Cenovus keeping costs low amid rising oil prices
- 29 Oct 2016
- Calgary Herald
- GEOFFREY MORGAN, Financial Post
Keeping costs low amid rising oil prices
Cenovus Energy Inc. hopes the next phase of its Christina Lake oilsands facility will be the first project to resume construction following the downturn — but at a much lower cost.
President and CEO Brian Ferguson said this week the company has asked contractors to re-submit bids for work on the expansion project to try to lock in lower prices.
“With regard to the next 50,000 barrel-per-day expansion at Christina Lake … will benefit from the pre-build associated with Phase F and the current deflationary environment,” Ferguson said on a third-quarter earnings call.
Even as crude prices edge higher, oilsands companies are looking for ways to keep costs low, particularly as they consider sanctioning new projects.
Stephen Kallir, Calgary-based analyst for Wood Mackenzie, said the company that is “first to act” to sanction a new project should be able to capture deflated prices for new projects, while the companies that follow risk sanctioning their projects during another inflationary cycle.
“Those prices could go right back up,” Kallir said.
Some service companies have already begun raising their prices. Precision Drilling announced last week it had begun charging oil companies more for hiring its deep-reaching, highly automated rigs. Similarly, Houston-based oilfield giant Schlumberger Ltd. said it is looking to raise the prices it charges oil producers for services.
The challenge for oilsands companies as they prepare to grow again is to keep their costs — both operating and capital — low.
Large and small oilsands producers have spent more than two years cutting costs, slashing budgets and laying off staff to try to survive the prolonged collapse in oil prices.
Their efforts have resulted in more than 20-per-cent reductions in operating costs, but investor focus is shifting as oil prices rise to whether companies can reduce capital costs on new projects.
“When oil prices declined in 2014 and 2015, everything was focused on operating costs because that’s what going to get you through the next year,” Kallir said.
“Now, things have shaken out a bit and now that they’re looking at expansions, the question is, ‘ What can we do on the capital side?’ ”
The problem, Kallir said, is it’s hard to measure how far capital costs for new projects have fallen during the price rout because no oilsands company has sanctioned a project since the beginning of the recession.
Kevin Birn, IHS Markit’s senior director of North American crude oil markets and oilsands dialogue, said the only clear indication of how far capital costs have fallen for new projects is Imperial Oil Ltd.’s proposed Aspen project.
Imperial first applied for regulatory approvals to build its steambased Aspen oilsands plant in 2013, when the company estimated it would cost $7 billion to construct in three phases that would produce a total of 135,000 barrels of oil per day.
Imperial refiled the application for the project, with a few technological improvements, after crude prices collapsed in 2015 and now expects to build the project at a cost of $4 billion in two phases that would produce a total of 150,000 bpd.
Birn said Imperial still must build the project, but the budget indicates the company could produce more oil for roughly half the per-barrel cost and represents “the only line of sight we have” for capital costs on new projects.
Ferguson said he hopes to provide an update on whether it will re-sanction its new expansion phase at Christina Lake when the company announces its capital budget for 2017.
RBC Capital Markets analyst Greg Pardy said in a research note Husky Energy Inc. was focused only on projects that could deliver a 10-per-cent internal rate of return at West Texas Intermediate oil prices of US$40 per barrel, about US$8 below where they are today.
That “hurdle rate” would represent a significant improvement on break-even price targets from before crude oil prices began to slip in 2014, and Husky could achieve those rates at current prices.
Husky is considering whether to sanction three steam-based heavy oil projects around Lloydminster, on the Alberta/Saskatchewan border, and is expected to make a decision on those projects by the end of next year.