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Canada in push and pull Big oil sands operators keep pumping into storage, clinging to hope there will be a payoff, while posting landslides in Q1 results Gary Park For Petroleum News
There is a mood of bravado in the core of Canada’s oil producing industry, tempered with edginess over where the business is headed.
As the major operators have rolled out the results of their first full quarter of a 50 percent plunge in oil prices, they have set the stage for an even larger wave of budget cuts and layoffs.
At the same time, they have continued pouring even more crude bitumen into a saturated market, shrugging off for now some of the shrinking profits and warnings that weak commodity prices will not go away soon, if ever.
“Stay tuned,” said Rich Kruger, chief executive officer of Imperial Oil (70 percent owned by ExxonMobil and Canada’s largest refiner). “We’re still early in this cycle and the dust hasn’t settled.”
Amid that somewhat ambiguous assessment, Imperial said it has not given up on plans to increase oil sands output beyond the 11 percent year-over-year boost in its production from northern Alberta to 219,000 barrels per day.
Output from its Kearl facility continued a steady climb to 95,000 bpd from 70,000 bpd a year earlier and is targeted at 110,000 bpd - although Imperial is not saying much about its plans for spending C$28.5 billion on the project and ramping up to 345,000 bpd by 2020 - from a resource of 4.6 billion barrels of recoverable bitumen.
Like its oil sands peers, Imperial’s bottom line took a hit. However, unlike Suncor Energy and Cenovus Energy, Imperial remained in the black, although its profit slumped more than 50 percent from a year ago to C$421 million.
Cenovus lost C$668 million in the first three months of 2015, a turnaround of almost C$1 billion in a year, while bitumen powerhouse Suncor posted a loss of C$341 million, compared with net income of C$1.49 billion a year earlier.
Suncor output for the opening quarter was 440,000 bpd, up almost 50,000 bpd from the same quarter of 2014 as the company turns even more attention to reducing costs and improving efficiency, while backing away from its once-ambitious plans to produce 1 million bpd by 2020.
Room on down side Peter Tertzakian, chief energy economist at ARC Financial, suggested there is still more room to “go down. It’s not going to be a significant step down (in capital spending), but I think you will see some more budget pullbacks.”
Regardless of some signs that crude prices might be firming up, some analysts say it will take a much larger and more sustained rebound to avoid another dose of cuts to spending and employment.
A 41 percent drop in drilling activity across all sections of the petroleum industry in Western Canada, with the Petroleum Services Association of Canada lowering its original forecast for 2015 by almost 50 percent to 5,320 wells, is expected to see the elimination of about 3,400 direct jobs and another 19,500 indirect jobs.
The eight largest upstream companies have slashed their combined spending by 25 percent to C$26.9 billion, while 47 energy firms are expected to reduce their collective spending by 30 percent to C$38.7 billion.
“Everybody’s uncertain,” said Jim Fearon, vice president with industry hiring firm Hays Oil & Gas, noting that companies are positioning themselves to have an appropriate workforce “to execute the projects that they deem essential” and prepare the industry for “what happens next.”
Volumes into storage In setting record volumes Suncor, Imperial and Cenovus are putting more volumes into storage, in hopes that it will ultimately sell at a better price, but that poses its own problem.
Cenovus Chief Executive Officer Brian Ferguson said potential storage congestion could even force a turnaround in crude prices.
“One of the things we’re very closely monitoring is supply and we’ve seen clearly a big drop in the rig count,” he told the Canadian Press. “That has not translated to a drop in supply yet in the United States. I think we’ll have more information, a clearer view in the direction of oil prices perhaps in the third quarter.”
Operating costs down On the flip side, operating costs at Cenovus’ two big oil sands facilities are down 31 percent in the past year and suppliers, under pressure, are cutting their costs by 5-10 percent, which could yield C$200 million in savings for the company this year. That also reflects a 15 percent reduction in its workforce and a C$700 million cut in its 2015 capital budget.
Although Canadian heavy crude prices were down 55 percent in the first quarter, Cenovus raised output at its flagship Christina Lake and Foster Creek thermal recovery operations by 20 percent to 144,000 bpd.
Cenovus, in looking to sell or go public with its royalty lands, has had “substantive interest from substantive parties,” Ferguson told analysts, indicating a transaction is possible this year if the “valuation meets our expectations.”
Suncor said its cash operating costs dropped to C$28.40 per barrel in the first quarter from C$35.60 a year earlier, but it has also trimmed its forecast for average West Texas Intermediate prices to US$54 a barrel from its previous target of US$59.
Chief Executive Officer Steve Williams said any price recovery could be offset by a revival of U.S. shale volumes and continued storage levels that are well above historic levels.
Along with partners Total and Teck Resources, Suncor is pushing ahead with its most ambitious new oil sands mine in years, with construction of the 180,000 bpd C$13.5 billion Fort Hills project now 25 percent complete and first oil targeted for late 2017.
Kruger, noting that 1.2 million bpd of new oil sands capacity has been shelved within the last year, said it is not possible to sell into the current price environment without participation by the entire supply chain in lowering the cost structure.
“There is a lot being written about where prices will settle out - US$50 to US$60, somewhere higher or somewhere lower. The truth is, no-one knows.”
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