Canada's Oil-Sands Producers Burn Cash in Latest Crude Plunge

  • Annual shortfall at $30 WTI seen as $8.4 billion: Peters & Co.
  • Industry keeps chugging to skirt risk of reservoir damage

Canada’s oil-sands companies keep producing even as the latest market slide brings bigger losses.

U.S. crude has started the year in decline and is hovering around $30 a barrel, down more than 70 percent from the high of 2014. At this level, the oil-sands industry would burn through about C$12 billion ($8.4 billion) of cash a year as revenues fail to cover costs, analysts at Peters & Co., a Calgary-based investment bank, wrote in a report this week. That’s about C$33 million a day.

So why not halt output to wait for higher prices?

It would take a plunge below $20 to justify shutting down larger projects run by producers including Meg Energy Corp. and Cenovus Energy Inc., according to Peters & Co.. That’s because curtailments can damage underground reservoirs in drilling operations and integrated companies need to keep feeding crude to their own refineries. Mining projects can cover costs with oil as low as $10 a barrel. Examples include Canadian Natural Resources Ltd.’s Horizon development, where there’s “no plausible scenario” for a shut in, Peters & Co. said.

“For now, with the big majors, it’s wait and see,” said Carl Evans, an analyst at energy data provider Genscape Inc. based in Boulder, Colorado.

Maintenance Schedules

Operators could choose to move up the timing of annual maintenance of plants and equipment so that a halt in output coincides with low prices, but their contracts to supply refineries make that unlikely for most, according to Evans. Connacher Oil and Gas Ltd., a small oil-sands developer that said last week it would accelerate planned maintenance at its Great Divide project and reduce output over the next couple of months, is an exception, Evans said.

The bulk of maintenance work that will take offline oil-sands upgraders, the plants that convert heavy bitumen to light, synthetic oil, is scheduled from March through May this year. The outages are set to reduce synthetic crude oil volumes by almost as much as similar work in 2015, when the industry undertook its biggest slate of repairs in five years to take advantage of low prices, according to Genscape.

West Texas Intermediate crude, the U.S. benchmark, slipped below $30 a barrel on Tuesday for the first time in more than 12 years amid a global oil supply glut. Canada’s heavy oil benchmark, which includes conventional production and bitumen and trades at a discount to the main U.S. grade, is hovering below $17 a barrel, implying a bitumen price of just over $10, according to data compiled by Bloomberg.

Short-Lived Pain

The most severe revenue shortfalls in the oil sands are expected to be short-lived. WTI is forecast by RBC Capital Markets to average $40 in 2016 and $57 in 2017. At $40, the annual “cash flow burn” is estimated by Peters & Co. to average about C$2 billion to C$3 billion.

Outside the oil sands, producers will probably continue scaling back on conventional heavy oil drilling and may turn off output from more wells as Western Canadian Select crude trades near record lows, said Chris Cox, an analyst at Raymond James Ltd. in Calgary. The curtailments probably aren’t enough to make a significant dent in the market, he said.

“It’s not anything that’s going to move the needle for total western Canadian production and definitely not on a global scale,” Cox said.

If prices stay this low, however, there should be a future supply impact as more oil-sands project expansions scheduled to start up after 2020 get deferred, according to Peters & Co. Developments that are considered more likely to proceed next decade amount to 525,000 barrels a day of supply, while less likely projects add up to 705,000, the report showed.

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