|
Wary mood takes hold Oil sands cost structure slows pace of expansion plans, report raises concerns Gary Park For Petroleum News
The year 2012 is turning into a perfect storm for Western Canada’s producers as events ranging from dismal natural gas prices, uncertainty for crude prices, a developing natural gas liquids glut and nervousness in the oil sands sector start to converge.
The result is an emerging industry-wide rethinking of some time-honored beliefs.
The doubt spread rapidly in early August when oil sands giant Suncor Energy said it would apply “rigorous scrutiny” while effectively shelving three megaprojects, followed by Canadian Natural Resources’ decision to cut its capital spending by C$680 million or 10 percent, mostly affecting expansion of its Horizon oil sands operation.
Laut forecasts ‘outstanding era’ But Canadian Natural President Steve Laut is refusing to be dragged into the doldrums, choosing instead to make a case that Canada is on the cusp of a new oil age.
“We believe we are about to enter an outstanding era for heavy oil and particularly for thermal or in-situ heavy oil,” he said.
Laut said the “market anomalies” that created a set of price discounts between West Texas Intermediate and Brent prices will not last long as new pipeline capacity between Cushing, Okla., and the Gulf Coast is introduced.
“We believe that the WTI-to-Brent differential will collapse back to essentially the toll between Cushing and the Gulf Coast, which of course is good news for all North American oil producers in the short- to mid-term,” he said.
Laut also said that other discounts between Canadian heavy oil and WTI are also shrinking to traditional norms of about 22 percent to 25 percent.
That price spread was almost entirely due to planned and unplanned heavy oil refinery capacity, but will turn around in the near future, he said.
Laut said that with 300,000 barrels per day of heavy oil conversion capacity scheduled to come onstream during the first half of 2013, issues such as narrowing price differentials between light and heavy crude will disappear and actually put downward pressure on the differentials.
In addition, there is reason for optimism based on the “strong likelihood” that TransCanada`s Keystone XL pipeline from the oil sands to the Texas Gulf Coast will finally get approved by whatever U.S. administration is in power after the November election, allowing North American heavy barrels to displace about 2.4 million bpd of U.S. medium-oil imports, he said.
Shortage of heavy oil Laut said Gulf Coast refineries are already running short of heavy oil because production volumes are down in Mexico and Venezuela.
“Even if unconventional light oil continues to grow at recent rates, we have some time to go before 800,000 bpd of foreign light oil is pushed out of the Gulf Coast,” he said.
Laut noted that Canadian Natural alone has 8.5 billion barrels of heavy oil to develop and 8,000 primary heavy oil locations in its inventory.
To back up its belief, the company is reallocating capital towards its primary heavy oil assets this year and planning to add an additional 54 wells, setting a new record of 872 wells.
The accelerated drilling push and the success of its drilling program is expected to see Canadian Natural’s production grow by 124,000 bpd, or 20 percent, this year, Laut said.
Challenge from fracturing The challenge facing the oil sands stems from the emergence over the past two years of hydraulic-fracturing techniques that, in Alberta alone, have introduced 175,000 bpd of unexpected light oil production, or the equivalent of a large oil sands facility, said Peter Tertzakian, chief energy economist with ARC Financial Corp.
He said 50 years of certainty over the source and destination of hydrocarbons is suddenly in question, making the oil sands less of a “compelling story” than it was a year ago.
“Now if you’ve got a billion dollars to spend, you’ve got to be thinking about all of these threats and new opportunities,” leading to a “big rethink of capital allocation,” Tertzakian said.
That appears to be taking place within Canadian Natural, which has set a capital outlay of C$100,000 per flowing barrel as its de facto ceiling to expand Horizon.
Laut said that above C$100,000 “you start to erode your economics” on these projects and, even at that level, Canadian Natural needs oil prices of US$80 per barrel for West Texas Intermediate “to get a return on capital that we require.”
Report cites concern CIBC World Markets said in a report issued Aug. 17 that the spending uncertainty taking hold in the oil sands is reason for concern, noting that although the Suncor and Canadian Natural program revisions won’t have any impact on production growth in the next few quarters will “push back long-term targets and raise questions regarding project viability.”
The Canadian investment bank, in a 270-page report, said strained pipeline systems and a rising glut of North American production, which could grow annually by 900,000 bpd the next five years, pose a threat to that outlook.
In particular, Canadian oil sands operators will find it increasingly difficult to justify expansion of their high-cost facilities when there is a wealth of more profitable, less capital-intensive opportunities across the continent, notably in the Bakken.
“Unfortunately … oil sands projects seem like the first to get rationalized,” CIBC said, with analyst Andrew Potter noting that Suncor and Canadian Natural have already started to pull back.
He said company expansion plans in total would add 1.4 million bpd of production by the end of 2016 and another 2 million bpd by 2020.
However, Potter said many oil sands projects can be competitive, especially using steam-assisted gravity drainage technology.
SAGD economic at WTI US$43 CIBC said SAGD can operate with West Texas Intermediate prices at US$43 per barrel, but those involved in upgraded mining operations need oil prices at US$83.30 to break even, assuming a 15 percent discount for Western Canada Select heavy crude blend to WTI.
If oil drops to US$70, close to 1 million bpd of planned production would be unable to justify proceeding, CIBC said.
Overall, the report said U.S. onshore production could grow by 700,000 bpd each year over the next five years from the Bakken, and the Permian and Eagle Ford plays in Texas, plus the Gulf of Mexico.
Potter said, “when plotted against pipeline capacity, it becomes increasingly clear that not all planned oil sands projects can proceed.”
He noted that if all current pipeline proposals go ahead, shipments out of Western Canada could increase by 2.9 million bpd by 2020, adding that “overall Canada needs pipe and lots of it to avoid the opportunity cost of stranding over 1 million bpd of potential crude oil growth.”
But Potter said that even if regulators approve Keystone XL, Kinder Morgan’s Trans Mountain expansion, Enbridge’s Northern Gateway, Alberta Clipper expansion and TransCanada’s tentative plans to convert part of its natural gas Mainline in Canada for 650,000 bpd of crude “there would still not be enough pipeline capacity to handle planned growth through 2020.”
He estimated the odds of the full slate of pipeline projects receiving a green light at 50-50, adding that without them Canadian producers could lose about C$20 billion in annual cash flow.
| 