Recipe for oil sands success

CNR refuses to layoff skilled staff while it strives to reduce operating costs, but hesitates to predict when sector might rebound

GARY PARK

For Petroleum News

Canadian Natural Resources, Canada’s largest oil and natural gas producer, is bucking all of today’s trends, especially by pushing ahead with C$2 billion of spending on the expansion of its Horizon oil sands projects.

To date, the independent is one of the few Canadian oil and gas producers to avoid layoffs, preferring to impose salary cuts on employees.

Although it is striving to reduce its cost structure rather than holding off in hopes of improvement in commodity prices, it is clinging to a company tradition of retaining as many skilled employees as possible so that it is primed for better days.

CNR said completing the next two phases of Horizon by the end of 2017 is a priority as it prepares to add another 125,000 barrels per day of production, doubling output to about 250,000 bpd, allowing a move from a reliance on conventional sources of oil and gas to long-life oil sands operations.

The company has posted one staggering statistic by driving down costs through 2015 to produce oil from its thermal recovery projects to C$9.59 per barrel.

But President Steve Laut said it is difficult to say when CNR might resume its pursuit of an ultimate goal of 500,000 bpd from the oil sands, suggesting that nothing is likely in the near term.

“It’s based on the cost structure and the commodity price, so I would say in this environment you’re probably going to see slow growth or a delay in growth,” he told the Canadian Press.

However, Laut said CNR is “fairly confident” that access to pipelines out of Alberta will be available by the time the company is ready to expand production.

Unlike many in the industry, Laut said he believes Alberta Premier Rachel Notley and Canadian Prime Minister Justin Trudeau are “dong the best they can” to advance pipeline proposals such as Energy East and “do what’s in the best interest of all Canadians.”

CNR’s fourth quarter results for 2015 yielded a small profit of C$131 million - off 89 percent from a year earlier - but made little impression on the company’s full-year net loss of C$637 million, despite a drastic reduction in capital spending to C$5.2 billion from C$8.6 billion in 2014.

It plans to lower spending this year to C$3.5 billion-C$3.9 billion, of which C$1 billion is earmarked to complete the Horizon expansion phase.

Persistently low prices have forced CNR to shut in 40 million cubic feet per day of gas and 1,000 bpd of oil output.

Although the oil sands have taken a pounding over the last year, there are a few shreds of hope, especially in a report by RBC Capital Markets which estimates production is on track to gain 760,000 bpd over the next four years from the current 2.4 million bpd.

That surge is expected to come from three mining projects (CNR’s Horizon, Imperial Oil’s Kearl and Suncor Energy’s Fort Hills), plus five in-situ operations (Cenovus Energy’s Foster Creek and Christina Lake, CNR’s Kirby, Husky Energy’s Sunrise and ConocoPhillips’ Surmont).

In addition, Imperial said it is seeking approval from the Alberta Energy Regulator to build a new oil sands project on its Cold Lake lease in northeastern Alberta, deploying an extraction process that will use less energy and water than conventional thermal-recovery operations.

Construction could start in 2019, with bitumen production of 50,000 bpd starting in 2022.

Imperial said it is weighing further expansion at Cold Lake, which has yielded more than 1 billion barrels and currently averages about 150,000 bpd.

However, RBC noted that its projected increase is still 235,000 bpd short of its previous target.

If the oil sands target is achieved, Canada’s overall oil volumes would reach 4.6 million bpd by 2020, creating one of the world’s oil producing powers, all of its driven by Canadian-based companies now that PetroChina and Norway’s Statoil are sitting on the sidelines.

Beyond 2020, as CNR’s Laut made clear, no growth plans have been announced pending clarity on Alberta’s and Canada’s actual greenhouse gas targets.

And, unless there have been corporate approvals, the long lead times needed for oil sands projects mean Canada could be at a disadvantage if the market rebounds after 2020.

What could be worse is any decisions to shut-in thermal-recovery operations, creating a risk of reservoir damage, said Calgary-based investment dealer Peters & Co.

The difficulty that prospect raises also penetrates deep into the ranks of mid-size producers such as Baytex Energy which has already shut in 7,500 bpd of low or negative margin oil, while cutting its 2016 capital budget by 33 percent to C$225 million-C$265 million.