All systems slow
While the widening Canadian heavy crude disc o u n t has sent the Alberta government scrambling to make up for the shortfall through possibly higher taxes and spending cuts, the province’s oil sands companies are not pressing the panic button — yet.
Stronger company balance sheets backing projects, foreign capital and risk-sharing will help the industry weather the downside, Bob German, president and chief executive of contracting company Horizon North Logistics Inc., told a recent investor conference.
“Many companies five years ago did not partner with anybody to share the risk, but are doing so now. The staying power given the long-term nature of these projects and through dips in commodity prices are better than they were five years ago.”
Nobody can deny, however, that the pace of oil sands contract awards has slowed down, says Maxim Sytchev, managing director of institutional research at AltaCorp Capital Inc., and capital spending is running behind the engineering- and- construction industry’s forecasts for the first time since 2009.
The Canadian heavy-oil benchmark is trading US$30 per barrel below that of West Texas Intermediate, but oil sands contractors can still see the wheels of new projects turning, and are reporting a “levelling out” of activity, rather than a screeching halt.
Oil sands capital spending in 2012 was comfortably above spending levels of the past three years and is expected to be about $18.5-billion in 2013, higher than the heady days of 2007-2008.
“Yes, we have all seen the announcements and the pushing of some projects to the right,” John Beck, chairman and CEO of Torontobased construction giant
Aecon Group Inc., said at the conference, organized by AltaCorp Capital.
“It was starting to be a feeling of, ‘Oh, oh, here we go 2007-2008 again,’ eight months ago ... but we have a significant amount of work in the oil sands today and we are bidding on significant more work, and more SAGD work.”
Ric Sorbo, senior vice-president and acting head, hydrocarbons and chemicals at Montreal-based SNC-Lavalin Group Inc., said his oil sands clients are increasing production in incremental phases of 20,000 barrels per day to 30,000 bpd to ensure the market does not face a glut.
“They are kind of like planes lining up to land at the airport, you can see them out there from quite a distance,” Mr. Sorbo said. “It does not seem like that pattern is going to change. We have a fair a number of customers that are very much in that cycle. It’s going to be pretty stable.”
Enbridge Inc. chief executive Al Monaco also is “concerned” about the impact of discounted Canadian crude on oil-sands investment.
“We need to attract world prices to promote investment in the oil sands,” Mr. Monaco told Bloomberg News. “We don’t want price discounts to affect investment.”
Production guidance for 2013 from companies such as Cenovus Energy Inc. is below analyst expectations.
David LeMay, president and chief operating officer at Calgary-based construction group The Churchill Corp., said that while there is a lot of activity, “there is caution, and while there is no foot on the brakes, there is foot off the gas on the owner side.”
Some of the more vulnerable companies are cracking under pressure. Talisman Corp., which has its own unique issues to contend with, said last month it is laying off staff. Analysts expect Suncor Energy Inc. to scrap the Voyageur upgrader project and take a decision on the Fortis Hill and Jocyeln projects later in the year.
Others such as Canadian
Oil Sands Ltd. are also expected to feel the pain down the road.
“We believe the downside risk to synthetic pricing will occur in later 2013, and with debt levels rising and high maintenance and capital requirements we believe the company’s dividend will likely be reduced in the second half of 2013,” investment bank Peters & Co. said in a note to clients.
Canadian Oil Sands said it could not comment before its fourth-quarter results were released after market hours on Thursday.
The oil price differentials are not hurting all oil sands companies equally, Aecon’s Mr. Beck said.
He said operators using steam-assisted gravity drainage techniques to recover oil, which are sometimes smaller producers, “would probably be more cautious about price fluctuations in the future; the large, integrateds — the Exxons and Totals — look at the very large picture and oil price futures do not affect their long-term decisions. And the third is the existing mining operations and that is completely independent of any oil price fluctuation. Those business run 24-7, 365 days a year and nothing will stop that.”
While rail is now a common route to escaping Canadian crude discounts, companies are also eyeing waterways to get their crude out of Alberta.
Expec ting fresh additions of 35,000 barrels per day from its Christina Lake Phase 2B project, MEG Energy Corp. recently secured contracts with American Commercial Lines Inc. to ship oil on barges to the Gulf Coast.
“Many oil sands companies are also moving into tight oil to take advantage of the tight opportunities as a short-term benefit,” says Andrew Potter, an analyst at Canadian Imperial Bank of Commerce, highlighting Cenovus Energy Inc.’s investment in Bakken plays.
CIBC recently raised its WTI forecast for the year but remains worried about the WCS differential spreading wider before BP PLC’s Whiting refinery and Enbridge’s Flanagan pipeline get on line.
Meanwhile, Peters & Co. is more bearish and has cut its Canadian production forecast by 7% by 2020.
“The risk profile for the oil sands as a whole remains challenging compared to some other unconventional North American plays, due largely to reduced heavy oil pricing realizations, large upfront capital commitments, and cost inflations leading to reduced margins.”
But such pessimism remains on the periphery — at least for now.
“Long term, oil sands offer great value because of the scale they offer compared to tight oil,” Mr. Potter said.
And while U.S. State Department disapproval of the Keystone XL pipeline could cause a “rethink” of projects, Canadian oil sands extraction is not as expensive as it used to be, according to RBC analyst Nathan Janzen.
SAGD projects break even around US$52 per barrel, below WCS prices of US$55 to US$60, the analyst estimated.
“While it is possible that some marginal projects will be lost or delayed, the level of current prices, along with the widely held belief that weakness in WCS relative to WTI and Brent prices will ultimately prove temporary, appears to be sufficient to allow much of the previously planned expansion in the Alberta oil sands to continue.”