Oil sands seen attacking costs amid crude slump

Kevin Orland 7/28/2017

CALGARY (Bloomberg) -- Canada’s oil-sands operators are making progress in shedding their image as high-cost producers destined to fail in a low-price world.

Suncor Energy, Cenovus Energy and MEG Energy all rose on Thursday after showing advances in cutting costs in their operations in northern Alberta. Those reductions helped their second-quarter results weather crude’s plunge into bear-market territory during the period.

While the tar sands -- which hold the world’s third-largest oil reserves -- were seen as prized assets during the oil-price spike a decade ago, investor sentiment has soured on the resource as the U.S. shale boom sent crude prices below $60/bbl in recent years. The fear was that the huge upfront investments the operations require, as well as the cost of mining or steaming the hydrocarbon-soaked sand out of the ground, would render them unable to compete against nimbler shale producers. That image may be changing.

“One of the things the industry has had to realize is that with $50 oil, you’ve got to be brutal in how you attack your costs,” said Justin Bouchard, an analyst at Desjardins Securities. “And we’re seeing that basically everyone is dropping their costs.”

Suncor cut its oil-sands cash operating cost 41% to C$27.80/bbl, helped by increased production. Cenovus said it can now cover all of the costs of operating its existing oil-sands operations with WTI crude in a mid-$30 range. And MEG trimmed its net operating cost to C$7.42/bbl in the second quarter, a 12% reduction from the first quarter, and cut its forecast for non-energy operating costs for the year.

Shares Climb

Cenovus shares rose as much as 12% to C$11.10 in Toronto, and MEG climbed as much as 9.1% to C$5.17. Even Suncor, which missed profit estimates due to an outage at its Syncrude facility, rose as much as 1.7% to C$39.63.

The cost cuts are coming in a variety of ways. Companies are shrinking the size of their well pads and reducing the amount of equipment they use. Others are working to reduce the amount of steam they need to push the sands out of the ground through the use of solvents. And they’ve improved the reliability of their facilities, which increases production faster than expenses.

The oil-sands companies do still have their challenges. MEG is carrying a debt load that Bouchard said is overshadowing its operational results, and Suncor is in a dispute with partner Total SA on the cost of the Fort Hills oil sands mine. Cenovus shares have been hammered this year after the company weakened its balance sheet to fund a $13.3 billion acquisition of ConocoPhillips oil-sands and Deep Basin assets. Those problems only make the cost-cutting drive that much more important.

“If you’re faced with a prolonged $50 world for oil, you’re going to find ways to make it work, or you’re going to close up shop,” Bouchard said.

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