LLOYDMINSTER, Canada (Reuters) - Amid the corn and canola fields of western Saskatchewan, oil foreman Dwayne Roy is doing what Saudi Arabia and fellow OPEC producers are loath to do: shutting the taps on active wells.
Inside a six-foot-square wooden shed that houses a basic hydraulic pump, the Gear Energy Ltd employee demonstrates how shutting down a conventional heavy oil well in this lesser-known Canadian oil patch is as simple as flipping a switch. His company has already done so hundreds of times this year, making the Lloydminster industry among the first in the world to yield in a global battle for oil market share that has sent crude prices tumbling to six-year lows.
Gear Energy Ltd, has idled up to 500 of its least efficient wells this year, many of them in the past weeks. Some cost of up to C$28 ($21.22) a barrel to operate. It costs another C$7 in royalty and transportation fees to get the crude, among the densest in the world, to regional rail hubs - where it was fetching barely $20 a barrel during last month’s lows.
“We ask every day: is this well making money today? Will it make us money going forward?” says Roy.
Such questions have been nagging oil industry veterans since crude prices started sliding last year as a result of a supply glut caused by a battle between exporters’ group OPEC and North American shale oil producers.
Energy firms around the world have responded by laying off thousands of workers and slashing spending by billions of dollars. But producers here are the first to do what the global market needs to rebalance: turn off the taps.
All told, at least 8,000 barrels per day (bpd) of local heavy conventional oil production has been idled by firms such as Gear, Canadian Natural Resources Ltd and Baytex Energy Corp this year.
So far their actions are merely symbolic - the output loss represents less than a rounding error in a global market that produces 95 million barrels each day.
Yet if prices stay low, other firms such as Husky Energy and Devon Energy could also shut in similar wells that produce conventional heavy crude, which accounts for roughly 11 percent of Canada’s 3.7 million bpd output.
Some producers in the North Sea are also starting to shut older fields earlier than planned, and thousands of small U.S. “stripper well” operators may follow suit.
”Heavy oils are some of the most flexible capital and can easily be dialed back up or ramped back up again if we choose,” CNRL chief executive Steve Laut told analysts last month.
CNRL has shut in about 4,000 bpd of high cost heavy oil production.
After the Organization of the Petroleum Exporting Countries said a year ago that it would no longer curb its own production to make way for fast-growing rivals, many analysts and traders have looked to the burgeoning U.S. shale industry to take over the role as the “swing” producers, responding to prices by cranking up or dialing down drilling within months.
Canadian conventional heavy crude producers are even nimbler.
Around Lloydminster, a city of about 32,000 that straddles Alberta and Saskatchewan provinces, jet-black production tanks dot the rolling prairie.
Each pair of tanks serves a single well, and each well can be shut down - or restarted - with ease.
“For us it’s honestly a matter of flicking a switch,” says Ingram Gillmore, chief executive of Gear Energy, which produces 5,500 bpd in the region. “I can bring production back into an improved pricing environment in a matter of days.”
To shut down a well, an operator will rent a “flushby” truck with a derrick and winch for a couple of hours to pump a lubricating fluid down the well to help prevent any build up of sand. After that, all one needs is to kill the pump motor, latch the shed door and wait for oil prices to recover.
By contrast, most of the world’s big oil producers will keep pumping even during a slump to keep cash coming because of the high upfront capital expenditures and the time and cost needed to shut down and restart complex, big scale operations.
Robert Bedin, an analyst at ITG Investment Research estimates that it can cost hundreds of thousands of dollars to shut down - and later restart - oil sands behemoths some 350 miles (572 kilometers) to the northeast.
According to some estimates, when U.S. crude tanked below $40 a barrel and Canadian heavy crude fell below $20 last month, nearly all the country’s oil sands and conventional heavy production was operating in the red.
While most shut-in wells will get restarted if prices recover, some older ones may be gone for good.
At one such dismantled well site a pile of dented steel panels, metal piping, some wooden beams and a couple of concrete blocks lie next to the abandoned wellhead.
Eventually Gear will pull out the wellhead, cement the well, level the clay and spread topsoil so grass can grow again. And then it will start over here or in a different spot as soon as prices allow.
(The story corrects location to western Saskatchewan in paragraph 1)
Reporting by Nia Williams; Editing by Jonathan Leff and Tomasz Janowski