The last place oil producers want to be when prices plummet to profit-demolishing lows is midstream on a billion-dollar project in one of the costliest parts of the planet to extract crude.
Yet that’s exactly where half a dozen oil sands operators from Suncor Energy Inc. to Brion Energy Corp. find themselves with prices for Canadian oil now hovering around $30 a barrel. While all around them projects have been postponed or canceled, their investments were judged too far along when the oil game suddenly moved from offense to defense.
These projects will add at least another 500,000 barrels a day — roughly a 25 percent increase from Alberta — to an oversupplied North American market by 2017. For companies stuck spending billions in a downturn, the time required to earn back their investments will lengthen considerably, said Rafi Tahmazian, senior portfolio manager at Canoe Financial LP.
A general rule of thumb says new plants require a West Texas Intermediate price of $80 a barrel to break even. Western Canada Select, a blend of heavy Alberta crude, is currently selling at a discount of about $14 a barrel to the WTI benchmark, which lost 21 cents to $46.22 on the New York Mercantile Exchange at 11:15 a.m.
This differential for Alberta’s oil, based on such factors as quality and pipeline capacity, has ranged from $7 to $20 this year and exceeded $40 a barrel in late 2012 and part of 2013.
Cenovus Energy Inc., a Calgary-based producer that uses steam technology to melt bitumen and pump it to the surface, has postponed two new projects until the oil price recovers. But it’s pressing ahead with expansions started before the downturn that will add 100,000 barrels of capacity by next year.
Oil companies plan for price variations during the lives of long-term projects. Cenovus “stress tested” its expansion down to a price of $50 a barrel, a level that will allow it to continue paying a reduced dividend and fund some further growth, Ferguson said in July.
Even $50 might appear optimistic now, with WTI briefly sinking below $40 in August and some analysts, including those at Citigroup Inc., forecasting prices in the low $30s. Cash flow for Cenovus can fluctuate by hundreds of millions of dollars with changing prices, but the company still aims for a 15 percent return over the life of its projects, said spokeswoman Sonja Franklin.
There are some silver linings for those still expanding. The Canadian dollar, which has fallen in tandem with oil, boosts the bottom line, as do reduced costs for skilled tradesmen and materials.