Husky scales back spending and drilling on price drop, following other Canadian producers

Houston — Husky Energy is cutting spending and output amid an oil price slump that has hit Canadian producers even harder than their US peers.

West Texas Intermediate at Cushing, Oklahoma has fallen to roughly $31/b from $47/b in early March, while Western Canadian Select at Hardisty, Alberta has fallen to roughly $20/b from $34/b over the same period, S&P Global Platts data shows.

At the same time, prices for WCS at Nederland, Texas have outpaced the fall of Hardisty-based prices, following weakness in other US Gulf Coast grades, such as Mars. With US refiners boosting imports of Saudi Arabian crudes, the USGC will be well-supplied with medium to heavy sour barrels.

The tightening of the Nederland WCS price premium to Hardisty is removing the incentive to ship Canadian crude to the USGC by rail or even pipeline. Alberta Premier Jason Kenney said this week he expects crude-by-rail exports to plunge from a previously forecast record high of 500,000 b/d in March down to just 100,000 b/d in the coming weeks.

Related podcasts

Part 1: Volatility in global markets creates havoc for upstream US oil, gas and LNG

Part 2: Plunging oil prices, pandemic having dramatic downstream impact

All of this is occurring because of the double whammy of the novel coronavirus pandemic crushing global crude demand coupled with the emerging pricing and market share war between Saudi Arabia and Russia.

Canada also is weighing imposing stricter limits on crude production that were first initiated in late 2018 because of a previous collapse in Canadian crude prices due to a lack of pipelines required to move barrels.

The Nederland WCS price premium to Hardisty WCS must be at least $12/b to encourage rail shipments on committed long-term contracts and as high as $18/b for spot shipping.

However, that spread was just $7.10/b Thursday, and has averaged just $9.09/b so far in March, Platts data shows.

Even cheaper pipeline deliveries from Canada require a spread of at least $10/b for economic viability.

CUTTING BACK

As such, Husky Energy said it is slicing its 2020 capital spending by more than 27 percent from about $2.37 billion down to $1.72 billion.

Husky said it will cut off new drilling for now, and focus instead on optimizing existing production while leaning on refining and other downstream profits.

Earlier this week, Calgary-based Cenovus Energy cut its capital budget by 32% and temporarily suspended its crude-by-rail shipments. Likewise, MEG Energy sliced its spending by about 20% and Seven Generations Energy by more than 18%. Seven Generations CEO Marty Proctor called this a time of "unprecedented volatility."

Apart from some recently completed optimization projects to allow more volumes to flow on Canadian pipelines to the US, there are a wave of delayed, but still pending pipeline projects in the works.

They have faced issues with regulatory roadblocks, lawsuits and environmental protests, but the new collapse in oil prices threatens to further delay or cancel some of these projects proposed by Enbridge, TC Energy and others.