February 23, 2016 / 6:04 AM / 2 years ago

Canadian oil sands firms mull once unthinkable: curbing output

CALGARY, Alberta, Feb 23 (Reuters) - With Canadian benchmark crude near record lows, some major oil sands producers are starting to consider slowing output at their huge thermal operations in northern Alberta, a process fraught with technical and financial difficulties.

Cutting production is one of the least appealing options for producers who have invested billions of dollars and years of work in carefully-engineered bitumen reservoirs and fear doing permanent damage to sites designed to operate for decades.

Two producers, Cenovus Energy and MEG Energy - both among the most efficient producers in the patch - say they do not see the need to act yet, but have plans for reducing volumes if oil prices fell further and stayed there.

Expensive technology needed to pump high-pressure steam to unlock bitumen deposits mean Alberta's oil reserves - the world's third-largest - have some of the highest overall production costs, well above the present price of around $18 a barrel for benchmark oil sands crude. (Graphic: reut.rs/1Rc4Tjm)

The producers, however, focus on their operating costs, wary of high potential costs of cutting and later cranking up production and the risk of upsetting the delicate balance needed to pump out heated bitumen when wells get idled for too long.

MEG Chief Executive Bill McCaffrey said the company could slow output by letting its Christina Lake oil sands reservoir enter natural decline if it was unable to cover variable cash operating costs of around C$4 a barrel for a sustained period.

In the fourth quarter of 2015, when Canadian heavy crude averaged $27.7 a barrel, the revenue MEG got for a barrel of oil once blending, transportation, operating expenses and royalties are taken into account, was just over C$9. With benchmark Canadian crude trading around $10 a barrel lower so far this year, that revenue is almost certainly insufficient to cover the cash costs.

Cenovus Chief Executive Brian Ferguson told Reuters earlier this month U.S. benchmark crude would have to stay below $27 a barrel well into 2017 for slowing production to make economic sense, but was prepared for such a possibility and had plans to reduce volumes if needed.

For now, producers are looking at alternatives such as selling off pipeline, storage and production facilities to ease the financial squeeze caused by dwindling revenues.

The companies have also been experimenting with maintenance schedules, allowing output to drop temporarily at some locations either by delaying equipment servicing or bringing forward planned maintenance turnarounds.

CAUTIONARY TALE

The fate of small producer Connacher Oil and Gas explains why outright production cuts are such anathema for Canadian oil sands companies.

During the previous crude price slump in late 2008, the company shut in half of its 10,000 bpd Great Divide thermal production for two months and has struggled to hit output targets ever since. Last month it said it would slash its oil sands production by 70-80 percent.

While operators stop steaming through some wells for up to three weeks during planned maintenance, analysts say halting steam injection for more than a month can drop reservoir pressure and make it hard to pump out heated bitumen again.

For analysts, the very fact that big oil sands companies are even talking about slowing production despite the risk of permanently damaging reservoirs shows how bleak the industry outlook is.

“It’s a new way of thinking,” said Wood Mackenzie analyst Mark Oberstoetter. “Now it’s not to maximise production, but look into what they can do to bring a little bit off without jeopardizing future barrels.”

FirstEnergy Capital analysts say producers may curtail output by 10 to 30 percent if benchmark heavy Canadian crude drops under $12 a barrel, below the lows around $13 touched in January.

For most oil sands companies reducing steam injections to cut production is a hypothetical scenario as thermal extraction techniques have only been around over the past three decades when the focus has squarely been on boosting output.

“This expertise does not exist yet. Reservoir models are still being proven for thermal processes,” said Doug Hollies, vice president of engineering at Codeco Oilsands Engineering.

Unlike large oil sands producers, many of which have integrated refining businesses or assets to sell, small companies do not have the luxury of cross-subsidizing operations.

One engineering consultant, who declined to be named because of client confidentiality, said one company was considering shutting down its 600-800 barrel per day pilot project at month-end after 18 months of ramping the reservoir up to full pressure, because it is bleeding money.

It will join a handful of other tiny thermal pilot projects that have fallen victim to the global price rout and shut down since June 2014. ($1 = 1.3734 Canadian dollars)

Reporting by Nia Williams; Editing by Amran Abocar and Tomasz Janowski

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