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Cenovus says oilsands expansions likely to go ahead

CEO says company can still turn a profit if price differential persists.


CALGARY—Cenovus Energy Inc. can “power through” its new oilsands projects even though the company, like most Alberta crude producers, is getting a steep discount for its oil.

CEO Brian Ferguson says that operating costs at its oilsands operations are low enough that it can turn a good profit even if the differential—the price gap between heavy Alberta crude and the US benchmark—persists.

“That gives us the ability to actually power through some of those troughs and continue to move forward with the projects,” he told a conference call.

The average differential between Western Canada Select, the Canadian heavy benchmark, and West Texas Intermediate, the US light benchmark, averaged US$30.37 per barrel in December, compared to US$11.72 a year earlier.

A lower WCS price is not unusual, given the fact that it’s of lower quality and further away from market. But with the differential stretching as wide as US$40 in recent months, there have been concerns about future growth in the oilpatch and what that means for government royalty and tax revenues.

The differential for March is narrower, at around US$26.

Tough conditions can have benefits for oilsands producers, in the form of cheap materials and labour, said Ferguson. For instance, at the height of the recession in 2009, when crude prices virtually cratered, Cenovus brought on a third phase of its steam-driven Christina Lake project under budget.

Cenovus is also an “integrated” company, meaning that in addition to drawing oil out of the ground, it has interests in refineries that process the crude into higher-value fuel products.

When those refineries are fed with cheaper oil, their costs go down, essentially offsetting the damage the lower prices do to the upstream, or production, side of the business.

At the crux of the differential issue is a lack of pipeline capacity to get Alberta crude to the best markets.

Proposals to get Alberta crude to the west coast for export to Asia, such as Enbridge Inc.’s Northern Gateway and Kinder Morgan’s Trans Mountain expansion, are also far from certain, amid environmental concerns within BC.

Cenovus says it takes a “portfolio” approach to getting its product to market.

“We are in no way betting all of our eggs in one basket on Keystone XL,” said Ferguson.

Don Swystun, executive vice-president of refining, marketing, transportation and development, said about 40,000 barrels of per day of Cenovus production can access tidewater, and therefore global markets.

About 11,500 Cenovus barrels flow along the existing 300,000 Trans Mountain pipeline to the BC Lower Mainland and Washington State. Another 20,000 travel to the Gulf Coast through ExxonMobil’s Pegasus pipeline.

Some 6,000 barrels a day move by rail, and Cenovus sees that growing to 10,000 this year. Volumes are also moving by barge.

Between Northern Gateway and the Trans Mountain expansion, Cenovus has committed to ship 175,000 barrels of oil per day to the west coast.

It has signed up to ship another 150,000 barrels per day to the Gulf between Keystone XL and Enbridge Gulf Coast access projects.

Cenovus is also keen on a TransCanada proposal to convert some of its natural gas mainline to oil service and ship up to one million barrels per day to Quebec and perhaps the east coast. The pipeline company will hold a formal process, called an open season, later this year, in which companies can bid for space on the line.

“We believe it is very important for the country… to move volumes to export off the east coast as well as to Quebec for refineries there. So we will be having significant participation when that line goes to open season also,” said Swystun.

Cenovus says it recorded net and operating losses in the fourth quarter as well as an 18% drop in cash flow compared with the year-earlier period.

The Calgary-based oil producer had a net loss of $118 million, a big turnaround from the year-earlier profit of $266 million.

It also had an operating loss of $189 million, compared with the profit of $332 million in the fourth quarter of 2011.

©The Canadian Press