Oilsands firms may be forced to cut production as danger of negative bitumen prices looms

CALGARY C Oil prices have fallen so low that oilsands producers have reached danger of seeing negative prices for their bitumen.

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A report Monday from FirstEnergy Capital Corp. warns when oil prices keep falling, it will cost some oilsands companies more to produce bitumen than they get for selling it.

The report said “bitumen costs are now within the single digits” and “if they’re going negative we suspect some bitumen producing projects could curtail output at least modestly.”

Bitumen is definitely an ultra-heavy oil that trades for a cheap price to both global benchmark oil prices along with a Canadian heavy oil blend called Western Canada Select, which closed at US$16.24 per barrel on Monday. Since it is so thick producers have to include it with a mixing agent called diluent in order to flow it through a pipeline.

The danger for oilsands companies is the cost of bitumen falling below the price of diluent, “so your costs exceed your revenues from selling the blend,” FirstEnergy analyst and also the report’s author Michael Dunn said.

He said WCS prices at US$12 per barrel is the “threshold” where the price of diluent exceeds the revenues many oilsands producers receive for selling the blended product.

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In recent days, his report notes, WCS has fallen to US$14 per barrel and some oilsands producers happen to be netting only US$4 per barrel for their product. An additional drop could result in operators lowering their output.

“While we would not expect operators to shutter output entirely, perhaps it’s reasonable to assume that some projects might have production curtailed by perhaps 10 % C 30 percent for several weeks or more if prices go negative,” the report stated.

In recent weeks, New York-based investment bank JP Morgan issued a report having said that WCS prices had fallen to a level roughly matching the typical operating cost of extracting bitumen, which could also result in production shut-ins or companies running operational losses.

A handful of smaller oilsands producers have previously shut being produced, with additional companies stating they will cutback the quantity of oil they produce in the coming months.

Wood Mackenzie analysts Peter Argiris and Nathan Nemeth said three smaller, steam-based oilsands companies – Laricina Energy Ltd., Grizzly Oil Sands ULC and Southern Pacific Resource Corp. – have shut in some production so far.

A fourth oilsands producer, Connacher Gas and oil Ltd., has said it’ll bring its production down from 14,000 barrels each day to between 3,000 and 4,000 bpd in February and March.

Connacher said that reduced production was the result of the accelerated maintenance schedule, but Nemeth said maintenance usually lasts just a few weeks rather than two months so, “It does seem like some sort of production curtailment is going on there.”

Imperial Oil Ltd. is a larger company that FirstEnergy recognized as potentially slowing its production, especially at its steam-based project in Cold Lake, where production has always been flat despite the addition of a new plant capable of producing 40,000 bpd.

Imperial spokesperson Lisa Schmidt said the company has not “shut in any production.”

Several analysts, including Dunn, said that oilsands companies have historically attempted to avoid shutting in production out of fear that doing so would damage their oil reservoirs.

Argiris said Connacher shut in certain of their production a few years ago and “then they found it tough to get it back to where it had been producing historically simply because they lost their steam chamber.”

“How much they are able to curtail, we just really don’t know. When your revenues are negative before covering your fixed costs, then you really don’t wish to produce,” Dunn said.

gmorgan@nationalpost.com

Twitter.com/geoffreymorgan