‘Brutal’ Cost-Cutting Brings Fossils Back to Profitability
With “brutal” cost-cutting, oil producers in Canada and abroad are learning to live with prices that may never recover to their pre-2014 heights, according to separate reports in the Financial Times and Bloomberg News.
“Conventional oil and gas producers are approving new projects at the fastest rate since the oil price crash three years ago,” the Times writes, “in a sign of ‘big oil’ fighting back against competition from U.S. shale producers amid low crude prices.”
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Oil majors greenlit 15 new oil and gas developments by the end of June this year, three more than they approved in all of 2016, the outlet reports, “as average development costs have fallen 40% since 2014,” the paper reports, citing analysts at Wood Mackenzie. Approvals have been “highly selective,” however, “with only the most attractive projects going ahead.”
Nonetheless, the renewed activity represents a phase-change for the industry’s pricing expectations, the Times adds. “Back in 2015, quite a lot of people thought the oil price drop was just a blip,” said Rystad Energy analyst Readul Islam. “The industry took a while to get its collective mind around the idea of ‘lower for longer,’ and now people are getting used to lower for even longer.”
That extends to Canada’s oil patch, Bloomberg News reports. Suncor Energy, Cenovus Energy, and MEG Energy Corporation all saw their share values rise last week “after showing advances in cutting costs in their operations in northern Alberta.”
Suncor claims to have cut its direct tar sands/oil sands operating costs by 41%, to C$27.80 per barrel. Cenovus insists it can now compete against benchmark West Texas Intermediate crude costing in the mid-US$30-per-barrel range. And MEG goes even further, asserting that its net operating costs are a credulity-straining C$7.42 a barrel. (None of those figures include finance charges for the notoriously high capital costs of bitumen mines, in-situ recovery, or bitumen upgrading plants.)
“One of the things the industry has had to realize,” commented Desjardins Securities’ Justin Bouchard, “is that with US$50 oil, you’ve got to be brutal in how you attack your costs. And we’re seeing that basically everyone is dropping their costs.”
The companies’ efforts have been rewarded in a return to positive earnings for several after losses last year, CBC News notes. Cenovus claimed a quarterly profit of $2.64 billion. MEG recorded earnings of $104 million. CNBC news reports that Suncor, while falling short of some analysts’ hopes, nonetheless posted net income of $323 million in the second quarter of the year.
An exception was ExxonMobil’s Canadian unit: Imperial Oil acknowledged a second-quarter loss of $77 million, blamed on “planned and unplanned” production shutdowns, Reuters reports.
Operating savings range from smaller well pads, to introducing solvents as well as steam to melt underground bitumen and force it to the surface, Bloomberg notes. Down the road, industry executives are looking to cut out most of the cost of human employees, as well.
Meanwhile, Reuters reports that a drop in supplies of competing grades of raw oil from OPEC and non-OPEC producers like Mexico and Colombia has left a “gap” in markets. That dynamic has provided “something of a lifeline” for Canadian producers “as traders scramble for heavy crude.” The new demand has brought the traditional discount paid for Western Canada Select (WCS) oil relative to U.S. crude to a near-record low US$5 a barrel.
“At current levels, that would put the outright price of WCS…at just under $45 a barrel,” the news agency notes, a high enough price to keep at least some newly-efficient tar sands/oil sands producers in the black.