January 7, 2011 / 4:13 AM / 7 years ago

Canadian Natural oil sands output cut, oil price up

5 Min Read

CALGARY, Alberta (Reuters) - Canadian Natural Resources Ltd's shares tumbled and oil prices jumped on Friday after a fire halted production at the company's main oil sands project in northern Alberta.

Canadian Natural, the country's largest independent oil producer, could not say when its 110,000-barrel-a-day Horizon facility would resume normal operations, but it said it expects to have a repair schedule readied next week.

"We've essentially just initiated the investigation process ... and our first priority is to actually get into the unit for the assessment and inspection," Peter Janson, senior vice-president of Horizon operations, told Reuters.

"It will take us a little time to make sure we don't have any hazards that could affect personnel going back into that area."

The blaze, which broke out on Thursday evening, initially engulfed an upgrading unit that converts the tarlike bitumen extracted from the sands into synthetic crude, injuring five workers.

Though the company has not been able to gain access to the site since the fire, Janson said the upgrader's key coker unit was damaged but not destroyed in the blaze.

The plant, the newest major project in Alberta's oil sands, cost C$9.7 billion ($9.8 billion) to build. The company said it has a $2 billion insurance package to cover the cost of repairs as well as the operating costs for the facility after 90 days.

Canadian Natural is working with Alberta's health and safety agency to determine the cause of the fire. The agency has put stop-work order on the site and is allowing only its own investigators to access the damaged area.

Alberta's employment minister, Thomas Lukaszuk, told reporters the stop-work order and investigation were open-ended and there were no deadlines.

The incident reverberated through energy markets on Friday. Discounts on Canadian oil versus U.S. crude shrank after ballooning recently due to a squeeze in export pipeline capacity. The price spread between the West Texas Intermediate and Brent benchmarks also narrowed, in part because of the Horizon shutdown, analysts said.

Canada is the largest foreign oil supplier to the United States and Horizon's output is equal to about 6 percent of the daily average of 1.84 million barrels that Canadian companies exported there in December.

Shares in Canadian Natural dropped C$2.35, or 5.5 percent, to C$40.60 on the Toronto Stock Exchange. It was the most active issue on the market, with 14.2 million shares traded, six times the usual volume over the past three months.

Until there's an estimate of how long repairs will take, investors are unable to gauge the impact on the company, which is the largest of several energy, industrial and sports concerns in which Calgary financier Murray Edwards is a major investor.

"That's the problem - it's all uncertainty, and that's what will likely weigh on the stock," Canaccord Genuity analyst Phil Skolnick said.

A month-long outage could cut the company's 2011 production by about 1 percent from the midpoint of the company's estimate of 645,000-694,000 barrels of oil equivalent a day, Skolnick said in a note to investors.

That would mean a reduction in cash flow of about C$145 million from the current C$7.6 billion estimate, assuming U.S. oil prices averaging $85 a barrel.

A six-month outage could cut output by 8 percent and chop cash flow by C$885 million, he said.

The incident was seen supporting the Canadian crude market, with discounts shrinking from earlier this week, when a squeeze on transport capacity prompted the widest spreads since September.

Trade sources said light synthetic crude -- the type produced at Horizon -- for February delivery fetched as much as 5 cents a barrel over the West Texas Intermediate benchmark price, down from a discount of as much as $4 per barrel earlier this week.

Western Canada Select heavy blend was quoted at $22.55 per barrel under WTI, up from a discount of $24 on Thursday.

The lost production was seen as a factor that prompted investors to unwind positions that had sent European marker Brent's premium to U.S. crude soaring in recent days.

A long outage may help cut an oversupply of crude at the Cushing, Oklahoma, storage hub, which had been seen as a factor in the wide WTI-Brent spread.

"Even though it may not have a direct supply effect on Cushing right now, it does give a little relief to the overflowing storage situation," said Carl Larry of Oil Outlooks.

Additional reporting by Janet McGurty; editing by Frank McGurty and Peter Galloway

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