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Independent defers natural gas spending Canadian Natural Resources finds better returns from heavy oil, aided by drop in imports to Gulf Coast from Mexico, Venezuela By Gary Park For Petroleum News
Canadian Natural Resources is marching to a drum beat that has the sound of heavy oil.
For the second time this year, Canada’s second largest gas producer is shifting from what was once the core of its business to more financially appealing heavy oil opportunities.
Unwilling to chase volume growth for its own sake, CNR is diverting capital by shelving 308 gas wells in the second half of 2006 (down 50 percent from the original plans) on top of the 105 eliminated from its first half program and plans to scale back its first-quarter winter drilling in 2007 — all part of the fallout from the sharp decline in gas prices since last December’s peak.
“We are not giving up on natural gas over the long run (because) we believe the current price down cycle will run its course and returns from natural gas will recover,” said Chairman Allan Markin.
“In the interim we can better control our costs and take advantage of the results of our proactive heavy oil marketing strategy.” Price differential down Whatever its confidence in the long-range prospects for gas, the company is not ready to trade the chance to make money from heavy oil at a time when the price differential with light crude is down to an unprecedented 25 percent from 40 percent a year ago and 45 percent in the first quarter of 2006.
A contributing factor in the narrowing gap was the reversal of the Pegasus and Spearhead pipelines in the United States, expanding markets in the US Gulf Coast and Midwest for CNR’s production.
President and Chief Operating Officer Steve Laut said heavy crude landings on the Gulf Coast from Mexico and Venezuela are down about 6 percent year over year, which bolsters the demand for Canadian heavy.
He said it is “very tough for any gas project to compete with heavy oil” these days.
CNR’s own finding and development costs are currently C$1.809-$2 per thousand cubic feet for gas, up 20 percent from a year ago, and C$4.50 per barrel for heavy oil, up 15-20 percent without making allowance for the fact that its production is cheaper to connect to pipelines than gas, he said.
In such an environment it will deploy only 50-55 rigs in the opening quarter of 2007, down from the peak 71 in the first quarter of 2006. Horizon project close to budget On average, the company pulled in $60.05 per barrel for oil production in the second quarter, 41 percent more than a year ago.
In such a robust environment, CNR is content to scale back its gas operations and exit 2006 producing about 100 million cubic feet per day less that its second quarter output of 1.5 billion cubic feet per day, while the year-end is expected to see oil pumping at 250,000 barrels per day, 5-6 percent more than targeted, although its overall volumes for the year will miss guidance by about 4 percent because of problems in the North Sea and offshore West Africa.
With its large Horizon oil sands project close to the first phase budget of C$6.8 billion and expected to pump the first of its 110,000 bpd a year from now, CNR is contemplating adding a sixth upgrader to the list now planned for the Edmonton refinery district.
A decision is expected early next year on whether to proceed with the first phase, producing 125,000 bpd of light synthetic crude in 2012 ort 2013, then grow to 175,000 bpd in 2015 — a chance for CNR to capture more of the value from the 300,000 bpd planned for Horizon.
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