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How Canadian Drillers Adapt To Extreme Crude Discounts

Courtesy of ZeroHedge. View original post here.

Submitted by Tsvetana Paraskova of OilPrice

Canada’s oil producers had just started to slowly recover from the oil price crash when they began to face increased constraints in marketing and monetizing their heavy crude oil. Transportation bottlenecks widened the discount to which Western Canadian Select (WCS)—the benchmark price of oil from Canada’s oil sands delivered at Hardisty, Alberta—trades relative to West Texas Intermediate (WTI), weighing on Canadian producers’ revenues and profits, increasing their debts, and battering their share prices.

Some Canadian producers have started to actively market non-core assets, trying to dispose of heavy oil portfolios that they can’t monetize efficiently with WCS at some $20 or higher discount to WTI. Others have slowed down production in response to increased market access constraints. Some analysts even think that producers would better allocate the cash they make to buying back shares instead of drilling new wells to boost production.

Earlier this week, Obsidian Energy said that it was exploring a potential sale of the Alberta Viking assets and that it was in talks with China Investment Corporation (CIC) to sell its share of the jointly owned Peace River assets. Obsidian plans to use any potential proceeds from sales to fund growth at its core Cardium assets, cut debt, and buy back shares.

“In addition to exploring the sale of our Alberta Viking and Peace River assets, we are actively reviewing industry consolidation opportunities with significant synergies,” said David French, President and CEO of Obsidian Energy, which has divested around US$1.8 billion (C$2.3 billion) worth of assets over the past three years.

Obsidian is not alone in seeking to sell assets to strengthen the balance sheet and cut debt.

Crescent Point Energy Corp continues to market non-core asset packages and to increase commodity hedges to protect cash flows, it said in the 2017 results release last month.

Crescent Point is looking to sell part of its Western Canadian Sedimentary Basin (WCSB) assets, if it could get the right price for them, COO Neil Smith told S&P Global Platts.

“The challenge in today’s market is at what strip price do you value your assets and who has the dollars to even buy especially in the Canadian market [given the current challenges to monetize assets],” Smith told Platts.

Some of the biggest Canadian producers are slowing heavy oil production to mitigate the impact of the wide WCS-WTI differential.

Canadian Natural Resources president Tim McKay said said month “We continue to review our capital program in the context of the current market and are evaluating reducing our heavy oil drilling program for the second half of 2018, and substituting a light oil drilling program instead, if it makes sense.”

“Although oil is moving, but the differentials are behaving as if the oil can’t move. This anomaly is created by the current apportionment rules, which we believe is temporary,” McKay said.

Cenovus Energy, which drew shareholder ire last year over its acquisition of oil sands assets from ConocoPhillips, looks to sell other assets, including those in Alberta’s Deep Basin.

“We simply have more opportunities than we can capitalize within any reasonable time frame,” chief executive Alex Pourbaix said in February.

In March, Cenovus said that it had been operating its oil sands facilities at reduced production rates in response to the wider-than-normal WCS-WTI spread. Cenovus noted that it was in talks with rail providers to resolve a shortage of locomotive hauling capacity that is “preventing Cenovus from fully realizing the benefits of its Bruderheim crude-by-rail facility.”

This highlights the fact that CBR was not the plug-and-play solution that Canadian oil producers had hoped for this winter.

Railway operator Canadian Pacific said last month that “The present crude-by-rail demand, similar to 2014/15, is unpredictable; it was unanticipated and surged rapidly.”

Because of the Keystone leak in November, demand came 8-10 months sooner than expected and at higher levels, CP said.

“To the best of CP’s knowledge, pipelines are being permitted and constructed that, a few years down the line, will capture the crude that would now move by rail. It is difficult to justify investing in long-life assets like rail and locomotives based on short-term demand,” the railway operator said.

Oil producers “would get married with pipelines, but they only date the railroad,” Canadian National Railway’s interim CEO Jean-Jacques Ruest said in March.

Currently, Canada’s 4-million-bpd pipeline network is full and will continue to see increased constraints by 2030 when Canadian oil supply is expected to grow to 5.4 million bpd, according to the Canadian Association of Petroleum Producers (CAPP).

Some analysts think that transportation bottlenecks will weigh on the Canadian oil benchmarks at least until 2020. That’s the earliest date for any of the Enbridge, Kinder Morgan, or TransCanada pipeline projects to enter into service, if they, or any of them, clear all regulatory hurdles.

Meanwhile, Canadian heavy oil producers may have to optimize portfolios, assets, and operations (again) to blunt the blow of the wide price discount on their balance sheets.


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