CALGARY – Faced with record low prices for heavy crude, Canadian energy information mill sacrificing other areas of the business to keep higher-cost oilsands production going and safeguard the billions already invested in these multi-decade projects.
No living large for oil majors as even they take a savage beating from fall in crude prices
Integrated oil companies for example Imperial Oil Ltd., its parent Exxon Mobil Corp., and BP PLC are built to become resilient to promote downturns, thanks largely to downstream operations that offset upstream woes. But Tuesday’s fourth-quarter results show even they’re going for a savage beating in the fall in prices C in Canada, Imperial collected less than $23 a barrel because of its bitumen throughout the period – and that they are continuing to move forward with extreme caution in 2016.
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Companies including Husky Energy Inc, MEG Energy Corp and Pengrowth Energy Corp are selling assets or slowing light and conventional oil exploration and production, even while they forge ahead with oilsands projects which are in many cases bleeding money on every barrel.
Although the proceed to support higher-cost production seems counterintuitive, oilsands companies take a longer-term view that shutting plants in Alberta would be very expensive and risk permanently damaging carefully engineered reservoirs, underground deposits of millions of barrels of tarry bitumen.
It is simpler, and cheaper, to shut down and later restart conventional wells.
Producers are also betting that oil prices will ultimately recover. The latest Reuters poll of oil analysts forecasts the U.S. benchmark will average US$41 a barrel in 2016, a level where most Canadian oilsands projects can break even.
Bankers say the need to bolster balance sheets and canopy oilsands losses will boost the quantity of Canadian energy deals this season, particularly sales of pipelines, and storage and processing facilities.
“The market was down significantly last year when it comes to energy M&A, and we think that’s going to reverse,” said Grant Kernaghan, Canadian Investment Banking head for Citigroup.
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CORE BUSINESS
MEG is selling its 50 per cent stake in the Access pipeline, which analysts value around $1.5 billion, while Husky is selling a package including 55,000 barrels of oil equivalent per day of oil and natural gas production, royalties and midstream facilities, valued at between $2.4 billion to $3.2 billion.
According to some recent TD Securities report, without any oilsands projects can cover overall costs, including production, transportation, royalties, and sustaining capital, with U.S. benchmark crude below US$30 a barrel.
The benchmark heavy Canadian blend, Western Canada Select (WCS), now trades around US$16.30 a barrel, just a few dollars above record lows hit in January.
But as nearly 80 percent of oilsands cost is fixed investments, for example equipment for injecting high-pressure steam underground to liquefy tarry bitumen, producers would rather possess some revenue coming in to assist offset those costs than none, said FirstEnergy Capital analyst Mike Dunn.
To make sure, if WCS prices dropped even more to below US$12 a barrel, Dunn said producers may take a look at methods to trim production by 10-30 percent.
Oilsands “remains our core business therefore we will appear to various other handles we have to support that business,” said Brad Bellows, a spokesman for MEG.
Even because it makes major cuts, Husky is ramping up new thermal projects, including its Sunrise joint venture with BP. Sunrise in northern Alberta took three years and $2.5 billion to build and Husky is incorporated in the midst from the two-year process of raising reservoir pressure to full production capacity. Then, Sunrise is anticipated to create for 4 decades.
As well as selling assets, some players, for example Canadian Natural Resources Ltd and Baytex Energy are shutting in uneconomic conventional heavy oil wells, but leaving their oilsands operations intact.
JEWELS IN THE CROWN
Bankers state that midstream assets – pipelines, storage and processing facilities – prove popular with buyers for example pension funds and equity firms, which favour investments with stable cash flows that are relatively simple to value.
“They’re to some extent the jewels in the crown. These companies wouldn’t be seeking to sell them if they could get away with not doing it,” said Citi’s Kernaghan.
Last year, oilsands producer Cenovus Energy sold a portfolio of oil and gas royalty properties to Ontario Teachers’ Type of pension for $3.3 billion.
Industry veterans note oilsands operations also needed to be “cross-subsidized” by healthier areas of the company over the past prolonged market slump within the 1980s and predicted producers would push to help keep operating until prices recover.
? Thomson Reuters 2016
