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When the numbers will crunch Wood Mackenzie: $75 oil could take chunk out of capital spending; Canada’s big oil sands players keep cool amidst market turmoil Gary Park For Petroleum News
Canada’s high-cost oil sands producers are not yet running for cover, despite oil prices stuck around $80 a barrel, with some talk of a dive to $70, or even $60.
Bank of Canada Governor Stephen Poloz told the Canadian Senate Banking Committee that the impact could shave 0.25 percent off Canada’s Gross Domestic Product, not an insignificant amount when growth is not expected to rise above 2 percent-2.5 percent for 2014.
But the lull in expansion of the oil and natural gas sector is eased by Wood Mackenzie forecasts that current global GDP projects should be sufficient to absorb the anticipated increase in oil production from countries outside the Organization of Petroleum Exporting Countries.
Even so, the consulting firm cautioned that if West Texas Intermediate prices drop to $70-$75 there could be deep cuts in capital spending.
Suncor Energy, the bitumen behemoth, said it still intends to pour billions of dollars into the oil sands next year, disregarding the bite being taken out of its profits by crude prices that have skidded to four-year lows.
Likewise, Cenovus Energy and Husky Energy are taking the price weakness in their stride, showing no signs of reining in spending - even though they are ready to take action if needed.
MEG Energy, which has a significant Chinese investor, has booked 25,000 barrels per day of space on Enbridge’s Flanagan South pipeline and has an option to quadruple that as its studies possible exports from the U.S. Gulf Coast to protect its output volumes.
Suncor’s spending up Suncor still expects to raise its capital spending in 2015 to about C$8 billion from C$6.8 billion this year as construction ramps up on the C$13.5 billion Fort Hills joint venture that is slated to come onstream in 2017, targeting 180,000 bpd, said Chief Executive Officer Steve Williams.
It is also continuing to invest in small projects to maximize crude production from existing oil sands assets.
However, he qualified that upbeat mood by cautioning that if crude plunged to $40-$50 “we’d have to reflect, but right now nothing we see will cause us to change course on the capital budget.”
But Suncor has taken some precautionary measures by halting exploratory drilling on shale gas lands in British Columbia and scrapping its C$11 billion Joslyn oil sands mine with partner Total.
Williams said those decisions mean the company is well-positioned to ride out price storms.
In the third quarter, Suncor shipped its first tanker load of heavy Alberta crude to Europe from a Quebec port on the St. Lawrence River.
Williams said additional cargoes could be moved from the same port to markets on the U.S. Atlantic Coast and Gulf Coast and as far as Europe depending on the economics.
Cenovus close to 2014 Cenovus Chief Executive Officer Brian Ferguson said his company’s 2015 capital budget will be close to matching this year’s C$3 billion, with the focus on projects that can deliver near-term cash flow.
Since being cut adrift from Encana five years ago, Cenovus has “evolved and matured in terms of our own production base,” he said.
Ferguson said C$2 billion worth of work will proceed on the flagship Foster Creek and Christina Lake oil sands projects, but discretion will be applied to other growth plans.
“You should expect us to be very prudent in terms of any decisions” beyond C$2 billion in 2015 or subsequent years.
However, if Cenovus needs a cash-flow fix its answer may lie in 4.5 million acres of freehold mineral titles inherited when it was spun off by Encana in 2009.
Ferguson said a decision will be made this year on whether to monetize the royalty interests through the creation of a new company or an outright sale.
Encana set the standard this year by realizing US$1.67 billion from its PrairieSky initial public offering and another US$2.6 billion from a secondary offering that unloaded its entire freehold interests.
The value of the Cenovus titles has been estimated at C$2 billion for an acreage that produces about 8,000 barrels of oil equivalent per day.
“It is clear that there is more potential on these lands than we are currently realizing,” said Ferguson, referring to the C$122 million generated in cash flow for the first nine months of 2014.
Husky focus on smooth operations Husky Chief Executive Officer Asim Ghosh said his company has a “wide” portfolio that allows spending to be easily shifted around, but, for now, the focus is on making sure projects operate smoothly, while taking steps to “weatherproof our business.”
“My overall philosophy is we cut our coat to the cloth available,” he told analysts, predicting next year’s spending will be in the range of C$2 billion-C$2.5 billion. “I’ve got enough levers to play with to give me that flexibility.”
But Husky provided evidence of the industry struggle to contain costs in the oil sands, disclosing the price tag on its Sunrise project - a joint venture with BP to contribute 60,000 bpd in its first phase that starts in 2015 and eventually 200,000 bpd - has climbed to C$3.2 billion from C$2.8 billion.
The increase works out to C$53,000 per flowing barrel of production, compared with the previous C$47,000, said TD Securities analyst Menno Hulshof.
MEG eying market options MEG, in which China’s state-owned CNOOC holds a 17 percent stake, is eying a full range of potential options for accessing international markets, although it has not yet applied for a U.S. permit to export Canadian crude from U.S. shores, said Chief Executive Officer Bill McCaffery.
He said Enbridge’s Flanagan South-Seaway combination puts Canadian heavy crude in the Houston area, which makes that one “obvious” option for moving crudes offshore.
FirstEnergy Capital analyst Martin King said that although exports through the U.S. are currently only about 25,000 bpd, they could climb to 500,000 bpd.
MEG is projecting that its bitumen output - once targeted at 200,000 bpd - has doubled over the past year to 76,500 bpd, with shipments to U.S.-based refineries being steadily boosted through the use of unit trains.
“A natural trend over time is that we’ll continue to strengthen our connections and transportation methods to North American refiners, but then we’ll also look to broaden that,” McCaffery said.
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