Low Crude Prices Leave Many Canada Oil Sands Producers in the Red

 

Alberta's oil sands hold the world's third-largest crude reserves but also have some of the highest breakeven costs globally because of energy-intensive production methods.

 

Canadian heavy crude trades at a discount to U.S. crude because of quality and the cost of transportation from landlocked Alberta to U.S. markets.

 

The differential is currently steady near $13.75 a barrel, putting the outright price of Canadian heavy at around $22 a barrel, near a decade low.

 

Still, oil sands projects are unlikely to shut down because of the billions of dollars already sunk into them.

 

ARC Financial analyst Jackie Forrest said at current prices thermal oil sands projects are losing around C$1 ($0.7259) a barrel, while mining operations are bleeding roughly C$3 for every barrel produced.

 

"There are definitely producers at this price who are losing money. They are not even covering variable costs associated with producing bitumen, blending it and sending it down the tracks," she said.

 

Companies also have to contend with other expenses including debt servicing and administrative fees.

 

That means even though the most efficient projects - such as Cenovus Energy (CVE)'s Foster Creek Christina Lake facilities - may still be in the black, profit margins at a company-level are thin to non-existent, said Wood Mackenzie analyst Mark Oberstoetter.

 

In August, when prices for Canadian heavy crude were also around $22, TD Securities estimated in a report that more than three-quarters of Canada's 2.2 million barrels per day of oil sands production were under water cost-wise.

 

The bank is close to releasing an updated version of the report and declined to comment before publication.

 

Then, as now, Canadian producers can only react by cutting spending aggressively, renegotiating supply contracts and laying off staff.

 

Oberstoetter estimates that so far 2016 capital spending budgets are on average around 40 percent lower than in 015.

 

"We were thinking in the summertime maybe 2016 would not be as bad as 2015, but given the (price) changes and the continued uncertainty it's pointing to a bleaker picture," he said.

 

Mike Dunn, an analyst at FirstEnergy Capital, said companies could cut spending by another 10 percent to 20 percent if prices remain weak.


($1 = 1.3776 Canadian dollars)

(By Nia Williams; Editing by Steve Orlofsky)