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DUBAI (Reuters) - Nexen Inc confirmed on Wednesday that it will exit Yemen's Masila oilfield, the troubled Arab country's largest, after the government refused to renew its operating license.
The urgent need by Yemen for more cash, as well as political turmoil in the impoverished country, were expected to hinder Nexen's efforts to renew the license for another five years.
Canada's sixth-largest independent oil producer said it was told by the government of Yemen that its bid to extend the production sharing agreement (PSA) on Block 14 at Masila had not been accepted and the block would be operated by a Yemeni company once the PSA expired on December 17.
"The Yemeni cabinet yesterday informed us of the creation of a committee that would head up the transition from their side and we will respond to their request," said Nexen spokesman Pierre Alvarez.
Over the weekend, Yemen's state news agency reported the setting up of a new state-owned oil company to be called PetroMasila, which will replace Nexen in Block 14.
The block held Yemen's largest proven oil reserves as of end-2010, according to its Petroleum Exploration and Production Authority (PEPA).
Nexen was producing 35,000 barrels a day from the field, which in total pumps around 70,000 bpd and exports the bulk of the output through the Ash Shihr terminal on the south coast.
Nexen's share for 2011 production is expected to be about 24,000 bpd to 28,000 bpd, the company said, adding that after royalties this was to drop to 14,000 bpd to 16,000 bpd.
Yemen, the poorest Arab country, is a small, non-OPEC producer with approximately 260,000 bpd of oil production which has been in steady decline since 2001, when it hit a peak of 440,000 bpd. At Masila alone, total production peaked in 2003 at 225,000 bpd, Nexen said.
The company said it was still assessing its options for the other block it operates in Yemen, East Al Hajr, or Block 51, which produces about 6,000 to 8,000 bpd net to Nexen, with the contract set to expire in 2023.
Nexen began production in Masila in 1993 and operations have been largely unaffected during the country's long-running political crisis, except for a brief halt to output in May because of a worker strike.
Ash Shihr export terminal, where Nexen was exporting from, is still operating even as Yemen's main oil pipeline carrying Marib crude to the main export terminal Ras Isa, on the Red Sea coast, is shut down following consecutive explosions.
Yemen has been rocked by months of protests demanding the resignation of President Abdullah Ali Saleh. World powers fear that chaos in the country, home to al Qaeda's most powerful regional branch and a neighbor to the world's biggest oil exporter, Saudi Arabia, could threaten oil shipping lanes and raise the risk of militant strikes on western targets.
Nexen said the decrease in its overall oil volumes resulting from the contract expiry will be offset by its share of production from the Total SA-operated Usan offshore project in West Africa, which is expected to begin production in the first half of 2012.
Nexen will receive 36,000 bpd from Usan and the company said the oil will be twice as profitable as its Yemen production.
Despite the loss of the contract, Nexen shares rose 23 Canadian cents, or 1.5 percent, to C$15.53 on the Toronto Stock Exchange on Wednesday, even as the exchange's benchmark index fell 1.9 percent.
The company had already warned investors that the contract was at risk and few analysts had expected Nexen to long remain in the country given the political risks.
"The positive thing is that it's a clean break versus something that would have costs attached," said Alan Knowles, an analyst at Haywood Securities. "I think that's why the shares are up.
Additional reporting by Scott Haggett in Calgary and Swetha Gopinath in Bangalore; editing by James Jukwey and Rob Wilson