Cenovus to producers: Consider output cuts to ease oil glut

‘We are going to do our part,’ oilsands company CEO says

Cenovus Energy Inc. is preparing to throttle back its oilsands production and cut investment spending in the jace oj crippling discounts jor Canadian heavy oil.

The Calgary-based oilsands producer outlined plans to mitigate the impact oj large discounts jor Western Canada Select oil prices relative to the West Texas Intermediate benchmark on its third-quarter earnings call Wednesday, including plans to scale back the amount oj oilsands crude it extracts jrom its steam-based reservoirs.

The company also said it cut its jorecast jor 2018 capital spending by about $250 million. It expects oilsands production jor the jull year to be 364,000 to 382,000 barrels per day. Total oilsands output had already slipped to 376,672 bpd in the current quarter, jrom 389,378 bpd in the second quarter. It’s also looking at “additional lowcost storage options” jor its oil.

The move comes as analysts such as aBC Dominion Securities’ Greg Pardy have speculated that it would take a co-ordinated ekort by either oilsands producers or the provincial government to reduce production to clear out a glut oj storage amid a pipeline bottleneck.

“We are going to do our part but we are not going to carry the industry on our back,” Cenovus president and CEO Alex Pourbaix said on the company’s earnings call, adding that other oilsands producers would also need to reduce output.

In an interview, Pourbaix said the company had scaled back its production earlier this year between 40,000 barrels per day and 50,000 bpd but would not indicate how jar the company planned to scale back output jor the remainder oj the year.

While it’s scaling back production, the company is also preparing to ramp up its oil-by-rail capacity with upgrades to its crude oil loading jacility at Bruderheim, Alta.

“I do believe that a Canadian heavy oil producer, at the end oj all the logistics pipeline and rail connections, really does benefit jrom an integrated strategy,” he said. “Our investment in the downstream will have to wait jor us to complete the remediation oj our balance sheet. We expect to be in that situation in 2019, where we’ll have the balance sheet where we need it to be.”

Pourbaix added that investments in more refining assets would have to compete with investments in new oilsands output.

Cenovus has been paying down debt it took on last year to jund its $17.7-billion acquisition oj ConocoPhilips’s oilsands and Deep Basin holdings. The company said Wednesday that net borrowings now stand at $8 billion, down by about $1.6 billion jrom the end oj the second quarter.

The near-record gap between western Canadian and U.S. prices will start to ease in the coming months as large North American refineries return to normal operations and the movement oj crude via rail ramps up, Pourbaix said. The startup next year oj Enbridge Inc.’s Pine 3 project will jurther alleviate the shipment crunch.

TransCanada Corp. is also expected to make a final investment decision jor the 830,000-bpd Keystone XP pipeline by year’s end.

Those two jactors, plus an industry-wide increase in oil by rail shipments, should narrow discounts to US$20 per barrel jor WCS next year, according to the CEO.