Discounts, pipeline constraints drive slash of output

CALGARY Cenovus Energy Inc. said Thursday it has been running its oilsands operations at reduced production rates and storing excess barrels due to wider than-normal light-heavy oil price differentials and pipeline capacity constraints.

The firm has been operating its Christina Lake and Foster Creek facilities at reduced production levels since February, CEO Alex Pourbaix said in a statement. “We’re taking steps to respond to a critical shortage of export pipeline capacity in Western Canada that is beyond our control and is having a negative impact on our industry and the broader Canadian economy.”

Cenovus has resorted to using its significant oil storage capacity because Canadian heavy oil is selling at a wide discount to West Texas Intermediate. It plans to sell the crude when pricing improves, he said.

The move is a “sensible commercial decision” in the face of a challenging set of pricing conditions, RBC analyst Greg Pardy wrote in a note.

Cenovus is also evaluating opportunities to optimize the scheduling of maintenance and holding talks with rail providers to resolve a shortage of locomotive capacity.

Railways have been hesitant to add oil shipping capacity because they fear the business will evaporate once new export pipelines come on stream, demanding long-term take-or-pay contracts and higher rates to take on the risk.

The limited capacity and cautious stance on adding more led Barclays Capital analyst Paul Cheng to increase his WCS-WTI differential price forecast by US$4.50 to US$24.60 per barrel from US$18.40 per barrel from 2019 to 2022, when more pipeline capacity is expected to be online.

First Energy analyst Mike Dunn said in a note that while there is some uncertainty on timing and scale of crude-by-rail increases, he continues to expect differentials to narrow as crude-by-rail picks up around midway through this year.

Railway shipments have been hampered over the winter because of a combination of harsh weather and a bumper crop, leading to shipping backlogs, he said.

National Bank Financial analyst Travis Wood said in a note that he still expects rail to have a marginal effect on increased crude exports this year given the limited locomotive capacity.

He said that pipeline maintenance has added to capacity constraints and forced Alberta heavy oil storage to record highs, which will result in weak pricing that may continue on past the first quarter.

Cenovus noted that while its strategy may result in fluctuating production from month to month, it continues to expect fullyear oilsands volumes for 2018 to be within the its guidance of 364,000 to 382,000 barrels per day.

First-quarter oilsands production is expected to be between 350,000 and 360,000 barrels per day.