Resumption at CNRL project to lower prices for oil sands crude
nathan vanderklippe
CALGARY— From Friday's Globe and Mail
Published Thursday, Aug. 04, 2011 6:26AM EDT
The price of crude is likely to decline for a number of oil sands companies as Canadian Natural Resources Ltd. (CNQ-T35.25-0.94-2.60%)brings back to life its fire-damaged Horizon project.
The Horizon outage caused a shortage of synthetic crude, a kind of light oil that is manufactured by oil sands producers from the heavy bitumen they mine from the Fort McMurray area. The supply shortfall caused a spike in synthetic prices, which have risen to $14 (U.S.) above benchmark oil prices. That has meant that, when North American oil prices reached $100, synthetic crude producers were fetching over $110 a barrel.
But over the next three or four weeks, Horizon will resume its output of 110,000 barrels a day of synthetic crude, and that premium – which has flowed to companies like Suncor Energy Inc., Canadian Oil Sands Ltd. and Nexen Inc. – is likely to bleed away.
“When we bring Horizon on, I would expect that premium to shrink – and we normally get about a $1 discount,” said CNRL president Steve Laut.
The resumption of operations at Horizon comes after months of difficult repairs that created substantial delays. CNRL initially said it hoped to bring half of its operations back on stream by mid-June following the devastating January fire, caused by a series of system and operator errors.
But crews working to fix Horizon faced both a frigid winter, with temperatures plunging below -30 C, and a summer that saw more difficult weather. On 16 days, winds were too strong to do high lift jobs. Workers were also forced out of the area for several days because of lightning. In addition, work was halted from May 15 to June 7 because of nearby forest fires.
CNRL also had to charter three heavy-lift flights to bring in new parts from Germany.
The company had estimated repair costs at $350-million to $450-million. On Thursday, it pegged the total at $425-million, which will be covered by insurance.
Mr. Laut said it will take another two to three weeks to restart operations at Horizon, and a further three to four days to bring production up to the plant’s 110,000-barrel-a-day capacity.
The return of Horizon comes as CNRL reports second-quarter profit of $929-million, beating the same quarter in 2010 by more than 40 per cent. The company’s diluted cash flow per share, at $1.40, trailed its year-ago results by 6 per cent as daily production, at 556,539 barrels of oil equivalent, lagged the second quarter of 2010 by 14 per cent.
Most of those declines were in Horizon’s oil output; the company’s natural gas production has held flat this year. CNRL has been among the most pessimistic energy companies with regard to natural gas prices, which it believes could take two to seven years to recover.
Still, the company has continued a campaign of quietly scooping up more land – most of it with natural gas production. CNRL has boosted its 2011 acquisition budget to $950-million; it has already bought just over 26,000 barrels of oil equivalent production – most of it in the form of natural gas.
The acquisitions are “within our core areas in Western Canada,” Mr. Laut said.
He defended buying more gas assets, even as prices continue to be so low that many producers have lost money.
“Basically, there’s a right price for everything,” he said, adding that spending those dollars on speeding development of existing oil properties could be counterproductive.
“You put too much capital to any one component, you lose your capital efficiencies,” he said. “It gets too busy – rigs are too busy, and you stretch your intellectual capital too far.”
CNRL is also facing difficulty in developing some of its own properties. The company said Thursday that it has experienced a three- to six-month delay in securing regulatory approval for the use of a new technology, called polymer flooding, at its Pelican Lake field. Polymer flooding is used to squeeze difficult-to-produce quantities of oil from mature fields.
But it uses higher pressure than other so-called “enhanced oil recovery” methods, and Alberta’s energy regulators have asked for further proof that it can be done safely, Mr. Laut said.
“We believe there’s no issues, but we want to make sure we have all the data to back that up.”
http://www.theglobeandmail.com/globe-investor/resumption-at-cnrl-project...
