage.
“In 1994, the Western Canadian Sedimentary Basin was still relatively immature . . . today, however, I believe our basin is maturing rapidly,” Fischer said in a speech last week to the Calgary Chamber of Commerce.
|Hurricane Ivan, shown off the Alabama coast last week, forced Nexen to turn off a few spigots.|
“The opportunities today are found in non-conventional plays such as oilsands, coalbed methane and internationally.”
The Gulf of Mexico is a core area for Nexen, representing almost one-quarter of its 250,000 barrel of oil equivalent (boe) per day total production.
Ivan forced the Calgary-based explorer and producer (E&P) to turn off the spigot on roughly three-quarters of its 60,000 boe per day Gulf output.
“It will have a negative impact on volumes, but hopefully we’ll ramp back up quickly . . . that’s just one of the risks of working in the Gulf of Mexico,” Fischer said.
“We don’t control nature; we plan for nature’s events when we design our equipment . . . and when we do our plans, we always anticipate some downtime for storms.”
Fischer doesn’t believe investors feel antsy about Nexen’s business choices, even though the stock fell 47 cents per share the day of the suspension, before rebounding the next day. Two years ago the company was forced to shut in a small portion of its Gulf production due to another tempest.
Despite being located in Hurricane Alley and in the oft-turbulent political waters of Africa, the Middle East and South America, Nexen believes it is on the right course. To avoid stepping outside the comfort zone could doom Canadian explorers to other dangers, such as losing the competitive advantage and succumbing to takeovers.
Canadian E&Ps have been actively tapping hydrocarbons abroad since the 1980s, which accelerated dramatically in the 1990s. This trend must only increase, Fischer said, as conventional sources continue to become scarce and companies strive to replace reserves and production.
He said public companies continually compete with their contemporaries from around the world for much sought-after investment dollars, and therefore must seek growth through the drillbit. However, globalization means grappling geopolitical activities of these countries and regions, where social-economic returns are often intertwined with security concerns.
In the 18 years since Nexen began oil exploration and production in Yemen, it has never had to suspend its operations, despite the volatile nature of the Middle East. Fischer said at least part of this success is due to the company’s efforts with local governments and communities to become a stakeholder in the challenges they face.
|Nexen CEO Charlie Fischer says risk is part of business.|
For example, Nexen, along with the Yemeni government and the Canadian International Development Agency, is pursuing a water-management project for communities near the company’s operations. It’s an important project, Fischer said, in a country where only 17 per cent of the rural population has access to clean water.
Another initiative sees Nexen sponsor 40 Yemenis annually to study at Calgary post- secondary institutions.
Fischer isn’t Pollyanna-ish about his company’s good works, not wanting to leave the impression that these efforts are solely driven by Nexen’s charitable spirit. In the end, he told the chamber audience, it comes down good business.
“If you don’t work closely with governments and host communities, you could run into big (production) interruptions of some sort, and the cost of this could be extremely high,” he said.
The CEO said bigger risks are facing the industry closer to home, notably legislative and regulatory changes introduced in the wake of corporate scandals south of the border. While Canadian regulators have taken a more conservative approach, he added, their American counterparts are piling on the regulatory requirements, sometimes to excess.
Fischer figures that new regulations under the 2002 Sarbanes-Oxley Act, implemented by the U.S. Securities and Exchange Commission (SEC), costs the company about $2 million per year. He agreed steps needed to be taken following debacles such as Enron and WorldCom, but said he believes there were other means at the SEC’s disposal.
“We’re spending more on attestation and review than our basic audit costs. For years we have met all the standards . . . and I’m not sure the (regulatory) institutions fully realize the cost, not only in absolute time and resources, but in lost opportunity as we try and meet all of these standards,” he said.
Fischer also advocates creating a climate whereby companies strive to achieve ethics in corporate governance, and not just policing measures. He stressed that more debate is needed on the issue.
(John Ludwick can be reached at email@example.com)