We operate the Masila Project with a 52% working interest. Our share of 2007 production was 57,000 bbls/d before royalties (29,900 after royalties). After more than 10 years of growth, our Masila fields have matured, but significant value still remains. As a result of the Production Sharing Agreement (PSA) terms that govern Masila production, we still expect to generate approximately 22% of total project free cash flow from the remaining proved reserves recoverable before the PSA expires in 2011.

The first successful Masila exploratory well was drilled at Sunah in 1990, with additional discoveries quickly following at Heijah and Camaal. Initial production began in July 1993, with the first lifting of oil in August 1993. Masila Blend oil averages 32° API at very low gas-oil ratios. Most of the oil is produced from the Upper Qishn formation, but we also produce from deeper formations including the Lower Qishn, Upper Saar, Saar, Madbi, Basal Sand and Basement formations. Production is collected at our Central Processing Facility (CPF) where water is separated for reinjection and oil is pumped to the Ash Shihr export terminal on the Indian Ocean and shipped to customers, primarily in Asia.

We are managing the pace of our drilling program to ensure we recover the remaining reserves in the most efficient, costeffective manner. In 2008, we plan to drill ten development wells and sidetracks.

Production Sharing Agreement (PSA)
The Masila PSA was signed in 1987 between the Government of Yemen and the Masila joint venture partners (Masila Partners), including Nexen. Under the PSA, we have the right to produce oil from Masila into 2011 and to negotiate a five-year extension. Production is divided into cost recovery oil and profit oil. Cost recovery oil provides for the recovery of all exploration, development, and operating costs that are funded by the Masila Partners. Costs are recovered from a maximum of 40% of production each year, as follows:

The remaining production is profit oil that is shared between the Masila Partners and the Government and is calculated on a sliding scale based on production. The Masila Partners’ share of profit oil ranges from 20% to 33%. The structure of the agreement moderates the impact on the Masila Partners’ cash flows during periods of low prices, as we recover our costs first and then share any remaining profit oil with the Government. The Government’s share of profit oil includes a component for Yemen income taxes payable by the Masila Partners at a rate of 35%. In 2007, the Masila Partners’ share of production, including recovery of past costs, was approximately 39%.