BMO Warns Oilsands Must Cut Costs

The cash costs of oilsands producers must shrink to remain competitive in the “new normal of lower oil prices for longer,” BMO analyst Randy Ollenberger said in a note Monday.

Canadian heavy oil prices fell below US$30 for the first time in more than six years as Bank of Montreal warned that oilsands producers must cut costs.

Most producers will continue producing from existing operations and complete projects under construction

Ryan Jackson/Postmedia News
Energy companies are tightening their belts in the oilsands, slashing budgets, scrubbing and delaying projects, and laying off scores of contract workers.

With oil hovering around US$50 a barrel, the bounce is suddenly missing from Fort McMurray’s step.

Hotel rooms, typically tough to find, are readily available. About $100,000 has been trimmed from the average selling price of a single, detached home in the past year. People are lining up at the food bank in numbers previously unseen. More staff is being hired and food drives are being planned in hope of keeping up with demand. More donations than ever are coming in, but nowhere enough, executive director Arianna Johnson says.

 

Western Canadian Select fell 59 US cents to US$29.85 at 12:28 p.m. Mountain time, the lowest since Feb. 18, 2009, according to data compiled by Bloomberg. The grade’s discount to U.S. benchmark West Texas Intermediate narrowed 80 US cents to US$13.60 a barrel. Crude futures settled at a six-year low of US$43.88 in New York on concern record supply may strain storage capacity.

The cash costs of oilsands producers must shrink to remain competitive in the “new normal of lower oil prices for longer,” BMO analyst Randy Ollenberger said in a note Monday. The majority of Canada’s crude comes from oilsands in Northern Alberta and is among the most expensive to produce. Companies including Royal Dutch Shell Plc and Cenovus Energy Inc. have cut costs and suspended projects as prices plunged.

“You will see companies do another round of budget cuts if oil settles in the low 40s,” Ollenberger said.

Crude from oilsands is produced from bitumen, which must be dug or pumped out of the ground after it’s melted by steam. The bitumen is upgraded to lighter synthetic crude or is diluted with condensate and shipped by pipeline or rail car thousands of miles to refineries, most in the U.S.

Shell withdrew an application to develop the Pierre River mining project to focus on existing ones, Shell Canada President Lorraine Mitchelmore said in a statement last month. Cenovus suspended construction on Christina Lake Phase G with work to resume when market conditions improve, Chief Operating Officer John Brannan also said last month. Both companies, along with Suncor Energy Inc, have also cut staff to reduce costs.

Cost Savings

Major sources of costs savings that may have been overlooked include lower royalty rates and reduced blending costs, Ollenberger said in his note Monday. Per-barrel costs can be cut with increased production through existing facilities, he said.

Canadian Oil Sands Ltd., among the largest five producers, needs a WTI price of about US$50 a barrel to sustain business with no production declines, Chief Financial Officer Robert Dawson said March 11. Smaller companies are facing financial troubles. Southern Pacific Resource Corp. has defaulted on debt and Connacher Oil and Gas Ltd. says it’s in danger of not being able to pay creditors.

Canada’s oilsands production will grow 8.3% this year, the country’s National Energy Board said Feb. 10. Projects to extract bitumen require billions of dollars of up-front investment.

Most producers will continue producing from existing operations and complete projects under construction, Jackie Forrest, vice president of Calgary-based ARC Financial Corp., said in a Jan. 29 e-mail.

WTI crude would have to stay between US$30 and US$35 a barrel for at least six months before wells and mines are shut, Dinara Millington, a vice president at Canadian Energy Research Institute, said Feb. 19.

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