Canada's biggest oil companies are looking beyond government-mandated production cuts and a swamped export pipeline grid with 2019 spending plans designed to take advantage of an expected upturn in the industry.
After starting the year with optimism that the pipeline outlook was improving, court rulings and regulatory proceedings winnowed the slate of anticipated pipeline construction starts from three to zero. As oil sands projects started earlier in the decade came on stream, glutted pipelines and brimming storage sent the price gap between benchmark Canadian heavy and U.S. light crudes to a record.
The Alberta government watched its cash flow evaporate as oil that it collects as royalties sold for the lowest prices in decades. In December, Premier Rachel Notley called a halt to the bleeding and ordered across-the-board cuts of about 325,000 barrels per day starting in January. Prices rebounded and benchmark Western Canada Select had doubled from its lows by mid-December.
Suncor ups spending
As the drama unfolded, Canada's biggest oil companies rolled out their 2019 capital budgets. Suncor Energy Inc., which has used its refining strength to profit where other operators have struggled, said it will spend between C$4.9 billion and C$5.6 billion in 2019, compared with an estimated 2018 spend of C$4.5 billion to C$5 billion. Despite the increased spending estimate, Suncor said the midpoint of its guidance represents essentially flat spending. The company also estimated its production will increase as much as 10% despite Alberta's cutbacks.
Suncor CEO Steve Williams has been a critic of the production cuts, which exempt producers of less than 10,000 bbl/d. The company has claimed its share of the curtailment is actually higher than the 8.7% described by the government and operations at its sophisticated plants that process tar-like bitumen into refinery-ready synthetic crude could be compromised. The planned 2019 capital spend "will include low-capital-intensity, high-return projects aimed at margin improvements, enhancing midstream logistics infrastructure and cost-reduction initiatives," Williams said.
Alberta's government and most producers are anticipating relief from pipeline congestion by the end of 2019, when Enbridge Inc.'s Line 3 expansion is expected to add about 360,000 bbl/d of export capacity. Many producers plan to increase output when the new space becomes available.
Enbridge Inc.'s Line 3 expansion is under construction in Canada. Producers anticipated the completion of the U.S. portion of the project in late 2019.
Source: Enbridge Inc.
Exxon Mobil Corp.'s Canadian unit, Imperial Oil Ltd., plans to ramp up work at its C$2.6 billion Aspen project, which is expected to start producing approximately 75,000 bbl/d of bitumen after goes into operation in 2022. Imperial, which produces heavy oil and bitumen from several Alberta locations, is less affected by pipeline constraints because it has upgrading and refining capability within Alberta, and Exxon Mobil has refining operations in neighboring Montana. Imperial said at its investor day in November that it expects to maintain flat spending at an average C$2.2 billion to C$2.5 billion annually over the next five years, with approximately C$1 billion to C$1.2 billion in spending on growth projects including Aspen and its Kearl oil sands project.
Husky Energy Inc. will moderately trim its capital spending to approximately C$3.4 billion, down about C$300 million from an earlier estimate as it adjusts to Alberta's production cut. Husky's big cost for the year is likely to be its hostile bid for oil sands producer MEG Energy Corp. Husky wants to spend C$6.4 billion to bulk up its Canadian heavy oil output to feed its upgrader on the Alberta-Saskatchewan border and a string of company-owned refineries across the U.S. Midwest. By adding MEG's 92,000 bbl/d of production to its own, Husky could grow output to 410,000 bbl/d, closely matching its refining capacity of about 400,000 bbl/d.
MEG, which produces raw bitumen by steaming it out of wells in northeastern Alberta, had not announced its spending plans for 2019. It expected to exit the current year with about 100,000 bbl/d of production and anticipated increasing shipments of bitumen by rail to 30,000 bbl/d by the end of the first quarter, double the amount it expected to ship by that method in the fourth quarter of 2018.
Canadian Natural Resources Ltd., Canada's biggest oil company by production, went with a low-risk 2019 capital budget of C$3.6 billion, about C$1 billion less than it expected to spend in 2018. Citing the nation's chaotic pipeline situation and low prices, the company announced production cuts before Alberta made them mandatory. The company planned to shelve as much as 50,000 bbl/d of its 1 million bbl/d-plus production in November and December. President Tim McKay said the company expects conditions to improve over 2019, and Canadian Natural is ready to lift output if this happens.
Cenovus Energy Inc., which has a stake in a refining venture with Phillips 66 that allows it to process some of its bitumen into gasoline products for sale in the U.S. market, also pared its planned 2019 spending by 4% to a range of C$1.2 billion to C$1.4 billion. The bulk of the cuts will come at its Deep Basin natural gas operation in Alberta. The company said it plans to spend the bulk of its 2019 budget to expand oil sands production. Cenovus planned to ramp up crude-by-rail volumes by 100,000 bbl/d by the end of 2019.