Production curtailments deliver billions to taxpayers: Cenovus CEO

CALGARY — The Alberta government’s oil production curtailment program will deliver billions of dollars in benefits to taxpayers this year thanks to stronger crude prices, the chief executive of Cenovus Energy Inc. said April 24.

On a conference call to discuss the company’s latest financial results, Alex Pourbaix said his company paid more than $190 million in provincial royalties in the three months ended March 31, but he doesn’t mind because a reduction of price discounting of western Canadian oil has more than made up for the 5% reduction in Cenovus production the program caused.

“In the fourth quarter of 2018, when light-heavy differentials reached record highs, peaking at more than US$50 per barrel, Cenovus had a net royalty credit with the province of Alberta of approximately $30 million. So, in other words, not only did we not pay royalties, the government in fact owed us for the royalties,” he said.

“In the first quarter, as a result of improved commodity pricing, which drove our strong financial performance, we made royalty payments to the province of more than $190 million.”

Cenovus is responsible for about 10% of provincial production, Pourbaix added, which means the overall royalty benefit to taxpayers over 2019 could be “eight or 10 or even higher billion dollars.”

He said that provides a good argument for the new United Conservative government, which takes office next week, to continue its initial support of the initiative announced by NDP Premier Rachel Notley in December.

The province declined comment because of the transition in government. In its quarterly fiscal update in February, however, it almost doubled its estimate of oil sands royalties for the fiscal year ended March 31, 2019, to $3.4 billion from the budgeted $1.8 billion.

The curtailment program which started Jan. 1 was designed to keep 325,000 barrels per day off the market to clear up a glut of oil that had overwhelmed pipeline capacity and lowered prices. It is to fall to about 175,000 bpd by June.

The plan has been opposed by producers with Canadian refining operations such as Suncor Energy Inc. and Imperial Oil Ltd. that achieve higher refinery profits when local oil prices are lower.

The UCP has indicated it will cancel another NDP plan to add rail assets capable of moving 120,000 bpd of crude starting by the end of the year.

The new government should meet with industry to consider transferring those rail assets rather than simply cancelling the contracts, Pourbaix said later in an interview, adding it’s vital that rail options are available if curtailments are removed by year-end as scheduled and no new pipeline capacity has been added.

Cenovus is ramping up its own crude-by-rail shipments from between 15,000 and 20,000 bpd in the first quarter to about 100,000 bpd by year-end.

At its annual general meeting in Calgary, Cenovus shareholders voted more than 89% against a motion to set greenhouse gas emission targets aligned with the goals of the Paris climate accord.

Pourbaix said the proposal by the Fonds de Solidarite des Travailleurs du Quebec would be too “prescriptive” in forcing the company to set medium- and long-term targets for its direct and indirect methane and other GHG emissions from operations.

Cenovus reported it completed construction of a 50,000-bpd expansion at its Christina Lake thermal oil sands project in the first quarter but said it won’t ramp up production there until curtailment is over and there is progress on getting the oil to market.

The company beat analyst expectations with adjusted first-quarter income of just over $1 billion on revenue of $5 billion, compared with adjusted income of $432 million on revenue of $4.6 billion in the same period of 2018.

The beat was driven by higher oil sands prices and better profits due to lower oil feedstock prices at the two US refineries Cenovus co-owns with operator Phillips 66, analysts said.

It posted a net profit of $110 million, compared with a loss of $654 million a year earlier.

Cenovus reported first-quarter oil sands production of 343,000 barrels per day, down five per cent compared with a year ago, while operating costs rose to $9.06 per barrel compared with $8.78 a year ago.

Production from the company’s Deep Basin assets averaged 104,000 barrels of oil equivalent per day, down 18% from a year ago due to the sale of its Pipestone business, lower capital investment, natural declines and weather-related outages.