CALGARY – Production cutbacks and deferred drilling programs are emerging as a common theme as Calgary-based oil and gas companies elect to leave barrels in the ground rather than sell at current low prices.
In third-quarter results released this week, energy companies large and small say they are avoiding wider-than-usual price discounts compared with U.S. benchmark prices blamed on difficulty in getting barrels to market due to full export pipelines.
At least 110,000 barrels per day of potential oil production is being left behind, including cutbacks announced by major oilsands players Canadian Natural Resources Ltd., Cenovus Energy Inc. and MEG Energy Corp. last week, calculates analyst Phil Skolnick, managing director with Eight Capital.
“Storage is tight in Canada so it will help clear the storage levels or bring then down, which should then help the diffs (price differentials), and that will be 110,000 bpd that won’t be trying to find a home on pipe right now.”
He pointed out bitumen must be blended about three-to-one with diluent to flow in a pipeline so the reductions actually translate into a “meaningful” amount of reduced demand on the system.
In a note on Monday, RBC analyst Greg Pardy estimated between 52,000 and 98,000 barrels per day wasn’t being produced, a small portion of Canada’s overall output of about 4.6 million barrels of oil per day and not enough to make a big difference in pricing.
The cuts represent “a constructive start to reducing Alberta’s elevated storage levels, but still fall well below our estimated supply-demand imbalance (after crude-by-rail exports of 250,000 bpd) of 160,000 to 185,000 bpd in the fourth quarter of 2018,” he said.
On Wednesday after markets closed, Athabasca Oil Corp. said it would dial back production at its two steam-driven oilsands projects by between 16 and 27 per cent to deal with wide discounts that it expects to persist until next spring.
“Athabasca has responded to the widening differentials by strategically slowing production by 5,000 to 8,000 bpd for the balance of the year (November and December) at Hangingstone and Leismer,” it said, noting third-quarter production of about 30,500 bpd, up eight per cent over the same period a year ago.
Meanwhile, Perpetual Energy Ltd. and Gear Energy Ltd. are among companies that have announced they will defer planned drilling programs in the fourth quarter until next year in hopes that flush production from new wells will find more robust prices.
Gear added Thursday it plans to put 40,000 barrels of heavy oil into surface storage tanks to be sold at a later date.
“To shut down production, it actually costs money, it’s not just a matter of turning off the valve,” said Dinara Millington, vice-president of research for the Canadian Energy Research Institute.
“So there’s going to be a decision, where’s the net benefit larger? Is it shutting down production and eating that cost but then selling your future production for higher prices? Or is it continuing production … and then incurring the cost of lower netbacks?”
Lower production translates into less money for government programs, she said, noting that provinces collect royalties based on how much petroleum is produced while lower profits mean less corporate income tax for federal coffers.
Follow @HealingSlowly on Twitter.
Companies mentioned in this article: (TSX:ATH, TSX:CVE, TSX:CNQ, TSX:PMT, TSX:MEG)