Cenovus Energy Inc. says cheaper feedstock for its refineries and a transportation strategy designed to get around congested pipelines will help offset discounted prices for its oil.
Even as Calgary-based Cenovus struggles alongside other Canadian producers with the current wide price differential between light and heavy oil, chief executive officer Brian Ferguson said the differential is actually a benefit to the oil giant’s downstream businesses.
The low prices mean lower feedstock costs at the Wood River refinery in Illinois and the Borger refinery in Texas, which Cenovus co-owns with operator Phillips 66.
“We’re actually … on track for probably a record first quarter in terms of refining cash flow,” Mr. Ferguson said in an interview on Thursday.
Canadian heavy oil, often traded as a blend called Western Canadian select, has seen a differential of as high as $30 to $40 (U.S.) a barrel below the headline oil price numbers. This is due to higher production of light oil in the United States and a lack of pipeline capacity to transport Canadian production.
Mr. Ferguson reiterated that all Canadians should be concerned about the lack of pipeline capacity and the discounted prices producers in Canada are receiving.
Although Cenovus is planning on eventually increasing its transportation capacity through the proposed Northern Gateway pipeline to the Pacific and the delayed Keystone XL south to the U.S. Gulf Coast, Mr. Ferguson insisted “we are in no way betting all of our eggs in one basket on Keystone XL.”
Cenovus is taking a multipronged approach to transporting its crude that includes pipelines as well as “longer-term arrangements on rail,” Mr. Ferguson said, adding that rail shipments are here to stay.
This year, Cenovus plans to increase its rail shipments to 10,000 barrels a day from the current 6,000, followed by another increase again in 2014.
Last summer, when oil differentials were less volatile, Cenovus also entered into a contract with an unnamed U.S. refinery, locking in a much narrower oil differential. Cenovus would not disclose any of the details, including crude volumes or the price spread, but called it “advantageous” and “a very meaningful number.”
In releasing its fourth-quarter and year-end results on Thursday, Cenovus said average daily oil production grew by 23 per cent in 2012 – and 35 per cent in the oil sands.
The company reported earnings of $866-million in 2012, lower than 2011’s $1.23-billion. Cenovus also reported a fourth-quarter earnings loss of $189-million. The full-year decrease and the quarterly loss were due primarily to a $393-million writedown of its assets, principally natural gas, at the Suffield military base in southeast Alberta.